Mathieson Nominees v Aero Developments & Ors [2016] VSC 131

SALE OF LAND - Effect of nomination of party to take transfer - Whether a charge on the land enforceable against nominated party - Construction of nomination clause.

SECURITIES - Fixed and floating charge over company assets - Whether an equitable charge or an equitable mortgage - An equitable charge and an equitable mortgage both create a proprietary right in the charged property - Differences between an equitable mortgage and an equitable charge - Equitable mortgage created.

1 The Plaintiff, Mathieson Nominees Pty Ltd ("Mathieson Nominees"), claims that it is entitled to an equitable charge over subdivisional land at Point Cook in Victoria and that it has an interest in the land capable of supporting a caveat.

2 The land in question (the "Property") was situated and known as Boardwalk Estate Lot LL Boardwalk Boulevard, Point Cook, Victoria. It was comprised in plan of subdivision No. PS 511526L and described in certificate of title volume 10834 folio 436. The Property was located directly opposite the Point Cook town centre, approximately 500 metres south of the Princes Freeway within the suburb of Point Cook.

3 At all relevant times, the Property was vacant land, although a town planning permit No. WPS 5394 had been issued which permitted a 22 lot subdivision of the Property, including 21 townhouse allotments and a larger allotment which was proposed to include 125 apartments.

4 The Plaintiff at trial did not pursue its claims against the Second or Third Defendants, being Cash Flow King Pty Ltd and Mr Gary Evans respectively. The Plaintiff limited its claims to an entitlement to an equitable charge over the Property and the maintenance of a caveat in respect of the claimed interest.

5 Sprint Homes Pty Ltd ("Sprint Homes") was first registered as a company on 19 October 2006.

6 The Third Defendant, Gary Philip Evans ("Mr Evans") was appointed a director of Sprint Homes on 19 October 2010.

7 Sprint Homes planned to purchase the Property from the Victorian Urban Development Authority ("VicUrban"). The Property was undeveloped at that time.

8 Sprint Homes needed to borrow funds to proceed with the purchase and develop the Property.

9 On or about 20 March 2009, Mr Evans obtained a valuation of the Property addressed to Sprint Homes from a valuer, the Hay Property Group. The valuation valued the Property at $5.5 million.

10 Sprint Homes approached the Plaintiff, Mathieson Nominees, for the purpose of obtaining loan funds. Mathieson Nominees agreed to advance the necessary funds for the deposit, being $225,000, as well as an additional amount of $25,000 which was to be put towards the working capital of Sprint Homes.

11 The loan to Sprint Homes by Mathieson Nominees was effected by a deed of advance made on or about 18 April 2008 (the "Deed of Advance" or the "Loan Agreement") between Mathieson Nominees, the Second Defendant, Cash Flow King Pty Ltd ("Cash Flow King") and Sprint Homes, under which Mathieson Nominees agreed to advance to Sprint Homes the sum of $250,000 (the "Advance" or the "Original Loan"). Cash Flow King was the Guarantor under the Deed of Advance.

12 The Deed of Advance was signed by Mr Alan Mathieson and Mr Ian Mathieson for Mathieson Nominees and by the Third Defendant, Mr Evans, on behalf of both Sprint Homes and Cash Flow King.

13 The Deed of Advance included the following provisions:

(a) By clause 2.1, Mathieson Nominees agreed to advance to Sprint Homes the sum of $225,000 for the payment of a deposit under a contract of sale of real estate between Sprint Homes as purchaser and the Victorian Urban Development Authority as seller, for the purchase of a property known as the "Boardwalk Estate" (the "Property"), together with the sum of $25,000 for working capital for Sprint Homes (together called the "Original Loan");

(b) By clause 1.1, the Boardwalk Estate was defined as being the land in certificate of title Volume 10834 Folio 436;

(c) By clause 3, Sprint Homes was required to repay the Advance and the interest thereon (the "Advance Interest Amount") on 20 April 2009 or when the default provisions in clause 5 of the Deed of Advance were triggered;

(d) By clause 1.1, the Advance Interest Amount was defined as the sum of $125,000; and

(e) By clause 1.1 the "Lender's Securities" were defined as follows:

"Lender's Securities" means:

(a) a fixed and floating charge granted by the Borrower to the Lender on or about the date of this deed;

(b) a fixed and floating charge granted by the Guarantor to the Lender on or about the date of this deed; and

(c) a caveat over the land in Certificate of Title Volume 10845 Folio 458.

14 On or about 18 April 2008, Sprint Homes executed an instrument being a fixed and floating charge (the "Instrument of Charge") in favour of Mathieson Nominees over all of its present and future property (the "Charged Property") as security for the repayment of the Advance.

15 The Instrument of Charge included the following provisions:

1. By clause 2.1, Sprint Homes charged the Charged Property in favour of Mathieson Nominees as security for the payment of the Secured Money as beneficial owner of the Charged Property;
2. By clause 1.1, Charged Property was defined as being all present and future property of Sprint Homes, wherever situated;
3. By clause 2.2(a), the Instrument of Charge was a fixed charge on all present and future estates and interests in land, including each fixture, structure or improvement on land or fixed to it; and
4. By clause 4.2(b), Sprint Homes was not, without the consent of Mathieson Nominees, to dispose of or otherwise deal with the Charged Property over which the Instrument of Charge was fixed. This clause was in the following terms:

4.2 Negative obligations

The Company must not, without the consent of the Chargee:

...

(b) dispose of or otherwise deal with the Charged property over which the Charge is fixed;

16 On or about 21 April 2008, Mathieson Nominees paid to Sprint Homes the loan sum constituted by the Advance in the amount of $250,000.

17 On 2 June 2008, the Instrument of Charge was registered with the Australian Securities and Investments Commission ("ASIC") as charge number 1642778.

18 By the contract of sale dated 16 June 2008 (the "Contract"), Sprint Homes purchased the Property from Victorian Urban Development Authority ("VicUrban") for $4.5 million plus GST. The Contract provided for payment of a deposit of $225,000, with settlement of the balance falling due for payment within 9 months.

19 The deposit under the Contract of $225,000 was paid to the VicUrban on or about 22 July 2008.

20 The Contract was amended by agreement of the parties to adjust the settlement date for the payment of the residue of the purchase price from 16 March 2009 to 30 March 2009. However, Sprint Homes failed to pay the residue or the purchase price by 30 March 2009 and fell into default under the Contract.

21 On or about 15 June 2009, VicUrban served a notice of rescission of the Contract on Sprint Homes.

22 Negotiations then ensued with the result that on or about 29 June 2009 VicUrban agreed to further extend the settlement date under the Contract to 31 July 2009 and withdraw the notice of rescission dated 15 June 2009. A clause in the Contract as amended also entitled the purchaser to a discount of $500,000 on the purchase price if the Contract was settled on or before 31 July 2009.

23 On 3 July 2009, the First Defendant, Aero Developments Pty Ltd ("Aero Developments"), was registered as a company. Mr Evans was the sole Director and Secretary of Aero Developments from 3 July 2009 until 15 September 2009. Since 15 September 2009, Mr Peter Plevritis ("Mr Plevritis") and Mr Riccardo Tenuta ("Mr Tenuta") have served as Directors and Secretaries of Aero Developments in place of Mr Evans.

24 Mr Joe Katz ("Mr Katz") was appointed as solicitor for Aero Developments.

25 By a nomination in writing dated 3 July 2009, Sprint Homes nominated Aero Developments as substitute purchaser under the Contract. The nomination was executed by Mr Evans as the director of both Sprint Homes and Aero Developments and was effected without notice to Mathieson Nominees. The nomination was in the following terms:

As the property is expressed as sold to the Purchaser "and/or Nominee" (or words to that effect) then pursuant to the conditions of the contract the Purchaser nominates the Nominee as substituted purchaser to take a transfer or conveyance in lieu of the Purchaser.

The purchaser and the Nominee acknowledge that they will henceforth be jointly and severally liable for the due performance of all the obligations of the Purchaser under the Contract and payment of any expenses resulting from this nomination (including any Stamp Duty).

26 On 14 July 2009, Mr Katz sent an email to Mr Tenuta with a copy to Mr Evans. This followed a meeting held at the office of Mr Katz. The meeting was attended by Mr Katz, Mr Evans and Mr Michael Knight, who was in the business of procuring loan funds and was the principal of Knight Jones and Associates. Knight Jones and Associates and Mr Knight had been appointed by Aero Developments for the purpose of securing finance to enable it to settle the purchase of the Property.

27 The 14 July 2009 email from Mr Katz noted the development potential of the Property and the plan of subdivision which had been prepared in relation to the land, subdividing the property into 21 town-house lots, open space, together with a 'super lot' which had been designated in the relevant planning scheme for 125 apartments. The email also noted the valuation of the property at $5.5 million "as is".

28 On or about 17 July 2009, Mr Tenuta, Aero Developments and Mr Evans executed a written agreement dated 17 July 2009 (the "17 July Agreement"). The 17 July Agreement was in the form of a deed, and was executed as such.

29 The principal objective of the 17 July Agreement was to secure funding for Aero Developments, which had been nominated on 3 July 2009 to take the transfer of the Property under the Contract for the sale of the Land from VicUrban to Sprint, to facilitate completion of the Contract. At the time of this agreement, Mr Evans was both the sole director and sole shareholder of Aero Developments.

30 The 17 July Agreement recited the background, and noted that Aero Developments continued to make loan applications to settle the Contract through its agent Knight Jones and Associates and its principal Mr Knight. It also noted that a proposed first mortgage loan would not provide sufficient funds to settle the purchase of the Property, and that Mr Tenuta had agreed to procure a second mortgage loan of $800,000 to enable Aero Developments to take a transfer of the Property from the Authority. Mr Evans agreed to guarantee the obligations of Aero Developments under the proposed second mortgage. The 17 July Agreement also provided, amongst other things, that:

2.1 VicUrban had agreed to discount the purchase price by $500,000;

2.2 The development permits and approvals set out in the email from Mr Katz dated 14 July 2009 were true and correct; and

2.3 The cost of completing the works for the development of the Property was in the vicinity of $300,000.

31 The 17 July Agreement further recorded that the proposed second mortgage lender was a company associated with Mr Tenuta and that a $600,000 'reward' would be payable to the proposed second mortgage lender equating to 150 per cent per annum on the proposed loan of $800,000. The agreement also noted that unless such a 'reward' was paid, Aero Developments would be unlikely to secure the additional $800,000 of funds it required to settle the purchase of the Property from VicUrban.

32 On 21 July 2009, Clayton Utz, solicitors for VicUrban, wrote to Mr Katz confirming that VicUrban agreed to amend the Contract by adding Aero Developments as nominee. The Contract was accordingly varied on 23 July 2009 to include the words "and/or Nominee" in the purchaser's details in the particulars of sale and Aero Developments was added as the nominated purchaser.

33 However, Aero Developments failed to pay the residue of the purchase price by the varied settlement date of 31 July 2009.

34 On 3 September 2009, VicUrban issued a second notice of rescission.

35 On 15 September 2009, Mr Evans ceased as a director of Aero Developments.

36 On 15 September 2009, Mr Plevritis and Mr Tenuta were appointed directors of Aero Developments, and, on or about the same day, both became sole shareholders of Aero Developments.

