Latec Investments Ltd v Hotel Terrigal Pty Ltd

This is an appeal from a decree of the Supreme Court of New South Wales in its equitable jurisdiction setting aside a contract of sale and a memorandum of transfer of certain land under the provisions of the Real Property Act, 1900 N.S.W. by which the first appellant purported to exercise its power of sale under a memorandum of mortgage given to it by the first respondent as security for a loan. The decree went on to declare the memorandum of mortgage unenforceable and to restrain the first appellant from exercising any power, right or remedy thereunder, the ground for this relief being, as appears from the reasons for judgment, that in respect of the contract of loan and the securities therefor the provisions of the Money-lenders and Infants Loans Act, 1941 N.S.W. had not been complied with. Since the making of the decree this Court has given a decision, in Motel Marine Pty. Ltd. v. I.A.C. (Finance) Pty. Ltd. [1] , which shows that the Money-lenders and Infants Loans Act has no application to the present case. So much of the decree as is based upon the provisions of that Act must therefore be vacated. The order setting aside the contract of sale and transfer, however, was based upon a conclusion of fact that the mortgagee's power of sale had been exercised not in good faith but in fraud of the mortgagor. Whether relief should have been granted upon this ground is the question to be decided now.

The second appellant is the purchaser from the mortgagee, and the third is the trustee of a debenture deed who claims a charge over the assets of the purchaser. The second and third respondents do not need to be considered on this appeal.

The mortgagee lent the mortgagor £36,365 on 10th March 1958, taking as security a memorandum of mortgage over the subject land (subject to an earlier mortgage) and an equitable mortgage over its undertaking and assets generally. On the subject land was a hotel called the Hotel Terrigal and a guest house. The mortgagee appointed a receiver under its equitable mortgage in June 1958, and on 23rd July 1958 the mortgagor went into voluntary liquidation. The mortgagee took no steps to effect a sale until late in September 1958, and not until after its directors had learned that a stranger might be interested to purchase the property. It made no endeavour to sell to the stranger or to find any other purchaser by private contract. Instead, its board determined at some stage to sell the property to the second appellant, which was one of several subsidiaries of the mortgagee. They had identically composed boards of directors, and the mortgagee held all the shares in the second appellant. Before any sale was made, a firm of estate agents was instructed to put the property up for auction on Friday, 3rd October 1958. A Friday was generally recognized as not a good day for such a sale, and the interval of time available for advertisements was significantly less than usual. Nevertheless the auctioneers made efforts to attract potential buyers and some thirty-five people attended the auction. The highest bid received was £58,000. Although the mortgagee's directors knew that an experienced valuer had valued the property six months before at £54,000 for the hotel and £2,500 for the guest house, a reserve of £85,000 had been fixed and the property was accordingly passed in. The auctioneers then advised the mortgagee to accept the offer of £58,000 if a better should not be forthcoming. The mortgagee, however, made no attempt to negotiate with any of the bidders or to obtain any higher offer. Its directors determined - indeed it is a reasonable inference from the unusual features of the submission to auction that for some time they had had it in mind - that to have the Hotel Terrigal owned by one of their group of companies would be better for them than selling it to a stranger. One of the group owned a competing hotel in the same district, and the benefits to be derived from peaceful co-existence had attractions too obvious to be overlooked. The fact that an exercise of the power of sale so as to bring about this result would amount to a virtual foreclosure did not deter them. Without any further attempt having been made to find an outside purchaser, the mortgagee entered into a contract with its subsidiary, the second appellant, to sell the mortgaged property to the latter at the price of £60,000. There was, of course, no bargaining between them. The common board of directors simply fixed the figure and had a contract prepared and executed by both companies. The contract, dated 26th March 1958, provided for payment of £6,000 as a deposit, but fixed no time for payment either of that amount or of the balance of £54,000. The memorandum of transfer, acknowledging receipt by the mortgagee of £19,675, was registered on 25th February 1959. In fact nothing had been paid at that stage. The first mortgage over the property was paid off by the purchaser in the following July, but it was not until a year after the date of the contract that any of the purchase money was paid to the mortgagee. Then the whole outstanding amount was paid in one sum.

The amount owing under the mortgage at the time of the sale was of the order of £86,000. It may be that by no means could a purchaser have been found to buy the property at so high a price, but the course that was followed in respect of the auction was not calculated to test the question. Vis-à-vis the mortgagor, the mortgagee was not bound to use its best endeavour to obtain the highest price procurable; but what it in fact did points pretty clearly to the conclusion that its intention was not really to sell the property but was to ascertain what kind of figure, being put into a contract of sale to the subsidiary, would look like a genuine sale price. As between the mortgagee and the subsidiary it did not matter much what the figure was; but there was an obvious advantage, in case of a possible impeachment of the sale, in selecting a price a little higher than the best bid obtained at an auction. The only danger in holding the auction was that a bid might be obtained which exceeded the amount owing under the mortgage. If that should happen, there could be no excuse for not accepting it, and the hotel would have to pass into a stranger's hands; but, by fixing a short date for the auction and choosing an unpropitious day of the week, as much was done to obviate this unfortunate result as was possible consistently with employing an auctioneer who was no party to the scheme and creating an appearance of a genuine attempt to sell at a proper price.

