Oversea Chinese Banking Corporation (OCBC) v Malaysian Kuwaiti Investment Co Sdn Bhd

Supreme Court of Victoria|2003-12-19|Before: Redlich J

CATCHWORDS Construction of "all monies" clause in first mortgage - mortgage executed contemporaneously with facility agreement for designated purpose - terms of facility agreement prevail. Tacking further advances onto registered first mortgage - Rule in Hopkinson v Rolt - Mortgagee having actual notice of purchasers' interests in contracts of sale - Knowledge by mortgagee's officers and solicitors - Intention to oust rights of purchasers unnecessary - Whether constructive notice sufficient. Failure of mortgagee to make reasonable inquiries as to whether purchasers' equitable interests extinguished - Rule in Jared v Clements. Justice and fair dealing between parties - Whether mortgagor in breach of negative obligations in mortgage - Whether purchasers had constructive notice of terms of mortgage by virtue of registration. - purchasers' conduct not contributing to mortgagee's belief.

OVERSEA-CHINESE BANKING CORPORATION LIMITED (A.R.B.N. 073 598 035)

ALJADE DEVELOPMENT AND CONSTRUCTION SDN BHD (Company No. 208479-W)

OVERSEA-CHINESE BANKING CORPORATION LTD (ARBN 073 598 035)

1 A bank advanced funds to a developer to refurbish residential apartments. The advance was secured by a registered first mortgage over the apartments. During the course of refurbishment and before the advance was repaid, the mortgagor entered into contracts of sale of a number of the apartments with two purchasers. The bank was given notice of the sale of these apartments. The mortgagor's sale of the apartments was said by the bank to be in breach of negative covenants in the mortgage of which the purchasers had constructive notice. Subsequently, the mortgagor fully repaid the advance to the bank. Later, the bank advanced further sums of money to the mortgagor, for purposes unrelated to the refurbishment of the apartments. The bank sought to secure the further advance by the registered first mortgage over the apartments that had been sold to the purchasers. The bank alleged that at the time of the further advance, it had been told by the mortgagor that the contracts of sale with the purchasers were not proceeding. The purchasers disputed that the bank had been so advised and claimed that the bank continued to have notice of their prior equitable interests.

2 The question arises as to whether the registered "all monies" mortgage secured the further advances made by the bank. If it did, it is necessary to consider whether the bank's further advance should be given priority over the equitable interests acquired by the purchasers of which the bank had notice prior to making the further advance. If the mortgagor advised the bank that the contracts were not proceeding, and this was an issue very much in dispute, was the bank entitled to rely upon the information provided by the mortgagor or should it have made inquiries of the purchasers? If the mortgagor in selling the apartments was in breach of the terms of the mortgage, were the purchasers to be treated as constructively aware of such breaches so as to preclude them from enforcing their interests?

3 The bank purported to exercise its powers as mortgagee under the first mortgage and took possession of the apartments. It commenced proceedings against the purchasers for removal of caveats which the purchasers had placed over the apartments. The purchasers commenced proceedings against the bank seeking a declaration that their equitable interests in the apartments acquired by virtue of their contracts of sale, took priority over the mortgage and sought specific performance of their contracts of sale. The mortgagor, though a party to these proceedings, did not participate in them and no one was called to give evidence on its behalf. As the same issues of fact and law arise in each of the proceedings they have, by consent, been heard together.

4 Richfield Investments Pty Ltd (the mortgagor) is and was at all material times the registered proprietor of land at 123-139 LaTrobe Street, Melbourne, Victoria (the property). By agreement dated 22 September 1997, the mortgagor entered into a construction facility agreement with Oversea-Chinese Banking Corporation Limited (OCBC - the bank) to refurbish residential apartments at the property (the facility agreement). On the same date, the mortgagor granted the bank a fixed and floating charge over all its property, assets and rights and executed a mortgage over the whole of the property in favour of the bank as security for the payment of the monies advanced under the facility agreement. The mortgage was registered on or about 14 October 1997.

5 The mortgagor drew down $6,863,000 pursuant to the facility agreement for the expressly designated purpose of development and sale of the apartments on the property.

6 On or about 12 August 1998, the mortgagor entered into a contra-debt agreement with its holding company, MKDV Sdn Bhd (MKDV), Profil Kemas Sdn Bhd (PKSB) and Aljade Development and Construction Bhd (Aljade). MKDV was part of the Adorna Group of companies in Malaysia owned or controlled by one, Dato Fong, who also owned and controlled the mortgagor. The contra-debt agreement obliged the mortgagor to execute a contract of sale of certain apartments to Aljade and obliged PKSB, which was indebted to Aljade, to pay the mortgagor the purchase price for those apartments. By the contra-debt agreement, Aljade agreed not to take any legal proceedings against PKSB or the other parties to the contra-debt agreement.

7 On or about 3 September 1998 the mortgagor, as vendor and Aljade as purchaser, entered into a contract of sale for apartments 19, 22, 62 and 63 at 123 LaTrobe Street (the Aljade apartments). On 7 October 1998, Aljade nominated Jadewealth Pty Ltd to complete the contract of sale.

8 Pursuant to Special Condition 9 of the contract of sale, the Aljade apartments were to be transferred to Aljade in partial satisfaction of a substantial debt arising out of construction works that Aljade had undertaken for MKDV.

9 On 24 December 1998, a plan of sub-division in respect of the property was registered. On 21 January 1999 Jadewealth by its solicitor, J. P. Sesto and Co, lodged a caveat over the Aljade apartments.

10 By a deed of satisfaction dated 27 January 1999 between the mortgagor, MKDV and Malaysian Kuwaiti Investment Co Sdn Bhd (MKIC) the mortgagor agreed to sell six apartments on the property to MKIC. MKIC agreed and declared that settlement of the apartments would constitute full satisfaction of a debt due to MKIC by MKDV. By contract of sale of the same date, the mortgagor as vendor agreed to sell and MKIC agreed to purchase the six apartments (the MKIC apartments). It was an express term of the contract of sale that the purchase price was paid by way of debt satisfaction. On or about 4 February 1999, MKIC lodged a caveat over the MKIC apartments.

11 The mortgagor's solicitors, Russell Kennedy, on 25 March 1999 requested the bank's solicitors, Mills Oakley, to prepare discharges of mortgage and partial discharge of the charge over the Aljade and MKIC apartments. On 26 March 1999, the bank's solicitors forwarded forms of discharge of mortgage and partial discharge of charge to the bank.

12 On 13 July 1999, J. P. Sesto & Co. by facsimile transmission informed the bank's solicitors, Mills Oakley, that Jadewealth was the nominated purchaser of the Aljade apartments. On 14 July 1999, there was a telephone conversation between Ms Sue Oppler, an employee of the bank's solicitors and Ms Wai Hwoon Low, the mortgagor's solicitor, concerning the facsimile transmission from Jadewealth's solicitors who were inquiring about pay out figures. Ms Oppler and Ms Low agreed that as the contract of sale was for nil consideration, completion of the contract would have to wait until the bank had received sufficient funds from the sale of other apartments so that it could release the titles and discharge the mortgage on the Aljade apartments. It appears that the bank's and mortgagor's solicitors adopted the same approach to the MKIC contract.

13 On 17 August 1999 the bank received, by facsimile transmission from the mortgagor, a copy of the cover page, execution page, particulars of sale and relevant special conditions of the contracts of sale for the Aljade and MKIC apartments. On 27 August 1999 the bank's solicitors received a letter dated 19 August from the mortgagor's solicitors enclosing particulars of sale and signed pages of the Aljade and MKIC contracts of sale. The bank received from its solicitors on 9 September 1999 further forms of discharge of mortgage and partial discharge of charge in respect of the MKIC and Aljade apartments undercover of a letter stating that the mortgagor's solicitors had advised that they expected settlements to be effected in late September 1999. On a date between 9 September and 28 September 1999, Ms Ramona Enconniere, a senior officer of the bank, signed the partial discharges of mortgage in relation to the Aljade and MKIC apartments and the partial discharges of the charge.

