Plaintiff v First Defendant Second Defendant

1 This is an application by the plaintiff ('164 Fyans') for an order for the removal of caveat AK439320A ('the caveat') lodged by the first defendant ('Morris') in relation to its property at 164 Fyans Street, Geelong which is the land described in Certificate of Title 9749 Folio 487 ('the property').

2 By the caveat, Morris claims an interest in the property as chargee, stating the grounds of its claim as follows:

Pursuant to a Deed of Charge in favour of the Caveator dated June 2013, executed by Trevor Bruce Elsworthy, a director of the sole registered proprietor being 164 Fyans Street Pty Ltd.

3 The deed described in the caveat is in this form:

DEED OF CHARGE

I Trevor Bruce Elsworthy of 30 Western Beach Road Geelong, in the State of Victoria, hereby charge all my right, title and interest In (sic) all freehold property owned by me or any related Company that I am currently a director of, for all amounts owing to Morris Finance Ltd. I Trevor Bruce Elsworthy consent to a caveat to be lodged over any such freehold property including that referred in the Schedule below:

SCHEDULE

Certificate of Title Vol 9749 Fol 487

Dated: June 2013

Executed as a Deed:

SIGNED SEALED AND DELIVERED BY: T Elsworthy

TREVOR BRUCE ELSWORTHY

In the presence of:

................................

Witness

................................

Name of Witness

CHRIS HICKEY

4 The property has been sold and settlement was due on 14 April 2014 under a 13 March 2014 contract of sale ('the contract of sale'). It is in this context that 164 Fyans seeks the removal of the caveat.

5 The background to the application is a history of dealings between Morris and Mr Elsworthy and companies of which he has been a director and shareholder.

6 On about 22 July 2011, Morris entered into a commercial hire purchase agreement ('the hire purchase agreement') with Elsworthy's Bulk Store Pty Ltd ('Elsworthy's Bulk') of which the directors and shareholders were at all relevant times Ms Rita Florence Elsworthy, Ms Sonja Elsworthy and Mr Elsworthy. Mr Elsworthy was also the company secretary. The hire purchase agreement stated that it was executed by Elsworthy's Bulk under s 127 of the Corporations Act 2001 (Cth) and was signed by Mr Elsworthy as a director ('the hire purchase agreement'). By a deed of guarantee dated 21 July 2011, Mr Elsworthy was named as the guarantor of Elsworthy's Bulk's obligations under the hire purchase agreement.

7 164 Fyans was registered as a proprietary company on 1 September 2011. It is described by its solicitors and in the contract of sale as custodian trustee for Mr Elsworthy and Ms Sonja Elsworthy as trustees for the T & S Elsworthy Superannuation Fund. Mr Elsworthy and Ms Sonja Elsworthy were appointed directors of 164 Fyans upon its registration and Mr Elsworthy, its secretary. Mr Elsworthy and Ms Sonja Elsworthy each hold one of its issued shares beneficially.

8 On 4 November 2011, 164 Fyans was registered as the proprietor of the property. The property is subject to a first mortgage registered on the same date in favour of Westpac Banking Corporation.

9 On or about 25 February 2013, Morris entered into a commercial lease of goods ('the lease') with Elsworthy Property Pty Ltd ('Elsworthy Property'). Mr Elsworthy and Ms Sonja Elsworthy are the two shareholders of Elsworthy Property and Mr Elsworthy is its sole director and company secretary. Mr Elsworthy executed a 24 February 2013 deed of guarantee in favour of Morris in relation to Elsworthy Property's obligations under the lease.

10 On 18 June 2013, Elsworthy's Bulk was the subject of a voluntary winding up. Liquidators were appointed.

11 On 27 June 2013, Morris, as chargee under the guarantee relating to the hire purchase agreement, lodged a caveat over properties at Grovedale and Indented Head of which Mr Elsworthy and Ms Sonja Elsworthy were joint registered proprietors. On 28 June 2013, Morris, described as chargee under the lease, lodged a caveat over Geelong properties of which Elsworthy Property was the registered proprietor.

12 Elsworthy Property and Mr Elsworthy defaulted under the lease and the associated guarantee, respectively.

13 Mr Elsworthy had a meeting with Mr Nathan Murray, Morris's managing director, and Mr Hickey on 28 June 2013. During this meeting, Mr Elsworthy was asked to give Morris a charge over the property.

