Padovan & Anor v MGG Group Pty Ltd

Judgment 1In these proceedings the Plaintiffs, Michael Padovan and Ravi Bale, initially sought a declaration that land situated at Lot 2 of a property at Chetwynd Road, Merrylands ("Merrylands Lot") is subject to an equitable charge in their favour to secure repayment of the amount of $464,000 and other moneys due under a contract dated 28 August 2006 ("Contract") for the purchase of that land from MGG Group Pty Limited (in liquidation) ("MGG Group") and RCJ Holding Pty Ltd (in liquidation) ("RCJ Holding"). MGG Group is a company associated with the Third Defendant, Mr Mouhsen Gittany ("Mr Gittany"). RCJ Holding is a company associated with the Fourth Defendant, Mr Steven Jeitani ("Mr Jeitani"). The proceedings against Mr Jeitani were previously stayed due to his bankruptcy by reason of s 58 of the Bankruptcy Act 1966 (Cth) and the Plaintiffs sought and were granted leave to discontinue all claims for relief so far as they concerned Mr Jeitani. I do not understand the claim for a declaration as to a charge over the Merrylands Lot to have been pressed at the hearing, and I note that property was subsequently sold in a mortgagee sale. 2The Plaintiffs also sought a declaration that they were entitled to be subrogated to the rights of Arab Bank Australia Limited ("Arab Bank") against, relevantly, Mr Gittany as guarantor of the debt due to Arab Bank from MGG Group which was secured by a registered mortgage held by Arab Bank over the Merrylands Lot. They seek an order that, relevantly, Mr Gittany pay the amounts due on rescission of the Contract and a declaration that they are entitled to contribution from Mr Gittany in respect of the whole of the funds received by Arab Bank from the sale of the property in reduction of the debt due to Arab Bank from MGG Group. 3The Plaintiffs rely on the affidavits of Mr Michael Padovan sworn 25 August 2010 (Padovan 1) and 21 February 2011 (Padovan 2) and the affidavit of Mr Ravi Bale sworn 21 February 2011 (Bale). Mr Gittany relies on his affidavit sworn 19 July 2011 (Gittany). Factual background 4Each of the Plaintiffs is a director and shareholder of Turbo Scaffolding and Formwork Pty Ltd ("Turbo Scaffolding") which is a manufacturer and importer of scaffolding equipment. From November 2003, Turbo Scaffolding supplied scaffolding material to Gittany Scaffolding Pty Ltd ("Gittany Scaffolding") and, as at 31 March 2005, Gittany Scaffolding owed $106,137.64 to Turbo Scaffolding (Bale [5], [7]; Padovan [9]). 5In February 2005, Turbo Scaffolding established a trading account for Samco Scaffolding Pty Ltd ("Samco"), another company with which Mr Gittany and Mr Jeitani were associated (Bale [9]; Padovan 2 [8]; Gittany [8]). The evidence of Messrs Bale and Padovan is that, by the beginning of 2006, Samco had purchased almost $450,000 of scaffolding material, paid $221,000 and incurred a debt to Turbo Scaffolding of $227,121.25 (Padovan 2 [11]-[12]; Bale [10]). Mr Gittany's evidence is that the debt was $198,121.35 at this time (Gittany Exhibit p 2). I do not need to resolve this dispute in the evidence because the amount owing was subsequently dealt with by the transaction referred to in paragraph 6 below. 6In response to a demand that the amount outstanding on the accounts of Gittany Scaffolding and Samco be settled, Messrs Gittany and Jeitani put a proposal to the Plaintiffs that the debts owed by those companies could be satisfied by the transfer to the Plaintiffs of property owned by companies associated with Messrs Gittany and Jeitani (Padovan [14]-[16]; Bale [11]-[13]). After discussion of the possible purchase of another property, it was suggested that the Plaintiffs could buy two units to be built on a property situated at Merrylands which was then registered in the name of M Gittany Pty Limited (which later changed its name to MGG Group) and S Jeitani Pty Ltd (which later changed its name to RCJ Holding) (Gittany [13]). The proposed sale price was $670,000 and the amount of $300,000 of the debt then owed to Turbo Scaffolding by Gittany Scaffolding and Samco was to be treated as payment of a deposit on the sale (Gittany [14]-[20]; Padovan 2 [22]; Bale [16]-[17]; Padovan T 21.40-22.45; Gittany T25.20). The Contract showed a deposit amount of $300,000 and provided for the Plaintiffs to pay the balance of $370,000 on settlement (Padovan 1 Annexure "D") and the Plaintiffs paid stamp duty on the purchase calculated by reference to the total purchase price of $670,000 (Bale [21]; Bale Exhibit E). 