Nicobar Pty Ltd v Abrokiss Pty Ltd

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

5844/03 - NICOBAR PTY LTD v ABROKISS PTY LTD JUDGMENT

1 HIS HONOUR: This is a motion seeking various orders, but the only part of it before me is an application to compel the receivers of two companies (the third and fourth defendants) to pay over the surplus held by them after the sale of the first defendant's real property to the plaintiff. 2 The motion was heard by me on 8 December 2003. Mr LJ Aitken of counsel appeared for the plaintiff and Mr IE Davidson of counsel appeared for the receivers. The matter was stood over until 12 December 2003 for further submissions in writing. The plaintiff defaulted in its obligations in this respect and the matter was further adjourned until 18 December 2003. 3 I am indebted to both counsel for their very helpful written submissions. 4 On 18 December, I heard short argument. I took the view that I should not make any order on the notice of motion. I made certain directions with respect to the final hearing. Mr Davidson sought costs of the motion. I said I would give my formal decision and reasons today. I am now fulfilling that obligation. 5 The background to the dispute is that the plaintiff issued a summons on 19 November 2003 seeking a declaration that it was entitled to surplus funds held by the third and fourth defendants after the sale of two hotels owned by the first and second defendants. A statement of claim was filed on 26 November 2003 fleshing out those claims. 6 The statement of claim says that on or about 24 December 2001, Suncorp Metway Limited (Suncorp) advance the $5,193,000 to the second defendant and took a mortgage over the first and second defendants' hotels as well as taking a company charge. 7 It then says that a company called Surpion Pty Ltd advanced the first and second defendants one million dollars which was paid by Surpion to Suncorp. Surpion took a security which it later assigned at law to the plaintiff. 8 The statement of claim then alleges that there are other claimants to security over the properties, but that all are invalid or do not have priority over the security of the plaintiff. 9 It is common ground that Suncorp appointed the third and fourth defendants as receivers to manage and sell the hotels which, in due course, they did. 10 The plaintiff then alleges that the receivers charged excessive fees and paid over excessive legal expenses in connection with the realisation of the hotels which should not diminish the pool of money available to meet the plaintiff's security. 11 The solicitor for the receivers has filed an affidavit which deposes that for about six months, the receiver operated "two large pubs", that the accounts are complicated and that he is on notice from the plaintiff that there will be many challenges. An estimate of ten days is anticipated for the accounts to be settled. 12 It is common ground that in the course of the receivership, the receivers spent a very large sum of money on their own costs. The plaintiff says that much of this was in connection with an abortive attempt to resist an action for specific performance of a contract to acquire one of the hotels the subject of the receivership. The receivers deny this allegation. 13 It is clear, however, that the receivers' accounts will be contested by the plaintiff. This is clear from the present statement of claim and motions in these proceedings. The plaintiff also seeks to challenge the amount of the receivers' remuneration when an application is made under s 425 of the Corporations Act 2001. It seeks to cover any challenge to standing by taking an assignment from the liquidators of the first two defendants. 14 The receivers have also had notice of other claims against them arising out of the receivership in particular a claim for $280,000 connected with the sale of one of the hotels. 15 The plaintiff says that Suncorp has now been paid in full except for about $20,000. The receivers deny this. The plaintiff says that the receivers had a surplus. They have already paid over part of the proceeds of the realisation to the plaintiff. The receivers still hold about $300,000. It appears that the plaintiff may well be entitled to that balance subject to payment of the receiver's costs and expenses. 16 The authorities seem to be to the effect that where the creditor is almost completely paid and its receiver holds sufficient to pay over the balance, the court should treat the creditor as having been fully paid; see Rottenberg v Monjack [1993] BCLC 374, 382. 17 The plaintiff claims to be subrogated to that creditor by virtue of its paying part of its secured debt of $1,000,000. The receivers deny that claim. 18 The evidence shows that the Suncorp Company Charge defined "Moneys Secured" as including "(d) fees and expenses including legal expenses… by the Bank in connection with… enforcement or attempted enforcement of, or … the exercise of any Power under this Company Charge. 19 The Company Charge also contained power for the Bank to appoint receivers. Clause 18.2 provides that, "Any Receiver appointed by the Bank is an agent of the mortgagor and the mortgagor is solely responsible for anything done or not done by the receiver and for the Receiver's remuneration." 