LTDC Pty Ltd v Cashflow Finance Australia Pty Ltd

The interest acquired by the plaintiff

The plaintiff, LTDC Pty Ltd, is a provider of short-term loans that are secured by real property.
Mr James Foster is a solicitor, and a director of the plaintiff. On 29 March 2017 Mr Foster was contacted by a finance broker, namely Mr Quinn of My Business Path. Mr Quinn stated that his clients, Ms Geary and Mr Shaikho, had a company, Madebra, that required finance in a net amount of about $100,000. Mr Quinn informed Mr Foster that Ms Geary and Mr Shaikho would guarantee the loan and provide a mortgage over their property in Chipping Norton. Mr Quinn said that the property was estimated to be worth $1 million, and that there was $600,000 owing against it. Mr Quinn also sent an email to Mr Foster on that day. The email was in the following terms: Debbie Geary Moe Shaikho Madebra Enterprises Pty Ltd Property: 149 Alfred Road, Chipping Norton 2170 < $1mill ANZ loan <$600K Term - 3 months, 3% Fee - 18K
Later on 29 March 2017 Mr Foster conducted a title search in respect of the Chipping Norton property. The search showed that Ms Geary and Mr Shaikho were the registered proprietors as joint tenants. It also showed that Pepper Finance Corporation Ltd held a registered mortgage over the property. Mr Foster also conducted an ASIC search of Madebra. This search showed that Ms Geary was the sole director and secretary of the company and that she and Mr Shaikho held all of the shares in the company. Mr Foster then obtained an automated valuation of the property through the RP Data Core Logic website. The valuation gave an estimated value of $892,783, with an estimated price range of $803,504 to $982,061.
A letter of offer dated 29 March 2017 was prepared and sent to Madebra, Ms Geary and Mr Shaikho. The letter of offer concerned a loan of $150,000 for a term of 3 months at an interest rate of 6% per month reducible to 3% per month where there is no default. It was stated that the amount available to be advanced at settlement would be $103,500, being the loan amount less 3 months capitalised interest, a management fee of $15,000 (plus GST), and an establishment fee of $15,000 (plus GST).
Mr Foster gave evidence to the effect that the plaintiff's lending parameters were to lend up to 80% of the value of the security property. He also explained that a gross loan amount of about $130,000 to $150,000 would be necessary in order to yield a loan with a net amount of about $100,000.
Mr Foster gave evidence that he used the RP Data Core Logic valuation, together with information obtained from other websites, such as information concerning recent sales in the area, to make an assessment of the value of the Chipping Norton property. Mr Foster deposed that shortly before settlement of the loan on 13 April 2017, he carried out such an assessment (which he referred to as a "desktop valuation"). On that occasion, Mr Foster estimated that the Chipping Norton property was worth $950,000. It is not clear whether Mr Foster carried out any such assessment of value at an earlier time, although it is likely that at an early stage he formed a view that the value would probably allow the proposed loan to fit within the plaintiff's lending parameters. In cross-examination he stated that he did some quick calculations "to see whether we progress forward or not". It seems that no notes evidencing any calculations or assessment of value were made.
The letter of offer was signed by Ms Geary and Mr Shaikho on 31 March 2017. I infer that the signed letter was received by the plaintiff on that day.
On 31 March 2017 Mr Foster instructed a solicitor, Mr Adair, to prepare loan documents. Mr Adair carried out a number of searches, including name searches of Ms Geary and Mr Shaikho at ASIC and the New South Wales Land Registry. The ASIC search in respect of Mr Shaikho revealed that he was involved as a director, secretary and shareholder in SSS Haulage Pty Ltd. The plaintiff added that company as one of the guarantors of the loan. On 3 April 2017 Mr Adair sent draft loan documents to the solicitor then acting for the borrower and guarantors on the proposed loan.
The documents included a Loan Agreement, a Deed of Guarantee and Indemnity, and a mortgage over the Chipping Norton property.
On 3 April 2017 Mr Quinn sent an email to Mr Foster in the following terms: This company is a transport business operating out of western Sydney. The loan will be used to pay out company creditors. Exit strategy for loan is to refinance with another lender.
Also on 3 April 2017 Mr Foster requested Mr Quinn to provide information as to the amount owing to the first mortgagee. Mr Quinn sent a screenshot of the account summary showing that the balance on the account was $595,311.01. Another screenshot of the account summary was forwarded to Mr Foster on 10 April 2017. The document in evidence is indistinct, but seems to show a balance of less than $600,000.
On 12 April 2017 the various transaction documents, as executed by Madebra and the guarantors, were returned to Mr Adair. Mr Adair advised Mr Foster that the documents were in order.
