BETWEEN : OAKLEIGH ACQUISITIONS PTY LTD (IN LIQ) (ACN 008 879 454)

Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA

Mortgages - Rights and liabilities of mortgagor and mortgagee - Mortgagee in liquidation - Whether mortgagees may recover liquidator's costs - Whether internal costs - Mortgage payment made by third party - Whether payment discharged debt - Whether mortgagor entitled to benefit of third party payment - Turns on own facts

Finance Brokers Control Act 1975 (WA)

Australian Securities and Investments Commission v Rowena Nominees Pty Ltd [2003] WASC 112; (2003) 45 ACSR 424

Conlan (as Liquidator of Oakleigh Acquisitions Pty Ltd) v Registrar of Titles [2001] WASC 201; (2001) 24 WAR 299

Emdon Investments Pty Ltd v Schelfhout Holdings Pty Ltd (in liq) [1998] FCA 1151

Re Emanuel (No 14) Pty Ltd (in liq); Macks v Blacklaw & Shadforth Pty Ltd (1997) 147 ALR 281

Re Rowe; Ex parte Derenburg & Co [1904] 2 KB 483

Sandtara Pty Ltd v Australian European Finance Corporation Ltd (1990) 20 NSWLR 82

Sydlow Pty Ltd (in liq) v T G Kotselas Pty Ltd [1996] FCA 1384; (1996) 65 FCR 234

Venetian Nominees Pty Ltd v Conlan (1998) 20 WAR 96

Walter v James (1871) 6 Exch 124

Crantrave (in liq) v Lloyds Bank Plc [2000] QB 917

D'Alessandro & D'Angelo v Bouloudas (1994) 10 WAR 191

Falcke v Scottish Imperial Insurance Company (1886) 34 Ch D 234

Hill v Zymack [1908] HCA 13; (1908) 7 CLR 352

Nicobar Pty Ltd v Abrokiss Pty Ltd [2003] NSWSC 1247; (2003) 48 ACSR 259

Re Trustees Executors & Agency Co Ltd (1984) 9 ACLR 497

Rogers v Resi­Statewide Corporation Ltd (No 2) [1991] FCA 535; (1991) 32 FCR 344

Root Quality Pty Ltd v Root Control Technologies Pty Ltd [2000] FCA 980; (2000) 177 ALR 231

Stefanelli v Emmanuel, unreported; FCt SCt of WA; Library No 950521; 28 September 1995

Vickery v JJP Custodians Pty Ltd [2002] NSWSC 782; (2002) 11 BPR 20,333

1 This is an appeal from an order of Acting Master Chapman for summary judgment.

2 The appellants commenced proceedings against the respondent following a breach of the respondent's obligations under a mortgage agreement. The respondent admitted the breach but disputed the amount that the appellants could recover.

3 The respondent owned a residential property ("the property"). The respondent sought finance for his business and in early 1993, approached Graeme Grubb Finance Brokers ("GGFB") with a view to obtaining a mortgage over the property.

4 GGFB was the business name of Rowena Nominees Pty Ltd ("Rowena"). Rowena was a finance broker licensed under the Finance Brokers Control Act 1975 (WA). Rowena is not a party to these proceedings.

5 Rowena engaged in what are known as pooled mortgages. A potential borrower, such as the respondent, would approach Rowena, trading as GGFB, with a view to obtaining finance for a venture. Rowena would, in turn, approach a number of potential investors and invite them to advance moneys for the venture. Often, the amount required was beyond the resources of an individual investor and several entities or people contributed varying amounts so as to make up the whole.

6 Oakleigh Acquisitions Pty Ltd ("Oakleigh") generally assisted Rowena with brokered mortgages and acted as a trustee for investors who had supplied the funds to Rowena for the advances to borrowers. There is no indication that Oakleigh was involved in this mortgage prior to 1998.

7 On 29 July 1993, GGFB wrote to the respondent confirming that his loan application for an amount of $71,000 had been approved (AB 80). The loan amount involved contributions from four investors:

John Clifford Avery and Isabell Stella Avery ("Averys"): $10,000;

David John Clark and Hilda May Clark ("Clarks"): $15,000;

Tom Trentham Warren and Olga Gray Warren ("Warrens"): $25,000; and

Donald Robert Taylor and Mona Beatrice Taylor ("Taylors"): $21,000. (Collectively, the "original mortgagees")

8 The respondent subsequently entered into an undated mortgage with the original mortgagees for a loan of $71,000 to be secured over the property and some of the respondent's chattels ("Mortgage"). The Mortgage provided for interest only payments, payable monthly in advance. The monthly payments were to be paid directly to Rowena, who would then forward payments to the original mortgagees.

9 Although Rowena brokered the Mortgage, neither Rowena nor Oakleigh appear as parties to the Mortgage.

10 In a separate arrangement, Rowena entered into a "Cashflow Guarantee" with each of the original mortgagees whereby Rowena guaranteed the payment of each monthly payment ("Guarantees"). The Guarantees were not in evidence, nor was there any agreed statement of facts as to the relevant terms of the Guarantees. Instead, the parties referred to a deed of appointment made by the Taylors to GGFB which stated (at AB 153):

"The [Taylors have] been informed by [GGFB] that [GGFB] offers a cash flow guarantee in relation to all mortgages prepared by [GGFB] and as such has an interest in all mortgages prepared by [GGFB]."