The onus clearly lay upon the purchaser, being a subsidiary of the mortgagee, to satisfy the court that the power of sale was exercised in good faith, and that reasonable steps were taken to obtain a fair price: Farrar v. Farrars Ltd. [1] . That onus it signally failed to discharge. The learned trial judge concluded that there was a lack of that kind of good faith which in the eyes of a court of equity is essential to the validity of a mortgagee's sale on the principles discussed in such cases as Kennedy v. De Trafford [2] ; Barns v. Queensland National Bank Ltd. [3] and Pendlebury v. Colonial Mutual Life Assurance Society Ltd. [4] ; and he also concluded that the collaboration of the mortgagee and the purchaser through their common directors amounted to fraud in the sense of ss. 42 and 43 of the Real Property Act, 1900 N.S.W., so that the mortgagor's claim to have the sale set aside is not defeated by the indefeasibility which those sections accord to a registered title. I have already said enough to show that in the first of these conclusions I agree. As to the second, we were invited to hold that nothing is fraud in the sense which is relevant under the Real Property Act unless it includes a fraudulent misrepresentation. The whole course of authority on this branch of the law is to the contrary. Moral turpitude there must be; but a designed cheating of a registered proprietor out of his rights by means of a collusive and colourable sale by a mortgagee company to a subsidiary is as clearly a fraud, as clearly a defrauding of the mortgagor, as a cheating by any other means: cf. Waimiha Sawmilling Co. v. Waione Timber Co. Ltd. [1] . In the present case it is all very well to say that the directors had reason to think that on a genuine sale they would not have got more than £60,000 for the property. The fact remains - I see no escape from concluding that it is a fact - that the reason why there was only a pretence of attempting to get a better price was simply that the object in view was not really to effect a sale, but was to destroy the mortgagor's interest and get the hotel for the mortgagee's group of companies, without allowing the mortgagor the opportunities to pay off the mortgage which the procedure for foreclosure would have afforded. It is impossible to regard the case as only one of constructive or equitable fraud - there was much more in it than a mere fraud upon the power, as it is sometimes called. There was pretence and collusion in the conscious misuse of a power. It may be that those concerned salved their consciences by telling themselves that the mortgagor company, being already in liquidation, was in so parlous a financial condition that the course they were taking was unlikely in the long run to do anyone any harm. But it was a dishonest course none the less, and the proper name for it is fraud.

1. (1888) 40 Ch. D. 395, at p. 398. 2. [1897] A.C. 180. 3. (1906) 3 C.L.R. 925. 4. (1912) 13 C.L.R. 676. 5. [1926] A.C. 101, at p. 106.

If the mortgagor had sought the intervention of the court without delay, the findings of fact with which so far I have dealt would necessarily have led to a decree setting aside the sale as against the mortgagee and the purchaser and granting consequential relief. But nearly five years went by before proceedings were commenced, and it is necessary to consider whether the mortgagor's right to relief is affected by what occurred in that time. First let me be clear about the nature of the right which the mortgagor might have asserted. To say that the court would have set the sale aside as against the mortgagee and its purchaser is not to say that either the contract or the ensuing transfer would or could have been rendered void at law. It means only that the purchaser would (in effect) have been declared compellable to act in relation to the mortgagor as if the mortgagee had sold and transferred not the mortgaged property but only the mortgage and the moneys thereby secured: see Selwyn v. Garfit [2] ; Stump v. Gaby [3] . The appropriate consequential relief would not have been granted, as in the case of a mortgage of land under common title, on the footing that the sale and transfer had been ineffectual to extinguish an equity of redemption and that the mortgagor was therefore entitled to redeem as against the purchaser: cf. Bailey v. Barnes [1] ; Parkinson v. Hanbury [2] ; Sewell v. Agricultural Bank of Western Australia [3] ; Coroneo v. Australian Provincial Assurance Association Ltd. [4] , for the mortgagor had the legal title, not an equity of redemption, and the transfer had operated to deprive him of the legal title by virtue only of special statutory provisions: see ss. 58 and 59 of the Real Property Act and ss. 109, 110 and 111 of the Conveyancing Act, 1919-1954 N.S.W.. The right which the mortgagor had immediately before the sale was a right to have the mortgagee ordered (notwithstanding that the contractual date for payment had passed) to receive what should be found on a taking of accounts to be owing under the mortgage and thereupon to execute a discharge of the mortgage: Greig v. Watson [5] ; Perry v. Rolfe [6] ; see also Re Forrest Trust [7] . After the sale, however, the reasoning which would have led a court of equity, if the land had been under common law title, to refuse to recognize the sale as having destroyed the equity of redemption would have led necessarily to the conclusion that equity would treat the purchaser as if it had taken a transfer of the mortgage only, though with this difference, that since the purchaser, unlike the mortgagee, had acquired the legal estate in the land the mortgagor must be accorded a true equity of redemption. Against the assertion of this equity of redemption, s. 112 (3) (a) of the Conveyancing Act, 1919-1961 N.S.W. would have afforded no protection, because the purchaser had had the clearest notice of the invalidity of the mortgagee's exercise of its power of sale: see Bailey v. Barnes [8] .

1. (1888) 38 Ch. D. 273, at p. 280. 2. (1852) 2 De G. M. & G. 623, at p. 630 [42 E.R. 1015, at p. 1018]. 3. [1894] 1 Ch. 25, at p. 27. 4. (1860) 1 Dr. & Sm. 143 [62 E.R. 332]. 5. (1930) 44 C.L.R. 104, at p. 114. 6. (1935) 35 S.R. (N.S.W.) 391, at p. 394. 7. (1881) 7 V.L.R. (Eq.) 79. 8. [1948] V.L.R. 297. 9. [1953] V.L.R. 246. 10. [1894] 1 Ch. 25.

But, as I have said, the mortgagor took no step to establish its equity of redemption for nearly five years. One reason was that the voluntary liquidator had no funds available for litigation. But whatever the full tally of the reasons may have been, if there were nothing more to consider than the bare fact of the delay it may be that the mortgagor would not be precluded from asserting its rights even after so long a time: see Fysh v. Page [9] . But an important change in the situation occurred a little more than a year after the sale. On 18th March 1960, the first appellant executed a trust deed in respect of debentures to be issued, and it put out to the public a series of prospectuses which led many persons to take up debentures. The prospectuses showed, as the fact was, that the purchaser of the mortgaged property, the second appellant, had joined in the trust deed as a guarantor and had given the trustee, who is the third appellant here, a floating charge over all its assets as security for the debentures. Each prospectus, moreover, contained an explicit statement that the Hotel Terrigal was owned by the second appellant. The statement, of course, would have been true if the second appellant's title had been unimpeachable by the mortgagor, and neither the trustee nor the persons who took up debentures were given any cause to doubt it. It is a fair inference that the liquidator of the mortgagor company had notice of what was happening, for he was the auditor of the mortgagee. After another two and a half years the floating charge crystallized. The trustee of the debenture deed appointed a receiver of both the first and the second appellants, but it was not until a year later still that a new liquidator of the purchaser was appointed and the present proceedings were begun.