Mr Foster then conducted a company search of the first mortgagee. This was done because Mr Foster wanted to notify the mortgagee of the $150,000 loan and the grant to the plaintiff of a mortgage over the Chipping Norton property. A notice to that effect was sent to the first mortgagee on 12 April 2017. Mr Foster also took steps to notify on the PPSR security interests held by the plaintiff in respect of the personal property of Madebra and each of the guarantors.
Also on 12 April 2017 the plaintiff lodged a caveat on the title to the Chipping Norton property (caveat number AN305910), claiming an interest as mortgagee pursuant to the mortgage of the property dated 12 April 2017. Mr Foster deposed that it was his practice to do this so that the plaintiff can "confirm its security position" prior to advancing funds.
Prior to the actual advance of funds, Mr Foster conducted another title search in respect of the Chipping Norton property. He gave evidence that this was done to confirm that the caveat had been registered "immediately behind the first mortgagee's mortgage". The search showed that there were no mortgages or other security interests noted on the title apart from the registered mortgage in favour of Pepper Finance Corporation Ltd. The search also showed that the caveat had been noted as an unregistered dealing.
Mr Foster also requested that Ms Geary provide another screenshot of the account balance on the mortgage, as at "post 10:30am tomorrow". Mr Foster evidently wanted to confirm the amount of the debt owing to the first mortgagee, prior to the plaintiff advancing any funds. Ms Geary sent a screenshot at about 11:00am on 13 April 2017 showing that the balance on the account was $599,308.29.
As mentioned earlier, Mr Foster then carried out an assessment of the value of the Chipping Norton property, and estimated it to be worth $950,000. On that basis, the amount owing to the first mortgagee, plus the amount of the new loan, was slightly less than 79% of the value of the property.
Mr Foster deposed that he was satisfied, based on the title search, that the plaintiff had a second ranking security on the property, and was further satisfied that the loan to value ratio was within accepted parameters. Mr Foster therefore took steps to advance the loan funds to Madebra on 13 April 2017.
Mr Foster deposed that if he had been aware at that time that the defendant had a purported interest in the Chipping Norton property, he would not have caused the plaintiff to proceed with the loan.
The loan was due to be repaid on 13 July 2017. The plaintiff agreed to extend the loan for a month to give more time for a refinance to occur. The extension was on the condition that the months interest of $4,500 was paid by 13 July 2017. The interest was paid by that date.
A similar one month extension was arranged in early August, so that the loan was henceforth to be repaid by 13 September 2017. That did not occur, and no further extension was agreed. No further interest payments were made.
On 2 November 2017 Ms Geary informed the plaintiff's solicitors that it was intended to sell the Chipping Norton property. On 27 January 2018 she and Mr Shaikho entered into a contract to sell the property for $935,000. On about 1 March 2018 the plaintiff became aware of the caveat that had been lodged by the defendant.
In cross-examination, Mr Foster agreed that the plaintiff did not make enquiries as to the financial position of Madebra, or its capacity to repay the loan. He took the view that, at least in circumstances where there is a loan to a company and the lender is expecting to be paid out from a specific asset or an asset of a guarantor, it was not relevant to look at the financial performance of the company. Mr Foster accepted that the plaintiff was in this case engaging in "a form of asset lending".
Mr Foster agreed that the plaintiff did not undertake a search of the PPSR in relation to Madebra. Mr Foster later stated in effect that the primary security for the loan was the Chipping Norton property, and this was evidenced by the undertaking of "inquiries into the property as opposed to the PPSR".
Mr Foster agreed that he knew Madebra was proposing to use the loan funds to pay out company creditors, and that the exit strategy for the loan was to refinance with another lender. He stated that he was satisfied at the time that "they would be able to get a refinance". He did not accept that he was on notice that the company might be in financial distress and unable to afford the loan.
Mr Foster conceded that as at 3 April 2017 it was possible that Madebra already had creditors to whom it had given security over its assets. Mr Foster stated that having done the title search (of the Chipping Norton property) he would have thought that none of the company's creditors had obtained or were relying on personal guarantees as security "because who lends money and doesn't register on the real property [register] if that's what they're relying on".
He went on: My experience is that anyone who is relying on an unregistered security or an equity that's created as a result of a charging clause, that if they're relying on that, then they register… And later: I've never known any lender or any creditor…to take a charge against somebody and hope for the best not to register on the Real Property Act [register]…