14 On 28 September 1999, being the day prior to the repayment by the mortgagor of the balance of the amount advanced pursuant to the initial facility agreement, Ms Perla Koh, the officer of the bank managing the mortgagor's file, alleges that Mr Dato Fong, the managing director of the mortgagor, spoke with her about the MKIC and Aljade contracts of sale which had just come to her attention. She testified that she had only that day learned of the facsimile transmission of 17 August 1999. Ms Koh gave evidence that Mr Fong informed her that the MKIC and Aljade contracts were not proceeding and that she made a handwritten notation to that effect. She said she made no further inquiries. I shall deal with the evidence concerning the bank's notice in greater detail later in my reasons.

15 On 18 October 1999, the bank offered a further advance for approximately $1.4M to the mortgagor, intending that such further advance would be secured by the existing registered first mortgage.

16 On the following day, the bank received a facsimile transmission from its solicitors notifying the bank that they were holding contracts of sale in respect of the Aljade and MKIC apartments. On 25 October 1999, the mortgagor accepted the bank's offer of a further advance.

17 The further advance was drawn down in four payments. The first draw down was $117,500.00 on 4 November 1999 to pay various liabilities of the mortgagor. The second draw down was $495,000.00 on 22 November 1999 to discharge debts owing to the bank by Century Estates Pty Ltd (a company owned and controlled by Dato Fong). The third draw down was $600,000.00 on 23 November 1999 to reduce the debts owing to the OCBC Bank (Malyasia) BHD by MKDV Sdn Bhd (the Adorna Group of companies). The fourth draw down was $185,000.00 to the mortgagor's account to cover interest in advance for the further facility.

18 The mortgagor has not repaid any of the further advances to the bank and has refused to effect the settlements of the Aljade or MKIC apartments.

19 In March 2002, the bank exercised its powers as mortgagee under the mortgage and took possession of the Aljade and MKIC apartments. It has remained in possession of the apartments since that time and asserts that it is entitled to and will sell those apartments as mortgagee pursuant to the mortgage. Each of the purchasers contend that they have an equitable interest in the apartments, the subject of their contracts of sale, which take priority over any interest the bank has in the property. They seek orders compelling the bank to deliver up discharges of the mortgage and the charge over their apartments.

20 The mortgage upon which the bank relies was a first mortgage which has been registered on the title since 1997.[1] Once registered, the bank acquired a legal interest[2] in the nature of a statutory charge.[3]

21 The initial question for determination is whether on the proper construction of the documents (Facility Agreement, Instrument of Mortgage and Memorandum of Common Provisions), the mortgage at the time of its execution was intended to secure further advances that might be made pursuant to a subsequent agreement. The first mortgage executed in 1997 to secure the Facility Agreement was in form a standard "all monies" mortgage.

The relevant provisions of the Facility Agreement Mortgage and Memorandum of Common Provisions (the documents)

22 The Facility Agreement in clause 2.2 provided that the advance was to be used by the customer "to assist with the refurbishment of 37 residential apartments on the property". No provision was made in the Facility Agreement for a re-advance of monies.

23 The Facility Agreement defined "Collateral Security" to mean:

"Security interest ... held or given, whether before or after this document is executed, as security for or otherwise in connection with Money Owing."

24 The Facility Agreement defined "money owing" to mean:

"On any day, the aggregate of all money of whatever nature owing or remaining unpaid by the Customer to the Bank on that day under this document, whether the liability is actual or contingent, as determined by the Bank." (emphasis mine)

25 The first mortgage described as the "Collateral Security" secured the "money owing" under the Facility Agreement. The mortgage was stamped as "Collateral Security". Though the use of the word "collateral" does not involve any notion of primacy of one document over another,[4] the Facility Agreement provided that in the event that there was any conflict between the terms of the Facility Agreement and the collateral securities, the Facility Agreement would prevail over those contained within the collateral security. In turn, the first mortgage expressly provided that its terms were to prevail over the Memorandum of Common Provisions (MCP) to the extent of any inconsistency.

"This mortgage is given in consideration of the Mortgagee granting or agreeing to grant certain advances, accommodation credit or other facilities to or at the request of the Mortgagor and for the purpose of securing to the Mortgagee the payment of all money liabilities and interest referred to in the Memorandum mentioned below as the Secured Money intended to be secured by this Mortgage."

"The mortgage is a continuing security. It remains in effect until the Mortgage gives a final discharge to the Mortgagor. The Mortgagor is only entitled to a final discharge if:

(b) The Mortgagee is satisfied that there are no amounts which will subsequently fall within the description of the Secured Money.

In satisfying itself under paragraph (b), the Mortgagee may consider any matters it thinks relevant, including (without limitation) the possibility that a payment to reduce the Secured Money might be repayable, void or voidable under a law relating to insolvency or protecting creditors."

28 By virtue of the provisions of the Facility Agreement and Instrument of Mortgage the advance granted by the bank became the "Secured Money" secured by the mortgage. "Secured Money" was defined in clause 1.1 of the MCP as:

"All monies owing or remaining unpaid by the mortgagor to the mortgagee at or after the date of this mortgage on any account and in any way whatever and whether:

(b) Owing or remaining unpaid by the mortgagor alone or together with another person; or

(c) Owing or remaining unpaid by the mortgagor as principal debtor, surety, partner, trustee, beneficiary or otherwise; or

(i) is or could become owing in connection with a liability which is actual or contingent, ascertained or unascertained, fixed or fluctuating or of any other character;

(ii) is or is for principal, interest, Guarantee obligations, purchase obligations, fees or damages or otherwise;

(iii) is in dollars, another currency or a combination of currencies; or

(iv) is owing by the Mortgagor acting or purporting to act as trustee."

"The mortgagor must pay the secured money (free from any deduction, set off or counterclaim)

(a) in debt at the times and in the ways specified in the Relevant Agreement; and

(b) otherwise on demand to or as directed by the mortgage."

30 By clause 3.1 of the MCP, the mortgagor undertook to pay the secured monies "on the terms and in the way specified in the relevant agreement". "Relevant Agreement" was also defined in clause 1.1 of the MCP and means:

"(a) This Mortgage and a Collateral Security; and (b) An agreement between:

(iii) the Mortgagee and any combination of the Mortgagor and one or more Debtors; and

(i) that relates to the Secured Money or another Relevant Agreement (other than a letter from the Mortgagor or a Debtor); or

(ii) containing terms on which the Secured Money remains outstanding; or

(iii) that the Mortgagor and the Mortgagee agree is a Relevant Agreement."

31 Mortgages containing similar "all monies" terms to the present mortgage and MCP have been construed as covering subsequent advances.[5] Hill J in Re Bankrupt Estate of Murphy; Donnelly v Commonwealth Bank of Australia Ltd[6] refused to read down the extreme width of an "all monies" clause so it would not apply beyond the initial banking transaction which it secured. To so construe the clause would have been to treat paragraphs of the mortgage and memorandum as being redundant. Murphy's case was cited with approval in Ronan & Ors v Australia & New Zealand Banking Group Ltd.[7] Similarly in Re Piccolo,[8] Kenny and Heerey JJ found the terms of the mortgage wide enough to support a subsequent bank facility. Heerey J regarded the language of the guarantee contained within the mortgage as not confined to any particular form of bank facility or to the first one which had been put in place. Kenny J found that the subsequent agreements and financial accommodations to the company were intended by the parties to be secured by the guarantee and mortgage. McDonald J in Aspenview's case[9] reached the same conclusion in relation to a mortgage containing similar terms. Each of these cases turned upon the language used, its context and the commercial purpose of the parties.