11 Around September 1996, the respondent reduced the Mortgage by $6000 and agreed to a further extension of the now $65,000 Mortgage. Rowena received the $6000 and applied it to reduce the Taylors' mortgage contribution to $15,000 (at AB 151). On 22 February 1997, the extension of Mortgage was executed by the respondent.

12 From early 1998, the respondent missed some monthly payments, including those that fell due for February and September 1998 and March 1999. With respect to these three monthly payments, Rowena paid to the original mortgagees, pursuant to the Guarantees, an amount equal to what they would have received had the respondent made the monthly payment ("Guarantee Payments"). The original mortgagees apparently were not aware at the time that the payments had been made by Rowena rather than the respondent.

13 The respondent made four further monthly payments until May 2000, at which point he ceased making any further payments.

14 Both Rowena and Oakleigh are now in liquidation. Mark Anthony Conlan ("Conlan") was appointed as liquidator of Rowena on 21 July 1999 and of Oakleigh on 25 August 1999. Conlan is a partner in the accounting firm of RSM Bird Cameron Partners.

15 On 9 June 2000, Conlan, as liquidator of Rowena, wrote to the respondent advising that (at AB 88):

" ... the loan is in arrears and that Rowena has an interest in the loan folio by way of cashflow guarantee interest payments made from the Trust account to the mortgagee."

16 On 21 March 2001, the Averys and the Warrens transferred their interests in the Mortgage to Oakleigh, being an interest of $35,000 of the principal $65,000 Mortgage amount (at AB 68). The Clarks and the Taylors each retained their $15,000 respective interests in the Mortgage.

17 On 26 June 2001, Conlan advised the respondent by letter of the transfer. Conlan attached a settlement statement including a provision of $2041.25 for "Interest paid under Cash Flow Guarantee Payable to Rowena".

18 The Clarks subsequently authorised Conlan to act on their behalf to issue notices of demand, commence legal proceedings and sell the property and all other matters incidental thereto. The authorisation also stated (at AB 73):

"Mark Anthony Conlan shall be entitled to deduct all costs and expenses incurred in taking any of these actions, from any proceeds recovered."

19 The Taylors also authorised Conlan to act on their behalf in enforcing the Mortgage (at AB 206).

20 Conlan retained RSM Bird Cameron Partners, the firm of which he is a partner, to assist in the liquidation of Oakleigh (at AB 206). Between August 2002 and April 2003, Conlan personally conducted work or supervised employees of RSM Bird Cameron on work done in connection with the enforcement of the Mortgage (at AB 207). This included monitoring the attempts to sell the property and providing settlement statements to the respondent and his solicitor (at AB 207).

21 On 31 July 2002, the appellants' solicitors served a notice of demand upon the respondent (at AB 36 and 38). On 24 December 2002, the appellants issued a writ against the respondent for possession of the property and costs (at AB 28). The respondent filed his defence on 22 January 2003 denying every allegation in the statement of claim and denying the appellants' entitlement to any relief (at AB 33).

22 On 23 January 2003, the appellants prepared a settlement statement, which included provision for $2875.50 with the description "Interest paid under Cash Flow Guarantee - Payable to Rowena" and references to the months of February and September 1998 and March 1999 (AB 94).

23 On 7 April 2003, the appellants filed a chamber summons seeking summary judgment (AB 27). Three days later, the respondent entered into a contract for sale of the property (AB 99). The parties subsequently filed a minute of consent orders whereby the property would be sold, certain moneys deducted and the remainder paid into the trust account of the appellants' solicitors pending determination by the Master.

24 Settlement of the property occurred in May 2003 and the proceeds are now in trust awaiting determination of these proceedings.

25 By Order of Master Sanderson in chambers on 20 August 2003, the issues to be determined by a Master were confined to six questions. The questions included:

"(a) Is the liquidator of the First Plaintiff entitled to deduct his costs of the liquidation from the proceeds of sale of the Property...?

(b) Assuming that the liquidator of the First Plaintiff is entitled to deduct his costs of the liquidation from the proceeds of sale of the Property, what is an appropriate amount in respect of such costs?

...

(e) Is the Defendant entitled to credit for payments made by Rowena Nominees Pty Ltd against the moneys payable by the Defendant under the Mortgage?"

26 On 7 October 2003, the Master heard the matter in Chambers and on 2 December 2003 delivered an ex tempore judgment. The extracted orders stated the answers as follows:

"(a) No (save for out of pocket expenses referred to in answer C below).

(b) Not applicable, having regard to answer A above

...

(e) Yes."

27 The Master appeared to give two reasons for answering "No" to question (a). The first was that the costs could not have been claimed by a natural person as mortgagee, so they could not be claimed by a liquidator of a company. Further, since the appellants had not been in possession or tried to sell the property, the liquidator's costs could not "be compared ... with that of a receiver/manager who attempts to sell a business as an ongoing concern ... ". This second observation may go primarily to the reasonableness of the costs, and was not in issue before us. The Master's reason for allowing the respondent the benefit of the Rowena payment in question (e), was that the appellants did not have "standing" to claim that which was owing to Rowena.