37 Further, on or about 15 September 2009, Mr Tenuta, Mr Plevritis, Mr Evans and Sprint Homes executed a written agreement bearing that date (the "Share Sale Agreement"). Mr Evans was the "Vendor" and Mr Tenuta and Mr Plevritis were the "Purchasers" under the Share Sale Agreement. It provided in recitals that:

1. By a Contract of Sale of Real Estate made between Sprint as purchaser and Victorian Urban Development Authority ("VicUrban") as vendor ("Contract"), on 16 June 2009 VicUrban sold to Sprint lot LL on Plan of Subdivision PS511526L being the land described in Certificate of Title Volume 10834 Folio 436 ("Property").

B. The Vendor is the sole director and sole shareholder of Sprint.

1. As Sprint had considerable financial problems and an adverse credit profile due to which it was unable to secure loan funds to enable it to settle the Contract, on 3 July 2009 Sprint nominated Aero Developments Pty Ltd AN 138 086 978 (a company with no financial history and more likely to be able to secure loan funds) as the substituted purchaser of the Property entitling Aero to take transfer of the Property from VicUrban.

1. The Vendor is at the date hereof, the sole director and sole shareholder of Aero.
2. By agreement between VicUrban and Aero, the payment of the residue under the Contract was extended to 31 July 2009 ("Settlement Date") to enable Aero to take transfer of the Property from VicUrban on or before the Settlement Date.
3. Knight Jones & Associates Pty Ltd, and its principal, Michael Knight (together "Knight") have used their best endeavours to procure a loan to be secured by a 1st ranking mortgage over the Property ("1st Mortgage Loan") for the purpose of Aero taking transfer of the Property from VicUrban.
4. On the basis that the 1st Mortgage Loan was procured for an amount and on terms and conditions which Aero could prudently accept, interests associated with the Purchasers ("2nd Mortgage Lender") had agreed to lend $800,000 to Aero on the security of a 2nd Ranking Mortgage over the Property ("2nd Mortgage Loan") on terms and conditions set out in a Deed made between Tenuta, Aero and the Vendor a copy of which is annexed hereto.
5. Notwithstanding the best efforts of Knight to procure the 1st Mortgage Loan for an amount and on terms and conditions which Aero could prudently accept, such loan has not been able to be procured.
6. Aero failed to take a transfer of the Property from VicUrban on or before the Settlement Date and VicUrban has served a Rescission Notice ("Notice") on Aero (a copy of which is annexed to this Deed) which provides, inter alia, that unless Aero makes good the default specified in the notice within 14 days from the service of the Notice on Aero, VicUrban intends to exercise the rights set out in the Notice including the rescission of the Contract.
7. The Vendor and Sprint are concerned that if the Contract is rescinded due to the effect of the Notice, the deposit paid by Sprint under the Contract will be forfeited and VicUrban will be entitled to exercise its rights and remedies against Sprint as is set out in the Notice and otherwise according to law and against the Vendor pursuant to the Guarantee and Indemnity attached to the Contract and executed by him ("adverse consequences").
8. In order to avoid the adverse consequences, the Vendor and Sprint have requested the Purchasers to:-

(a) acquire, or to procure their nominee(s) to acquire Aero from the Vendor; and

(b) procure Aero to take transfer of the Property from VicUrban prior to the expiration of the 14 days set out in the notice,

and the Purchasers have agreed to do so on the terms and conditions set out in this Deed.

38 The Share Sale Agreement provided in essence that:

1. The Purchasers (Mr Tenuta and Mr Plevritis) would purchase the Vendor's (Mr Evans) shares in Aero Developments for $1.00;
2. The Purchasers would procure Aero Developments to have the Property transferred to it by VicUrban;
3. The Purchasers would refund to Sprint Homes the deposit of $225,000 which it had paid to VicUrban under the Contract, together with interest; and
4. On settlement of the Contract, the Vendor and Sprint Homes were required to procure the appointed surveyor to complete his work on the Property and procure a contractor to carry out the required subdivisional works on the Property.

39 Settlement of the sale of the Property to Aero Developments finally took place on 17 September 2009. To facilitate the purchase, a net amount of $3,600,000 was loaned to Aero Developments by the Bank of Queensland. A further sum of $818,448 was provided at settlement by Mr Tenuta and Mr Plevritis.

40 On 22 September 2009, Mr Katz wrote to his client Aero Developments setting out details of settlement as follows:

41 Aero Developments became registered as proprietor of the Property on 16 October 2009, with a first mortgage in favour of the Bank of Queensland being registered on the same day.

42 On 11 January 2010, Gideon Rathner ("Mr Rathner") and David Coyne ("Mr Coyne") were appointed administrators of Sprint Homes.

43 On 22 January 2010, Mathieson Nominees lodged a caveat (the "Caveat"), being caveat No AG990587N, over the Property claiming an interest as chargee. The Caveat was lodged on behalf of Mathieson Nominees, by its solicitor, Mr Armytage.

44 On 22 January 2010, Mathieson Nominees appointed Paul Vartelas as receiver and manager of Sprint Homes pursuant to the Instrument of Charge.

45 On 10 February 2010, Sprint Homes was wound up pursuant to a resolution of creditors. Mr Rathner and Mr Coyne became liquidators of Sprint Homes.

46 On 15 February 2010, Aero lodged an application under s 89A of the Transfer of Land Act 1958 (Vic) in respect of the Caveat, supported by a certificate signed by Mr Katz.

47 On 15 February 2010, Aero Developments lodged an application for removal of the Caveat.

48 By letter dated 15 February 2010 the Registrar of Titles advised Mathieson Nominees that the Caveat would lapse unless proceedings were issued.

49 By Writ dated 24 March 2010 Mathieson Nominees commenced these proceedings against Aero Developments, Cash Flow King and Mr Evans. Mathieson Nominees seeks:

1. A declaration that the registration of Aero Developments as proprietor of the Boardwalk Estate [the Property] was affected by fraud within the meaning of ss 42 and 44 of the Transfer of Land Act 1958 (Vic);

2. A declaration that its caveat remain recorded against the certificate of title;

1. A declaration that it is entitled to an equitable charge over the Boardwalk Estate;
2. Orders that it have possession of and be at liberty to sell the Boardwalk Estate;
3. Orders that the proceeds of sale be applied in accordance with s 77(3) of the Transfer of Land Act 1958 (Vic);
4. A declaration that, in respect of the sale, it have all the powers of sale and the same ability to give good title to a purchaser by way of transfer of the Boardwalk Estate which a mortgagee has under s 77 of the Transfer of Land Act 1958 (Vic);
5. Alternatively, a declaration that the nomination of Aero Developments is void pursuant to s 172 of the Transfer of Land Act 1958 (Vic); or
6. An order that Aero Developments transfer the Boardwalk Estate to Sprint Homes; and

50 By Counterclaim dated 13 July 2010, Aero Developments seeks:

1. A declaration or order to the effect that the caveat lodged by Mathieson Nominees is taken to have lapsed and is no longer of any force or effect pursuant to s 89A(5)(b) of the Transfer of Land Act 1958 (Vic);
2. An order or direction requiring the Registrar of Titles to remove the caveat from and against the Boardwalk Estate;

51 On 25 March 2010, the Registrar of Titles wrote to Mathieson Nominees advising that no further action would be taken in respect of the Caveat as proceedings were on foot.

52 Following an exchange of email correspondence on or about 8 December 2014, Mathieson Nominees provided a withdrawal of the Caveat to enable a mortgage in favour of Bendigo Bank to be registered. This was done on the basis that a replacement caveat could be lodged by Mathieson Nominees to protect its claim based on the Instrument of Charge.

53 On 18 May 2015, Mathieson Nominees lodged a replacement caveat, No. AL893408P, at the Office of Titles, claiming an interest in the Property as "Chargee".

54 Neither the Original Loan, nor any part of it, has been repaid to Mathieson Nominees.

55 At the trial the Plaintiff abandoned its allegation of fraud and a claim that the nomination transaction ought to be set aside.[1]

56 The claims by Mathieson Nominees in respect of the Property are made on three broad bases:

(a) the Property was subject to a charge in favour of Mathieson Nominees when it was purchased by the original purchaser, Sprint Homes, and the charge remains in place as an encumbrance on the land comprised in the Property, despite the nomination of a substitute purchaser (the "Nomination Contention");

(b) The relationship between the parties and the nature of the relevant transactions gives rise to an equitable charge or lien over the Property on equitable principles, by reason that Aero Developments acquired its interest in the Property with notice of the charge in favour of Mathieson Nominees (the "Equitable Lien Contention"); and

(c) The substitute purchaser acquired the Property with notice of a breach of duty owed to the original purchaser by its director (the "Breach of Duty Contention").

57 The First Defendant, which was the substitute purchaser of the Property, resists the Plaintiff's claims, and does so essentially on the following grounds:

(a) The Property is registered under the Transfer of Land Act 1958 (Vic) (the "Act"). Accordingly, the indefeasibility provisions of the Act operate. As such, by force and effect of s 42 of the Act, Aero Developments holds its interest subject to such encumbrances as are recorded in the relevant folio of the Register but absolutely free from all other encumbrances. As the alleged interest claimed by Mathieson Nominees is not registered, Aero Developments maintains that it therefore holds the Property free of the alleged encumbrance;

(b) As to the Nomination Contention, Aero Developments says that, following the nomination, Mathieson Nominees acquired no rights and assumed no obligations with the result that Mathieson Nominees has no rights as against Aero Developments. In this case the nomination was no more than a direction to the vendor, VicUrban, that upon payment of the settlement monies, the Property is to be transferred to Aero Developments and not to the contracting purchaser, Sprint Homes;

(c) As to the Equitable Lien Contention, Aero Developments says that none of the pre-requisites for the establishment of an equitable charge or lien can be made out;

(d) Further, even if the conditions for implication of an equitable charge or lien can be established in the present case, Mathieson Nominees has no right to bring a claim against Aero Developments as a consequence. Aero Developments remains entitled to the benefit of the indefeasibility provisions of the Act;

(e) As to the Breach of Duty Contention, Aero Developments acknowledges the in personam exception to indefeasibility with the result that a registered proprietor may not be protected from the consequences of its own actions where those actions give rise to a personal equity in another. However, it contends that a claim under Barnes v Addy arising from an alleged breach of duty, even if that did occur, is not a personal equity which defeats the indefeasibility provisions of the Act, and no other personal equity of this nature arises.

(f) Further, no breach of any fiduciary duty occurred in this case arising from a breach of duty owed to the original purchaser by its director. It says that there were sound commercial reasons for the nomination of Aero Developments to complete the Contract, and no breach of duty arises from this transaction. In any event, even if such conduct did occur in breach of any duty to Sprint Homes, Aero Developments had no knowledge of it, and the interest it subsequently acquired in the Property cannot be affected by such conduct.

58 The Plaintiff sought for the Court to draw a Jones v Dunkel inference based upon the failure of Aero Developments to call Mr Evans as a witness.[2]

59 In the light of there being no credible explanation for its failure to call Mr Evans, the Court was invited by the Plaintiff to infer that the witness' evidence would have been unfavourable to Aero Developments, had it called him as a witness.

60 It was contended that adverse inferences should be drawn against Aero Developments. These were said to be that:

(a) it was possible for Sprint Homes to have settled the Contract;

(b) its financial position as at 3 July 2009 was adequate to enable it to do so; and

(c) the shares in Aero Developments were sold by Mr Evans for $1.00 when they could well have been worth considerably more.

61 I am not satisfied that by the failure to call Mr Evans it was open to draw any such inferences, beyond the conventional Jones v Dunkel inference that calling the witness would not have assisted the case of that party.

62 Further, there is a credible explanation for Aero Developments not calling Mr Evans. He was initially a co-defendant, although the Plaintiff elected not to proceed against him. However, he was never 'in the camp' of the First Defendant.

