Naxatu Pty Limited v Perpetual Trustee Company Limited; In the Matter of... [2011] FCA 669 | Case summary

Naxatu Pty Limited v Perpetual Trustee Company Limited; In the Matter of... [2011] FCA 669 | Case summary | Zoe

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Naxatu v Perpetual 6 In its Originating Process, Naxatu claims that it is entitled to a s 423 inquiry in relation to Perpetual's conduct as mortgagee in possession and as mortgagee exercising its power of sale and therefore as controller of "… certain Real Property Act Strata titles". 7 The complaints which Naxatu makes in its pleadings are: (a) Perpetual has failed to discharge its first mortgage securities over Naxatu's securities when it has been obliged to do so since at least 2008; (b) Perpetual has failed to furnish adequate, proper and comprehensible mortgagee accounts; (c) Perpetual has appropriated the sale proceeds of mortgaged titles unlawfully to the detriment of Naxatu's securities; (d) Perpetual has sacrificed Naxatu's interests in its securities and is thus obliged to account to Naxatu on a wilful default basis; (e) Perpetual paid GST to the Australian Taxation Office in respect of the sale proceeds of home units in the development when it was not obliged to do so because it could have and should have applied the Margin Scheme to those sales; (f) Perpetual failed to keep proper accounting records; (g) Perpetual failed to bring to account the sale proceeds of Lot 127 in SP70294, Lot 78 in SP67386 and Lot 33 in SP69440; and (h) Perpetual wrongly debited the loan account of Sterling with fees, charges, late payment fees, penalty interest and legal fees. 8 Naxatu reiterated these claims in its Statement of Claim. In that pleading, it focussed many of its complaints upon certain accounts furnished by Deacons (now Norton Rose, the lawyers for Perpetual) on behalf of Perpetual, to Naxatu's lawyers (Cara Marasco & Company) (CMC) on or about 10 October 2007. 9 In its Defence, Perpetual asserts that: (a) As a result of taking various transfers of mortgage from Permanent, it held first registered mortgage security over 43 units in the development, including over Naxatu's securities; (b) Deacons were mistaken when they asserted in their letter to CMC dated 13 December 2006 that Perpetual had by that date been fully repaid its entire debt and had realised a surplus; (c) Perpetual had never realised a surplus; (d) The private ruling which it obtained from the Australian Taxation Office concerning its GST liability and the applicability of the Margin Scheme did not provide sufficient comfort to Perpetual to justify applying the Margin Scheme to sales of home units in the development effected by it; (e) By May 2007, there was a claim by Bridgecorp under the Deed of Priority; (f) It was not the controller of Naxatu's securities because Naxatu itself had entered into possession; and (g) It had not been guilty of any wrongdoing as controller of any securities.

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The Issues Between Naxatu and Perpetual 18 The parties filed an agreed Statement of Issues on 28 May 2010. Paraphrasing and summarising that Statement somewhat, the following issues arise: (a) Whether the Court should order an inquiry in respect of: (i) Alleged waste in respect of the application of the proceeds of sale of home units mortgaged to Perpetual to the detriment of Naxatu's securities; (ii) Perpetual's failure to discharge its mortgages; (iii) Bridgecorp's entitlements under the Deed of Priority upon the true construction of that Deed; (iv) Whether, upon the true construction of Perpetual's first mortgage over those home unit properties over which Naxatu holds a second registered mortgage (Naxatu's securities), Perpetual is entitled to recover any liability to Bridgecorp from those securities or any of its costs, charges, remuneration or expenses relating to the claim; (v) Whether Perpetual's assumption of liability to Bridgecorp in respect of the Deed of Priority is a liability for which it is entitled to claim or assert priority over Naxatu's securities; (vi) Whether the postponement of Naxatu's mortgage in favour of Permanent's mortgages operated to postpone Naxatu's mortgage in respect of further loans made by Permanent and Perpetual after the postponement, in respect of the proceeds of sale of securities for such further loans released by Permanent and Perpetual to Sterling and Bridgecorp and in respect of the proceeds of sale of securities for such further loans that Permanent and Perpetual agreed to release, pay or make available to Bridgecorp; (vii) Whether s 58(3) of the Real Property Act 1900 (NSW) (the Real Property Act) trumps the Deed of Priority; (viii) Whether Perpetual breached its obligation of good faith in relation to its treatment of GST and the Margin Scheme, in relation to its levying of administration fees, early discharge fees and other imposts and in relation to its treatment of the sale proceeds from the sale of home units covered by its first mortgage; (b) Whether any consequential orders are appropriate assuming that an inquiry is ordered.