28 The appellants now appeal against the Master's answers to questions (a) and (e). The total amount in dispute is $12,682.85 plus interest and costs.

"1. The learned Master erred in law when he held that the Plaintiffs could not recover costs incurred by the Plaintiffs' liquidator in connection with the enforcement of the mortgage. He should have found that:

(a) that all costs, charges and expenses properly and reasonably incurred in enforcing the mortgage or protecting the Plaintiffs' interest in the mortgage were recoverable by reason of clause 3(v) of the mortgage;

(b) the liquidator's costs, charges and expenses were incurred by reason of the exercise or intended exercise of the powers contained within the mortgage as a consequence of the Defendant's failure to make payment as and when due and default in repayment of the debt secured by the mortgage; and

(c) the liquidator's costs charges and expenses were the costs of persons employed by the Plaintiff mortgagees for the purpose of protecting and enforcing the mortgage security.

2. The learned Master erred in law and in fact when he found that the Respondent was entitled to credit for payments made by Rowena Nominees Pty Ltd against the monies payable by the Respondent from the mortgage. He should have found:

(a) that the Respondent did not provide to Rowena the funds that Rowena had used for the purpose of payment to the mortgagees on occasions on which the Respondent was in default; and

(b) that the Respondent knew that the payments by Rowena had been made in breach of trust."

30 Clause 3(v) of the Mortgage obliges the respondent to pay various costs. The clause provides:

"3. During the continuance of this security and whether the Mortgagee shall or shall not have entered upon or taken possession of the said land hereby mortgaged...

(i) - (iv) ...

(v) To pay all costs ... charges and expenses in connection with and incidental to the preparation approval stamping and registration of this mortgage and also the discharge thereof and any costs and expenses which may from time to time be paid or incurred by the Mortgagee by reason of the non-observance or non-performance by the Mortgagor or Borrower of any of the covenants or conditions herein contained or implied ... including the costs of all Solicitors architects surveyors agents or other persons employed by the Mortgagee ..."

31 The question is therefore whether the liquidator's costs are costs "incurred by" the appellants as mortgagees.

32 The appellants submit that since RSM Bird Cameron charged Conlan for the time its staff spent in chasing the respondent, those costs fall within cl 3(v). Although Conlan swore that he retained RSM Bird Cameron to assist in the liquidation of Oakleigh, he also deposed, in his capacity as liquidator, that all work was done by him or supervised by him in enforcing the Mortgage (at AB 207). The substance of the agreement between Conlan, as liquidator, and RSM Bird Cameron was not before the Court. A liquidator acts as an agent of the company when it enters into agreements, although liquidators differ from normal agents in terms of their duties to the principal company and the company's creditors (Sydlow Pty Ltd (in liq) v T G Kotselas Pty Ltd [1996] FCA 1384; (1996) 65 FCR 234 at 238 - 239). As liquidator, Conlan would generally be entitled to remuneration which would include compensation for work done for him by his employees: Venetian Nominees Pty Ltd v Conlan (1998) 20 WAR 96 at 99.

33 The respondent contends that the costs of the liquidator are not costs "incurred" by the appellants, as the liquidator's work is essentially work that the company would have had to do in any event. In effect, it was submitted, the position was the same as if the directors of Oakleigh had undertaken the work. The respondent submits that such work is really internal administrative work and, as such, the mere "internal costs" of this work are not recoverable by the appellants.

34 Assuming the costs to be "internal costs" at common law, a mortgagee may not recover its internal costs from the mortgagor: Sandtara Pty Ltd v Australian European Finance Corporation Ltd (1990) 20 NSWLR 82. However, this rule does not prevent the parties from providing for the recovery of internal costs in a mortgage agreement. Accordingly a mortgagee may recover internal costs where they have been provided for in the mortgage: Sandtara at 95.

35 In Sandtara, Cole J rejected the argument that internal costs are not ordinary "costs" incurred by a company, stating (at 92):

"This would suggest that internal costs do not 'exist' because they are not charged to a third party. With due respect such a view is unrealistic ... whether they are recoverable or not must depend upon the contractual obligation of a mortgagor to pay them."

36 Cole J held that the internal costs of the mortgagee in that case were recoverable under the mortgage. The relevant provision in that mortgage provided:

" ... the Borrower will pay the legal and all other costs of the Lender ... in and about the preparation of this Agreement, the Securities referred to herein and all other matters incidental thereto and all matters arising therefrom (including default)."

37 The term "all other costs" does not seem to me to be relevantly different from "any costs and expenses" in the present case. If the former allows for the recovery of internal costs, the later must also. Clause 3(v) requires that such costs be "paid or incurred" by a mortgagee. Cole J observed that internal costs "are incurred whether charged or not" (at 92).

38 I would respectfully adopt the reasoning of Cole J, which I find persuasive.

39 Although no evidence was led before this Court as to the mechanism by which Conlan, as liquidator, receives his remuneration, and putting to one side the question of whether the remuneration claimed was fair and reasonable, it is clear that Oakleigh has incurred the cost of work, being the remuneration of the liquidator and his employees.

