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[2011] NSWCA 266
Court of Appeal (NSW)
2011-07-27
Bathurst CJ, Allsop P, Simpson J
Original judgment source is linked above.
Before: Simpson J File Number(s): 2008/286721
Judgment 1BATHURST CJ: This is an appeal from a judgment of Simpson J in proceedings in which the first respondent ("Adelaide Bank") sought: possession of the properties known as Units 1 and 5,110-112 Twin Road, Ryde from the first appellant ("Property Builders"); and a judgment in the monetary sum of $1,550,256.81 from each of the appellants. The claim against Property Builders was based on the covenants contained in a Real Property Act 1900 mortgage which had been transferred to Adelaide Bank and in respect of which there had been default. The claim against the second appellant ("Mr Phontos") was made pursuant to a guarantee given by him in respect of the debts secured by the mortgage. Adelaide Bank claimed that the benefit of the guarantee has been assigned to it.
Factual Background 2On 10 October 2006 the third respondent Eurofinance Capital Limited ("Eurofinance") made an offer of loan to Property Builders. The offer was for a loan of $2,400,000 for a period of 9 months with interest at a rate of 15.2 percent per annum reducing to 10.2 percent for prompt payment. The security required for the loan was a registered mortgage over the property 110-112 Twin Road, Ryde, of which the units formed part. In addition, joint and several guarantees for the loan were sought from Mr Phontos and a Mr Peter Phontos. In the events which occurred, Mr Peter Phontos did not give a guarantee but no point was taken concerning this. 3The offer of loan was made subject to the following conditions: "1 Non-refundable settlement fee of $33,000 (GST inclusive) which is payable upon acceptance of this letter. 2 Suitable insurance with interest of Eurofinance Capital Limited noted as first mortgagee. 3 Customer's acknowledgment that this proposed mortgage may be transferred to Advance Investment Finance No 2 Pty Limited and onto Adelaide Bank Limited. 4 Customer providing an advise [sic] from quantity surveyors JPQS Pty Limited of the cost to complete and obtain strata title. The advise [sic] should be addressed to Eurofinance Capital Limited. 5 Customer providing an undated payout figure from Provident Capital Limited. 6 Valuation on the property offered as security to be performed by the lenders' appointed valuer. Such valuation is to be to the full satisfaction of the lender. Estimated fee of $1,100 to your account. 7 Eurofinance Capital Limited to retain $100,000 from the advance as an interest provision." 4The offer also expressly stated that the letter of offer should not be deemed or construed for any purpose as a contract of loan. 5The offer was accepted by the appellant on 12 October 2006. On 31 October 2006 Property Builders granted a mortgage in favour of Eurofinance over the property, 110-112 Twin Road, Ryde. The mortgage was registered under the provisions of the Real Property Act 1900. So far as relevant the mortgage provided as follows: "In consideration of $2,400,000 the 'Principal Sum' lent or to be lent to the Mortgagor at the request of the Mortgagor, the Mortgagor covenants with the Mortgagee as follows.
The Trial Judge's Findings 24Her Honour identified three matters raised by Property Builders in its defence to the claim brought against it. The first was that the 2008 "roll-over" of the loan entirely replaced the 2006 loan. Given that it was the 2006 loan that was originally secured by the mortgage, this was said to have the consequence that the transfer of the mortgage to Adelaide Bank could not possibly operate to transfer the 2006 loan which, the appellants contended, no longer existed. Thus, it was submitted that there was no liability to the bank. The appellants sought to rely upon Queensland Premier Mines Pty Limited v French [2007] HCA 53; (2007) 235 CLR 81 as authority for this proposition (see judgment at [61(i)]). 25The second contention was that the resolutions of Eurofinance and AIF on 2 May 2008 amounted to an equitable assignment of the 2008 loan to AIF. Aligned with this proposition was the submission that AIF at the time of the assignment paid out Eurofinance and, accordingly, when the mortgage was transferred there was no money owed to Eurofinance. Accordingly, it was claimed that if Property Builders owed any money it was to AIF (see judgment at [61(ii)]). 26The third proposition was that no notice of assignment of the debt from Eurofinance to Adelaide Bank was given to Property Builders prior to the commencement of the proceedings and, therefore, there was no basis for the bringing of the claim (see judgment at [61(iii)]). 27Her Honour rejected each of those contentions. 28In relation to the first, she found that the 2008 "roll-over" was an extension of the existing facility. In these circumstances she held that the first matter raised did not provide a defence to the claim against Property Builders. 29So far as the second contention was concerned, the trial judge found that even if there was an equitable assignment of the debt to AIF, the resolutions passed by Eurofinance and AIF in May 2008 did not "confer on Property Builders any equitable rights, and [they] certainly did not give Property Builders any absolution from its obligations to repay the debt ... " (see judgment at [89]). 30As I have indicated earlier, her Honour rejected the third contention, namely that no notice of assignment to Adelaide Bank was given under s 12, stating that the notice to Mr Phontos was sufficient as he was the alter ego of Property Builders. 31So far as the claim against Mr Phontos under the guarantee was concerned, her Honour accepted the argument that the transfer of the mortgage did not carry with it an assignment of the guarantee. However, her Honour took the view that the s 12 notices constituted sufficient evidence that such an assignment had taken place (see judgment at [101]).