Determination

In Butler v Fairclough (1917) 23 CLR 78 it was held that the failure of an equitable mortgagee to promptly lodge a caveat brought about a loss of priority over the holder of a later equitable interest who had relied upon the result of a title search showing no relevant interests apart from a registered mortgage. Griffith CJ stated (at 91-2): In the case of a contest between two equitable claimants the first in time, all other things equal, is entitled to priority. But all other things must be equal, and the claimant who is first in time may lose his priority by any act or omission which had or might have had the effect of inducing a claimant later in time to act to his prejudice… …A person who has an equitable charge upon the land may protect it by lodging a caveat, which in my opinion operates as notice to all the world that the registered proprietor's title is subject to the equitable interest alleged in the caveat. In the present case the plaintiff might, if he had been sufficiently diligent, have registered his charge of 30th June on that day. The defendant, having before parting with the purchase money to Good found on searching the register that Good had a clear title, paid the agreed price. The question then seems to be: Had the plaintiff when the defendant acquired his equitable right taken or failed to take all reasonable steps to prevent Good from dealing with the land without notice of plaintiff's title?
Isaacs J, after referring to the failure of the equitable mortgagee to lodge a caveat, stated (at 97): In my opinion, in the absence of some clear explanation justifying or excusing this failure it is one which, at all events in so simple a case as an equitable mortgage, postpones the mortgagee to the person bona fide misled by the result of a search as in the present case. The protection given by the Act to an unregistered and, perhaps, unregistrable transaction is coupled with the price of diligence in guarding others against loss arising through ignorance of the transaction.
In J & H Just (Holdings) Pty Ltd v The Bank of New South Wales (1971) 125 CLR 546 Barwick CJ (with whom McTiernan and Owen JJ agreed) made it clear (at 554) that the failure by the holder of an equitable estate to lodge a caveat does not necessarily involve the loss of priority that precedence in time would otherwise give. The Chief Justice continued (at 554-5): Of course, there may be situations in which such a failure may combine with other circumstances to justify the conclusion that "the act or omission proved against" the possessor of the prior equity "has conduced or contributed to a belief on the part of the holder of the subsequent equity, at the time when he acquired it that the prior equity was not in existence" cf. per Knox C.J. in Lapin v. Abigail. This is the relevant principle to apply if it is claimed that the priority of a prior equitable interest has been lost in competition with a subsequent equitable interest. "In general an earlier equity is not to be postponed to a later one unless because of some act or neglect of the prior equitable owner. In order to take away any pre-existing admitted title, that which is relied upon for such a purpose must be shown and proved by those upon whom the burden to show and prove it lies, and … it must amount to something tangible and distinct, something which can have the grave and strong effect to accomplish the purpose for which it is said to have been produced: per Lord Cairns L.C. in Shropshire Union Railways and Canal Co. v. The Queen. The Act or default of the prior equitable owner must be such as to make it inequitable as between him and the subsequent equitable owner that he should retain his initial priority. This in effect means that his act or default must in some way have contributed to the assumption upon which the subsequent legal owner acted when acquiring his equity": Lapin v. Abigail per Dixon J. In my opinion, the failure to lodge a protective caveat cannot properly be said necessarily to be such an act or default. It could not properly be said to be so in the present case.