32 Such terms are frequently intended to provide a mortgagee with protection in respect to all monies which the mortgagee pays or becomes liable to pay for or on account of the mortgagor. As this case illustrates, the competition which arises is between the very broad language used in such a clause and the inclination to confine such provisions to the financial assistance and purpose that was within the parties' contemplation at the time of their agreement.

33 Such "all monies" or "dragnet clauses" as they are sometimes described were considered by Young J in Estoril Investments Pty Ltd v Westpac Banking Corporation.[10] His Honour formulated general rules of construction for the purpose of determining the intention of the parties. Those relevant to the present case are:

(1) The mortgage will only secure advances made or debts incurred in the future if the past debts are identified.

(2) Only debts of the same type or character as the original debt are secured by the mortgage.

(3) A dragnet clause will often cover future debts only if documents evidencing those debts specifically refer back to the clause.

(4) Once the original debt has been fully discharged, the mortgage is extinguished and cannot secure further loans.

(5) If the mortgagor transfers the land to a third party, any debts which the original mortgagor incurs thereafter are not secured by the mortgage.

34 Santow J in Re, Modular Design Group Pty Ltd[11] regarded the guidelines as demonstrating the proper interpretive approach which should be followed but the guidelines have more recently been viewed as having limited utility.[12] Hill J in Murphy's case considered the guidelines to have received no real support in the reasons of the Court of Appeal in Smith's case,[13] so that the "all monies" clause should not be read down even where the guideline covered the situation.[14]

35 Where the further debt was found to be for a commercial purpose of the same nature or kind as that originally secured by the terms of the mortgage there has been a disposition by the Courts to give effect to the literal meaning of the words of an "all monies" clause.[15]

36 Whilst the guidelines enunciated by Young J will be of some assistance in the interpretive task, the "all monies" clause must be construed in the light of the actual language used and having regard to the context in which this mortgage came to be executed and its commercial purpose. [16]

37 The purchasers submit that I should adopt the approach to the question of construction that led Brooking J in Re, Clark's Refrigerated Transport[17] to confine the scope of a mortgage containing similar terms. The question which his Honour considered was whether a mortgagor under an all monies mortgage can have intended to secure, not only present and future obligations to the mortgagee, but also any debt or liability of the mortgagor to a third party which may be assigned by such party to the mortgagee. The proper construction of the contemporaneous documents led his Honour to conclude that it was not the intention of the parties that the mortgagor's liability could be enlarged in this fashion. Brooking J found that the term "on any account whatever" contained within the mortgage, limited the mortgagor's debts and liabilities to those which arose from some transaction between the mortgagor and mortgagee. In the present case, though the mortgagor by the further facility agreement had agreed to the use of the property, primarily to secure a further advance to repay indebtedness by third parties to the bank or its Malaysian branch, the mortgagor's liability still arose directly out of a transaction between the mortgagor and mortgagee.

38 In its submissions, Aljade was critical of the bank's motivation at the time that it contemplated making a further advance to the mortgagor in 1999. Aljade argued that the further advances were an attempt to foist the obligations of third parties onto the mortgagor. It said the mortgagor had received no "corporate benefit" from the advances.

39 It is trite to observe that a borrower may use its property as security for any legal commercial activity it chooses which may include being a guarantor of the debts of another or an assignee of a debt. There is no reason to conclude that the mortgagor was other than a willing independent participant in the negotiations in which it sought to obtain further advances from the bank for its commercial activities. Evidence of subsequent conduct has in limited and well defined circumstances been admitted to clarify the meaning of the terms of the contract.[18] No circumstance exists in this case permitting reference to such conduct for the purpose of the construction of the parties' agreement in 1997.

40 Even if the criticisms by Aljade of the bank's purposes during 1999 were correct, and I do not regard it as necessary to make any findings in that regard, such matters can throw no light upon the commercial purpose of the initial transaction or the intention of the parties at that time.

The parties commercial purpose - Construction of the documents

41 The Facility Agreement and viva voce evidence establishes that the purpose of the initial advance was to assist the mortgagor with the refurbishment of residential apartments at 123 LaTrobe Street, Melbourne. The financial facility of up to $6,863,000.00 was to be repaid from the net sale proceeds of the apartments. Any balance of the outstanding loan was to be repaid by the expiration of the Facility Agreement on 31 August 1999. The consideration for the mortgage was the granting of the advance for the purpose of the construction of the units on the property. It secured the payment of all money owing for that purpose.

42 The Facility Agreement, Mortgage of Land and Fixed and Floating Charge were all brought into existence on 22 September 1997. These documents should properly be regarded as reflecting a single transaction and so be treated as a single document for the purposes of construction.[19]

43 In reliance upon the terms of the mortgage and the MCP, Mr Lally QC who appeared with Mr M. Clarke submitted on the bank's behalf that the new facility agreement falls within the meaning of "Relevant Agreement", that the further advance falls within the definition of "Secured Money" in clause (b), (c) and (d)(i) of the mortgage and that the new facility agreement is an agreement within clause b(i) and (ii) and (c) of the meaning of "Relevant Agreement" in the mortgage. The bank submits that the definition of "secured money" in the MCP is sufficiently wide to cover an advance to the mortgagor to pay the debts of Century Estates Pty Ltd and the Adorna Group of Companies. The bank submits that a narrower construction would render parts of the memorandum of common provisions and the terms of the mortgage redundant.

44 The purchasers submit that the definition of "Secured Money" in the MCP is inconsistent with the meaning of "monies owing" in the original facility agreement. The purchasers contend that the meaning of "secured money" should be construed so that it is co-extensive with the monies owing under the original facility agreement.

45 The critical question is whether upon the proper construction of the documents the security to be provided was for "money owing" under the facility agreement and such other "secured monies" as may become owing pursuant to any further relevant agreement or whether the security was confined to money owing under the initial facility agreement.

46 In Cuzeno RVM Pty Ltd v Overton Investments Pty Ltd Palmer J regarded it as axiomatic that an all monies clause of the type contained in the MCP:

"....must be construed by reference to the context of the transaction in which the clause appears and by reference to the commercial purpose of the transaction which the clause is intended to serve........" [20]

Kenny J in Piccolo's case thought that in many cases an all monies clause would not be construed to secure a debt of a fundamentally different character from that contemplated by the contracting parties. [21] This is a case in which the intent of the contracting parties is at odds with the objectives of the draughtsman of these standard form mortgages containing general provisions.[22]

47 The terms of the mortgage and MCP are to be interpreted having regard to the facility agreement executed contemporaneously with them and in accordance with the cannon of construction that an agreement in standard form containing general provisions will give way to inconsistent written provisions made by the parties in respect to that particular transaction.[23] Reflecting such an approach the provisions of the facility agreement are expressed to prevail over the provisions of the mortgage document which in turn prevails over the provisions of the MCP.

48 In accordance with the general rule that extrinsic evidence is not admissible for the construction of a written document[24], I have not taken into account the evidence of those officers of the bank who were cross-examined without objection, to the effect that the original facility agreement was a single purpose facility for refurbishment and that at the time of the execution of these documents the bank had no intention to extend any other facility to the mortgagor.

49 As at September 1997 when the documents were executed, the only "Relevant Agreement" was the original facility agreement. The documents read together disclose that it was not the parties intention at the time of the execution of the original facility agreement and collateral securities that funds might be secured by the existing first mortgage which were of a different character and for entirely different purposes to the refurbishment of the apartments. Upon the proper construction of the documents the mortgage was confined to monies owing for purposes related to the initial facility agreement.

50 Without a further agreement between the mortgagor and bank, the mortgage, though still registered, could not provide security for an advance of a fundamentally different character.