40 I would therefore find that the costs of Conlan and his employees in RSM Bird Cameron Partners were costs incurred by Oakleigh as the primary mortgagee. Subject to the question of whether all work from which the costs arose was done in enforcing the Mortgage, these costs would fall within cl 3(v). The question of the quantum of the costs is an issue which would require determination, although I note that it would be open to the Master to regard the IPAA scale as appropriate: Venetian Nominees Pty Ltd v Conlan at 106.

41 Finally, Conlan is not a party to these proceedings nor was he a party to the Mortgage. The right to recover costs incurred is that of the appellants, as mortgagees, including Oakleigh. It would follow that on a strict construction of the question put before the Master the answer would be "No, but the plaintiffs may deduct the liquidator's costs from the proceeds of the mortgage".

42 Since the Master did not determine what is "an appropriate amount" in respect of the costs, due to his answer to question (a), and seeing that the matter was not argued before us, question (b) should be remitted to the Master for determination.

43 Rowena made three Guarantee Payments. The total amount claimed by the appellants for these payments is $2875.50, which includes interest at the higher rate up until 23 January 2003.

44 The Master determined that the appellants did not have standing to pursue a claim for the Guarantee Payments and that the right was that of Rowena. The gist of the respondent's submissions was that the respondent owed the Guarantee Payments to Rowena, but not to the appellants; it was not a question of "standing" to claim for Rowena, but of what was owed to the appellants.

45 Conlan, as liquidator of Oakleigh and Rowena, has twice asserted that the Guarantee Payments are payable to Rowena and not Oakleigh: in the settlement statements of 2001 and 2003 the amount is recorded as "Payable to Rowena". In addition, as noted earlier, Conlan has stated that "Rowena has an interest in the loan".

46 The appellants have admitted that the Rowena payment was applied in reduction of the debt. On 11 September 2003, the respondent's solicitor, in a notice to admit, requested a response to the following question (at AB 377):

"Do your clients acknowledge the payments made by Rowena to Oakleigh in the amount of $2,875.50 which sum was applied by Oakleigh in reduction of the mortgage debt of [the respondent]?"

The appellants' solicitor admitted the following (at AB 379):

"My client also acknowledges that payments made by Rowena to the mortgagees (not specifically to Oakleigh) in the amount of $2,8750.50 were applied by the mortgagees in reduction of the mortgage debt by [the respondent]."

47 The appellants may claim for the Guarantee Payments if those payments did not discharge the respondent's obligations under the Mortgage. The issue therefore, is whether the Guarantee Payments discharged the debt owed by the respondent to the appellants.

48 Under the Mortgage, the respondent covenanted to pay to the mortgagees interest on the principal sum by "consecutive calendar monthly instalments" (cl 2 and Schedule). The Mortgage was not to be redeemed or redeemable until payment of the whole of the principal and interest. There was no provision for a guarantee or indemnity in the Mortgage. Indeed, Rowena was not even a party to the Mortgage. The Mortgage therefore does not assist.

49 Whether an unrequested payment in respect of another's debt will discharge the debt will depend upon the answer to two questions. The first is sufficiently stated for present purposes as whether the payment is made "for and on account of" the debt or the debtor; that is, with the intention of discharging the debt either in whole or in part. The second is whether the debtor has adopted the payment.

50 As to the first, a payment cannot be adopted by a debtor so as to discharge the debtor, if the payment was not made on behalf of the debtor or with intent to discharge the debt: eg, Re Rowe; Ex parte Derenburg & Co [1904] 2 KB 483. As I have noted, the facts before us concerning the Guarantees are sparse. Having regard to the nature of the agreement between the original mortgagees and Rowena, there might have been reason to doubt whether the Guarantee Payments were made with the intention to discharge the debt. However, that does not seem to have been in issue before the Master, and was not in issue before us. Rather, the appellants submitted that, for other reasons, the respondent "could not" have adopted the Guarantee Payments. I therefore assume that there was the relevant intention.

51 It is not, of course, necessary for a payment to be adopted at the time at which it was made. It can be adopted by the debtor by a plea in an action brought by the original creditor. It is not clear when the respondent first became aware of the Guarantee Payments, but it does seem reasonably clear that, by the time at which this matter was before the Master, the respondent had purported to adopt the Guarantee Payments.

52 However, the appellants submit that the respondent was unable to adopt the Guarantee Payments, because the Guarantee Payments were made in breach of trust and the respondent was aware of the breach of trust. The evidence that the Guarantee Payments were a breach of trust is said to be in the decision of Conlan (as Liquidator of Oakleigh Acquisitions Pty Ltd) v Registrar of Titles [2001] WASC 201; (2001) 24 WAR 299, at [5] of the reasons of Owen J, and a passage to similar effect in Australian Securities and Investments Commission v Rowena Nominees Pty Ltd [2003] WASC 112; (2003) 45 ACSR 424 at [11], per Pullin J. There are, in my view, insuperable difficulties with that submission. First, the respondent was not a party to either of the two decisions mentioned, and I cannot see how a finding that any payment by way of cash flow guarantee was in breach of trust, could therefore bind the respondent. Second, the respondent is said to be affixed with knowledge of the breach of trust by reason of the fact that his counsel referred to one or the other of those decisions in written submissions; even if one assumes that the respondent thereby became aware that some payments by way of cash flow guarantee were made in breach of trust, it seems to me that that cannot fix him with knowledge of the (unproven) circumstances of the particular Guarantee Payments in issue in the present case.

