Plaintiffs v MIG PROPERTY SERVICES PTY LTD

Supreme Court of Victoria|2009-06-09|Before: ROBSON J

CORPORATIONS - Company in liquidation - Company trustee of unit trust - Mortgage debenture over trust assets - Receiver and manager appointed over assets and undertaking of company - First registered mortgagee of trust property - Mortgagee in possession of trust property - Mortgagee appoints agent in possession - Sale of property by agent in possession - Sale proceeds exceeds mortgagee's debt and expenses of sale - Agent in possession fails to discharge mortgagee's debt - Land subject to unregistered second mortgage and other equitable charges - Subsequent interest holders in dispute as to their respective entitlements - Mortgagor and agent fail to calculate surplus and pay surplus into Court - Mortgagor and agent fail to account to liquidator and subsequent interest holders for moneys applied to satisfy debt and expenses of mortgagee and agent - Whether mortgagee and agent obliged to retain surplus and pay it to subsequent equitable interest holders in accordance with their entitlement and priority under s 77(3) of the Transfer of Land Act 1958 - Whether mortgagee and agent entitled to the costs of inquiring into and determining who they should pay the surplus to as an expense against the proceeds of sale - Whether mortgagee's debt satisfied in full on sale of land - Whether mortgagee and agent obliged to account for surplus on settlement of sale of land - Whether mortgagee and agent are entitled to any expenses incurred subsequent to settlement of sale of land

CORPORATIONS - Receiver and manager appointed out of Court - Mortgagor's debt satisfied in full - Receiver and manager remains in possession of other assets of mortgagor - Whether receiver and manager obliged to deliver up real property in his possession to the liquidator - Whether appointment of receiver and manager is terminated.

CORPORATIONS - Whether orders against mortgagee, agent in possession and receiver and manager should be made under ss 423(1), 425, 434(1)(b), 434A and 434B(1) and (5) of the Corporations Act 2001.

CORPORATIONS LAW - Lien for "salvage costs" - Whether equitable lien extends to cover expenses of liquidator in procuring mortgagee and agent in possession holding surplus moneys to pay those moneys into Court - Whether expenditure exclusively for that purpose - Application of principle in Universal Distributing.

PROPERTY LAW - Transfer of Land Act 1958 - Construction of s 77(3) - Whether surplus moneys on land sold by mortgagee held on trust for subsequent equitable mortgagees and chargees - Whether reference to subsequent mortgagees and chargees in s 77(3)(c) includes unregistered mortgagees and chargees - Whether s 77(3) should be construed subject to legal and equitable interests otherwise recognised at law - s 77(3) of the Transfer of Land Act 1958.

PROPERTY LAW - Mortgage - Whether mortgagee entitled to costs, charges and expenses beyond those "properly and reasonably" incurred.

Adams v Bank of New South Wales [1984] 1 NSWLR 285

Adsett v Berlouis [1992] FCA 368; (1992) 109 ALR 100

Ansett Australia Ground Staff Superannuation Plan Pty Ltd v Ansett Australia Ltd [2002] VSC 576; (2002) 174 FLR 1

ANZ Banking Group v Evans (1992) 2 Qd R 230

Australian Securities and Investments Commission, Re Lanepoint Enterprises Pty Ltd (receivers and managers appointed) [2006] FCA 1493

Avco Financial Services v White [1977] VicRp 62; [1977] VR 561

Australian Co-operative Development Society Ltd (in liq) [1978] Qld R 395

Avco Financial Services v Commonwealth Bank of Australia (1989) 17 NSWLR 679

Bank of New South Wales v Adams [1982] 2 NSWLR 659

Bank of New Zealand v Development Finance Corporation of New Zealand [1987] NZCA 146; [1988] 1 NZLR 495

Batten v Wedgwood Coal and Iron Co (1884) 28 Ch D 317

Beddoe, Re [1893] 1 Ch 547

Beeby v Official Assignee of Pickering and Pickering [1953] NZLR 832

Bolingbroke v Hinde (1884) 25 Ch D 795

Bowesco Pty Ltd v Cronin [2008] WASC 286

Challenge Bank Ltd v Hodgekiss Unreported, NSWSC, Young J, 17 August 1995

Charles v Jones (1887) 35 Ch D 544

Colin D Young Pty Ltd v Commercial & General Acceptance Ltd (1982) NSW ConvR 56,572

Commonwealth Bank of Australia v Butterell (1994) 35 NSWLR 64

Dean-Willcocks v Nothintoohard Pty Ltd (in liq) [2006] NSWCA 311

Enterprises Pty Ltd (receivers and managers Appointed) [2007] FCAFC 85

Equus Financial Services Ltd v RMBL Investments Pty Ltd (1996) 22 ACSR 744

Expo International Pty Ltd v Chant (1979) 2 NSWLR 820

F & G Nominees Pty Ltd v Coxon [2007] WASC 113

Fraser v Australian Securities & Investments Commission, In the Matter of Lanepoint [2007] FCAFC 85.

Gomba Holdings (UK) Ltd v Minories Finance Ltd (No 2) [1993] Ch 171.

Hall v Poolman (2009) 22 ACSR 139.

Hope v Hope [1977] 1 NZLR 582

Incorporated Trustees of Australian Clergy Provident Fund v Perpetual Executors and Trustees Association of Australia Ltd [1957] VicRp 54; [1957] VR 390

Just Juice Corp Pty Ltd; James v Commonwealth Bank of Australia [1992] FCA 420; (1992) 37 FCR 445

Kerabee Park Pty Ltd v Daley [1978] 2 NSWLR 222

Mangan, Re, ex parte Andrew [1983] FCA 134; (1983) 123 ALR 633.

Mercantile Credits v ANZ Banking Group Ltd (1988) 48 SASR 407

Moodemere Pty Ltd (in liq) v Waters [1988] VicRp 31; [1988] VR 215

Morrison, Bennell v Smith [1962] Tas SR 337

Murrell; Ex parte Official Trustee in Bankruptcy [1984] FCA 314; (1984) 57 ALR 85

Regent's Canal Ironworks Co; Ex parte Grissell (1875) 3 Ch D 411

Rottenberg v Monjack (1993) BCLC 374.

Thomson's Mortgage Trusts, Re [1920] 1 Ch 508.

Universal Distributing Co Ltd (in liq) [1933] HCA 2; (1933) 48 CLR 171

Vink v Tuckwell [2008] VSC 100

Wallis, Re; ex parte Lickorish (1890) LR 25 QBD 176.

Weld-Blundell v Synott [1940] 2 KB 107

West v Diprose [1900] 1 Ch 337.

West London Commercial Bank v Reliance Permanent Building Society (1885) 29 Ch D 954

Westpoint Finance Pty Ltd v Chocolate Factory Apartments Ltd [2002] MSWCA 287.

1 Each of the plaintiffs and the defendants to this proceeding claim an interest over property held on trust for the S&D International Unit Trust. The Trust assets included a property at 580 Barkly Street, Footscray which has now been sold by the first mortgagee, MIG Property Services Pty Ltd (MIG), the first defendant, and another property at 45 Boronia Drive, Hillside which is in the possession of the receiver, Mr Vartelas, the second defendant, who was appointed by the registered first mortgagee and mortgage debenture holder MIG.

2 Previously the trustee of the unit trust, S & D International Pty Ltd (S&D), the second plaintiff, carried on an Indian wholesale grocery business at the Footscray property known as Bharat Traders International. The business was initially established as a partnership in 1991 by Dinesh Malhotra, the third defendant, his brother Vinod Malhotra, and Markandey Tiwari. In 1992, Markandey Tiwari divorced his wife Sheela who then married Dinesh Malhotra. Also in 1992, Markandey and Vinod left the partnership and Dinesh Malhotra was registered as sole proprietor of the business name. The business was thereafter built up and conducted by Sheela Tiwari and Dinesh Malhotra. In 1996, the unit trust was established and S&D appointed the trustee. S&D took over the business and acquired the Footscray property in 1996. Subsequently, in 2000, S&D as trustee purchased the Hillside property. These properties were mortgaged to the CBA Bank along with a mortgage debenture over the assets and undertaking of S&D. These securities are now held by MIG.

3 The two units in the unit trust were held by Sheela Tiwari. Dinesh Malhotra resigned as a director in 1999; although he claimed that at all times he was the beneficial owner of half the units in the trust and half the shares in the trustee. In April 2002, for reasons it is not necessary to canvass, Dinesh Malhotra was locked out of the Footscray property by Sheela Tiwari where they also resided. He soon thereafter lodged a caveat over both properties claiming to have an estate in fee simple.

4 After Dinesh was excluded from the Footscray property, Sheela Tiwari and her son Pradeep Tiwari caused S&D to grant an unregistered mortgage to the ANZ Bank and a registered mortgage debenture in exchange for a business loan and a home loan which were used by Sheela Tiwari to buy a home at Point Cook. The ANZ Bank lodged a caveat giving notice of its unregistered second mortgage.

5 In August 2002, Dinesh Malhotra instituted legal proceedings in the Supreme Court of Victoria to establish his half interest in the properties and the business. Thus began a long series of court cases which have led to the current proceedings. Sufficient to say, Dinesh Malhotra succeeded in his initial proceedings in establishing that he was beneficially entitled to a half interest in the unit trust and its assets.

6 Sheela Tiwari retained the firm of Velos and Davis to act for her and S&D in the proceedings instituted by Dinesh. She also caused S&D to give an equitable charge over the Footscray property and the Hillside property to secure legal fees incurred on her behalf and S&D's behalf in the Supreme Court proceedings.[1] Mr Bill Velos of the firm of Velos and Davis is the fourth defendant. On 6 August 2007, Mr Velos and his partner Peter Davis obtained judgment against Sheela Tiwari for $190,708.52 plus costs in respect of fees and charges incurred in acting for her and S&D in the Supreme Court proceedings.[2] This debt has not been paid and Mr Velos and Peter Davis claim to be entitled to the moneys in Court as a matter of priority by virtue of the equitable charges.[3]

7 Sheela Tiwari appealed the Supreme Court decision and while the matter was pending in the Court of Appeal, Sheela Tiwari and Dinesh Malhotra agreed to appoint an administrator to run the business until their dispute could be resolved. They appointed Stirling Horne and Peter Vince, the sixth and seventh defendants, as administrators. Despite the business being previously profitable, they, as Dinesh Malhotra alleges, with the connivance of Sheela Tiwari and her son Pradeep Tiwari, recommended that the trustee be wound up. At that stage, the trustee owed CBA as a secured creditor approximately $240,000. In June 2005, the creditors of S&D resolved to wind up the company and appointed Messrs Horne and Vince as liquidators.

8 Dinesh Malhotra then instituted further proceedings in the Supreme Court to terminate the winding up and to remove Messrs Horne and Vince as liquidators. At first instance, he failed to have the winding up terminated and Messrs Horne and Vince removed as liquidators. He successfully appealed the decision of the Court not to remove Messrs Horne and Vince. In June 2007, Mr Handberg, the first plaintiff, was appointed as the liquidator of S&D in their stead. In November 2004, Messrs Horne and Vince lodged a caveat against the properties notifying their claim to a lien over the assets for their unpaid fees and expenses.

9 Previously, Messrs Horne and Vince had sought to have Dinesh Malhotra's caveats removed. In July 2006, the Supreme Court refused their application.

10 As mentioned above, the CBA bank held securities over S & D and the properties and at about the time S & D was placed in administration, the CBA Bank called up its loan owed by S & D. In June 2005, Dinesh Malhotra was able to arrange for the CBA to be paid out by Colonel Naresh Malhotra who took over the securities but assigned them to MIG on 11 September 2006.

11 On 25 October 2006, Mr Vartelas was appointed receiver and manager of the assets and undertaking of S&D under the mortgage debenture held by MIG.[4] In August 2007, Mr Vartelas was appointed the agent of MIG and entered into possession of the two properties. At that time, the principal debt secured by the mortgages was $242,540.38.

12 On or about 19 September 2007, MIG, through its agent Mr Vartelas, sold to Tiwari Enterprises Pty Ltd,[5] a company associated with Sheela Tiwari, the Footscray property at public auction for the total sum of $1,360,000. Settlement of the sale occurred on 18 October 2007.[6] On 19 October 2007, the estate agents accounted to MIG for the deposit. At settlement, withdrawals were provided for the Dinesh Malhotra caveat, the ANZ Bank caveat and the Horne and Vince caveat. Mr Dinesh Malhotra agreed with MIG to provide his withdrawal on the basis that MIG would pay the surplus (if any) into Court. MIG did not pay the surplus into Court nor had it done so by the time this proceeding commenced. At or after settlement, MIG did not account to the mortgagor or the subsequent interest holders for the moneys it was retaining in satisfaction of its secured debt. It did not treat its mortgage and other securities as satisfied in full. On the contrary, it retained the proceeds of sale and failed to calculate what it was owed.

13 In September 2008, on the application of the liquidator of S&D, MIG and Mr Vartelas were ordered to pay the balance of the moneys which they still retained from the sale of the Footscray property and the receivership of S&D into Court. MIG has still not finally accounted to the liquidator or the other encumbrancers.

14 The proceedings seek to settle the entitlement of several parties to the moneys paid into Court, their entitlement to the Hillside property and other issues related to the conduct of MIG as mortgagee and Mr Vartelas as agent for the mortgagee and receiver of S&D.

15 There are two proceedings before me. In the main proceeding, the plaintiffs are Mr Handberg, the current liquidator of S&D, and S&D itself. It will be necessary to examine their claims in detail later, but suffice to say the liquidator seeks an order that he has first priority to the funds in Court on the basis he has a lien over them arising out of his efforts to preserve them from misuse by MIG and Mr Vartelas. He also seeks orders resolving the entitlements of the other defendants. The liquidator and S&D also seek orders against MIG and Mr Vartelas challenging their conduct as mortgagee and as agent in possession and as receiver and manager of S&D respectively.

16 MIG and Mr Vartelas deny any improper conduct as mortgagee, as agent in possession or as receiver of S&D and claim that MIG and Mr Vartelas are entitled to the moneys in Court to meet its mortgage. MIG and Mr Vartelas also claim that the surplus, after being delivered back to MIG and Mr Vartelas , if any, be dealt with according to the Court's directions.

17 Dinesh Malhotra claims that he is entitled to a half interest in the moneys in Court as he was held to be the beneficial owner of a half interest in the Footscray property in the Supreme Court proceedings. It is not disputed that he is entitled to a half interest in the unit trust. The trust assets, however, are subject to the trustee's right to indemnify itself for liabilities incurred on behalf of the trust.[7] Whether the trust should be determined and the beneficial unit holders paid out is not in issue before me. If the trust is determined, then the trustee is to convert the trust assets into money and distribute the surplus amongst the registered holders in proportion to their unit holding.[8] The other interested party in the unit trust, Sheela Tiwari, is not a party to either proceeding.

18 The fourth defendant is Mr Bill Velos. As mentioned above, his firm Velos and Davis acted for Sheela Tiwari and S&D in the proceedings taken by Dinesh Malhotra to establish his half interest in the trust and the trust assets. To secure their legal fees, S&D, then under the control of Sheela Tiwari and her son Pradeep Tiwari, gave equitable charges in favour of Velos and Davis over both properties. Mr Velos is owed some $198,000 in fees. He has a judgment debt for the sum. He claims he has priority next after MIG to the moneys in Court.

19 As mentioned above, the fifth defendant is Pradeep Tiwari, the son of Sheela Tiwari. In July of 2008, the ANZ Bank assigned its unregistered second mortgage and mortgage debenture it held over the assets and the undertaking of S&D to Pradeep Tiwari. Mr Tiwari claims that he has priority next after MIG to the moneys in Court.

20 As mentioned above, the sixth and seventh defendants are Messrs Horne and Vince. In November 2004, they lodged caveats over the Footscray and Hillside properties claiming an equitable interest as lien holders for their costs. They claim that they are entitled to their costs in priority to any claim that the liquidator may have to his costs.