63 In any event, the Jones v Dunkel inferences, if any were to be drawn, would not have advanced the Plaintiff's case when weighed against the abundant, if not overwhelming, direct evidence in support of the case of Aero Developments on the issues claimed to be relevant to the inferred evidence.

64 The claim that the Court should draw any such inferences from these circumstances is rejected.

65 A preliminary question arises as to the nature of the security provided by the Instrument of Charge and its legal effect. More particularly, the issue is whether the instrument gave rise to an equitable charge or an equitable mortgage.

66 Although the question as to whether the Plaintiff has an interest in the land (the Property) and, if so, the nature of such interest, was not directly addressed by the parties in argument, it is a useful, if not essential, antecedent to any inquiry as to whether any exception(s) to the indefeasibility regime contained in the Transfer of Land Act 1958 (Vic) have been made out in the circumstances of this case.

67 Four kinds of consensual security over property (whether over personal or real property) have been identified, namely that of pledge, contractual lien, equitable charge and mortgage.[3] An equitable lien may also arise by operation of law.[4] A security interest is a right in rem to the extent that the creditor is, generally speaking, in the event of default under the founding instrument, entitled to remove the asset which is the subject of the security from the general body of creditors.[5]

68 As earlier observed, the Instrument of Charge was executed by Sprint Homes in favour of Mathieson Nominees on 18 April 2008. The instrument, which was drawn up by the solicitors for Mathieson Nominees took the form of a deed titled 'Fixed and floating charge'. It was lodged for registration with the ASIC on 2 June 2008.

69 The nature of the Instrument of Charge executed by the relevant parties did not amount to a mere pledge or a contractual or equitable lien. Accordingly, for present purposes, only a security by way of an equitable charge and an equitable mortgage will be the subject of this short and non-exhaustive examination.

70 The essence of an equitable charge has been summarised by Gillard J of this Court in AVCO Financial Services v White in the following terms:[6]

An equitable charge for a debt is a security whereby only a right to payment of the debt out of the property is conferred by the owner of the property to the holder of the security. The remedy of the holder of the security on default in payment of the debt was to apply to a court of equity to have the property sold and the proceeds paid into court.

71 In Porter & Anor v Bonarrigo & Anor ('Porter') this Court considered the character of an equitable charge and the mode of its creation.[7] The Court held:[8]

1. An equitable charge is created when property is expressly or constructively made liable to the discharge of a debt or some other obligation and the charge confers on the chargee a right of realisation by judicial process, such as an order for sale: Swiss Bank Corp v Lloyds Bank Ltd; Re Cosslett (Contractors) Ltd. For example, an agreement that a person may place a caveat on another's title has been held to constitute a charge. In Re Cosslett (Contractors) Millett LJ held:

It is of the essence of a charge that a particular asset or class of assets is appropriated to the satisfaction of a debt ... so that the chargee is entitled to look to the asset and its proceeds for the discharge of the liability.

1. An equitable charge is to be distinguished from a purely contractual arrangement giving rise to no proprietary right.
2. Whether a particular set of circumstances gives rise to an equitable charge will depend on the intention of the parties, ascertained objectively from the language used by the parties in the instrument in the light of surrounding circumstances. In Swiss Bank v Lloyds, Buckley LJ observed:

But notwithstanding that the matter depends upon the intention of the parties, if upon the true construction of the relevant documents in the light of any admissible evidence as to surrounding circumstances the parties have entered into a transaction the legal effect of which is to give rise to an equitable charge in favour of one of them over the property of the other, the fact that they may not have realised this consequence will not mean that there is no charge. They must be presumed to intend the consequences of their acts.

1. There is no required form an equitable charge should take. However, the instrument must indicate the parties' intention that the relevant property should constitute a security: AVCO Financial Services Ltd v Whi__te ...

72 Justice Finklestein in Beconwood Securities Pty Ltd v Australia & New Zealand Banking Group Ltd provided a useful description of the distinction between fixed and floating charges:[9]

A charge may be fixed, that is, attached to particular assets which are identified or ascertainable. Or a charge may relate to a changing class of present and future assets and not attach to any particular asset unless it is converted to a fixed charge. In the case of a fixed charge, the chargor cannot dispose of the assets without the chargee's consent, but the chargor can in the case of a floating charge.

73 As to whether an instrument gives rise to an equitable charge or an equitable mortgage, Sykes and Walker reason that the language used by the document purporting to create the security interest must be construed in order to ascertain the nature of the security:[10]

Though the fundamental analytical distinction is that the charge is a pure hypothecation and the equitable mortgage is a mixed hypothecation, the only practical way of characterising the transaction and determining whether one has a mortgage situation or a charge situation is to look at the way in which it has been created, a matter which appears to depend mainly on the phraseology employed. Traditionally certain language creates the charge; other language creates the mortgage.

74 Accordingly, it may be that upon a proper construction of the relevant instrument, an alleged instrument of charge may instead create an equitable mortgage.

75 Professor Robert Goode provides a helpful overview of the nature of a charge in Goode on Legal Problems of Credit and Security:[11]

A good description of the nature of a charge is to be found in the judgment of Atkin LJ in National Provincial and Union Bank of England v Charnley:

The first question that arises is whether or not this document does create a mortgage or charge, and to determine that it is necessary to form an idea of what is meant by a "charge". It is not necessary to give a formal definition of a charge, but I think there can be no doubt that where in a transaction for value both parties evince and intention that property, existing or future, shall be made available as security for the payment of a debt, and that the creditor shall have a present right to have it made available, there is a charge, even though the present legal title which is contemplated can only be enforced at some future date, and though the creditor gets no legal right of property, either absolute or special, or any legal right to possession, but only gets a right to have the security made available by an order of the Court. If those conditions exist I think there is a charge. If, on the other hand, the parties do not intend that there should be a present right to have the security made available, but only that there should be a right in the future by agreement, such as a licence, to seize the goods, there will be no charge.

Thus a charge (also sometimes termed a hypothecation) does not depend on either delivery of possession or the transfer of ownership, but represents an agreement between creditor and debtor by which a particular asset or class of assets is appropriated to the satisfaction of a debt, so that the creditor is entitled to look to the asset and its proceeds to discharge the indebtedness, in priority to the claims of unsecured creditors and junior incumbrancers. The charge does not transfer ownership to the creditor; it is merely an incumbrance, a weight hanging on the asset which travels into the hands of third parties other than a bona fide purchaser of the legal title for value and without notice.

76 As to the distinction between a charge and an equitable mortgage, Sykes and Walker observe:[12]

The most important result, so far as the difference in substance is concerned, is that the equitable mortgagee has the potentiality of full beneficial ownership through the process of foreclosure; the equitable charge as such can never attain to the position of full beneficial owner. The charge has the hypothec remedy of judicial sale, it is true, but that is a jus in re aliena.[13]

77 The nature of the right to relief provided by a charge is described by the learned authors of Fisher and Lightwood's Law of Mortgage, stating that a charge:[14]

[I]s a security whereby real or personal property is appropriated for the discharge of a debt or other obligation, but which does not pass either an absolute or special property in the subject of the security to the creditor, but only a right of realisation by judicial process in case of non-payment of the debt: see Stainbank v Fenning [1851] EngR 532; (1851) 11 CB 51; 138 ER 389 and Stainbank v Shepard [1853] EngR 258; (1853) 13 CB 418; 138 ER 1262. This definition was cited with approval by Buckley LJ in Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584 at 595; [1980] 2 All ER 419 at 425; and see also Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207 at 227; [1985] 1 All ER 155 at 169 and United Travel Agencies Pty Ltd v Cain (1990) 20 NSWLR 566.

The principal remedies of the chargee are sale and the appointment of a receiver. If the charge is by deed the chargee will have statutory powers in this respect.

79 Sykes and Walker conclude with the following observations on the relief provided to an equitable chargee:[16]

The remedies of an equitable chargee, unless [the] contract adds otherwise, are judicial sale and the appointment of a receiver. Both remedies are gained only through the court.

The chargee on default has the right to apply to the court for an order for sale. Such order is of right and not regarded as a matter of discretion. ... The court has a discretion whether to give the conduct of sale to encumbrancer or chargee. The chargee may obtain leave to bid at the sale.

80 Thus a charge does not assign or convey to the chargee any of the charged property. Rather, it secures the debt against the charged property. It provides this security by empowering the chargee, in the event of default or other defined event under the instrument of charge, to seek orders from a court for a judicial sale and the appointment of a receiver, or whatever other remedies are permitted by the charge.

81 Whether the instrument in question is an equitable charge or an equitable mortgage, both have a characteristic in common, namely that a proprietary right is created in the charged property, as distinguished from a bundle of contractual rights.

82 Further, if the charged property the subject of the security is real property, the transaction will give rise to an interest in land sufficient to support a caveat under the Transfer of Land Act 1958 (Vic).

83 In Porter, the Court also referred to the necessity for an equitable interest in relation to property to be in writing and signed by the person creating the interest pursuant to s 53 of the Act.[17] This requirement applies equally to an equitable charge and an equitable mortgage to be enforceable as a security insofar as the transaction seeks to create a proprietary interest in land.

Whether an Equitable Charge or Equitable Mortgage in this case

84 Returning to the factual circumstances of the case at hand, I am satisfied that the Instrument of Charge which gave rise to the security claimed by Mathieson Nominees, when read as a whole, gave rise to an equitable mortgage and not to an equitable charge.

85 The Instrument of Charge conferred the following powers on the chargee, Mathieson Nominees:

Chargee's powers

11.1 Generally

(a) While an Event of Default subsists, the Chargee may do things which a mortgagee and an absolute owner could do to the Charged Property and exercise the rights, powers and remedies of a mortgagee and an absolute owner of the Charged Property. These include, but are not limited to the things and powers described in clause 11.

(b) The Chargee need not make a demand or give notice to anyone before doing these things or exercising these powers, except if notice is required as described in clause 11.8.

11.2 To take possession of Charged Property

While an Event of Default subsists the Chargee may:

take possession of the Charged Property; and receive the proceeds from the sale of the Charged Property.

...

11.4 To sell

While an Event of Default subsists the Chargee may do any of the following:

(sell) sell or help sell the Charged Property on the terms and in the manner it thinks fit, whether or not the Chargee has taken possession;

86 These powers gave immediate rights to Mathieson Nominees, including the right to take possession of the property, in the event of default. Although Mathieson Nominees could elect to seek a court order in aid of the enforcement process, this was not a pre-condition to enforcement.

87 Being a security in the nature of an equitable mortgage, the remedies available to Mathieson Nominees were not confined to a judicial sale and the appointment of a receiver.

88 It is noted that in this case, the Plaintiff never sought any relief from the Court to directly enforce its security.

89 In any event, even if this construction of the Instrument of Charge is incorrect and an equitable charge was created, it is of no material consequence in the context of this case for the reasons stated below in [114]-[154].

90 The Plaintiff submits that Sprint Homes became, upon execution of the Contract, the equitable owner of the Property, by reason that the Contract was specifically enforceable by Sprint Homes. At that point, Mathieson Nominees had a security over Sprint Homes' equitable interest in the Property pursuant to the Instrument of Charge. The interest obtained by Sprint Homes pursuant to the Contract, it was submitted, passed to Aero Developments when it became the substituted purchaser under the nomination.

91 There are two key aspects to the Nomination Contention, namely:

(a) the contractual effect of the nomination of Aero Developments to take the transfer of the Property in place of Sprint Homes; and

(b) whether the Instrument of Charge became enforceable against the nominated party upon the nomination being effected.

