Nunn v Wily

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

3361/98 LORRAINE GWENNETH NUNN V ANDREW HUGH JENNER WILY

The proceedings 1 These proceedings relate to the validity and effect of a document expressed to be a mortgage between the plaintiff, Mrs Nunn, as mortgagee, and her son and daughter-in-law, David and Geraldine Ewins, as mortgagors, over a property at 15 Kennedy Place Bayview Heights, bearing the date 20 January 1997. I shall refer to this document for convenience as 'the Mortgage', but I do not thereby intend to pre-judge the effect of the document in law. The defendant, Mr Wily, is the trustee in bankruptcy of the estates of Mr and Mrs Ewins. 2 This is one of those cases, sadly quite common, where a parent is persuaded by her child to provide security for the child's borrowings. The child's financial failure brings down the parent as well. Here, there is a novel twist because, after losing her home, Mrs Nunn entered into an arrangement with Mr and Mrs Ewins, evidenced by the Mortgage and the loan agreement, which she now relies upon to give her priority over their unsecured creditors for loans she claims to have made to them. 3 The proceedings began by summons filed on 31 July 1998. Mrs Nunn initially sought only an order that the operation of her caveat against dealings in the Bayview Heights property, based on the Mortgage, be extended until further order of the Court. Subsequently Mrs Nunn filed an amended summons seeking declarations and rectification. Eventually, after the hearing had begun, she filed a further amended summons, by leave, in which she sought (inter alia): · a declaration that she has an interest in the Bayview Heights property created by the Mortgage; and · an order rectifying the Mortgage by inserting a provision having the effect that the Mortgage secured money advanced by Mrs Nunn pursuant to a loan agreement between her and Mr and Mrs Ewins dated 20 January 1997; · a declaration that the Mortgage secures repayment to Mrs Nunn of four specified advances, or some one or more of those specified advances as the Court may determine, together with interest on the secured advances, and an order that Mr Wily pay the secured advances and the interest to Mrs Nunn. 4 Unfortunately, the case did not proceed by pleadings. This is a case where pleadings would have been of real assistance in defining the issues and sharpening the submissions of the parties. However, Mrs Nunn's solicitor provided a letter dated 26 October 1998 which purported to set out the basis of her claim, and this provided some limited guidance. 5 The Bayview Heights property was sold after the commencement of the proceedings. Mrs Nunn's caveat was permitted to lapse when, on 5 August 1998, Mr Wily gave an undertaking noted by the Court to pay $150,904 upon settlement of the sale, to be held in a solicitor's controlled moneys account pending agreement between the parties or an order of the Court. I was informed from the bar table that the amount actually paid into Court and now awaiting my decision is $110,860.93. This case is about the destination of that money. Mrs Nunn says that because the Mortgage gave her an interest in the Bayview Heights property, or because it would do so after rectification, she is entitled to the money in priority to the unsecured creditors of her son and daughter-in-law. Mr Wily says that the Mortgage did not give Mrs Nunn an interest in the Bayview Heights property, and there is no case for rectifying it so as to extend the security to that property. Mr Wily further contends that even if she obtained an equitable interest under the Mortgage it would have no priority over the interest held by the trustee in bankruptcy for the benefit of creditors generally, and consequently the money should be made available to the unsecured creditors of Mr and Mrs Ewins. 6 The main question in these proceedings is whether the Mortgage, as a matter of construction of its express or implied terms or by means of rectification, provides Mrs Nunn with an equitable interest as mortgagee giving her security over the Bayview Heights property for the loans she has made. Mr Wily has not sought to challenge the Mortgage as a voidable transaction under s 121 of the Bankruptcy Act 1966 (Cth) or otherwise, although he purports to reserve his right to do so when the outcome of the present proceedings is known. He has, however, raised the contention that he has priority over Mrs Nunn's interest (if any) because of her postponing conduct. There being no cross-claim, it appears that the latter argument is advanced in order to defeat Mrs Nunn's claim to rectification, and to deny her any declaration that would expressly or impliedly recognise that she has an interest having priority over the interest of the trustee in bankruptcy.

Parol evidence 7 Evidence concerning intentions, the negotiations leading up to, and the background of, the Mortgage and loan agreement were admitted at the hearing. I proceeded on the basis that such evidence was likely to be admissible with respect to some of the issues in contention, even if it were not admissible generally. 8 In these reasons for judgment, I shall first make findings of fact on the basis of the evidence as a whole. Then I shall consider whether those findings are available, having regard to the parol evidence rule, with respect to the various contentions advanced by the parties.

Observations as to credit 9 Oral evidence was given by Mrs Nunn, Mr and Mrs Ewins, and Mrs Nunn's solicitor, Ms Bova. Counsel for Mr Wily contended that Mrs Nunn and Mr and Mrs Ewins were unreliable witnesses whose evidence should not be believed. Although I have found some aspects of their evidence unsatisfactory, in ways that I shall indicate, I do not regard them as unreliable witnesses generally, and I am prepared to accept most of their evidence on its face. This is in a context in which Mr Wily did not adduce evidence challenging the evidence given by plaintiff's witnesses comprehensively, relying instead on documentary evidence and an affidavit by Mr John Hooper which was limited to some specific questions. 10 As to Mrs Nunn's evidence, counsel for Mr Wily submitted that she relied on her difficulties of recollection selectively. However, observing her in the witness box, I was satisfied, on balance, that she was endeavouring to tell the truth and to recollect matters put to her in cross-examination. She is an elderly woman whose memory has genuinely been weakened by Meniere's disease and her heart condition and consequent medication, as well as the stress of losing her home and seeing her son become bankrupt and have his home sold, notwithstanding the assistance she had given him. 11 This overall assessment is an answer to the numerous specific attacks on her evidence in the defendant's written submissions. For example, these considerations are sufficient, in my view, to explain her inability to recall seeing the ANZ Bank letter of 22 September 1993, and her difficulty in recalling Mr Kerridge's memorandum of fees of 29 January 1997, until various entries in the narrative account in that document were put to her. It is unnecessary to go through each of the defendant's criticisms, because my answer to each criticism is essentially the same. However, later in these reasons for judgment I shall make findings that events occurred which Mrs Nunn has been unable to recollect - for example, I find that she had one or more discussions with her son before she instructed Ms Bova to lodge a caveat against the title to the Bayview Heights property, although her evidence is that she cannot recollect any such discussion. 12 I have no difficulty accepting the factual evidence given by Mr Ewins. The evidence he gave about his purpose and intentions, and his understanding of the mortgage arrangements, and the caveat and the possession proceedings, was obviously self-serving, but nevertheless I found it generally plausible. My only general reservation is that his drafting of his mother's letter of instructions dated 18 December 1996 showed that he had an understanding of legal/commercial transactions which was rather better than the level of understanding of the lodgment of a caveat, the concept of registration and the nature of the possession proceedings conveyed by his oral evidence. My opinion, however, is that he engaged in a limited degree of understatement of his understanding in response to the cross-examiner's questions, rather than that he deliberately set out to mislead. 13 Thus, his evidence that he did not know 'the details' of the proceedings against his mother by the ANZ Bank for possession of the Wheeler Heights property, and that he did not 'specifically' understand the concept of possession, may be literally true, if 'the details' and a 'specific' understanding are taken to require sophisticated legal knowledge, but in my opinion he understood very well the commercial and practical significance of a possession order. Similarly, his evidence that he did not fully understand the concept and effect of registration of the Mortgage would be correct if it referred to a legal understanding, but in my opinion it would not be correct if it referred to a practical understanding of the effect of registration. I do not regard matters such as this as undermining his overall credibility. 14 However, there was one instance where I thought his evidence was unreliable. He denied that he had told his mother to lodge a caveat against the title to the Bayview Heights property, and claimed that he had not even discussed with her the question of lodging a caveat until after she had done so. I have been unable to reach a conclusion, on the evidence, as to whether he initiated lodgement of the caveat, but I find that he discussed the subject with her before she instructed Ms Bova on 29 April 1998. 15 I found Mrs Ewins to be a less satisfactory witness than Mrs Nunn or Mr Ewins. Her reliance upon a bad memory was less convincing than her mother-in-law's, since there was no equivalent medical or other explanation for the bad memory and it seemed to occur at convenient times in cross-examination. I formed the impression that she was 'holding back' in her oral evidence. At one stage she said, 'I know we had a caveat put on the house to try and salvage', and then she stopped, apparently believing that she had said the wrong thing, and then she endeavoured to qualify the effect of that evidence. As I shall explain, I have reached the view that her evidence on that point is not damaging in its overall context. I do not regard her evidence as totally unreliable, but it was not convincing. Generally, its significance is no more than that it corroborates the evidence of Mrs Nunn and Mr Ewins. 16 In one respect, however, Mrs Ewins' evidence is important. It establishes, to my mind, that she was aware of her husband's actions with respect to the Mortgage transaction and his borrowings from his mother, and that she consented to the granting of a security over her interest in the Bayview Heights property to secure those borrowings. There is a suggestion in the submissions of counsel for Mr Wily that Mrs Ewins may not have properly signed the documents on 24 January 1997, but I see no reason for doubting that she did so.

