Plaintiff v Defendant

62 I find that the first occasion on which St George had any notice of a mortgage granted to the plaintiff over the Delhi Street property was upon receipt of the plaintiff's letter dated 9 April 2010. Notwithstanding the contention by St George that the letter was ambiguous, I am satisfied that the notice that was given was sufficient to enable St George to ascertain the full terms of the mortgage and the borrowing secured thereby.

63 If, contrary to its case at trial, the plaintiff were to contend that St George knew enough about a third party debt to give rise to a duty of enquiry as to the existence of a mortgage over the Delhi Street land, I would reject such a contention. I am not satisfied on the evidence that St George was told that additional funding had been provided by the plaintiff. It was a purpose of the July Deed that St George should not know of that debt. Notwithstanding Gordon's note of the meeting on 17 June 2009, I am not satisfied that Gordon told Blunden on that occasion of the 'Salta debt'.

64 Negotiations between the Group and the plaintiff, that resulted in the July Deed, had commenced in early May 2009. The course of those negotiations was not revealed by Tilley and Gordon at the meeting on 19 May 2009. The suggestion by Tilley and Gordon in their email of 13 May 2010, that they had 'disclosed several times in the past that moneys were owing to Salta outside the building contract' is not supported by the attachments to the email. It is true that St George knew there was mezzanine finance of around $3 million. Tilley and Gordon had sought the release of funds by St George to discharge that debt. There was reference in one document to a debt owing to Atlas, but Tilley had also advised on 19 May that it was 'secured by external means and not against anything held by SGB'. Had Gordon mentioned a 'Salta debt' and mortgage at the meeting on 17 June 2009, it would have undermined the Group's strategy to keep the true nature and extent of the relationship between the Group and the plaintiff from St George. To disclose the extent of the debt and the security would also have put at risk the rescue plan that was ultimately embodied in the July Deed.

65 Insofar as it may be relevant, I find that such information as St George had, concerning mezzanine finance and third party financial accommodation to the Group, was not sufficient to put St George on enquiry about the possibility that FSDWA might have acted in breach of the terms of its mortgage to St George, by granting an undisclosed second mortgage over the Delhi Street property. The plaintiff did not, of course, contend for any such finding.**

**66 The plaintiff contended that the bill facility expired on 31 July 2009 or on 31 October 2009, and thereafter St George made further advances, when each series of bills was rolled over. The next event, relied upon by the plaintiff as a further advance, was the establishment of the overdraft account on 12 March 2010. Each of those events, of course, predated the letter from the plaintiff to St George of 9 April 2010.

67 The plaintiff did not contend that the rollover of commercial bills prior to expiry of the bill facility constituted an advance that would attract the operation of the rule in Hopkinson v Rolt. In my opinion, the further accommodation provided by St George on and after 31 July 2009 did not constitute further advances for the purpose of the rule.

68 The essence of a 'further advance' is informed by the object of the rule. In Commonwealth Bank of Australia v Grubic,[18] the Full Court of the Supreme Court of South Australia expressed the objects of the rule thus:**

The rule in Hopkinson v Rolt was grounded on principles of justice and fair dealing as between the mortgagor and mortgagees and as between the competing mortgagees: Matzner v Clyde Securities Ltd (supra) at 300; Mercantile Credits Ltd v Australia and New Zealand Banking Group Ltd (1988) 48 SASR 407, 409. The rule was designed to achieve two objects. The first was to leave the mortgagor in a position to raise further monies on his property, which he could be prevented from doing if the first mortgagee was free to diminish the security of the second mortgagee by making further advances. The second, which is of particular relevance here, was to prevent the first mortgagee with notice of the second from diminishing the value of the security for the second mortgage by making advances of money in addition to that initially secured by the first mortgage. As between competing mortgagees, the purpose was to ensure that the first mortgagee did not by additional advances adversely affect the value of the second mortgagee's security.

**69 These objects share a common expectation, that the further advance will have the effect of increasing the liability of the mortgagor and, but for the operation of the rule diminish the value of the mortgagor's unencumbered equity in the charged property. The further advance must also be voluntary, in the sense that the mortgagee is not bound under the secured facility to make the advance.[19] The passage from Grubic was adopted by White J in Westpac Banking Corporation v Adelaide Bank Limited.[20] Definitions of 'advance' found in facility agreements, mortgages and other contexts, are of little assistance.[21]

70 There may be circumstances in which a secured indebtedness is reduced or eliminated and then restored by an advance of further funds. The Westpac Banking case is one such example. The creation or extension of an overdraft, or bill facility, may constitute a further advance, although a mortgagee would not, in my view, lose its priority as a secured creditor for a further advance merely because an overdraft had returned to credit, if the bank had agreed to provide an ongoing fluctuating overdraft facility. Unless terminated, the bank would be obliged to honour cheques drawn, and thus make further advances. In that sense, the advances would be involuntary.

71 In the present case, when St George continued to roll over bills after the bill facility came to an end, and eventually converted the liability into an overdraft, it did so because the borrower had not repaid the facility. The liability of FSDWA had never been discharged. The secured debt was never reduced. Equity is concerned with the substance of a transaction, its effect on the mortgagor and the conscience of the mortgagee. The drawing, accepting and rolling of bills on and after 31 July 2009, and the creation of the overdraft on 12 March 2010, recorded a continuation of a liability, that remained unsatisfied. It is not to the point that St George decided to manage the indebtedness of FSP by agreeing to accept further bills or, as occurred on 12 March 2010, convert the debt into an overdraft. Put another way, the indebtedness of FSDWA to St George, secured by the mortgage, was never reduced so as to legitimately place FSDWA in a position where it might take advantage of the reduced liability and increased equity to seek other financial accommodation secured under a subsequent mortgage.

72 There was no further advance, for the purpose of the rule in Hopkinson v Rolt, by the rollovers that took place after 31 July 2009 and the establishment of the overdraft account on 12 March 2010.**

2.1 You unconditionally and irrevocably guarantee payment to us of the guaranteed money. If the customer does not pay the guaranteed money on time and in accordance with any arrangement under which it is expressed to be owing, then you agree to pay the guaranteed money to us on demand from us (whether or not we have made demand on the customer).

2.2 The guarantee in clause 2.1 is a continuing obligation and extends to all of the guaranteed money.

74 On 3 August 2012, St George prepared and served on FSDWA a 'Notice of Default' under s 106 of the Transfer of Land Act 1893 (WA). The notice was addressed, 'TO THE BORROWERS AND MORTGAGORS NAMED BELOW'. The borrower was FSDWA. It was also the mortgagor of the Delhi Street property. The notice provided:

1. This notice is given by the Lender as credit provider under the Loan Agreement and as mortgagee under the Mortgage.
2. You are in default of the terms of your Loan Agreement and Mortgage in that you did not repay all moneys owing to the Lender pursuant to the Loan Agreement on the expiry date of the loan being 31 October, 2009. You have also failed to pay interest due since that date.
3. To remedy this default, the Total Amount Due must be paid to the Lender no later than 10 August, 2012 (Rectification Date). Interest, fees, and charges continue to accrue on this amount until paid. Additional enforcement expenses may also be incurred.[22]

75 The 'Loan Agreement' mentioned in the notice was the bill facility and the guarantees given by FSDWA with respect to the obligations of Gallway Investments and Tilley Properties. The 'Total Amount Due' in the notice was $54,215,174.50 as of 1 August 2012. The notice continued:

This amount which is required to be paid to repay your loan in full, as at the date specified. The amount required to pay out your loan changes each day as interest and charges accrue and payments are credited.