In these circumstances the trustee, with the support of its co-appellants, contends that the mortgagor ought not to be given the relief to which, according to the views I have expressed, it would otherwise be entitled. As between the trustee and the mortgagor I am of opinion the contention should succeed. In all cases where a claim to enforce an equitable interest in property is opposed on the ground that after the interest is said to have arisen a third party innocently acquired an equitable interest in the same property, the problem, if the facts relied upon as having given rise to the interests be established, is to determine where the better equity lies. If the merits are equal, priority in time of creation is considered to give the better equity. This is the true meaning of the maxim qui prior est tempore potior est jure: Rice v. Rice [1] . But where the merits are unequal, as for instance where conduct on the part of the owner of the earlier interest has led the other to acquire his interest on the supposition that the earlier did not exist, the maxim may be displaced and priority accorded to the later interest. In the present case it seems to me that there is much to be said for holding that, since during the long period of the mortgagor's delay in setting up the invalidity of the purchaser's title persons were induced to lend money on debentures in the belief that an unencumbered fee simple in the subject property formed part of the security under the trustee's floating charge, the mortgagor ought not to be allowed to insist upon its equity of redemption as against the equitable interest of the trustee.

1. (1853) 2 Drew. 73, at p. 78 [61 E.R. 646, at p. 648].

But apart altogether from any question of estoppel by conduct, in my opinion the equitable charge of the trustee for the debenture holders stands in the way of the mortgagor's success because it was acquired for value and without any notice either of the existence of the mortgagor's right to set aside the sale or of any facts from which such a right might be inferred. The trustee, of course, has not the legal estate; its rights are purely equitable; but the case falls within one of the categories described in the judgment of Lord Westbury in Phillips v. Phillips [1] in which the legal estate is not required in order that a defence of purchase for value without notice may succeed. It is the case of a suit "where there are circumstances that give rise to an equity as distinguished from an equitable estate - as, for example, an equity to set aside a deed for fraud, or to correct it for mistake" [2] . In such a case, his Lordship said, if the purchaser under the instrument maintains the plea of purchase for value without notice "the Court will not interfere" [2] . It is true that if the mortgagor in the present case was entitled to have the mortgagee's sale set aside it had more than a mere equity: it had, as I have pointed out, an equity of redemption, and such an interest, being in respect of an estate in fee simple, has been considered an equitable estate ever since Lord Hardwicke decided Casborne v. Scarfe [3] see also [4] . But each of the illustrations Lord Westbury chose was also a case where the equity was accompanied by an equitable interest which might constitute an equitable estate. So much had been shown by decisions of most eminent judges, at least twice in the ten years before his Lordship spoke: see Stump v. Gaby [5] ; Gresley v. Mousley [6] , and Lord Westbury's judgment gives every indication of an intention to state systematically the effect of previous decisions, and not to depart from them in any degree. The illustrations therefore make it clear, it seems to me, that the cases to which his Lordship was referring were not only those in which there is an assertion of an equity unaccompanied by an equitable interest (as was held to be the case in Westminster Bank Ltd. v. Lee [7] and National Provincial Bank Ltd. v. Hastings Car Mart Ltd. [8] - indeed he may not have had them in mind at all - but those in which an equity is asserted which must be made good before an equitable interest can be held to exist. In the latter class of cases the equity is distinct from, because logically antecedent to, the equitable interest, and it is against the equity and not the consequential equitable interest that the defence must be set up. That the defence of purchase for value without notice (in the absence of the legal estate) is a good defence against the assertion of the equity in such a case had been established long before Lord Westbury's time. In Malden v. Menill [1] , for example, Lord Hardwicke had refused rectification of an instrument for mistake, as against a purchaser of an equitable interest without notice, on the ground that the mistake should not "turn to the prejudice of a fair purchaser". Such cases as Garrard v. Frankel [2] and Bainbrigge v. Browne [3] were soon to be decided on the same principle. See generally Halsbury's Laws of England, 3rd ed. vol. 14, p. 537, par. 1008. The reason of the matter, as I understand it, is that the purchaser who has relied upon the instrument as taking effect according to its terms and the party whose rights depend upon the instrument being denied that effect have equal merits, and the court, finding no reason for binding the conscience of either in favour of the other, declines to interfere between them. Consequently the party complaining of the fraud or mistake finds himself unable to set up as against the other the equitable interest he asserts; but the fact remains that it is against the preliminary equity, and not against the equitable interest itself, that the defence of purchase for value without notice has succeeded. The maxim qui prior est tempore is not applicable, for it applies only as between equitable interests, the logical basis of it being that in a competition between equitable interests the conveyance in virtue of which the later interest is claimed is considered, as Lord Westbury pointed out, to be innocent, in the sense of being intended to pass that which the conveyor is justly entitled to and no more: [4] . Where a claim to an earlier equitable interest is dependent for its success upon the setting aside or rectification of an instrument, and the court, notwithstanding that the fraud or mistake (or other cause) is established, leaves the instrument to take effect according to its terms in favour of a third party whose rights have intervened, the alleged earlier equitable interest is unprovable against the third party, and consequently, so far as the case against him discloses, there is no prior equitable interest to which his conveyance can be held to be subject.

1. (1861) 4 De G.F. & J. 208, at p. 218 [45 E.R. 1164, at p. 1167]. 2. (1861) 4 De G.F. & J., at p. 218 [45 E.R., at p. 1167]. 3. (1861) 4 De G.F. & J., at p. 218 [45 E.R., at p. 1167]. 4. (1737) 1 Atk. 603 [26 E.R. 377]. 5. (1738) 2 J. & W. 194 App. [ 37 E.R. 600]. 6. (1852) 2 De G. M. & G. 623 [42 E.R. 1015]. 7. (1859) 4 De G. & J. 78 [45 E.R. 31]. 8. [1956] Ch. 7. 9. [1964] Ch. 9. 10. (1737) 2 Atk. 8, at p. 13 [26 E.R. 402, at p. 405]. 11. (1862) 30 Beav. 445 [54 E.R. 961]. 12. (1881) 18 Ch. D. 188. 13. (1861) 4 De G. F. & J. 208, at p. 215 [45 E.R. 1164, at p. 1166].