The Moorlife businesses, and guarantees of Moorlife debts 17 The circumstances which led to the Mortgage and loan agreement have quite a long history. Mr Ewins and Mrs Nunn acquired a shelf company in 1985 and changed its name to Moorlife Australia Pty Ltd in December 1985. Initially two shares were allotted, one each to Mr Ewins and Mrs Nunn, both of whom were appointed directors. 18 Mrs Nunn was only involved for a brief time as a director and shareholder. Shortly after the company was acquired, Mr Ewins entered into a 'partnership' with Mr Starr Prendergast, in the sense that they commenced to carry on a business through the company. Thereafter Mrs Nunn had no shareholding interest in that company, and was not an officer or employee of it. 19 The business was the supply of skincare products under the 'Moorlife' brand to pharmacies and other retail outlets. The business and some stock were purchased by the company from their previous owner. The company was a wholesaler, acquiring products from Europe, selling them through agents in Queensland and New South Wales, and despatching the product from Sydney to meet orders. 20 The business was financed by borrowings from the ANZ Bank. In 1985 Mr Ewins and Mr Prendergast approached the ANZ Bank, which agreed to provide a loan facility to the company if the loan was supported by adequate personal guarantees and security. 21 After exploring other avenues, Mr Ewins approached his mother for assistance. Mrs Nunn was the registered proprietor of a property at 246 South Creek Road, Wheeler Heights, which had been the home where she had lived with her first husband before they separated. The property was subject to an existing mortgage to the ANZ Bank. She agreed to provide a guarantee, supported by the existing mortgage, after being told by Mr Ewins that the borrowing by the company would be no more than $25,000. Her evidence is that she believed her liability was limited to that amount, but it is unnecessary for me to decide whether that was so, and I decline to do so. 22 On 5 November 1985, Mr Ewins and Mr Prendergast executed an unsecured guarantee in respect of debts owed by Moorlife Australia to the ANZ Bank. On 25 March 1986, Mrs Nunn executed a guarantee in similar terms, unlimited as to amount and secured over the Wheeler Heights property. 23 The business of Moorlife Australia operated for only about two years. Mr Ewins gave evidence that the selling agents were not able to live up to their own sales projections. Mr Prendergast dropped out of the business and Mr Ewins acquired another shelf company, which was re-named Moorlife International Pty Ltd. The business of the new company has been to sell skincare products with an emphasis on herbal products, principally by export, the main country of export being New Zealand. Mr Ewins purchased the remaining stock of the business of Moorlife Australia and made it available to the new company. The business of the new company has continued to operate until the hearing, notwithstanding the intervening bankruptcy of Mr Ewins. 24 Mr Ewins and Mrs Nunn were appointed directors of Moorlife International on 26 February 1988. Mr Ewins was a director until after his bankruptcy, and Mrs Nunn has been a director and the secretary at all relevant times. Initially ten shares were issued, Mr Ewins holding nine and Mrs Nunn holding one share. There is some evidence before me to indicate that on 5 May 1989 Mr Ewins sold eight shares to Mrs Nunn, and an additional forty shares were allotted to Mrs Nunn on 2 February 1992, so that at all relevant times thereafter Mrs Nunn has held forty nine shares and Mr Ewins has held one share. 25 The evidence about share ownership consists of Mr Ewins' oral evidence at the hearing, a statutory declaration of Mr Ewins and Mrs Nunn dated 7 November 1997, a copy of a letter dated 12 November 1997 from an accountant on behalf of the company to the Australian Securities and Investments Commission and a letter from the same accountant to the Office of State Revenue dated 19 December 1997, and the company's 1997 annual return and other notifications to the Commission signed by Mr Ewins and dated 19 September 1997. That evidence is inconsistent with the annual returns of the company up until 1997, and most of it came into existence in the months just before Mr Ewins became bankrupt. If the evidence is true, it places control of Moorlife International and its business beyond the reach of Mr Ewins' trustee in bankruptcy, Mr Wily. 26 Counsel for Mr Wily has attacked this evidence, inviting me to disbelieve it and to conclude that Mr Ewins was an unreliable witness. Counsel pointed out that Mr Ewins signed various company returns prior to 1997 which showed him as the majority shareholder. In his oral evidence Mr Ewins said that the shareholding information in these returns was included through an accountant's mistake. Counsel drew attention to the fact that the alleged meeting of directors which is said to have allotted forty shares to Mrs Nunn occurred, conveniently, just over five years prior to Mr Ewins' bankruptcy, and therefore beyond the scope of s 120 of the Bankruptcy Act. Counsel contends that a claim in the statutory declaration of Mr Ewins and Mrs Nunn, that it was resolved on 2 February 1992 (presumably at a meeting of the shareholders) that the memorandum and articles of association of Moorlife International be amended to provide that if any shareholder was to die or become bankrupt his or her shares in the company would be forfeited to the remaining shareholders, was implausible and not supported by other records. 27 I agree with counsel for Mr Wily that these are all matters that give the evidence about share ownership an air of implausibility. On the other hand, that evidence was consistently supported by the oral evidence of Mr and Mrs Ewins and Mrs Nunn, and (apart from the previous annual returns) no evidence was adduced to contradict it. The accountant was not called to give evidence. I am not satisfied that the suspicious aspects of the evidence entitle me to disbelieve it, or to draw adverse conclusions about Mr Ewins' reliability as a witness. It is unnecessary for me to make any firm finding as to the ownership of the shares of Moorlife International for any other purpose, and in the circumstances I decline to do so. 28 Initially Moorlife International conducted its banking with a branch of the Westpac Bank in Queensland. In 1990 Mr Ewins decided that the company should open a Westpac account in Sydney. The Bank required directors' guarantees. Mrs Nunn was concerned about giving a guarantee to Westpac Bank, because Moorlife Australia owed a substantial amount of money to the ANZ Bank, for which she had given a guarantee. Mr Ewins reassured her by saying that the guarantees were just like account application opening forms, and it was a formality that each director had to sign the forms at the Bank. He said to her, 'I won't to allow the bank to take out any borrowing against any of your property'. Mr Ewins and Mrs Nunn executed separate guarantees to support debts incurred by Moorlife International to Westpac Bank, unlimited as to amount, on 12 October 1990. Subsequently, Westpac took mortgage security to support Mr Ewins' guarantee over the property of Mr and Mrs Ewins at Bayview Heights, but it did not take security over the Wheeler Heights property owned by Mrs Nunn. 29 Although Mrs Nunn was a director and the secretary of the company, and she lent it $30,000 and gave a guarantee, the business of the company was managed by Mr Ewins until his bankruptcy. Mrs Nunn and Mrs Ewins assisted him, principally by packing and despatching purchase orders. Mr Ewins gave evidence that he consulted her from time to time, but I infer that the consultation was insubstantial. According to his evidence, when he was overseas in New Zealand or elsewhere, Mrs Nunn had the day-to-day management of business. But I infer that this did not involve her in significant business decisions, and was principally the continuation of packing and despatching products in accordance with purchase orders. I make these inferences on the basis of the evidence of Mr and Mrs Ewins and Mrs Nunn, and my observation of Mrs Nunn as a witness. She was very vague and unclear on business matters, and had been seriously ill from time to time since 1994, when she contracted Meniere's disease and developed a heart condition. 30 Mrs Nunn received no financial benefit from her position as a company officer or shareholder, or from her work for the company, except for occasional payments of no more than $100 per week, made after she became ill in 1994.

Proceedings by ANZ Bank for recovery 31 When the business of Moorlife Australia came to an end, there was a substantial debt to the ANZ Bank. Notwithstanding that debt, the company was deregistered and dissolved on 13 April 1992. Perhaps discovery of this fact, coupled by the failure of the guarantors to discharge the debt, caused the Bank to write its letter of 22 September 1993. 32 That letter was addressed to Mr Ewins as secretary of Moorlife Australia, and was copied to Mrs Nunn. The purpose of the letter was said to be to confirm the Bank's attitude to the conduct of lending facilities held with the Bank, and to re-affirm the Bank's intentions should its requirements not be met. The letter demanded payment of arrears in the sum of $8,050. The Bank noted that Moorlife Australia had been deregistered, and that the new operating company was Moorlife International, but that strike-off action was in progress against that company, and it required the position to be rectified by 30 September 1993. The letter said that the 'only tangible asset' securing the loan facilities was an unlimited mortgage over the Wheeler Heights property supporting a guarantee of the debt given by Mrs Nunn. The letter warned that the Bank would move to obtain possession of and execute its power of sale over the Wheeler Heights property unless the default was remedied by 1 October 1993. 33 Although the Bank's letter referred to Mrs Nunn's mortgage and guarantee as the 'only tangible asset' supporting the debt, it appears that Mr Ewins and Mrs Nunn believed the Bank could have recourse to his interest in the Bayview Heights property, by virtue of his guarantee. In fact Mr Ewins' guarantee of debts of Moorlife Australia to the ANZ Bank was not secured over the Bayview Heights property, although Westpac Bank had security over that property in respect of the debts of Moorlife International. 34 After the Bank's letter of 22 September 1993, there were discussions involving the Bank's representatives, Mr Ewins and Mrs Nunn, as a result of which the Bank wrote to Mr Ewins on 12 October 1993, confirming that action to take possession of Mrs Nunn's property would be suspended subject to the fulfilment of certain conditions, including payment of regular monthly instalments to reduce the debt. Nothing was said in the letter of 12 October 1993 about the deregistration of Moorlife Australia. In May 1994 the ANZ borrowings were restructured when the existing overdraft was paid out and a new facility at $45,300 was fully drawn down. It is not clear whether the restructuring took into account the fact that Moorlife Australia had been deregistered, but a Bank letter to Mrs Nunn dated 6 May 1994 seems to have assumed that the company was still in existence. 35 By mid-1996 the Bank was again pursuing Mr Ewins for payment of arrears. By that time the debt stood at over $48,000. The registration of Moorlife Australia was restored, on the application of the ANZ Bank, by court order made on 29 May 1996, to facilitate the Bank's enforcement of its security. Mrs Nunn and her son discussed their financial predicament. Mrs Nunn understood that the only way to pay the ANZ Bank would be by selling her house at Wheeler Heights, or her son and daughter-in-law's house at Bayview Heights. Mrs Nunn decided to sell her home at Wheeler Heights and to provide her son with sufficient money from the proceeds of sale to pay out the ANZ debt. She told her son that the house had become too big for her to manage, and it was therefore better to sell her house than the house where he lived with his family. She calculated that she would have enough money left over to pay for a home unit or to move into a retirement village. During discussions on the subject, her son said to her, 'If you lend me the money I will give you a mortgage over my house so your money will be secure'. Mr Ewins gave evidence that he made this promise following discussions with his father. 36 Counsel for Mr Wily contended that no arrangements for a mortgage were made as early as mid-1996. He submitted that the evidence by Mr Ewins to this effect was an attempt to try to locate the commencement of the Mortgage agreement at a point in time before any relevant relation-back period in his bankruptcy. However, I find the evidence by Mr Ewins and Mrs Nunn on this point to be plausible. It is clear that the ANZ Bank had become active and was applying strong pressure by 1996. It served a notice on Mrs Nunn under s 57(2)(b) of the Real Property Act 1900 (NSW) on 26 June 1996. It is likely that discussions for the sale of the Wheeler Heights property and for the protection of Mrs Nunn by a mortgage would have taken place about the time of service of the notice, if not earlier. This finding is not inconsistent with the fact that Ms Bova was not instructed to prepare the Mortgage until December 1996. 37 Arrangements to sell the Wheeler Heights property were made with the ANZ Bank. On 2 August 1996 the Bank wrote to Mr Ewins, evidently for the purpose of confirming the arrangements. The letter advised Mr Ewins that the action to take possession of the Wheeler Heights property would be brought to judgment, but once judgment was obtained the Bank would review the matter before actually taking possession. The letter confirmed that Mrs Nunn had agreed to make the necessary efforts to sell the Wheeler Heights property, and advised her to contact a local real estate agent for a valuation of the property, and to attend to some repairs, with a view to finalising the sale within 'a suitable time frame'. 38 On 1 October 1996 the Bank served a statement of claim on Mrs Nunn for possession of the Wheeler Heights property. Mrs Nunn obtained legal advice on the Bank's possession proceedings from Mr Kerridge of Kerridge and Osborne, and contemplated filing a defence on the ground that she did not understand the effect of the guarantee and mortgage. However, by 20 November 1996 she had decided not to do so, in order to protect her son, who might be pursued by the Bank if Mrs Nunn established a good defence. The Bank's solicitors set out their proposals for settlement of the possession proceedings in a letter dated 1 November 1996, a copy of which Mr Kerridge forwarded to Mrs Nunn, with comments, under cover of a letter dated 20 November 1996. The Bank proposed that it be paid by 31 March 1997. Mr Kerridge advised that a further period should be negotiated, which would enable Mrs Nunn to exchange contracts for the sale of her home at any time up to 31 March 1997. However, he reported that the Bank's solicitors had refused to agree to that proposal. 39 During October and November 1996 Mr Ewins endeavoured to find an alternative source of finance, so that he could pay off the ANZ debt. When the alternative finance failed to materialise, Mrs Nunn signed consent orders by which she accepted the written proposal by the Bank for settlement of the proceedings. She authorised Mr Kerridge to send the consent orders to the Bank's solicitor on 19 December 1996. Under the consent orders, the Bank obtained judgment for possession and the Court noted an agreement between the parties. The agreement was that the Bank promised not to exercise its power to sell the property before 31 March 1997, and Mrs Nunn acknowledged her liability under her guarantee and agreed to pay the Bank by 31 March 1997.