7Turbo Scaffolding thereafter continued to supply scaffolding to Samco (Padovan 2 [28]; Gittany Exhibit p 3; Bale Exhibit Tab F) and received partial payments which were applied to the Samco account, and the balance of the debt which arose in respect of those supplies was treated as a payment on account of the balance of the purchase price under the Contract (Bale [23]; T52.45, T53.40, T65.50 and T66.15). (Mr Gittany contends that Samco was also to be provided with a credit against Samco's account which was not provided, that Mr Jeitani and Mr Bale had reached the agreement rather than Mr Gittany and that insufficient scaffolding was supplied, but these matters would not alter the result of these proceedings given the acknowledgment that the entirety of the purchase price due under the Contract was paid, to which I refer below.) 8In February 2007, MGG Group and RCJ Holding accepted an offer of finance from Arab Bank for a construction facility ("Facility") which required those companies to grant Arab Bank a first registered mortgage over the whole of the Merrylands property including that part of the land which, following subdivision, would become the Merrylands Lot which was to be conveyed to the Plaintiffs (Padovan 2 Tabs PQ and R). It was a term of the Facility that MGG Group and RCJ Holding procure exchanged contracts in respect of two of the four proposed units (Padovan 2 Tab T) and that obligation was satisfied by the Contract. Additional security given to Arab Bank included unlimited personal guarantees from Messrs Gittany and Jeitani (Padovan 2 Tab UV) and a mortgage over a property at Bass Hill owned by Messrs Gittany and Jeitani ("Bass Hill Property") (Padovan 2 Tab PQ). 9A letter dated 1 June 2007 from the solicitor for MGG Group and RCJ Holding to the solicitor for Messrs Padovan and Bale (Padovan 1 p 61) confirmed that those companies had received the sum of $670,000 from Messrs Padovan and Bale. There are misprints in the title of the letter but it plainly refers to this transaction. Mr Gittany sought to dispute the amount of the debt owing at the date of that letter (T55.24) but I give significant weight to that acknowledgement. In closing submissions, Counsel for Mr Gittany accepted that, by about May 2007, the Plaintiffs had paid almost all the purchase price and on 1 June 2007 the vendors' solicitor confirmed that full payment had been received. 10An email dated 1 August 2007 from Mr Bale to Samco indicated that $627,050.36 was owing by Samco at August 2007 (Gittany [10]; Gittany Exhibit p 4). Mr Gittany disputed this amount in the course of the hearing but accepted in cross-examination that further supplies between August 2007 and April 2008 added a further $33,000 to the debt (T67.15). Mr Bale's evidence is that the total value of the material supplied by Samco in consideration of the purchase price for the Merrylands Lot was $661,441 (Bale [26]). Ultimately, Mr Gittany did not press the submission that scaffolding had not been supplied to the full value of the consideration for the Merryland Lot in closing submissions. 11Construction work at the Merrylands property was subsequently completed and, in April 2008, an interim occupation certificate issued (Padovan 2 Tab F). The Plaintiffs went into occupation of units 3 and 4 and made those units available for rent, although the plan of subdivision had not yet been registered (Padovan 2 [34], Tab E and G). Mr Gittany contends that the rent received was to be applied by the Plaintiffs in reduction of the Samco account, increasing the balance due under the Contract, but there is no documentary evidence of such an arrangement and I do not accept his evidence in this regard. 12Completion of the Contract did not occur, for reasons apparently relating to delay in the issue of a final occupation certificate. The Plaintiffs subsequently issued a Notice to Complete dated 15 October 2008. The Contract was rescinded on 4 November 2008 when completion did not occur. The Plaintiffs claimed a refund of the consideration under the Contract (which, as I have set out above, had been satisfied by the supply of scaffolding by Turbo Scaffolding) which was not made (Padovan 1 [10]-[11]). 