The Appeal by Property Builders 32The written submissions filed on behalf of Property Builders as developed orally seemed to suggest that the appeal should be allowed for three reasons. First, that there was an equitable assignment of the debt in 2008 as a result of which Eurofinance retained no interest in the debt such as to enable a transfer to Adelaide Bank. Second, the transactions of 2 May 2008 resulted in the mortgage being paid out. Third, that no notice of the assignment was given to Property Builders under s 12 of the Conveyancing Act 1919. 33In my opinion, none of these propositions is correct. As to the first, 1 accept for the purpose of the argument that the resolutions of 2 May 2008 evidenced an agreement for valuable consideration to assign the debt due by Property Builders from Eurofinance to AIF, thereby effecting an equitable assignment ( Holroyd v Marshall (1862) 10 HLC 191 at 209; Tailby v Official Receiver (1888) 12 App Cas 523 at 531, 546-547). On that bais, Eurofinance remained the legal owner of the debt, albeit as trustee for the assignee, at least after the consideration was paid: Cator v Croydon Canal Co (1843) 160 ER 1149 at 1150; Fulham v M'Carthy (1848) 1 HLC 703 at 722. This does not mean that Eurofinance could not assign the legal interest in the debt or that it could not sue as legal owner of the debt to recover the money due. 34In this context it is necessary to have regard to the effect of the transfer of mortgage. This is set out in s 52 of the Real Property Act 1900, which provides as follows: "52(1) By virtue of every such transfer, the right to sue upon any mortgage or other instrument and to recover any debt, sum of money, annuity, or damages thereunder (notwithstanding the same may be deemed or held to constitute a chose in action), and all interest in any such debt, sum of money, annuity, or damages shall be transferred so as to vest the same at law as well as in equity in the transferee thereof. (2) Nothing herein contained shall prevent a Court from giving effect to any trusts affecting the said debt, sum of money, annuity, or damages, in case the transferee shall hold the same as a trustee for any other person." 35In the present case the mortgage contained a covenant to pay the principal sum secured thereby, namely the $2,400,000 advance and interest thereof. In these circumstances the right to recover such principal and interest was transferred to Adelaide Bank and vested in it by virtue of the transfer of mortgage. Property Builders first sought to argue that the mortgage only secured money due under a separate agreement, namely what was described as the 2006 loan agreement as varied in 2008, and as that agreement was not assigned to Adelaide Bank there was no debt upon which Adelaide Bank could sue. It relied in support of that submission on what was said by Kiefel J in Queensland Premier Mines Pty Limited v French supra as to the operation of s 62 of the Land Title Act 1994 (Qld), which is the equivalent provision of s 52 of the Real Property Act 1900: "The words of the section are plain. Neither the historical reason for the provision nor its purpose, of effectuating a transfer of both security interest and the right to moneys arising from the mortgage transaction, supports a construction which extends the section to obligations arising otherwise than under the terms of the mortgage. It is no part of the purpose and function of a statute such as the Land Title Act to rewrite the bargain between transferor and transferee." (at [56]) 36This submission is incorrect for two reasons. First, it ignores the fact that the mortgage contained the express covenant to pay the nominated principal sum and interest. As counsel for Property Builders properly conceded, the mortgagee could sue on the personal covenants contained in the mortgage without any reference to the loan agreement. Further, the loan agreement was merely an agreement to make a loan once certain conditions were satisfied. The loan was only made once those conditions were satisfied and then on the terms and conditions contained in the mortgage. 