Other financial difficulties in late 1996 40 In late 1996 Mr Ewins was not only in financial difficulty with the ANZ Bank. He and his wife were being sued by Mr John Hooper in the District Court, and they were under pressure from Westpac Bank in respect of the overdraft of Moorlife International and arrears on their home loan. I should mention, as well, that on 30 October 1996 Mr Ewins signed an acknowledgment that he was unable to pay his father, Terrence Ewins, a debt of $357,756.75. However, it does not appear that he was under any particular pressure to pay that debt, and I shall say no more about it. 41 The District Court action by Mr Hooper was not explained by the evidence before me. It was a claim for over $100,000, and appears to have arisen out of some unsuccessful investments made by Mr Hooper with a Mr John Gagne, allegedly as a result of misrepresentations by Mr and Mrs Ewins. There was a hearing in 1996 but the case was adjourned until March 1997. Although Mr Ewins said in evidence that the case was not of particular concern to him, it must have added to the financial pressure he was already under. Apart from the possibility of losing the case, Mr and Mrs Ewins were incurring costs for legal representation. As I shall explain, their costs to Messrs Kerridge and Osborne had risen to $28,000 by early 1997. Mr and Mrs Ewins gave evidence that they did not discuss the case in detail with Mrs Nunn. I find this plausible, having regard to Mrs Nunn's illness at the time, and her concern with respect to the sale of the Wheeler Heights property to meet demands of the ANZ Bank, and to forestall the recovery action by Westpac Bank. 42 Westpac Bank had made loans to Moorlife International beginning in August 1990, supported by the guarantees of its directors, Mr Ewins and Mrs Nunn. Westpac held first and second mortgages over the home of Mr and Mrs Ewins at Bayview Heights, to secure a home loan as well as the loan to Moorlife International. By October 1996 the Bank was seeking to reduce or eliminate the overdraft, and to recover arrears of home loan repayment instalments. On 6 October 1996 the Bank issued demands to Mr and Mrs Ewins. By 6 November 1996 their arrears in respect of home loan repayments amounted to $30,220. 43 Mrs Nunn was upset that Westpac Bank was threatening proceedings against her son, for possession of the Bayview Heights property. She wanted to help him to keep his family home. In December 1996 her son said to her: 'I need to borrow some more money from you to pay Westpac.' She agreed to this request, and her son said to her that the mortgage that he had already promised would also cover this fresh loan. 44 Westpac took proceedings for recovery of the home loan and for possession of the Bayview Heights property in 1997. I shall describe what happened after I deal with some important intervening events.

Instructions to Ms Bova 45 By December 1996 it had become a matter of great importance to Mrs Nunn and Mr Ewins that a purchaser be found for the Wheeler Heights property. When a real estate agent contacted them to say that he had found a buyer, Mr Ewins and Mrs Nunn decided to give effect to their arrangements for a mortgage from him and his wife to her over the Bayview Heights property. 46 I find, on balance, that the purpose of Mr and Mrs Ewins and Mrs Nunn in doing so was to give Mrs Nunn some protection in respect of the loans that she would make out of the settlement money in order both to repay the ANZ Bank and reduce the Westpac debt. Although they must have been concerned about the prospect of possession proceedings by Westpac, I accept Mr Ewins' evidence that he expected, at this stage, that he could capitalise the arrears of his home loan debt and re-arrange future instalment payments, once he had paid out the Westpac overdraft from Mrs Nunn's settlement money. 47 Mr Kerridge, who was acting for Mr Ewins and Mrs Nunn with respect to the ANZ possession proceedings and the sale of the Wheeler Heights property, told them he could not act for Mrs Nunn on the proposed mortgage. He referred her to Ms Mary Bova. 48 Ms Bova gave evidence that she received a telephone call from Mrs Nunn on 18 December 1996. Mrs Nunn told her she would like Ms Bova to act for her to draw up papers for a loan to her son and his wife. Mrs Nunn explained that she was selling her property at Wheeler Heights and her solicitor in that transaction advised her to have another solicitor prepare the loan documents to protect her interests. Mrs Nunn said the mortgage should be an 'all moneys mortgage' since she did not at that stage know how much her son would require. Mrs Nunn said the mortgage would be a second mortgage. 49 Ms Bova responded by accepting instructions and saying she would telephone Mr Kerridge to discuss the matter, so that the documents could be ready prior to settlement of the sale of the Wheeler Heights property. Ms Bova said (in paragraph 1 of her affidavit) that she asked for written confirmation of her instructions. That evidence corresponds with the evidence of Mr Ewins. I disagree with a submission by counsel for Mr Wily that there was a discrepancy between the evidence of Mr Ewins and Ms Bova on this subject. 50 On 18 December 1996 Mrs Nunn wrote a letter to Ms Bova instructing her to prepare a second mortgage over the Bayview Heights property. Mr Ewins gave evidence that he drafted the letter in discussion with Mrs Nunn, and she made some edits to the draft. During the hearing, questions were raised as to whether the letter was ever actually received by Ms Bova, or (if received) was received much later than the date it bears. But the original letter was produced and I am satisfied that it was received by Ms Bova on or shortly after its date. 51 The letter, which is in evidence, says: 'Under an agreement entered into between us, I have agreed to advance David and Georgie funds in excess of $120,000 in order to pay bank obligations with the ANZ and Westpac banks, taking a security over their property to secure these advances to my estate. Initially, settlement [presumably, settlement of the sale of the Wheeler Heights property] is scheduled for January 10, 1997, but we are advised that it is unlikely this date can be met by the purchasers' bank - therefore I intend to allow the purchasers to move in under licence until settlement can be effected. It is important that the mortgage document be prepared and executed by David and Georgie prior to any funds being released at settlement - some of which will be deducted by the ANZ Bank upon settlement. 'As I do not have final payout figures, it will be necessary to prepare the mortgage as an 'all moneys' mortgage, payable on demand, together with any applicable interest, charges, and costs. 'For the purposes of attending to this matter, I would like by way of this letter, to authorise you to execute any and all documents on my behalf as may be necessary. ...' 52 Counsel for Mr Wily contended that this letter was misleading, for two reasons. First, he criticised the letter because it contained no reference to the financial difficulties and pressures to which Mr Ewins was subject at the time. It is undeniable that Mr Ewins was in serious financial difficulties at the time, though whether he was insolvent would probably have depended upon an assessment of his prospects in the litigation brought by Mr Hooper, and of the likelihood that his father would require payment of his debt. The contention by counsel for Mr Wily is that information about Mr Ewins' financial difficulties was omitted in order to minimise the risk that the Mortgage transaction might be challenged under s 121 of the Bankruptcy Act. In my view, however, the omission of such material is insignificant, given that the letter (though substantially drafted by Mr Ewins) was a letter from Mrs Nunn to her independent solicitor giving instructions as to work to be done for her. 53 Secondly, counsel for Mr Wily criticised the letter because it failed to record that Mrs Nunn was herself a guarantor of the ANZ and Westpac debts, and that the payment of those debts out of the settlement money would discharge her own liability. I disagree. In my opinion, a layman observing the transaction between Mrs Nunn and Mr Ewins would regard it as accurate to say, when Mrs Nunn paid the bank debts at her son's request, that she was paying his debts. Moreover, my view is that the evidence shows that Mr Ewins indemnified his mother in respect of her guarantee liability for the Westpac debt, and that either he impliedly indemnified her in respect of the ANZ debt, or he put himself in a position where he was not entitled to claim contribution from her in respect of his own guarantee liability for the ANZ debt. Therefore, the legal position of Mrs Nunn and Mr Ewins inter se corresponded with lay observation. 54 As regards the Westpac debt, there is fairly clear evidence of an express oral agreement between Mr Ewins and Mrs Nunn that in consideration of her agreeing to give a guarantee for the borrowing by Moorlife International, he would indemnify her and hold her harmless from any claims made by Westpac on her guarantee. It is true that they were both directors and shareholders and therefore she stood to gain if the business was successful. As a co-director and co-shareholder providing a guarantee for the company's debt, she would normally have no more than a right of contribution from her co-guarantor. But Mr Ewins said to her: 'Mum, don't worry, these are really just like account application opening forms. It's a formality that all directors, each of the directors has to sign the forms at the bank. This does not permit any borrowing from the bank, and I won't allow the bank to take out any borrowing against any of your property. ... Don't worry Mum, I won't hold you, I won't make you responsible for running up any debts to the company.' 55 In my opinion that is a clear offer to indemnify her, which she accepted by then agreeing to give the guarantee. 56 There is no evidence of any similarly categorical express offer in the case of the ANZ debt. However, the evidence of Mr Ewins, which I accept, is that during the conversation in which he asked her to give a guarantee to the ANZ Bank for borrowings by Moorlife Australia, Mrs Nunn asked him how long the money would be needed, and he said: 'I would hope it won't be very long once we get the products out on the market place. We hope to be able to pay it out with six months to a year.' 57 By 'we' he meant to refer to himself and Mr Prendergast. His statement clearly implied a promise to her that he and Mr Prendergast would ensure that the debt was paid, and that in turn implied a promise to her to indemnify her in respect of any liability under her guarantee. In my opinion, the implied promise of indemnity satisfies all the ingredients for the implication of terms into a commercial contract, as set out in such cases as BP Refinery (Western Port) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, 283. 58 Even if there were no contract of indemnity between Mr Ewins and Mrs Nunn in respect of the ANZ debt, it is probable that Mr Ewins and the other guarantor, Mr Prendergast, would not have against Mrs Nunn the normal right of contribution enjoyed by one co-surety against another, in the circumstances of this case. Mr Ewins and Mr Prendergast enjoyed all the benefits of the guarantee, since Mrs Nunn had no interest in Moorlife Australia and gave the guarantee solely to assist her son. In such a case it appears that the guarantor who receives no benefit has a defence to an action for contribution: J O'Donovan and J Phillips, The Modern Contract of Guarantee (3rd ed, 1996), p 641. 59 Professors O'Donovan and Phillips rely on overseas authority for this proposition, and they acknowledge that there is no direct Australian authority for it. However, in AGC (Advances) Ltd v West (1984) 5 NSWLR 590, 603-4, Hodgson J contemplated that the burden of guarantees by co-sureties might be shared unequally where one surety enjoys a disproportionate benefit from the guarantee, although on the facts he thought equal contributions were appropriate. Further, there is an analogy, supporting the approach of Professors O'Donovan and Phillips, in the equitable right of exoneration enjoyed by one of two joint borrowers, where what was borrowed has been applied for the benefit of the other borrower. The borrower who receives no benefit is treated, as between the borrowers, as if he or she were merely a surety entitled to be indemnified by the principal debtor: Farrugia v Official Receiver in Bankruptcy (1982) 43 ALR 700, 702-3. 60 Therefore, I conclude that it would be wrong to say, as counsel for Mr Wily submitted, that Mrs Nunn was doing no more than paying her own debt when she made funds available to discharge corporate obligations to the ANZ and Westpac Banks. She was paying debts both of which would ultimately have fallen on Mr Ewins, given the departure (in the case of the ANZ debt) of Mr Prendergast. The letter of instructions was not misleading. 61 After receiving instructions from Mrs Nunn, Ms Bova telephoned Mr Kerridge. Mr Kerridge explained to Ms Bova that Mrs Nunn was a guarantor for her son and his wife who had defaulted in repayments to the bank. He explained that he had suggested to Mrs Nunn that, since he was acting for her son and his wife in relation to another matter, she should obtain independent legal advice from Ms Bova. 62 According to Ms Bova's file note of 23 January 1997, Mrs Nunn told her that she did not want to have the Mortgage registered, and that she understood that her son could use the property as security for other loans. Mr Ewins denied that Mrs Nunn told Ms Bova any such thing. The file note also says that Mrs Nunn told Ms Bova that her son would look after her. That is not disputed. It appears to me likely that the question of Mr Ewins making other borrowings was raised by Ms Bova in order to explain to Mrs Nunn the effect of non-registration. Ms Bova explained the position to Mrs Nunn and was satisfied that Mrs Nunn understood, and she made the file note accordingly. But the matter was of no particular significance to Mrs Nunn, and she has forgotten the conversation (a conclusion consistent with a concession made by counsel for both parties during the hearing). 63 Mr Ewins gave evidence that, at the time, he did not understand that non-registration of the Mortgage to his mother would permit him to make other borrowings. I accept that at the time of his mother's discussion with Ms Bova, Mr Ewins did not intend to make further borrowings (except from his mother) and so it is unlikely that he would have considered the question of the effect of non-registration on his capacity to do so. 64 Ms Bova became aware that the settlement date for the sale of the Wheeler Heights property was 24 January 1997. She prepared a letter to Mr and Mrs Ewins bearing that date, enclosing a form of mortgage, a schedule and a loan agreement, and telling them to read the documents carefully and sign them where indicated, and to return them with cheques for costs and stamp duty. In fact she handed the letter and draft documents to Mr Ewins at her office, telling him that she could not advise him about the documents since she had prepared them on behalf of his mother, and advising him to see another solicitor. He said that would not be necessary. 65 Ms Bova also prepared a written direction to Mrs Nunn dated 24 January 1997, signed by Mr and Mrs Ewins, directing Mrs Nunn to pay $63,216.48 'being part of our second mortgage facility as secured over 15 Kennedy Place, Bayview Heights' to Moorlife Australia Pty Ltd. The amount referred to in this direction is the amount owing to ANZ Bank. Mr Kerridge acted on the direction.