21 The second proceeding was commenced in May 2008 by Pradeep Tiwari against MIG and Mr Vartelas seeking a declaration that, by operation of s 77(3) of the Transfer of Land Act 1958, the defendants were bound to pay to the ANZ Bank such moneys as were payable for moneys owing under or in respect of the second ranking ANZ mortgage from the sale of the Footscray property.[9] He also sought an order that the defendants pay out the ANZ mortgage. Pradeep Tiwari was a guarantor of the ANZ Bank loan to S&D that was used to buy the house for his mother. Soon, after commencing the proceeding, Pradeep Tiwari paid out the ANZ Bank and took an assignment of its securities. Pradeep Tiwari claims he is entitled to the moneys in Court next after MIG. The issues in the second proceeding will essentially be resolved in the first and I will not address it further in this judgment.

22 The myriad of claims have been argued for many days before me. The issues between the parties still have not been accurately identified. On 29 April 2009, I ruled that certain issues raised by Dinesh Malhotra in his notice of contentions but not in his points of claim challenging the validity of the ANZ Bank securities and the Velos and Davis charges are before me. Since my ruling, the liquidator and S&D have undertaken to pursue those or related claims on behalf of the trust against Mr Velos and Mr Tiwari. At an earlier stage of the proceedings, they had raised them in their statement of contentions and points of claim but ceased to do so shortly after the hearing before me commenced.

23 After hearing the then case of the plaintiffs, MIG and Mr Vartelas, but before completing the case of Mr Malhotra, or hearing the cases of Mr Tiwari, Mr Velos and Messrs Horne and Vince or hearing the final addresses of any party, Mr Robertson of counsel, who appears for MIG and Mr Vartelas, helpfully suggested that I should hear discrete issues between the parties as that did not require the attendance of all parties and would help to keep the costs down. To that end I agreed to hear the issues outstanding between the plaintiffs and MIG and Mr Vartelas, which I have. This judgment deals with those issues.

THE ISSUES BETWEEN THE LIQUIDATOR AND MIG AND MR VARTELAS

24 Strictly speaking, the matters raised between the plaintiffs of the one part and MIG and Mr Vartelas of the other also concern the other parties. They have been content, however, to allow them to be argued between the plaintiffs, MIG and Mr Vartelas. Mr Dinesh Malhotra, who is unrepresented, was informed that he could attend if he wished, but did not appear. Only the plaintiffs, MIG and Mr Vartelas appeared to argue the issues.

25 There are two basic issues. First, as mentioned above, the liquidator seeks an order that he has first priority to the moneys in Court as against the other parties, save the secured debt of MIG, on the basis that he has a lien over them arising out of his efforts to preserve them from misuse by MIG and Mr Vartelas.

26 Secondly, the plaintiffs contend that MIG's mortgage was satisfied in full on the sale of the Footscray property on 18 October 2007, or at the latest on 19 October 2007, when MIG or its agents received the balance of the sale moneys. I will henceforth refer to the settlement date as 19 October 2007 for these reasons. The plaintiffs also claim that MIG and Mr Vartelas were obliged to and should now account to the plaintiffs and the other subsequent encumbrancers for the moneys that they retained from the sale as at 19 October 2007; and as and from 19 October 2007, MIG and Mr Vartelas held the surplus moneys on trust for the subsequent interest holders. Further, the plaintiffs contend that given the circumstances of this case, MIG and Mr Vartelas were obliged to pay the surplus moneys immediately into Court after settlement on 19 October 2007.

27 The plaintiffs contend that as the debt due to MIG was satisfied in full on 19 October 2007, the receivership over the assets and undertaking of S&D should have been terminated that day or shortly thereafter. Further, the plaintiffs contend that MIG and Mr Vartelas are not entitled to any interest, costs, fees or expenses after 19 October 2007. The plaintiffs contend that MIG and Mr Vartelas should now compensate S&D and/or the other subsequent encumbrancers in interest for failing to pay the moneys into Court as requested by S&D and the subsequent encumbrancers.

28 The plaintiffs seek relief under sections 434(1)(b), 434B(1), 434B(5) and 1321 of the Corporations Act 2001 in respect of MIG's and Mr Vartelas' conduct.[10]

29 The plaintiffs contend that MIG is not entitled to include in the sum secured by the mortgage; expenses incurred in having Colonel Malhotra exercise powers as the registered mortgagee and to effect the transfer of the mortgage to MIG; and fees charged by Mr Mond, the controller of MIG, for his personal services purportedly provided to MIG.

30 MIG and Mr Vartelas dispute the claims of the liquidator and S&D, save that they admit that they should give an account, but only when they have fully satisfied MIG's mortgage debt, fees and expenses, including those of Mr Vartelas, which they claim they have not done.

31 MIG and Mr Vartelas contend that MIG's mortgage debt was not satisfied on 19 October 2007 and it is still not satisfied to this day. They claim that they were and are entitled to retain the whole of the sale moneys while they made and continue to make investigations and inquiries into the merits of the subsequent interest holders.

32 MIG and Mr Vartelas contend that they were bound by s 77(3)(c ) of the Transfer of Land Act 1958 (TLA) to hold the proceeds of sale until they had determined for themselves the respective interests and priorities of the "subsequent mortgages and charges." They contend that they were entitled to seek the directions of the Court in determining those issues if they so wished. MIG and Mr Vartelas contend that they should not have been ordered to pay the moneys that they still retained into Court.

33 MIG and Mr Vartelas contend that s 77(3)(c) includes unregistered mortgages and charges. The plaintiffs dispute that construction and say that the ANZ Bank's equitable mortgage and the other equitable charges under its mortgage debenture were not to be satisfied by MIG under paragraph (c); but rather that paragraph (d) applied which required the surplus proceeds to be paid to the mortgagor or into Court.

34 MIG and Mr Vartelas contend that they were not obliged to account to the subsequent interest holders on 19 October 2007 or any date thereafter until they had completed their duties under s 77(3)(c ) of the TLA as set out above. They contend that once they have carried out their duties under s 77(3)(c ), and not until then, will they finally account to the subsequent interest holders.

35 MIG and Mr Vartelas contend that as the mortgage debt has not been satisfied, the receivership should not be terminated and should not have been terminated on 19 October 2007 or any date thereafter.

36 MIG and Mr Vartelas contend that the Court should not adjudicate on the issue of the appropriateness of MIG reimbursing itself from the sale proceeds for the proceedings against Colonel Malhotra or Mr Mond's fees. They contend that this issue should be left for the taking of accounts in the traditional way, if its accounting is ultimately disputed by any of those entitled to dispute it.

37 For the reasons that follow, I have found on a preliminary basis that the liquidator is entitled to priority for the costs he incurred in preserving the fund by having it paid into Court.

38 I have found that the MIG and Mr Vartelas should have discharged the mortgage debt on 19 October 2007 and forthwith paid the surplus moneys into Court. I have found that on 19 October 2007 they should have accounted for the allocation of the sale proceeds to the subsequent interest holders including S&D. I have found that, as against S&D as mortgagor, MIG and Mr Vartelas are not entitled to any interest, costs, charges or expenses beyond 19 October 2007. I have found that MIG and Mr Vartelas were not entitled to apply the sale proceeds to meet the costs of MIG incurred in relation to Colonel Malhotra and the charges claimed by MIG for Mr Mond's personal services in dealing with the mortgage.

39 I have found that Mr Vartelas' appointment as receiver of S&D should have ceased on 19 October 2007. I have found that Mr Vartelas is not entitled to any cost, charges or expenses as receiver beyond 19 October 2007. I have found that MIG and Mr Vartelas are obliged to pay interest on the surplus moneys retained by them. I have found that on 19 October 2007 Mr Vartelas should have delivered up to S&D the Hillside property. I have found that it is appropriate to make orders under the Corporations Act 2001 to give effect to these findings.

THE ACTIONS OF MIG AFTER THE SALE OF THE FOOTSCRAY PROPERTY

40 Before MIG and Mr Vartelas were able to sell the Footscray property, they negotiated with the several caveators to remove their caveats. These negotiations were extensive and took place over several months. On 28 September 2007, the liquidator demanded that "the entire net proceeds of the sale of the land (after your reasonable fees and expenses incurred only in getting in, protecting and realizing the property) should be paid to me or into Court".[11]

41 MIG and Mr Vartelas informed the caveators and the liquidator that it was their intention to pay into Court the surplus moneys from the sale after satisfying MIG's mortgage. They agreed with Mr Malhotra that they would pay the surplus into Court. As a consequence the caveats were removed to allow the sale to proceed. The property was then sold for $1,360,000 and settlement took place on 18 October 2007.