20 Mr Davidson says that whether Suncorp has been fully paid or not, because of the need for further expenditure by the receivers which they are entitled to make under the document of charge under which grounded their appointment, the plaintiff could not be said to be subrogated at the present time to Suncorp's rights. He relies on the decision of the Court of Appeal in Austin v Royal (1999) 47 NSWLR 27, especially [11]. 21 The validity of this submission depends on whether the moneys secured by the charge include the receivers' costs and expenses. 22 Ordinarily, what are called the mortgagee's internal costs of administering the mortgage do not fall within phrases like "costs, fees and expenses"; see Fisher & Lightwood on Mortgages, Australian edition (Butterworths, Sydney, 1995) [40.26]. However, the result in any particular case will depend on the construction of the particular mortgage documents in their factual matrix: Sandtara Pty Ltd v Australian European Finance Corp Ltd (1990) 20 NSWLR 82, 90. 23 There are reported cases where receivers' remuneration and expenses have been held to fall within the phrase; see eg Re Wallis (1890) 25 QBD 176, 182; Gomba Holdings (UK) Ltd v Minories Finance Ltd (No 2) [1993] Ch 171 and Rottenberg v Monjack (supra). 24 I do not consider that I should venture into the construction of the mortgage or company charge on this application. Questions of fact may also be involved in calculating whether all or some part (or no part) of what the receivers claim come within the phrase. There is also the question which has not been explored on this motion as to whether clause 18.2 operates to remove the receivers' remuneration from the phrase, notwithstanding that it might otherwise have fallen within it. 25 Thus, for present purposes, I will merely apply the general rule. 26 Thus, Mr Davidson's submissions on this point do not absolve me from considering what is the nature of the plaintiff's right. 27 Mr Aitken relies on my decision in Tolhurst v Crickett Pty Ltd (2001) 10 BPR 19,087 where I said at 19,088 [8]: "The law is that if A pays in whole or in part a mortgage owed by B to C, then the usual construction of that scenario is that A did not intend to discharge the mortgage, but to have the appropriate interest transferred or held on trust for him" 28 I adhere to that proposition which is well supported by the Privy Council's decision in Ghana Commercial Bank v Chandiram [1960] AC 732 and see Fisher & Lightwood [14.6]. 29 However, where only part of the debt is paid, all this means is that the original creditor has the obligation of transferring the mortgage if it has otherwise been paid in full. There might be cases where there can be a legal assignment of the debt if the payer's is the only amount still owing by the mortgagor. 30 As part of a debt cannot be assigned at law, the usual procedure will be for there to be an equitable assignment which may well mean that the original creditor has to lend its name to the recovery proceedings. 31 In equity, the original creditor is a necessary party to the recovery proceedings. 32 In the present case, Suncorp has never been joined as a party. 33 The upshot is that the plaintiff has no right at law and that it has not properly invoked any equitable right because its suit is defective for want of parties. 34 Mr Aitken says that the proceedings should not be allowed to be disposed of on such a technicality. 35 There are three answers to this submission. First, the observance of what Mr Aitken calls "technicalities" is important in our law in this area. Secondly, the present case is a very technical matter. Thirdly, I am not disposing of the case, I am merely declining to give relief on the motion and letting the case proceed to final hearing. 36 However, even if I put aside "technicalities", the result of the motion is the same. 37 The receivers claim to be entitled to retain the balance pending passing of their accounts and also as security for any action that might be brought against them arising out of the receivership. 38 Mr Aitken submits that the legal position is a simple one, namely in what circumstances is an agent, in the absence of specific contractual entitlement, permitted to retain part of the proceeds of a recovery which he is employed to make against his employer. He says that the receivers are not entitled to retain any sum at all for those purposes out of what he claims are the plaintiff's monies. 39 If Mr Aitken is correct, the plaintiff's claim is really one at law for money had and received. Actions at law result in verdict and judgment after a final hearing. It is usually quite inappropriate to make some interim order for payment by interlocutory motion. 40 During the oral argument, Mr Aitken acknowledged the force of what I have stated in the preceding paragraph. He thus mounted an alternative case that his client was entitled to an account in equity and an interim order for payment. 41 I have little doubt that, one way or another, the plaintiff may have standing to ask for an account even if only because of the assignment of rights it has obtained from the liquidator of the first and second defendants. However, just what is the basis of its standing to seek an account is a vital issue. 42 If the plaintiff's standing is as a second mortgagee, then it is in the same plight as a mortgagor.