Payments by Mrs Nunn on settlement of the sale of the Wheeler Heights property 66 Completion of sale of the Wheeler Heights property, for a purchase price of $302,500, took place on 24 January 1997. Out of the proceeds of settlement, $63,216.48 was paid to Moorlife Australia to discharge the ANZ debt. 67 On about 7 February 1997 Mrs Nunn paid $55,300 into the account of Moorlife International operated with Westpac Bank. The effect of this payment was to discharge Moorlife International's business debt to Westpac, and consequently to discharge the guarantee liability of Mrs Nunn to Westpac. The payment did not reduce the liability of Mr and Mrs Ewins on their home loan. I accept the evidence of Mr Ewins that it was the Bank's idea, rather than his, that Mrs Nunn's payment should be allocated to the business debt. Westpac did not have any security from Mrs Nunn to support her guarantee, and the security against Mr Ewins and his wife for the business debt was a second mortgage. It would have suited Westpac's interests to remove the business debt and confine the banking relationship to the home loan. The arrears on the home loan were in excess of $30,000 on a loan of about $248,000. I reject the contention that the payment was made for the purpose of removing Mrs Nunn's guarantee liability. 68 In January 1997 Mr Ewins asked Mrs Nunn to lend him some money to pay Custom Credit. According to her evidence, her son said that this loan would also be covered by the Mortgage. She agreed to it. On about 7 February 1997 she paid $4387.52 to Custom Credit. There was some evidence to the effect that the Custom Credit loan was connected with an American Express card issued to Mr Ewins on which Mrs Nunn was a supplementary cardholder. But it appears that the Custom Credit debt, though made available by American Express, was drawn down by Mr Ewins alone, and Mrs Nunn had no liability in respect of it. Therefore the payment was a true loan by her to discharge her son's debt. 69 Messrs Kerridge and Osborne, solicitors, rendered an account for their costs and disbursements in the Hooper litigation, in which Mr and Mrs Ewins were the clients, on 29 January 1997. It was necessary for Mr and Mrs Ewins to pay this account so they could continue with their defence, the case being part heard at that time. On 7 March 1997 Mrs Nunn paid the account at her son's request and on his promise that the mortgage would cover the loan. Again, this payment was a true loan by her to discharge her son's debt. 70 Thus, the total amount paid by Mrs Nunn at her son's request, which is said by her to be secured by the Mortgage, is $150,904. That is the amount which Mr Wily undertook to pay into a controlled moneys account on settlement of the sale of the Bayview Heights property, although (as I have mentioned) it appears that a lesser amount has in fact been paid, presumably by arrangement between the parties. On 10 February 1997, evidently anticipating the payment she would make to Messrs Kerridge and Osborne, Mrs Nunn signed a memorandum by which she purported to confirm that she had lent Mr and Mrs Ewins the sum of $151,000, pursuant to the Mortgage and loan agreement dated 20 January 1997. This document is rather self-serving and of no probative value.

The Mortgage and loan agreement 71 As I have said, on 24 January 1997 Ms Bova handed to Mr Ewins a form of mortgage, a schedule and a draft loan agreement. All three documents were signed by Mr and Mrs Ewins on the same day without alteration, and their signatures were witnessed by Ms Bova's secretary. They left the documents at Ms Bova's office for her attention. The Mortgage and loan agreement were subsequently dated (incorrectly, as I shall explain) 20 January 1997. Mrs Nunn did not sign the documents at that time. However, I infer from the facts that Mr and Mrs Ewins signed and delivered the documents as a bundle (though it is not clear whether they were stapled or pinned together at that time) to the firm of solicitors representing Mrs Nunn, with the intention of being immediately bound by them. 72 The Mortgage was in the standard Real Property Act form. It purported to be a mortgage over the Bayview Heights property, subject to two specified registered encumbrances, and identified Mrs Nunn as the mortgagee and Mr and Mrs Ewins as the mortgagors. It stated that the mortgagor covenanted with the mortgagee that the provisions set out in 'Annexure A & B hereto [sic]', and Memorandum No Q 860000 filed in the Land Titles Office, were incorporated in the mortgage. However, there were no annexures A and B to the form of mortgage. Instead, physically attached to or accompanying the Mortgage were a schedule (headed ' SCHEDULE HEREINBEFORE REFERRED TO ') and the form of loan agreement, neither of which was labelled 'A' or 'B'. 73 The schedule contained two provisions. By the first provision the mortgagor irrevocably appointed the mortgagee as attorney to exercise rights in the name of the mortgagor at any time after breach or default by the mortgagor. The second provision was a series of covenants by the mortgagor, one of which was to pay to the mortgagee 'the Principal Sum' at such time and on such dates and in such manner as would be agreed in writing between them from time to time. The words 'Principal Sum' were not defined. 74 The loan agreement appears to be a standard form used by Ms Bova's firm, in which most of the variable details (other than the name of the Lender) are in schedules rather than in the body of the agreement. Mrs Nunn is identified as the 'Lender' in the body of the agreement, and Mr and Mrs Ewins are identified together, in Schedule Two, as the 'Borrower'. The body of the agreement recites that the Borrower has requested the Lender to make advances but does not specify any particular sums. The words 'Principal Sum' are used and are defined (clause 1 (c)) to include, inter alia, all moneys advanced under the agreement. The agreement (clause 2 (b)) provides for a 'first advance' in an amount specified in Schedule One, but that part of the schedule has not been completed. The agreement (clause 2 (c)) provides for further advances by the Lender upon receipt of a written application by the Borrower prior to the advance. The repayment of the loan is expressed to be 'upon demand' (clause 3) and interest (clause 4 (a)) is expressed to be 'at the rate or rates and at the times and in the manner which shall be specified by the Lender (in its absolute discretion)' and 'notified in writing by the Lender to the Borrower from time to time'. Under the heading 'description of security' in Schedule Two, the following entry has been made: 'A third ranking registered mortgage from the Borrower over the whole of the land comprised in Certificate of Title Folio Identifier 28/216125 being Lot 28 in Deposited Plan 216125 situated at Church Point in the Municipality of Pittwater Parish of Narrabeen and County of Cumberland commonly known as 15 Kennedy Place, Bayview Heights.' 75 Ms Bova gave evidence that it was her normal practice, when drafting mortgages and loan agreements, to refer to the schedule to the mortgage as annexure A and to annex the loan agreement as annexure B to the mortgage. She said that in this case she overlooked the fact that the mortgage schedule and the loan agreement attached to the mortgage were not identified as annexures A and B. 76 Although the Mortgage and loan agreement bear the date 20 January 1997 (the schedule is undated), they were not given to Mr Ewins for signature until 24 January 1997. Ms Bova's evidence is that she mistakenly believed that the mortgage money was to be advanced on 20 January 1997, and dated the documents accordingly, after they were returned to her duly executed by Mr and Mrs Ewins. She said the correct date should have been 24 January 1997. The Mortgage has never been registered. Ms Bova said she was instructed by Mrs Nunn not to do so.