On the principle to which Lord Westbury referred it seems to me inevitable that the mortgagor's claim in the present case to have the mortgagee's sale and the transfer to the purchaser "set aside", i.e. treated as if they were only a sale and transfer of the mortgage, should fail as against the trustee for the debenture holders, though it should succeed as against the mortgagee and the purchaser. It appears that the mortgage was a second mortgage and that after the sale the purchaser paid off the first mortgage. The purchaser is entitled therefore to stand in the shoes of the first mortgagee. The result is that the mortgaged property is subject, first, to the purchaser's rights in respect of the discharge of the first mortgage; secondly, to the trustee's charge; and thirdly, to the purchaser's rights as notional transferee of the second mortgage under the (otherwise invalid) sale. The mortgagor is entitled to anything that may remain of the property or its proceeds after these encumbrances have been satisfied. The indications seem to be that after the rights of the trustee have been satisfied there will be nothing left, and for that reason it seems unnecessary to make an order for working out the rights of all parties in detail.

On the views I have stated, the appeal should be allowed, the greater part of the decree of the Supreme Court should be set aside, and a declaration should be made establishing the rights of the purchaser in respect of the first mortgage and of the trustee for the debenture holders. Perhaps any further relief might be left to be given by the Supreme Court under a general liberty to apply. Probably, though I express no final opinion at the moment, the costs both here and in the Supreme Court should be paid by the first and second appellants so far as they relate exclusively to the question whether the mortgagee's sale and transfer were impeachable for lack of good faith, but otherwise the costs in both courts (except those of the counterclaim by the defendant Idlewise Pty. Ltd.) should be paid by the plaintiff, the first respondent here, in view of the fact that it fails both on its claim under the Moneylenders Act and on its claim to priority over the trustee for the debenture holders. The proper course is, I think, to direct that short minutes of the order to be made be brought in by the appellants, preferably after consultation between counsel for all parties. The appeal may then be restored to the list and the appropriate order may be made.

In the suit which has led to this appeal the respondent Hotel Terrigal Pty. Limited (in liquidation) sought a decree setting aside a transfer of land made by the first-named appellant, Latec Investments Limited, to the second-named appellant, Southern Hotels Limited, a wholly-owned subsidiary of the first-named appellant with a common board of directors. The transfer was made in purported exercise of Latec's power of sale as the registered mortgagee of the land in question and it was attacked by the mortgagor, Hotel Terrigal, on the ground that the sale which led to the transfer was not made bona fide in the exercise of the mortgagee's power of sale. A further contention based upon the provisions of the Money-lenders and Infants Loans Act was not pursued upon the appeal in view of the recent decision of this Court in Motel Marine Pty. Ltd. v. I.A.C. (Finance) Pty. Ltd. [1] . Some time after the transfer to Southern Hotels, Latec and its subsidiaries gave to the third-named appellant, The M.L.C. Nominees Limited, security by way of equitable charge over all their assets and a further question arises whether, if it be shown that Hotel Terrigal is otherwise entitled to relief against the first and second-named appellants, that relief can be afforded subject only to the subsequently acquired interest of The M.L.C. Nominees. On the view of the facts which the learned judge of first instance accepted, it was held that the sale was not made bona fide in the exercise of the mortgagee's power of sale, that it was part of a fraudulent scheme to which both the vendor and purchaser were party "to acquire the Hotel Terrigal for the Latec chain", that the claim of Hotel Terrigal was not barred by laches and that it prevailed over the interest of The M.L.C. Nominees. Further his Honour rejected the contention that ss. 58 and 59 of the Real Property Act so operated, in any event, to confer an indefeasible title upon Southern Hotels.

The relevant facts are set out in the reasons of the learned judge and in my view his conclusions on the matters which arose as between Hotel Terrigal and the first and second-named appellants were soundly based. I think that upon the proved facts it is undeniable that the sale to Southern Hotels was not made bona fide in the exercise of Latec's power of sale as mortgagee and that his Honour's assessment of the conduct of the parties was completely justified. I should add that I entirely agree with the observations of Kitto J. on this branch of the case and, having passed over the argument in so far as it was based on ss. 58 and 59 of the Real Property Act as being without substance, content myself with dealing with the contention advanced on behalf of The M.L.C. Nominees that its claim should prevail over that of Hotel Terrigal.

This contention was based upon an observation of Lord Westbury in Phillips v. Phillips [2] , a case in which the proposition was asserted in argument that a court of equity "would give no relief whatever to any claimant against a purchaser for value without notice" [1] . His Lordship was "struck with the novelty" [1] of the proposition and for the purpose of dealing with it found it "necessary to revert to first principles" [1] . He said: "I take it to be a clear proposition that every conveyance of an equitable interest is an innocent conveyance, that is to say, the grant of a person entitled merely in equity passes only that which he is justly entitled to and no more. If, therefore, a person seised of an equitable estate makes an assurance by way of mortgage or grants an annuity, and afterwards conveys the whole estate to a purchaser, he can grant to the purchaser that which he has, viz., the estate subject to the mortgage or annuity, and no more. The subsequent grantee takes only that which is left in the grantor" [1] . Having further examined the doctrine he went on to say: "where there are circumstances that give rise to an equity as distinguished from an equitable estate - as for example, an equity to set aside a deed for fraud, or to correct it for mistake - and the purchaser under the instrument maintains the plea of purchase for valuable consideration without notice, the Court will not interfere" [2] . However, in the case before the Court on that occasion the plaintiffs had, as his Lordship found, an equitable estate and so what passed to the defendants by virtue of the deed upon which they relied was necessarily subject to the plaintiff's earlier interest and, so, the case was not affected by the quoted proposition. Lord Westbury's observations were quoted by Fry J. in Cave v. Cave [3] but this again was a case in which the plaintiffs were held to have an equitable interest in the subject-matter of the litigation.