42 Soon after the sale, MIG and Mr Vartelas again informed the caveators that it was still their intention to pay the surplus moneys into Court under s 77(3)(d) of the TLA once the principle, interests and all costs and expenses payable under the mortgage had been paid. On 12 November 2007, the solicitors for MIG and Mr Vartelas told the liquidator's solicitors that they expected to receive instructions to transfer the moneys into Court "once all accounts had been rendered and all fees and disbursements paid." In late November 2007, the solicitors for MIG and Mr Vartelas advised the plaintiffs, that once confirmation had been received that MIG had been paid in full, the surplus moneys would be paid into Court. They indicated, however, that if an agreement could be reached between the claimants it would not be necessary to do so.

43 In the weeks following settlement, MIG and Mr Vartelas assert that they took steps to ascertain the amount of the secured debt including the various costs incurred by MIG and Mr Vartelas. An incomplete accounting of the proceeds of the sale was provided to the liquidator on 27 November 2007.[12] MIG and Mr Vartelas contend that ascertaining the interest rate applicable to the loans was not a simple exercise as it depended upon ascertaining and applying the rates charged by the Commonwealth Bank over the period since the transfer of the mortgage. [13].

44 In January 2008, after the plaintiffs threatened legal action unless the surplus moneys were paid into Court, MIG and Mr Vartelas took the advice of counsel as to their obligations in respect of the surplus.

45 Mr Parncutt of counsel gave evidence by affidavit that, in or about November 2007, he was consulted by Comlaw concerning the duties of MIG and Mr Vartelas as agent for the mortgagee in possession with respect to the disposition of the proceeds of sale of mortgaged property and the obligation to account to the mortgagor and the timing of payment into court of the residue of the moneys where there were various claimants to the moneys.[14] He says that he advised Mr Leonidas of Comlaw "that as there were a number of claimants to the surplus of the proceeds of sale, the duty of the mortgagee in possession entitled him to hold the moneys for the purpose of clarifying the claims being made to the surplus of the net proceeds of sale and to ascertain the position of interested parties in the moneys."[15] He advised that this was a positive duty imposed upon the selling mortgagee to deal with a subsequent mortgagee prior to paying the residue moneys to the mortgagor or into the Supreme Court under ss 77(3)(d) of the TLA. He also advised that MIG and Mr Vartelas were not obliged to deal with the surplus moneys in accordance with any directions of the liquidator of the mortgagor. MIG and Mr Vartelas accepted the advice.

46 Mr Parncutt says that "as it became clear that there were a number of claimants to the moneys, he advised that once the subsequent mortgagee and chargee had been paid from the surplus, the residue would necessarily have to be paid into Court, but that it would be appropriate first to ascertain whether there was any disagreement to the payment of the subsequent mortgagee or chargee prior to payment into Court, so as to avoid an erosion of the moneys by protracted proceedings."[16] Mr Parncutt also says that unregistered mortgages fell within s 77(3)(c) based on his research of the authorities, including Ex parte Australian Co-operative Development Society Ltd (in liq),[17] which I discuss below.

47 Mr Parncutt's evidence that he was consulted in or about November 2007, is not easy to reconcile with Mr Vartelas' evidence that he took Mr Parncutt's advice in January 2008 and on 21 February 2008. In any event, on 16 January 2008, the solicitors for MIG and Mr Vartelas advised the caveators that MIG and Mr Vartelas had taken advice and that they would not be paying the surplus moneys into Court as they previously said they would. MIG and Mr Vartelas thereupon set about informing themselves on the interests claimed by the caveators.

48 On 21 February 2008, Mr Mond and Mr Vartelas and their solicitor Mr Leonidas conferred with Mr Parncutt of counsel . Mr Parncutt was instructed of the claims made by the liquidator and that Mr Leonidas had agreed to pay the surplus moneys into Court. Mr Parncutt advised that to pay moneys into Court in disregard of s 77(3)(c) was not an appropriate course. Mr Parncutt said MIG and Mr Vartelas as agent had a "positive duty" to deal with the subsequent mortgagee prior to paying the residue moneys to the mortgagor or into Court. Mr Parncutt advised that an application could be made to Court as to how the moneys should be applied. However, he said, this did not involve payment of moneys into Court. Mr Parncutt advised that a letter should be sent to the interested parties asking them to set out their position and that information could be included in any application made to the Court.[18]

49 By a brief dated 8 March 2008, Mr Parncutt was instructed to draw an originating motion, affidavit in support, which had been discussed at the conference on 21 February 2008, and to settle a letter which ultimately became the letter of 1 May 2008 sent by Comlaw to the interested parties.[19] The originating motion was never issued.

50 Eventually, on 1 May 2008, MIG and Mr Vartelas set out their understanding of the respective claims in a lengthy letter to each caveator from their solicitors, Comlaw. The letter also sets out the substance of Mr Parncutt's advice to MIG and Mr Vartelas given on 21 February 2008. The letter was settled by Mr Parncutt. They suggested to all claimants that the ANZ Bank be paid the moneys owing under its unregistered mortgage and asked for their consent to do so.

51 The ANZ Bank disagreed with the suggestion of MIG and Mr Vartelas as set out in Comlaw's letter of 1 May 2008. MIG and Mr Vartelas were informed by solicitors for the plaintiffs that the ANZ Bank insisted that the surplus be paid into Court under s 77(3)(d). The ANZ Bank argued that paragraph (c) did not apply to unregistered charges. On the other hand, the former and current liquidators and Mr Velos asserted that the surplus should be paid to the ANZ Bank.[20] After they were informed of the ANZ's stance on 9 May 2008, they amended their direction to MIG and Mr Vartelas and said that the moneys should be paid into Court.[21]

52 Dinesh Malhotra had stated back in September 2007 that he wanted the moneys paid into Court and only removed his caveat when MIG and Mr Vartelas agreed to do so. The solicitors for MIG and Mr Vartelas wrote to him to seek his confirmation that he still wished the moneys to be paid into Court. They received no response.

53 On 20 May 2008, the ANZ Bank confirmed its position. At that point, MIG and Mr Vartelas claimed that the mere fact that all caveators had agreed the moneys be paid into Court did not relieve MIG and Mr Vartelas of their duty to comply with paragraph (c). The next day, however, Mr Tiwari instituted his proceedings seeking an order that MIG pay out the ANZ Bank's mortgage.

54 By this stage, it was obvious to MIG and Mr Vartelas that they would need directions from the Court as to how they should discharge their responsibilities under paragraph (c). On 2 June 2008, Comlaw on behalf of MIG and Mr Vartelas suggested to Mr Tiwari that his proceedings may be a suitable vehicle for the determination of the respective priority issues.[22] Shortly thereafter, MIG and Mr Vartelas were informed that the ANZ Bank had assigned its unregistered second mortgage to Mr Tiwari on 9 July 2008.

55 After 2 June 2008, little, if anything, was done by MIG or Mr Vartelas to bring the issue of MIG's and Mr Vartelas' responsibilities under paragraph (c) or generally to Court even though MIG and Mr Vartelas were aware that they would not be able distribute the surplus moneys to the ANZ Bank. Eventually, on 13 August 2008, the liquidator took proceedings in his own name and in the name of S&D to resolve the issues between the parties and to have MIG and Mr Vartelas pay the moneys still held by Mr Vartelas, as agent and as receiver, into Court for safe keeping.

56 MIG and Mr Vartelas submit that they retained the sale proceeds on legal advice that they should retain those moneys until they were in a position to pay the subsequent mortgagees and chargees. Mr Mond is a director and the person in control of MIG. He gave evidence that he is not aware how much is still owed to MIG under the mortgage.

57 As the following history will establish, despite repeated requests by the liquidator, MIG and Mr Vartelas have failed and refused to properly account to the liquidator for the moneys applied to discharge the mortgage debt.