43 The general rule is that a mortgagee who is threatened by the mortgagor with contested accounts is entitled to retain his costs of the accounts: Project Research Pty Ltd v Permanent Trustee of Aust Ltd (1990) 5 BPR 11,225. See also Equus Financial Services Pty Ltd v RMBL Investments Pty Ltd (1996) 7 BPR 14,966; 22 ACSR 744 and Overton Investments Pty Ltd v Cuzeno RVM Pty Ltd [2003] NSWCA 27. 44 The reasoning of that case is that a mortgagee has almost an absolute right to costs in a redemption suit and that a like rule applies where the proceedings are not actually a redemption suit, but proceedings in lieu. 45 Is the taking of accounts between the receiver and the mortgagor, in the same plight as a redemption suit? 46 In this connection, I should note my decision in Touzell v Cawthorn (1995) 18 ACSR 328, where the principle in Project Research was applied to a solicitor's bill in a company administration. 47 My answer to the question is, "Yes". The purpose of the exercise is to determine what, if anything, is the surplus to be paid to the next person entitled to the equity of redemption by the mortgagee or his agent.

48 Mr Aitkin then submits that the matter should proceed on the basis of the court making a detailed enquiry into the receivers' conduct as Controller within the meaning of s 420A of the Corporations Act, once the receivers have filed their statutory accounts. 49 He then submits that, in the interim, unless the receivers as Controller are able to demonstrate a strict entitlement to retain funds which do not belong to them, they should be required to pay them forthwith to the plaintiff. 50 Mr Aitken relies on s 423 of the Corporations Act, which, he says, provides a method by which the court can supervise the behaviour of a Controller. He says that, in appropriate circumstances that supervision can include the award of a monetary sum. He cites the decision of Campbell J in Artistic Builders Pty Ltd v Elliot and Tuthill (Mortgages) Pty Ltd (2002) 10 BPR 19,565 (followed by Stone J in Duggan v Thomas [2002] FCA 830 [35]). 51 A close reading of the decision of Bryson J in GE Capital Australia v Davis (2002) 11 BPR 20,529 and the statements of law in my note in (2003) 77 ALJ 102 show that the decision in Artistic Builders may not have dealt with a key issue because of a strange concession by counsel and it may be difficult for Mr Aitken to make out his case under s 423 of the Corporations Act. 52 The situation if there is a contested hearing with respect to the receivers' remuneration under s 425 of the Corporations Act does not seem any different to any other litigation between these parties with respect to accounts and the receivers' remuneration. 53 Mr Aitken also sought to have the case determined as if it were an application for an injunction to preserve a fund. To this end, he referred to Exhibit PX03 which appears to show that the receivers are about to embark on expenditure of megadollars on their own remuneration and legal expenses. 54 However, there is no suggestion at all that the receivers are not well able to repay any monies found to be repayable by them out of their own funds. 55 I thus reject the analogy with an application for injunction. 56 The next matter to consider is whether the receivers have any lien over the disputed funds. 57 Mr Aitken says that there could be no lien. He says that this is a case where the receivers are agents of Suncorp. They may well have an indemnity from Suncorp. However, they have no claim for any lien of the monies of the plaintiff. 58 In Re Central Commodities Services Pty Ltd [1984] 1 NSWLR 25, Needham J, after a thorough review of the authorities ruled that a court appointed receiver is entitled to an equitable lien in respect of his costs and expenses. This decision was approved by the Full Federal Court in the seminal case of Shirlaw v Taylor (1991) 31 FCR 222, 230 and on many other occasions since. 