92 Exceptions aside, nomination clauses in contracts for the sale of land usually fall into two broad categories:

(a) a clause which merely constitutes a direction to the vendor upon settlement to transfer the property sold to a nominated third party. In this case, the rights and obligations under the original contract remain unaffected, and the nominee does not become a party to the contract; or

(b) a clause which permits the purchaser to nominate a person who will stand in place of the purchaser under a novated contract.

93 In Avzur Hotels Pty Ltd v Ivanhoe Entertainment Pty Ltd ('Avzur'),[18] Finkelstein J said the following in respect of the approach to be taken to the construction of a nomination clause in a contract:

Ordinarily when a purchaser is described as "A or his nominee", A is treated as having the power to nominate the person to whom the property purchased is to be transferred. The nominee does not become a party to the contract, much less a party with the rights and obligations of the purchaser: Tonelli v Komirra Pty Ltd [1972] VicRp 87; [1972] VR 737. On the other hand, a contract may permit the purchaser to nominate a person that will stand in his place as the purchaser but, of course, under a novated contract: Salter v Gilbertson (2003) 6 VR 466; 21 ACLC 850; [2003] VSCA 1 at [16]-[21] (Salter); Commissioner of State Revenue v Politis (2004) 55 ATR 491; [2004] VSC 126 at [16]. A nomination clause will have that effect only if it clearly so provides: Harry v Fidelity Nominees Pty Ltd (1985) 41 SASR 458 at 460 per King CJ ("I would be most unwilling to construe a contract as containing a provision of such unusual character [a substitution clause] ... unless the language of the contract was quite clear"); Lambly v Silk Pemberton Ltd [1976] 2 NZLR 427 at 432 per Cooke J ("And in the absence of compelling language I do not think the court should impute to the parties an intention to allow an original signatory to substitute for himself a man of straw"). In Salter (at [16]-[17]) Phillips JA adopted the need to show a "compelling language" test.

94 I apply the 'compelling language' test described in Avzur to the construction of the relevant clause of the Contract in this case.

95 Reference is also made to the observations of Judd J in 428 Lt Bourke St Pty Ltd v Lonsdale St Café Pty Ltd & Ors ('428 Lt Bourke Stree Pty Ltd'),[19] where his Honour referred to the following observations of Nettle J (as his Honour then was) in Commissioner of State Revenue v Politis as to the effect of nomination clauses:[20]

Plainly, however, under most nomination clauses the nominee would not acquire any rights as against the vendor, let alone the rights of the purchaser; for most nomination clauses constitute no more than a power in the purchaser to require the vendor to complete the contract by transfer of the land to the purchaser's nominee. In such cases the purchaser has rights as against the vendor to have the land transferred to the purchaser or to the purchaser's nominee, at least upon payment of the purchase price. And the purchaser has an interest in the land, in the nature of an equitable fee simple (assuming that the contract provides for purchaser of the fee simple), although of course that really means no more than that the contract is susceptible to an order for specific performance at the suit of the purchaser. But the nominee does not acquire any rights as against the vendor, because the nominee is not privy to the contract. And for the same reason, the nominee has no standing in equity to obtain an order for specific performance of the contract. He must sue in the name of the purchaser or join the purchaser as a defendant. Therefore, such if any interest as the nominee may have in the land is one which derives from the purchaser, and relevantly the most that can be said is that the nominee may acquire an interest in the land equivalent to that which the purchaser had or would have had under the contract of sale.

96 In this case the following events occurred which resulted in the inclusion of a nomination clause in the Contract:

1. The Contract of sale dated 16 June 2008 (the "Contract"), Sprint Homes, being the identified purchaser, purchased the Property from VicUrban, the vendor, for $4.5 million plus GST. The Contract provided for payment of a deposit of $225,000.00, with settlement of the balance due to be paid within 9 months.
2. Special Condition 14 of the Contract authorised the purchaser to 'nominate a substitute or additional purchaser'. It provided:

14. NOMINATION

14.1 Purchaser may nominate

If the purchaser is not in default under this contract, the Purchaser, at any time up to 21 days before the Settlement Date, may nominate a substitute or additional purchaser by delivering to the Vendor's solicitors:

(a) a completed and executed notice of nomination;

(b) a copy of the completed and executed "Purchaser Declaration" in the form approved from time to time by the Commissioner for State Revenue.

14.2 Indemnity

The Purchaser and each of the guarantors must indemnify and keep indemnified the Vendor from and against any claim, penalty or demand in respect of stamp duty or costs arising from the nomination of any substitute or additional purchaser.

14.3 General condition 5 inapplicable

General condition 5 does not apply to this contract.

14.4 Purchaser remains liable

The Purchaser remains personally liable for the performance of all of the Purchaser's obligations under this contract despite the nomination of any substitute or additional purchasers.

1. On 3 July 2009, a nomination was made in writing by completion of an instrument headed 'Sale of Real Estate Nomination Form'. Under this instrument, Sprint Homes nominated Aero Developments as substitute purchaser under the Contract. The nomination was executed by Mr Evans as the director of both Sprint Homes and Aero Developments and was effected without notice to Mathieson Nominees. The instrument of nomination stated:

As the property is expressed as sold to the Purchaser "and/or Nominee" (or words to that effect) then pursuant to the conditions of the contract the Purchaser nominates the Nominee as substituted purchaser to take a transfer or conveyance in lieu of the Purchaser.

The purchaser and the Nominee acknowledge that they will henceforth be jointly and severally liable for the due performance of all the obligations of the Purchaser under the Contract and payment of any expenses resulting from this nomination (including any Stamp Duty).

1. On 21 July 2009, Clayton Utz, solicitors for VicUrban, wrote to Mr Katz confirming that VicUrban agreed to amend the Contract by adding Aero Developments as nominee. The Contract was accordingly varied on 23 July 2009 to include the words 'and/or Nominee' in the purchaser's details in the particulars of sale and Aero Developments was added as the nominated purchaser. So far as it is relevant, the chain of correspondence leading to this outcome is detailed below.

97 On 20 July 2009, solicitors for the Plaintiff purchaser, Katz Lawyers, wrote to the solicitors for the vendor, Clayton Utz:

We have been advised by our client's lender that they require a letter from you confirming that the Vendor has agreed to the nomination of Aero Developments. If you could please prepare and email a confirmation letter as soon as possible, that would be greatly appreciated.

98 On 21 July 2009, solicitors for the vendor replied:

We refer to your email dated 20 July 2009.

We have provided our client with a copy of your client's Nomination Form and relevant Statutory Declaration regarding its nomination. Our client instructs us that it is agreeable to amending the purchaser's details in the Contract of Sale to include the words "and/or Nominee".

99 On 23 July 2009, solicitors for the purchaser replied:

Thank you for your email and documentation. Joe has advised that the lender requires a letter just stating that the Vendor accepts the nomination of Aero Developments. If you could kindly draw a fresh letter and email it to me that would be great.

100 On 23 July 2009, solicitors for the vendor replied:

We refer to your email dated 23 July 2009.

As advised in our letter dated 21 July 2009, our client agrees to amend the Contract of Sale to include the words "and/or Nominee" and has accepted the nomination by your client of Aero Developments Pty Ltd.

101 It is noted that, in all material respects, the nomination clause in Special Condition 14 of the Contract is relevantly similar to the clause considered by Judd J in 428 Lt Bourke St Pty Ltd. That read:[21]

If the contract says that the property is sold to a named purchaser 'and/or nominee' (or similar words) the named purchaser may, at least 14 days before settlement date, nominate a substitute or additional purchaser, but the named purchaser remains personally liable for the due performance of all the purchaser's obligations under this contract.

102 I arrive at a similar construction in the present case.[22] To my mind there is no compelling language contained in the Contract or the accompanying written nomination which drives to a conclusion that the nomination in this case gave rise to a substitution of the original Contract by a novated contract. Indeed, the contrary conclusion is clearly evidenced by this transaction.

103 In particular, Clause 14.4 of the Contract provided that the purchaser was to remain liable for the performance of the purchaser's obligations under the Contract in spite of the nomination. This provision is inconsistent with a novation.

104 I am satisfied that the nomination clause, when considered as a whole and in the context of the execution of the nomination form, did not permit the purchaser to nominate a person who would stand in place of the purchaser under a novated contract.

105 Rather, it was a clause which merely constituted a direction to the vendor upon settlement to transfer the property sold to the nominated third party, being Aero Developments. The rights and obligations under the original Contract remained unaffected, and the nominee did not become a party to the Contract.

106 Accordingly, Aero Developments gained no enforceable right to enforce the Contract against the vendor, VicUrban. Nor did it gain a purchaser's lien, or any right to compel specific performance of the Contract in its favour.

107 Further, Aero Developments did not gain any other enforceable right through the transaction resulting in its nomination. It was not a party to the Share Sale Agreement (the parties being Mr Tenuta and Mr Plevritis, together with Mr Evans and Sprint Homes). Although the Share Sale Agreement contemplated that Aero Developments would take a transfer of the Property from VicUrban, it gained no enforceable right as against any of the parties to the Share Sale Agreement for this to be achieved.

Whether the Instrument of Charge became enforceable against the Nominated Purchaser

108 The Plaintiff advanced a case that the nomination transaction gave rise to an interest in the Property under the Instrument of Charge in favour of Mathieson Nominees. It was submitted that this interest survived the nomination clause and the subsequent registration of Aero Developments as the registered proprietor. As a consequence, it claimed that the Instrument of Charge is presently enforceable by Mathieson Nominees and gives it a caveatable interest in the Property.

109 This submission was advanced by the Plaintiff seemingly on the basis that the nomination transaction, which resulted in Aero Developments becoming the substitute purchaser under the Contract upon a novation in its favour, became subject to the Instrument of Charge and was in turn bound by it.

110 On this analysis, Aero Developments could take only the proprietary interest in the Property which was possessed by Sprint Homes, namely its equitable interest in the Property as purchaser which was subject to the Instrument of Charge. The Plaintiff submitted that Aero Developments became the equitable owner of the land upon entering into the nomination and therefore took the Property subject to the Instrument of Charge.

111 It is accepted that the Instrument of Charge remained in place and was capable of enforcement by Mathieson Nominees as a fixed and floating charge. As earlier observed, Clause 2.2(a) of the Instrument of Charge created a fixed charge 'on all present and future estates and interests in land'. In relation to the Property, this meant that the Instrument of Charge remained in place as security over this asset, which was not removed from the corpus of property comprising the Charged Property upon the nomination becoming effective. In this way, the property continued to be subject to the Instrument of Charge.

112 However, for the reasons which follow, the Nomination Contention must be rejected. Even if Aero Developments became a substituted purchaser of the Property through the nomination transaction pursuant to a novated contract, upon registration it took a transfer of the Property free from any other interests by operation of the indefeasibility provisions of the Transfer of Land Act 1958 (Vic). It is to this issue which I now turn.

Whether Aero Developments Acquired an Indefeasible Title

113 In the circumstances of this case, Aero Developments acquired an indefeasible title upon becoming the registered proprietor of the Property.

114 The Torrens scheme of registration of land in Victoria is provided for by ss 40 to 43 of the Transfer of Land Act 1958 (Vic) (the "Act").

115 In Breskvar v Wall, Barwick CJ described the effect of the scheme in an oft-cited passage:[23]

The Torrens system of registered title of which the Act is a form is not a system of registration of title but a system of title by registration. That which the certificate of title describes is not the title which the registered proprietor formerly had, or which but for registration would have had. The title it certifies is not historical or derivative. It is the title which registration itself has vested in the proprietor.