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The Facts 19 Naxatu is the registered proprietor of a second ranking mortgage (Registered Dealing No 7805323K) over the following strata lots in New South Wales, namely, Lots 25, 65, 71, 82 and 83 in Strata Plan 67386. These are the home unit properties which comprise Naxatu's securities. 20 Naxatu's securities form part of the development. The development was undertaken on the site in Pyrmont Bridge Road, Glebe, an inner west suburb of Sydney, where the Royal Alexandra Children's Hospital had operated for many years prior to the mid 1990s. Sterling entered into a Development Agreement with the New South Wales Government to develop that site. The site was 5.595 hectares in area. It was to be developed in stages - six in all. The development was complex. It involved the construction of: (a) up to 810 dwellings; (b) up to 3,360 square metres of commercial and retail space; (c) 1,087 car spaces; (d) 8,025 square metres of public open space; and (e) other significant works. 21 Sterling paid $30.6 million to the New South Wales Government for the site. Just as the construction was to proceed in stages, the sales of home units were to be effected progressively as those units were completed and made ready for sale. 22 Naxatu acquired its interest as second ranking mortgagee in Naxatu's securities from GPC Custodian Pty Limited (GPC) pursuant to two Transfers of Mortgage, one of which (Registered Dealing No AC634381V) is dated 4 August 2006 and the other of which (Registered Dealing No AC515949F) is undated. The second mortgage held by GPC which it transferred to Naxatu by means of these dealings also attached to Lot 78 in SP67386 but that home unit was sold on 27 July 2006. 23 The consideration paid by Naxatu to GPC for the transfer of GPC's second ranking mortgage is specified in the transfers as $1.00. 24 As at August 2006, Perpetual held first ranking registered mortgages (Registered Dealing No 8965348A and No 8968538Y) over at least eighteen properties within the development (Perpetual's securities). Perpetual's first ranking mortgages attached to all of Naxatu's securities. Perpetual was, and is, the custodian of the Challenger Howard Mortgage Fund. Challenger Managed Investments Limited (Challenger) is the trustee of that fund. 25 Perpetual had acquired its mortgages from Permanent pursuant to a Transfer of Mortgage dated 7 August 2005 (Registered Dealing No AB728671N). Sterling had mortgaged Perpetual's securities to Permanent by means of two registered mortgages, both of which were dated 10 September 2002. Those two mortgages secured Loan No 2197 for $2,016,000 and Loan No 2198 for $1,106,000 respectively. Other loans were made by Permanent to Sterling between May 2003 and 7 August 2005. Each of those subsequent loans was secured by a separate mortgage. The total amount lent to Sterling by Permanent by way of these additional loans was $13.424 million. 26 These loans were all made by Permanent on behalf of Challenger. They were apparently made to the Sterling Guardian Unit Trust of which Sterling Guardian Pty Limited (Sterling Guardian) was the trustee. The precise detail of the structures and arrangements established amongst the Sterling Estates group of companies does not matter for present purposes. It is sufficient to record and remember that these loans were secured by the various mortgages to which I have referred at [25] above. Those mortgages were all granted by Sterling to Permanent. 27 Each mortgage granted by Sterling in favour of Permanent was supported by a Deed of Loan and was in a standard form. Each mortgage incorporated the terms and conditions set out in the Registered Memorandum of Mortgage Conditions No 6321899 (the standard terms). 28 Each mortgage secured, amongst other things, all moneys which Sterling was or at any time might become actually or contingently liable to pay to or for the account of Challenger. 29 On or about 2 April 2004, Sterling, Permanent and Bridgecorp entered into the Deed of Priority. It will be necessary to discuss the Deed of Priority in more detail later in these Reasons. At about the same time, Bridgecorp lent to Sterling $6,585,000 in order to facilitate completion of the development. 30 Challenger consented to Sterling's granting a second mortgage over the Bridgecorp securities. The loan advance made by Bridgecorp to Sterling was to the advantage of Sterling and its lenders. 31 When individual home units within the development were sold from time to time, a partial discharge of the relevant security property was effected and, if the property was one of the Bridgecorp securities, the priority amount specified in the Deed of Priority reduced accordingly. 32 By December 2005, Permanent, on behalf of Challenger, was owed approximately $2.475 million. 33 GPC had acquired its second ranking registered mortgage from Macquarie Australia Management Services Pty Limited (Macquarie) on 17 September 2004. Macquarie's registered mortgage (Registered Dealing No 7805323K) had been granted by Sterling on 20 July 2001. Although that mortgage had been granted and registered prior to 10 September 2002 (the date when Permanent took its mortgages), on 11 September 2002, Macquarie had agreed to postpone its mortgage behind Permanent's mortgages (see Postponements of Mortgage Registered Dealings No 8965249X and No 8968539W, both of which are dated 10 September 2002). 34 In September 2005, Sterling had defaulted in its obligations to Challenger. 35 On or about 30 January 2006, two partners of Korda Mentha (Messrs Winterbottom and Madden) were appointed as voluntary administrators of Sterling and of other companies in the Sterling Estates group. Sterling subsequently went into liquidation and Messrs Winterbottom and Madden were appointed its liquidators. 36 On 1 February 2006, Perpetual appointed Messrs Parbery and Robinson of PPB as receivers and managers of certain unsold home units in the development. 37 On 27 January 2006, Bridgecorp appointed Messrs Lock and Sheahan of Sheahan Lock Partners as receivers and managers of various unsold units in the development. As at that date, Bridgecorp held registered second mortgage security over nine unsold home units. 38 Administrators were appointed to Sterling and to other companies in the Sterling group on 3 February 2006. As at that date, the site had been fully developed save for the final stage (Stage 6) and the administration block. As at that date, many completed home units were yet to be sold. 39 As at August 2006, Bridgecorp held a second ranking registered mortgage over several properties in respect of which Perpetual held a first registered mortgage (the Bridgecorp securities). 40 The Bridgecorp securities comprised different home units from those which comprised the Naxatu securities. Those home unit properties were part of four separate strata plans. Strata Plan 67386, in which the Naxatu securities were registered, was not one of the strata plans in which the Bridgecorp securities were to be found. 41 On 11 August 2006, Naxatu's lawyers wrote to Perpetual. In that letter, those lawyers requested Perpetual to provide information in relation to the amount which it would require to be paid to it or realised from the sale of home units in the development in order to discharge its mortgages. Perpetual was also put on notice that, once Perpetual had received all sums due to it under its two mortgages, Naxatu would require it to discharge the two mortgages which it held over Naxatu's securities. 42 Deacons responded to the 11 August 2006 letter from Naxatu's lawyers with two letters, one dated 14 August 2006 and one dated 30 August 2006. Omitting formal parts, the letter of 30 August 2006 was in the following terms: Perpetual Trustee Company Limited - Sterling Estates Development Corporation Pty Limited (Receivers and Managers Appointed) (Subject to a Deed of Company Arrangement); Your Client: Naxatu Pty Limited We refer to your letter to us dated 11 August 2006. Our clients have exchanged contracts for the sale of the following 10 properties as mortgagee exercising its power of sale: Property Address Title Particulars ContractDate Contract Price Second Mortgagee Unit 116, "Aquilon" Apartments, 4 Alexandra Drive, Camperdown NSW 116/SP70294 25 May 2006 $382,500.00 Bridgecorp Finance Limited Unit 127, "Aquilon" Apartments, 4 Alexandra Drive, Camperdown NSW 127/SP70294 25 May 2006 $700,000.00 GPC Custodian Pty Limited Unit 5403, "Vie II" City Quarter, Pyrmont Bridge Road, Camperdown NSW 33/SP71745 6 July 2006 $540,000.00 Bridgecorp Finance Limited Unit 1502, "Vie I" City Quarter, Pyrmont Bridge Road, Camperdown NSW 120/SP71747 6 July 2006 $632,000.00 Bridgecorp Finance Limited Unit 3302, "Vie 3" City Quarter, Pyrmont Bridge Road, Camperdown NSW 13/SP71747 6 July 2006 $502,500.00 Bridgecorp Finance Limited Unit 78, "Etage" Apartments, 10 Pyrmont Bridge Road, Camperdown NSW 78/SP67386 27 July 2006 $425,000.00 Naxatu Pty Limited Unit 7, "Terraces", 2 Alexandra Drive, Camperdown NSW 7/SP70293 27 July 2006 $950,000.00 Bridgecorp Finance Limited Unit 33, "Venables" Apartments, 20 Pyrmont Bridge Road, Camperdown NSW 33/SP69440 4 August 2006 $690,000.00 GPC Custodian Pty Limited Unit 12, "The Terraces" Apartments, 2 Alexandra Drive, Camperdown NSW 12/SP70293 10 August 2006 $900,000.00 Bridgecorp Finance Limited Unit 3204, "Vie I" City Quarter, Pyrmont Bridge Road, Camperdown NSW 3/SP71747 11 August 2006 $470,000.00 Bridgecorp Finance Limited Total $6,192,000.00

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Please find enclosed the front pages of the contracts for each of these properties. Our client anticipates that upon settlement of the sale of all of these properties, it will realise sufficient funds to discharge its debt secured against these and other properties owned by Sterling. However, our client makes no representation in this regard as it is subject to final verification of various costs and fees including our client's receiver's costs, agent's commission, GST, legal fees of enforcement and sales of the properties, costs of advertising and other realisation costs, interest, additional interest and other charges. Our client will take no steps towards discharging, assigning, releasing or otherwise dealing with its securities until it has been paid out in full and on the conditions set out below. Equitable Doctrine of Marshalling We refer to your letter to us dated 11 August 2006 in which you claimed the benefit of the equitable doctrine of marshalling. We note that by that letter Naxatu Pty Limited asserts that it has taken an assignment of the benefit of mortgage number 7805323 over the following properties: 1. Folio Identifier 65/SP67386; 2. Folio Identifier 71/SP67386; 3. Folio Identifier 78/SP67386; and 4. Folio Identifier 83/SP67386. Our client's suite of securities also covers the following properties, which have not yet been sold: Property Address Title Particulars Second Mortgagee Unit 25, "Etage" Apartments, 10 Pyrmont Bridge Road, Camperdown NSW 25/SP67386 Macquarie Australia Management Services Pty Limited Unit 65, "Etage" Apartments, 10 Pyrmont Bridge Road, Camperdown NSW 65/SP67386 Naxatu Pty Limited Unit 82, "Etage" Apartments, 10 Pyrmont Bridge Road, Camperdown NSW 82/SP67386 Macquarie Australia Management Services Pty Limited Unit 83, "Etage" Apartments, 10 Pyrmont Bridge Road, Camperdown NSW 83/SP67386 Naxatu Pty Limited Unit 71, "Etage" Apartments, 10 Pyrmont Bridge Road, Camperdown NSW 71/SP67386 Naxatu Pty Limited Unit 3506, "Vie I", City Quarter, Pyrmont Bridge Road, Camperdown NSW 23/SP71747 Bridgecorp Finance Limited Unit 3503, "Vie I", City Quarter, Pyrmont Bridge Road, Camperdown NSW 26/SP71747 Bridgecorp Finance Limited Unit 4404, "Vie II", City Quarter, Pyrmont Bridge Road, Camperdown NSW 54/SP71745 Nil