13In April 2009, Messrs Gittany and Jeitani put a further proposal to the Plaintiffs. The Plaintiffs contend that proposal was to the effect that another property owned by MGG Group at South Wentworthville (also referred to in the correspondence as Merrylands) ("South Wentworthville Property") would be conveyed to Turbo Scaffolding; Turbo Scaffolding would discharge the existing mortgage on that property to the Arab Bank and the difference between the amount paid to discharge the mortgage and the agreed value of the property (less a further "discount" of $30,000) would be set off against the amount due to Turbo Scaffolding on rescission of the Contract (Padovan 2 [46]-[47]). On the other hand, Mr Gittany contends that the parties agreed a purchase price of $690,000 plus GST and that the remaining debt owed by Gittany Scaffolding was to be "wiped clean" under this proposal. 14I should set out the accounts given by each of Mr Padovan and Mr Gittany of this proposal, which has assumed significance in Mr Gittany's closing submissions as set out in paragraph 29 below. Mr Padovan gives evidence that, in April 2009, he, Mr Bale and their solicitor Mr McGrath met with Messrs Gittany and Jeitani at the South Wentworthville Property and a conversation occurred in words to the following effect: [Padovan]: "What's happening at Chetwynd Road?" [Jeitani]: "Still not sorted, we can't do anything with it at the moment." [Padovan]: "What's happening here?" [Jeitani]: "We bought this to develop it, it's already DA approved for two townhouses at the front and two villas at the back, same as Chetwynd Road, it cost us $690,000, there is a mortgage to the Arab Bank for about $460,000, we will transfer it to you if you pay out the Arab Bank or else we can develop it together." [Padovan]: "It's not worth $690,000." [Jeitani]: "The contract will be for $660,000 but we want a discount of $30,000 on the debt." [Padovan]: "If we give you a discount of $30,000 and pay out the Arab Bank on this you still owe us $440,000 for Chetwynd Road." [Jeitani]: "You still have Chetwynd Road, once everything is sorted out you will just have to pay the balance on settlement." [Padovan]: "Why do we have to pay out the Arab Bank for this." [Jeitani]: "The Bank will not release it for anything less than $460,000, we can't pay it, if you want the property you have to pay out the Bank, it will reduce what we owe you while we are waiting for the Council at Chetwynd." [Padovan]: "We will think about this, but are you going to stitch us up for the rest of the money owing on Chetwynd." [Jeitani]: "We will pay it, we won't do that to you, you can register a mortgage over Chetwynd Road for the balance owing and we will guarantee it." 15Mr Gittany's evidence of the same meeting is directed to a conversation between Mr McGrath, the solicitor acting for the Plaintiffs, and Mr Gittany, in which he said that: [Gittany]: "I'm happy to bring down the price to around $690,000 plus GST but the guys have to right [sic] off Gittany Scaffolding's old account and the difference between the sale price and the Bank's discharge figure will need to be credited to Samco's account after we reconcile all of Samco's accounts with Turbo." Mr Gittany gives evidence that, after Mr McGrath took the Plaintiffs' instructions, he accepted that offer but indicated that the Plaintiffs required that the sale price on the contract be stated as $600,000 plus GST, there was a further discussion of terms and "[w]e all shook hands at the end of the discussions and walked away with an express verbal agreement". 16Mr Gittany accepts, in closing submissions, that there is no documentary evidence to support his version of the April 2009 agreement and relies on his oral account. The documentary evidence is consistent with Mr Padovan's account of the terms of this arrangement and I accept that account and do not accept Mr Gittany's account of the terms of the arrangement. In particular, an email dated 26 April 2009 from the solicitors acting for Messrs Jeitani and Gittany to the solicitors for the Plaintiffs (Gittany "MG-Ex 1" p 172) refers to a price of $690,000 without reference to the addition of GST and the Plaintiffs contend (and I accept) that the reference in that email to $690,000 is to a $600,000 purchase price plus GST of $60,000 and the $30,000 "discount". The contract for the sale of the South Wentworthville Property dated 8 July 2009 refers to a price of $660,000 and, contrary to Mr Gittany's evidence, states that the price includes GST of $60,000 (Padovan 1 Exhibit Tab JK). The vendor's settlement figures (Gittany "MG-Ex 1" p 175) also refer to a purchase price of $660,000. 