1 HIS HONOUR: Section 57(2) of the Real Property Act 1900 (NSW) ("the Act") authorises a registered mortgagee, chargee or covenant chargee of Torrens Title land, on default by the mortgagor, charger or covenant charger and subject to certain pre-conditions, to exercise a power to sell the land.
2 Section 58(1) of the Act provides that:
Where a mortgagee, chargee or covenant chargee is authorised by section 57 (2) to exercise the powers conferred by this section, the mortgagee, chargee or covenant chargee may sell the land mortgaged or charged, or any part thereof, and all the estate and interest therein of the mortgagor, charger or covenant charger, and either altogether or in lots by public auction or by private contract, or both such modes of sale, and subject to such conditions as the mortgagee, chargee or covenant chargee may think fit, and to buy in and resell the same without being liable for any loss occasioned thereby, and to make and execute all such instruments as shall be necessary for effecting the sale thereof, all which sales, contracts, matters, and things hereby authorised shall be as valid and effectual as if the mortgagor, charger or covenant charger had made, done, or executed the same, and the receipt or receipts in writing of the mortgagee, chargee or covenant chargee shall be a sufficient discharge to the purchaser of such land, estate, or interest, or of any portion thereof, for so much of the purchaser's purchase money as may be thereby expressed to be received.
3 Section 58(3) of the Act provides that:
The purchase money to arise from the sale of any such land, estate, or interest, shall be applied, first, in payment of the expenses occasioned by such sale; secondly, in payment of the moneys which may then be due or owing to the mortgagee, chargee or covenant chargee; thirdly, in payment of subsequent mortgages, charges or covenant charges (if any) in the order of their priority; and the surplus (if any) shall be paid to the mortgagor, charger or covenant charger, as the case may be . (emphasis added)
4 Knox Street Apartments Pty Ltd ("Knox"), a company associated with the plaintiffs, developed a property at Knox Street, Chippendale in a joint venture with Kimberley Securities Pty Ltd ("Kimberley"). The joint venture was completed. Kimberley has since been wound up in insolvency.
5 The first plaintiff owned certain land comprising folio identifier 8/SP56179 and the third plaintiff owned certain land comprising folio identifier 7/SP56179 (which are strata units in a development in Hutchinson Street, Surry Hills). I shall, where convenient, refer to the first plaintiff and the third plaintiff collectively as "the Esbers" and I shall refer to both lots collectively as "the land".
6 In 1998 the Esbers mortgaged the land by first registered mortgages in favour of Permanent Trustee Australia ("the first mortgagee"), securing certain obligations of Knox to the first mortgagee.
7 In 1999 the Esbers mortgaged the land by second registered mortgages in favour of the second defendant, Residential Housing Corporation Pty Ltd, securing certain obligations of Knox to the second defendant.
8 Finally, on or about 7 December 2000 and with the consent of the second defendant, the Esbers mortgaged the land by third unregistered mortgages ("the third mortgages") to Kimberley to secure monies payable by Knox to Kimberley and guaranteed by the Esbers.
9 In about November 2001 (after Knox had defaulted) the first mortgagee, exercising its power of sale under the Act, sold the land.
10 The proceeds of sale were more than sufficient to pay the expenses of the sale and to discharge the debt owed to the first mortgagee. It paid over the balance remaining in its hands to the second defendant. The amount paid to the second defendant was more than sufficient to discharge its debt and it held a balance of $416,780.81 ("the disputed amount").
11 The Esbers asserted to the second defendant that Knox (and accordingly they as guarantors) owed no money to Kimberley and that no money was owed under the third mortgages. They called on the second defendant to pay the disputed amount to them.
12 Kimberley asserted to the second defendant that a $2 M fee payable under the joint venture arrangement as well as other monies were owing to it under the third mortgages. It called on the second defendant to pay the disputed amount to it.
13 Initially, the second defendant took the stance that it was not in a position to release any funds until the issue was resolved. In a letter dated 13 February 2002 to the Esbers' solicitors, the second defendant's solicitors said that the second defendant would not place itself in a position of risk from any dispute arising between Kimberley and the Esbers.
14 On 13 February 2002 the second defendant's own solicitors gave it advice that at that stage it should not release any funds to any party until the matter was resolved.
15 On 15 February 2002, in a letter to Kimberley's solicitors, the second defendant's solicitors said, amongst others, that the second defendant did not wish to become involved in the dispute and would consider what further approaches Kimberley's solicitors may suggest as to how the funds could be held by someone other than the second defendant until the dispute was resolved.
16 Affidavit evidence was given by Mr James Christie, a director of the second defendant, that after receiving Kimberley's demand he telephoned Mr Nati Stoliar, a director of Kimberley, who insisted that the excess funds were paid to Kimberley and told Mr Christie that if need be Kimberley would commence court proceedings to enforce its rights, whereupon Mr Christie gave instructions for the disputed amount to be paid to Kimberley. Apart from this, the evidence did not reveal what caused the second defendant, in the face of the conflicting demands on it, to change its stance.
17 On 28 February 2002 the second defendant and Kimberley entered into a Deed of Indemnity and Release under which, against an indemnity from Kimberley, the second defendant paid over the disputed amount to Kimberley.
18 The Esbers first pursued Kimberley in these proceedings for the disputed amount. After a trial in which the second defendant did not take any active part, McDougall J held that as at 28 February 2002 (when the second defendant paid over the disputed amount to Kimberley) no money secured by the third mortgages was due from the Esbers to Kimberley.
19 Because of Kimberley's insolvency the Esbers have not recovered from it and there is no suggestion that they ever will. The second defendant's indemnity from Kimberley is apparently worthless.
20 The third mortgages were never registered.
21 The Esbers (for whom Mr T G R Parker SC and Ms S Fendekian of counsel appeared) contend that s 58(3) of the Act required the second defendant to pay the disputed amount to them. They say that in paying Kimberley the second defendant acted contrary to s 58(3) because the payment was not "in payment of subsequent mortgages". This is, they say, because: