2009/290393 OGILVIE & ANOR v FERRY & ORS
JUDGMENT
1 HIS HONOUR: This case concerns whether, if a unit in a unit development to which the plaintiffs claim to be entitled is sold pursuant to a mortgage, the plaintiffs are entitled to be subrogated to the rights of the mortgagor and their rights vis a vis other guarantors of the mortgage debt.
FACTS
2 The facts are essentially undisputed. The following account is based heavily on the plaintiffs' written submissions.
3 The fourth defendant, Gemshine Pty Limited (in liq) ("Gemshine") was placed in liquidation on 28 November 2008. The directors of Gemshine at all material times were the first defendant, James Joseph Ferry, the second defendant, Philip Harold Mudge and Andrew Bagg. The shareholders of Gemshine at all material times were Bluemint Pty Limited as to 30 ordinary shares and Crownpav Pty Limited as to 70 ordinary shares.
4 The fifth defendant is Bluemint Pty Limited ("Bluemint"). The sole director of Bluemint at all material times was Mr Bagg. He was also the sole beneficial owner of the only issued share. These proceedings were originally brought but have since been discontinued against Mr Bagg.
5 Crownpav Pty Limited ("Crownpav") was deregistered on 24 April 2009. The directors and equal shareholders of Crownpav at all material times until its deregistration were Dr Ferry and Mr Mudge.
6 The sixth defendant is Ferry Asset Holdings Pty Limited ("FAH"). The sole director and shareholder of FAH at all material times was Dr Ferry.
7 The seventh defendant, Salfa Pty Limited (in liq) (receiver and manager appointed) ("Salfa"), was placed in liquidation on 10 June 2008. The directors and shareholders of Salfa at all material times were Dr Ferry, Mr Mudge and Mr Bagg.
8 On the hearing of these proceedings only the first and sixth defendants appeared and argued the case. "The defendants" as used in this judgment is to be taken to refer to them except where the context otherwise requires.
9 On 12 December 2002 Dr Ferry, Mr Mudge, Mr Bagg, Bluemint and Crownpav ("the Joint Venturers") entered into a deed ("the Joint Venture Deed") with Salfa for the purpose of acquiring various parcels of land situated at 63-67 Pavilion Street and 30-32 Crown Road, Queenscliff ("the Project Property") and developing the Project Property by constructing 36 strata title residential units on it ("the Joint Venture").
10 The Joint Venture Deed included terms to the effect that:
(a) the Joint Venturers would acquire the Project Property in the name of Salfa [clause 4.5];
(b) the Joint Venturers authorised Salfa to enter into contracts for the purchase of the Project Property [clause 9.2];
(c) the Joint Venturers authorised Salfa to enter into, on behalf of the Joint Venturers, all contracts, agreements, arrangements and understandings, and accept all necessary obligations and incur all necessary costs and expenses, for or appropriate to the carrying on of the Joint Venture [clause 9.1];
(d) all contracts and other commitments entered into by Salfa as authorised by the Joint Venture would be deemed to be entered into by Salfa as nominee for the Joint Venturers [clause 4.5(i)];
(e) all profits, losses and other liabilities of Salfa in respect of its position as nominee would belong to the Joint Venture [clause 4.5 (ii)];
(f) Salfa would hold as bare trustee for the Joint Venturers all property held, developed, constructed or acquired by Salfa on behalf of the Joint Venturers for the purpose of Joint Venture [clause 4.5 (iii)];
(g) as between themselves, the liability of each of the parties to the Joint Venture Deed, in relation to the development of the Project Property and any associated liability, was limited to their respective interests in the Joint V enture [clause 4.3];
(h) each party to the Joint Venture Deed was solely responsible and liable for liability arising out of the assets brought by that party to the development of the Project Property and performance of the various responsibilities of that party to the development [clause 4.4].
11 On 28 May 2003 the plaintiffs and Salfa entered into a written contract ("the Home Sale Contract") for the sale by the plaintiffs to Salfa of their property at 32 Crown Road, Queenscliff.
12 On the same date, 28 May 2003, the plaintiffs and Salfa entered into a written contract ("the Unit Purchase Contract") for the purchase by the plaintiffs from Salfa of a proposed residential strata title unit to be known as Unit 36 ("Unit 36") in the proposed development of the Project Property.