1. (1861) 4 De G. F. & J. 208 [45 E.R. 1164]. 2. (1861) 4 De G. F. & J., at p. 215 [45 E.R., at p. 1166.] 3. (1861) 4 De G. F. & J., at p. 215 [45 E.R., at p. 1166.] 4. (1861) 4 De G. F. & J., at p. 215 [45 E.R., at p. 1166.] 5. (1861) 4 De G. F. & J., at p. 215 [45 E.R., at p. 1166.] 6. (1861) 4 De G. F. & J., at p. 218 [45 E.R., at p. 1167]. 7. (1880) 15 Ch. D. 639.

In the present case it is contended on behalf of The M.L.C. Nominees that after the sale and transfer to Southern Hotels, Hotel Terrigal had on the view of the facts most favourable to it nothing more than a mere equity to set aside the transaction and, as I understand the argument, this proposition is put upon the authority of the examples given by Lord Westbury of cases where the right which is being asserted is "an equity as distinguished from an equitable estate - for example, an equity to set aside a deed for fraud, or to correct it for mistake". But to my mind the argument misconceives the significance of Lord Westbury's observation and the assertion that Hotel Terrigal had nothing more than a mere equity is made in the face of abundant authority to the contrary to which I shall presently refer. Before doing so, however, it should be observed that this is not a case of a common law mortgage; it is a case where the registered mortgage created a statutory charge over the mortgagor's land leaving the whole of the legal and beneficial ownership thereof in the mortgagor. No doubt the registration of the transfer operated to transfer the legal title in the land to Southern Hotels but I find it difficult to see why it should be thought that a sale and transfer made and given by a mortgagee not bona fide "within the limits of the power" (Pendlebury v. Colonial Mutual Life Assurance Society Ltd. [1] ) can operate to strip the mortgagor of the whole of his equitable interest in the land: cf. Cloutte v. Storey [2] . However this may be, there is, as I have said, abundant authority for the proposition that the owner of land a transfer of which has been obtained by fraud retains an equitable interest therein. Uppington v. Bullen [3] was such a case as also were Stump v. Gaby [4] and Gresley v. Mousley [5] . In Stump v. Gaby [4] Lord St. Leonards said: "I will assume that the conveyance might have been set aside in equity for fraud: what then is the interest of a party in an estate which he has conveyed to his attorney under circumstances which would give a right in this Court to have the conveyance set aside? In the view of this Court he remains the owner, subject to the repayment of the money which has been advanced by the attorney, and the consequence is that he may devise the estate, not as a legal estate, but as an equitable estate, wholly irrespective of all question as to any rights of entry or action, leaving the conveyance to have its full operation at law, but looking at the equitable right to have it set aside in this Court. The testator therefore had a devisable interest. My strong impression is that this very point is concluded upon authority, but if not I am ready to make an authority on the present occasion, and to decide that, assuming the conveyance to have been voidable, the grantor had an equitable estate which he might have devised " [6] . In Gresley v. Mousley [5] the earlier cases were cited and Knight Bruce L.J. said: "The questions accordingly are, first, whether if Sir Roger Gresley had a title in equity to be relieved against the sale" (on the ground of fraud), "he had after the sale a devisable interest in the property sold " [7] . His Lordship then formulated the other questions which arose and added: "The first is concluded by the cases decided by Lord St. Leonards that were mentioned in the argument, if we are bound by those authorities. But if we are not, I still think that the decisions were correct and ought to be followed" [1] . Turner L.J. was of the same opinion. However these cases were, as was pointed out to us, decided before Phillips v. Phillips [2] and it was urged upon us that we should in this case treat Lord Westbury's observation as conclusive on the point. But the point has received attention since then and I refer first of all to Dickinson v. Burrell [3] where Lord Romilly held that the right to institute a suit to set aside a conveyance of property upon equitable grounds passed by the grantor's subsequent conveyance of the same property though he pointed out that it would be otherwise in a case where the subsequent conveyance was not a conveyance of the property itself but merely of the right to sue. In re Garnett; Robinson v. Gandy [4] is another case which illustrates the proposition that the execution of a release voidable in equity for fraud does not deprive the releasor of his equitable title to the subject fund. The contention raised in this case was that upon the setting aside of a release given by a wife before marriage she and her husband then acquired a new title so that it could be said, in accordance with the provisions of a marriage settlement made after the release was executed, that they had become entitled to the subject fund during coverture. The contention was rejected, Cotton L.J. observing: "The setting aside of the release did not give them any new right, but merely had the effect of removing that which, if it had stood, would have been a bar, and have prevented their previously existing right to assert their title to the residuary personal estate of their uncle a right which they had at the time the settlements were executed, and a right which was not obtained by them in consequence of the release having been set aside" [5] .

1. (1912) 13 C.L.R. 676. 2. [1911] 1 Ch. 18. 3. (1842) 2 Dr. & War. 184. 4. (1852) 2 De G. M. & G. 623 [42 E.R. 1015]. 5. (1859) 4 De G. & J. 78 [45 E.R. 31]. 6. (1852) 2 De G. M. & G. 623 [42 E.R. 1015]. 7. (1852) 2 De G. M. & G., at p. 630 [42 E.R., at p. 1018]. 8. (1859) 4 De G. & J. 78 [45 E.R. 31]. 9. (1859) 4 De G. & J., at p. 89 [45 E.R., at p. 35]. 10. (1859) 4 De G. & J., at p. 90 [45 E.R., at p. 35]. 11. (1861) 4 De G. F. & J. 208 [45 E.R. 1164]. 12. (1866) L.R. 1 Eq. 337. 13. (1886) 33 Ch. D. 300. 14. (1886) 33 Ch. D., at p. 303.

In the same case Lindley L.J. said: "Then Mr. Justice Kay, taking that view of the settlement, decided in favour of the trustees upon the ground that the husband in her right did acquire, or become entitled to, or possessed of, the property in question by reason of the circumstance that the release which had been given prior to the marriage was set aside by this Court, and that the setting aside of the release was the acquisition of some fresh title. With great deference to the learned Judge I cannot take that view. Setting aside a release confers no new title. It removes an impediment to the enjoyment of a pre-existing title. The lady did not acquire a title when the release was set aside. She always was entitled notwithstanding the release" [1] .