51 The further facility agreement involved the mortgagor on its own account hypothecating its interest in the remaining apartments at LaTrobe Street largely to secure the debts of two separate corporate entities, Century Estates Pty Ltd and the Adorna Group of Companies. This was an entirely different commercial purpose to that for which the original documents were executed.

52 The agreement to make the further advances was constituted by the letter of offer of the bank dated 18 October 1999 and the letter of acceptance of that offer by the mortgagor dated 25 October 1999. The letter of offer, when accepted, was intended to replace the previous Facility Agreement.

53 The purpose of the new facility agreement was identified in the bank's letter of offer dated 18 October 1999. It read:

"Purpose. The facility is to be utilised as follows: - $495,000.00 to fully repay the Bill, Acceptance and Discount Facility owing by Century Estates Pty Ltd. This Facility will be cancelled after repayment. - $185,000.00 to service the interest payments and fees on the Facility. - $820,000.00 to partially repay the debt owing by Adorna Group of Companies to OCBC Bank (Malaysia) Berhad."

The debts of Century Estates Pty Ltd and the Adorna Group were, by the new agreement, effectively transferred to the mortgagor.

54 The purchasers submit that the agreement that the bank would provide a new facility to the mortgagor required that a new mortgage and new charge be prepared executed and registered. The bank's letter of offer dated 18 October 1999 of a further facility to the mortgagor provided:

"Existing Securities (1) First Registered Mortgage over all the remaining apartments, storages and car park bays at 123 LaTrobe Street, Melbourne given by the customer. (2) Guarantee and Indemnity given by Dato John Wa Tan Fong. (3) First Registered Fixed and Floating Charge over the assets and undertaking of the customer."

The letter of offer also described new securities that were to be executed being a Subordination Agreement from related companies and an Authority to Set Off and Appropriate over deposit accounts.

55 The mortgagor's letter of acceptance prepared by the bank required the bank to commence preparation of "the security documents in accordance with the letter of offer". This was plainly a reference to the new securities. The letters of offer and acceptance constituted a new facility agreement. Whether the new facility agreement constituted a variation or termination of the old agreement as MKIC contends[25], the existing first mortgage was to be maintained to operate as security for the further advances to be made under the new agreement.

56 The only viva voce evidence on this subject came from Ms Koh. She said that the mortgagor was not required by the bank to execute a further security as there had been no discharge of the first mortgage. She believed that the security was still in place. The only new documents which needed to be executed were the authority to set up the new facility and a subordination agreement. The bank's solicitor had not been asked to prepare any new documentation for execution in relation to the new facility as the securities already existed.

57 The mortgagor did not seek a discharge of the existing first mortgage and accepted that the existing mortgage should be used to secure the further advance. Aljade, in its written submissions acknowledged the mortgagor agreed to extend the mortgage to cover the new advance but said it did so under threat from the bank that the first facility would expire and the securities would be called up.

58 By the new agreement the mortgagor and bank intended that the registered first mortgage be utilised as the principal security for the new advances. That is to say, the parties by their new agreement determined to extend the operation of the existing mortgage to provide security for further advances unrelated to the purpose of the original facility agreement.

What was the status of the first mortgage and charge following repayment in full of the advance made under the original facility agreement?

59 The purchasers deny that the bank had any existing legal interest in the land after the monies owing under the original facility agreement being the "secured money" under the mortgage had been repaid in full on 29 September 1999.

60 The purchasers made the following submission. As there was no money owing to the bank which could be secured by the mortgage or charge, the mortgagor was entitled to have the securities discharged. They submit that the further advances made by the bank to the mortgagor in November 1999 were pursuant to the new facility agreement which replaced the original facility agreement which had come to an end either as a consequence of the express words of the new facility agreement or by implication. If the first mortgage was a continuing one as the bank has claimed, it only became enlivened, the purchasers submit, once the bank and the mortgagor entered into the further facility agreement on 25 October 1999 and that such an agreement being later in time than the purchasers' contracts of sale, the purchasers' equitable interests have priority.

61 The purchasers rely upon National Bank of Australasia Ltd v Mason[26] and Perry v Rolfe[27] in support of the contention that, although their equitable interests stood second to the interest of the bank prior to 28 September 1999, once the original facility agreement was repaid in full, the mortgage and charge "secured nothing" and the purchasers' equitable interests became first in time. Neither case to which the purchasers referred establishes the proposition upon which the purchasers rely.

62 In Sibbles v Highfern Pty Ltd[28] the High Court was concerned with a mortgage granted to secure an overdraft account of fluctuating amount. The contractual arrangement between bank and customer continued though at different times no money was owing by the customer to the bank. In the principal judgment reference is made to the decision of the House of Lords in London & County Banking Company (Limited) v Ratcliffe[29] in which the Lord Chancellor observed that until advances were actually made by a bank to a mortgagor "there was not and there could not be, any existing charge for them".[30] Mason CJ, Dawson, Toohey and Gaudron JJ regarded the Lord Chancellor as meaning:

"that a charge in relation to a further advance cannot operate on the property charged until the advance is made."[31]

The majority judgment was to the effect that the underlying contractual arrangement continued to subsist. Though the mortgage continued, the charge did not operate upon the property until the account with the bank was overdrawn.

63 Whether the mortgage was a continuing one or had been revived by agreement between the parties, the bank did not have a charge which operated between 29 September 1999, and the 25 October 1999. The charge commenced to operate from 4 November 1999 when the first advance pursuant to the new facility was made. It was the advances pursuant to further facility agreement which provided the foundation for the bank's claim that the mortgagor was in default under the mortgage.

64 As the mortgage was not, in my view, a continuing one, it is likely that the bank was a constructive trustee for the mortgagor during the period between 29 September 1999 and 25 October 1999, but as this has not been the subject of submissions I do not stay to consider it.[32]

65 The purchasers' submission that the bank no longer had a legal interest is misconceived. The first mortgage had not been extinguished by the fact that the advance had been paid off. There was no discharge of the mortgage. The bank's mortgage continued to be registered on the title and the bank at least retained a bare legal interest in the land, the mortgage in due course securing the further advances as a consequence of the new agreement between the bank and mortgagor.

66 I shall later consider the bank's position if, as the purchasers' submit, the bank ceased to hold a legal interest upon repayment of the initial advance.

67 The question then arises as to whether the bank's security for the further advances was to be postponed to the equitable interest of the purchasers, upon the application of the rule in Hopkinson & Anor v Rolt.[33]

68 The House of Lords in Hopkinson v Rolt held that a first mortgagee whose mortgage is taken to cover what is then due and also future advances cannot claim the benefit of such future advances in priority over a second mortgagee of whose mortgage it had notice at the time of its execution and before it made these new advances. The case overruled Gordon v Graham,[34] Lord Cowper having there reasoned that it was the folly of the second mortgagee with notice of the first mortgage, to take such a security.

69 The rule in Hopkinson v Rolt was explained by Lord Blackburn in Bradford Banking Co Ltd v Henry Briggs Son & Co Ltd:

"The first mortgagee is entitled to act on the supposition that the pledgor who was owner of the whole property when he executed the first mortgage continued so, and that there has been no such second mortgage or pledge until he has notice of something to shew him that there has been such a second mortgage, but as soon as he is aware that the property on which he is entitled to rely has ceased so far to belong to the debtor, he cannot make a new advance in priority to that of which he has notice. As Lord Campbell says,

'The hardship upon the bankers from this view of the subject at once vanishes, when we consider that the security of the first mortgage is not impaired without notice of a second'.