13 The Unit Purchase Contract was expressed to be conditional on the registration of the relevant Strata Plan. It was a term of the Unit Purchase Contract that Salfa would take all reasonable steps to obtain registration of the Strata Plan before 1 July 2005 ("the Target Date").
14 Special Condition 40.8 of the Unit Purchase Contract provided that, subject to registration of the Strata Plan, the Unit Purchase Contract would be completed by the later of (a) 6 weeks after the date of the Unit Purchase Contract and (b) 21 days after Salfa notified the plaintiffs that the Strata Plan had been registered.
15 Special Condition 58 of the Unit Purchase Contract provided that, subject to the delivery by the plaintiffs to Salfa of a bank guarantee on completion, the plaintiff would be deemed to have paid in full the purchase price payable under the Unit Purchase Contract if the plaintiffs complied with all their obligations under the Home Sale Contract and under an earlier Option Deed.
16 The contractual arrangements required that the bank guarantee be provided by Salfa to the plaintiffs on completion of the Home Sale Contract and in satisfaction of part of the purchase price payable by Salfa to the plaintiffs under that contract. The contractual arrangements also required that, on completion of the Unit Purchase Contract (which was to occur at a later time), the plaintiffs would hand back the bank guarantee to Salfa in satisfaction of the plaintiffs' obligation to pay the purchase price to Salfa under the Unit Purchase Contract.
17 On 8 July 2003 the Home Sale Contract was completed. The plaintiffs gave to Salfa a transfer of the property the subject of that contract. They received the sale price part of which was in the form of a bank guarantee dated 7 July 2003 for $1,150,000. The bank guarantee was issued by Westpac Banking Corporation ("Westpac"). Although the contracts had envisaged a bank guarantee by QBE, it should be inferred that the plaintiffs and Salfa agreed to the substitution of Westpac as the bank guarantor.
18 On 21 November 2003:
(a) Salfa, which at this time was the registered proprietor of the various parcels of land comprising the Project Property, entered into a written agreement, entitled Master Loan Deed, with Capital Finance Australia Limited ("Capital Finance") for the provision of a secured loan facility by Capital Finance to Salfa for the purposes of the Joint Venture (" the Secured Loan Facility").
(b) The Joint Venturers (except Mr Bagg) and Gemshine entered into a Deed of Guarantee with Capital Finance by which they guaranteed the payment to Capital Finance of such amounts as became due to it by Salfa under the Secured Loan Facility ("the Guarantee Deed"). They are hereafter referred to as "the Guarantors".
(c) Gemshine granted a Fixed and Floating Charge over all its property, present and future, to Capital Finance as security for Gemshine's obligations under the Guarantee Deed but subject to a limit of $100,000 ("the Gemshine Security").
(d) Salfa entered into a Fixed and Floating Charge with Capital Finance by which Salfa charged all property, present and future, held by it in its own right or on behalf of the Joint Venture, as security for the payment to Capital Finance of such amounts as became due to it by Salfa under the Secured Loan Facility ("the Charge").
(e) Salfa, as the registered proprietor of the Project Property, mortgaged the Project Property to Capital Finance as security for the payment to Capital Finance of such amounts as became due to it by Salfa under the Loan Facility ("the Mortgage").
19 On 17 December 2003 the Mortgage was registered number AA265191 on the titles to the Project Property. The plaintiffs were not informed, prior to Salfa granting the Mortgage or the Charge, that Salfa was going to grant those securities.
20 On various occasions from about December 2003 Salfa borrowed funds from, and otherwise became indebted to, Capital Finance pursuant to the Secured Loan Facility ("the Secured Debt").
21 By a deed made on 22 June 2005, the plaintiffs and Salfa varied the Unit Purchase Contract by, inter alia, changing the Target Date from 1 July 2005 to 14 May 2006. In addition, as the Westpac bank guarantee of 7 July 2003 was to expire on 1 October 2005, the Deed required Salfa by 1 September 2005 to provide the plaintiffs with a replacement bank guarantee expiring on 14 June 2006.
22 On 23 September 2005 Westpac issued a replacement bank guarantee for $1,150,000 in favour of the plaintiffs with an expiry date of 14 June 2006.