In Person-to-Person Financial Services Pty Ltd v Sharari (supra) McLelland J (as his Honour then was) reviewed the authorities to that point and said (at 747): It is quite clear, as was held in J & H Just (Holdings) Pty Ltd v Bank of New South Wales, that failure by the holder of an equitable interest to lodge a caveat in respect of that interest where a caveat might have alerted the acquirer of a subsequent equitable interest to the existence of the earlier interest of which he was unaware, does not necessarily result in the postponement of the earlier to the subsequent interest, but that case does not provide authority for the proposition that failure to lodge a caveat can never bring about the postponement of an earlier to a subsequent interest. Such a proposition would be inconsistent with the decision of the High Court in Butler v Fairclough (1917) 23 CLR 78 which was not over-ruled by, and in my view stands comfortably with, the decision in J & H Just (Holdings) Pty Ltd v Bank of New South Wales… The effect of a failure by the holder of an equitable interest to lodge a caveat will depend upon the particular circumstances. A critical point of distinction between the circumstances under consideration in Butler v Fairclough and those under consideration in J & H Just (Holdings) Pty Ltd v Bank of New South Wales is that the party whose conduct in failing to lodge a caveat was under consideration was in the former case an unregistered second mortgagee who did not have the certificate of title, and in the latter case an unregistered first mortgagee who did have the certificate of title.
In Double Bay Newspapers Pty Ltd v A W Holdings Pty Ltd (supra) Bryson J (as his Honour then was) said (at 423): In the presence of these authorities McLelland J in Person-to-Person Financial Services Pty Ltd v Sharari [1984] 1 NSWLR 745 made observations which show the significance which in my opinion ought to be attributed to a failure to lodge a caveat. I respectfully share his Honour's view that the decision in Butler v Fairclough continues to be of authority. Priority which would otherwise exist according to time may be lost where some act or omission by the holder of the earlier interest has led the holder of a later interest to acquire his interest on the supposition that the earlier did not exist. Examples of those circumstances occur where the holder of a later interest searched the register, found no such information as lodgement of a caveat would have put there and acted in reliance on the apparent absence of any such interest. As is shown by J & H Just Holdings where these circumstances exist they may not be the only significant circumstances, and they may be outweighed by other circumstances.
In the light of these authorities, and in accordance with what was said by Mason and Deane JJ in Heid v Reliance Finance Corporation (supra) at 341-2, the defendant is correct to contend that in determining which is the better equity, the inquiry is upon all of the circumstances of the case, including the circumstances in which the respective equitable interests were acquired.
I have considered the evidence adduced by the defendant as to the enquiries and due diligence it conducted in relation to Madebra and the guarantors prior to entry into the Finance Facility Deed. I am satisfied that the defendant carried out proper due diligence prior to the provision of its finance, as it submitted.
In the course of its enquiries, the defendant became aware that Ms Geary and Mr Shaikho owned the Chipping Norton property. It seems that some information was received to the effect that the property was worth about $890,000, and that loans valued at $594,000 were "held against the property".
Even though that property would fall within the ambit of the charge given by the guarantors pursuant to cl 38 of the Finance Facility Deed, the defendant did not undertake a title search to ascertain what if any interests were registered or recorded against the title, and no caveat was lodged once the Finance Facility Deed had been entered into.
The evidence given by Ms Stelfox made it clear that the defendant regarded the security it obtained pursuant to cl 38 as merely "secondary" security, even to the point that it did not really rely upon it when it entered into the Finance Facility Deed. It was not one of those cases, referred to by Ms Stelfox, where the defendant would take a second registered mortgage (with a deed of priority).
The failure of the defendant to promptly lodge a caveat on the title to the charged land is at least partly explained by the standard practice of invoice financiers to not lodge caveats until there is a default under the finance agreement. That practice, as followed by the defendant, itself rests to a degree upon the circumstance that the real property security afforded pursuant to guarantees taken by the defendant are relied upon "only if a problem arises with the collectability of the client's debtor ledger". The practice, as followed by the defendant, seems to further rest upon aspects of the law relating to caveats in Queensland, which are not present in New South Wales.
The conduct of the defendant in not proceeding to promptly lodge a caveat in relation to the Chipping Norton property can be fairly regarded as deliberate conduct undertaken in the perceived commercial interests of the defendant. Moreover, the defendant should be taken to have been aware that the failure to caveat might lead to the creation of a later equitable interest on the assumption that the defendant's interest did not exist. Ms Stelfox seemed to accept that such an outcome was reasonably foreseeable.