It seems to me to depend entirely on what I cannot but think a principle of justice, that a mortgagee who is entitled, but not bound, to give credit on the security of a property belonging to the debtor, cannot give that credit after he has notice that the property has so far been parted with by the debtor." [35]

70 The rule ensures that a first mortgagee cannot encroach upon the mortgagor's remnant estate so as to enlarge the scope of its first mortgage to cover fresh advances when the first mortgagee knows the property to no longer be the mortgagors to charge.[36] The principle underlying the rule was explained by Lord Lindley M.R. in West v Williams:

"That an owner of property dealing honestly with it, cannot confer on another a greater interest in that property than he himself has. The rule rests on no technicality of English law; it is based on the plainest good sense."[37]

71 The rule is not confined to competing mortgages.[38] When the holder of the subsequent interest is a purchaser of land the rule also applies[39] as it does to an assignee of the mortgagor's interest.[40]

72 The source of the rule is to be found in equitable principles based on notice affecting the conscience, so that the person with notice takes subject to it. The rule does not depend upon the doctrine of estates.[41] It is the equities derived from the contractual relationship which make it unconscionable for the mortgagor to further charge the property to secure a subsequent advance made by the mortgagee. Notice that the prior interest exists makes it inequitable for the mortgagee to rely upon its subsequently acquired interest which the mortgagor was not entitled to create. The rule was described by Holland J in Matzner v Clyde Securities Ltd as based upon "justice and fair dealing as between the mortgagor and mortgagees." [42]

73 Considerations of fairness and justice applicable to priorities between successive mortgagees were again identified as the foundation for the rule in Mercantile Credits Ltd v Australia and New Zealand Banking Group Ltd.[43] The rule does not affect the mortgagee's title to the charge upon the land which extends at any given time only to the amount owing at that time. As King CJ stated:

"The rule in Hopkinson v Rolt does not operate to defeat that security or any part of it. It merely fixes the amount for which the security has priority over subsequent securities at the date upon which the mortgagee has notice of those subsequent securities."[44]

74 So far as Torrens title land is concerned principles as to notice, constructive notice and inquiry which may affect the title to general law land have little or no scope for operation because one who becomes the registered proprietor under Torrens title "takes free from all unregistered interests whether he has notice of them or not."[45]

75 The rule with which I am concerned does not affect indefeasibility of title. Such equitable doctrines as the rule in Hopkinson v Rolt remain enforceable against those who have acquired a registered interest under the Torrens system.[46] In Mercantile Credits Ltd v ANZ Banking Group Limited King CJ observed that:

"....the principal of indefeasibility of title cannot operate to exclude a rule of law, derived from equity, which limits priority over a subsequent registered mortgage to the amount for which the security exists at the time of notice of the subsequent mortgage."[47]

76 The rule in Hopkinson v Rolt has been applied on numerous occasions to the Torrens system of title by registration.[48] The New South Wales Court of Appeal in Sussman & Anor v AGC Advances Ltd[49] was concerned with the principle in Otter v Lord Vaux[50] which, like the rule in Hopkinson v Rolt, is based on equitable notions of fair dealing and justice as between a mortgagor and second mortgagee. President Kirby, with whom Powell JA agreed, said:

"...the system of title under which the property is held should not be regarded as a point of differentiation if the system of title by registration can accommodate the rule. Long standing authority in this State and in Victoria have held that it can."[51]

77 The rule operates only when the first mortgagee has made a further advance.[52] It has no application where the first mortgagee is bound to make and the mortgagor bound to accept advances made after the date of the second mortgage. [53] When the further advances are made under a building mortgage so that each advance facilitates the construction of the building and increases rather than diminishes the value of the security, the rules do not operate. Matzner v Clyde Securities Ltd was such a case where advances made were necessary to enable the buildings to be completed. The mortgagee's obligation to make advances under the terms of the mortgage were not discharged by notice of the subsequent mortgages.

78 Even if the holder of the subsequent interest acquires that interest with notice of the first mortgage, the rule operates.[54]

Must there be an intention to oust the intervening interest?

79 Based largely upon the judgment of Kearney J in Central Mortgage Registry of Australia Ltd v Donemore's Pty Ltd[55], the bank claims that it will only lose its priority if its conduct was accompanied by an intention to oust the intervening interest. Kearney J described the rule in Hopkinson v Rolt as founded on it being an equitable fraud for the first mortgagee to claim priority in respect of further advances which were made with notice of an intervening equity.

80 His Honour quoted a passage from the judgment of the Canadian Court of Appeal in Pierce v Canada Permanent Loan and Savings Co in which it was said:

"In the absence of notice (i.e. notice which gives him real and actual knowledge, and so affects his conscience), the mortgagee is entitled to assume and act on the assumption that the state of the title has not changed." [56]

81 The decision of Kearney J in Donemore rested heavily upon the Irish case of O'Byrne's Estate,[57] in which a first mortgagee made bona fide advances under an all monies mortgage unaware that the mortgagor had further mortgaged the property, the subsequent mortgage then becoming registered. The first mortgage being registered, the charge over further advances had priority in the absence of actual notice by the first mortgagee of the second mortgage. The registration of the second mortgage did not prevent the first mortgage from operating as security for such further advances made to the mortgagor.

82 Kearney J in Donemore set out the following passage from the judgment of the Lord Chancellor in O'Byrne:

"It was on the ground of notice, and of notice alone, that the priority of the first mortgage was interfered with; and as the ground on which the courts of Equity interfere, where notice is proved, with what otherwise would be the rights of the party, is, that it is necessary to do so in order to prevent fraud, it follows that the ground on which the first mortgagee was postponed was that it was considered that his making, voluntarily and without any legal obligation on his part to do so, a further advance when he knew of the second mortgage, and so knowingly and deliberately ousting, or endeavouring to oust, the right acquired by the second mortgagee, would be, if it were allowed to prevail, a fraudulent act, and as such could not be allowed to stand." (emphasis mine).[58]

83 In this passage from O'Byrne's case, the Lord Chancellor expressed his view as to the basis upon which the first mortgagee's interest had been postponed in Hopkinson v Rolt. In my respectful opinion their Lordships judgments in Hopkinson v Rolt do not rest on the ground that the first mortgage was postponed because the mortgagee had the knowledge and intent described by the Lord Chancellor.

84 In Hopkinson v Rolt, Lord Chelmsford, speaking of the facts in the decision of Gordon v Graham[59], which their Lordships overruled, referred to the knowledge by the assignee of the mortgage of the subsequent equitable charge in the following terms:

"But it was a very different question whether if, with knowledge of this deed and of the priorities established by it (which must be assumed), he chose to make further advances, he ought to be allowed to rank for these before Montgomery."[60] (emphasis mine)

In the following passage, Lord Chelmsford challenged the doctrine upon which Gordon v Graham was based:

"The reason upon which the doctrine proceeds is 'that it was the folly of the second mortgagee with notice to take such security'. Now, what is this but to say that a mortgagee, by taking a security for advances which may never be made, may effectually preclude a mortgagor from afterwards raising money in any other quarter? And, as the first mortgagee is not bound to make the stipulated farther advances, and with notice of a subsequent mortgage, he can always protect himself by inquiries as to the state of the accounts with the second mortgagee, if he chooses to run the risk of advancing his money with the knowledge, or the means of knowledge, of his position, what reason can there be for allowing him any priority? What injustice is done to him by postponing him to the second mortgagee under such circumstances? But, on the other hand, if it is to be held that he is always to be secure of his priority, a perpetual curb is imposed on the mortgagor's right to encumber his equity of redemption."[61] (emphasis mine)

85 There was no fraud involved in the case of Hopkinson v Rolt, as it is understood at common law, the first mortgagee believing, upon a mistaken view of the law, that it retained its priority for further advances which it made notwithstanding its knowledge of the creation of a further encumbrance by the mortgagor. The loss of the first mortgagee's priority arose because of the knowledge of the first mortgagee that the owner of the property had further dealt with that property prior to the making of the further advance, the justice not resting upon any notion of a wrongful intent. A first mortgagee who makes further advances with full notice of the security of the second mortgagee is left in full possession of their option to make or to refuse further advances as they deem prudent. As the Lord Chancellor observed in Hopkinson v Rolt:

"The hardship upon bankers from this view of the subject at once vanishes when we consider that the security of the first mortgage is not impaired without notice of a second, and that when this notice comes, the bankers have only to consider (as they do as often as they discount a bill of exchange), what is the credit of their customer, and whether the proposed transaction is likely to lead to profit or to loss."[62]

86 In considering the justice of the rule neither the judgments of the Lord Chancellor or Lord Chelmsford or the dissenting judgment of Lord Cranworth raise considerations of intent or fraud.