The intention of Mr and Mrs Ewins in executing the documents 77 Mr Ewins gave evidence that at the time he signed the Mortgage and loan agreement, it was his intention and understanding that the Mortgage secured payment of all moneys which his mother had agreed to lend him, and would subsequently lend, in the total sum of $150,904. The oral evidence of Mrs Nunn about her intentions at the time Mr and Mrs Ewins signed the documents is to the same effect. Mrs Ewins gave evidence that, at the time when she signed the Mortgage and loan agreement, she believed that her husband was borrowing money from his mother, and that she and her husband were mortgaging their home to secure the repayment of whatever money he might borrow from her. 78 Counsel for Mr Wily has attacked this evidence. He submits that it was never intended by Mrs Nunn or Mr and Mrs Ewins that the arrangements would be a mortgage in the true sense. This is one of the major points of controversy between the parties, and I shall return to it later. 79 At this point I shall deal with some evidence which, according to Mr Wily, demonstrates that neither Mrs Nunn nor Mr and Mrs Ewins had any intention to create any form of security in the true sense. In his proceedings in the District Court against Mr and Mrs Ewins, Mr Hooper issued a subpoena for production to Mrs Nunn on 19 February 1997, requiring production of (inter alia) documents having any connection with Mr and Mrs Ewins and Moorlife Australia and any bank account in connection with any transaction from 1 January 1990 to the return date of the subpoena. The subpoena was wide enough to require production of the Mortgage and loan agreement, as well as the documentary records of loans made by Mrs Nunn to Mr Ewins. However, Mrs Nunn responded by letter saying that she had no records to produce. Mr Hooper also served a notice to produce on Mr and Mrs Ewins, requiring production of (inter alia) documents identifying any encumbrance against the title to the Bayview Heights property. Counsel for Mr and Mrs Ewins informed the District Court that they had no documents to produce. 80 These responses to the subpoena and notice to produce are relied upon by Mr Wily to demonstrate that at the time of the responses, neither Mrs Nunn nor Mr and Mrs Ewins regarded the Mortgage as a true security. In my view, there are other more plausible explanations for their failure to produce the Mortgage and loan agreement, including the explanation that so much material was required to be produced that they overlooked documents which, as far as I understand the Hooper litigation, had very little relevance.

Proceedings by Westpac Bank for recovery 81 On 30 April 1997 Westpac Bank commenced proceedings against Mr and Mrs Ewins in this Court claiming a money judgment for the total debt owing to the Bank and possession of the Bayview Heights property. By 26 August 1997 arrangements had been made for a stay of further recovery action on the basis that consent orders would be made entering judgment for the debt (then about $272,000) and for possession, and that the borrowers would agree to a new regime of instalment payments. 82 Default judgment was entered on 24 March 1998 and a writ of possession was issued. The Bank informed Mr and Mrs Ewins of these facts by a letter dated 16 April 1998. The letter said that the Bank had decided to allow them a further and final period of 21 days in which to voluntarily vacate the property and hand over the keys. Mrs Nunn's caveat (mentioned below) was lodged on 29 April 1998.

The bankruptcy of Mr and Mrs Ewins, and the appointment of Mr Wily 83 Mr and Mrs Ewins became bankrupt on 11 December 1997, and Mr Wily was appointed trustee in bankruptcy in both cases. On 2 October 1997 Mr Ewins signed a Statement of Affairs, with the purpose of proposing an arrangement under Part X of the Bankruptcy Act, indicating that he owed $1,355,983.70 to unsecured creditors, and that there was a substantial shortfall in available assets. 84 Mr Wily investigated the assets of Mr and Mrs Ewins, and by March 1998 he had commenced proceedings in the Federal Court of Australia for possession of the Bayview Heights property. On 30 June 1998 orders were made in the Federal Court granting Mr Wily possession of the Bayview Heights property as trustee of the bankrupt estates of Mr and Mrs Ewins.

Mrs Nunn's caveat 85 As I have mentioned, Mrs Nunn did not sign the Mortgage, schedule and loan agreement in January 1997, and the Mortgage was not registered. Evidently the documents were simply retained by Ms Bova. According to Ms Bova's evidence, Mrs Nunn's omission to sign the documents was simply an oversight. 86 Mrs Nunn attended the office of Ms Bova on 29 April 1998, and signed the Mortgage, schedule and loan agreement. Having signed those documents, Mrs Nunn lodged a caveat against the title to the Bayview Heights property, claiming an interest as equitable mortgagee. 87 It appears that Mrs Nunn took these steps in response to moves by the trustee in bankruptcy and Westpac to obtain possession of the Bayview Heights property. She knew she could not stop these processes, but she believed she could at least recover the money she had lent to her son. Notwithstanding Mr Ewins' denial, the evidence shows, in my opinion, that there were some discussions between Mr Ewins and Mrs Nunn before Mrs Nunn saw Ms Bova, and that the proposal to lodge a caveat against the title emerged from those discussions, though it has not been established that Mr Ewins initiated the proposal. 88 It is clear from the evidence that Mrs Nunn and Mr and Mrs Ewins were very concerned about the prospect of sale of the Bayview Heights property. In her evidence Mrs Ewins said 'we put a caveat on the house to try and salvage'. That seems to me an accurate description of what happened, provided that 'salvage' is understood as meaning 'recover for Mrs Nunn', since her recovery of money would be likely to indirectly benefit Mr and Mrs Ewins through her subsequent generosity or under her will. Mrs Nunn was motivated to protect her own interest in recovery of the money she had lent, by relying on the Mortgage to give her priority over unsecured creditors. 89 On 15 July 1998 Mr Wily served a lapsing notice with respect to Mrs Nunn's caveat, leading to Mrs Nunn's commencement of the present proceedings. 90 Mr Wily does not recognise the validity of the Mortgage but he has not commenced any proceedings to avoid the Mortgage pursuant to any provisions of the Bankruptcy Act 1966 (Cth) or otherwise. There is no cross-claim in the proceedings.

Mr Wily's contentions 91 In a letter dated 26 October 1998, Mrs Nunn's solicitor purported to set out the basis of Mrs Nunn's claim. According to the letter, Mrs Nunn makes three principal assertions. First, she claims that upon their proper construction, the Mortgage and loan agreement secured, by way of mortgage over the Bayview Heights property, the repayment of all moneys owing by Mr and Mrs Ewins to Mrs Nunn. This was referred to in submissions as 'the construction argument'. Secondly, she says that if the express words of the documents do not have the effect for which she contends, that effect was produced by implied terms. Thirdly, she says that if the documents do not have the effect for which she contends, either by construction of their express words or by implication, there was nevertheless a common intention to produce that effect, and the Mortgage should be rectified to reflect that common intention. 92 The further amended summons, filed after the commencement of the hearing, adds three additional claims. First, there is a claim for declarations that the payments made by Mrs Nunn to the ANZ and Westpac Banks, Custom Credit and Messrs Kerridge and Osborne, or at least some of them, are secured by the Mortgage. Secondly, Mrs Nunn claims interest on the amounts secured by the Mortgage. Thirdly, she seeks to establish that the costs of the present proceedings are secured by the Mortgage.

93 There are questions of construction of two kinds. First, there is a question about the nature of the transaction between Mrs Nunn and Mr and Mrs Ewins. Secondly, if the Court finds that the transaction really was a mortgage supporting a loan agreement, a number of questions arise about gaps and ambiguities in the documents. The nature of the transaction

94 Mrs Nunn says that the transaction is what it purports to be, namely a mortgage securing, over the Bayview Heights property, all of the money she advanced to her son. Mr Wily says the transaction was not intended to be, and never was, a mortgage or anything else with legal effect. It was an arrangement having the appearance of a mortgage, entered into in order to prevent the sale of the Bayview Heights property for the benefit of the unsecured creditors of Mr and Mrs Ewins' bankrupt estates.

95 As I understand the law (and neither party advanced any contrary submission), the evidence admissible on this issue is not restricted by the parol evidence rule. The question whether the transaction was, in its nature, a mortgage or a sham is no different, for this purpose, from the question whether a transaction is a mortgage or a conveyance and repurchase (or a conveyance with an option to repurchase). Dealing with the latter question in Gurfinkel v Bentley Pty Ltd (1966) 116 CLR 38, Windeyer J said (at 114): 'It has of course long been the law that parol evidence is admissible to show that a conveyance, absolute in its terms, was intended by both parties to be by way of security. ... Of course if it can be shown by parol evidence that both parties to a document adopted the form they did as a disguise, then their true intent and not the form will prevail.'

96 In the same case Barwick CJ explained (at 108) that this is not an exception to the rule that oral evidence will not be admitted to contradict or vary a writing into which the parties have reduced their entire agreement, for 'the very question at issue is whether the parties have made the writing the expression of their whole agreement or of their mutual intention'. The general rule excluding parol evidence has no application, in other words, until it is first determined that the terms of the agreement or transaction which is to be interpreted have been wholly reduced to writing: State Rail Authority of NSW v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170, 191 per McHugh JA.

97 It therefore seems to me that all of the findings of fact made earlier in these reasons for judgment can be brought to bear on this issue. The task of the Court is to ascertain the real intention of the parties to the transaction, looking beyond its written form to its real substance and object: see Fisher & Lightwood's Law of Mortgage (Australian edition, 1995, by ELG Tyler, PW Young and CE Croft), paragraphs [1.16] and [3.6].

98 In the present case, the evidence relevant to the question whether Mrs Nunn and Mr and Mrs Ewins intended to create, and did create, a mortgage over the Bayview Heights property includes at least the following: · the Mortgage, schedule and loan agreement; · Mrs Nunn's letter of instructions to Ms Bova dated 18 December 1996; · the discussions between Mrs Nunn and Mr Ewins beginning in mid-1996 in which he agreed with her that he would give her a mortgage to secure her payment of the ANZ and Westpac debts, and the subsequent discussions in which he said that her loans for payment of the Custom Credit and Kerridge and Osborne debts would be covered by the Mortgage; · evidence of the matrix of facts leading up to the execution of the documents, including the financial difficulties of Mr Ewins and (to a degree) Mrs Nunn, and the pressure being applied by the ANZ and Westpac Banks and the Hooper litigation; · Ms Bova's evidence as to the instructions she received from Mrs Nunn; and · the evidence of Mr and Mrs Ewins as to their intentions in executing the documents.