14 In his 17 April 2014 affidavit in opposition to the application, Mr Hickey deposes that he told Mr Elsworthy that he did not think there would be sufficient equity in the other charged properties (which were likely to be sold by the Commonwealth Bank as mortgagee) to satisfy the Morris debts under the lease and the hire purchase agreement. According to Mr Hickey's unchallenged affidavit, Mr Elsworthy said words to the effect that he did not want to be sued or made bankrupt or for Morris to be out of pocket. He said that, upon the sale of all the properties, Morris's debt would be paid.

15 Mr Hickey's affidavit goes on to describe what occurred in this way:

1. At this point in the meeting, I said to Mr Elsworthy that we were aware that he had an interest in a further property at 164 Fyans Street, South Geelong ('the Fyans Street property'). (Prior to the meeting, [Morris] had conducted a title search of this property and determined that it was owned by 164 Fyans Street Pty Ltd and that Trevor Elsworthy was a director of the company.)

We asked him if he would give us a chargeable interest and allow us to register a caveat over the Fyans Street property. He said that it may be part of a superannuation fund and that he was going to have to get that checked. I advised him that on the title search it indicated that the Fyans Street property was held by 164 Fyans Street Pty Ltd and didn't appear to be an asset of a superannuation fund on the face of it. He said he would look into this point and get back to us, but that for the purposes of securing the debt owed to the first defendant that he would agree to allowing the Fyans Street property to be charged. He advised us that at the time there was a mortgage of around $300,000 over the Fyans Street property and that the property was worth around $1 million.

1. It was at this time, when Trevor Elsworthy had agreed in principle to the caveat being lodged over the Fyans Street property that he also agreed to sign a deed allowing us to take a chargeable interest in the property to secure the debt owing to [Morris]. Both Nathan and I adjourned the meeting for a short time to prepare the Deed of Charge and then re-entered the meeting room, whereupon Trevor Elsworthy signed the document.

16 Mr Nathan Murray agrees with Mr Hickey's account of the meeting and adds this in his affidavit, also sworn on 17 April 2014:

1. My only other recollection about that meeting is the fact that we don't usually allow our clients to sell their own leased goods when an event of default has occurred under their lease agreements. At the time [the hire purchase agreement] was in default as [Elsworthy's Bulk] had been placed into liquidation and [the lease] was in default as [Elsworthy Property] had failed to make all of the lease payments due under [the lease]. It is our usual practice to immediately repossess the leased goods and sell them to mitigate our loss.
2. Upon Trevor Elsworthy requesting to sell the leased goods, I advised him that it was not our usual practice to allow the private sale of the lease goods,(sic) however, given that he had provided us with a chargeable interest to secure the debt owing to [Morris] by virtue of him signing the Deed of Charge allowing us to caveat the property at 164 Fyans Street, South Geelong owned by Fyans Street Pty Ltd, of which he was a director, that I was prepared to make an exception on this occasion.
3. Having inspected the exterior of the Yarra Street property, the Moorabool property, the Indented Head property and the Grovedale property, and given my many years of experience in the finance industry, I was well aware that there would be insufficient equity in those properties to discharge the debt to [Morris]. I knew at the time that the chargeable interest in the Fyans Street Property was given to [Morris] by [164 Fyans] on 28 June 2013 that we would need to rely on it in order for the debt owing to [Morris] to be paid.
4. During the meeting of the 28 June 2013 in exchange for the execution of the Deed of Charge by [164 Fyans] allowing [Morris] to charge the Fyans Street Property to secure the indebtedness we agreed to:

(a) Hold off any litigation as against any of the parties to [the hire purchase agreement] and [the lease] and their related guarantees;

(b) Not to bankrupt Trevor Elsworthy;

(c) To provide a Withdrawal of Caveat over the Indented Head property, which allowed non-secured interest holders, including his lawyers and his real estate agent to be paid in priority; and

(d) To allow him to attempt to privately sell the leased goods the subject of [the lease], which was outside of our usual practice.

17 On 1 July 2013, the caveat, lodged by Morris, was noted on the title to the property.

18 On 6 August 2013, controllers were appointed to Elsworthy Property.

19 164 Fyans fell into arrears under the Westpac registered mortgage and decided to sell the property before Westpac took action as mortgagee.

20 On 7 March 2014, Mr Aaron Jolly of 164 Fyans' solicitors, Whyte Just & Moore, wrote to MSB Lawyers, Morris's solicitors, enquiring as to the basis upon which Morris claimed an interest in the property as chargee.

21 On 13 March 2014, Mr Elsworthy executed the contract of sale on behalf of 164 Fyans. The sale price was $1 million. As I have already noted, settlement was due under the contract of sale on 14 April 2014. 164 Fyans' solicitor was informed that $692,640.36 was owing to Westpac under the mortgage of the property as at 14 April 2014.