23 On 16 May 2006 Salfa transferred:
(a) a 244/10,000th share in the whole of the Project Property to Dr Ferry;
(b) a 244/10,000th share in the whole of the Project Property to Mr Mudge; and
(c) a 244/10,000th share in the whole of the Project Property to Mr Bagg.
24 On 22 May 2006 the plaintiffs and Salfa again varied the Unit Purchase Contract (as previously varied) by, inter alia, changing the Target Date from 14 May 2006 to 22 June 2006.
25 On 14 June 2006, which was the expiry date of the Westpac bank guarantee of 23 September 2005, the plaintiffs and Salfa again varied the Unit Purchase Contract (as previously varied) by, inter alia, changing the Target Date from 22 May 2006 to 22 August 2006 and by agreeing that the plaintiffs would not call on the bank guarantee of 23 September 2005. At midnight 14 June 2006 the bank guarantee of 23 September 2005 expired without having been called on by the plaintiffs.
26 On 14 June 2006 the fractional transfers to Messrs Ferry, Mudge and Bagg were registered (registration numbers AC312044, AC312045 and AC312046) on the titles to the Project Property. Following registration, the registered proprietors of the Project Property were:
(a) Salfa as to a 9268/10000th share;
(b) Dr Ferry as to a 244/10000th share;
(c) Mr Mudge as to a 244/10000th share; and
(d) Mr Bagg as to a 244/10000th share.
27 On 16 June 2006 the Strata Plan was registered as Strata Plan number SP76969. Upon registration of the Strata Plan:
(a) the Project Property became Lots 1 to 36 in SP 76969; and
(b) Unit 36 became Lot 36 in SP 76969.
28 The Unit Purchase Contract (as varied by the variations referred to above) became an unconditional contract to purchase Unit 36 in respect of which the plaintiffs had paid the whole of the purchase price. They had paid the whole of the purchase price because, as required by Special Condition 58 of the Unit Purchase Contract as varied, they had complied with their obligations under the Home Sale Contract and the Option Deed and, as required by the variation of 14 June 2006, they had allowed the bank guarantee to expire on 14 June 2006 without calling on it.
29 On 20 June 2006 Salfa notified the plaintiffs that the Strata Plan was registered. The notification meant that, pursuant to Special Condition 40.8 of the Unit Purchase Contract, completion of that contract was required to occur 21 days later, namely, on 11 July 2006. Completion by Salfa did not occur on that date or at all.
30 On or about 25 July 2006, although completion had still not occurred, the plaintiffs and Salfa agreed that the plaintiffs would take possession of Unit 36 immediately and that no occupation fee was payable by the plaintiffs. The plaintiffs thereupon took possession of Unit 36 from Salfa and they have been in possession of it continuously since that date. In about August/September 2006 the plaintiffs commenced living in Unit 36 and they have lived there continuously since that date.
31 On 20 July 2007, by summons filed in this Division, the plaintiffs commenced proceedings 3719 of 2007 against Salfa ("the Specific Performance Proceedings"). In the summons the plaintiffs claimed, inter alia, an order for specific performance of the Unit Purchase Contract, a declaration that they had paid in full the purchase price under that contract and ancillary orders.
32 On 3 September 2007, in the Specific Performance Proceedings, the Court ordered that the Unit Purchase Contract be specifically performed, declared that the plaintiffs had paid in full the agreed purchase price under the Unit Purchase Contract and ordered Salfa to do all things necessary to transfer Unit 36 to the plaintiffs.
33 On a number of occasions up to 12 February 2008 the Court extended time for compliance by Salfa with the orders of 3 September 2007. The last such extension was up to 21 February 2008.
34 On 28 March 2008 the amount of the Secured Debt owed by Salfa to Capital Finance was $7,798,816.13. On that day Capital Finance assigned and transferred all of its right, title and interest in:
(a) the Secured Debt;
(b) the Guarantee Deed;
(c) the Gemshine Security;
(d) the Charge; and
(e) the Mortgage
to FAH. On 5 May 2008 the transfer of the Mortgage to FAH was registered on the strata titles to the 8 units in the Project Property that remained unsold at that date - namely, Units 8, 9, 14, 20, 21, 29, 31 and 32 - and it was also registered on the title of Unit 36.
35 On 6 June 2008, in the Specific Performance Proceedings, the Court ordered that Salfa complete the Unit Purchase Contract on 8 September 2008 and that it hand to the plaintiffs on that date the Certificate of Title for Unit 36, a signed and dated discharge of the Mortgage in registrable form in respect of Unit 36 and an executed transfer of Unit 36 in favour of the plaintiffs.
36 On 10 June 2008, on the application of Dr Ferry, Salfa was wound up in insolvency by order of this Court. It appears that the liquidator does not expect a dividend will be paid to unsecured creditors.
37 On 27 June 2008 FAH, pursuant to and as assignee of the Charge, appointed John Vouris and Robert William Whitton jointly and severally as receivers and managers in relation to Salfa.
38 On 8 September 2008 Salfa, acting through the receivers and managers, gave to the plaintiffs an appropriately executed transfer of Unit 36 in favour of the plaintiffs in registrable form but did not give to the plaintiffs a discharge of the Mortgage or the Charge as regards Unit 36 or the Certificate of Title for Unit 36. This was because, as the Secured Debt was still outstanding, FAH declined to provide a discharge of the Mortgage or to release the Certificate of Title.
39 On or about 30 September 2008 Mr Vouris as a receiver and manager of Salfa notified the plaintiffs that the assets of Salfa would be realised to satisfy the Secured Debt.
40 On 28 November 2008 Gemshine, one of the Guarantors, was ordered to be wound up in insolvency by this Court. It appears that Gemshine has no assets.
41 On 14 April 2009 Mr Whitton resigned his appointment as a receiver and manager of Salfa, leaving Mr Vouris as the sole receiver and manager.
42 On 23 July 2009 the solicitors for FAH and Mr Vouris by letter notified the plaintiffs' solicitors of a number of matters including:
(a) that Mr Vouris "is now obliged to get in the property the subject of the security for the purposes of repaying the secured creditor, FAH";
(b) that his obligation "necessarily includes Unit 36";
(c) that FAH "now proposes to engage in an orderly, staged sale of the remaining unsold units"; and
(d) that "FAH is obliged to obtain clear title and vacant possession of each of the Units, including Unit 36".
43 Since the date of the assignment of the Secured Debt (28 March 2008), FAH, as mortgagee exercising a power of sale, has sold Units 8, 9, 14, 21 and 31. The remaining units are Units 20, 29, 32 and the plaintiffs' Unit 36. Even when Units 20, 29 and 32 are sold, the Secured Debt will not be fully paid. The shortfall will be large. There is therefore a real risk that FAH will sell Unit 36, as it foreshadowed it would do in its solicitors' letter of 23 July 2009.
PLAINTIFFS' SUBMISSIONS ON THEIR CLAIM
44 The plaintiffs are in a position analogous to that of sureties in respect of the secured debt: Duncan, Fox, & Co v The North and South Wales Bank (1880) 6 App Cas 1 at 10 - 11 per Lord Selborne LC.
45 If the plaintiffs were to pay the debt to get a discharge of the mortgage over their unit, they would be entitled to be subrogated to FAH's remaining rights in relation to the debt, including its rights against the Guarantors.
Orders against the principal debtor
46 The law does not require the plaintiffs to wait until their unit is sold by FAH, and then enforce their rights of subrogation to FAH's rights. The plaintiffs are entitled to an order that the principal debtor pay the debt, because the plaintiffs' Unit 36 is security for the debt and FAH is proposing to sell the unit.
47 But such an order is of no utility because Salfa is insolvent and, in any event, the Court has already ordered Salfa, in the Specific Performance Proceedings, to provide a discharge of the Mortgage but to no avail.
48 The plaintiffs submit that Salfa borrowed as agent for the Joint Venturers, but acquired the project property as bare trustee for the Joint Venturers. The Joint Venturers are therefore liable directly to FAH for the debt: Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199 at 207. Accordingly the plaintiffs are entitled to an order that the Joint Venturers repay the debt to FAH.