99 In my opinion, this evidence points to the conclusion that the parties intended to create a mortgage over the Bayview Heights property to secure the money Mrs Nunn had agreed to provide for the benefit of Mr and Mrs Ewins, and money that she may agree to provide for their benefit in future. Their intention was to protect the position of Mrs Nunn by creating security in respect of those payments. They did not intend a mere sham.

100 However, counsel for Mr Wily relies on other evidence to support a submission that the arrangement between Mrs Nunn and Mr and Mrs Ewins was never intended by them to be a mortgage in the true sense. It was not intended, he says, to provide any form of security. He refers to the following matters: · although a document entitled 'Mortgage' was signed, it was signed by only two of the three parties to it; · by agreement it was not to be registered; · its terms were never complied with, as regards such matters as written applications for advances and notification of interest; · no claim was ever made by Mrs Nunn for payment under the Mortgage, nor was there any recovery action, notwithstanding the financial position of Mr and Mrs Ewins; · the Mortgage was not signed by Mrs Nunn until several months after Mr and Mrs Ewins had become bankrupt and at a time when the removal of Mr and Mrs Ewins from the Bayview Heights property and the sale of the property had become imminent; · neither Mr and Mrs Ewins nor Mrs Nunn produced the Mortgage and loan agreement in response to Mr Hooper's demand for production in the District Court proceedings; · except for lodging the caveat, Mrs Nunn and Mr and Mrs Ewins did nothing to reflect the existence of the Mortgage; · Mrs Nunn lodged the caveat only after Westpac's writ of possession had been issued, and Mr Wily had applied to the Federal Court for an order for possession, and in the circumstances the purpose of lodging the caveat was to prevent the sale of the Bayview Heights property rather than to protect a legitimate mortgagee interest. 101 According to counsel for Mr Wily, the real purpose and use of the Mortgage was to prevent the sale of the Bayview Heights property. The Mortgage was 'a deliberate, contrived and devious attempt to avoid the proper entitlements of the Ewins' unsecured creditors'.

102 I have decided to reject the submission by counsel for Mr Wily. Clearly there were some unusual aspects to the transaction and its implementation. But to a large degree, the unusual features can be explained by the fact that the transaction was between family members. Thus, the fact that the Mortgage was not registered does not imply that it had, or was intended to have, no binding effect. Notwithstanding s 41 of the Real Property Act, courts have long recognised unregistered mortgages of Torrens Title land as being in the nature of equitable mortgages and enforceable in the same way: Barry v Heider (1914) 19 CLR 197; J & H Just (Holdings) Pty Ltd v Bank of New South Wales (1971) 125 CLR 546.

103 The fact that the documents were not signed by Mrs Nunn until more than a year after their execution by Mr and Mrs Ewins is not an obstacle to characterising the transaction as a mortgage. Section 56 of the Real Property Act requires the proprietor to execute a mortgage in the approved form. A form of mortgage not signed by the proprietor may not be capable of being characterised as a mortgage at all. The statute does not require signature by the mortgagee, but the approved form provides for 'acceptance' by the mortgagee, and it may be that the omission of the mortgagee's signature will lead the Registrar-General to decline to register the instrument (see s 104). However, nothing in the statute prevents a form of mortgage from being characterised as a mortgage before the mortgagee signs it. The question whether a mortgage is effective before the mortgagee accepts it is another matter, which I shall address later.

104 The fact that the parties to the transaction did not follow all of its terms, with respect to such matters as written loan applications and the setting of interest rates, does not demonstrate that the transaction as a whole was intended to be of no effect. Nor does the fact that Mrs Nunn made no demand under the mortgage, for this was a family arrangement and enforcement of any kind only became necessary when there was a real risk that the property would be sold in a manner that would, unless a caveat was lodged, defeat Mrs Nunn's interest. I have found that the omission by the parties to the transaction to produce the documents in the Hooper litigation can be explained by other reasons, and did not give rise to any inference that they regarded the transaction as ineffective.

105 It is true that Mrs Nunn acted in response to the threats by Westpac and Mr Wily to dispose of the Bayview Heights property in a manner that would defeat her security. But this does not imply that the transaction was ineffective. On the contrary, the correct inference is that Mrs Nunn called on Ms Bova to lodge a caveat precisely because she regarded herself as having an effective security, and she believed the time had well and truly arrived for her to assert that security. I have found that her intention was not to prevent the sale, but to protect her own interest.

106 In my opinion, in light of the evidence leading up to the execution of the documents by Mr and Mrs Ewins, and the form of the documents themselves, the contention that the transaction was simply ineffective is doomed to fail. A variant of that contention would be that the transaction was intended to have no effect until an enforced sale of the property was imminent. But in my opinion, the facts do not support that variant. It is true that Mrs Nunn took no steps to protect her interest by lodgement of a caveat until a trigger was presented by the possession proceedings taken by Westpac and Mr Wily. But the evidence does not establish that she or Mr and Mrs Ewins regarded the transaction as ineffective until that time. On the contrary, I have found that Mr and Mrs Ewins signed and delivered the documents with an intention to be immediately bound by them. Further, Mrs Nunn acted on her son's directions by making the four payments that he requested, after making it clear to Ms Bova (in the letter of instructions dated 18 December 1996) that the documents were to be executed by Mr and Mrs Ewins before any funds were released. She appears to have assumed that after her son and daughter-in-law signed, nothing more needed to be done to make the transaction effective.

107 My conclusion is that the transaction between Mrs Nunn and Mr and Mrs Ewins was intended to be a mortgage giving Mrs Nunn security over the Bayview Heights property for the payments she had agreed to make, and may in future agree to make, at her son's request. Other construction issues

108 Counsel for Mr Wily submits that the Mortgage and the loan agreement have been defectively drafted in various ways. In making his argument, he insists that the Mortgage and the loan agreement are very different documents both in nature and effect, and therefore it is not possible to overcome the deficiencies of one document by having recourse to the other. I disagree.

109 The approved form of mortgage under the Real Property Act does not necessarily contain all of the ingredients necessary for a valid mortgage. The form identifies the property and the parties and contains a charging clause, but does not deal with such matters as the amount secured over the property, repayment or interest. Some standard provisions of mortgage instruments have been extracted and registered as Memorandum Q860000, which is incorporated by reference into the Mortgage in this case: see Real Property Act, s 80A; Fisher & Lightwood's Law of Mortgage , at para [3.11]. It is common practice to set out the arrangements as to borrowing, repayment and interest in a loan agreement, or a schedule to the form of mortgage, or both. Where the mortgage on its face purports to incorporate another document by reference, or where it is clear that one or more collateral documents relate to the same transaction, it is necessary to construe the documents together in order to determine their legal effect: Smith v Chadwick (1880) 20 ChD 27, 62; Manks v Whiteley [1912] 1 Ch 735, 754 (on appeal, Whiteley v Delaney [1914] AC 132).

110 In the present case the evidence shows that the Mortgage, schedule and loan agreement were prepared by Ms Bova contemporaneously and were handed over to Mr Ewins for execution as a single bundle, whether they were physically pinned together or not. They were signed by Mr and Mrs Ewins on the same day in Ms Bova's office and were handed over, duly executed, in a single bundle. The subject matter of the three documents is complementary, for the mortgage creates security, the schedule contains a covenant to pay the Principal Sum in the manner agreed in writing from time to time, and the loan agreement provides for the advance of the Principal Sum, which is there defined, and makes other provisions including provisions for payment upon default. The principle in Smith v Chadwick allows the Court to have regard to this evidence and to conclude that this is a proper case for construing the documents together. This is evidence of the 'surrounding circumstances' or 'matrix of facts', admissible notwithstanding the parol evidence rule: Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 348-9 per Mason J.

111 Once that step has been taken, many of the difficulties of construction raised by counsel for Mr Wily disappear. The Mortgage refers to 'Annexure A & B hereto'. Two documents were in the same bundle as the Mortgage at the point of execution, namely the schedule and the loan agreement. They were not labelled 'A' and 'B', but there can be no doubt, in my view, that they are the two annexures identified in the Mortgage. It is not necessary to rely on other extrinsic evidence in order reach this conclusion. But it is permissible to do so, because the absence of the letters 'A' and 'B' on the documents that accompanied the Mortgage gives rise to an ambiguity, and parol evidence is admissible to remove that ambiguity: Codelfa Construction , 352 per Mason J. In this case the evidence of Ms Bova that her normal practice was to identify the schedule and loan agreement as annexures A and B, but omitted to do so in this case, reinforces the conclusion which is otherwise available.

112 While the Mortgage makes no reference to the loan agreement, it contains a covenant by the mortgagor to incorporate the annexures, one of which is the loan agreement. In my view, when those two documents are read together with the schedule, they purport to provide security with respect to the Principal Sum and interest identified by the loan agreement. The fact that the documents were incorrectly dated 20 January 1997, by mistake of Ms Bova, does not affect their validity or construction, since there is clear evidence that they were first executed on 24 January 1997.

113 The loan agreement, as I have said, makes provision for the first advance to be in an amount specified in Schedule One, but the relevant part of the schedule has been left blank. Therefore there is no 'first advance' in the present case. Clause 2(c) requires that any further advances be made upon receipt by the Lender of a written application form from the Borrower. This is a provision inserted for the benefit of the Lender, and it is open to the Lender to waive strict compliance with it.

114 I agree with counsel for Mr Wily that clause 2(c) has not been satisfied in respect of any of the four amounts for which Mrs Nunn claims security, because of the absence of a written application form. I do not regard the direction from Mr and Mrs Ewins to Mrs Nunn to pay $63,216.48 on settlement to Moorlife Australia as falling within the description of an application form for the purposes of clause 2(c). However, the evidence indicates that the parties to the Mortgage and loan agreement intended the four payments to be advances secured by the Mortgage. They were each the subject of a specific conversation between Mr Ewins and Mrs Nunn. By agreeing to make the payments requested by her son without requiring a written application form, Mrs Nunn waived her entitlement to insist on strict compliance with the loan agreement. Therefore, each of the four payments fell within the loan agreement and consequently were secured by the Mortgage, notwithstanding the absence of any written application forms. Conclusions as to construction

115 My conclusions are that, upon the proper construction of the Mortgage, schedule and loan agreement, the Mortgage secures the payments by Mrs Nunn in respect of the ANZ and Westpac debts, and payments to Custom Credit and Kerridge and Osborne, in the total sum of $150,904. Subject to some possible vitiating factors and discretionary considerations (matters considered below), Mrs Nunn is entitled to a declaration to that effect. Implication of terms

116 Mrs Nunn contends that if, upon the proper construction of the express terms of the Mortgage (and, she says, the schedule and loan agreement which are to be construed together with the Mortgage), the Mortgage does not secure the advances that she has made, the Court should find that there is an implied term in the Mortgage having this effect. She relies on the well-known criteria for the implication of contractual terms, stated by the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, at 283, as follows: 'Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in our contract which the parties had not thought fit to express. In their view, for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express terms of the contract.'