116 The following provisions of the Act bear out this observation.

117 Section 40 provides:

Instruments not effectual until registered

(1) Subject to this Act no instrument until registered as in this Act provided shall be effectual to create vary extinguish or pass any estate or interest or encumbrance in on or over any land under the operation of this Act, but upon registration the estate or interest or encumbrance shall be created varied extinguished or pass in the manner and subject to the covenants and conditions specified in the instrument or by this Act prescribed or declared to be implied in instruments of a like nature.[24]

118 Section 41 provides:

Certificate to be conclusive evidence of title

No folio of the Register under this Act shall be impeached or defeasible by reasons or on account of any informality or irregularity in any application or instrument or in any proceedings previous to the creation of the folio or the making of any recording on it; and every folio of the Register shall be received in all courts as evidence of the particulars recorded in it and all the recordings of those particulars in the Register, and shall be conclusive evidence that the person named in the folio as the proprietor of, or having any estate or interest in, or power to appoint or dispose of, the land described in the folio is seised or possessed of that estate or interest or has that power.

119 Section 42 provides:

Estate of registered proprietor paramount

(1) Notwithstanding the existence in any other person of any estate or interest (whether derived by grant from Her Majesty or otherwise) which but for this Act might be held to be paramount or to have priority, the registered proprietor of land shall, except in case of fraud, hold such land subject to such encumbrances as are recorded on the relevant folio of the Register but absolutely free from all other encumbrances whatsoever, except -

(a) the estate or interest of a proprietor claiming the same land under a prior folio of the Register;

(b) as regards any portion of the land that by wrong description of parcels or boundaries is included in the folio of the Register or instrument evidencing the title of such proprietor not being a purchaser for valuable consideration or deriving from or through such a purchaser.

(2) Notwithstanding anything in the foregoing the land which is included in any folio of the Register or registered instrument shall be subject to -

(a) the reservations exceptions conditions and powers (if any) contained in the Crown grant of the land;

(b) any rights subsisting under any adverse possession of the land;

(c) any public rights of way;

(d) any easements howsoever acquired subsisting over or upon or affecting the land;

(e) the interest (but excluding any option to purchase) of a tenant in possession of the land;

any unpaid land tax, and also any unpaid rates and other charges which can be discovered from a certificate issued under section three hundred and eighty-seven of the Local Government Act 1958, section 158 of the Water Act 1989 or any other enactment specified for the purposes of this paragraph by proclamation of the Governor in Council published in the Government Gazette - notwithstanding the same respectively are not specially recorded as encumbrances on the relevant folio of the Register.

120 Section 43 provides:

Persons dealing with registered proprietor not affected by notice

Except in the case of fraud no person contracting or dealing with or taking or proposing to take a transfer from the registered proprietor of any land shall be required or in any manner concerned to inquire or ascertain the circumstances under or the consideration for which such proprietor or any previous proprietor thereof was registered, or to see to the application of any purchase or consideration money, or shall be affected by notice actual or constructive of any trust or unregistered interest, any rule of law or equity to the contrary notwithstanding; and the knowledge that any such trust or unregistered interest is in existence shall not of itself be imputed as fraud.

121 The indefeasibility provisions were considered by this Court in Perpetual Trustees Victoria Ltd v G Gheourghui.[25] In that case, which dealt with an application to remove a caveat, Harper J (as his Honour then was) provided the following summary of the operation of the relevant provisions of the Act, which I follow and apply:[26]

The effect of s 40 is that no instrument until registered shall be effectual to create, vary, extinguish or pass any estate or interest in or over any land under the operation of the Act; but upon registration, the estate or interest shall be created, varied, extinguished or pass in the manner and subject to the conditions specified in the relevant instrument or in the Act.

Section 41 then proceeds to give effect to the proposition that a certificate issued by the Registrar of Titles pursuant to the Act shall be conclusive evidence of the title to which the certificate refers.

The section provides amongst other things, in effect, that the register shall be received in all courts as evidence of the particulars recorded in in and shall be conclusive evidence that the person named in the relevant folio as the proprietor or as having any estate or interest in the land is possessed of that estate or interest as described in the register.

Consistently with the scheme of the Act s 42 then provides, in effect that - notwithstanding the existence in any estate or interest which but for the Act might be held to be the paramount or have priority - the registered proprietor of land shall, except in the case of fraud or other specified instances, hold such land subject only to such encumbrances as are recorded on the relevant folio of the register and absolutely free from all other encumbrances.

...

By [s 43 of the Act] it is provided, in effect, that no person taking or proposing to take a transfer from or proposing to deal with the registered proprietor of any land shall be required or in any manner concerned to enquire of ascertain the circumstances or the consideration for which the property was registered.

More particularly the section also provides, in effect, that no person dealing with the registered proprietor shall be affected by notice, actual or constructive, of any trust or unregistered interest, any rule of law or equity to the contrary notwithstanding; and the knowledge that any such trust or unregistered interest is in existence shall not, of itself, be imputed as fraud.

122 A similar approach was adopted by Rothman J in Perpetual Limited v Barghachoun when his Honour said:[27]

Indefeasibility of title is the most fundamental feature of the land registration system in Australia. Under it, the state guarantees the title of those with a registered interest in land, to the extent of that interest. The foregoing is trite. But the principle is so important, and adherence to it so essential, that registered title is able to be challenged, under the legislative provisions in each of the States, only in the most exceptional circumstances. The Torrens system has enabled conveyance with certainty in Australia and, even though there may be occasions where notions or comparative justice may seem to have been transgressed, it is essential that indefeasibility of title is not undermined.

123 As is plain from these authorities, except in cases of fraud or other instances provided for in s 42, 'there is immediate indefeasibility of title by the registration of the proprietor named in the register' with the result that a registered interest prevails over an encumbrance not recorded on the Register and prevails unaffected by notice of the unregistered interest.[28]

124 The statutory fraud exception arises where there is dishonest conduct on the part of the registered proprietor whose title is challenged.[29] The emphasis in the authorities is on actual fraud on the part of the registered proprietor,[30] although it has been suggested that this may be based on actual knowledge that a fraud was committed or wilful blindness as to the possibility that a fraud was being perpetrated.[3]

125 However, statutory fraud was not pressed by the Plaintiff in this case and the allegation was abandoned.

126 The in personam exception to indefeasibility is however relevant to the present proceeding. It was said by the Privy Council in Frazer v Walker that indefeasibility 'in no way denies the right of a plaintiff to bring ... a claim in personam, founded in law or equity, for such relief as a court acting in personam may grant'.[31] However, such claims must be brought under established causes of action, whether legal or equitable.[32]

127 It follows that, absent any recognised in personam right which is capable of defeating the title of Aero Developments, upon registration, Aero Developments took the title to the Property free of any interest which Mathieson Nominees had under the Instrument of Charge.

Whether Mathieson Nominees has an In Personam Right Capable of Defeating the Title of Aero Developments

128 The scheme of the Torrens legislation is such that, with very few exceptions, a purchaser who becomes the registered proprietor of an interest in land title takes free from all unregistered interests, whether he has notice of them or not.[33]

129 Proceedings may, however, be brought against the registered proprietor in respect of land registered based on the exceptions described in s 42 of the Act or by persons who make claims founded upon the conduct of the registered proprietor.[34] However, and subject to these exceptions, the indefeasibility regime established by the Act remains paramount.[35]

130 An exception to s 42(1) of the Act can arise in relation to certain legal or equitable causes of action directed specifically against the registered proprietor. The in personam exception, as it is called, operates so that the registered proprietor is not protected from the consequences of his own actions where those actions give rise to a personal equity in another. In Bahr v Nicolay (No 2) Wilson and Toohey JJ observed:[36]

The point being made by the Privy Council [in Frazer v Walker[37]] is that the indefeasibility provisions of the Act may not be circumvented. But, equally, they do not protect a registered proprietor from the consequences of his own actions where those actions give rise to a personal equity in another. Such an equity may arise from conduct of the registered proprietor after registration: Barry v Heider [1914] HCA 79; (1914) 19 CLR 197. And we agree with Mahoney JA in Logue v Shoalhaven Shire Council (1979) 1 NSWLR 537, 563 that it may arise from conduct of the registered proprietor before registration.

Whether any 'In Personam' Claim by Mathieson Nominees against Aero Developments

131 However, I find that there was no conduct on the part of Aero Developments, either before registration of its interest or after that time, which gave rise to any personal equity in Mathieson Nominees such that the interest of Aero Developments as the registered proprietor ought to be rendered subject to the Instrument of Charge.

132 As earlier found, Mr Tenuta and Mr Plevritis became the corporate mind of Aero Developments upon becoming its directors and shareholders following execution of the Share Sale Agreement dated 15 September 2009.

133 Aero Developments only acquired its rights on settlement of the Contract when it took the transfer from VicUrban in its favour at settlement on 17 September 2009. The evidence is that when it did so, it took title without any knowledge of any intention on the part of Mr Evans or Sprint Homes to defeat the claims of Mathieson Nominees, if ever that was their intention, which in any event is not accepted on the evidence.

134 At the time of settlement of Property in favour of Aero Developments on 17 September 2009, the evidence which I accept is that the company and its directors at the time had no knowledge of any prior dealings between Sprint Homes and Mathieson Nominees (including the Loan Agreement and the Instrument of Charge). There was no dishonesty on their part, or through them, on the part of Aero Developments.

135 I find that Aero Developments took the transfer of the Property without notice, whether actual or constructive notice, of the equitable mortgage comprised in the Instrument of Charge.

136 The first point to observe is that when Aero Developments took its transfer of the Property, it did so without any caveat having been lodged against the title to the Property by Mathieson Nominees. Such a caveat, had it been lodged, would have served to give notice to Aero Developments of the interest in land under the equitable mortgage comprised in the Instrument of Charge, and it would have taken the Property subject to that interest.

137 The question on this issue then becomes whether Aero Developments acquired the necessary knowledge of the equitable mortgage comprised in the Instrument of Charge by any other means, including whether it attained constructive knowledge?

138 On 15 September 2009 Mr Evans ceased as a director and the shareholder of Aero Developments. Mr Evans, as the former director and shareholder of Sprint Homes and a signatory to the Instrument of Charge, I find had knowledge of the Instrument of Charge, and the fact that the Property was an asset of Sprint Homes which was the subject of the security provided by the Instrument of Charge.

139 The Share Sale Agreement was executed on 15 September 2009. On the same day Mr Plevritis and Mr Tenuta were appointed directors of Aero Developments, and both became the sole shareholders of Aero Developments.

140 Settlement of the sale of the Property to Aero Developments finally took place on 17 September 2009, when it took a transfer of the Property.

141 At the time, no caveat had been lodged by Mathieson Nominees against the title to the Property which gave notice of the interest in the Property which it claimed under the Instrument of Charge.

142 There is no evidence that either Mr Plevritis or Mr Tenuta knew by any other means of the existence of the Instrument of Charge on the day of settlement, 17 September 2009.

143 The Share Sale Agreement executed on 15 September 2009 between Mr Tenuta and Mr Plevritis as the purchasers and Mr Evans is silent on the existence of the Instrument of Charge. Clause 3 of the agreement provided:

Immediately after Aero takes transfer of the Property from VicUrban, the Vendor and Sprint must:-

3.1 expeditiously deliver to Aero all documents in their or either of their power, possession or control in relation to the Property and its proposed development in accordance with the details set out in the Contract ("Development Project").

144 Neither Mr Plevritis nor Mr Evans were called to give evidence at the trial.

145 Mr Tenuta gave evidence and was cross-examined.

146 Mr Tenuta gave evidence that although he was aware that Sprint Homes had considerable financial problems, he did not know any particular details of its financial situation.