Finally in Melbourne Banking Corporation Ltd. v. Brougham [2] the question again arose before the Judicial Committee of the Privy Council. In this case a discharged bankrupt who had obtained from his official assignee a conveyance of all his estate then vested in the former, sought a decree setting aside a release of his equity of redemption with respect to land mortgaged by him to the appellant bank before the commencement of the bankruptcy. The release had been given by the official assignee during the subsistence of the bankruptcy and the respondent claimed that it was voidable on the ground that it had been obtained by misrepresentation. Objection was taken to the maintenance of the suit by the respondent and on this point Lord Selborne, on behalf of their Lordships, observed: "It was contended at the bar that this conveyance was not sufficient to enable the respondent to institute a suit to set aside the release of May, 1870, from Goodman to the appellants; but if that release was voidable in equity, it is clear, both on principle and on authority, that there was an equitable interest in the Alma station, which, in 1877, continued to be part of the estate vested in the official assignee, and that the deed executed by Jacomb (the official assignee at the time) was sufficient to pass that interest. Their Lordships, therefore, do not doubt that the respondent, when he instituted this suit, had the same locus standi in curiâ which Jacomb would have had if the deed of 2nd March 1877, had not been executed" [3] . Stump v. Gaby [4] was cited to their Lordships in this case and their Lordships' decision accepts it as authoritative. I regard these authorities as establishing that where the owner of property has been induced by fraud to convey it the grantor continues to have an equitable interest therein and that that interest may be devised or assigned inter vivos and that the grantor's interest in the property does not come into existence only if and when the conveyance is set aside.

1. (1882) 7 App. Cas. 307. 2. (1882) 7 App. Cas., at p. 311. 3. (1852) 2 De G. M. & G. 623 [42 E.R. 1015].

These cases, however, have nothing to say concerning the principles upon which the priority of competing equitable interests is to be determined. But they do serve to indicate that where a grantor is entitled to set aside a conveyance for fraud he has, in every sense of the term, an equitable interest in the subject land and that if he is to be postponed to an equitable interest acquired without notice at some later time it is not because it can be said, in the sense in which the appellants use that expression, that he has a mere equity as distinguished from an equitable estate; if he is to be postponed then there must be some other reason.

In his "Chapters on Equity in New South Wales" the late Sir Frederick Jordan mentions that "The equitable assignee of property other than a chose in action takes subject to any equities which are in substance interests in the property; but not subject to equities in the nature of rights of set-off" (6th ed. (1945) p. 61). He then makes reference to the proposition that as against a person who has an equity as distinguished from an equitable estate, the defence of purchaser for value without notice may be maintained by a person who has an equitable interest only. But on the authority of Stump v. Gaby [1] and other cases to which I have referred he expressed the view that an equity is in itself an equitable estate and the real principle upon which the title of the owner of a subsequent equitable estate has been allowed to prevail is that the claimant under the prior equity has been estopped by his conduct from disputing the title of the person who has purchased the interest in good faith. For this proposition the learned judge cited Hunter v. Walters [2] ; Bickerton v. Walker [3] ; and French v. Hope [4] ; and these are cases where, if the proposition advanced in this case be sound, it would have been unnecessary to enquire whether the claimant earlier in point of time had been negligent or to examine the consequences of that negligence.

1. (1852) 2 De G. M. & G. 623 [42 E.R. 1015]. 2. (1871) 7 Ch. App. 75. 3. (1885) 31 Ch. D. 151. 4. (1887) 56 L.T. 57.

It must be remembered that there was a considerable conflict of opinion between Lord Westbury and Lord St. Leonards concerning the availability of the defence of purchaser for value without notice in the case of competing equitable interests and this is to be noticed in Lord St. Leonards' writings in the year following the decision in Phillips v. Phillips [5] . (The Law of Vendors and Purchasers - Sugden - 1862). He maintained that the defence was always available to the bona fide purchaser of an equitable interest and observed (at p. 798) that: "Till the case of Phillips v. Phillips [5] the validity of the defence against an equitable title appears not to have been questioned". Yet that case, which Lord St. Leonards thought departed from the earlier law, did not deny the availability of the defence to a subsequent purchaser of an equitable interest without notice of an earlier interest which was of the character under consideration in the present case. It cannot, of course, be disputed at the present time that the defence of purchaser for value without notice of a prior equitable interest cannot be generally maintained but it does appear that it has always - that is to say, both before and after Phillips v. Phillips [1] - been allowed to prevail where the person entitled to the earlier interest required the assistance of a court of equity to remove an impediment to his title as a preliminary to asserting his interest. In such cases it seems that the court will not interfere and to me it does not seem to matter much whether it be said that this is because, as Lord Westbury's observations suggest, that a plaintiff seeking to set aside a deed for fraud or to reform it for mistake is, at that stage, asserting an equity as distinguished from an equitable estate, or, because a plaintiff in such cases will be denied the assistance of a court of equity to remove the impediment to his title if, before he seeks that assistance, an equitable interest in the subject property has passed to a purchaser for value without notice of the plaintiff's prior interest. I prefer the latter as a more precise statement of the law and, indeed, I think this is the true meaning of Lord Westbury's observations. But either statement leads to the same result which in the present case means that the interest of The M.L.C. Nominees should be taken to prevail over that of Hotel Terrigal.

1. (1861) 4 De G.F. & J. 208 [45 E.R. 1164]. 2. (1861) 4 De G.F. & J. 208 [45 E.R. 1164]. 3. (1861) 4 De G.F. & J. 208 [45 E.R. 1164].

For these reasons I am of the opinion that the appeal should be allowed and that it should be otherwise disposed of in the manner suggested by Kitto J.