117 Mrs Nunn urges the Court to take into account the evidence of the objective factual background known to the parties on or before the date of their contract, including evidence of the objectively known aim of the transaction: Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 352-3 per Mason J. She submits that when her evidence and the evidence of Ms Bova is considered together with the terms of the documents themselves, there is no other conclusion than that the Mortgage secures any advances made by Mrs Nunn to or at the direction of Mr and Mrs Ewins from time to time.

118 Since I have found that, upon the proper construction of the Mortgage, the schedule and the loan agreement, the Mortgage secures all of Mrs Nunn's advances, it is unnecessary for me to decide whether, if the proper construction of the documents were otherwise, there would be an implied term of the kind for which Mrs Nunn contends. Indeed, in view of my construction of the documents, I find the question of implied terms to be an artificial one. Once all three documents are taken into account to construe the documentary transaction as a whole, there are express provisions dealing with the loan arrangements, the Principal Sum, and in particular, the question of further advances. Subject to questions of variation and waiver, those express terms govern the transaction and there is no room, nor need, for implied terms linking the loan provisions to the creation of an equitable security interest.

119 The hypothesis that Mrs Nunn has failed to establish her case as a matter of construction of express terms must entail the proposition that the Mortgage is to be construed in isolation from the schedule and loan agreement. If one were to look at the Mortgage as a single document in isolation, the argument for implied terms would be bound to fail. The Mortgage is a brief printed form which does not purport to record a complete loan transaction. Implied terms of the kind contended for by Mrs Nunn would not satisfy the Privy Council's third and fourth criteria in the passage from the BP Refinery case quoted above.

120 In summary, I would not find that there were implied terms in the Mortgage of the kind contended for by Mrs Nunn, if I were required to make the artificial hypothesis necessary to make the question of implied terms a relevant one. Rectification

121 Mrs Nunn contends that if there is any defect of expression in the Mortgage, then it should be rectified to reflect the common intention of herself and Mr and Mrs Ewins, that the Mortgage would secure the advances made by Mrs Nunn for the benefit of Mr and Mrs Ewins. I have found that the Mortgage secures those advances, upon its proper construction. Therefore, there is no need for any order rectifying the Mortgage or the other documents.

122 However, in case the proceedings go further, I shall make findings with respect to the common intention of the parties to Mortgage. My findings are as follows: · Mrs Nunn and Mr Ewins made an express oral agreement in mid-1996 that in consideration of her agreeing to make available funds sufficient to discharge the debt of Moorlife Australia to the ANZ Bank, he would grant her a mortgage over the Bayview Heights property; · they made an express oral agreement in December 1996 that in consideration of her agreeing to advance $55,300 to pay Moorlife International's debt to Westpac Bank, he would extend the promised mortgage to provide security for repayment of that amount; · they made an express oral agreement in January 1997 that in consideration of her agreeing to advance $4387.52 to pay his debt to Custom Credit, he would extend the promised mortgage to provide security for repayment of that amount; · they made an express oral agreement in January, February or March 1997 that in consideration of her agreeing to advance $28,000 to pay costs due to Messrs Kerridge and Osborne, that amount would be treated as an advance under the Mortgage which, by that time, had been executed by Mr and Mrs Ewins; · Mr Ewins had his wife's authority to make these four agreements; · the agreements may or may not have been complete enough to constitute oral contracts, but they were, in each case, finally concluded common intentions sufficient for the purposes of the law of rectification (as to which, see Joscelyne v Nissen [1970] 2 QB 86; Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336); · the common intentions were, in each of the four cases, communicated by Mrs Nunn and Mr Ewins to one another, satisfying any retirement of the law of rectification that there be an outward expression of common intention (see, for example, Elders Trustee and Executor Co Ltd v EG Reeves Pty Ltd (1987) 78 ALR 193) and continued until execution ( Westland Savings Bank v Hancock [1987] 2 NZLR 21, 30); · the evidence establishing the common intention of the parties is convincing proof, and sufficient for the purposes of the law of rectification (Joscelyne v Nissen, at 98; generally as to rectification, see GE Dal Pont and DRC Chalmers, Equity and Trusts in Australia and New Zealand (1996), 675ff; DW Greig and JLR Davis, The Law of Contract (1987), 932ff).

123 Consequently, I would conclude (were it necessary) that Mrs Nunn has established as against Mr and Mrs Ewins the ingredients of a case for rectification, justifying an order along the lines sought in the further amended summons. However, counsel for Mr Wily forcefully contended that even if I were to reach this conclusion, I should not make a rectification order for two reasons.

124 The first reason stems from remarks by Menzies J in Commercial Banking Co of Sydney Ltd v George Hudson Pty Ltd (1974) 131 CLR 605. Dealing with some questions of construction of the statutory power to extend the time for registration of a company charge, his Honour said (at 613): 'It is a deeply rooted principle of company law that, when liquidation has commenced, one creditor should not be assisted by the court to improve its position vis-a-vis other creditors.'

125 Counsel for Mr Wily submits that by making a rectification order, I would be assisting Mrs Nunn, who would otherwise be, at most, an unsecured creditor, to the detriment of the other unsecured creditors who are represented by Mr Wily. In the exercise of my discretion, he says, I ought not to do so.

126 However, the principle stated by Menzies J is not absolute. In Vector Capital Ltd v SNS Software Network Systems Pty Ltd (1988) 12 NSWLR 1, another case concerning the extension of the time for lodging of a registrable charge, Needham J held that, although an intervening winding up is relevant to the exercise of the Court's discretion, the fact of commencement of a winding up does not require that the extension be refused (at 8). To hold otherwise would be to destroy the Court's discretion.

127 Menzies J's principle was applied to proceedings for rectification in JJ Leonard Properties Pty Ltd v Leonard (WA) Pty Ltd (1988) 6 ACLC 247. In that case the charging clause (which identified the property to be charged) was omitted from a debenture, notice of which was lodged with the Commission. Subsequently, the borrowing company was wound up and the liquidator treated the chargee as an unsecured creditor. The chargee therefore sought to rectify the debenture to include the intended charging clause. Kennedy J, whose judgment was upheld by the Full Court of the Supreme Court of Western Australia, found that it would be proper to order rectification, but he declined to do so on grounds that he described as discretionary.

128 One of the discretionary grounds emerging from the Full Court's decision has recourse to Menzies J's principle (at 250, per Burt CJ). To make a rectification order of the kind sought by the plaintiff in that case would be to convert the plaintiff's claim from an unsecured to a secured claim, even though the property to be secured was not identified in the unrectified transaction. One can see that, in such circumstances, rectification would assist one otherwise unsecured creditor to prevail over the other creditors, contrary to deeply rooted principle. In the present case, rectification would not identify the property, but only make it clear that certain advances were subject to the security. In my opinion, the 'deeply rooted principle' is not so strongly against rectification in those circumstances. But it is unnecessary for me to reach a concluded view, since rectification is not needed in view of my earlier findings.

129 The second reason for resisting rectification put forward by counsel for Mr Wily also arises out of the JJ Leonard Properties case. I treat it as a different ground from the first because it relies upon a proprietary analysis which may be more than just a discretionary consideration . In that case Kennedy J and the Full Court based their refusal to order rectification upon the ground that rectification will not be ordered if to do so would prejudice a bona fide purchaser for value who has acquired an interest in the property dealt with in the instrument sought to be rectified. This general rule is beyond challenge: see RP Meagher, WMC Gummow and JRF Lehane, Equity Doctrines and Remedies (3rd ed, 1992) para 2618. The interesting point is that in the JJ Leonard Properties case the rule was applied in a manner that treated the creditors of a company in liquidation as having a proprietary interest in the assets of company.

130 For that approach the court relied upon Re Ashpurton Estates Ltd [1983] Ch 110, where Lord Brightman said (at 123): 'Once the company has gone into liquidation, the existing unsecured creditors are interested in all the assets of the company, since the liquidator is bound by statute to distribute the net proceeds pari passu among the unsecured creditors, subject to preferential debts. The assets of the company are at that stage vested in the company for the benefit of its creditors. The unsecured creditors are in the nature of cestuis que trust with beneficial interests extending to all the company's property.'

131 Reliance was also placed upon Re Anglo Oriental Carpet Manufacturing Co [1903] 1Ch 914, 918 (per Buckley J) and Ayerst v C & K (Construction) Ltd [1976] AC 167, 176-80 (per Lord Diplock).

132 In the present case the interest competing with Mrs Nunn's claim is the interest of unsecured creditors of two bankrupts, asserted by their trustee in bankruptcy, rather than the interest of unsecured creditors of a company in liquidation. The proposition that the trustee in bankruptcy has a proprietary interest is beyond dispute: Bankruptcy Act 1966 (Cth), s 58. The significance of the JJ Leonard Properties case lies in its holding that the creditors (and hence, in our case, the trustee in bankruptcy) are to be treated as 'purchasers' for the purposes of the law concerning competing equities and equitable interests. That being so, the question is whether, for present purposes, the trustee in bankruptcy is affected by notice possessed by the bankrupts, for here Mr and Mrs Ewins had notice of all aspects of the claim to rectification, and whether the analysis is affected by s 58. This aspect of the matter was not argued before me and it is unnecessary for me to decide it.

133 Suffice it to say that, in the present case, I am not persuaded that either of the grounds emerging from the JJ Leonard Properties case would be obstacles to rectification, if it were otherwise necessary and appropriate to grant such relief. Vitiating factors

134 As I understood his argument, counsel for Mr Wily relied on several matters not only as showing that a mortgage was not intended by the parties and as matters going to the Court's discretion with respect to relief, but also as independent grounds for resisting Mrs Nunn's claim to an interest having priority over the interests of unsecured creditors. The matters treated in this way were Mrs Nunn's delay in executing the Mortgage, her failure to have the mortgage registered, and her delay in lodging a caveat. The effect of delay in execution by the mortgagee

135 I have found that Ms Bova supplied drafts of the Mortgage, schedule and loan agreement to Mr and Mrs Ewins on 24 January 1997, with a view to the documents being immediately executed. By executing the documents in those circumstances, Mr and Mrs Ewins accepted the arrangements reflected in them, and an agreement to grant the Mortgage immediately arose. That agreement was enforceable against them, though it related to land, because they signed written instruments. Being an agreement of which equity would grant specific performance, it was treated from that moment as an equitable mortgage. Consequently, an equitable interest arose in Mrs Nunn on 24 January 1997, notwithstanding that she did not sign the documents until April 1998. Her delay in signing the documents was therefore not a vitiating factor.