22 On 9 April 2014, Morris's solicitors wrote to 164 Fyans' solicitors stating that Morris was owed $152,921.09 plus legal costs under the hire purchase agreement and the lease. Morris proposed that the proceeds from the sale of 164 Fyans be placed in an account wholly or partly controlled by it 'pending the outcome of a Writ and Statement of Claim [Morris] proposes to file in the County Court shortly'. Morris would also be content if such amounts were paid into Court.

23 On 16 April 2014, 164 Fyans' solicitors wrote to Morris's solicitors rejecting the proposal and indicating that 164 Fyans would proceed with the caveat removal application on 24 April 2014.

24 There is no evidence of any proceeding commenced by Morris in the County Court or elsewhere to substantiate its alleged interest as chargee under the deed of charge.

It is common ground that Morris as caveator bears the onus of satisfying the Court in an application under s 90(3) of the Transfer of Land Act 1958 for the removal of the caveat that:

(1) there is a serious question to be tried that it has the estate or interest in the property claimed; and

(2) the balance of convenience favours the maintenance of the caveat until trial.[1]

25 It is sufficient that Morris show a sufficient likelihood of success to justify the preservation of the status quo until any trial.[2]

26 The first requirement for the creation of a charge over real property is an intention on the part of the chargor to create the charge.[3] I am not persuaded that there is a serious question to be tried on this issue.

27 Morris argues that the deed of charge contains clear and unambiguous words describing the intentional charging of the property by 164 Fyans to secure 'all amounts owing to Morris Finance Ltd'. I disagree.

28 The deed of charge does not mention 164 Fyans itself or its interest in the property. It simply refers to the charging of Mr Elsworthy's own interest in freehold property owned by him or by 'any related company that I am currently a director of'. As 164 Fyans points out, Mr Elsworthy had no interest in the property by virtue of his position as a director of the registered proprietor. I note, too, that it is not alleged that Mr Elsworthy intended to charge whatever beneficial interest he may have had in his capacity as a trustee of a superannuation fund for whom the property was held on trust by 164 Fyans.

29 What the deed of charge does state is that Mr Elsworthy consents to the lodgement of a caveat over any such freehold property, which is said to include the property (described by its certificate of its title particulars). It does not refer expressly to any consent on the part of 164 Fyans to any caveat.

30 Nor, to the extent that they may be taken into account, do the circumstances in which the deed was drawn up by Morris's own representatives help in this regard. The affidavits of Mr Hickey, who was Morris's credit manager, and Mr Murray, its managing director, show that Mr Elsworthy told them at the time he signed the deed of charge that the property might be held by a superannuation fund and that he would need to check that and would let them know the upshot. It was in that context and with that reservation that he indicated his own willingness to have 164 Fyans' property charged to secure the debt to Morris and went on to execute the deed of charge.

Section 53(1) of the Property Law Act

31 The second requirement for the creation of a charge over real property arises under s 53(1) of the Property Law Act 1958. Section 53(1) requires the charge to be created in writing, signed by the person creating the interest or by his agent lawfully authorised in writing or relevantly by operation of law.

32 The deed does not refer expressly to 164 Fyans or bear its common seal. There is no evidence as to the provisions of the company's constitution or replaceable rules to suggest that a single director was authorised to execute such a document in that way on its behalf. There is no evidence of a written instrument authorising Mr Elsworthy to act as 164 Fyans' agent.

33 Morris does not rely upon s 127 of the Corporations Act 2001. That section provides that a proprietary company may execute a document, without using its common seal, if the document is signed by two directors or a director and company secretary or by a sole director who is also a company secretary. 164 Fyans has two directors, but only one signed the deed of charge.

34 Morris does however rely upon the permissible assumptions under ss 128 and 129(2) of the Corporations Act 2001 (Cth) to argue that Mr Elsworthy's action in executing the deed of charge was an effective signing on behalf of 164 Fyans for the purposes of s 53(1).

35 Sections 128 and 129 were relevantly in these terms:

128 Entitlement to make assumptions

(1) A person is entitled to make the assumptions in section 129 in relation to dealings with a company. The company is not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect

(2) A person is entitled to make the assumptions in section 129 in relation to dealings with another person who has, or purports to have, directly or indirectly acquired title to property from a company. The company and the other person are not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect.

(3) The assumptions may be made even if an officer or agent of the company acts fraudulently, or forges a document, in connection with the dealings.

(4) A person is not entitled to make an assumption in section 129 if at the time of the dealings they knew or suspected that the assumption was incorrect.