The evidence of Mr Foster establishes that when the plaintiff acquired its interest it was not aware of the defendant's prior interest. In that regard it is clear that the plaintiff, through Mr Foster, relied upon the results of the two title searches which relevantly showed only the existence of the first registered mortgage.
Mr Foster evidently held the firm view that anyone who was seeking to rely upon an unregistered interest in real property would register their interest on the Real Property Act register. I take that evidence to mean that the person would either register the relevant dealing or lodge a caveat claiming the interest.
There was no independent expert evidence adduced about the conveyancing practices of lenders in New South Wales, although I note that Mr Foster is himself a solicitor with some years of experience in acting for lenders in New South Wales. However, it is clear in my view that it is prudent conveyancing practice in New South Wales for a lender, upon taking a second ranking mortgage or charge over real property (and not having the certificate of title), to promptly take steps to either register its interest or lodge a caveat claiming the interest (see Elderly Citizens Homes of SA Inc v Balnaves (1998) 72 SASR 210 at 226-7; cf Lapin v Abigail (1930) 44 CLR 166 at 205). Moreover, whilst that prudent practice might not be followed in every case, it is sufficiently common and well-known that it is in my opinion generally reasonable for a lender proposing to take a second ranking mortgage or charge to assume, based on a title search which shows neither a second registered interest nor a caveat, that no equitable mortgage or charge exists. I say generally reasonable because circumstances may exist in a particular case which would render it unreasonable to make the assumption.
In the present case the defendant criticised the adequacy of the plaintiff's due diligence. In particular, it was suggested that had adequate due diligence been undertaken the plaintiff would have found out about the charge contained in the Finance Facility Deed, or at least become aware of circumstances that would suggest that there may well be existing equitable interests over the Chipping Norton property. In this regard, there is no doubt that the defendant did not make enquiries (including any search of the PPSR) as to the financial position of Madebra. Mr Foster explained that the plaintiff was a lender of short-term finance, and in this instance was relying upon the Chipping Norton property as its security. Mr Foster also stated that the expected method of repayment of the loan was by way of a refinance, and he thought at the time that Madebra would be able to refinance.
The defendant also criticised the approach taken by Mr Foster to the assessment of the value of the Chipping Norton property.
I have carefully considered these matters. However, it seems to me that in the context of a loan of the type proposed to be made by the plaintiff to Madebra, the plaintiff acted appropriately in focusing upon the adequacy of the Chipping Norton property as a security, rather than an assessment of the financial position of Madebra. The loan was not to be serviced out of the revenue of Madebra. The interest for the three month term of the loan was to be paid when the advance was made, and the loan was intended to be repaid by way of a refinance. I accept that Mr Foster thought, based on his experience, that there were grounds to expect that a refinance would likely occur. It was not shown that it was unreasonable for Mr Foster to hold that view.
I do not think that in the circumstances the plaintiff acted unreasonably or incautiously by not undertaking assessments of the financial position of Madebra, including by searching the PPSR. Had that search been undertaken, it would not have revealed the terms of the Finance Facility Deed, in particular the charge given by Ms Geary and Mr Shaikho. The search might provide information to suggest that further enquiries be made about the financial position of Madebra but, as I have said, I do not think that the plaintiff was reasonably required to focus on that matter.
I do not think that the plaintiff otherwise acted unreasonably or incautiously. I should record that I do not think there is any substance in the point sought to be made by the defendant based on the increase of approximately $4,000 in the balance on the account of the first mortgage. That amount is roughly the amount of the monthly payment required on the mortgage.