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As you will see we have included information on the second and subsequent mortgagees of each property, where relevant. This information comes from title searches conducted on the properties on 14 August 2006. Accordingly, assuming the funds received at settlement of the sales of the 10 properties for which our client has exchanged contracts is sufficient to realise our clients' debt in full, our client does not intend to sell the balance of its securities. Your client and others with an interest in the 18 properties over which our client originally held a registered first mortgage have either orally or in writing claimed to be entitled to the benefit of the equitable doctrine/remedy of marshalling. In the circumstances, where there are various second and subsequent mortgagees over most of the properties, we have taken these claims to mean the benefit of the equitable doctrine/remedy of marshalling by apportionment. Accordingly, we have sent a letter in similar terms to the following parties who may claim an interest in the surplus funds and surplus securities: (1) Bridgecorp Finance Limited; (2) Naxatu Pty Limited; (3) GPC Custodian Pty Limited; (4) Macquarie Australia Management Services Pty Limited; (5) Sterling Estates Development Corporation Pty Limited (Subject to a Deed of Company Arrangement) - David John Winterbottom and Martin Madden as deed administrators; and (6) Sterling Estates Development Corporation Pty Limited (Subject to a Deed of Company Arrangement) - Patrick Yu as director, who asserts that control of the company has been returned to him. We are currently attempting to review a copy of the executed Deed of Company Arrangement. Upon completing that review, we will advise our client on whether the surplus funds and surplus securities form part of the deed fund. Subject to that advice, we will cease further correspondence with either one of the parties described in paragraph (5) or (6) above. First mortgagee's position Our client's position is as follows: 1. As first registered mortgagee over all of the properties it is entitled to exercise its power of sale in any manner and over any property it chooses. Since the appointment by our client of its receivers, it has exercised this right, to the greater detriment of particular second mortgagees and the lesser detriment of other second mortgagees of the 18 properties over which it originally held security. 2. Upon receiving payment of the total amount of its secured debt, Perpetual Trustee Company Limited is obliged to deliver up a discharge of its mortgage and the relevant certificate of title. It is obliged to deliver these documents for each parcel of property to the entity with an interest in each particular parcel of property with priority in that particular parcel immediately following our client. 3. Our client intends to assess the entity with the interest in the property immediately following our client's interest based upon the legal, registered interests on title to the properties, as described above and as set out in the title searches conducted by our client an 14 August 2006. 4 Our client considers that it is obliged to adopt this course: Commonwealth Trading Bank v Colonial Mutual Life Assurance Society Limited (1970) 26 FLR 338. 5. In short, our client will act based upon the registered, legal interests in the properties. It will not attempt to determine the priorities between entities with competing claims to the surplus funds or securities. 6. The equitable doctrine/remedy of marshalling by apportionment operates to provide a second or subsequent mortgagee with a remedy against other second or subsequent mortgagees. It operates to do equity between the second and subsequent mortgagees or other parties, who may have been disproportionately affected by the unfettered acts of the first mortgagee exercising its power of sale. It operates as an accounting exercise, to apportion our client's debt across its entire suite of securities (and not only those 10 properties which our client has actually sold). Thereafter, the notional equity remaining in each property is paid to the relevant subsequent mortgagee of that property from the proceeds of sale of the remaining properties. Please see the 4th edition of Meagher, Gummow & Lehane's Equity Doctrines and Remedies for a general outline of the doctrine of marshalling by apportionment. 7. The equitable doctrine/remedy of marshalling by apportionment does not operate to provide a second or subsequent mortgagee with a remedy against the first mortgagee. 8. Upon satisfaction of our client's debt, it is concerned to: (1) discharge its mortgages and cease its ongoing involvement in this matter to reduce its costs, which are secured by and are recoverable under its existing mortgages. By minimising these secured costs, this proposed course of action will benefit your client; (2) deal in any surplus funds and its remaining securities in a manner consistent with the rights of each subsequent mortgagee to each parcel of property; but (3) act without prejudice to any rights of the subsequent mortgagees, amongst themselves, to exercise any rights/remedies conferred by the equitable doctrine of marshalling by apportionment or any other rights or remedies. First mortgagee's proposal We are instructed to put the following proposal to your client: 1. Perpetual Trustee Company Limited will attend to settlement of the sale of the 10 properties described in the table commencing on page 1 above; 2. Perpetual Trustee Company Limited will pay any surplus proceeds, after settlement of these sales, into the Supreme Court of New South Wales or into any interest bearing bank account as agreed between and directed in writing by all parties claiming an interest in the surplus funds, including Bridgecorp Finance Limited, Naxatu Pty Limited, GPC Custodian Pty Limited, Macquarie Australia Management Services Pty Limited and the relevant Sterling entity (if applicable). 3. Upon Perpetual Trustee Company Limited realising its debt in full, it will provide a discharge of its mortgage to the second mortgagee holding a registered mortgage behind it on title to each parcel of property. In respect of the property bearing folio 54/SP71745 it will provide a discharge of its mortgage to the relevant Sterling entity. It will do so only on condition that all parties agree in writing to the terms set out below: 3.1 The provision of any discharge of mortgage is made without prejudice to any party's right to claim the benefit of the equitable doctrine of marshalling by apportionment and subrogation to the rights of our client under its mortgage over the property, particularly those parties which do not hold a registered interest in that parcel of property. This will particularly apply, in respect of all second mortgagees over the various parcels, to the property bearing folio 54/SP71745. 3.2 We require all parties to provide a full release to our clients. Thereafter, we consider that each subsequent mortgagee may exercise its rights under its mortgage, subject to any orders of any court enforcing the equitable doctrine/remedy of marshalling or otherwise. If our clients do not receive a full release, it will retain the surplus funds and surplus securities pending an order of the Supreme Court of New South Wales declaring the rights of all parties and/or directing our clients to take particular action. Our clients are entitled to adopt this course pursuant to clause 3.1 and 8 of the memorandum of common provisions applicable to our client's mortgages (dealing no. 6321899). Please provide us with your client's response to this proposed course of action at your earliest convenience, and in any event, by close of business on Wednesday, 6 September 2006. 43 Other correspondence ensued. 44 On 15 June 2007, Deacons wrote to CMC in the following terms (omitting formal parts): Perpetual Trustee Company Limited - Sterling Estates Development Corporation Pty Limited (Receivers and Managers Appointed) (Subject to a Deed of Company Arrangement) Your Client: Naxatu Pty Limited We refer to your letter to us dated 29 May 2007. We refer to paragraph 10 on page 3 of your letter. Kindly refrain from referring to without prejudice communications in open correspondence. Our client has now received a private ruling from the Australian Taxation Office in relation to its liability for GST on the sale of the properties in this receivership. That private ruling did not give our client the comfort it required in order to apply the margin scheme in an attempt to minimise its GST liability for the benefit of the second mortgagees. In those circumstances, our client intends to pay the full amount of GST on the sale of those properties without the application of the margin scheme. Further, our client has received notice of a dispute from Bridgecorp Finance Limited (Bridgecorp) by which Bridgecorp asserts that our client has exceeded the amount to which it is entitled under its first priority under the Deed of Priority between it and Bridgecorp. Our client has provided various items of information and documentation to Bridgecorp in this regard. We understand that Bridgecorp will shortly request further information and documentation in writing from us in relation to the priority amount. Until such time as our client and Bridgecorp resolve this issue, our client is not in a position to set out the exact amount owing to it and secured by its mortgages. However, upon the assumption that our client has not exceeded its first priority and upon the further assumption that our client will pay the full amount of GST on the sale of the properties, our client is currently owed $771,734.25 by Sterling Estates Development Corporation Pty Limited (Receivers and Managers Appointed) (Subject to a Deed of Company Arrangement) (Sterling). Our client is first mortgagee of the relevant properties. Your client is second mortgagee of the relevant properties. In those circumstances, regardless of the actual amount owing by Sterling to our client, for the reasons outlined below, our client is entitled to exercise its power of sale over the relevant properties. In this regard, we note that: 1. Sterling has committed various financial and non-financial breaches of our client's loan and security documentation. Your client does not appear to dispute this position; 2. Our client's entitlement to exercise its power of sale under section 58 of the Real Property Act 1900 has crystallised. Your client puts forward no assertion to the contrary; 3. Our client as first mortgagee is entitled to exercise that power of sale without the current concurrence or agreement of any other subsequent mortgagees. This is a fundamental right of a first mortgage under the Torrens System; and 4. Upon exercise of that power of sale, our client is obliged to account to your client and all other second mortgagees for the sale of the securities and any surplus funds. By your letter, your client sets out various demands for information and documentation. With respect, these demands go well beyond what your client is entitled to obtain from our client under its duty to account to Naxatu Pty Limited. Our client is aware of its obligation to provide on account to your client and it will do so. However, until such time as our client resolves the priorities issue with Bridgecorp, it is not in a position to say definitively the amount owing to it and accordingly, is not in a position to provide your client with an account. Further, as our client has not attended to the sale of the balance of its securities, it is equally not in a position to provide your client with an account of these securities. In this regard, we note that the receivership of the properties of Sterling, the subject of our client's mortgages, continues. We note that you are instructed "to oppose [our] client taking any further steps to exercise its power of sale over the properties which are the subject of Naxatu's security". For the reasons set out above, our client is entitled to exercise its power of sale irrespective of your client's opposition. Your client is not entitled to prevent our client from exercising its rights under its securities. Kindly provide us with any authorities supporting your client's position to the contrary. We note that your client arranged to let the various properties set out in our letter to you dated 15 May 2007. We note your client's admission that it has committed a trespass to our client's possession of the securities. We reserve all of our client's rights. The steps your client has taken are impeding the exercise of our client's rights under its securities and are preventing it from exercising its power of sale. Kindly confirm, by the close of business on Friday, 22 June 2007 that your client will procure the various tenants to deliver up vacant possession of the properties to our client in a