Orders against the Guarantors
49 To the extent that orders against the principal debtor (be it the Joint Venturers or Salfa) would not result in the payment of the debt, the plaintiffs are entitled to orders that the Guarantors pay the debt. That is because the plaintiffs' rights of subrogation, should FAH sell the unit, would extend to FAH's rights against the Guarantors, and the plaintiffs should not have to wait until their unit is sold before calling on the Guarantors to pay their proper share (in this case, 100%) of the debt to the extent necessary to release Unit 36 from the Mortgage. See Aquilina Holdings Pty Ltd v Lynndell Ply Ltd [2008] QSC 57.
50 The Guarantors' submission that, even if the plaintiffs should be treated as sureties, such an order is inappropriate because, if the Guarantors pay the debt, the Guarantors themselves would have rights of subrogation which would allow them to enforce the registered Mortgage over the unit and thus defeat the plaintiffs' unregistered interest -is not a sufficient answer. That is because the plaintiffs would be in the position of having paid the debt as quasi-sureties in circumstances where the Guarantors paid no part of it. The plaintiffs' right to be subrogated to FAH's rights against the Guarantors would remain. That is why Drew v Lockett (1863) 32 Beav 499; 55 ER 196, approved in Bofinger v Kingsway Group Ltd (2009) 239 CLR 269, is not an answer to this case. The subsequent mortgagees in Drew v Lockett did not pay the first mortgagor's debt.
51 The true nature of the present dispute is exposed perfectly by asking the following question. What rights and obligations would the plaintiffs and the Guarantors have, as between themselves, if FAH sold the plaintiffs' unit (as the last of the mortgaged units to be sold) and applied the proceeds to the debt?
52 In that situation, the plaintiffs' entitlement to enforce, for their own benefit, FAH's rights against the Guarantors could not be resisted by the Guarantors asserting a right of subrogation to FAH's rights under the Mortgage. That is because FAH will have exhausted its rights under the Mortgage; and the Mortgage does not, of course, give FAH any rights against the plaintiffs personally. There would be no rights in FAH against the plaintiffs to which the Guarantors could be subrogated.
53 Ultimately, therefore, the issue is whether the burden of the debt is to be shared between the Guarantors and the plaintiffs equally or in some other proportion or whether, on the other hand, it should be borne wholly by the Guarantors. In the ordinary case, equity is equality. In this case, however, the circumstances are that:
(a) the borrowing was for the benefit exclusively of the Guarantors because they were also the Joint Venturers (in the case of Mr Bagg, he was a Joint Venturer and his company, Gemshine, was a guarantor);
(b) the Guarantors/Joint Venturers beneficially owned the project property absolutely because Salfa held it as bare trustee for them;
(c) Salfa, as bare trustee for the Guarantors/Joint Venturers, and therefore for their benefit and with their express authority, received the whole of the sale price of Unit 36 but has failed to deliver an unencumbered title to the plaintiffs.
54 In the above circumstances, it would be unconscionable for the Joint Venturers, in their capacity as Guarantors, to assert rights of subrogation or contribution for the purpose of defeating or diminishing the plaintiffs' interest in the unit or the plaintiffs' rights to be subrogated to FAH's rights under the Guarantee Deed.
55 Put another way, it would be inequitable for the plaintiffs and the Guarantors to be treated, as between themselves, as if they were both simply sureties for the debt. The Court has power, which it should exercise in this case, to regulate their rights and obligations, as between themselves, as if the Guarantors were sureties and the plaintiffs were sub-sureties (that is, as if the Guarantors were primarily liable and the plaintiffs only secondarily liable to the extent of their Unit 36).
56 The rule - that a person who pays out another person's secured debt in return for a fresh security, which proves to be worthless through no fault of the debtor, cannot be subrogated to the original security because he obtained all that he bargained for - has no application in the present case. In addition, the bank guarantee did not secure Salfa's obligations under the Unit Purchase Contract. All it did was provide to the plaintiffs, in non cash form, the balance of the sale price of their home, and which (under the Unit Purchase Contract) they were to use to pay the purchase price of the unit.
THE DEFENDANTS' SUBMISSIONS
No Unconscionability
57 Subrogation (in the sense not used in marshalling) is available only to rectify an unjust enrichment or other inequity (at [99] - [103] and [111] and Cochrane v Cochrane (1985) 3 NSWLR 403). There is no unjust enrichment or inequity. The plaintiffs paid the full purchase price for the property at a time when they must have been fully aware of the encumbrance on the title and in any event Dr Ferry as guarantor of only Salfa's liability to Capital Finance cannot be accountable for the plaintiffs' present position.