The respondent Hotel Terrigal Pty. Limited (which I shall call "Terrigal") was the registered proprietor of land subject to a mortgage to the first-named appellant, Latec Investments Limited (which I shall call "Latec"). Upon the land there was erected the Terrigal Hotel. The mortgage being in arrears, Latec on 26th November 1958, in purported exercise of its powers of sale as a mortgagee, sold the land to one of its wholly-owned subsidiaries, the second-named appellant Southern Hotels Pty. Limited (which I shall call "Southern"), and that company became registered as the proprietor of an estate in fee simple in the land free from any encumbrances in favour of Terrigal. Subsequently, on 18th March 1960, Southern gave the third-named appellant The M.L.C. Nominees Limited (which I shall call "M.L.C. Nominees") security by way of floating charge over its assets, including the land in question, to support a guarantee, so that M.L.C. Nominees became in equity the mortgagee of the land. The contest in this suit, which was not instituted until 22nd October 1963, is really between Terrigal and M.L.C. Nominees, the former affirming, and the latter denying, three main propositions: (1) that the mortgagee's sale was voidable; (2) that accordingly Terrigal has an equity or an equitable interest in the land taking priority - in the absence of any special circumstances warranting its postponement - over the later equitable interest of M.L.C. Nominees; and (3) that by reason of the foregoing, and notwithstanding Terrigal's inaction for five years, the conveyance to Southern giving effect to the mortgagee's sale should be set aside and Terrigal should be restored to the register as the proprietor of the land subject to the original mortgage. Else-Mitchell J. decided in favour of Terrigal and this appeal is from his judgment.

Before Else-Mitchell J. the case was complicated by a question arising under s. 22 of the Money-lenders and Infants Loans Act N.S.W.. However, since the case was before him this Court has decided that s. 13 of the Tasmanian Moneylenders Act, which corresponds with s. 22 of the New South Wales Act, does not apply to borrowing by a company. We are thus enabled to confine our attention to the three matters already stated. It is agreed, moreover, that they are to be determined on the footing that M.L.C. Nominees took its security from Southern for value and without notice that Terrigal had any rights in, or in respect of, land the subject of the charge.

As to the first of these three matters, I agree with Else-Mitchell J. that the mortgagee's sale was voidable. What happened was that on 27th June 1958 Latec, exercising its power under the mortgage, appointed a receiver of Terrigal who, on 24th September and to the knowledge of Latec, instructed L. J. Hooker Ltd. to offer the Terrigal Hotel for public auction on Friday, 3rd October, with a reserve of £85,000. These instructions, stipulating Friday as the day of the sale, leaving insufficient time for proper advertising and fixing a reserve of £85,000, made it virtually certain that there would be no sale of the hotel, and so it turned out. The hotel was passed in at £58,000. By a contract dated 26th November 1958 but arranged earlier, the Terrigal Hotel was sold by Latec to Southern for £60,000, payable by a deposit of £6,000 upon the signing of the contract and the balance of £54,000 on completion. It seems that the £60,000 was paid as follows: -

To Beattie & Frost on 23rd June 1959 to discharge a mortgage given to them as builders: £17,040 10s. 5d. To L. J. Hooker Ltd. on 23rd June 1959: £ 1,800 0s. 0d. To I.A.C. (Finance) Pty. Ltd. £ 2,350 0s. 0d. To Latec Investments Limited on 27th November 1959 - balance: £38,809 9s. 7d.

Else-Mitchell J. held that this sale by Latec to Southern was not an honest sale and, in my opinion, there were ample grounds for his so holding. What Mr. Mahoney referred to as a genuine attempt at an open sale hardly bears that aspect upon a critical appraisal. The auction could well be regarded as nothing but a piece of camouflage to hide Latec's plan for a private sale to a subsidiary company and to provide a not-too-high figure as the minimum at which that sale might, with some measure of safety, be made. It was argued by Mr. Mahoney for the appellant that the price of £60,000 was in fact a fair price, but the evidence does not warrant this Court in making such a finding. There was evidence for and against such a conclusion but, without making any finding as to the value of the Terrigal Hotel in November 1958, Else-Mitchell J. found that the sale was not made in good faith, and this was a finding open upon the evidence. Furthermore, as the learned judge thought, it is the character of the transaction as a virtual foreclosure, rather than the particular price fixed, that warranted the intervention of the Court. The finding of lack of good faith on the part of Latec, to which, of course, its creature, Southern, must have been a party, is sufficient ground for avoiding the sale to Southern: Kennedy v. De Trafford [1] ; so that as against Latec and Southern, Terrigal is entitled to be registered as proprietor of the land subject to the mortgage. 1. [1897] A.C. 180.

The second question - that is, the question of priority between Terrigal's and M.L.C. Nominees' equitable rights - I find one of substantial difficulty. If the maxim " Qui prior est tempore potior est jure " applies, Terrigal's right to have the conveyance set aside and to be restored to the register, without regard to M.L.C. Nominees' equitable interest, prevails, but the appellants' contention is that this right is a mere equity and the maxim has no application when the contest is between such an equity and an equitable interest of the character held by M.L.C. Nominees. This contention rests upon the line of authority based upon Phillips v. Phillips [2] . Lord Westbury there said: "Hence grantees and incumbrancers claiming in equity take and are ranked according to the dates of their securities; and the maxim applies, " Qui prior est tempore potior est jure ". The first grantee is potior - that is, potentior. He has a better and superior - because a prior - equity. The first grantee has a right to be paid first, and it is quite immaterial whether the subsequent incumbrancers at the time when they took their securities and paid their money had notice of the first incumbrance or not Now, the defence of a purchaser for valuable consideration is the creature of a Court of Equity, and it can never be used in a manner at variance with the elementary rules which have already been stated But there appear to be three cases in which the use of this defence is most familiar: - Thirdly, where there are circumstances that give rise to an equity as distinguished from an equitable estate - as for example, an equity to set aside a deed for fraud, or to correct it for mistake - and the purchaser under the instrument maintains the plea of purchase for valuable consideration without notice, the Court will not interfere" [1] . In Cave v. Cave [2] , Fry J., referring to the defence of purchaser for value without notice, said: "That defence, as we all know, has been the subject of a great deal of decision, and it is by no means easy to harmonize the authorities and the opinions expressed upon the subject. Criticisms upon old cases lie many strata deep, and eminent Lord Chancellors have expressed diametrically opposite conclusions upon the same question. The case of Phillips v. Phillips [3] is the one which has been principally urged before me, and that, as being the decision of a Lord Chancellor, is binding upon me, notwithstanding the subsequent comments upon it of Lord St. Leonards in his writings" [4] . His Lordship went on to cite the passage I have already quoted from Lord Westbury's judgment in Phillips v. Phillips [3] and, having come to the conclusion that he was dealing with a contest between equitable estates and not between an equitable estate and a mere equity, concluded: "Therefore I shall conclude that, within the case of Phillips v. Phillips [3] , the interest of the plaintiff in this case is an equitable interest, and not merely an equity like the equity to set aside a deed, and therefore it must take its priority according to the priority of date" [5] .