76 Section 106 of the Transfer of Land Act 1893 (WA) provides:

(1) Subject to Division 2 of Part 6 of the Land Administration Act 1997 in the case of conditional tenure land, a mortgage and a charge under this Act shall when registered as hereinbefore provided have effect as a security but shall not operate as a transfer of the land thereby mortgaged or charged; and in case default be made in payment of the principal sum interest or annuity secured or any part thereof respectively or in the performance or observance of any covenant expressed in any mortgage or charge or hereby declared to be implied in any mortgage and such default be continued for one month or for such other period of time as may therein for that purpose be expressly fixed the mortgagee or annuitant or his transferees may serve on the mortgagor or grantor or his transferees notice in writing to pay the money owing on such mortgage or charge or to perform and observe the aforesaid covenants (as the case may be).[23]

**77 The plaintiff submitted that the section required personal service on the mortgagor of a notice to pay after default had occurred, as a step to enliven the operation of a power of sale in circumstances of continuing default. The plaintiff contended that, in the absence of a demand, there was no default for nonpayment under a guarantee. Accordingly, the plaintiff contended, St George could not retain more than the amount due under the bill facility or overdraft, out of the sale proceeds of the Delhi Street property.

78 The plaintiff did not contend that there had not been a default, or that St George was not permitted to serve the notice. Its contention was that there had not been any default under a guarantee.

79 St George relied upon the terms of the notice to the borrower and mortgagor, FSDWA, calling upon it to repay the whole of the indebtedness calculated as at 1 August 2012 in the sum of $54,205,174.50. St George contended that the whole sum became payable under the mortgage. Clause 1.3 of the mortgage provided:**

You agree to pay us on demand that part of the amount owing specified in the demand. However, as long as you are not in default this is subject to any contrary agreement in writing between you and us.

**80 St George contended that the amount owing included the amounts under the guarantees, even though a demand might not have been made for payment. The plaintiff contended that in the absence of a demand under a guarantee, no amount was owing, contingently or otherwise.

81 St George further contended that, even if liability only crystallised under a guarantee on demand, it had the right to retain the proceeds of sale pending the amount becoming due and payable. Clause 27.2 of the mortgage provided:**

If, at the time we receive the money, any part of the amount owing is not then due for payment, we may retain an amount equal to that part. We must hold it in an interest bearing account. We may use it (and any net interest after tax - including income tax) to pay the amount owing when it becomes due for payment.

Thus, St George contended, it could, were it necessary to do so, serve demands under each guarantee to crystallise the liability and draw down on the retained funds.

82 The plaintiff argued that cl 27.2 did not prevail over s 61 of the Property Law Act 1969 (WA) that required the funds to be disbursed in the prescribed manner. Section 61 provides:

The money that is in fact received by the mortgagee, arising from the sale, after discharge of prior encumbrances to which the sale is not made subject (if any) shall be held by him in trust to be applied by him -

(a) firstly, in payment of all costs, charges and expenses properly incurred by him as incident to the sale or any attempted sale, or otherwise; and

(b) secondly, in discharge of the mortgage money, interest and costs, and other money (if any) due under the mortgage,

and the residue of the money so received shall be paid to the person entitled to the mortgaged property, or authorised to give receipts for the proceeds of the sale thereof.

**83 The plaintiff argued that the purpose of cl 27.2 was to regularise the interim retention of money properly received under the mortgage on account of money actually owing but not yet due for payment. It argued that in the absence of a proper demand under the guarantees there was no amount actually owing or due for payment. Thus, St George was not authorised under cl 27.2 to retain the excess amount on account of a liability under the guarantees.

84 St George did not suggest that it had retained the excess amount under cl 27.2. But insofar as St George might seek to avail itself of the retention power, there would be no difficulty in calculating the amount of interest that ought to have been earned and applied in reduction of the liability.

85 In my view, there is no tension between the operation of cl 27.2 and s 61. Clause 27.2 provides machinery for the management of funds in anticipation of an amount owing that is not yet due and payable. The amount to be set aside must be an amount owing under the mortgage. An event may be required, such as a demand, to make the amount due for payment. There may be other circumstances in which the clause might operate: where, for example, there is a number of commercial bills with different maturity dates. But the present case is not troubled by any need to rely on cl 27.2.