17In closing submissions, Mr Gittany submitted that the objective intention of the parties was that the April 2009 agreement was to "wipe the slate clean" and replace the debt owed to the Plaintiffs with that arrangement. Alternatively, he submits that that part of the debt which comprised the debt of Gittany Scaffolding should be treated as extinguished by the April 2009 agreement. Since I do not accept Mr Gittany's oral evidence as to the terms of this agreement, I cannot accept those submissions. 18Mr Gittany also referred, in closing submissions, to the last statement made by Mr Gittany as set out in Mr Padovan's account of the April 2009 conversation to the effect that " We will pay it, we won't do that to you, you can register a mortgage over Chetwynd Road for the balance owing and we will guarantee it " (Padovan 2 [46]). Mr Gittany submitted that the effect of that statement was that, if the April 2009 agreement did not extinguish the Plaintiffs' claim, it created a new relationship by which (1) the Plaintiffs would receive title to the South Wentworthville Property; (2) the Plaintiffs (or Turbo Scaffolding) would sell the property; (3) the Plaintiffs would be entitled to the net balance on settlement; and (4) the Plaintiffs would be entitled to register a mortgage over the Merrylands Lot and call for guarantees from Messrs Jeitani and Gittany. 19I do not accept that is the effect of Mr Gittany's last statement in that conversation or the conversation as a whole. The conversation does not, in terms, involve any assent by the Plaintiffs to the arrangement for which Mr Gittany contends, still less any assent to that arrangement on a basis that would extinguish any other rights which they had. It is unlikely that the Plaintiffs would, in the prevailing circumstances, have assented to a proposition that they should extinguish the then debt in exchange for a promise of transfer of property of lesser value, a second-ranking security over the Merryland Lot and a personal guarantee. It is even more unlikely that, had they done so, that agreement would neither be documented nor its existence referred to in any email or other correspondence and the Plaintiffs would also take no steps to seek the security which, on that account, they were promised but not given. 20The purchase of the South Wentworthville Property by the Plaintiffs was completed in July 2009 and the Plaintiffs gave a credit of $175,967.15 (referable to the equity in that property) against the amount due by MGG Group and RJC Holding to the Plaintiffs on rescission of the Contract, which was recorded in a letter dated 13 July 2009 from the Plaintiffs' solicitors (Padovan 2 Exhibit JK). The Plaintiffs contend, and I accept, that a debt of $464,032.85 remained, being $670,000 less $146,000 (made up of $176,000 minus the $30,000 "discount" referred to above (Padovan 1 [11], T31.1-12)) and that no further payments were made by or on behalf of MGG Group or RCJ Holding to the Plaintiffs (Padovan 1 [13]). 21In December 2009 the Plaintiffs registered a caveat on the title to the Merrylands Lot. The Plaintiffs subsequently brought winding up actions against MGG Group and RCJ Holding (Padovan 1 p 62-65) and the Court ordered those companies be wound up on 5 February 2010. 22Arab Bank thereafter entered into possession of the units on the Merrylands property and they were sold in 2010. Correspondence from Arab Bank's solicitors (Padovan 1 Exhibit Tab O) indicate that Arab Bank sold as mortgagee and I do not accept Mr Gittany's evidence to the contrary. The net proceeds of those sales were applied in reduction of the debt due under the Facility (Padovan 2 [54]; Padovan 1 Exhibit Tab O) and the proceeds of the four units fully repaid one loan account (#115) with Arab Bank and left a figure of $74,649.84 due to Arab Bank on another account (#117) (Exhibit P3). Subrogation 23The Plaintiffs now seek to assert a right of subrogation to the personal guarantee given by Mr Gittany which was secured by the mortgage in favour of the Arab Bank over the Merrylands Lot. 24The Plaintiffs contend that as and from the exchange of the Contract for purchase of the Merrylands Lot they acquired an interest in that lot. In my view, the Plaintiffs have established that they paid the amount due under the Contract in full, or at least Mr Gittany is estopped from denying that fact having regard to the transactions and acknowledgment to which I have referred in paragraph 9 above: Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 at 244; Slan v Edgerly [2008] NSWSC 1316 at [10] per Bryson AJ. Prior to the rescission of the Contract the Plaintiffs had an equitable interest in the Merrylands Lot arising under the Contract, since the Court would have granted orders by way of specific performance or injunction to enforce that contract including requiring MGG Group and RCJ Holding to take steps to complete the subdivision: Jessica Holdings Pty Ltd v Anglican Property Trust Diocese of Sydney (1992) 27 NSWLR 140; Forder v Cemcorp Pty Ltd (2001) 51 NSWLR 486. 