58 On 9 July 2007, Mr Handberg asked Mr Vartelas for details of the sum required to discharge S&D's debt to MIG.[23] On 30 July 2007, Mr Handberg requested that Mr Vartelas provide a report as to the affairs of S&D which included details of S&D's liability. Mr Vartelas responded through his solicitors, Comlaw, advising that the principal amount owed was $242,540.83, with interest and costs to be calculated.[24] On 24 August 2007, Mr Vartelas informed Mr Handberg in a meeting that S&D owed MIG between $240,000 and $500,000 including interest and costs and that he would calculate the final payout figure to discharge S&D's debt to MIG by the end of the following week and that this amount was likely to be in excess of $500,000.[25]

59 In his report as to affairs of 9 October 2007, lodged after the property had been auctioned, Mr Vartelas estimated the amount owed to MIG as $517,382.[26] As indicated above, the sale settled on 18 October 2007, and on 22 October 2007, Mr Handberg requested "an accounting of all amounts disbursed from the sale proceeds of the property and confirmation that the surplus has been paid into Court."[27] On 20 November 2007, Comlaw confirmed that Mr Handberg had requested an accounting of the proceeds and said it had been prepared. Comlaw also said that further costs were being incurred by Mr Vartelas, which were covered by the mortgage, in making documents requested by Mr Handberg available for inspection.[28]

60 On 27 November 2007, a partial accounting of the proceeds of sale was provided. Comlaw informed Mr Handberg that they were awaiting confirmation from the mortgagee itself that it had been paid in full. They said that once they had received this confirmation, they would be paying the funds into Court under s 69 of the Trustee Act 1958 and section 77(3)(d) of the TLA.[29]

61 The account indicated that at settlement Comlaw had received the proceeds of sale and after paying the expenses of sale, had paid $350,000 to MIG, legal fees to itself and the balance of $887,476.92 to Mr Vartelas as agent for MIG, save for $15,000 which was retained by Comlaw in its trust account.

62 Of the moneys received by Mr Vartelas, he paid a further $60,000 to MIG, remuneration and expenses to himself and held a balance of $743,256.42. Thus, as at 27 November 20007, MIG had been paid $410,000 but had still not advised to what extent its mortgage debt had been paid.

63 On 7 January 2008, Mr Handberg repeated his demand that the balance be paid into Court and threatened proceedings unless this was done.[30] I have set out above the events that led to the order on 25 September 2008 that the moneys held by Mr Vartelas be paid into Court. After the order was made on 25 September 2008, and on that day, Mr Handberg sought a full and detailed account of the amount MIG claimed was secured by the debenture charge and the mortgage, the receipts and payments by Mr Vartelas and the costs and expenses incurred by MIG and Mr Vartelas.[31]

64 On 26 September and 30 September 2008, Mr Handberg sought a response to his request. Ultimately, on 3 October 2008, Comlaw provided accounts, but again were only able to give an estimate of the amount owed to MIG, as costs were still being incurred in the proceedings.[32] The accounts disclosed that Mr Vartelas had now paid $140,000 to MIG (making a total now of $490,000 paid to MIG) and after costs and expenses, $625,227.59 was paid into Court. The account also showed that additional legal fees and fees to Mr Vartelas, since the 27 November 2007 account, were some $51,000.

65 An account was also provided by Mr Vartelas as receiver and manager of S&D. It showed receipts of $93,322.01 (mainly from licensing fees) and expenses of $89,613.57. The balance of $3,708.44 was paid into Court.

66 At this stage, MIG had not provided any account of the application of the $490,000 paid to it, and in particular how it had been applied to principal, interest and costs. On 7 October 2008, Mr Handberg through his solicitors sought those particulars.[33] On 9 October 2008, Mr Handberg through his solicitors repeated his request of MIG.[34] Although Comlaw, on behalf of MIG and Mr Vartelas, made copies of Mr Vartelas' invoices, advises and time sheets available for inspection, MIG failed to provide any details of the allocation of the $490,000 that had been paid to it.

67 Mr Vartelas says that the payments to MIG were made at MIG's request. Mr Vartelas paid the money over without any account from MIG as to what it was owed and on what basis. Mr Vartelas' evidence on why he did not pay out MIG's mortgage on receipt of the moneys is unsatisfactory. His evidence was as follows:

You received the funds - all the settlement occurred on 19 or 18 October, is that correct?---I understand that - roughly that.

And the funds sat in Mr Leonidas' trust account?---Yes.

There was nothing preventing you at that stage from paying the surplus moneys into court, was there?---Well, yes, there was. I mean, I was under instructions from my appoint[or]. Plus, I couldn't pay the surplus because at that stage I still didn't know what the full extent of the debt to my appointor was; neither was my role completed. My role would not have been completed until I finalized my whole administration, prepared the final account. It wasn't just a simple case of me handing over money to my appointor, putting the money to court and walking away.

What did you do between October and December to ascertain what the amount due to MIG was?---I made inquiries with Mr Mond. I had a number of meetings with --- I had a couple of meetings with his accounting staff, with the staff of David Mond & Associates. Mr Mond had allocated one of his staff to work out the final details of these loan accounts. As well as that I had a lot of other duties which I had to carry out in relation to my appointment as agent for the mortgagee.[35]

68 Mr Mond of MIG said Mr Vartelas made the decisions in relation to the application of the proceeds of sale, although he agreed that he had requested the payments to MIG. [36] Mr Mond could not explain how those payments were calculated.[37]

69 Payments to MIG were made without Mr Vartelas being provided with finalized calculations of interest or costs and without him being able to say whether they were in payment of principal, interest or costs. Mr Vartelas evidence was as follows:

What inquiry did you make of MIG [in relation to the request for payment of $8,000]? --- I asked them how they arrived at that figure, and they said it was the same as the sum of $52,000, it was part of payment towards their outstanding account, loan account, until such time they advised me that the loan account was substantially higher than the amounts that they were requesting, and they would provide me with details of the loan in due course.[38]

Mr Vartelas was vague about the instructions he received in relation to the quantum of his appointor's debt:

It doesn't appear anywhere in the evidence that you made any inquiry with Mr Mond as to what amount was required to pay MIG out?---No, that's not correct.

When did you make of that inquiry?---I made inquiries with Mr Mond on a number of occasions.

What occasions were they?---Well, from the day prior to the settlement until the day after the settlement. In fact, I communicated with Mr Mond on a number of occasions.

And when you asked him to instructions as to what amount he was owed or MIG was owed, what did you tell you?---Well, he had together his own information. He was putting together information in relation to legal costs, he was working at his interest rate, he had given me already--- .[39]

70 It was not until the first day of the trial on 6 February 2009, that Mr Mond on behalf of MIG explained how the MIG secured debt was calculated. Mr Mond exhibited tables calculating the interests as it accrued on the CBA home loan[40] and the CBA business loan.[41] Mr Mond accepted that the balance owing on the loans could have been paid at any time from the proceeds of sale, so that MIG would have no further claim on the balance of the proceeds of sale or on the Hillside property, but he chose not to pay the debts.[42]

71 Mr Mond admits that on 29 October 2007, MIG received the sum of $350,000 from the proceeds of sale in part satisfaction of the debt owed to it. He said that $109,600.49 was applied to S&D's home loan and that accordingly, as at 29 October 2007, a small sum of $456.62 was left owed on that account.[43] He offered no satisfactory explanation of why the home loan was not discharged.

72 On 31 July 2007, MIG had been informed of interest rates on the home loan.[44] On the other hand, MIG did not appear to have sought the default interest rates on the business loan until October 2008.[45]

73 Mr Mond said that he did not pay out S&D's debts to MIG from the proceeds as he had been continually advised by his lawyers that there was litigation going on, that there were issues that still had to be addressed, that there was no certainty about MIG's obligations or what MIG's entitlements were or what might occur going forward and he was very concerned about those issues.[46]

74 As indicated above, MIG has charged the costs of its litigation with Colonel Naresh Malhotra against the mortgage debt. When MIG took the assignment of the CBA securities from Colonel Malhotra, MIG did not obtain documents from Colonel Malhotra to enable MIG to be registered as the mortgagee. Litigation was taken against Colonel Malhotra to restrain him from discharging the mortgages, to have him sign a notice to pay and ultimately, to get a registrable assignment of the securities.[47] The expense of undertaking all these proceedings has been treated as an expense covered by the mortgage.