86 Whatever may be the scope of cl 27.2, I am of the opinion that the amount owing under the mortgage included the guaranteed money under each guarantee, whether or not a demand for payment had been made. Even in the absence of a demand, the guaranteed money is owing but not currently payable by FSDWA. Alternatively, the guaranteed money might fall within the category of money advanced or paid on behalf of FSDWA or at its express or implied request. I am not persuaded that until a demand has been made on FSDWA, St George was unable to apply the proceeds from the sale of the Delhi Street property in satisfaction of the guaranteed money.

87 In any event, I am satisfied that the notice of default, dated 3 August 2012, made a demand for payment on the guarantor under the guarantees. Even though the default mentioned in the notice was a failure to repay the bill facility on 31 October 2009, and not a failure to pay under the guarantees, the mortgagor was authorised to serve a notice in anticipation of exercising its power of sale. To remedy that default, the mortgagor was required to pay the total amount, including the contingent liability under the guarantees no later than 10 August 2012. On service of the notice, and expiry of the time for payment, the guaranteed money became due and owing.

88 The plaintiff advanced a further argument. It contended that even if the notice of default were to be construed as a demand under the guarantees, or should St George serve a further demand in order to perfect the obligation to pay, any indebtedness would constitute a 'further advance' made after notice of the Salta mortgages. Accordingly, St George would lose its priority in respect of that further demand. As I understood its contention, the plaintiff would argue that by making demand under the guarantees, St George was, by that act, purporting to extend its security over the obligation well after notice of the Salta mortgages.

89 The plaintiff's final contention is without merit. The liability, undertaken by the mortgagor under the guarantees, predated the Salta mortgages. No evidence has been advanced that the liability of FSDWA under any guarantee involved a further advance after 9 April 2010. By giving the notice of default, incorporating a demand to pay, St George did not tack a new liability onto the mortgage, thus diminishing the value of the security, or increasing the liability of FSDWA.

90 The plaintiff called for an accounting in relation to the proceeds from the sale of the Delhi Street property, should it be found that the St George mortgage secured only the amount outstanding under the commercial overdraft debt as at the date of settlement, with the balance plus interest being paid to the plaintiff to discharge its secured debt. Having regard to the reasons given above, there is no occasion for any such accounting to be undertaken. St George is entitled to the whole of the proceeds from the sale of the Delhi Street property, which have been appropriated and applied against the debt due under the mortgage, which includes the mortgagor's liability under the overdraft and under the guarantees.**

[1] [1861] EngR 641; (1861) 9 HL Cas 514.

[2] (1886) 12 App Cas 29, 36.

[3] amount owing means all amounts that:

for any reason or circumstance in connection with any agreement (including a loan agreement, guarantee, lease or other facility document), transaction, engagement, document, instrument (whether or not negotiable), event, act, omission, matter or thing whatsoever;

and whether or not of a type within the contemplation of the parties at the date of this mortgage:

• are payable, are owing but not currently payable, are contingently owing, or remain unpaid, by you to us; or

• we have advanced or paid on your behalf or on your express or implied request; ...

[6] [1861] EngR 641; (1861) 9 HL Cas 514; (1861) 11 ER 829.

[7] [2003] VSC 495, footnotes omitted.

[8] [1987] HCA 66; (1987) 164 CLR 214, 221.

[9] Westpac Banking Corporation v Adelaide Bank Limited [2005] NSWSC 517 at [75].

[10] Deeley v Lloyds Bank Ltd [1912] AC 756, 782.

[11] (1993) 11 WAR 536, 547; emphasis added.

[12] [2003] VSC 495 [169]-[182]; footnotes omitted, emphasis added.

[18] Commonwealth Bank of Australia v Grubic Full Court of the Supreme Court of South Australia 27 August 1993, unreported; BC9300359 at 65, citations omitted, emphasis added.

[19] OCBC v AKIC [2003] VSC 495 at [77].

[20] [2005] NSWSC 517, [57]-[59].

[21] Quainoo v NZ Breweries Ltd [1991] 1 NZLR 161; Williams v Glyn's Bank Limited [1981] Com LR 205.