58 The plaintiffs claim that the unconscionability is the fact that the plaintiffs' property was charged with the mortgage debt in circumstances where they stood to gain no benefit from the development whereas Dr Ferry stood to benefit from the transaction as a result of him being a "joint venture participant". It is however a mistake to understand the term "unconscionable" as some amorphous general view of "fairness": Bofinger at [90].
59 In Registrar General v Gill NSWCA, 16 August 1994, unreported, the majority made the following statement of principle:
"The equitable principles relating to subrogation aim to adjust the interests of three parties, such as a creditor, a debtor and … surety, in such a way as to avoid the unconscionable result of double recovery by the creditor or inequitable discharge of the liability of the debtor".
60 It is apparent from this statement that the reference to "unconscionability" is limited to adjusting the rights between the creditor, the debtor and the surety. There is no place in this analysis for some wider application of "fairness" involving third parties.
61 Even if "unconscionability" equated to "fairness" of all the parties involved and even if the plaintiffs were sureties of Salfa's debt to the secured creditor the "fairness" is not satisfied by the orders sought by the plaintiffs. The uncontested facts are these:
(i) As at June 2006 the plaintiffs had paid nothing towards the purchase price of Unit 36 and held security in the form of a bank guarantee to protect their position regarding the payment by Salfa for their property.
(ii) Dr Ferry had granted a personal guarantee to the secured creditor that he reasonably expected would rank behind the mortgage over the development property (including Unit 36) and which he expected could not be called upon without the mortgage on the development property being fully exhausted;
(iii) The plaintiffs with full knowledge of the situation allowed the bank guarantee to lapse.
62 Before the plaintiffs allowed the bank guarantee to lapse they could not possibly claim that it was unconscionable for Dr Ferry's personal guarantee to be paid out in priority to the exhaustion of the mortgage over Unit 36, because they had paid nothing for it. After the Plaintiffs allowed the bank guarantee to lapse they cannot claim to be in any better position by the result of their own actions. As Sir John Romilly MR stated in Drew v Lockett at 505 - 506:
"… if he thinks fit to advance his money on such security (referring to the second mortgagee but equally applicable to the Plaintiffs) it is his own affair and he cannot afterwards with justice complain".
63 The appellants in Bofinger were both the guarantors and the individuals who stood to benefit from the development transaction the subject of the proceedings. There was no suggestion in that authority that the guarantors lost their right as primary guarantors (Drew v Lockett) in the manner claimed by the plaintiffs.
Claim For Subrogation Negatived by Alternative Security
64 The plaintiffs claim that the bank guarantee was not security for the performance of Salfa to the plaintiffs however such an assertion is inconsistent with the terms of the contract for sale: cll 37.1, 39 and 41.
Plaintiffs' Right in Priority to Dr Ferry's
65 The plaintiffs contend that their right to be subrogated to the position of the secured creditor ranks ahead of that of Dr Ferry who argues that as the guarantor of the primary debt he has priority: Drew v Lockett. The plaintiffs seek to rely on the principles of co-sureties as expressed in Official Trustee in Bankruptcy v Citibank Savings Ltd (1995) 38 NSWLR 116 to argue that they should have priority to be subrogated because of Dr Ferry's involvement with the joint venture.
66 Dr Ferry responds with the argument that the principles regarding co-sureties do not apply to subrogation: Cochrane v Cochrane (1985) 3 NSWLR 403 at 405 and Bofinger at [83] - [84].
67 The plaintiffs' rejoinder is that Drew v Lockett does not apply because the second mortgagee was not offering to pay out the secured creditor in that matter. However, that argument ignores the fact that the plaintiffs are not offering to pay out the secured creditor any more than the second mortgagee was.
68 The plaintiffs submit that the dispute as to priorities can be exposed if the question is asked "what rights and obligations would the plaintiffs and the Guarantors have as between themselves if FAH sold the plaintiffs' unit". Whilst this is a novel approach to subrogation and would seem to be based on the plaintiffs' "fairness" assessment it is illustrative of the misconceptions in the plaintiffs' analysis.