53 Finally, it is submitted by the appellants that it would be "unconscionable" for the respondent to be permitted to adopt the Guarantee Payments, as a result of certain orders made by Owen J. Apparently as a result of those orders, the appellants are obliged to pay to Conlan as the liquidator of Rowena amounts received under the Guarantees. They therefore will be out of pocket and the appellants submit that it is unconscionable for the respondent to have the benefit of a discharge of the Mortgage without having paid the full amount secured by the Mortgage. Again, the respondent does not appear to have been a party to the proceedings which led to the orders made by Owen J, and is not bound by them. The principle upon which the alleged "unconscionability" rests has not been demonstrated (or, indeed, explained). It therefore appears to me that, based upon my understanding of the way in which the matter proceeded before the Master, the Master was correct in the conclusion that the respondent is entitled to credit for the Guarantee Payments made by Rowena.

54 I should add that, since preparing these reasons, I have had the advantage of reading in draft the reasons of McLure JA. Her Honour's analysis of the effect of the orders of Owen J - that they terminated the respondent's right to ratify the Guarantee Payments, prior to ratification - is persuasive. However, this was not an argument developed by the appellants, whose counsel made it clear that the only reason advanced for the respondent's alleged inability to ratify was the alleged breach of trust, and the only relevance of the orders of Owen J was the "unconscionability" argument which arose. The respondent has had no opportunity to deal with any other possible significance of Owen J's orders. Although it seems unlikely, it is possible that, had such a point been made by the appellants from the outset, the respondent might have been able to meet it either by argument or by evidence (eg, of some alleged ratification prior to those orders). I would not therefore be prepared to uphold the appeal on this basis.

55 According, I would allow the appeal and substitute the following answer for the Master's answer to (a):

"(a) No, but the plaintiffs may deduct their costs incurred, including the fair and reasonable costs of the liquidator, from the proceeds of the sale of the property.

56 I would set aside the Master's answer to (b), which should be returned to the Master for determination.

57 MCLURE JA: I have had the advantage of reading in draft form the reasons to be published by Wheeler JA. The factual background and issues are set out in her judgment and not repeated here unless required for an understanding of these reasons. I agree with her conclusion relating to the recovery of the liquidator's costs but have reached a different conclusion in relation to the cash flow guarantee payments.

58 The question is whether the moneys secured by the Mortgage include the liquidator's remuneration and expenses associated with the respondent/mortgagor's default under the Mortgage. The Mortgage secures the payment of all moneys payable by the mortgagor pursuant to its terms. Clause 3(v) places an obligation on the mortgagor:

"To pay all costs ... charges and expenses in connection with and incidental to the preparation approval stamping and registration of this mortgage and also the discharge thereof and any costs and expenses which may from time to time be paid or incurred by the Mortgagee by reason of the non-observance or non-performance by the Mortgagor ... of any of the covenants or conditions herein contained ... or by reason of the exercise or attempted exercise of any of the powers herein contained or implied including the costs of all Solicitors architects surveyors agents or other persons employed by the Mortgagee ...".

59 The respondent contends that at common law, the internal costs of the mortgagees are not recoverable from the mortgagor in the absence of an express provision in the Mortgage to the contrary; that the liquidator's costs the subject of the claim are in substance internal costs; and that cl 3(v) does not permit the recovery of internal costs. The appellants did

not challenge the correctness of the respondent's first proposition. It is in accordance with the case law reviewed by Cole J in Sandtara Pty Ltd v Australian European Finance Corporation Ltd (1990) 20 NSWLR 82.

60 The evidence was that the liquidator is a partner in the firm of chartered accountants known as RSM Bird Cameron Partners. The liquidator and various employees of RSM Bird Cameron performed services for which they have charged on a time basis. The liquidator also claims for office disbursements for, inter alia, photocopies, telephone calls, couriers, searches and stationery. The liquidator deposed to the fact that he "retained" RSM Bird Cameron to assist. It is unclear what he means by this. The evidence does not enable the Court to make a finding as to whether or not the liquidator is legally liable for RSM Bird Cameron's costs and expenses. However, nothing turns on the answer to that question.

61 The liquidator is entitled to reasonable remuneration from Oakleigh for services rendered in relation to the winding up and to reimbursement from Oakleigh for outgoings (out-of-pocket costs and expenses) properly incurred: Venetian Nominees Pty Ltd v Conlan (1998) 20 WAR 96 at 99 - 100. Mr and Mrs Clark authorised the liquidator to act on their behalf in pursuing the defaulting mortgagor and to deduct his costs and expenses from the proceeds recovered. The remaining mortgagees, Mr and Mrs Taylor, limited their authority to aspects of the proceedings.