147 It was never put to Mr Tenuta on behalf of Mathieson Nominees that he was aware of the existence of the Instrument of Charge or that in the circumstances he should have made any inquiries as to the existence of such a security.

148 I accept that Mr Tenuta used Mr Katz as his solicitor for the purposes of the transactions entered into by Aero Developments.

149 There is no evidence upon which it is possible to conclude that either Mr Tenuta or Mr Plevritis, or their solicitor Mr Katz, had actual knowledge of the existence of the Instrument of Charge at the time when Aero Developments took its transfer on the day of settlement.

150 Further, I am not satisfied that circumstances existed which support a finding that either Mr Tenuta or Mr Plevritis should be fixed with constructive knowledge of the existence of the Instrument of Charge at the relevant time, by reasons of there being circumstances which should have put them on enquiry as to that fact.[38] No submission was made to this effect on behalf of Mathieson Nominees.

151 Accordingly, notice of the existence of the Instrument of Charge cannot be imputed to Aero Developments from its directors, Mr Tenuta and Mr Plevritis.

152 The question remains as to whether the relevant knowledge ought to be imputed to Aero Developments from the knowledge of the existence of the Instrument of Charge possessed by its former director Mr Evans.

153 In the circumstances of this case, in my opinion, the knowledge of the existence of the Instrument of Charge possessed by its former director Mr Evans is not to be imputed to Aero Developments. Aero Developments was a small single purpose company. It could not be said to have had a 'corporate memory' in any true sense of the concept which may in some circumstances be attributed to larger enterprises. The knowledge possessed by its former director and shareholder Mr Evans was effectively expunged upon his retirement from both positions with Aero Developments and his withdrawal from the transaction comprised in the transfer of the Property from VicUrban to Aero Developments through completion of the Contract.

154 For these reasons, I am satisfied that Aero Developments took the Property for value, as reflected in the Share Sale Agreement, but it took the transfer of the Property without notice of the Instrument of Charge, whether actual or constructive.

155 It was further submitted on behalf of the Plaintiff that Mathieson Nominees had a claim under one or other of the equitable causes of action in Barnes v Addy.[39] This was said to be an enforceable personal equity of the type contemplated in Bahr v Nicolay (No 2).

156 In Barnes v Addy Lord Selborne said:[40]

Strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, [knowing receipt] or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees. [knowing assistance]

157 The observations of Lord Selborne have developed a life of their own, somewhat removed from the founding language of his Lordship. The principles are now commonly referred to as the two limbs of Barnes v Addy, the first being a claim in knowing receipt and the second being a claim in knowing assistance.[41] A claim for knowing receipt arises where a person knowingly receives property in breach of trust. A claim for knowing participation (also referred to as a claim for knowing assistance) arises where a person has knowingly assisted a trustee to carry out a 'dishonest and fraudulent design'. Barnes v Addy liability has been applied beyond breaches of express trusts to breaches of fiduciary duty on the part of directors and other persons standing in a fiduciary relationship.[42]

158 Mathieson Nominees, in its statement of claim, appeared to advance a claim based on Barnes v Addy in the following terms:

In breach of his fiduciary duty to Sprint and his duty to its creditors Evans procured for the benefit of Aero a windfall to the detriment of Sprint and its creditors.

Particulars

(1) Evans caused Sprint to make the Nomination of Aero as purchaser under the Contract for no consideration, Sprint was thereby denied the benefits of the purchaser under the Contract.

(2) Prior to settlement that Vendor discounted the Contract price by $500,000 (from $4,500,000 to $4,000,000) and waived penalty interest.

(3) Aero settled the Contract on 17 September 2009 by payment of $3,775,000 (ex GST and stamp duty) to the Vendor, which along with the Deposit paid by Sprint satisfied the Contract.

(4) Evans had a valuation from Hay Property Group of $5,500,000 (ex GST) as at 20 March 2009 and again at 7 July 2009.

(5) Aero obtained a windfall under the Contract because the Land had increased in value and, following the Nomination, the windfall was available and not to Sprint but to Aero, for which no consideration was paid ("the Windfall").

(6) Evans had knowledge that Sprint was in a parlous financial position and that depriving Sprint of the Windfall would prejudice its creditors including Mathieson.

(7) On or about 1 July 2009 Ian Mathieson on behalf of Mathieson told Evans that Mathieson was ready willing and able to advance sufficient further funds to enable Sprint to settle under the Contract.

(8) On or about 1 July 2009 Evans told Ian Mathieson on behalf of Mathieson that Sprint would not need the offer of finance from Mathieson because it had made other arrangements, Evans did not disclose that Sprint was negotiating the Nomination, which Evans procured on 3 July 2009.

(9) Sprint entered into a deed dated 15 September 2009 with Riccardo Tenuta, Peter Plevritis, and Evans to, among other things, refund the Deposit to Sprint (clause 2.2.2). Evans has not taken any steps to procure Aero to refund the Deposit to Sprint.

(10) Aero knew about the matters set out in this paragraph because Evans was a director of Aero at all relevant times.

(11) At all relevant times Joe Katz, solicitor acted for both Sprint and Aero. Accordingly, the knowledge of the Charge in favour of Mathieson and the breaches by Evans of his fiduciary duty to Sprint can be attributed to Aero.

159 The Plaintiff's plea of this cause of action lacked definition as to which limb of Barnes v Addy it was intending to advance. The Plaintiff appeared to press its claim based on the first limb of Barnes v Addy, being knowing receipt, as well as knowing assistance under the second limb. I will deal with both causes of action.

160 Knowledge is an essential requirement to be assessed by courts in governing the boundaries of liability under both limbs.

161 As to the first limb of knowing receipt, I adopt the following elements of the cause of action in Australia as identified by Owen J in The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) ('Bell Group'),[43] where his Honour applied what was said by Stephen J in Consul Developments Pty Ltd v DPC Estates Pty Ltd ('Consul Developments') [44] about constructive knowledge:

The resulting law, as I apprehend it, is that for a third party to be held liable for knowing receipt:

(a) there must be a "trust";

(b) the trustee must have misapplied "trust property";

(c) the third party must have received trust property;

(d) at the time of receiving the trust property, the third party must have known of the trust and of the misapplication of the trust property; and

(e) the third party will be taken to have 'known' in the relevant sense if the third party:

(i) has actual knowledge of the trust and the misapplication of trust property; or

(ii) has deliberately shut his or her eyes to those things; or

(iii) has abstained in a calculated way from making such enquiries as an honest and reasonable person would make, about the trust and the application of the trust property; or

(iv) knows of facts which to an honest and reasonable person would indicate the existence of the trusts and the fact of misapplication.

162 It is to be noted that in a 'knowing receipt' case, as stated by Owen J in Bell Group above,[45] there are two elements of knowledge which need to be established: first that the third party knew of the trust and second knew of the misapplication of the trust property.[46]

163 In Farah Constructions Pty Ltd v Say-Dee Pty Ltd ('Farah Constructions'),[47] the High Court, in a unanimous joint judgment,[48] dismissed a claim under the first limb of Barnes v Addy on the basis that there was no receipt of property which had the requisite proprietary character, there was no agency and thus no basis for notice or knowledge which could give rise to liability as a recipient of trust property.

164 As to liability under the second limb of Barnes v Addy, the Court in Farah Constructions settled the question as to the level of knowledge required of a third party to make out the cause of action. Against the background described,[49] the Court observed[50] that it has been customary in Australia to analyse the requirement of knowledge in the second limb of Barnes v Addy by reference to the five categories of knowledge agreed between counsel in Baden v Société Générale pour Favoriser le Dévelopment du Commerce et de l'Industrie en France SA ('Baden'),[51] namely:

(i) actual knowledge; (ii) wilfully shutting one's eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man; (v) knowledge of circumstances which would put an honest and reasonable man on inquiry.

165 The Court in Farah Constructions proceeded:[52]

[175] Although Baden post-dated the decision in Consul, the five categories found in Baden assist in an analysis of that for which Consul provides authoritative guidance on the question of knowledge for the second limb of Barnes v Addy.

[176] Thus, support in Consul can be found for categories (i), (ii) and (iii). Further, Consul also indicates that category (iv) suffices. However, in Consul, Stephen J held that knowledge of circumstances which would put an honest and reasonable man on inquiry, later identified as the fifth category in Baden, would not suffice. Gibbs J left open the possibility that constructive notice of this description would suffice. Barwick CJ agreed with Stephen J.

[177] The result is that Consul supports the proposition that circumstances falling within any of the first four categories of Baden are sufficient to answer the requirement of knowledge in the second limb of Barnes v Addy, but does not travel fully into the field of constructive notice by accepting the fifth category. In this way, there is accommodated, through acceptance of the fourth category, the proposition that the morally obtuse cannot escape by failure to recognise an impropriety that would have been apparent to an ordinary person applying the standards of such persons.

[178] These conclusions in Consul as to what is involved in "knowledge" for the second limb represent the law in Australia. They should be followed by Australian courts, unless and until departed from by decision of this Court.

166 Accordingly, the High Court, in considering the rule in Barnes v Addy for the first time since Consul Developments, affirmed in Australia the first four (but not the fifth) of the Baden categories of knowledge required to be established under the second limb.

167 Following Farah Constructions and Bell Group, the tests as to knowledge under limbs of Barnes v Addy appear to be the same.

Breach of Fiduciary Duty Claimed by Plaintiff

168 In the present case, the claim under Barnes v Addy was put on the basis of an alleged breach of s 180 of the Corporations Act 2001 (Cth), being an alleged breach of fiduciary duty owed by Mr Evans to his company Sprint Homes arising from his position as a director of the company.

169 The conduct said to amount to a breach of Mr Evans' fiduciary duty was described in the Plaintiff's statement of claim referred to above. Essentially the conduct relied upon amounted to a contention that Mr Evans orchestrated a transaction pursuant to which Sprint Homes parted with the Property in favour of Aero Developments for no valuable consideration, effectively providing them with a windfall.

No Breach of Fiduciary Duty Established on the Facts

170 I am not satisfied that any such claim as alleged under Barnes v Addy could possibly be established on the facts of this case.

171 There was no breach of any relevant fiduciary duty on the part of Mr Evans to his company Sprint Homes.

172 There were sound commercial reasons for the transaction which resulted in Aero Developments taking the transfer of the Property. There was no diversion of any credible commercial opportunity from Sprint Homes in favour of Aero Developments. Indeed, the resulting transaction was designed to rescue Sprint Homes from a serious commercial predicament.

173 It will be recalled that the Contract was amended by agreement of VicUrban and Sprint Homes to adjust the settlement date for the payment of the residue of the purchase price from 16 March 2009 to 30 March 2009. However, Sprint Homes failed to pay the residue or the purchase price by 30 March 2009 and fell into default under the Contract.

174 On or about 15 June 2009, VicUrban served a notice of rescission of the Contract on Sprint Homes. Sprint Homes failed to settle, in spite of the vendor agreeing to withdraw its rescission notice and further extending the settlement date under the Contract to 31 July 2009. A clause in the Contract as amended also entitled Sprint Homes to a discount of $500,000 on the purchase price if the Contract was settled on or before 31 July 2009. The Contract could not be settled by this date in spite of this significant incentive.

175 Mr Katz had acted for Sprint Homes after it had entered into the contract with VicUrban for the purchase of the Property. It was shortly before or shortly after Sprint Homes was served with the first rescission notice by VicUrban that Mr Katz began acting for Sprint Homes. Mr Evans instructed Mr Katz to assist him to find finance to settle the purchase of the Property. Mr Katz introduced Mr Evans to Mr Knight for the purpose of sourcing finance for the transaction.

