Mr Prentice the plaintiff ("the trustee") for whom Mr D. Krochmalik of counsel appears has been appointed as trustee of the estate of Nicole Lyn Marjoribanks ("Nicole"). Nicole was made bankrupt on 20 May 2014 by order of the Federal Circuit Court.
One of the assets of Nicole is a half interest in a property at Forresters Beach ("the property"). The other half interest in the property is owned by Nicole's parents, the defendants, between themselves as joint tenants. Mr A.D. Justice, of counsel, appears for the defendants.
The trustee has become the registered co-owner of the property. There is no dispute that he owns 50% of the property as a tenant in common with the defendants.
The trustee has written to the defendants on two occasions offering to sell his half interest to them. The defendants have refused to take up the offer. The trustee wants to arrange a sale of the property and, contemplating the lack of cooperation in such a course on the part of the defendants, he seeks an order under s 66G of the Conveyancing Act 1919 (NSW).
The defendants do not contend that the trustee is not, as a matter of general principle, entitled to an order for sale of the property and they say that, if the property has to be sold they will cooperate in that process, so that there is no need for trustees for sale.
To understand the qualification I need to set out some relevant matters of history relating to the purchase of the property.
The property was purchased in 2010 for $800,000. It was agreed between the defendants and Nicole that the defendants would put in $400,000 of the purchase price from their own funds and that Nicole would contribute $400,000 but to do so not from her own funds but by way of a loan from Bankwest. Bankwest did provide $400,000 but Nicole was not the sole borrower rather she and the defendants were the borrowers. The bank, not surprisingly, required a mortgage over the property and Nicole and the defendants gave a mortgage to the bank.
At the time of settlement of the purchase the defendants and Nicole entered into a co-ownership Deed which recorded that the property would be held by the defendants and Nicole fifty-fifty but that Nicole would be solely responsible for repayment of the mortgage to the bank (see pp 136-137 Exh A). The Deed also provided for the defendants to pay rent at a commercial rate should they reside at the property. I think it is accepted that the defendants have resided at the property for a considerable time but have not paid any rent to Nicole. It is agreed that Nicole has paid a total of $97,000 in repayments to the bank and the defendants have paid a total of $14,574, a portion of which was paid before Nicole was made bankrupt.
The Deed also has a provision dealing with how the proceeds of sale are to be divided and it is in the following terms:
"5. Any amount owing under Nicole's mortgage shall be repaid from her half share in the sale proceeds of the property."
There was also a clause (cl 6) to the effect that Nicole would use her best endeavours to discharge the mortgage over the property.
The question which has arisen for determination is this. If a sale of the property proceeds, will the trustee be entitled to 50% of the net proceeds (after discharge of selling costs, legal costs and the mortgage) or will he be required to account for the mortgage debt agreed to be currently approximately $437,000 out of the net proceeds due to him.
It is accepted by all parties that if the trustee is required to, as it were, account for the mortgage repayments there will be little or no equity left to him in the net proceeds. If the trustee is not required to account for the money paid to the bank then the trustee accepts that the defendants have a claim on the bankrupt estate for the $437,000 as unsecured creditors and could lodge a proof of debt seeking to recover that amount or the percentage of recovery that would be yielded from the pot of assets.
Mr Justice of counsel who appears for the defendants puts his client's entitlement to insist on payment by the trustee of the equivalent of the bank debt on three basis:
1. Contribution
2. Exoneration
3. Mutual set off- s 86 of the Bankruptcy Act 1966 (Cth)
There was a fourth possible way of putting the defendant's claim and that is as a charge based on the terms of the Deed. Mr Justice did not however put his case on this basis, conscious perhaps because of the trustee's answer to it which was if, contrary to the trustee's contention a charge was created it was rendered ineffective by reason of the effect of the Personal Property Securities Act 2009 (Cth) ("PPSA"). Mr Justice accepted that the PPSA would defeat any charge created by the Deed.
In considering whether contribution and exoneration and s 86 of the Bankruptcy Act 1966 (Cth) apply it is necessary to restate the circumstances in which the question falls for determination- ie after the bank has been paid out its full mortgage debt. It can also be remarked that since Nicole has become a bankrupt it is open to the bank to call up the loan of $437,000 at any time and if it is not paid by the defendants, to sell the property. If the bank did call up the debt from the defendants, the defendants would be liable to the bank for the $437,000 debt. If Nicole was removed as a debtor and the property not sold the defendants would remain as debtors to the bank.
Contribution
As the High Court remarked recently in Lavin v Toppi [2015] HCA 4 the rationale of the right of contribution both at law and in equity was described by Kitto J in Albion Insurance Co Ltd v Government Insurance Office of New South Wales (1969) 121 CLR 342, at pp 349-350 as one of natural justice which ensures that
"persons who are under co-ordinate liabilities to make good the one loss (eg sureties liable to make good a failure to pay the one debt) must share the burden pro rata"
and a similar enunciation in Friend v Brooker and Another [2009] HCA 21 set out at [45] of Lavin is in the following terms:
"The equity to seek contribution arises because the exercise of the rights of the obligee or creditor ought not to disadvantage some of those bearing a common burden; the equity does not arise merely because all the obligors derive a benefit from a payment by one or more of them."