25When the units on the Merrylands Lot were not conveyed to the Plaintiffs and the Contract was rescinded, a purchaser's lien in turn came into existence to secure repayment to them of the consideration paid under the Contract: Rose v Watson (1864) HL Cas 672; 11 ER 1187; Hewett v Court (1983) 149 CLR 639; Slan v Edgerly above. It follows that the Plaintiffs had an equitable interest in the Merrylands Lot from the date of the Contract up to and continuing after the rescission of the Contract. 26The Plaintiffs contend that the grant of a registered mortgage by MGG Group and RCJ Holding to Arab Bank in turn had the effect of charging the Merrylands Lot in which they held an equitable interest with payment of a debt due to Arab Bank from MGG Group and RCJ Holding and, as and from that time, the Plaintiffs were in the position of involuntary sureties of the debts of MGG Group and RCJ Holding. The Plaintiffs rely on Ogilvie v Ferry [2010] NSWSC 379 at [75] where the Court held that the plaintiffs in that case were entitled to be subrogated to the claims of a principal creditor whose debt was reduced by the proceeds of sale of the relevant property and were entitled to claim indemnity from the guarantors. Hamilton AJ held that a right of subrogation was established where the plaintiffs' beneficial interest in the property "... 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 ..." (at [75]). 27His Honour also identified an alternate basis for subrogation, which would be available even if a first party was not to be treated as a co-surety with a second party, where the first party had paid a debt for which the second party was primarily answerable and which, in equity and good conscience, should have been discharged by the second party, and noted that principle was available to a party which had paid that debt under compulsion in respect of its property answerable for the debt (at [79]-[80]). 28Mr Gittany submits that the decision in Ogilvie v Ferry is distinguishable because the Plaintiffs in that case had paid in specie or in lieu the whole amount due at the time the subsequent creditor registered its mortgage, had obtained an order for specific performance and had received a duly executed transfer. Mr Gittany points out that the Plaintiffs' right to specific performance was extinguished by the act of rescission in this case, but fairly also acknowledges that a purchaser's lien is not extinguished by the purchaser's lawful rescission. I do not consider that Ogilvie v Ferry is distinguishable and I consider that I should apply its reasoning in the present facts. In my view, the Plaintiffs' equitable interest in the Merrylands Lot, initially as purchaser under the Contract and, after the rescission of the Contract, under a purchaser's equitable lien, was, in the language of Ogilvie v Ferry , taken and sold when Arab Bank exercised its power of sale and the proceeds of sale of that interest were applied by Arab Bank as set out in paragraph 22 above. In these circumstances, I consider that the Plaintiffs are entitled to be subrogated to the rights of Arab Bank against Mr Gittany as guarantor of the debt due to it from MGG Group and RCJ Holding. 29Mr Gittany also submits that the Plaintiffs were not entitled to be subrogated to the rights of Arab Bank at the time the proceedings were commenced by reason of the agreement entered into in April 2009 to which I have referred in paragraphs 14-19. I do not accept that submission since I do not accept that agreement had the effect for which he contends for the reasons set out above. 30In my view, the right of subrogation is available notwithstanding the amount due to Arab Bank under the Facility was not repaid in full by the sale of the Merrylands Lot. In State Bank of New South Wales v Geeport Developments Pty Ltd (1991) 5 BPR 11, 947, Cohen J observed that a right of subrogation can arise from payment of part of a debt to the extent of the payment, and noted that: "... there will be a subrogation of a proportionate part of the security. It may well be that the right to exercise that subrogation may not come into existence until the whole of the debt has been paid, whether by the principal debtor or another person so that the right until then remains dormant. This however seems more a matter of enforcement rather than a question of the rights which exist." 