62 The respondent contends that the liquidator's remuneration entitlement is part of the mortgagees' internal costs because the liquidator assumes the powers and duties of a director of the company. It is the case that a liquidator displaces the directors and assumes many of their functions. However, that is only one part of the liquidator's role. The office of a liquidator is a hybrid composite with elements of fiduciary, trustee, agent, officer of the company and (in this case) officer of the Court: Sydlow Pty Ltd (in liq) v T G Kotselas Pty Ltd [1996] FCA 1384; (1996) 65 FCR 234 at 238 - 239. Having regard to the status, functions and broad range of duties of a liquidator, it is incorrect to characterise his costs for the provision of services as internal costs. That is so, notwithstanding that the liquidator was acting as the mortgagees' agent in pursuing the recovery of the debt secured by the Mortgage.

63 In any event, even if the liquidator's costs are properly characterised as internal costs, cl 3(v) of the Mortgage is wide enough to cover them. Clause 3(v) has two limbs. The first relates to all costs etc "in connection with and incidental to" a number of matters, none of which are relevant here. The second limb refers to any "costs and expenses ... paid or incurred by the Mortgagee". The second limb applies in this case.

64 In Sandtara v AEFC (supra) the question was whether the mortgagee's internal administrative (time) costs were included under a clause similar to the first limb of cl 3(v). The Judge in that case (Cole J) was not required to consider whether internal administrative costs are "paid or incurred" for the purposes of such clauses. The natural and ordinary meaning of those words connote that the costs and expenses must be a liability of the mortgagee: a liability that has been discharged by payment or a liability that has accrued but is not discharged. Thus, where a natural person acts for himself or herself, there is no relevant liability. However, where a person acts through its servants or agents, a liability will be incurred. The question is whether the second limb covers internal costs paid or incurred. In my view it does. The inclusive list of the types of costs covered referred to in the final two lines of cl 3(v) set out above, reflects an intention to include the costs of agents as well as employees of the mortgagees. For these reasons, I agree with the orders proposed by Wheeler JA on this issue.

65 Rowena Nominees Pty Ltd was a finance broker and carried on business under the name "Graeme Grubb Finance Broker". Mr Mark Conlan is the liquidator of Rowena and Oakleigh. In 1999 Mr Conlan, Rowena and Oakleigh commenced proceedings in this Court for a trial of preliminary issues arising out of the liquidation. Owen J heard and determined that application: Conlan (as Liquidator of Oakleigh Acquisitions Pty Ltd) v Registrar of Titles [2001] WASC 201; (2001) 24 WAR 299 ("the preliminary issues action"). At [5] of the judgment, Owen J stated:

"Rowena maintained a trust account. It maintained a separate account styled 'cash flow guarantee account'. On about 84 occasions ... the trust account was overdrawn at the close of business on a particular day, sometimes to a significant extent. This was caused, at least in part, by the way the cash flow guarantee was administered. Rowena would pay interest to the investors from the cash flow guarantee account. If there was insufficient money in that account the shortfall would be made up by transferring money from the trust account."

66 The appellants were parties to the preliminary issues action. It appears to be common cause that the respondent was not a party to that action.

67 On 16 August 2001 Owen J made orders in the preliminary issues action as follows:

"8. In relation to Category 1, 2 and 3 mortgages and subject to paragraph 10, on discharge or dealing the share or interest of Oakleigh and of any co-mortgagee who is a person or company listed in the Second Schedule shall be held by Conlan on trust until further order but (and subject to paragraph 10) the share or interest of any other person shall be paid to that person.

...

10 If on a discharge of mortgage to which these orders relate any amount was, or is, received in a situation where the mortgagee has previously received that amount by way of interest from the cash flow guarantee account maintained by Rowena (called the 'Paid Component') and:

(a) if the mortgagee receives moneys at settlement of the discharge of mortgage from or on behalf of a borrower, the mortgagee shall forthwith pay from interest received an amount equal to the Paid Component (or if less, all of the interest) to Conlan to be held on trust pending further order; or

(b) if Conlan is required to pay moneys, which include interest received from a borrower, to any mortgagee pursuant to paragraphs 8 or 9, the amount of interest received from a borrower payable to the mortgagee shall be reduced by an amount equal to the Paid Component and held on trust by Conlan pending further order."

69 Rowena made three payments of interest totalling $2,875.50 to the then mortgagees under the cash flow guarantee. The appellants contend that whether or not they are successful in their claim for the specified amount, they are obliged under order 10 to make a payment of that amount to Mr Conlan. I accept that to be the proper construction of the orders.

70 There has been a multitude of cases following the determination of the preliminary issues action, one of which is Australian Securities and Investments Commission v Rowena Nominees Pty Ltd [2003] WASC 112; (2003) 45 ACSR 424 ("the remuneration action"). In that case Mr Conlan and Rowena applied for directions authorising Mr Conlan to pay his remuneration, costs, charges and expenses out of moneys held on trust for certain creditors. The appellants rely on statements made by Pullin J in that case to support the factual assertions they make in this case.

71 Further, the only evidence of the cash flow guarantee in relation to the Mortgage is cl 5 of the Deed of Appointment between Rowena and two of the appellants, Mr and Mrs Taylor, defined in the Deed as "the Lender". Clause 5 provides:

"The Lender has been informed by the Broker that the Broker offers a cash flow guarantee in relation to all mortgages prepared by the Broker and as such has an interest in all mortgages prepared by the Broker."