59 Equitable liens are however, available to a wider class case of people than persons appointed by the court. 60 The general rule is that where a person who is a fiduciary or an officer of the court produces a fund through his own effort, he is entitled to an equitable lien over the fund in respect of defending himself against claims made against him for what he did in producing the fund. I dealt with that general principle in Commonwealth Bank of Australia v Butterell (1994) 35 NSWLR 64, 71, a case of an administrator under the Corporations Act. 61 When following that decision in Cresvale Far East Ltd v Cresvale Securities Ltd (No 2) (2001) 39 ACSR 622, 636, Austin J explained it by saying that an administrator is in a fiduciary position to the company and thus is an analogous position to a court appointed receiver and thus is entitled to an indemnity. There is nothing in the Court of Appeal's decision in that case, Kirwan v Cresvale Far East Ltd (2002) 44 ACSR 21 which affects this part of Austin J's decision. 62 Although the scope of equitable liens is wide and the boundaries are flexible, and although a receiver appointed out of court owes fiduciary duties both to his appointor and perhaps also to the mortgagor, I do not consider that the principle applies to receivers appointed out of court. If this were not so, there would be little point in the authorities continuing to emphasize the fact that the receivers in the successful cases of lien were receivers appointed by the court. 63 This conclusion is supported by O'Donnell, Company Receivers & Administrators [12.1090] (Update 40) and see Harris & Lewin Pty Ltd v Harris & Lewin Agents Pty Ltd [1976] ACLC 40-216.

64 The receiver is usually the agent of the mortgagor company and may have a lien against the assets of the company, but this will not normally have force against a secured creditor. 65 However, there are clearly some circumstances where the lien against the mortgagor may have priority over a secured creditor. One example is National Australia Bank Ltd v Composite Buyers Ltd (1991) 6 ACSR 94. Fuller discussion is provided in Hill v Venning (1979) 4 ACLR 555 which discuss cases where the receiver is surplanted by a liquidator, but his equitable lien survives; see eg Foxcraft v Wood (1828) 4 Russ 487; 38 ER 888. 66 The original foundation for the lien found, in a interlocutory hearing, by Connolly J in Hill v Venning (supra) appears to be Drinkwater v Goodwin (1775) 1 Cowp 251; 98 ER 1070 which was a case at law involving a factor who had spent his own money on his master's business before the master became bankrupt. It was a decision of the full bench of the King's Bench presided over by Lord Mansfield. I find it just a little difficult to see how it supports an equitable lien, but it may be one of those commercial law innovations introduced by Lord Mansfield which have developed into the modern law of equitable liens. 67 For these reasons, I do not consider it appropriate to make any order for payment on this motion. The plaintiff is not, as a matter of principle clearly entitled to be paid anything more at this stage. The entitlement of the plaintiff depends to a degree on the answers to questions of fact which need to be determined on a final hearing. 68 Accordingly, the plaintiff's application fails. I cannot see any reason why the ordinary order for costs should not be made, particularly in the light of the plaintiff's default which occasioned the adjournment on 12 December. 69 Thus, I decline to make an order for payment on the motion and I order the plaintiff to pay the costs of the third and fourth defendants of this hearing.

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