reasonable time frame. Should we not receive your client's confirmation in this regard, or should our client not consider the proposed period to be reasonable, we are instructed to immediately commence proceedings against Naxatu Pty Limited and any other party our client considers necessary in order to secure vacant possession of these properties. We note your assertion that the relevant properties had been left vacant for a very considerable period "often around 9 months, and in one case, for about a year". Our client's receivers have appointed agents to manage these properties. They have requested a response to your client's assertion. Nevertheless, we note that we wrote to your clients on 30 August 2006 to indicate that our client had then exchanged contracts for the sale of the 10 properties set out in that letter. From that date until recently, our client had offered and then continued undertakings to all second mortgagees in order to allow those second mortgagees to negotiate amongst themselves in relation to their various claims to the properties, and their various claims to be entitled to marshal our client's securities. In this period our client anticipated that it would be paid out in full and accordingly it took this course to minimise its costs for the benefit of all of the second mortgagees. This course was taken at the request of all second mortgagees, including your client Throughout this period our client was waiting for a confirmation from the second mortgagees that they had resolved their dispute or confirmation from any second mortgagee that it considered a resolution impossible, in which case our client would have taken various steps in relation to the properties. This confirmation was not ever received. We deny the fact of the delay asserted against our client, in the terms asserted, and any suggestion that any delay was contributed to by our client. In the circumstance, it is our client's position that: (1) there is no basis at law for an assertion that our client's action in this receivership have "have amounted to a waste of the secured property for which it is accountable to the second mortgagee"; and (2) there is no basis in fact, in the circumstance of this receivership for such an assertion by your client against ours. We note your client is depositing the rents, to a separate account. Kindly provide us with all funds held in this account immediately, and direct all tenants to provide all future rentals to the receivers appointed by our client. Your client simply has no basis to retain these rents, collected in trespass to our client's rights. 45 On 27 June 2007, CMC responded to that letter as follows: RE: NAXATU PTY LIMITED and PERPETUAL TRUSTEE COMPANY LIMITED - STIRLING ESTATE DEVELOPMENT CORPORATION PTY LIMITED (RECEIVERS AND MANAGERS APPOINTED) (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) We refer to your letter dated 15 June 2007. Your client's stance is becoming more perplexing and more concerning with each communication. First, you have not furnished the accounts and information requested in our letter of 29 May in the last paragraph on page 3. Second you have not furnished the deed requested and the calculations sought in the first paragraph on page 4. Third, there is no response to the issues raised in the 3rd and 4th paragraphs on that page. Fourth, contrary to our previous understanding as noted in paragraph 10 of our earlier letter, it is now asserted that without taking into account the Bridgecorp contentions, that your client is owed $771,734.25. Your client persists in failing to give particulars of the amount asserted to be owing, notwithstanding what has now become a long and disturbing history of different and apparently irreconcilable statements on that topic. In your letter of 13 December 2006 you represented to us that your client "had realised a surplus subject to the resolution of its liability for GST." As at 14 August 2006, your client's debt was approximately $5,100,000.00. By letter dated 30 August 2006, you informed us that the value of the security sold by your client was $6,192,000.00. The maximum GST payable on this figure is $562,909.09. Having regard to the fact that your client settled on the Properties sold pursuant to its securities ("the Properties") in September 2006, please advise us of the following: (i) The amount of GST remitted by your client to the Australian Taxation Office ("ATO") in respect of the Properties as at 13 December 2006 ("GST Remitted"); (ii) The basis upon which the GST Remitted was calculated. You assert that to date your client has attempted to minimise its GST liability for the benefit of the second mortgagees however, the private ruling ("the Ruling") obtained by your client from the ATO does not give it "the comfort it required". With respect the applicability of the margin scheme in these circumstances is not a question of whether your client receives "the comfort it required" from some private Ruling. If the provisions of Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 (Commonwealth) ("GST Act") enable the margin scheme provisions to be applied for calculating the liability of the Mortgagee under s.105.5 of the GST Act to pay the GST the debtor would have owed on that sale, then clearly the mortgagee is sacrificing the interests of subsequent owners by failing to adopt that method. There seems to be some back-sliding here, because when the properties were sold by your client as mortgagee exercising power of sale, the margin scheme provisions were treated as being applicable. Each of the contracts contained explicit provision that "Margin scheme will be used in making the taxable supply". Thus the requirements of s.75.5 (1) and (1A) of the GST Act are clearly satisfied. Further, Professor O'Donovan has clearly stated that the Margin Scheme is available to Receivers and Managers making similar sales where the requirements of Division 75 of the GST Act are satisfied: See Company Receivers and Administrators (LBC) at [11.1650]. Their obligation also stems from s.105.5 of the GST Act, and there is no basis to make any distinction between mortgagees selling and Receivers and Managers selling so far as the construction of the relevant provisions of the GST Act is concerned. In particular, s.105.5 has been drafted to make the precise mechanism of sale and the precise capacity and identity of the vendor irrelevant to the obligation to remit the tax the debtor would have owed on the sale. We are informed by Patrick Yu, a former Director of Stirling Estates Development Corporation Pty Limited ("Stirling"), that the land upon which the Properties were constructed, was acquired on 1 July 1998 for $30million. We are further informed that properties sold by Stirling prior to the Receivers and Managers being appointed, were sold applying the Margin Scheme and that two subsequent Mortgagees L. M. Investments Limited and Capital Finance Limited successfully applied the Margin Scheme, in relation to securities sold by them pursuant to First Mortgages. We are informed by Mr Yu, that as to the sales by Capital Finance Limited, Brian Ferrier of Ferrier Hodgson can confirm the successful application of the Margin Scheme provisions. Please tell us on what basis your client now asserts that the margin scheme provisions for discharging its GST obligations under s.105.5 are not available? So that our client can assess the reasonableness of your client's decision, please provide us with a copy of the Ruling and all necessary associated documents including the relevant application for the ruling so that our client can obtain its own expert advice and assess whether it is prepared to provide your client with an indemnity in relation to any tax liability your client incurs by the application of the Margin Scheme. Your client's rights to exercise its powers pursuant to Section 58 of the Real Property Act must be exercised for proper purposes and in accordance with its duty and obligation not to sacrifice the interests of the Second Mortgagee. In the absence of further, better, clearer and more detailed explanation from you, the second mortgagee does not accept your assertion that additional GST beyond that required to be remitted under the Margin scheme provisions is owed, and accordingly says that the threatened sale should not occur. You acknowledge your client's obligation to provide an account to our client but your client seeks to avoid that obligation by relying on a dispute with Bridgecorp. With respect your failure to address the matters we raised as to how Bridgecorp could possibly have a viable dispute under the deed of priority is most unsatisfactory. Until those issues are addressed, our client can only assume that there is no satisfactory answer available. Presumably, as at 13 December 2006, when your client instructed you that it had realised a surplus subject to the GST issue, it had conducted an accounting of monies owed to it pursuant to its securities and concluded that it had been paid the monies owed to it under its facilities. Very little has occurred since 13 December 2006 other that your client having received the Ruling and a dispute with Bridgecorp. It seems that there are only two issues that prevent your client from providing a detailed accounting: • GST; • Bridgecorp. As to the GST issue, our client is prepared to accept an interim accounting, based on a reconciliation of the amount actually paid to the ATO as opposed to the maximum liability of $562,909.09. As to the Bridgecorp issue, our client is prepared to accept an accounting based on the assumption that your client has not exceeded it's first priority. We are accordingly instructed to once again request that you provide us with an accounting subject to the matters referred to in the preceding paragraph before your client takes any steps towards selling the balance of the securities held by it. In relation to your allegation that our client has committed a trespass, we deny that allegation as our client had a claim of right as second mortgagee and the first mortgagee had informed him that it had realised a surplus. Further, our client acted reasonably in circumstances where the Properties had remained vacant for a significant period of time rendering them liable to vandalism and not generating any income for the common benefit of security holders. In the circumstances we suggest it is unhelpful and inappropriate to make allegations of that kind. Our client has acted responsibly by quarantining the funds in a separate account and continues to do so. Our previous letter stated the conditions under which the funds would be released to the first mortgagee, and the second mortgagee maintains that position. We are instructed to advise that upon your client providing a satisfactory accounting and satisfactory explanation of the GST problem it will assess its position in relation to the request made to procure vacant possession of the Properties. In the meantime for so long as the requested information remains outstanding, we are instructed to require that your client undertake not to take further steps to obtain possession of the Properties or sell the Properties without giving us 5 days written notice of such intention. We are instructed to put your client on notice that upon such notice being given, proceedings to restrain your client taking such steps will be commenced without further notice. 46 Perpetual provided an accounting to Naxatu under cover of Deacons' letter dated 10 October 2007. Naxatu was not satisfied with that accounting. It instructed CMC to write to Deacons and demand the discharge of Permanent's mortgages. CMC wrote to Deacons on 8 February 2008 in the following terms (omitting formal parts): RE: NAXATU PTY LIMITED and PERPETUAL TRUSTEE COMPANY LIMITED STIRLING ESTATE DEVELOPMENT CORPORATION PTY LIMITED (RECEIVERS AND MANAGERS APPOINTED) (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) We refer to previous correspondence in this matter and more particularly to our letter of 26 November 2007 to which you have not provided a reply. In the absence of a satisfactory explanation to the matters referred to in our letter of 26 November 2007, it is clear that your client has received more from the sale of the Stirling Securities than was required to Discharge the remaining Securities and release to our client the Securities in respect of which our client holds a Second Mortgage. In your letter dated 31 October 2007, you indicated that the balance outstanding to your client was $759,239.93 inclusive of GST. We are instructed by our client that on 8 December 2007 your client proceeded to sell by way of Auction, 3 of the properties over which your client would obtain a first registered Mortgage. It is our client's belief that the Properties sold by your client are: 1. Unit 3506 Vie 1 Lot 23 SP71747 2. Unit 3503 Vie 1 Lot 26 SP 71747 3. Vie 4 Lot 54 SP71745