72 The parties accepted for the purposes of the appeal that the payments the subject of the claim were paid by Rowena to the original mortgagees pursuant to the terms of the Deed of Appointment.

73 The mortgagees claim from the respondent the full amount of the respondent's indebtedness under the Mortgage including the amount that had been paid by Rowena to the mortgagees pursuant to the cash flow guarantee and applied by them in reduction of the indebtedness ("the specified amount"). The respondent defended the claim on the ground that by his conduct in resisting the claim he had ratified or adopted the payment made by Rowena and thus he was liable to Rowena for the specified amount and had no liability to the mortgagees. Thus, the purported adoption occurred well after Owen J made the relevant orders in the preliminary issues action. Rowena is not a party to the action.

74 Doing the best I can, I understand the appellants' contentions to be that the respondent's liability to the appellants was not discharged by Rowena's payments under the cash flow guarantee because it was unconscionable firstly, for the respondent to take the benefit of payments made by the "broker out of funds other than funds paid to the broker by the respondent for that purpose" and secondly, because pursuant to the orders made by Owen J, the appellants are obliged to refund the payments to Mr Conlan whether or not they are entitled to recover them from the respondent. Another limb to the first argument is that the respondent was not permitted to ratify or adopt payments made by Rowena in breach of trust.

75 At one stage counsel for the appellants appeared to suggest that the appellants would be entitled to relief if the respondent's conduct in resisting the payment could be labelled as unconscionable. It is clear the appellants do not rely on the equitable or statutory causes of action in unconscionability but rather on a generalised notion. The concept of unconscionability is the underlying principle for a number of causes of action, including a restitutionary claim for money paid. However, to be successful, the appellants must bring themselves within a recognised cause of action or defence. If the respondent's indebtedness to the mortgagees for the specified amount has been discharged, there can be no relevant unconscionability, more so when the respondent admits its indebtedness to Rowena for the specified amount.

76 In what appears to be a fall back position, the appellants contended that "it is quite likely" that Rowena never had right of subrogation against the respondent for the cash flow payments but if it did, Rowena had to sue in the appellants' name.

77 The primary issue is whether the payments made by Rowena to the mortgagees under the cash flow guarantee discharged the respondent's indebtedness to the mortgagees to the extent of the payment. If the answer to that question is yes, that is the end of the matter unless the mortgagees have another cause of action against the respondent. None was identified. However, as previously noted, the appellants raised the possibility of Rowena being entitled to be subrogated to the rights of the mortgagees who (according to the appellants) must sue on Rowena's behalf. The question of subrogation was not addressed in any detail in the parties' oral or written submissions. However, there is an analytical overlap with the respondent's submission that he is liable to pay the specified amount to Rowena.

78 The steps in the analysis are as follows. The respondent is not a party to the cash flow guarantee. However, there can be a binding guarantee agreement between a guarantor and creditor, sometimes referred to as a recourse agreement: O'Donovan and Phillips, The Modern Contract of Guarantee, English ed (2003) at [1-30]. In the usual tripartite guarantee to which the debtor is also a party, the guarantor has a contractual right of indemnity against the debtor and an equitable right of subrogation by which the guarantor is entitled to stand in the shoes of the creditor. Where, as in this case, the debtor did not request the guarantee, the guarantor's right of reimbursement from the debtor can only be based on a restitutionary claim for money paid. In order to succeed against the debtor, the guarantor (in this case Rowena) would have to prove that the payments made by Rowena:

(ii) were reasonably necessary in the interests of the debtor or the guarantor; and

(iii) discharged the liability of the debtor to the creditor.

79 If Rowena could establish a restitutionary claim then a number of other issues would arise for determination, including whether:

(a) a guarantor to a recourse agreement with a restitutionary right against the debtor also has an equitable right of subrogation (see O'Donovan and Phillips at [12-82]);

(b) the right of subrogation only arises when the creditor is paid in full and whether the appellants' action was premature (see O'Donovan and Phillips at [12-273]);

(c) if security has been discharged by the mortgagee, that security is treated as if it were still available to assist the guarantor (see O'Donovan and Phillips at [12-255]); and

(d) the mortgagees are the proper plaintiffs to a subrogation claim by the guarantor. In their written submissions, the appellants relied on authority relating to an insurer's right of subrogation where no question of discharge of a defendant's indebtedness or liability arises.

80 These issues were not developed or pressed in the appeal. The appellants' focus was on the contentions that the debt was not discharged, or should not be treated as discharged, because of the source of the payments or the orders made by Owen J.

81 The appellants relied on statements of principle in Goff and Jones, The Law of Restitution, 6th ed (2002) at [1-018]. The authors note it is not easy to discharge another's debt in English law and that it will occur only if the debtor authorised, or subsequently ratified, the payment. In a footnote containing the authorities relied on to support that proposition, the learned authors continue:

" ... it is probably now settled that if A, a stranger [to B], pays B's debt to C, such payment will not of itself discharge B's liability to C, unless it has been made on B's behalf and has been subsequently ratified by him ...".