69 If Unit 36 was sold by FAH what in fact would be sold (transferred) would be the registered interest of Salfa. This would not involve the sale of any interest in the plaintiffs' property, however, the registration of the resultant transfer would extinguish the plaintiffs' equitable interest in this unit. There would, however, be no assignment of that equitable interest.
70 The sale of Salfa's registered interest is consistent with both Dr Ferry's expectation when he provided his personal guarantee and presumably with the plaintiffs' expectation when they allowed the bank guarantee to lapse, that is, that the secured creditor's interest in the property was paramount.
71 The plaintiffs' submission that FAH was "selling the plaintiffs' unit" encapsulates the misconception that is at the heart of these proceedings. Should FAH sell or assign Unit 36 what it would be assigning was Salfa's registered interest not the plaintiffs' equitable interest. To speak of Unit 36 as "the plaintiffs' unit" in colloquial language is to expose the legal fallacy that lies at the heart of the plaintiffs' case.
CONCLUSION AS TO CLAIM
72 The parties' contentions in this case have been complicated, even convoluted. The contentions as set out in this judgment are taken from summaries submitted at the end of argument and are considerably simplified. Despite the complication of the arguments, in my view the central issues to be decided are comparatively simple.
73 The first question is whether the plaintiffs are entitled to be subrogated to the rights of FAH if Unit 36 be sold pursuant to the Mortgage. It should be noted that they make no claim under the doctrine of marshalling. The claimed subrogation could arise from the plaintiffs' position as co-sureties with the Guarantors or, alternatively, it could arise from the fact that, co-sureties or not, the plaintiffs would have paid out the principal debt. The defendants have argued that the plaintiffs are not to be regarded as co-sureties because no interest of theirs existed to be bound when the Mortgage was given. They have argued that the principle that a person who has paid out the principal debt is subrogated to the rights of the principal creditor, although it may apply in the United States, does not apply in New South Wales.
74 I should say at this stage that I do not accept the plaintiffs' contention that the borrowing by Salfa was as agent for the Joint Venturers, so that they are to be taken as principally liable for the Secured Debt. Whilst the relevant document is not entirely clear in its terms in my view the proper construction to be placed on it is that Salfa made the borrowing as trustee for the Joint Venturers.
75 In order to determine whether the plaintiffs are to be regarded as co-sureties, in my view what is required is not some complicated inquiry into the history of the matter but an examination of the realities of the present situation. Unit 36 is subject to the Mortgage. The plaintiffs are the beneficial owners of Unit 36, albeit the title remains in the name of Salfa. Their beneficial interest will in effect be taken and sold upon exercise of the power of sale under the Mortgage. The proceeds of sale, to which they are beneficially entitled, will be taken by the mortgagee in satisfaction of the Secured Debt. Suretyship can undoubtedly arise from the subjection of property to the principal obligation, as well as from a promise to pay it: Re Conley (trading as Caplan & Conley) Ex parte The Trustee v Barclays Bank Ltd [1938] 2 All ER 127. Despite the defendants' contention to the contrary, the plaintiffs had an interest in the mortgaged property at the time the Mortgage was given: Jessica Holdings Pty Ltd v Anglican Property Trust Diocese of Sydney (1992) 27 NSWLR 140; Forder v Cemcorp Pty Ltd (2001) 51 NSWLR 486. In my view they are at the present time co-sureties with the Guarantors in relation to the Secured Debt.
76 The defendants' contention is that all that will be sold upon exercise of the power of sale is Salfa's interest in Unit 36 that is subject to the Mortgage. I do not accept this submission, which, in my view, flies in the face of the fact that the beneficial interest owned by the plaintiffs will equally be sold and conveyed.
77 That of itself is sufficient to found the plaintiffs' right of subrogation.
78 I do not accept the defendants' argument that subrogation of the plaintiffs is precluded by the fact that the bank guarantee provided security for their position. Apart from anything else, I simply do not think that on its terms the bank guarantee provided such security.