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On the information available to our client, the amount realised from the sale of the 3 properties referred to above, was approximately $1 Million. We have conduced searches in relation to the properties referred to above. The searches reveal that your client has settled on the Sale of Units 3506 and 3503. Having regard to the sale of the Securities referred to above, your client should now be in a position to Discharge it's Mortgage in respect of the properties in respect of which our client is Second Mortgagee. We are instructed to request that your client deliver to our offices Discharges of Mortgage and the relevant Certificate of Titles in respect of the Properties over which our client retains a Second Mortgage. If your client is of the view that it has a proper basis upon which it is entitled to refuse our client's request, then we are instructed to request that you provide us with details of the basis upon which your client refuses to deliver to our client the relevant Discharges of Mortgage and Certificates of Title. Further, we are instructed to request that you provide us with a detailed response to the matters raised in our letter of 26 November 2007. We are instructed to advise that in the absence of a satisfactory response that our client will commence legal proceedings to enforce it's rights without further notice to you. 47 By facsimile dated 3 March 2008, Deacons replied to the letter from CMC dated 8 February 2008. Deacons' reply was in the following terms (omitting formal parts): Subject Sterling Estate Development Corporation Pty Limited (Receivers & Managers Appointed) (Subject to Deed of Company Arrangement) Your client: Naxatu Pty Limited Our client: Perpetual Trustee Company Limited (Perpetual) Pages 2 (Including this page) Dear Sir We refer to your letter dated 8 February 2008. We confirm that settlement has occurred in respect of the following properties: 1. 2641612 - Unit 3503, 26/1 Alexandra Drive, Camperdown - $385,000.00 - 21 January 2008 2. 2641610 - Unit 3506, 23/1 Alexandra Drive, Camperdown - $400.000.00 - 21 January 2008 3. 2641615 - Unit 4404, 54/6 Alexandra Drive, Camperdown - $343.000.00 - 6 February 2008 (collectively referred to as the Properties) We will provide a full account shortly. In such circumstances Perpetual is obliged to account for any surplus to the second mortgagees of those Properties. Any surplus funds are to be placed into Court. On 31 October 2007 we requested you to provide to us full detailed particulars of any fact, matter or circumstance that is alleged by your client to constitute an act or omission on the part of our client as sacrificing the interests of your client. You have failed to provide to us any such information. Your reference to section 423 of the Corporations Act (Act) in your letter dated 22 November 2007 as providing a basis for your client's requests for the information sought by your client is misconstrued. A careful reading of s423 of the Act imposes no such obligation upon our client. In light of the recent developments we will also forward to you shortly a proposed draft deed of release in anticipation of discharge of mortgages over property which your client is second mortgagee. 48 Although the lawyers exchanged further correspondence during 2008, no real progress was made towards resolving the parties' differences. This led CMC to endeavour, one last time, to persuade Perpetual to provide a proper accounting to Naxatu of its (Perpetual's) dealings with the relevant properties and to provide a discharge of its mortgages. In that letter, CMC said: RE: NAXATU PTY LIMITED and PERPETUAL TRUSTEE COMPANY LIMITED - STERLING ESTATE DEVELOPMENT CORPORATION PTY LIMITED(RECEIVERS AND MANAGERS APPOINTED) (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) We refer to your letter 30 October 2008, and note that other than your brief emails of 2 December 2008 and 5 February 2009 advising that you were still waiting for Bridgcorp's Solicitors to reply to you that there has been no further communication from you concerning the claim by Bridgecorp. In view of your assurances that you would keep us informed of the progress of those discussions, we assume that no progress has been made. We have now been instructed to commence proceedings in order to secure the return of our client's titles, and counsel is in the course of updating the proposed orders for relief to take into account information that has become available since the initial draft. Those proceedings will be commenced without further notice unless the discharges of your clients mortgage over the titles for which our client is second mortgagee ("the Naxatu Securities") are delivered unconditionally and forthwith along with the titles. In the interim we respond to various matters raised in your communication as follows: Application of Margin Scheme: You have asked us to provide copies of all contracts relating to pre-sales in the development disclosing a condition that Sterling Estates elected to apply the margin scheme. We are not in a position to supply copies of all the contracts relating to presales. We enclose copies of relevant pages of contracts relating to Lots 65, 25, 71 and 78 in SP 67386 entered into by our client in May 2003. You will note that Special Condition 49 reserved to Sterling the right to apply the margin scheme. In relation to the election by Sterling to apply the margin scheme we direct your attention to the matter of Sterling Guardian Pty Limited v Commissioner of Taxation [2005] FCA 1166 and in particular paragraphs 4, 6 and 42 of the judgment. That decision makes it clear that Sterling elected to apply the margin scheme in relation to the sale of the Etage part of the development and that the Commissioner acknowledged its entitlement to deduct from the consideration received for the supply of the units sold the cost of acquiring the Camperdown land. As to any other documents that your client requires in order to make its submissions in relation to the application of the margin scheme we note that your client as Receiver Manager should be in possession of those documents and if he is not in possession, then he is entitled to request those documents be provided to him either by the solicitors who acted in relation to the relevant sales contracts and other advisors who would be in possession of any relevant documents. We have been informed by Patrick Yu, the director of Sterling at the relevant time, that he has previously met with your Mr. Holmes and Mr. Cruikshank and provided them with relevant information in relation to the application of the margin scheme by Sterling. In light of Mr. Yu's comments we find your request for copies of documents to be curious. The Bridgecorp claim: This claim is no answer to our client's demand to have your client discharge its first mortgage over the Naxatu Securities for at least four separate reasons. First: The Deed of Priority dated 4 April 2004, to the extent that it has any relevance (see below), is obviously not capable of being construed in the manner asserted in the letter to you from Polczynski Lawyers dated 16 October 2008. The suggestion that only loan balances and interest, cost expenses etc for loans 2213, 2214 and 3102 were the subject of priority to Permanent identified in the deed is contrary to the express provisions of the deed. In particular, the "First Mortgage" as defined in the deed was not so constrained and the deed in terms asserts that the First Lender was to have priority for "all moneys costs charges and expenses which the First Lender may incur or pay in or incidental to enforcing the First Mortgage". See clause 2(1) of the deed. The Deed makes further emphatic provision contrary to the primary contention of Bridgecorp's lawyers in clause 3, which confirms the priority notwithstanding any fluctuations in the amount or amounts secured by the First Mortgage. It then goes on to provide for the sole recognised exception to the amount for which Permanent had First Priority, namely that the amount of principal received on settlement of bona fide sales of a Mortgaged Property (as defined) for fair value would be applied in reduction of the First Priority amount. Clause 4 even goes to the point of precluding any obligation to give notice of future advances or accommodation or the incurring of any liability which are secured or intended to be secured by the First Mortgage. This provision also is inconsistent with the construction advanced by Bridgecorp. In the face of such explicit provisions it should be unnecessary to remind you of the basic principles of construction that render the primary basis for Bridgecorp's contentions untenable. It is sufficient for present purposes to refer to their confirmation in Pacific Carriers Ltd v BNP Paribas [2004] HCA 35 at [22]; 218 CLR 451 at 461-2. Second: We note that the Deed does not appear to have been the subject of any Registered Memorandum in approved form or registered on the title of the relevant properties, as contemplated by the provisions of s. 56A of the Real Property Act. Accordingly, the titles to the properties identified in the deed ("the Bridgecorp Securities") remained unaffected by the provisions of the deed, whatever contractual rights the deed might have given rise to inter parties. Upon a mortgagee sale, s. 58(3) of the Real Property Act prescribes the obligation of the Mortgagee exercising power of sale to deal with the proceeds as follows: "(3) The purchase money to arise from the sale of any such land, estate, or interest, shall be applied, first, in payment of the expenses occasioned by such sale; secondly, in payment of the moneys which may then be due or owing to the mortgagee, chargee or covenant chargee; thirdly, in payment of subsequent mortgages, charges or covenant charges (if any) in the order of their priority; and the surplus (if any) shall be paid to the mortgagor, charger or covenant charger, as the case may be." That the "mortgagee" whose "moneys which may then be due and owing" are to be paid "secondly" is the mortgagee exercising power of sale (in this case Perpetual) is apparent from sub-section (1) of section 58. Thus Perpetual as mortgagee exercising power of sale was obliged by the statute to appropriate the proceeds of sale of the Bridgecorp Securities to discharge moneys owed to it before applying any part of the proceeds to payment of subsequent mortgagees including Bridgecorp. For the sake of analysis of the issues it is useful to state the situation shorn of irrelevant complexities, so the material context can be stated in clear terms to expose the application of the applicable principles. The relevant sequence of events was (so far as material for the present analysis) as follows: 1. 20.7.01: Sterling mortgaged the Naxatu Securities to Naxatu's predecessor in title ["Mortgage 1"]. 2. 10.9.02: Sterling mortgaged the Naxatu Securities to Permanent ["Mortgage 2"] and a Postponement of Mortgage was executed and registered to reverse the order of registration as between the 1st and 2nd Mortgages over the Naxatu Securities. 3. Dealing AA563528: Sterling mortgaged the Bridgecorp Securities to Permanent ["Mortgage 3"]. 4. 2.4.04: Sterling mortgaged the Bridgecorp Securities to Bridgecorp ["Mortgage 4"]. A deed of priority between Sterling, Bridgecorp and Permanent provides for Bridgecorp to receive a second priority after $9,353,230 + interest and all moneys costs charges and expenses which Permanent may incur or pay in or incidental to enforcing the Mortgage 3. 5. Dealing AB728671: Permanent transferred Mortgages 2 & 3 to Perpetual. 6. Perpetual enforces Mortgage 3, appropriating (semble) $11.596M (which sum includes interest, costs charges and expenses) to the recovery of the moneys secured under Mortgage 3. 7. Bridgecorp asserts there is a failure on Perpetual's part to honour the deed between it and Permanent, and that some $1.45M from the proceeds of sale of Whiteacre should have been paid to it. 8. Perpetual refuses to release Mortgage 2 and deliver the title documents for the Naxatu Securities to Naxatu as the person entitled under Mortgage 1, apparently on the basis that there might be some amount that may be contingently secured on Whiteacre if Bridgecorp's contentions are correct. The authorities confirm that as between Naxatu as second Mortgagee on the Naxatu Securities and Perpetual, the application of the proceeds of sale of the Bridgecorp Securities is governed by the provisions of RPA s.58(3), notwithstanding that Permanent as first Mortgagee on the Bridgecorp Securities may have entered into some different arrangement with Bridgecorp: See Commonwealth Bank of Australia v Duggan [2003] FCAFC 64, esp. at [20], [22] & [29]. See also Irani v St George [2007] VSCA 33 at [39] & [40]. The amount being claimed by Bridgecorp reflects amounts that Bridgecorp claims are due to it under the provisions of the deed between it and Permanent. It does not assert any entitlement as a result of the operation of RPA s. 58(3). Thus, the claim is irrelevant to the obligation of Perpetual to discharge the mortgages it holds on the Naxatu Securities. Third: The amounts concerning which Bridgecorp makes complaint were in fact received and appropriated to the debt claimed by Perpetual to be secured under the mortgage. Those debts (assuming they were debts due under the facilities advanced to Sterling Estates) were thereby extinguished, and can no longer be thrown against or recovered under the mortgage held over the Naxatu Securities. In this regard we further note that the Memorandum of common provisions (Dealing 6321899) distinguishes between Secured Moneys and Security Interests for the purpose of the application of the proceeds of sale, in clause 8.1 of the Memorandum. The basis on which Perpetual asserts or must be taken to assert that it is able to throw any alleged breach of the deed between Permanent and Bridgecorp onto the Secured Moneys for the purposes of the Naxatu Securities is not apparent. Fourth: Because the postponement agreement was not registered as contemplated by RPA s. 56A, the prior registration of the Permanent Mortgage means that it had priority for the full amount it secured. There appears to be no privity of contract between Perpetual and Bridgecorp and the letter from Polczynski does not reference any. If there is some deed or other document containing an obligation on the part of Perpetual to honour the obligations of Permanent under the deed dated 2 April 2004, please let us have a copy of the relevant document(s). We have previously requested any such documents but without response. If there are none, please explain the basis on which Bridgecorp's claim is being entertained by your client. Relief under s.423 of the Corporations Act and other relief We note your comments concerning the applicability of s.423. We note the proceedings to be commenced will also seek in addition remedies under other causes of action, including liability of the mortgagee in possession to account on a willful default basis. Your letter misconceives the circumstances that attract the application of s. 423 of the Act. We can agree to disagree as to whether your client's claim to be mortgagee in possession of the Naxatu Securities renders it a Controller of those properties for the purposes of s.9 of the Act. Undoubtedly however, your client's taking of possession and sale as Mortgagee in possession of the various titles referenced in previous correspondence, and the application and misapplication of the funds so raised satisfies the elements of the definition of "controller" for the purposes of the Corporations Act. The scope of the statutory remedy is analysed by Campbell J (as he was then) in Artistic Builders Pty Ltd v Elliot & Tuthill (Mortgages) Pty Ltd [2002] NSWSC 16, esp. at [134] ff. The scope of remedies available under s 423 extends to requiring the first Mortgagee to pay money or compensation for loss (by analogy with Re Ah Toy (1986) 4 ACLC 480 at 483) and disallowance of inappropriate costs and expenses (by analogy with Burns Philp Investment Pty Ltd v Dickens [No 2] (1993) 31 NSWLR 280). See Artistic Builders ibid at [144]. An order under s 423 requiring the first mortgagee to make good loss occasioned by a failure to take all reasonable care to sell the property for not less than market value in breach of s.420A of the Corporations Act was confirmed in that case. The main basis on which the application under s.423 is being put forward is the failure on your client's part to faithfully perform its functions in relation to the sale of the securities it holds, its waste and misuse of the proceeds of sale received as controller, including handing over vast sums on account of non-existent and inappropriately returned tax liabilities and in not accounting for the proceeds thereof to Naxatu as second mortgagee. Perpetual's failure to fulfill these functions are said to affect the entitlement of Naxatu to obtain title to the Naxatu Securities clear of your client's mortgage. It also appears that orders under s.423 will be necessary to obtain pertinent documents and information repeatedly requested by us and repeatedly ignored by you, we assume on instructions. If your client is aware of any circumstances which would render your client other than a controller in respect of the various titles it has sold as mortgagee, the proceeds of which are the subject of the attempted and woefully deficient "accounting" exercise produced under cover of your letter dated 10 October 2007, please let us know by return. 49 This correspondence brought forth all of the arguments and contentions that the competing mortgagees wished to advance, but all to no avail. 50 As at the date of the hearing, Naxatu's securities had not been sold. 51 Further, the evidence of the accounting expert called on behalf of Perpetual, Mr Banks, was that Perpetual had retained more than its entitlement under the Deed of Priority. Mr Banks suggested that the amount of the excess retention was of the order of $208,000. 52 As a result of the settlement between Perpetual and Bridgecorp, that amount has, as between those parties, been quantified at $1.3 million. 53 Naxatu, of course, contests the characterisation of these realisations which is now agreed as between Perpetual and Bridgecorp.