75 MIG also engaged Mr Mond, practising under the name of David Mond & Associates, to carry out accounting work in relation to the amounts purportedly secured by the mortgage. [48]Mr Mond described this work as 'administration' and 'continuous liaison.'[49]

76 Under the CBA mortgage, the borrower was liable for all amounts which the Bank:

(a) is charged;

(b) charges;

(c) pays; or

(d) incurs,

in connection with the establishment and continuance of any Facility or any transaction contemplated by the Contract and the exercise or enforcement of any right, claim or remedy of any kind arising out of the Contract or the Security.[50]

77 As to the costs referable to Colonel Malhotra, MIG submits that it is entitled to these costs as mortgagee in protecting its title as mortgagee. MIG relies on In re Radcliffe[51] and Bolingbroke v Hinde.[52] In the former, the mortgagee assigned the mortgage and the assignee sought to charge the mortgagor with the costs of so doing. He was held not to be entitled to do so. Sir John Romilly, the Master of the Rolls said:

I do not doubt that where a mortgagee has incurred costs in relation to his security, by the acts or defaults of the mortgagor, the latter must bear them except under special circumstances.

This does not support the contention of MIG. In Bolingbroke v Hinde[53] the head note reads:

The plaintiff in a foreclosure action is as a general rule entitled to an account of only principal and interest due to him on his mortgage, and of the costs of the action. To entitle him to an account of any other costs he must make out a special case.

In this case the mortgagee had been in default. In both cases referred to the relevant factor was a default or failure by the mortgagor causing the mortgagee extra expense. The costs incurred by MIG in respect of Colonel Malhotra were not caused by any default of S&D. They were entirely caused by MIG's failure to obtain a proper transfer of the mortgage.

78 MIG also submits that MIG's situation is comparable to that in Re Mangan ex parte Andrew[54] where Beaumont J allowed the second mortgagee its costs (against the secured property) of buying in the first mortgage on the basis that buying in the first mortgage was a reasonable step taken to protect its position under the second mortgage. Beaumont J held that the mortgage rendered the mortgagor liable to the mortgagee for all costs and expenses incurred by the mortgagee for the preservation of the security.[55] He said that it was a "reasonable step" for the mortgagee to buy in the interest of the first mortgagee so as to protect its position under the second mortgage.

79 MIG refers to the costs provisions of the mortgage and the debenture charge instruments and contends that they allow the mortgagee the whole of its costs on a solicitor and client basis which it might "pay incur sustain or be put to" in connection with the mortgaged property, the security, and the exercise or attempted exercise of any power conferred by the security or by statute.[56] In addition, MIG contends that both the debenture and the mortgage expressly permit the mortgagee to assign its security.[57] MIG submits that costs incurred in connection with such assignments are therefore within the costs clause of each of the security documents.

80 Even if the costs of assignment were covered by the securities, these costs were not reasonably and properly incurred in affecting the assignment. They were incurred because of the failure of the MIG to procure a proper assignment in the first place.

81 In my opinion, it is not reasonable or proper that the costs that arose from MIG's failure to observe reasonable care in taking an assignment of the mortgage should be thrown against the mortgagor.

82 As to the costs charged by David Mond & Associates, MIG says that there is no reason in principle why the costs charged should not be charged to the account of S&D by MIG and Mr Vartelas.

83 The use of the name David Mond & Associates does not alter the fact that Mr Mond charged his remuneration in attending to the mortgage. David Mond & Associates is a name that Mr Mond used as a sole practitioner. On one view, it could be said that he was acting as the manager of MIG of which he was a director. This raises the question whether it is reasonable and proper for a mortgagee to charge against the mortgagor remuneration of officers of the mortgagor incurred in connection with the mortgage. Normally, remuneration would not be a cost, charge or expense paid or payable by the mortgagee in connection with the mortgage. In this case, Mr Mond on behalf of MIG engaged himself. The letter of engagement was signed on behalf of MIG by Betty Mond, Mr Mond's wife and fellow director of MIG.[58]

84 The plaintiffs challenge whether the fees were properly incurred and reasonable.[59] In my opinion, Mr Mond is not entitled to charge for his remuneration for personal services in connection with the mortgage. The mortgagor's liability extends to costs, charges or expenses involving actual and genuine expenditure on the part of the mortgagee.

85 In Re Wallis; ex parte Lickorish,[60] the Court of Appeal held that a solicitor mortgagee who acted in proceedings in respect of the mortgage was not entitled, as part of the costs, charges and expenses incurred as mortgagee, his profit costs in respect of professional services. The Court of Appeal limited the mortgagee's entitlements to out of pocket disbursements. Lord Esher said:

It has been settled for many years that the rights or mortgagor and mortgagee inter se depend upon the contract between them, and that, when there is no express contract, but only the ordinary contract which arises out of the relation of mortgagor and mortgagee, the mortgagee cannot charge the mortgagor with remuneration for his own personal services in relation to the mortgage debt or the mortgage security. This rule is not limited to solicitors, but it extends to any mortgagee who is capable of giving and who does give his own personal services in relation to the mortgage debt or security. This rule has been laid down with reference to the contract which arises simply out of the relation between mortgagor and mortgagee.[61]

In my view, MIG's arrangement with Mr Mond was merely a device to seek to throw onto the mortgage compensation that would not otherwise have been reasonably or properly incurred. I find that MIG is not entitle to throw against the mortgagor Mr Mond's remuneration for his personal services.

THE PLAINTIFFS' ARGUMENT ON THE MORTGAGEE'S OBLIGATIONS

86 The plaintiffs submit that the authors of The Mortgagee's Power of Sale assert that the expression "subsequent mortgages and charges" in paragraph 77(3)(c) of the TLA refers only to registered mortgages and charges, because they are all that are contemplated by s 74(1).[62] The authors say that Re Murrell[63] so held. They distinguish Avco Financial Services v Commonwealth Bank of Australia[64] and ANZ Banking Group v Evans.[65] I discuss these authorities below.

87 The plaintiffs submit that if that construction is correct, then the question of accounting to Mr Tiwari on the ANZ Bank mortgage or the Velos and Davis charge under s 77(3)(c ) did not arise, because their encumbrances are unregistered. The plaintiffs contend that this construction is preferable to that contended by MIG and Mr Vartelas, because:

(a) Section 74, which is contained within the same division of the TLA as s 77, provides for the creation of mortgages and charges by registration (this being the basis of the view of the authors in The Mortgagee's Power of Sale);

(b) The construction has the attraction of certainty. It is unlikely that Parliament intended that first registered mortgagees should have an obligation to ascertain who to account to for any surplus, even in circumstances where such a person is not readily found or identified or where there are competing claims to the surplus. Not only would such obligation be burdensome, but it would provide no practical assistance to the resolution of disputes; and

(c) Where the first registered mortgagee is in doubt about whom it is to account to, paragraph 77(3)(d) provides for payment into Court pursuant to s 69 of the Trustee Act 1958.

88 The plaintiffs contend that, upon settlement of the sale of the Footscray property, MIG was obliged to apply the proceeds in first satisfying the liabilities secured under the mortgage and then pay the residue moneys (if any) to the mortgagor, S & D or into the Supreme Court under the provisions so far as they are applicable of s 69 of the Trustee Act 1958 under s 77(3)(d) of the TLA. They contend that in the circumstances of this case, it was incumbent on MIG and Mr Vartelas to pay the moneys into Court to allow the respective claimants to pursue their claims to the moneys.

89 MIG and Mr Vartelas contend that section 77(3)(c) of the TLA requires the selling mortgagee to pay the subsequent mortgagees whether registered or not. It argues that section 77(3)(d) does not permit the payment of the surplus into Court, but only the residue, after the subsequent mortgagees have been paid. They rely on the analysis of Finkelstein J of a selling mortgagee's duty under the Western Australian Torrens statute in Fraser v Australian Securities & Investments Commission, In the Matter of Lanepoint Enterprises Pty Ltd (receivers and managers appointed).[66] They submit that they were obliged under s 77(3)(c) to pay moneys owing under or in respect of subsequent unregistered mortgages and charges in the order of their respective priorities. There were no subsequent registered mortgages or charges.