129 Assumptions that can be made under section 128

Constitution and replaceable rules complied with

(1) A person may assume that the company's constitution (if any), and any provisions of this Act that apply to the company as replaceable rules, have been complied with.

Director or company secretary

(2) A person may assume that anyone who appears, from information provided by the company that is available to the public from ASIC, to be a director or a company secretary of the company:

(a) has been duly appointed; and

(b) has authority to exercise the powers and perform the duties customarily exercised or performed by a director or company secretary of a similar company.

Officer or agent

(3) A person may assume that anyone who is held out by the company to be an officer or agent of the company:

(a) has been duly appointed; and

(b) has authority to exercise the powers and perform the duties customarily exercised or performed by that kind of officer or agent of a similar company.

Proper performance of duties

(4) A person may assume that the officers and agents of the company properly perform their duties to the company.

Document duly executed without seal

(5) A person may assume that a document has been duly executed by the company if the document appears to have been signed in accordance with subsection 127(1). For the purposes of making the assumption, a person may also assume that anyone who signs the document and states next to their signature that they are the sole director and sole company secretary of the company occupies both offices.

36 Morris cites s 129(2)(b) to argue that 164 Fyans might be assumed to have authorised Mr Elsworthy to execute the deed of charge on its behalf as a single director.

37 I am not persuaded that Morris has established that there is a serious question to be tried in this regard. There is no evidence of actual authorisation by reference to the constitution of 164 Fyans or otherwise.

38 Section 129(2)(b) adopts the principle of usual authority under the common law of agency.[4] A single director acting individually has no usual authority to bind a proprietary company with several directors.[5] A single director can only bind the company by joining in a collective resolution of the board or by exercising a delegated power to act as the company's agent duly authorised.[6]

39 There is insufficient evidence to establish that there is a serious question to be tried as to whether Mr Elsworthy acted as 164 Fyans' agent in signing the deed of charge. The evidence is rather to the effect that he informed Mr Hickey and Mr Murray (each of whom by their experience would have been aware of the significance of the fact) that the property might be owned by a superannuation fund. He made it clear that he would need to check whether that was the case, although he personally would be content for the property to be charged to secure debts to Morris owed by him and associated companies.

40 In reaching the conclusion that Morris has not established that there is a serious question to be tried as to whether Mr Elsworthy signed the deed of charge as agent for 164 Fyans, I have not overlooked his signature on the contract of sale. There, 164 Fyans is properly described as the vendor and Mr Elsworthy has signed on its behalf. In the case of Morris itself, the lessee under the lease is shown as Elsworthy Property and Mr Elsworthy has signed the document purportedly in accordance with s 127 of the Corporations Act 2001.[7] Similarly, Elsworthy's Bulk is named as the hirer under the hire purchase agreement and, once again, Mr Elsworthy as a director, purports to sign the document in accordance with s 127.[8] There is insufficient evidence to establish that there is a serious question to be tried as to whether 164 Fyans held out or otherwise represented that Mr Elsworthy was authorised to sign the document on its behalf, absent any express reference to the company.

41 As to the balance of convenience, even if Morris had satisfied me that it had established the requisite serious question to be tried that it had an interest as chargee, it has not commenced the foreshadowed proceeding to substantiate its claim to that interest. Yet, it seeks to maintain the caveat and frustrate the sale of the property by preventing its completion and the satisfaction of the claims of the registered first mortgagee.

42 The balance of convenience does not favour the retention of the caveat.

[1] Goldstraw v Goldstraw [2002] VSC 491, [30] (Dodds-Streeton J).

[2] Piroshenko v Grojsman & ors [2010] VSC 240, [18] (Warren CJ).

[3] White v Conroy [1921] NSWStRp 21; (1921) 21 SR (NSW) 257.

[4] Austin, Ford and Ramsay, Company Directors: Principles of Law and Corporate Governance (LexisNexis Butterworths, 2005) [3.66].

[5] See Northside Developments Pty Ltd v Registrar General [1990] HCA 32; (1990) 170 CLR 146, 205 (Dawson J); Ford's Principles of Corporations Law [13.080]; Austin, Ford and Ramsay, above n 4, [3.35].

[6] Northside Developments Pty Ltd v Registrar General [1990] HCA 32; (1990) 170 CLR 146, 205 (Dawson J).

[7] Exhibit AMJ6 to the affidavit of Aaron Martin Jolly sworn on 7 April 2014.

[8] Exhibit AMJ3 to the affidavit of Aaron Martin Jolly sworn on 7 April 2014.