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