37The further difficulty for the appellants is that no notice of any assignment of the debt to AIF was given by Eurofinance prior to the transfer of the mortgage to Adelaide Bank. For there to be an effective assignment at law such notice would need to have been given (assuming there was an assignment in writing). Absent such notice there seems to be no basis for saying that AIF, as distinct from Eurofinance and subsequently Adelaide Bank, was the legal owner of the chose in action, namely the debt. 38It follows that Property Builders is not entitled to succeed on this argument. 39The second proposition, namely that the effect of the transactions of 2 May 2008 were to discharge the debt owed by Property Builders to Eurofinance, is also incorrect. It is, of course, inconsistent with the first proposition which depended on the debt being assigned. As the proposition was developed orally it was suggested that the fact that AIF had paid Eurofinance an amount equal to the amount due by Property Builders to obtain an assignment of Property Builders' debt had the effect of discharging the obligation of Property Builders. The proposition has only to be stated to be rejected. The monies were not paid by AIF to Eurofinance to discharge the liability of Property Builders but rather to obtain an equitable assignment of the debt due by it to Eurofinance. 40So far as the third proposition is concerned, it was conceded in argument that notice under s 12 of the Conveyancing Act 1919 was not necessary to vest the chose in action in Adelaide Bank. That concession was correct. Section 52 of the Real Property Act 1900 provides that the debt vests to the transferee at law as well as in equity by virtue of every such transfer. As such, the assignment does not need to be perfected by a notice pursuant to s 12 of the Conveyancing Act 1919. In that regard s 6(1) of the Conveyancing Act 1919 provides that where it is inconsistent with the Real Property Act 1900, the Conveyancing Act 1919 shall not apply to lands coming under the provisions of the Real Property Act 1900. This analysis is consistent with the analysis of Young J in Nemeth v Reachcord Pty Limited [1998] NSWSC 271; (1998) 9 BPR 16,557 at 16,559. 41It follows that the appeal against her Honour's order granting possession of the units to Adelaide Bank should be dismissed. 42So far as the claim under the personal covenant is concerned, in addition to the matters raised above, Property Builders and Mr Phontos appealed on the basis that her Honour erred in awarding $1,550,256.81 to Adelaide Bank in that it included legal costs of AIF and Eurofinance in an amount of $152,682.81 and that the mortgage provided that the mortgagee was only entitled to its reasonable costs. The matter was not addressed orally but in its written submissions Property Builders made the same claim without any elaboration. 43Adelaide Bank in its submissions pointed to the fact that there was no material in the appeal papers to demonstrate that her Honour was in error in her calculation of the amount due. 44The only material before her Honour was an affidavit from Mr Socratous setting out the amount he claimed to be due to Adelaide Bank. Whilst it included amounts for legal costs it did not identify the nature of these costs, nor whether they were incurred by the first, second or third respondent, nor for what they were incurred. 45The position is quite unsatisfactory, but absent any material which would suggest that the costs did not fall within the definition of Debt in the schedule to the mortgage, this ground of appeal also should be dismissed as no error by the trial judge was disclosed. 46It follows that the appeal so far as it concerns the claim by Adelaide Bank against Property Builders should be dismissed. Pursuant to orders made at the hearing of the appeal, the respondents filed an affidavit of Mr Colin Sherry of 29 July 2011. That indicated that since the orders of the primary judge, funds had been received, presumably from the sale of remaining units and that the amount due as at 29 July 2011 was $268,821.79. In the absence of any application to file evidence to contest the accuracy of that affidavit I will accept it.