79 I should add that, even if the plaintiffs were not co-sureties, in my view they would be entitled to be subrogated to the principal creditor's rights as parties who in case of the sale of Unit 36 by the mortgagee would have paid out the principal debt. This flows from the definition of subrogation in Sheldon's Law of Subrogation (2nd ed, 1892) quoted by Windeyer J in Saffron Sun Pty Ltd v Perma-Fit Finance Pty Ltd (in liq) (2005) 65 NSWLR 603 at [14]:
" s1 Definition of subrogation - … It is broad enough to include every instance in which one party pays a debt for which another is primarily answerable, and which, in equity and good conscience, should have been discharged by the latter; but it is not to be applied in favour of one who has, officiously and as a mere volunteer, paid the debt of another, for which neither he nor his property was answerable, and it is not allowed where it would work any injustice to the rights of others."
80 The plaintiffs are not removed from that principle by having officiously or as mere volunteers paid the debt, since they will have paid it under compulsion in respect of their property that was answerable for the debt.
81 The defendants have argued that this principle relies upon US authority and should not be taken to be valid in New South Wales. However, it was adopted by Windeyer J (albeit obiter) and is treated as good law in Meagher Gummow and Lehane's Equity Doctrines and Remedies (4th ed, 2002) [9-005]. It is sound in principle. In my view the proposition has the force of law in New South Wales. The plaintiffs are therefore entitled under this principle as well to be subrogated to the rights of the principal creditor.
82 The other principal question is whether, once subrogated to those rights, they are obliged to contribute equally with the Guarantors or whether, as the plaintiffs claim, they are entitled to be indemnified to the extent of 100 per cent by the Guarantors. They say they are so entitled by reason of the fact that the Guarantors received the benefit of the relevant borrowing for the purposes of the Joint Venture, whereas the plaintiffs received none of the money and none of the benefit.
83 The relevant principles were set out as follows by Bryson J in Citibank supra at 125 - 126:
" Where only one guarantor derives benefit:
In J Phillips and J O'Donovan, The Modern Contract of Guarantee (1992), 2nd ed, Sydney, LBC at 529, the following passage appears:
'A right to contribution can be impliedly excluded but the courts should be reluctant to draw such an inference. Clearly there can be no implied exclusion of the right to contribution where the guarantors have reached a specific agreement on this matter. Sometimes, however, the right to contribution can be displaced by the parties' conduct or the course of events. It has been suggested that contribution is excluded where one guarantor enjoys the whole benefit of the guarantee in another capacity to the exclusion of his co-surety: in this special situation it might be inequitable to require the co-surety to contribute.'
The learned authors state (at 549):
'(e) Where one guarantor enjoys the whole benefit of the guarantee.
It has been held that where one guarantor enjoys the whole benefit of the guarantee through his shareholding in a company from which his co-surety has withdrawn, the co-surety is not liable to contribute. Since he enjoys all the benefits of the guarantee he alone must bear its burden and his co-surety had a sound defence to an action for contribution. There is, however, no direct Australian authority for this proposition which would allow one guarantor to escape his liability to contribute on the basis that he received no benefit from the guarantee where he is jointly and severally liable according to its terms. On the other hand, the proposition is consistent with the equitable genesis of the right of contribution. It is at least clear that a co-surety can resist a claim for contribution by relying on an indemnity granted to him by the plaintiff himself. This indemnity can be constituted by a verbal promise since the Statute of Frauds does not apply to such an undertaking.'
Clearly enough, there are cases where a person falls under a common liability but is not obliged to contribute equally to the liability. To take a grossly simple illustration, if two join in borrowing money but the money borrowed is applied for the purposes of only one of them, obviously enough the borrower who obtained the money is categorised as the principal borrower and the other is categorised as a surety for the purpose of adjustment of rights between them, whether or not they were expressly so categorised by the terms of their contract with the creditor, and whether or not there was any express arrangement excluding contribution or any actual advertence to the question of contribution at all. The court would have no difficulty in categorising one as principal and one as a surety, and in recognising that they do not stand in a position of equality so that there could be no claim for contribution by the principal, while the other would be entitled to an indemnity. Further, if both gave security over property the surety would be entitled to a charge over the charged property of the principal. That these observations are not an exercise in the excessively obvious is shown by the arguments put to the Chancery Division (Foster J and Fox J) in Re A Debtor; Ex parte Marley v Trustee of the Property of the Debtor [1976] 1 WLR 952; [1976] 2 All ER 1010. In that case the standing of one co-owner as surety was established by a concession, but, I would think, could not fairly have been disputed.