87 The rule in Hopkinson v Rolt has been held to apply as against the title of a purchaser of the mortgagor's land so that the mortgagee could not further charge the land by any subsequent advances which the mortgagee might make to the mortgagor/vendor.[63] In London & County Banking Co v Ratcliffe, their Lordships concluded that the bank had no charge on the land as against the purchaser for the fresh advances made by the bank with knowledge of the mortgagor's contract of sale. Their Lordships further held that a purchaser of land with notice that the bank holds the land as security for the general balance on the vendor's present and future account is not bound to inquire whether the bank has, after notice of the purchase, made fresh advances. The burden lies on the bank advancing on the security of the unpaid vendor's land, to give notice to the purchaser that it has so done or intends so to do.[64]

88 In Union Bank of Scotland v National Bank of Scotland,[65] the House of Lords reaffirmed the application of the rule preventing tacking where the mortgagor, to the knowledge of the mortgagee, has disposed of her interest in the land to another. Their Lordships considered the question to be whether the borrower:

".....having bargained away and made an assignation of her reversionary right to the knowledge of the National Bank could then obtain further advances upon the security of an interest which she had for valuable consideration already assigned to a third person. My Lords, it seems to me that such a proceeding is contrary to good faith, and the decision of Your Lordships' House in Hopkinson v Rolt establishes the principle and establishes it upon the broadest grounds of natural justice ... Doubtless each of the two parties may be said to have proceeded upon a bona fide belief in their respective rights and to have acted in pursuance of them, but how it can be suggested that Mrs McArthur could in good faith affect the charge with further sums borrowed that which she had already purported to assign I am at a loss to understand, and it is to be observed that the National Bank made the advances for which they now claim priority with the knowledge that Mrs McArthur had done so."[66] (emphasis mine)

89 The rule in Hopkinson v Rolt was applied in Bradford Banking Co Ltd v Henry Briggs Son & Co Ltd where following notice to a company that the shareholder had deposited his share certificates with a bank as security for the balance due and to become due on his current account, a company could not in respect of monies which became due from the shareholder to the company claim priority over advances made by the bank made after such notice. [67]

90 In Deeley v Lloyd's Bank Ltd,[68] the House of Lords referred with approval to its earlier decisions in which the rule had been applied. Their Lordships found that a bank, as first mortgagor, having had notice of a second mortgage could not prima facie as against the second mortgage, insist that the payments made after the date of that notice be applied so far as needed to discharge the debts anterior to that date, the second mortgagee in fact having gained priority. Referring to the bank's intention following the receipt of notice of the second mortgage Lord Atkinson was to state:

"It is said it never could be supposed that Wilkinson intended to postpone the bank's mortgage to Deeley's, thereby lessening the security of the bank. But the acquisition of priority for the latter security rests on the receipt of the notice by the bank. Wilkinson had forgotten all about the notice. He never thought of the acquisition of priority by Deeley's mortgage and it seems to me impossible for any human being to intend to bring about, or to retard, a result which was never present in his mind at all."[69] (emphasis mine).

91 The High Court in Sibbles v Highfern Pty Ltd referred without criticism to the rule in Hopkinson v Rolt and to the subsequent line of authority in which the rule was applied. In none of these cases did the first mortgagee intend to oust the rights acquired by a subsequent interest holder though the first mortgagee's conduct was calculated to do so.[70]

92 It is contrary to good faith on the part of a first mortgagee to do anything which would facilitate the enlargement of the scope of the first mortgage to the detriment of a second mortgage or to a purchaser under a contract of sale where the first mortgagee has notice of such equitable interest.[71] There was no suggestion in any of their Lordship's judgments in Deeley's case that the first mortgagee had conducted itself with the intention of depriving the subsequent interest holder of their rights. In each of the authorities to which I have referred the first mortgagee was found to have acted in ignorance or under a mistaken belief as to the law or the facts.

93 The mortgagee's conduct in such cases has sometimes been described as a species of fraud against which equity will provide relief. Both Kearney J in Donemore's case[72] and Anderson J in R & I Bank of Western Australia v Cash Resources Australia Pty Ltd[73] expressed the opinion that the knowledge of the mortgagee must be sufficient to sustain a charge of equitable fraud. Lord Lindley in Assets Co Ltd v Mere Roihi; Assets Co Ltd v Wiremu Pere[74] described equitable fraud as a misleading expression which denoted conduct having consequences in equity similar to those which flow from fraud. Equitable or constructive fraud need not carry with it an element of dishonesty though there are clearly species of equitable fraud which contain it.[75] It ranges from conduct involving moral turpitude to conduct which merely affects the conscience.[76] Fraud involving personal dishonesty is essential under s.42 of the Transfer of Land Act.[77] It was described by Batt JA in Russo v Bendigo Bank Ltd[78] as being "an intention to affect adversely the rights of another person or at least recklessness as regards the affection of such rights."[79] Such fraud need not be established to obtain equitable relief under the rule in Hopkinson v Rolt.

94 The knowledge of a first mortgagee necessary to attract the rule was described by Anderson J in R & I Bank v Cash Resources in the following terms:.

"The first mortgagee is entitled to act on the basis that his security continues in full effect until he has notice of something to the contrary. Knowing that a second mortgagee has acquired an interest in the property, it would be, in the language of equity, against conscience to allow the first mortgagee to make a further advance calculated to affect the rights of the second mortgagee." [80] It is not suggested by any of the parties that the facts in the present case are analogous to those in R & I Bank, but his Honour's reasons are nonetheless apposite. His Honour was not ascribing a particular intention to the first mortgagor when stating that it would be against conscience to make a further advance "calculated to affect the rights of the second mortgagee". This is to focus upon the likely consequences of such conduct upon the known interests of another.

95 To require a deliberate ousting of rights would significantly limit the scope of the rule which in most cases has been applied where the mortgagee, with notice of the subsequent interest holder, made the further advance in the bona fide belief that the existing charge entitled it to priority. No personal dishonesty, moral turpitude or an intent to oust the other's rights was involved. The bank's submission in the present case erroneously equates notice under the rule with fraud involving a wilful disregard and violation of the rights of another.[81]

96 The purchasers carried the legal burden of establishing that the bank had notice of their equitable interests. The party alleging notice sufficient to affect the conscience must prove it.[82] The purchasers discharged their legal onus of proof by establishing that the bank had actual notice through its officers and imputed notice through its solicitors of the purchasers' equitable interests. The bank alleged that it ceased to have such notice upon its officer, Ms Koh, being informed by the mortgagor that the contracts were not proceeding. The bank carried an evidential burden of establishing that it no longer had notice,[83] and in its submissions, properly conceded that it bore such an evidential burden of proof. Much of the trial was taken up with evidence directed to this issue and I now to turn to consider whether the bank has discharged its onus of proof.

The bank's knowledge of the purchasers' equitable interests

97 The bank submits that the following findings should be made on the evidence.

(1) The mortgagor informed that the bank on 28 September 1999, through its officer Ms Koh, that the purchasers contracts were not proceeding.