31His Honour's reasoning suggests that a declaration that the Plaintiffs are entitled to be subrogated to the rights of Arab Bank under the guarantee will have no impact on the interests of Arab Bank which would remain entitled to its rights under that guarantee until it was paid the whole of the guaranteed debt and would have no interest with what happens to that guarantee after that point. This would suggest that I can make such a declaration although there is a remaining debt owed by MGG Group and RCJ Holding to Arab Bank and Arab Bank has not been joined as party to the proceedings. However, I consider that I should afford Arab Bank the opportunity to be heard as to that question before making that declaration. 32The Plaintiffs' closing submissions also referred to a collateral mortgage held by Arab Bank over a property owned by MGG Group and RCJ Holding at Bass Hill and submit that the right of subrogation extends to allow the Plaintiffs to enforce that mortgage. No relief was sought in respect of the Bass Hill Property in the Summons and I will hear the parties as to whether I can and should make a declaration in respect of the mortgage over that property. 33The Plaintiffs also submitted that, if payment of Arab Bank's residual debt would give rise to the subrogation entitlement, I should make orders to that effect. I do not consider that I can or should make such orders which are not sought in the Summons and do not appear to relate to a present controversy, particularly in circumstances where Arab Bank is not presently a party to the proceedings. Equitable contribution 34Alternatively, the Plaintiffs claim equitable contribution from Mr Gittany, contending that the Plaintiffs and Mr Gittany are to be treated as co-sureties of the debt owed by MGG Group and RCJ Holding to Arab Bank, and that the sale by the Arab Bank of the Merrylands Lot over which the Plaintiffs held an equitable lien and the application of the net proceeds of that sale in payment of the debt due from MGG Group and RCJ Holding constituted payment by the Plaintiffs of more than their proportionate share of that liability giving rise to an entitlement to claim contribution from all solvent co-obligors. 35A right of contribution arises so as to prevent the injustice which would exist, where the whole or a disproportionate share of a common obligation is discharged by one of two or more co-obligors, and that right does not depend upon both obligors being liable to be sued in respect of the common obligation and can exist even where there is no personal obligation imposed on the co-obligor: McLean v Discount & Finance Ltd (1939) 64 CLR 312 at 328; Cochrane v GIO Finance Ltd (No 2) (2001) 51 NSWLR 624 at 632. 36In closing submissions, Mr Gittany accepted that, if equity provided the remedy of subrogation, it would also provide the remedy of contribution, but contended that the Plaintiffs were not entitled to take the benefit of the subsequent bank facility by being regarded as co-surety for the purposes of contribution. 37In this case, the Merrylands Lot in which the Plaintiffs held an equitable interest became charged with payment of the debt due by MGG Group and RCJ Holding to Arab Bank and the proceeds of sale of that property were applied by Arab Bank in reduction of that debt. Mr Gittany had given a guarantee for that same debt but has, it appears, made no payment of that debt. In this situation, Mr Gittany should be required to pay his proportionate share of that debt under principles of contribution. 38The Plaintiffs contend that, to the extent necessary, an account should be taken wherein the Plaintiffs' contribution to the repayment of Arab Bank's debt can be ascertained. I would make an order for such an account if the Plaintiffs continue to seek it having regard to the other findings which I have made above. Orders 39The parties should bring in Short Minutes of Order to give effect to this judgment. I will hear the parties further as to whether the orders I should make are constrained by the fact that Arab Bank is not presently party to the proceedings, and I note that the parties may wish to consider whether to notify Arab Bank of the date on which that matter will be listed and provide it with a copy of this judgment in case it seeks to be heard as to that matter. I will hear the parties as to costs.