Contribution is a doctrine of wide application forming part of the law of guarantees, insurance, bills of exchange and is accepted as both part of the common law and of equity (see Albion pp 350-351).
The principles of contribution generally requires the two debtors (or obligees) to contribute equally to the debt owed to the creditor (or obligor). There are cases in which a rateable contribution is applied eg Government Insurance Office (NSW) v Crowley [1975] 2 NSWLR 78 at pp 82- 83 and GRE Insurance Ltd v QBE Insurance Ltd [1985] VR 83 at pp 103- 104 and Drayton v Martin (1996) 67 FCR1 at 38 but the purpose of the doctrine is to avoid throwing "the whole burden of indemnity on the other" (Commercial & General Insurance Co Ltd v Government Insurance Office of NSW (1973) 129 CLR 374 at 381). In this case the bank will have been paid out of the property held equally by two sets of debtors, Nicole on the one hand and the defendants on the other. The principle of contribution would require these two groups to contribute equally.
What the defendants seek here is not an equal share of their obligations to the bank but rather a share not based on their equal liability to the bank or on their respective share in the property but rather an unequal carriage of the burden. That demand for inequality of burden is perfectly understandable and reasonable because it was agreed between the defendants and Nicole that she would bear the liability to repay the bank unequally but the source of that obligation is the Deed. I do not think that the principle of equitable contribution can be relied on by the defendants.
Exoneration
Exoneration is an equitable principle found in the law relating to mortgages and guarantees whereby a party (often a wife) whose property has been mortgaged or given as security for the debt of another (often a husband) is entitled to be indemnified entirely by the other person. It has been held not to be limited to husband and wife or parent and child.
The principle is discussed in some detail in Farrugia v Official Receiver in Bankruptcy (1982) 58 FLR 474, at 476 per Deane J and by Bryson J in Official Trustee in Bankruptcy v Citibank Savings Ltd (1995) 38 NSWLR 116, see also Young, Croft, Smith on Equity (Thomson Reuters, 2009) [12.580-12.620].
In Farrugia it was held that where joint property is charged partly for the benefit of the husband alone and partially for the benefit of both husband and wife and it was possible to apportion the principal between the two, there was room for the application of the equitable principle of exoneration and the wife was, in the absence of agreement to the contrary, entitled to exoneration to the extent of what was borrowed and applied for the benefit of the husband alone. Deane J said:
"Between themselves, Mr Farrugia was in the position of principal debtor and Mrs Farrugia the position of surety as regards the balance of the $10,500 which Mr Farrugia applied for his own purposes. Mrs Farrugia was entitled to throw that part of the borrowing on her husband's interest in the land to the exoneration of her own. If Mr Farrugia had not become bankrupt, Mrs Farrugia would, upon the sale of the property, have been entitled to require that the whole of the $10,500 applied for Mr Farrugia's benefit be repaid out of Mr Farrugia's share of the proceeds of sale. More importantly, Mrs Farrugia had a charge upon Mr Farrugia's interest in the land by way of indemnity to secure her right of exoneration (see Gee v Liddell [1913] 2 Ch 62 at 72). That charge was not obliterated by Mr Farrugia's bankruptcy. Mr Farrugia's interest in the property which passed to the Official Receiver was subject to it (see Aguilar v Aguilar (1820) 5 Madd 414 ; 56 ER 953 Re Berry [1976] 2 NZLR 449). I am fortified in that conclusion by the fact that it accords with the views of no less an authority on the law of bankruptcy than the late Mr Justice Riley (see Re Thompson; Ex parte Smith (1975) 8 ALR 475 at 477)."
The present case is even stronger then Farrugia because the defendants and Nicole specifically turned their attention to how the bank debt was to be dealt. In my view it is clear that as between themselves and Nicole the defendants were agreeing to join in the lending and to permit a mortgage of the property so that Nicole could obtain her share in the property. Nicole could not have insisted on the payment out to her of the net proceeds thus leaving her parents to carry themselves the debt to the bank that Nicole had decided to incur as the price for her half interest.
It is clear from the authorities that where the doctrine operates the trustee in bankruptcy takes the property of the bankrupt subject to the claimant's equity: Re Berry (a bankrupt) [1976] 2 NZLR 449, Parsons v McBain [2001] FCA 376; (2001) 109 FCR 120 and Dickson v Reidy (2004) 12 BPR 23, 201 [2004] NSWSC 1200.
In this case it was really Nicole's 50% share of the property that was the subject of the borrowing and the defendants were permitting their 50% share to be burdened by a mortgage necessary to secure Nicole's share.
The trustee asserted that a right of exoneration can be defeated. In Parsons Black CJ, Kiefel and Finkelstein JJ dealt with the question of defeat of the doctrine thus:
"[22] The trial judge denied to each appellant the right of exoneration because she had received "a tangible benefit" from the 1992 mortgage. The benefit, which might more accurately be described as an expected benefit, was that, by putting money into the partnership business, the business might survive and, as put by counsel for the trustee, that would bring "home money to put food on the table and clothe the children".