(2) Ms Koh believed Dato Fong, the managing director of the mortgagor, when he said that the contracts were not proceeding.

(3) The bank had no reason to distrust Dato Fong when he told Ms Koh that the contracts were not proceeding.

(4) The knowledge of other bank officers or the bank's solicitors as to the purchasers' interests were superseded by the knowledge acquired by Ms Koh on 28 September 1999.

(5) The bank and Ms Koh continued to believe after 28 September 1999 and at the time each further advance was made in November 1999 that the purchasers' contracts were not proceeding.

(6) The bank would not have made the further advance to the mortgagor in November 1999 had it believed that the purchasers' contracts were proceeding.

(7) The bank did not deliberately or knowingly oust or endeavour to oust the equitable interest of the purchasers.

(8) Ms Koh was not guilty of wilful blindness or recklessness.

98 Ms Enconniere, a senior officer in the bank and Ms Koh's superior, acknowledged that there was not a good banker-customer relationship between the OCBC Bank, Malaysia Berhard and the Adorna Group of Companies in Malaysia of whom Dato Fong was the managing director. OCBC Malaysia wished to terminate its relationship with the Dato Fong group of companies. OCBC Melbourne was requested to participate in a global strategy to exit the relationship with the Adorna Group of Companies.

99 It was anticipated that the advance under the facility agreement would be fully repaid by the mortgagor by 31 August 1999 leaving the mortgagor with eight unencumbered apartments worth approximately $2,000,000. The bank's strategy was to utilise the remaining unencumbered apartments upon full repayment of the initial advance, so as to strengthen the bank's security in connection with large debts of companies in Australia and overseas associated with the mortgagor.

100 The bank had not been forthright with Mr Fong in telling him for how long they were prepared to extend the first facility. Whilst approval had been given from head office for a six month extension from 31 March 1999, Mr Fong was told that it was for a three month period to keep pressure on Mr Fong.

Ms Koh's involvement with the mortgagor's files

101 Ms Koh testified that she was asked by Ms Enconniere to help out in August 1999 with the mortgagor's file and that it was toward the end of 1999 that she took over the day to day management of that account and became the account manager responsible for the mortgagor.

102 According to Ms Enconniere and Mr Phua, the former account manager for the mortgagor, Mr Phua had no responsibility for the mortgagor's file from mid 1999 when Ms Koh took over. However, on 18 October 1999 Mr Phua signed a letter by the bank to the mortgagor offering the further facility. He could not recall why he was involved at that time. On the following day, Mills Oakley sent him a facsimile confirming what apartments at LaTrobe Street had been sold. Mr Phua could not explain why the facsimile had been sent to him.

103 By late July Ms Koh had to familiarise herself with the mortgagor's file as it was being proposed by the bank that the securities of the mortgagor and associated companies, Century Estates and Aubella, should be cross collateralised and a deed of debt subordination executed by the three companies. By late July or early August 1999, Ms Koh was aware that an offer by the bank as to the terms on which the facility agreement would be extended had not been accepted by the mortgagor. She had discussions with Dato Fong and Vincent Fong during August and she prepared a credit review of the mortgagor and related companies in mid September.

Contingent liability for debts of Century Estates

104 The purchasers submitted that Ms Koh misled the Court when answering interrogatories as to whether the mortgagor was contingently liable for the debts of Century Estates Pty Ltd. I do not accept that Ms Koh in her answers to interrogatories intended to mislead the Court. She did not appreciate at the time she swore her answer that the obligations of the mortgagor ceased once Century Estates security dropped below $495,000.

105 The purchasers submitted that Ms Koh misled her superiors in Singapore regarding the status of the mortgagor's account. The deed of debt subordination which had been requested by the Singapore office of the bank had not been obtained by Ms Koh. Her correspondence to the Singapore office suggested otherwise. The bank in its submissions in reply conceded that the information contained in her report to Singapore may not have been "entirely correct", but submitted that I should accept her testimony that she did not deliberately mislead her superiors. I am not persuaded that her conduct was deliberate.

106 It was also submitted by the purchasers that the Singapore office had been misinformed by Ms Koh as to the state of up-to-date financial accounts of the mortgagor in the 16 September 1999 credit review prepared by Ms Koh.

107 The bank submits that any errors of advice by Ms Koh to the Singapore office did not provide Ms Koh with a motive to misrepresent her understanding of whether the Aljade and MKIC apartments were available as security. It was plainly a matter of great importance to the bank that these apartments remain available as security for the Century Estate and Adorna debts. These errors in advice may have influenced Ms Koh's conduct, but I am unable to make a positive finding to that effect.

Partial discharges of mortgages prepared by the bank's solicitors

108 It was the responsibility of the solicitors for the bank to determine whether the terms and conditions of each contract of sale complied with the terms and conditions which the mortgage stipulated must be present in each contract. When a unit was sold, the contracts of sale were forwarded to the bank's solicitors, who would verify the terms of the contract of sale and would advise the bank as to the amount of proceeds that the bank would receive. The solicitors would prepare discharges of mortgage for the bank to execute. In March 1999, the bank received a letter from its solicitors enclosing partial discharges of mortgage for the Aljade and MKIC apartments and advising the bank that they expected settlement to be effected in late September. The bank did not send back these partial discharges for the Aljade and MKIC contracts. Ms Koh surmised in evidence that there must have been some communication from the bank's solicitors advising that these partial discharges were not presently required for settlement. This is consistent with the agreement reached by the bank and mortgagor's solicitors that the settlement should wait until sufficient other apartments had been sold to fully pay off the advance.

109 On 17 August 1999, the solicitors for the mortgagor sent copies of particulars of sale of the contracts for the Aljade and MKIC apartments to the bank's solicitors. The enclosures have never been located. Under cross-examination the solicitor for the bank conceded that the enclosures would have been received, but could offer no satisfactory explanation for why the enclosures could not be found. On 9 September 1999 his firm wrote to Mr Phua at the bank enclosing partial discharges of mortgage for the Aljade and MKIC apartments. I infer that the partial discharges were prepared upon the basis of the particulars of sale which the bank's solicitors had received. There was no other documentation discovered from the bank's solicitor's file containing information which would have enabled the discharges for those apartments to be prepared.

110 None of the bank's officers claimed to be aware of the arrangement made by their solicitors with the mortgagor's solicitors on 14 July 1999, to which I have earlier referred, that the settlement of the MKIC and Aljade apartments, would have to wait until the bank had received sufficient funds from other sales to enable it to release the titles to the Aljade and MKIC apartments.

Bank's receipt of 17 August 1999 facsimile and enclosures

111 It was normal for any correspondence concerning the mortgagor to be given to the manager of the mortgagor's file. I have earlier referred to the receipt by the bank of the facsimile containing copies of pages of the contracts of sale for the Aljade and MKIC apartments. Ms Koh claimed that she was not given this facsimile. The facsimile was discovered by the bank, but the first page of the facsimile, which would identify to whom it was addressed at the bank, was missing. Mr Phua and Ms Enconniere denied that they received it.

112 The bank had a small office. A female member of staff had responsibility for opening the mail and distributing it. The practice was for such documents to be given to the file manager.

113 Ms Koh testified that the facsimile relating to the Aljade and MKIC apartments appeared to have been wrongly filed with the documents relating to Unit 28. There was only one file kept by the bank for the mortgagor's property. All of the correspondence from the bank's solicitors and any communications with the mortgagor would be placed on that file. By 28 September 1999, the sale of Unit 28 had been settled and a partial discharge of mortgage for it had been signed. Ms Koh had still not, she said, sighted the facsimile. She gave evidence it was only on 28 September 1999 when she went to the file that she found the facsimile for the Aljade and MKIC apartments.