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The True Construction of the Permanent/Perpetual Mortgages and the Deed of Priority 57 As mentioned earlier in these Reasons, the parties to the Deed of Priority were Permanent, Bridgecorp and Sterling. As at 2 April 2004, Naxatu was not involved, although one or other of its predecessors, Macquarie or GPC, was a secured lender to Sterling. As at 2 April 2004, Sterling was not in default under its various loan arrangements. Nor was there any suggestion that it was insolvent at that time. 58 In Recital A, the parties to the Deed of Priority acknowledged that Sterling had mortgaged the properties identified in that Recital to Permanent "… to secure repayment of all moneys lent or advanced by Challenger as trustee of the Howard Mortgage Trust from time to time to or at the request of [Sterling]". The properties identified in that Recital were the Bridgecorp securities. 59 Recital B contained an acknowledgement that Sterling was prohibited from creating any further mortgages over the mortgaged properties without the prior consent of Permanent. 60 Recital C recited the proposal for Sterling to grant a second mortgage over the Bridgecorp securities. Recital D recorded Permanent's consent to that proposal. 61 The operative clauses (clauses 1 to 8 of the Deed of Priority) are in the following terms: 1. The First Lender and the Second Lender hereby consent to the execution and registration of the First Mortgage and the Second Mortgage. 2. The First Lender and the Second Lender hereby agree with each other that the respective priorities to be afforded to the First Mortgage and the Second Mortgage shall be as follows (1) First Priority - to the First Lender Nine Million, Three Hundred and Fifty Three Thousand, Two Hundred and Thirty Dollars and Zero Cents ($9,353,230.00) plus interest and all moneys costs charges and expenses which the First Lender may incur or pay in or incidental to enforcing the First Mortgage. (2) Second Priority - to the Second Lender for all moneys secured by the Second Mortgage. 3. The First Lender and the Second Lender agree with each other that the priorities set out in Clause 2 of this Deed shall enure to the First Lender and the Second Lender notwithstanding any payment or credit which may be received or allowed by the First Lender or the Second Lender or any fluctuations in the amount or amounts secured by the First Mortgage or the Second Mortgage or any application of the rule in Clayton's case or the rule in Hopkinson v Rolt (1861) 9 HLC 514 and notwithstanding any notice heretofore or hereafter received by the First Lender or the Second Lender or any other fact or circumstance which might otherwise impair or postpone the said priorities. The First Lender and the Second Lender agree in favour of each other to provide a partial discharge in respect of their respective Mortgages upon settlement of bona fide sales of a Mortgaged Property for fair value. Notwithstanding anything else in this Deed, the First Lender agrees that the First Priority amount shall be permanently reduced by the principal amount received by it upon such a discharge. 4. The First Lender and the Second Lender agree with each other that nothing in this Deed shall be construed as obliging either of them to give any notice to the other of any advances or accommodation which may in the future be made to any person or the incurring of any liability which are secured or intended to be secured by the First Mortgage or the Second Mortgage. 5. Subject only to the priorities referred to in Clause 2 hereof the execution of this Deed by the First Lender and the Second Lender is without prejudice to the respective rights powers and remedies of the First Lender and the Second Lender as regards the Mortgaged Properties and as regards the personal covenants of the said Mortgagor (if any) pursuant to the First Mortgage or the Second Mortgage and all sureties (if any) pursuant to the First Mortgage or the Second Mortgage or under any other security instrument or document given by the said Mortgagor in favour of the First Lender or the Second Lender (as the case may be). 6. The First Lender and the Second Lender hereby agree that neither will transfer, assign or otherwise deal with their respective security without first causing any transferee, assignee or other party thereby obtaining an interest therein to enter into a Deed by which it undertakes to be bound by the provisions of this Deed in so far as they relate to the party hereto from which its interest is derived. 7. The Mortgagor covenants and agrees to the terms and conditions herein contained and further covenants and agrees to pay the costs and expenses of the First Lender and Second Lender in relation to the preparation and execution of this Deed. 8. Notwithstanding anything else contained in this Agreement the Second Lender acknowledges and agrees that the First Lender has entered into this Agreement in its capacity as the custodian of the Howard Mortgage Trust ("the Trust") and in no other capacity and that the First Lender is not liable to pay or satisfy any of its obligations under this Agreement, and shall have no liability to the Second Lender except to the extent of the First Lender's right of indemnity out of the assets of the Trust and that if those assets are insufficient, the Second Lender shall not seek to recover any shortfall by bringing proceedings against the First Lender personally or applying to have the First Lender wound up and the Second Lender waives its rights and releases the First Lender from any personal liability whatsoever in respect of any loss or damages which cannot be paid or satisfied out of the, assets of the Trust. 62 The Deed of Priority operates as a contract. It binds only the parties to that contract. 63 The effect of clauses 2 and 3 is: (a) Permanent is to be accorded first priority in respect of the mortgaged properties and the sale proceeds thereof up to the amount of $9,353,230 "… plus interest and all moneys costs charges and expenses which [Permanent] may incur or pay in or incidental to enforcing its first mortgage"; (b) After Permanent has been paid the total amount specified in (a), Bridgecorp is to be paid out of the proceeds of sale of the mortgaged properties "… all moneys secured by …" its second mortgage; (c) After payment of the amounts specified in (a) and (b), if any other sums are due to Permanent under its first mortgage, those sums are then to be paid to it; (d) The priorities laid down in clause 2 override any general law principles of the type described in clause 3; (e) As necessary, in order to give effect to the agreed priorities, each of Permanent and Bridgecorp agreed to provide a partial discharge of their respective mortgages upon settlement of bona fide sales of any of the mortgaged properties for fair value; and (f) The first priority amount is to be regarded as permanently reduced by the principal amount received by Permanent upon each such discharge. 64 The Deed of Priority contemplated that each of Permanent and Bridgecorp could make further advances to Sterling and could do so without notice to the other (clause 4). 65 No fresh obligation to make payments to either Permanent or Bridgecorp was imposed upon Sterling by the Deed of Priority. Its obligations to its lenders continued to be embodied in the relevant primary security documents. 66 Naxatu contends that, by honouring their commitments to Bridgecorp under the Deed of Priority, Permanent and Perpetual paid out moneys to Bridgecorp which they should have retained. Naxatu goes on to contend that, had those moneys been retained, Sterling's debts to Permanent/Perpetual would have been lower than the accounting between Permanent/Perpetual and Sterling would suggest. The reduction of the indebtedness of Sterling to Permanent/Perpetual would enure for the benefit of Naxatu because the Naxatu securities would yield a return for Naxatu which was greater than would be the case if Permanent/Perpetual proceeded in accordance with the Deed of Priority, as it has done. 67 These arguments advanced by Naxatu ignore the fact that all of the mortgages granted by Sterling to Permanent were "all moneys" mortgages. The standard expression is "Secured Moneys" and took the following form: "Secured Moneys" means all moneys which the Mortgagor or a Borrower (whether alone or with any other person) is or at any time may become actually or contingently liable to pay to or for the account of the Mortgagee or the Lender (whether alone or with any other person) for any reason whatsoever. It includes moneys at any time owing by way of principal, interest, fees, costs, Guarantee, indemnities, charges, duties or expenses or payment of liquidated or unliquidated damages under or in connection with, or as a result of any breach of or default under or in connection with, any Transaction Document or any other document or agreement. 68 The definitions of "Security Interest" and "Transaction Document" are also pertinent. Those definitions provide: "Security Interest" means any mortgage, pledge, lien or charge or any security or preferential interest or arrangement of any kind, or any other right of or arrangement with any creditor to have its claims satisfied prior to other creditors with, or from the proceeds of, any asset (including retention of title other than in the course of day-to-day trading and any deposit of money by way of security) but excluding any charge or lien arising in favour of any Governmental Agency by operation of statute provided there is no default in payment of the moneys secured by such charge or lien. "Transaction Document" means any Facility Agreement, this Mortgage, any Collateral Security or any document defined as a Transaction Document in a Facility Agreement or any document or agreement entered into under, or for the purpose of amending or novating, any of them. 69 The effect of these definitions in the mortgages, when read with the security clauses in the standard memorandum given by Sterling to Permanent (esp clause 6), is that, as between Permanent (and, later, Perpetual), all of the properties mortgaged by Sterling stood as security for all of the loans made to it by Permanent/Perpetual on behalf of Challenger. There was nothing in the security documents or in the surrounding circumstances that would suggest otherwise. The mere fact that separate Deeds of Loan and separate mortgage documents were executed does not alter this conclusion. 70 The Deed of Priority did not have any impact on those arrangements as between Sterling and Permanent/Perpetual. It simply regulated priorities as between Permanent/Perpetual and Bridgecorp in respect of moneys secured by their respective mortgages. 71 It follows from this analysis that Naxatu cannot complain about the way in which Perpetual has interpreted its own mortgages (it having done so correctly) nor can it complain about the existence of the Deed of Priority or the performance of its terms by Permanent/Perpetual and Bridgecorp. 72 These conclusions require that issues (a)(i) to (iv) specified at [18] above must be answered unfavourably to Naxatu.