1. (1861) 4 De G.F. & J. 208 [45 E.R. 1164]. 2. (1861) 4 De G.F. & J., at pp. 215-218 [45 E.R., at pp. 1166, 1167]. 3. (1880) 15 Ch. D. 639. 4. (1861) 4 De G.F. & J. 208 [45 E.R. 1164]. 5. (1880) 15 Ch. D. at p. 646. 6. (1861) 4 De G. F. & J. 208 [45 E.R. 1164]. 7. (1861) 4 De G. F. & J. 208 [45 E.R. 1164]. 8. (1880) 15 Ch. D., at p. 649.

There is, however, as Fry J. said, another line of cases, the authority of which is beyond question, establishing that where there is an equity to have the voidable conveyance of an estate set aside, there remains in the conveyor, notwithstanding the conveyance, an equitable estate which may be devised or transferred. Thus, in Stump v. Gaby [6] , Lord St. Leonards, speaking of a conveyance by an heir at law to his solicitor, said: "I do not deny that a deed may be so fraudulent as to be set aside at law; this, however, is not such a case; but I will assume that the conveyance might have been set aside in equity for fraud: what then is the interest of a party in an estate which he has conveyed to his attorney under circumstances which would give a right in this Court to have the conveyance set aside? In the view of this Court he remains the owner, subject to the repayment of the money which has been advanced by the attorney, and the consequence is that he may devise the estate, not as a legal estate, but as an equitable estate, wholly irrespective of all question as to any rights of entry or action, leaving the conveyance to have its full operation at law, but looking at the equitable right to have it set aside in this Court. The testator therefore had a devisable interest. My strong impression is that this very point is concluded upon authority, but if not I am ready to make an authority on the present occasion, and to decide that, assuming the conveyance to have been voidable, the grantor had an equitable estate which he might have devised" [1] . Likewise, in Gresley v. Mousley [2] , Knight Bruce L.J., in deciding that a conveyor of land who has an equity to be relieved against a sale, has a devisable interest in the property sold, said that the Lords Justice were bound by the cases cited to the Court, including Stump v. Gaby [3] . He added that, if the Lords Justice were not so bound, "I still think that the decisions were correct and ought to be followed" [4] . The argument that Stump v. Gaby [3] proceeded on a sound principle, which seems to have been accepted, was as follows: "When a decree is made for setting aside a conveyance it relates back, and the grantee is to be treated as having been, from the first, a trustee for the grantor, who, therefore, has an equitable estate, not a mere right of suit" [5] . As to the conveyance inter vivos of such an interest carrying the right to sue the original conveyee, see Dickinson v. Burrell [6] .

1. (1852) 2 De G.M. & G. 623 [42 E.R. 1015]. 2. (1852) 2 De G. M. & G., at p. 630 [42 E.R., at p. 1018]. 3. (1859) 4 De G. & J. 78 [45 E.R. 31]. 4. (1852) 2 De G. M. & G. 623 [42 E.R. 1015]. 5. (1859) 4 De G. & J., at p. 90 [45 E.R., at p. 35]. 6. (1852) 2 De G. M. & G. 623 [42 E.R. 1015]. 7. (1859) 4 De G. & J., at p. 86 [45 E.R., at p. 34]. 8. (1866) L.R. 1 Eq. 337.

If there is a difference between the two lines of authority, that difference seems to me to arise from concentration upon different aspects of what follows from a voidable conveyance. Thus, Phillips v. Phillips [7] , in so far as it says that a person with the right to have a voidable conveyance set aside has but a mere equity, directs attention to the right to have the conveyance set aside as a right to sue which must be successfully exercised as a necessary condition of there being any relation back of the equitable interest established by the suit. Stump v. Gaby [3] directs attention to the result of the eventual avoidance of the conveyance upon the position ab initio and throughout of the persons by whom and to whom the conveyance of property was made and says that, in the event of a successful suit (which may be maintained by a devisee), the conveyor had an equitable estate capable of devise and that the conveyee holds, and has always held, as trustee.

1. (1861) 4 De G. F & J. 208 [45 E.R. 1164]. 2. (1852) 2 De G. M. & G. 623 [42 E.R. 1015].

There is no doubt that the two lines of authority are well established. See, for instance, Halsbury's Laws of England, 3rd ed., vol. 14, pars. 1009 and 1030. Furthermore, there is room for the application of each in appropriate circumstances. Thus, if Terrigal were a person instead of a company and the question were whether, in the circumstances here, that person had a devisable interest in the hotel property by virtue of his equity to have the conveyance to Southern set aside, Stump v. Gaby [1] would require an affirmative answer on the footing that, in the circumstances, Terrigal had an equitable interest in the hotel property. Where, however, the question arises in a contest between Terrigal and M.L.C. Nominees, the holders of an equitable interest in the hotel property acquired without notice of Terrigal's rights, the authority of Phillips v. Phillips [2] is (i) that the contest is between Terrigal's equity to have the conveyance set aside and the equitable interest of M.L.C. Nominees and (ii) that in that contest, Terrigal's equity is not entitled to priority merely because it came into existence at an earlier time than the equitable interest of M.L.C. Nominees. In the circumstances here, therefore, the maxim " Qui prior est tempore potior est jure " has no application.

1. (1852) 2 De G. M. & G. 623 [42 E.R. 1015]. 2. (1861) 4 De G. F. & J. 208 [45 E.R. 1164].

The conclusion I have just expressed with regard to the second matter in issue makes reference to the third matter unnecessary.

Accordingly, it is because I think that the equitable estate of M.L.C. Nominees takes priority over the equity of Terrigal that I would allow this appeal.

I agree that, in the circumstances, the course we should follow is that proposed by Kitto J.

Having heard counsel for the respective parties the Court made the following order: -