136 Counsel for Mr Wily contended that Mr and Mrs Ewins signed the documents conditionally upon Mrs Nunn also signing them, and delivered the documents to Ms Bova to be held in escrow until Mrs Nunn signed them. He referred to Exton v Scott (1833) 6 Sim 31 [58 ER 507]. By the time Mrs Nunn signed the documents, the bankruptcies had intervened and it was too late for Mrs Nunn to acquire any interest, according to this argument. In my view the argument falls down on the facts. There is nothing to indicate that Mr and Mrs Ewins intended to be bound only conditionally or that they delivered the documents in escrow. On the contrary, I have found that both parties intended to be bound prior to the settlement on 24 January 1997. The effect of absence of registration and delay in lodging a caveat

137 As I have said, the absence of registration did not prevent an equitable interest from arising out of the Mortgage. However, relying on the JJ Leonard Properties case, counsel for Mr Wily contended that the equitable interest of the trustee in bankruptcy, held on behalf of the unsecured creditors of Mr and Mrs Ewins, had priority over the prior inconsistent equitable interest of Mrs Nunn under the Mortgage (assuming, for the purposes of this argument, that Mrs Nunn acquired an equitable interest). He said that this was because of postponing conduct by Mrs Nunn , the conduct being failure to register the Mortgage or to lodge a caveat promptly (and before the commencement of the bankruptcies) to protect her interest.

138 As counsel for Mrs Nunn pointed out, failure to lodge a caveat is not necessarily postponing conduct. The real question is whether the holder of the equitable interest which is first in time has failed to conform to the settled practice of competent solicitors acting for equitable mortgages: Person-to-Person Financial Services Pty Ltd v Sharari [1984] 1 NSWLR 745. Assuming, however, that the settled practice of competent solicitors is to lodge a caveat in circumstances such as confronted Ms Bova, the argument advanced on behalf of Mr Wily cannot succeed because it misapprehends the position of the trustee in bankruptcy.

139 When a debtor becomes bankrupt, the property of the bankrupt vests forthwith in the trustee: Bankruptcy Act 1966 (Cth), s 58 (1) (a). However, nothing in s 58 affects the right of a secured creditor to realise or otherwise deal with his or her security . As the holder of an equitable mortgage, Mrs Nunn was a secured creditor of Mr and Mrs Ewins at the time when they became bankrupt, within the definition of 'secured creditor' in s 5 of the Bankruptcy Act. Therefore her interest cannot have been defeated by her failure to lodge a caveat before Mr and Mrs Ewins became bankrupt.

140 Consequently neither of the non-registration of the Mortgage nor the failure to lodge a caveat until April 1998 is a vitiating factor. Interest

141 Clause 4 of the loan agreement provides for interest on the Principal Sum at the rate and time and in the manner specified by the Lender and notified in writing. There is no evidence that Mrs Nunn has given any such written notification. However, counsel for Mrs Nunn submits that the Court has the power to fix the rate of interest, and he invites the Court to do so by selecting the bankruptcy rate of 8 percent as a fair rate (Bankruptcy Act 1966 (Cth), s 112).

142 According to Fisher & Lightwood's Law of Mortgage , paragraph [39.54], 'where no rate of interest is fixed by the parties the Court can fix it, and has in the past adopted the rate of five per centum per annum', and 'in the case of further advances ... the interest is generally given at the same rate as upon the moneys originally lent'. Those statements assert that the Court has power to set an interest rate in an appropriate case, but they do not explain the foundation of the power or the circumstances in which it will be exercised.

143 In Finance & Investments Pty Ltd v Van Kempen (1986) 6 NSWLR 305, the mortgage instrument contained a clause making provision for the interest rate to be charged upon unpaid instalments, but the whole of the principal had become payable and there were no 'instalments', and therefore that clause had no operation. The Court of Appeal set a rate of interest to cover the circumstances, but in doing so they adverted to some limits on the process. In the first place, it is clear that the Court was dealing with an equitable accounting as on redemption. The issue was not one of construction. In proceedings for such an accounting, the Court is not even required to apply a rate of interest specified by the mortgage (although it will normally do so), as equity has the power to reject inequitable claims. Further restrictions emerged from the statement of principle by Mahoney JA (at 310), that the Court will make provision for an appropriate rate of interest 'where no provision is made in the mortgage document for the payment of interest in the circumstances which have arisen, and where from the nature of the mortgage transaction it is to be implied that interest was to be payable'.

144 The present case is distinguishable from the Finance & Investments case in three respects. First, here the question arises as between the mortgagee and unsecured creditors of the mortgagor, rather than between the mortgagee and mortgagor on an accounting upon redemption. The special equitable jurisdiction arising in the latter circumstance is not invoked, and the only question for me is a question of construction. It is unnecessary for me decide whether it would ever be appropriate for the Court to fix an interest rate in circumstances such as the present. At the very least, however, the Court will be less likely to do so in such a case as the present than in a case where the question for the Court relates to an accounting between mortgagor and mortgagee.

145 Secondly, this is not case where no provision is made for the payment of interest, since the loan agreement makes specific provision for interest to be paid as notified in writing by the Lender. Assuming I have the power to do so, and also a discretion not to do so, I see no obvious basis for the Court to intervene by prescribing a rate of interest when it was open to the Lender to exercise her contractual right to do so, and she has not. Thirdly, this is not case where the nature of the mortgage transaction implies that interest is to be payable. Here, the arrangement is not purely commercial. It is an arrangement between family members. It is far from self-evident that in family circumstances parties would expect the Lender to exercise a power to set a rate of interest.

146 I therefore decline to set an interest rate or to make a declaration that Mrs Nunn's security extends to any amount of interest on the moneys advanced by her for the benefit of her son. Does Mrs Nunn's security extend to her costs of the present proceedings?

147 Clause 5 (g) of the loan agreement deals with acts of default. Acts of default include the poll are becoming bankrupt. Clauses 6 and 9 of Memorandum Q860000, which have been expressly incorporated into the Mortgage, have the effect of securing costs incurred by reason of an act of default. In my opinion these provisions entitle Mrs Nunn to treat the costs of the present proceedings as secured by the Mortgage. The bankruptcy of Mr and Mrs Ewins caused her to incur those costs, because their bankruptcy has led to their trustee challenging Mrs Nunn's caveat and refusing to recognise her security interest. Discretionary bars to relief

148 Counsel for Mr Wily submitted that the effect of the relief sought in the further amended summons would be to secure specific performance of the Mortgage against a third party, namely the trustee in bankruptcy. He pointed out that the Court's power to decree specific performance is discretionary and will not be exercised to prejudice the position of third parties: Fisher & Lightwood's Law of Mortgage , paragraph 3.47; Williams & Glyn's Bank Ltd v Boland [1981] AC 487, 507; Ahmed v Kendrick (1987) 56 P & CR 120.

149 The basis of my decision is that, as a matter of construction, the Mortgage secured the advances made by Mrs Nunn to her son. The primary relief that I intend to grant is a declaration to this effect. While the granting of declaratory relief is discretionary, the Court will take into account that a declaration with respect of a matter of construction is generally desirable, so that the parties understand the nature and extent of their respective interests. The fact that the trustee in bankruptcy is a third party is relevant but, in my view, no obstacle to granting the relief that I have in mind. It is relevant that Mr Wily was before the Court and strenuously contested the matter.

150 Additionally, counsel for Mr Wily submitted that the Court should take into account, in the exercise of its discretion, the factors advanced on behalf of Mr Wily for the proposition that no true mortgage was intended. But I have generally found against those submissions, and they provide no discretionary grounds for denying the relief that I have in mind. Nor do I accept the submissions based upon laches or acquiescence, and upon the proposition that the Court should not make orders which bring into 'completeness' an arrangement which is clearly in breach of s 121 of the Bankruptcy Act. The facts do not support a case of laches or acquiescence, and I have not found (nor have the parties invited me to find) that the arrangement is in breach of s 121. Costs of Mr Wily's application for access to documents

151 On 24 November 1998 a subpoena for production was served on Mrs Nunn's solicitors in the proceedings, Marks Griffiths Bova & Knox. On 10 December 1998 the solicitors produced documents in answer to the subpoena, but they claimed privilege over some of the documents (accounts rendered to Mrs Nunn and Mr and Mrs Ewins, and trust account statements). Mr Wily asserted his entitlement to production of those documents.

152 The process of production was delayed by an interruption in the retainer of Marks Griffiths Bova & Knox. On 18 August 1999 that firm wrote to Mr Wily's solicitors advising that they were enclosing a notice of ceasing to act. Then on 9 November 1999 Marks Griffiths & Bova wrote to Mr Wily's solicitors, saying that they were once more the solicitors on the record for Mrs Nunn, and enclosing a further notice of change of solicitor.

153 After further correspondence, Marks Griffiths & Bova wrote to Mr Wily's solicitors on 1 November 1999 providing brief particulars of the documents as to which there was a claim to privilege. Mr Wily filed a notice of motion on 9 December 1999, seeking an order granting him access to the documents over which privilege have been claimed.

154 The matter came before me at a pre-trial directions hearing on 18 February 2000, but it proved unnecessary to determine Mr Wily's notice of motion because Marks Griffiths & Bova eventually withdrew Mrs Nunn's objection to production of the documents. I reserved costs of the application. Marks Griffiths & Bova confirmed that access would be granted to the documents, by letter of 24 March 2000.

155 Mr Wily reopened the question of costs of the application at the final hearing. There was no explanation for Mrs Nunn's prevarication and delay. In these circumstances it is clear that Mr Wily is entitled to an order that Mrs Nunn pay his costs of and incidental to the notice of motion filed on 9 December 1999. Conclusions

156 In my view, Mrs Nunn is entitled to a declaration to the effect that the Mortgage is a valid equitable mortgage that secures her four advances to Mr and Mrs Ewins, together with the costs of these proceedings but not interest on those advances. Mr Wily is entitled to an order for costs with respect to his notice of motion concerning production of documents. I shall stand the matter over and direct the plaintiff to bring in short minutes of orders, and I shall hear any further argument as to costs before my orders are made. * * * * * * * * *

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