[40]

GST and the Margin Scheme 81 Mr Stone, who was the manager employed by Challenger who had the carriage of these matters, gave evidence as to the way in which Perpetual and Challenger went about dealing with the problem of GST and the application of the Margin Scheme. 82 He said: (a) From the start, he was aware that Perpetual, as mortgagee in possession, might have been entitled to apply the Margin Scheme if Sterling had been entitled to do so and had done so when it was in control of the development. He turned his mind to the question and took action in relation to it. (b) The matter was complicated by the fact that not all of the companies within the Sterling Estates Group were under the control of Perpetual's Receivers - some were in liquidation and in the hands of different controllers. For this reason, accurate information would be difficult to gather. (c) He formed the view that the prudent course for him to follow was to seek a private ruling from the ATO as to whether Perpetual could and should apply the Margin Scheme. (d) Deacons applied for such a ruling on or about 25 October 2006. (e) On or about 12 December 2006, he instructed Deacons to obtain information from PPB directed to ascertaining what Sterling had done in the past in respect of the Margin Scheme. (f) On or about 13 February 2007, the ATO informed Deacons that Perpetual could apply the Margin Scheme in the way outlined in the application for a private ruling provided that it produced a fair and reasonable result. Deacons were also told that, if this method was different from what Sterling had done, Perpetual would need to apply the changed method to the earlier sales made by Sterling and make any necessary adjustment. (g) In his opinion, to proceed to apply the Margin Scheme was too great a risk for Perpetual given that it did not know whether and, if so, in what way, Sterling had previously approached the problem. 83 Mr Stone was cross-examined about the decision which he ultimately took concerning GST and the Margin Scheme. He was heavily criticised for not personally trying to locate the former directors of Sterling in order to obtain their recollections as to Sterling's practices before it lost control of the development. In addition, Naxatu called Mr Yu, a former director and the CEO of Sterling, who said that Sterling had applied the Margin Scheme in respect of the earlier sales made by it and did so by including the costs of construction in the relevant calculations. Construction costs were later excised from the relevant calculations as required by the decision of this Court in Sterling Guardian Pty Limited v Commissioner of Taxation (2006) 149 FCR 255. 84 Mr Stone gave me the impression that he was a cautious man who did not wish to take unnecessary risks when it came to the question of the payment of GST and the Margin Scheme. He sought advice. He asked for enquiries to be made. In the end, he did not receive the level of comfort which he required. 85 I do not think that the decision which Mr Stone made (or which others at Perpetual made upon his recommendations) not to apply the Margin Scheme has been demonstrated to have been wrong, let alone reckless, imprudent, negligent or made in bad faith (see Hawkesbury Valley Developments Pty Ltd v Custom Credit Corp Ltd (1994) 8 BPR 15,581). 86 The approach which Perpetual took to the Margin Scheme does not justify an inquiry as to that matter. 87 Mr Banks testified that Perpetual made an arithmetical error in calculating the GST that was paid. Perpetual acknowledged this. It will have to take responsibility for this if the error cannot be rectified. However, the mistake was genuine and the impact minor. This error does not justify an inquiry.