176 I accept that the knowledge of Mr Katz as to the financial circumstances of Sprint Homes prior to settlement of the sale of the Property was that it had financial difficulties in paying its creditors and that certain of those creditors, which did not include Mathieson Nominees, had commenced court proceedings and had served letters of demand on the company. Apart from these matters, Mr Katz did not have a complete knowledge of the financial position of Sprint Homes.

177 In relation to Mathieson Nominees in particular, I accept the evidence of Mr Katz that he was not aware that it had loaned $250,000 to Sprint Homes and had registered the Instrument of Charge over Sprint Homes at the time, or indeed at any material time before Aero Developments took a transfer of the Property and became the registered proprietor. Mr Katz learned of these matters well after the settlement of the sale of the Property following the service of a letter of demand by Mathieson Nominees.

178 Mr Katz organised the incorporation of Aero Developments.

I had no doubt that unless some very, very unusual financing was arranged that it was almost impossible, it's the only reasons we-we incorporated Aero, in order [so] that Sprint would not be front party declined for a loan.

180 Mr Katz negotiated the nomination of Aero Developments to take the transfer of the Property on 3 July 2009. I accept the reason he gave in his evidence for the nomination, as follows:

It became evident to me fairly quickly after my initial discussions with Mr Evans, and perhaps the next one or two discussions with Mr Knight, that Sprint Homes was either very unlikely or not going to be able to secure any funding for this transaction, because it had got itself into some financial difficulties with various creditors who were already prosecuting claims against it both in and out of court, some of which I was acting on ...

181 Mr Evans also said that Mr Evans was having 'extreme difficulties' raising finance, and that he was ultimately unsuccessful in procuring finance for the project, which I accept.

182 This was followed by a further rescission notice served on or about 3 September 2009.

183 Mr Tenuta and Mr Plevritis both became directors and shareholders of Aero Developments in place of Mr Evans on 15 September 2009 pursuant to the Share Sale Agreement of the same date. I am satisfied that, in the circumstances this was a commercially prudent transaction for Sprint Homes.

184 The Share Sale Agreement notably included in its recitals the following statement:

As Sprint had considerable financial problems and an adverse credit profile due to which it was unable to secure loan funds to enable it to settle the Contract, on 3 July 2009 Sprint nominated Aero Developments Pty Ltd ACN 138 086 978 (a company with no financial history and more likely to be able to secure loan funds) as the substituted purchaser of the Property entitling Aero to take transfer of the Property from VicUrban.

185 Mr Katz described the role of Aero Developments in the transaction, which I accept as accurate:

It rescued it. It rescued Sprint from disaster under this contract and having to forfeit 200 and whatever thousand dollars - 25 or whatever it was. ... and perhaps suffered other consequences which ... the vendor was entitled to under the contract.

186 As evidenced by these events, the reality is that Sprint Homes could not complete the Contract. The efforts of Sprint Homes to obtain sufficient loan funds to settle the purchase and develop the Property on acceptable commercial terms failed to materialise.

187 I reject the contention of the Plaintiff that Sprint Homes had access to sufficient funds to have completed the purchase under the Contract. The fact that Sprint Homes did have some creditors, but that Mr Knight considered them to be manageable, is not sufficient to displace this conclusion. Nor is the conclusion to be displaced by the fact that no evidence was presented as to the financial position of Sprint Homes either as at 3 July 2009, or at any other time.

188 The surrounding circumstances all pointed in one direction - Sprint Homes was unable to secure loan funds to enable it to settle the Contract with VicUrban. It was facing not one, but a second successive rescission notice, and was likely to not only lose the purchase, but also face the loss of its deposit and be exposed to a claim for damages and additional costs of a re-sale in the event that the Property was put up for a further sale by VicUrban and a lower purchase price achieved.

189 In the circumstances, Sprint Homes was compelled to extricate itself from the Contract in order to avoid loss of its deposit and exposure to a damages claim if the notices of rescission had been acted upon by the vendor, VicUrban.

190 The reality was that any potential for a commercial windfall to be gained by Sprint Homes from the Contract for the purchase of the Property from VicUrban, became illusory.

191 The outcomes of the transaction comprised in the Share Sale Agreement dated 15 September 2009, pursuant to which the purchasers of the shares in Aero Developments, Mr Tenuta and Mr Plevritis purchased Mr Evans shares in the company for $1.00, included an obligation on the part of the purchasers to refund to Sprint Homes the deposit of $225,000 which it had paid to VicUrban under the Contract, together with interest.

192 The Share Sale Agreement contained the following relevant clauses:

Clause 2

In consideration of the Purchasers and/or their nominees purchasing from the Vendor his 100 ordinary $1.00 shares in Aero for $1.00 on or about the date hereof -

2.1 The Vendor shall:

2.1.1 as transferor, execute Share Transfers transferring the Shares to the Purchasers and/or their nominees; and

2.1.2 resign as director, secretary and public officer of Aero.

2.2 The Purchasers shall procure Aero to:

2.2.2 subject to strict compliance by the Vendor and Sprint with the obligations imposed upon them by clause 3 of this Deed and the representations made and warranties given to the Purchasers by them or either of them in clause 4 of this Deed being true (such compliance and the truth of such representations and warranties all being conditions precedent to the obligations created on the Purchasers pursuant to clause 6 of this Deed), refund to Sprint the deposit of $225,000 which Sprint paid to VicUrban under the Contract ("Deposit") together with interest thereon at the rate set out and otherwise as is set out in clause 6 of this Deed.

Clause 3

Immediately after Aero takes transfer of the Property from VicUrban, the Vendor and Sprint must:

3.1 expeditiously deliver to Aero all documents in their or either of their power, possession or control in relation to the Property and its proposed development in accordance with the details set out in the Contract ("Development Project");

3.2 procure Mark Tomkinson ("Surveyor") to, at the cost of Aero, expeditiously complete all work undertaken by him in relation to the Development Project on behalf of Sprint; and

3.3 procure a contractor to, at the cost of Aero, expeditiously carry out subdivisional works at the Property ("Works") in order that the Wyndham City Council ("Council") expeditiously certifies Plan of Subdivision 617889G ('Plan') under s 11(7) and issues a Statement of Compliance under s 21 of the Subdivision Act 1988 in relation to the Property.

Clause 4

1. The Vendor and Sprint represent and warrant to the Purchasers and acknowledge and declare that they are aware that the Vendors have relied on such representations and warranties and have been induced thereby to enter into this Deed, that:

4.1 they have had preliminary discussions with contractors who are ready, willing and able to carry out the Works forthwith;

4.2 the Works will be completed within 6 months from the date on which Aero takes transfer of the Property from VicUrban;

4.3 the cost of the Works will not exceed $300,000 plus GST;

4.4 the Surveyor is ready, willing and able to expeditiously complete all of the Works to enable the Plan to be certified by the Council and for the Council to issue the said certificate of compliance;

4.5 the sale prices which Aero will obtain for lots 1-21 (both inclusive) on the Plan ("house blocks") will not be less than $160,000 per house block; and

4.6 they have had numerous enquiries from prospective purchasers of the house blocks and that due to their experience in sales of house and land packages, they are confident that they will procure the "off the plan" sale of all of the 21 house blocks within 4 weeks from the date on which Aero takes transfer of the property from VicUrban.

Clause 6

1. Subject to the provisions of paragraph 2.2.2 hereof, the Purchasers shall procure Aero to pay to Sprint:-

6.1 upon Aero not owing any monies to any person which are secured by the Property or such part of it as Aero remains the registered proprietor of; or

6.2 at the settlement of the sale by Aero of the last part of the Property,

Whichever is the first to occur, the Deposit together with interest thereon at the rate of 20% per annum calculated from the date on which Aero has taken transfer of the Property from VicUrban to the date of payment of the Deposit to Sprint.

193 Accordingly, subject to compliance with the Share Sale Agreement provisions, it provided for the refund to Sprint Homes of the deposit of $225,000 which Sprint Homes had paid to VicUrban under the Contract together with interest thereon at the rate of 20 per cent per annum calculated from the date on which Aero Developments took its transfer of the Property from VicUrban to the date of payment of the deposit to Sprint Homes. It is doubtful whether Mr Evans and Sprint Homes ever carried out the work contemplated under paragraph 3.3 of the Share Sale Agreement, which they were obliged to do after Aero Developments took its transfer of the Property. If this was so and the work was not done, under the Share Sale Agreement, Sprint Homes became disentitled to the refund of its deposit. However, by the terms of the agreement, Sprint Homes was placed in a position, at no cost to itself (which was to have been born by Aero Developments), of completing the specified work and obtaining refund of its deposit. Furthermore, upon Aero Developments completing the contract with VicUrban, Sprint Homes was rendered immune from any further claims for damages against it arising from its purchase of the Property. In this way, Sprint Homes secured significant commercial advantages for itself by the Share Sale Agreement.

194 I am satisfied that by the means described, Mr Evans acted responsibly as a director of Sprint Homes by extricating it from a disastrous Contract which it could not settle, securing the return of its deposit together with interest, and putting in place a structure which facilitated settlement of the Contract with VicUrban on 17 September 2009, thereby avoiding any exposure of Sprint Homes to damages. In these circumstances a finding cannot be made that Mr Evans breached any fiduciary duty he owed to Sprint Homes as its director.

No Requisite Knowledge Established on the Facts

195 It follows that, at the time of receiving the Property, Aero Developments, its directors and relevant agents, including its solicitor Mr Katz, could not have known of any relevant trust arising from any breach of fiduciary duty owed by Mr Evans to Sprint Homes - simply because there was no such breach. Similarly it could not have known of any misapplication of the trust property as this never occurred.

196 In short, Aero Developments did not knowingly receive the Property in breach of any trust. The Plaintiff's claim under the first limb of Barnes v Addy must fail on this basis.

197 Further, even if the case of the Plaintiff was advanced on the basis of the second limb of Barnes v Addy, being knowing assistance, the same considerations apply, with the result that it has not been established that Aero Developments knowingly assisted in any breach of trust.

A Barnes v Addy Claim Does Not Defeat Indefeasibility under the TLA

198 Further, and in any event, it has been authoritatively determined that a claim under Barnes v Addy is not a personal equity which defeats the indefeasibility provisions of the Transfer of Land Act 1958 (Vic).[53]

199 In Tara Shire Council v Garner ('Garner'),[54] Atkinson J sitting on the Court of Appeal described the interaction between the concept of indefeasibility and Barnes v Addy in graphic geophysical terms which in the case before the Court 'brings into sharp relief the great tectonic plates of law and equity as they grind against each other and struggle to settle into a stable position in the substratum of Australia's legal landscape'.[55]

200 However, it appears that the dust has settled on the issue.

201 The argument that a claim based on Barnes v Addy would be inconsistent with the principle of indefeasibility and would undermine the certainty of the Torrens register and hence the system of title by registration was accepted by the majority of the Court of Appeal of Victoria in Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd ('Macquarie Bank'),[56] where Tadgell JA held:[57]

[T]o recognise a claim in personam against the holder of a mortgage registered under the Transfer of Land Act, dubbing the holder a constructive trustee by application of a doctrine akin to "knowing receipt" when registration of the mortgage was honestly achieved, would introduce by the back door a means of undermining the doctrine of indefeasibility which the Torrens system establishes. ... In truth, I think it is not possible, consistently with the received principle of indefeasibility as it has been understood since Frazer v Walker [187] and Breskvar v Wall, to treat the holder of a registered mortgage over property that is subject to a trust, registration having been honestly obtained, as having received trust property. The argument that the appellant is liable as a constructive trustee because it had "knowingly received" trust property should in my opinion fail.