90 MIG and Mr Vartelas contend that the obligations under paragraph (c) were mandatory and they could not pay the residue (if any) into Court even if they wished to and all the interested parties agreed that they should. MIG and Mr Vartelas contend that to carry out their statutory duty under paragraph (c), they were required to ascertain what were the subsequent mortgages and charges and strive to achieve consensus between them as to their entitlement, quantum and priority. If after reasonable efforts to do so, they were not able to achieve consensus, then they should apply to the Court for directions as to what they should next do. All the time, however, they were obliged to retain possession of the residue moneys.

91 MIG and Mr Vartelas rely on Robinson, Transfer of Land in Victoria[67] where the author cites Beeby v Official Assignee of Pickering and Pickering;[68] Re Morrison, Bennell v Smith[69] and Hope v Hope[70] as authority for the construction that "subsequent mortgages and charges" includes unregistered mortgages and charges. In addition, MIG and Mr Vartelas rely on Ex parte Australian Co-operative Development Society Limited (in liq)'[71] Re Morrison[72] and Avco Financial Services Ltd v Commonwealth Bank of Australia.[73]

92 Thus, MIG and Mr Vartelas contend that the first mortgagee was required to determine the priorities of the subsequent encumbrance holders before paying the balance if any to the mortgagor. MIG and Mr Vartelas submit that, given Dinesh Malhotra's claim to rank ahead of the unregistered encumbrance holders in respect of a half interest in the land, the task of MIG and Mr Vartelas as the first mortgagee and its agent in possession necessarily involved the resolution by them of that question as well.

93 MIG and Mr Vartelas contend that given the nature of the disagreements which became apparent in the period after the sale, their process of determination necessitated (practically speaking) an approach to the Court for declaratory relief unless agreement could be reached between the various competing parties. MIG and Mr Vartelas submit they properly took steps to:

(a) take advice on MIG's obligations as first mortgagee with respect to the surplus;

(d) failing that, be in a position to apply to the Court on proper material giving details to the Court of each potential claim to the surplus funds.[74]

94 MIG and Mr Vartelas submit that they acted reasonably because, having received a claim by a subsequent mortgagee to surplus moneys, they sought to ascertain as soon as reasonably possible the validity or otherwise of the claim as best they could. MIG and Mr Vartelas assert that in the weeks following settlement on 19 October 2007, they took steps to ascertain the amount of the secured debt including the various costs incurred by them.[75] MIG and Mr Vartelas contend that MIG and Mr Vartelas were entitled and, indeed, bound to hold the surplus money for a reasonable time pending the establishment of any claim which might be made to the money and rely on Ex parte Australian Co-operative Development Society Limited (In Liquidation)[76] to support that contention. MIG and Mr Vartelas contend that they acted on legal advice (including counsel's advice) in their approach to their obligations under section 77(3) of the TLA.

95 They submit that an originating motion was in preparation, but the separate proceeding commenced by Pradeep Tiwari supervened They submit that proceeding, with appropriate cross-claims, would have been an appropriate vehicle for the resolution of the priority questions arising under section 77(3).

96 MIG and Mr Vartelas submit that they retained the sale moneys on legal advice that they should retain those moneys until they were in a position to pay the subsequent mortgagees and chargees.

97 I now turn to consider what MIG's and Mr Vartelas' obligations were on the sale of the mortgaged property.

98 Section 77 of the TLA provides as follows:

(1) If within one month after the service of such notice or demand or such other period as is fixed in such mortgage or charge the mortgagor grantor or other persons do not comply with the notice or demand the mortgagee or annuitant may, in good faith and having regard to the interests of the mortgagor grantor or other persons, sell or concur with any other person in selling the mortgaged or charged land or any part thereof, together or in lots, by public auction or by private contract, at one or several times, and for a sum payable in one amount or by instalments, subject to such terms and conditions as the mortgagee or annuitant thinks fit, with power to vary any contract for sale and to buy in at any auction or to rescind any contract for sale and to resell without being answerable for any loss occasioned thereby and with power to make such roads streets and passages and grant and reserve such easements as the circumstances of the case require and the mortgagee or annuitant thinks fit, and may make and sign such transfers and do such acts and things as are necessary for effectuating any such sale.

(2) An instrument of transfer by a mortgagee or annuitant expressed to be in exercise of the power of sale and in an appropriate approved form may be accepted by the Registrar as sufficient evidence that the power has been duly exercised.

(3) The purchase money received arising from the sale shall be applied -

(a) firstly in payment of all costs charges and expenses properly incurred incidental to the sale and consequent on such default;

(b) secondly in payment of the moneys which are due or owing on the mortgage or charge;

(c) thirdly in payment of moneys owing under or in respect of subsequent mortgages and charges in the order of their respective priorities;

(d) fourthly in payment of the residue (if any) to the mortgagor or into the Supreme Court under the provisions so far as they are applicable of section sixty-nine of the Trustee Act 1958 and the rules referred to therein, or if the sale is made by a mortgagee and the land is charged with a subsequent annuity or if the sale is made by an annuitant, in payment of the said residue into an account on deposit at interest in an authorised deposit-taking institution within the meaning of the Banking Act 1959 of the Commonwealth in the joint names of the annuitant and the Registrar to satisfy the accruing payments of the charge and subject thereto for the benefit of the parties who are or become entitled to the residue of the deposited money.

(4) Upon the registration of any transfer under this section all the estate and interest of the mortgagor or grantor of the annuity as registered proprietor of the land mortgaged or charged shall vest in the purchaser as proprietor by transfer, freed and discharged from all liability on account of such mortgage or charge and (except where such a mortgagor or grantor is the purchaser) of any mortgage charge or encumbrance recorded in the Register subsequent thereto except -

(a) a lease easement or restrictive covenant to which the mortgagee or annuitant has consented in writing or to which he is a party; or

(b) a mortgage charge easement or other right that is for any reason binding upon the mortgagee or annuitant -

and the title of the purchaser shall not be impeachable on the ground that no case had arisen to authorize the sale or that due notice was not given or that the power was otherwise improperly or irregularly exercised but any person thereby damnified shall have his remedy in damages against the person exercising the power, and for the purposes of Part III the purchaser shall be deemed to have dealt with the registered proprietor of the land.

99 Before seeking to construe s 77(3), it is appropriate to consider the obligations of a mortgagee under a general law mortgage. A mortgagee who exercises his power of sale holds the surplus moneys after satisfying his costs, expenses and the loan, on trust in favour of any person interested therein under any subsequent encumbrance.

100 In relation to general law land, a legal mortgage was affected by a conveyance of the land but with a right of redemption.[77] That mortgage was enforceable by foreclosure or sale in lieu thereof.[78] The authors of Coote's Treatise on the Law of Mortgages[79] state that on a sale of the mortgaged property under an express or a statutory power, the mortgagee becomes trustee of the surplus proceeds for the mortgagor or for any persons interested therein under any subsequent encumbrance or other dealing with the equity of redemption of which he has notice and he will accordingly be answerable if he pays the surplus to the wrong person but in a doubtful case he can pay the money into Court or invest it for the benefit of the persons entitled (my underlining).[80] In particular, where it is not apparent who the proper person to receive the surplus proceeds is, the mortgagee may pay the money into Court. Unless he does so, he is bound to invest the money for the benefit of the persons who may establish their claim to it. [81]

101 As indicated above, where the mortgagee sells, and has a balance of moneys in his hands, he is a trustee of those moneys for the persons beneficially interested. Any subsequent mortgage or charge over the land converts on the sale of the property to an equitable charge over the moneys.[82]

102 On the issue of furnishing accounts, Coote's Treatise on the Law of Mortgages says:

A mortgagee who has sold under his power, being a trustee of the surplus proceeds of sale in his hands, is bound , like any other trustee, to furnish to the person or persons entitled to receive those moneys an account, if demanded, of his claims under his mortgage in respect of principal, interest and costs, including the expenses of and incident to the sale.[83]

103 Under s 105 of the Property Law Act 1958, express provision is made that the surplus is held by the mortgagee on trust to be applied by him, "first, in payment of all costs, charges and expenses properly incurred by him as incident to the sale or any attempted sale, or otherwise; and 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 mortgage property, or authorized to give receipts for the proceeds of the sale thereof."