I also accept that Mr Foster had a reasonable basis to estimate that the value of the Chipping Norton property was about $950,000. He explained that he did not rely solely upon the RP Data Core Logic valuation, but took into account other sources of information and applied his own experience (admittedly not that of a qualified valuer). The sale price of $935,000 achieved about 9 months later suggests that Mr Foster's estimate was not unreasonable.
The defendant also seemed to suggest that the plaintiff's conduct in lending for a short-term, for large fees and at high interest rates, whilst relying only upon the Chipping Norton property as security (a form of "asset lending"), was itself a matter that weighed against the plaintiff in the assessment of the competing equities.
I do not regard this as having much significance in this case. Whatever else might be said about the nature of the short-term commercial lending market, including its commonly encountered features such as large fees and high rates of interest, and reliance upon real property security to facilitate repayment, lending in that market is a lawful activity. There are no doubt many instances where finance of that type, sometimes arranged very promptly, is of considerable benefit to the borrowers and those associated with them.
Having considered all of the circumstances of the case, I have come to the conclusion that the plaintiff has the better equity. The failure of the defendant to promptly lodge a caveat on the title to the Chipping Norton property left the owners of the property in a position to represent that the property was not subject to a charge in favour of the defendant. That is what effectively occurred when the finance broker approached the plaintiff seeking finance. The broker put to the plaintiff that a loan could be secured over the Chipping Norton property, which was valued at about $1 million and had "$600,000 owing against it". That figure was plainly a reference to the first mortgage. There was no mention of a charge in favour of the defendant. There is no suggestion that the existence of that charge was otherwise disclosed to the plaintiff. In this regard, I note further that cl 3A.2 of the mortgage granted to the plaintiff contains a confirmation that the property was "unencumbered other than as disclosed on the title search".
The evidence is clear that the plaintiff proceeded in reliance upon the results of the two title searches which relevantly showed only the registered first mortgage. In my opinion, it was reasonable in this case for the plaintiff to assume, based on those results, that no equitable mortgage or charge existed. That is to say, it was reasonably safe to make that assumption in the circumstances. A lender in the position of the plaintiff would not expect that an earlier lender would take the trouble to obtain second ranking security over the Chipping Norton property, yet not take steps to either have the relevant dealing registered or lodge a caveat claiming the interest. It was not put to Mr Foster that he (or anyone else associated with the plaintiff), was aware of any general practice amongst lenders to the contrary. Whilst the existence of an earlier interest could not be entirely discounted, I think it was reasonably safe for the plaintiff to proceed on the basis that no such interest existed.
It is clear that the defendant's failure to lodge a caveat contributed to the assumption upon which the plaintiff proceeded. The failure was deliberate conduct undertaken by the defendant in its perceived commercial interests, even if it also accorded with a standard practice in the invoice financing industry. The conduct is explicable to a large extent by the fact that the plaintiff placed little or no reliance upon its security over the Chipping Norton property when it proceeded to provide finance to Madebra. The defendant knew that the failure to caveat might lead to the creation of later interests on the assumption that the defendant's interest did not exist. There was in a sense a deliberate courting by the defendant of that risk. Lodging a caveat would, of course, have been a relatively simple and inexpensive step for the defendant to take.
I consider that in all the circumstances the conduct of the defendant, in failing to lodge a caveat prior to the plaintiff acquiring its mortgage over the Chipping Norton property, was such that in fairness and justice the defendant's earlier interest should be postponed to the plaintiff's later interest (see Heid v Reliance Finance Corporation (supra) at 341); it would in my view be inequitable as between the parties for the defendant to retain the priority it would otherwise enjoy (see Lapin v Abigail (supra) at 204).

At a glance

Court

Decision date

Before

Source

Judgment (7 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (8)

Cited By (1)