[23] If a surety receives a benefit from the loan, the equity of exoneration may be defeated. So, if the borrowed funds are applied to discharge the surety's debts, the surety could not claim exoneration, at least in respect of the benefit received. But the benefit must be from the loan itself. The question suggested by the Lord Chancellor of Ireland is: "Who got the money?": see Re Kiely (1857) 1 Ch R 394 at 405. In Paget v Paget [1898] 1 Ch 470 both the husband and the wife "got the money" and this prevented the wife claiming exoneration.
[24] The "tangible benefit" referred to by the trial judge will not defeat the equity. It is too remote. In any event, the exoneration to which a surety is entitled could hardly be defeated by a benefit which is incapable of valuation, and even if it were so capable, the value is unlikely to bear any relationship to the amount received by the principal debtor."
In a sense the defendants obtained the benefit of the loan because they were joint borrowers from the bank but the reality here is that Nicole was obtaining a loan to purchase her half interest in the property- the funds were effectively going entirely to pay for her half interest and not for the benefit of the defendants whose interest remained at 50% and which interest was fully funded by them. The property was mortgaged so that Nicole's half share could be funded. The practical answer to "who got the money?" from the bank is "Nicole". The benefit of having a co-owner able to fund her own 50% interest by a bank loan was of an intangible kind not capable of valuation and not having any relationship to the amount received by Nicole.
Contrary to Mr Krochmalik's submissions I do not understand the defendants to contend that they have a beneficial interest in the property greater than 50%. The defendants accept that it was intended that Nicole would have a 50% interest. What they assert is that it was agreed that Nicole's 50% interest would be paid for by her and since a loan was obtained from the bank by Nicole and with their assistance she would ensure that the loan was repaid by her and if not repaid before sale that the amount of the loan would be reimbursed to the defendants out of her share of the net proceeds. Bloch v Bloch [1981] HCA 56 and Calverley v Green [1984] HCA 81 are not relevant here.
Mr Krochmalik in his written submissions raised the point that the Deed is not witnessed, and hence that there is an issue about its enforceability. He said nothing about this point in oral submissions perhaps because Mr Justice made it clear that he does not put his case as based on a charge arising under the Deed.
[2]
Mutual set off- section 86 of the Bankruptcy Act 1966 (Cth)
Mr Justice sought, and I granted, time to the parties to provide written submissions on the question of the applicability of s 86 of the Bankruptcy Act 1966 (Cth) which submissions were detailed and which I received on 10 March 2015.
In the light of my conclusion on exoneration it is not strictly necessary to address this point but I will do so briefly.
S 86 of the Bankruptcy Act 1966 (Cth) provides relevantly:
"Mutual credit and set-off
(1) Subject to this section, where there have been mutual credits, mutual debts or other mutual dealings between a person who has become a bankrupt and a person claiming to prove a debt in the bankruptcy:
(a) an account shall be taken of what is due from the one party to the other in respect of those mutual dealings;
(b) the sum due from the one party shall be set off against any sum due from the other party; and
(c) only the balance of the account may be claimed in the bankruptcy, or is payable to the trustee in the bankruptcy, as the case may be."
The section has operation when a person claims to prove a debt in the bankruptcy. If after the sale of the property and settlement the defendants were seeking to recover $437,000 which had been utilised to repay the Bank debt and were seeking to prove for the $437,000 the trustee would not have any debt to assert against the defendants and hence set off against that debt claimed on the estate by the defendants.
Another way of looking at this is to say that on settlement the trustee here would have a claim for payment of half of the proceeds of sale which would not be a claim against the defendants to recover monies held by them. The trustee has no claim and asserts no claim against the defendants. When the defendants seek to prove in the bankruptcy the trustee will not assert any mutual debt and in my opinion s 86 of the Act has no application. I accept that Gye v McIntyre [1991] HCA 60; (1991) 171 CLR 609 makes it clear that s 86 is not to be read narrowly but neither it nor s 86 has any application to the present case.
Conclusion
It follows from my conclusion in respect of exoneration that the trustee is required to account to the defendants for the full amount of the mortgage paid out to the Bank from the proceeds of sale before any distribution is made to the trustee out of the net proceeds of sale. I will give the parties an opportunity to draft appropriate orders to reflect this conclusion.
Rent
There arises a question of whether the defendants must account for rent as an adjustment as between themselves and Nicole and hence the trustee and whether the defendants would be entitled to offset against that rent the amount of mortgage repayments made by them since those payments were agreed to be to Nicole's account. I will hear the parties on this question.
Costs
I will also provide the parties an opportunity to be heard on the question of costs.
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Decision last updated: 19 March 2015
Parties
Applicant/Plaintiff:
Maxwell Prentice in his capacity as the trustee of the bankrupt estate of Nicole Lyn Marjoribanks