202 Winneke P agreed with Tadgell JA, however Ashley AJA dissented, saying that:[58]

To accept such a position is, in my respectful opinion, effectively to deny the operation of a remedy which squarely falls within the in personam exception to indefeasibility, an exception which undoubtedly exists as a basis for indirect attack upon registration separate from the direct attack available by reliance upon statutory fraud. The approach accepts that, speaking generally, improper receipt of trust property can give rise to a constructive trust. But it says that, in the case of a dealing with trust property which is Torrens system land, recourse to imposition of such a trust is in part unnecessary; for dishonest receipt will constitute statutory fraud. Otherwise the possible scope of the remedy is denied application. The consequence of that approach is that the full range of operation of the particular remedy is emasculated. The proposition that an equity may be recognised and enforced so long as it involves no conflict with the indefeasibility provisions has not prevented the High Court from imposing constructive trusts so as to recognise equities in cases where the transfer of real property was effected at different stages in the course of events giving rise to the equities: thus Bahr, Muschinski and Baumgartner. In my opinion this court is not obliged to, nor should, deny the applicability of the constructive trust remedy in a case such as this. It is one thing to say (in the context of transfer) that, absent fraud, a potential transferee is not to be affected by notice, actual or constructive, of any trust. It is a quite separate matter to say that such a person is to be unaffected by notice, actual or constructive, of a breach of trust. Likewise, I consider, by analogy in the case of a mortgage of land. Moreover, it has been said that the purpose of indefeasibility is to protect a transferee from defects in the title of the transferor; not to free the transferee from interests with which he has burdened his own title. To deny the applicability of the in personam remedy now under discussion would not, I think, achieve that outcome.

203 However, in Garner, Atkinson J (with McMurdo P concurring, but with Davies JA in dissent[59]) respectfully disagreed with the majority in Macquarie Bank, preferring the judgment of Ashley AJA in that case as being 'more in accordance with principle and more effectively balance[ing] the protection afforded to trust property against its knowing receipt by a third party and the protection afforded to the title of registered proprietors'.[60]

204 In LHK Nominees Pty Ltd v Kenworthy,[61] four judges of the Full Court of the Supreme Court of Western Australia, however, followed the reasoning of Tadgell JA and Winneke P in Macquarie Bank.[62] Justices Anderson and Steytler reasoned that:[63]

As to the ... so-called "recipient liability" limb, the equity arising is defeated by registration of Torrens title in favour of the recipient. Like Pullin J, we prefer the reasoning of Tadgell JA and Winneke P to this effect in Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd to that of Ashley AJA in that case and also the decision of the majority in Tara Shire Council v Gardner [2002] QCA 232. Critical to this preference is the fact that, as was pointed out by Tadgell JA (at 157) (and also by Street J in Mayer v Coe [1968] 2 NSWR 747 at 754), because the Torrens system is one of title by registration and not one of registration of title, the proprietary rights of a registered holder of Torrens title land derive "from the fact of registration and not from an event antecedent thereto". While Tadgell JA was referring to a registered mortgagee, the position is, of course, the same in the case of the registered owner of the land. Consequently, where registration of title is not dishonestly obtained, it is, to use the words of Tadgell JA, not possible, consistently with the received principle of indefeasibility as it has been understood... to treat the holder of the registered title to property that is subject to a trust as having received trust property.

205 In Farah Constructions, the High Court resolved the question by adopting the observations of Tadgell JA in Macquarie Bank, explaining the position as follows:[64]

An exception operating outside the language of s 42(1) can exist in relation to certain legal or equitable causes of action against the registered proprietor. So far as Say-Dee [the respondent] was relying on Barnes v Addy, it was certainly alleging a recognised equitable cause of action. In Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd Tadgell JA (Winneke P concurring, Ashley AJA dissenting) held that a claim under Barnes v Addy was not a personal equity which defeated the equivalent of s 42(1) in Victoria, namely the Transfer of Land Act 1958, s 42(1).

...

Although the Court of Appeal [being the NSW Court of Appeal in Farah Constructions v Say-Dee] referred to Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd on another point, it did not refer to that case or LHK Nominees Pty Ltd v Kenworthy in relation to indefeasibility. It ought to have followed those cases.

206 Although this outcome has been the subject of academic criticism,[65] Farah Constructions on the issue of indefeasibility has settled the law in Australia.

207 For these reasons, the Plaintiff's claim under Barnes v Addy must fail.

208 There is no basis for maintaining any in personam exception to the indefeasibility of the title of Aero Developments to the Property.

209 In accordance with these reasons, the Plaintiff's claim is dismissed.

210 On the counterclaim of the First Defendant, there being no evidence adduced or submission made as to any damages suffered, it will be ordered and declared that:

1. The caveat lodged by Mathieson Nominees is taken to have lapsed and is no longer of any force or effect pursuant to s 89A(5)(b) of the Transfer of Land Act 1958 (Vic).
2. The Registrar of Titles is directed to remove the caveat from and against the title to the Property.

211 Unless there is reason to order otherwise, the Plaintiff is ordered to pay the costs of the First Defendant of the proceeding.

[2] [1959] HCA 8; (1959) 101 CLR 298.

[3] Re Cosslett (Contractors) Ltd [1998] Ch D 495, 508 (Millett LJ).

[4] See Porter & Anor v Bonarrigo & Anor [2009] VSC 500 at [94]-[95] quoting Edward I Sykes and Sally Walker, The Law of Securities, (LawBook Co, 5th ed, 1993) 199 where the learned authors describe the nature of an equitable lien in the following passages: 'The equitable lien differs from the equitable charge mainly in the mode of creation. It arises by implication of law in certain circumstances. Once in existence, it basically confers the same remedies, viz. the powers of sale and appointment of a receiver but only of course through the court. ... The equitable lien arises purely from implication of law. ... The equitable lien, like the equitable charge, is a pure hypothecation; it involves no transfer of actual or potential ownership, it does not depend on possession and it rests only on an equity, with the result that it is unenforceable against the bona fide purchaser for value without notice of the legal estate. Nevertheless, it is an "interest" in land; it is of a proprietary character'.

[5] R Goode, Goode on Legal Problems of Credit and Security (Sweet & Maxwell, 4th ed, 2008) 5 (citations omitted).

[6] AVCO Financial Services v White [1977] VicRp 62; [1977] VR 561, 563 (Gillard J).

[7] [2009] VSC 500, [63]-[73].

[8] Ibid at [65]-[68] (citations omitted).

[9] [2008] FCA 594, [38].

[10] Edward I Sykes and Sally Walker, The Law of Securities (LawBook Co, 5th ed, 1993), 197.

[11] R Goode, Goode on Legal Problems of Credit and Security (Sweet & Maxwell, 4th ed, 2008) 36 (emphasis added) (citations omitted).

[12] Edward I Sykes and S Walker, The Law of Securities (LawBook Co, 5th ed, 1993) 197 (emphasis in original).

[13] Latin: 'a right in the property of another'.

[14] E L G Tyler, P W Young and Clyde Croft, Fisher and Lightwood's Law of Mortgage (LexisNexis Butterworths, 2nd ed, 2005) 49 (emphasis added).

[16] Edward I Sykes and Sally Walker, The Law of Securities (LawBook Co, 5th ed, 1993) 198 (emphasis added).

[17] [2009] VSC 500, [82].

[18] [2009] FCA 701; (2009) 257 ALR 498, 501 [9].

[19] [2009] VSC 133.

[20] [2004] VSC 126, [15] (citations omitted).

[21] 428 Lt Bourke St Pty Ltd [2009] VSC 133, [31].

[24] Sub-section 40(2) repealed by No. 70/2014 s 10.

[25] [2007] VSC 412.

[26] Ibid at [8]-[11], [15]-[16].

[27] [2010] NSWSC 108, [25].

[28] Breskvar v Wall (1971) 126 CLR 376, 385 (Barwick CJ).

[29] Bahr v Nicolay (No 2) [1988] HCA 16; (1988) 164 CLR 604, 614 (Mason CJ and Dawson J).

[30] Ibid at 614 (Mason CJ and Dawson J) and 631-2 (Wilson and Toohey JJ).

Timothy Boyle, 'Never "Say-Dee": The Ongoing Relevance of the "First Limb" of Barnes v Addy in Modern Australian Law' (2011) 5 Journal of Equity 12[3], 139.

[31] [1967] 1 AC 569, 585.

[32] Grgic v Australian & New Zealand Banking Group Ltd (1994) 33 NSWLR 202, 222-3.

[33] LHK Nominees v Kenworthy [2002] WASCA 291; (2002) 26 WAR 517, 566 [262] (Pullin J); Perpetual Trustees Victoria Ltd v G Gheourghui [2007] VSC 412, [8]-[11], [15]-[16].

[34] Breskvar v Wall (1971) 126 CLR 376, 384-5 (Barwick CJ).

[35] Frazer v Walker [1967] 1 AC 569, 585.

[36] [1988] HCA 16; (1988) 164 CLR 604, 638.

[37] [1967] 1 AC 569, 585.

[38] As to constructive knowledge, see R P Austin and I M Ramsay, Ford's Principles of Corporations Law (LexisNexis Butterworths, 15th ed, 2013) 998 [16.250].

[39] (1874) LR 9 Ch App 244.

[40] Ibid at 251-2 (words in brackets added).

[41] Farah Constructions v Say-Dee [2007] HCA 22; (2007) 230 CLR 89, 140 [111].

[42] Ibid at [113]; Consul Development v DPC Estates Pty Ltd [1975] HCA 8; (1975) 132 CLR 373.

[44] [1975] HCA 8; (1975) 132 CLR 373, 408.

[45] Bell Group (2008) 39 WAR 1, [4748 (d)].

[46] See Polly Peck International Plc v Nadir [1992] EWCA Civ 3; [1992] 4 All ER 769, 777 (Scott LJ).

[47] [2007] HCA 22; (2007) 230 CLR 89.

[48] Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ.

[51] [1993] 1 WLR 509, 575-6 ('Baden').

[52] Farah Constructions [2007] HCA 22; (2007) 230 CLR 89, 163-4.

[53] Macquarie Bank v Sixty-Fourth Throne [1998] 3 VR 133, 156-157; Farah Constructions [2007] HCA 22; (2007) 230 CLR 89, 169-71.

[54] [2002] QCA 232; [2003] 1 Qd R 556.

[56] [1998] 3 VR 133.

[60] [2002] QCA 232; [2003] 1 Qd R 556, 584.

[61] [2002] WASCA 291; (2002) 26 WAR 517.

[62] Ibid at 549 [186] (Murray J); 555 [210] (Anderson and Steytler JJ); 568-72 [273]-[279] (Pullin J).

[64] [2007] HCA 22; 230 CLR 89, 169 [193], 171 [196].

1. [65] M Harding, 'Barnes v Addy Claims and the Indefeasibility of Torrens Title' [2007] MelbULawRw 15; (2007) 31 Melbourne University Law Review 343; M Bryan, 'The Liability of the Recipient: Restitution at Common Law or Wrongdoing in Equity?' in S Degeling and J Edelman (Eds), Equity in Commercial Law (LawBook Co, 2005) 327; Timothy Boyle, 'Never "Say-Dee": The Ongoing Relevance of the "First Limb" of Barnes v Addy in Modern Australian Law' (2011) 5 Journal of Equity 123, 138-45.