The Appeal by Mr Phontos 47In addition to asserting that Property Builders was not liable to Adelaide Bank based on the submissions referred to above, Mr Phontos argued that even if the debt had been effectively assigned to Adelaide Bank the guarantee had not been so assigned and in these circumstances he was not liable to Adelaide Bank regardless of the position of Property Builders. 48There was no evidence that the rights of Eurofinance under the guarantee were ever assigned to Adelaide Bank or for that matter to AIF. The resolution of 2 May 2008 made no reference to the guarantee neither did the transfer of mortgage incorporate such an assignment. It is clear that the provisions of s 52 of the Real Property Act 1900 do not of their own force give an assignee of a guaranteed debt a right to sue a surety on a covenant of guarantee contained in a mortgage much less on a guarantee not so contained: Consolidated Trust Company Limited v Naylor (1936) 55 CLR 423 at 431, 434. 49In its second further amended statement of claim Adelaide Bank pleaded that what was described as "the Agreement" was transferred to Adelaide Bank by the transfer of mortgage. The Agreement was defined to include this deed of guarantee. For the reasons given in the preceding paragraph this contention was incorrect. Further, it follows in my respectful opinion that there was no basis upon which her Honour could infer an assignment from the s 12 notice when the document pleaded as such an assignment did not have that effect. 50In these circumstances there was, in my opinion, no basis upon which Adelaide Bank was entitled to sue Mr Phontos on the guarantee. In Hutchens v Deauville Investments Pty Limited [1986] HCA 85; (1986) 68 ALR 367 the holder of a guarantee sought to sue a surety in circumstances where it had assigned the principal debt. The High Court stated it was not entitled to do so. The Court cited with approval a passage from the judgment of Jacobs J in International Leasing Corporation Limited v Aiken [1967] 2 NSWR 427 at 439 to the following effect: " If the debt is assigned but the guarantee is not assigned then the right in the original creditor to recover under the guarantee must at least be suspended so long as the debt is assigned. There cannot be two persons entitled to recover the amount of the same debt, one from the principal debtor, and so long as the principal debtor was in default, another from the surety ." 51The position is the same when the assignee of the principal debt seeks to sue on a guarantee which has not been assigned to it. 52Adelaide Bank in its submissions sought to rely on condition 3 of the offer of loan referred to at [3] above as constituting an assignment of the guarantee. There are at least three problems with this submission. First, it was not pleaded; second, condition 3 refers to the mortgage and not to the guarantee; third, and most fundamentally, a condition contemplating the possibility of an assignment does not amount to an assignment. 53It follows that the guarantee was not assigned to Adelaide Bank and Adelaide Bank was, therefore, not entitled to make a claim on it. 54In those circumstances, the appeal so far as it concerns Mr Phontos should be allowed. 55I should add that the Court asked counsel for the respondents whether he wished to consider whether he should seek to amend the respondents' notice of contention or file a cross-appeal to contend that there had been an equitable assignment of the guarantee in May 2008 or that the guarantee had been subsequently assigned, and whether he wished to seek leave to adduce further evidence to deal with those issues. In those circumstances the respondents sought and were granted an adjournment to consider those matters but ultimately determined not to take any such steps. 56So far as the question of costs is concerned the parties should have the opportunity to make submissions as to the appropriate costs order both in this Court and in the Court below having regard to the orders on the appeal. 57I would make the following orders: 1 Appeal allowed in part. 2 Orders 4 and 6 be set aside and the following orders made in lieu: (a) Judgment against the first defendant in favour of the first plaintiff in the sum of $268,821.79 to take effect as at 29 July 2011 plus interest thereon until the date of payment at the rate referred to in the letter from Eurofinance Capital Pty Limited to Property Builders Pty Limited dated 31 March 2008, being 16.60 percent per annum. (b) Direct the parties within 10 days to file written submissions as to the appropriate orders as to the costs of the appeal and the costs of the proceedings in the Court below. 58ALLSOP P: I agree with the Chief Justice. 59SACKVILLE AJA: I agree with the orders proposed by the Chief Justice and with his Honour's reasons.
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 15 September 2011
Property Builders Pty Limited
Adelaide Bank Limited
[1986] HCA 85
[1998] NSWSC 271
(1936) 55 CLR 423
(1986) 68 ALR 367
(2007) 235 CLR 81