114 The purchasers submit that Ms Koh's account should not be accepted. They also argue that Ms Koh misled the Court when explaining what attempts she made to locate the first page of the facsimile. In her answers to interrogatories on behalf of the bank, she deposed that after making proper inquiries of the bank's servants and agents she was unable to recall what had become of the first page of the fax. The purchasers correctly submit that this evidence was inconsistent with the evidence of Ms Lo who worked in the office and Mr Phua who deposed that neither, before or after the commencement of this litigation had anyone made inquiries of them about the facsimile.

115 The enclosures to the facsimile comprising particulars of sale of the purchaser's contracts were not, according to the bank's solicitor who was responsible for the bank's file, seen or considered by him, and they were not, Ms Koh claims, seen or considered by her until the day prior to the repayment in full of the initial advance. The bank points out that Ms Koh conceded that she read the facsimile on 28 September 1999 which was well before any further draw down occurred. The bank submits that Ms Koh had no motive to mislead the Court as to when she first read the particulars of sale of the purchasers' contracts or to mislead the Court as to the attempts she made to locate the cover page of the facsimile. Further, the bank contended that the evidence did not establish that there was any firm practice in relation to filing of documents.

116 As the bank received the discharges for execution on 9 September 1999 and executed them shortly thereafter, the question arises as to why Ms Koh would wait until the day prior to repayment of the advance to make inquiries of the mortgagor if she thought inquiry was needed.

117 Ms Koh recalled having sighted requests for discharges of mortgage over the Aljade and MKIC apartments at the time that Ramona Enconniere signed the discharges in September. Ms Enconniere said that she was shown the letter of 9 September 1999 and partial discharges and was requested by Ms Koh to execute them. The bank signed those discharges in anticipation that there would be a settlement of the Aljade and MKIC apartments. Because the debt to the bank was about to be paid out, Ms Enconniere was not concerned with whether the contracts of sale were in accordance with the approved form of contract when she signed the discharges of mortgage for the Aljade and MKIC apartments in September 1999.

118 Ms Koh claimed that as the time approached for the full repayment of the first advance she went back to the file to examine the requests for discharge of mortgage in relation to the Aljade and MKIC apartments. Her explanation for doing so was to ensure that enough apartments remained to provide the bank with sufficient security for the new facility that it was negotiating with the mortgagor.

The alleged conversation with Dato Fong on 28 September 1999

119 Mr Lucarelli Q.C., who appeared with Mr Salpic for MKIC has submitted that the conversation of the 28 September 1999 was a recent invention by Ms Koh. It was first raised on 28 October 2002 in answer to interrogatories. It had not been referred to in Ms Koh's affidavit sworn 10 May 2002 in support of the bank's application to have the caveats lodged by the purchasers removed. The purchasers submit that prior to this time the bank had simply denied that it had consented to the purchasers' contracts with the mortgagor. It is said, on the bank's behalf, that it would have been inappropriate for Ms Koh to refer to this conversation in her affidavit in support of the bank's application to have the purchaser's caveats removed as it was not part of the formal proofs required on an application for removal of a caveat. I agree that the drawing of an inference from the failure to refer to this conversation in the affidavit would not be justified.

120 In further support of the contention that it was "recent invention", the purchasers point to the fact that the conversation had not been pleaded in the bank's original defence filed on 9 July 2002, nor had it been referred to in any correspondence passing between the purchasers and the bank's solicitors prior to the commencement of any proceedings.

121 Ms Koh was unable to recall whether Mr Fong had been in Australia or Malaysia when she called him. The bank, despite requests by the purchasers for discovery, had provided no telephone records to confirm that such a phone call had been made on 28 September 1999. Ms Koh did recall that she was in her office and that she initiated the call to Dato Fong. The bank relies upon this evidence as being indicative of a truthful person attempting to recall events to the best of her ability.

122 In evidence-in-chief Ms Koh said that she believed Mr Fong because the contracts had been signed earlier in the year and it was very common for overseas purchasers not to proceed with such contracts. She referred to her previous experience of purchasers buying off a plan who chose another unit or did not proceed with that particular development. In support of this explanation the bank discovered only one contract where a purchaser did not proceed. That contract was conditional on finance being obtained.

123 Ms Koh denied in cross-examination that she had fabricated a reason for believing the purchasers were not proceeding with their contracts. She also stated that because of the bank's past dealings with Mr Fong there was no reason for her to doubt his statement.

124 In cross-examination Ms Koh said that she pointed out to Dato Fong that the contracts had come to the bank's attention. She told him they were contrary to the understanding they had reached that the security for the further facility included the Aljade and MKIC apartments and that repayment of the further advance would come from the net proceeds of sale of those apartments. She told Mr Fong that these contracts were contrary to the arrangement with the bank and she asked whether the contracts were going to proceed. Mr Fong replied that the contracts were "not going to proceed". When counsel for Aljade reminded her of her initial explanation that it was not uncommon for purchasers not to proceed, Ms Koh suggested that she may have misunderstood the questions the previous day in which she had proffered this explanation. Though these explanations may not, as the bank submits, be inconsistent, the manner in which Ms Koh offered them raised doubts about her account.

125 Ms Koh gave slightly differing evidence at various stages of her evidence as to precisely what Dato Fong had said - "the contracts are not proceeding", "are not proceeding any more", "are not going to proceed", "are not about to proceed" and "I am not proceeding".

126 Ms Koh's file note, which was discovered, was further evidence, the purchasers submit, of the conversation being "recent invention". It was not, the purchasers argue, in accordance with her usual practice which was to make detailed file notes which were often countersigned or initialled by her superiors when concerning important banking matters. On other occasions she had forwarded letters to the mortgagor setting out the important aspects of their discussions. Though Ms Koh referred to a practice of writing file notes or making notations she said that she did not do so if nothing substantial was discussed. The information she alleges Mr Fong provided would have been a matter of some significance to Ms Koh, yet she made no appropriate record of the mortgagor's information, nor did she confirm the mortgagor's advice in writing or tell anyone else.

127 Ms Koh initially said she would have mentioned her conversation with Mr Fong to her superior, Ms Enconniere. When pressed she was unsure as to when she would have mentioned it to her. She subsequently said she told Ms Enconniere in late October or early November 1999, at the time of the first draw down, that the purchasers' settlements were not going to proceed. She finally stated that she thought she would have mentioned it to Ms Enconniere but very much later than December 1999. She said she did not need to tell Ramona Enconniere about the conversation with Mr Fong because she was then the Account Manager.

128 Ms Enconniere contradicted Ms Koh. Initially she said that during 1999 she was not aware of the alleged conversation between Ms Koh and Dato Fong on 28 September 1999. She subsequently testified that Ms Koh "would" have mentioned it, but she "wouldn't know when, on what basis or how" she came to mention it. Ms Enconniere finally conceded she had no memory of Ms Koh mentioning any conversation with Dato Fong in 1999. Given the importance of the security to the bank it is a conversation which I would have expected her to recall if it occurred.

129 Ms Koh did not tell Mr Phua about it nor did she tell anybody in head office in Sydney or in Singapore. She said that he was no longer looking after the account at this time. She claimed she did not think there was any need to tell anyone as she did not at that stage know the importance of what the mortgagor had done.

130 After speaking with Mr Fong on 28 September 1999, Ms Koh did not make contact with MKIC, Aljade or their solicitors. She did not tell the bank's solicitors that the MKIC or Aljade contracts would not be proceeding. According to Ms Koh she simply accepted Mr Fong's word. The bank points to the fact that the contracts of sale were not sent to the bank until 17 August 1999 as supporting Ms Koh's belief that the contracts were not proceeding.

At a glance

Court

Decision date

Before

Source

Judgment (394 paragraphs)

Parties

Cases Cited (33)