[43]

Cross-Claim 92 There remains the question of the costs of Bridgecorp's Cross-Claim. Naxatu seeks the costs of that Cross-Claim as against Perpetual. Naxatu seeks from Bridgecorp the costs of the Notice of Motion filed by Bridgecorp on 6 May 2010. 93 Counsel for Naxatu submitted that it was Perpetual who had brought Bridgecorp into the proceedings and that Perpetual should therefore pay the costs of Bridgecorp's Cross-Claim except the costs of the Notice of Motion filed on 6 May 2010 by Bridgecorp which costs should be paid by Bridgecorp. 94 Counsel for Bridgecorp submitted that: (a) Naxatu had attacked the Deed of Priority; (b) That attack was the reason Bridgecorp had been dragged into the proceedings; (c) Bridgecorp had not really lost the Motion filed on 6 May 2010; and (d) In reality, it was Perpetual who brought Bridgecorp into the present proceeding. 95 I think that it was inevitable that Bridgecorp would eventually be brought into the proceedings in this Court. The inevitability of that outcome means that, in assessing where costs should fall, not much weight should be placed upon the fact that it was Perpetual who bit the bullet and commenced a proceeding against Bridgecorp. The real cause of Bridgecorp becoming a party was the fact that the proceedings were on foot. Naxatu was responsible for that state of affairs. But Naxatu has failed in its claims against Perpetual. 96 I think that, as between Naxatu and Bridgecorp, there should be no orders as to the costs of the Cross-Claim brought by Bridgecorp in proceeding NSD 493 of 2009 and no orders as to the costs of proceeding NSD 1452 of 2009 save for the costs incurred by Naxatu in respect of Bridgecorp's Notice of Motion filed on 6 May 2010. That Motion involved discrete applications which, in substance, Bridgecorp lost. I think that Bridgecorp should pay Naxatu's costs of and incidental to that Notice of Motion. 97 The Cross-Claim in this proceeding and the whole of proceeding NSD 1452 of 2009 will be dismissed by consent. Proceeding NSD 493 of 2009 will be dismissed with costs. 98 There will be orders accordingly. I certify that the preceding ninety-eight (98) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Foster.

Naxatu Pty Limited v Perpetual Trustee Company Limited; In the Matter of Sterling Estates Development Corporation Pty Limited

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Judgment (43 paragraphs)

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Cases Cited (9)

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