82 Thus, Goff and Jones identify two requirements when the debtor has not known of, or requested, the payment. Firstly, the payment must have been made on B's behalf and secondly, B must ratify the payment. This formulation of the law suggests that agency is the basis for the rule. Goff and Jones' statement of principle has been approved in recent Australian cases: Re Emanuel (No 14) Pty Ltd (in liq); Macks v Blacklaw & Shadforth Pty Ltd (1997) 147 ALR 281 at 287; Emdon Investments Pty Ltd v Schelfhout Holdings Pty Ltd (in liq) [1998] FCA 1151. If agency is the basis for the rule, the guarantor must pay the money on account of the debtor, not just the debt. That is consistent with the principle of agency law that there can be no ratification of an unauthorised act if the person was purporting to act on its own behalf rather than on behalf of a purported principal. Further, a principal cannot ratify a void act or transaction but can ratify a wrongful act, albeit with the attendant risk of rendering himself liable for the wrongful act (Dal Pont, The Law of Agency (2001) at [5.14] - [5.17]). These aspects of the law of agency were not addressed in the appeal.

83 The agency basis for the operation of the law in this area has been doubted: P Birks and J Beatson "Unrequested Payment of another's Debt" (1976) 92 LQR 189. In the authors' view, although the payment must be made with an intention to discharge the relevant debt (Re Rowe; Ex parte Derenburg & Co [1904] 2 KB 483), it is sufficient if the payment is made on account of the debt rather than on account of the debtor. The parties did not address the question of the underlying principle and fortunately it is unnecessary to determine the issue.

84 The appellants sought to establish their assertion that the payments made by Rowena to the original mortgagees came from funds belonging to persons other than the respondent held by Rowena in its trust account for unrelated purposes by relying on Pullin J's judgment in the remuneration action. Pullin J repeats the substance of par 5 of Owen J's judgment in the preliminary issues action. At [18] he refers to evidence from Mr Conlan that, based on his investigation of Rowena's records, in no case did any person whose funds were in the trust account immediately prior to payments from Rowena's trust account authorise the funds to be paid to an investor as interest payments owed by a borrower. Even if it was open to rely on the reasons of Owen J in the preliminary issues action and Pullin J in the remuneration action, there is no finding that Rowena used the funds in its trust account to make the payments the subject of this claim.

85 The only remaining issue concerns the orders made by Owen J in the preliminary issues action. The appellants' submissions on this point were primarily assertive and lacking in principled analysis. However, the respondent was aware of, and addressed, the relevant issues of principle (see pars 70 - 74 of his written submissions). The relevant orders made by Owen J are predicated on the likelihood or possibility of there being competing claims to payments made by Rowena to the mortgagees under the cash flow guarantees. The central question is whether the orders prevented the discharge of the respondent's indebtedness to the mortgagees for the specified amount.

86 Where a debtor has not requested the guarantor to make the relevant payment, any discharge of debt takes effect from the date the debtor adopts or ratifies the payment: Walter v James (1871) 6 Exch 124. In that case the plaintiff (creditor) claimed an amount from the defendant (debtor) who pleaded that a third party had paid the plaintiff a smaller amount in full satisfaction of the debt. After payment, the plaintiff and the third party agreed to undo the transaction and the amount paid was returned to the third party. The Court held that until the discharge was perfected by the debtor's adoption of the payment, it was competent for the creditor and third party to undo the transaction, so terminating the debtor's right to adopt or ratify.

87 An analogous situation has arisen here. The appellants are claiming the full amount of the respondent's indebtedness from the proceeds of the discharge of the Mortgage. The Court has intervened and changed the position of the creditor (mortgagees) and the third party (Rowena). Neither party contended that the orders made by Owen J in the preliminary issues action operated in rem to bind the respondent. However, that is of no consequence because the relevant focus is the effect of the orders on the transaction between Rowena and the mortgagees to which the respondent was not a party.

88 Pursuant to the orders made by Owen J, the mortgagees are required to pay the specified amount to Mr Conlan to abide any further order of the Court. They effect a significant and immediate change of position as between Rowena and the mortgagees, both of whom are bound by the orders. As from the date of the orders, the appellants are required, on receipt of money from the discharge of the Mortgage, to repay the specified amount to Mr Conlan to enable a determination as to who is

legally entitled to the money. Potential claimants may include any investors whose funds were misused by Rowena to fund its cash flow guarantee obligations. Whether or not the mortgagees can eventually establish a better legal entitlement or priority to the money is irrelevant. Of course, they will not be able to do so if it would result in double recovery of the specified amount. The orders made by Owen J effected the undoing of the payments and terminated the respondent's right to ratify them. Accordingly, the adoption is of no effect and the payments made by Rowena to the mortgagees have not discharged the respondent's indebtedness to the mortgagees for the specified amount. I would uphold this ground of appeal. As I am in the minority on this issue, it is unnecessary for me to state the orders I would propose.

89 MILLER AJA: I have had the opportunity of reading in draft the reasons for judgment of Wheeler JA. I agree with those reasons, and with the orders proposed. There is nothing I wish to add.

• Background
• Issues
• Recovery of liquidator's costs
• Payments made under cash flow guarantee
• Orders

• Recovery of liquidator's costs

• Payments under the cash flow guarantee