104 The authors of The Mortgagee's Power of Sale[84] assert that, although the matter is not free from doubt, it appears that where there are subsequent encumbrances, the whole of the surplus should be paid to the encumbrancer next in point of priority.[85] The authors say that if the mortgagee has doubts about the proper order of priority of other mortgages, the moneys are best paid into Court.[86] The authors, after discussing whether a mortgagee should seek directions as to whom he should pay the moneys to, offer the view that the fact that "a mortgagee is an investor and subject to an involuntary statutory trust should lead the courts to conclude that the mortgagee's duty in doubtful cases is to pay into court not, in effect, to see to the administration of the trust."[87]

105 I now turn to the position under the TLA and in particular the judicial authorities on this question.

Beeby v Official Assignee of Pickering and Pickering [1953] NZLR 832

106 Hay J of the Supreme Court of New Zealand was called on to decide whether the surplus moneys on a sale by the registered first mortgagee of Torrens system land were payable, under section 104(1) of the Land Transfer Act 1952 (NZ), the equivalent section of s 77(3)(d) of the TLA, to the official assignee of the bankrupt mortgagor free from the mortgagor's wife's equitable charge over the relevant land for ₤400 which had been granted by the mortgagor to his wife prior to his bankruptcy, or whether the proceeds were payable to the official assignee of the mortgagor subject to the charge. Section 104(1) of the Land Transfer Act 1952 (NZ) provided:

The purchase money to arise from the sale by the mortgagee of any mortgaged land, estate, or interest shall be applied -

(a) Firstly, in payment of the expenses occasioned by the sale;

(b) Secondly, in payment of the moneys then due or owing to the mortgagee;

(c) Thirdly, in payment of subsequent registered mortgages or encumbrances (if any) in the order of their priority;

(d) Fourthly, the surplus (if any) shall be paid to the mortgagor.

107 As can be seen, the statutory obligation to pay subsequent mortgages and charges was expressed to apply to registered mortgages and charges. Hay J held that, nevertheless, the wife's equitable charge should be recognised and that the provision under s 104 requiring payment of the surplus to the mortgagor did not abrogate the wife's equitable interest in the proceeds. He held that the fund in Court, being the surplus moneys arising from the sale by the mortgagee of the mortgaged lands, was payable to the official assignee as property passing to him in the bankruptcy of the mortgagor subject to the charge in favour of the wife for ₤400.

Re Morrison; Bennell v Smith [1962] Tas R 337

108 The applicant represented an unregistered second mortgagee of a bankrupt mortgagor. The first mortgagee under a registered mortgage sold the mortgaged property of the bankrupt mortgagor and paid the balance of the proceeds to the official receiver of the bankrupt. The applicant sought a declaration that the so much of the proceeds of sale of the property of the bankrupt, as held by the receiver, was held in trust by the receiver to pay the amount secured by the second mortgage. Crawford J held that the fact that the land was Torrens system land made no difference to the issue before him.[88] He observed that the enforcement of equitable rights exists for land held under the Torrens system; referring to Barry v Heider[89] where the High Court of Australia held that the Torrens system of title by registration did not deny equitable rights over the land. Crawford J held that a sale by a mortgagee constitutes the mortgagee as a trustee of the surplus proceeds in favour of the subsequent encumbrancers. Crawford J relied, inter alia, on Asquith J in Weld-Blundell v Synott[90] where Asquith J said "Undoubtedly a first mortgagee who sells the mortgaged property and collects the full proceeds is under some duty to encumbrancers that rank after him. That duty is to hold the balance of the proceeds after satisfying his own debt in trust for those encumbrancers."

109 Section 54 of the Real Property Act 1862 (Tas) governed the application of the proceeds of sale by the mortgagor of land registered under the Act. It was in similar terms to s 77(3) of the TLA, save that there was also provision for the surplus moneys to be applied in the satisfaction of the claims of all persons who had lodged caveats, after the satisfaction of subsequent mortgages and incumbrances (if any). Accordingly, it was not in issue that the first mortgagee should have applied the surplus moneys in favour of the second mortgagee before paying the balance to the receiver in bankruptcy. The receiver argued, however, that in the events that had happened, where the mortgagee had not satisfied the second mortgagee's claim but paid the moneys to the receiver, the second mortgagee only had a statutory right to damages against the first mortgagee for failing to pay the surplus moneys to the second mortgagee.

110 Crawford J disagreed. He held that the words used in the section that the money "shall be applied" did not alter the position in equity that the mortgagee is a trustee in respect of the proceeds of sale. He held that the second mortgagee had the right to follow the moneys wrongfully applied or to which he had any right in equity into the hands of the official receiver, particularly as the receiver had notice of the existence of the second mortgage.

111 Despite the particular wording of the Tasmanian Act, the decision is authority for the principle that on the sale of the mortgaged property under the Torrens system, the mortgagee holds the surplus on trust for the subsequent unregistered mortgagees or chargees and that irrespective of how the moneys were actually applied the beneficiaries could follow the moneys and uphold an equitable interest in them.

Hope v Hope [1977] 1 NZLR 582

112 An unregistered second mortgagee of Torrens system land claimed security in the surplus moneys of land sold by the first mortgagee. This claim was resisted by the wife of the mortgagor, who subsequently had obtained an order that security in her favour be granted over the proceeds of sale of the land to support maintenance orders made against the mortgagor in a matrimonial proceeding between the husband and wife. The wife claimed that under s 104(1) of the Land Transfer Act 1952 (NZ), the second mortgagee had no security over the proceeds resulting from the first mortgagee's sale. Section 104(1) of the Land Transfer Act 1952 (NZ) is set out above in the discussion of Beeby v Official Assignee of Pickering and Pickering.[91]

113 Unlike s 77(3) of the TLA, paragraph (c) referred to subsequent "registered" mortgages or encumbrances. The wife submitted that the subsection made no provision for payment to a mortgagee under an unregistered mortgage and unequivocally directed payment to the mortgagor after registered mortgages had been satisfied. She argued that an unregistered mortgage gave the mortgagee an equitable charge over the land but when that land was sold by a mortgagee his charge was lost and he had no security over any surplus moneys resulting.[92]

114 Wilson J held, however, that as found in Beeby v Official Assignee of Pickering and Pickering[93] the second mortgagee's equitable charge was converted on the sale of the land to an equitable charge on the petitioner's interest in the proceeds and attached to the moneys payable to the petitioner under section 104(1)(d). Wilson J said:

Section 104 does not abrogate the rights of mortgagees under unregistered mortgages - it merely postpones them to those of mortgagees under registered mortgages. Paragraph (d) does not vest the surplus from a mortgagee's sale in the mortgagor free from all equities but subject to them. In equity the equitable charge on the land is converted, on the sale of the land, to a charge on the proceeds.

115 Robinson[94] cites Hope v Hope[95] as authority for his assertion that s 77(3)(c) refers to unregistered mortgages as well as registered mortgages. As can be seen, this is not so.[96] The equivalent New Zealand section expressly referred to registered mortgages. It is, however, authority for the proposition that the second unregistered mortgagee has an equitable charge over the surplus moneys from the sale that is not defeated by the statutory provision that the first mortgagee pay the surplus to the registered proprietor.

Ex parte Australian Co-operative Development Society Limited [1978] Qd R 395

116 Hoare J of the Supreme Court of Queensland held that an equitable mortgage was a "subsequent mortgage or encumbrance" within the meaning of s 88(1)(c) of the Property Law Act 1974-1975 (Qld). He acknowledged that there had been doubts as to the proper construction of the relevant provisions of the Property Law Act. The relevant land was registered under the Real Property Act (the Torrens system). That Act provided that a registered mortgagee had the powers and liabilities of a mortgagee under the Property Law Act 1974. Section 88(1)(c ) of the Property Law Act 1974-1975 provided:

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