MATTER : Section 511A of the Corporations Law of Western Australia

Global Finance Group Pty Ltd (Administrator Appointed) (ACN 009 380 205)

SIMON ANDREW READ AS LIQUIDATOR OF GLOBAL FINANCE GROUP PTY LTD (IN LIQ) (ACN 009 380 205)

JEFFREY LAURENCE HERBERT AS LIQUIDATOR OF GLOBAL FINANCE GROUP PTY LTD (IN LIQ) (ACN 009 380 205)

Liquidators - Power to give directions - Principles for exercise of discretion - Transfer of Land Act 1893 - Registration of mortgage - Indefeasibility of title - Whether defeated by possible fraud of agent - Constructive trust - Orderliness of winding up affairs of company

Transfer of Land Act 1893

Title deeds to be released by liquidators to mortgagees

Agip (Africa) Ltd v Jackson & Ors [1991] Ch 547

Editions Tom Thompson Pty Ltd v Pilley (1997) 15 ACLC 1331

13 Coromandel Place Pty Ltd v C L Custodians Pty Ltd (In liq) [1999] FCA 144

Crawford v Australia & New Zealand Banking Group Ltd [1994] TASSC 100; (1994) 12 ACLC 957

Oertel v Hordern (1902) 2 SR (NSW) (Eq) 37

Re Berkley Applegate (Investment Consultants) Ltd (No 2) (1989) 1 Ch 32

Sanderson v Classic Car Insurances Pty Ltd (1986) 4 ACLC 114

1 McKECHNIE J: By a chamber summons dated 28 April 1999 the liquidators of Global Finance Group Pty Ltd seek directions concerning certain certificates of title. The result of this application may have a wide effect beyond the immediate parties for reasons which will become apparent.

2 The court's powers under the Corporations Law s511 are extensive.

"511 (1) [Application for determination or exercise of powers]

The liquidator, or any contributory or creditor, may apply to the court:

(a) to determine any question arising in the winding up of a company; or

(b) to exercise all or any of the powers that the court might exercise if the company were being wound up by the court.

The court, if satisfied with the determination of the question or the exercise of that power will be just and beneficial, may accede wholly or partially to any such application on such terms and conditions as it thinks fit or may make such other order on the application as it thinks just."

4 In Re Lemon Tree Passage & Districts RSL & Citizens Club Co-operative Ltd (1988) 6 ACLC 24, Young J considered the status of a liquidator as a very special one. At 26, he said:

"The status of a liquidator in a winding up by the court is a very special one. To a great extent, he is delegated with the authority of the court to determine at first instance questions which arise in the winding up subject to the supervision of the court. Today the liquidator does administratively what, in earlier ages, was done by officers of the court within the court system. Accordingly, it seems to me that, apart from very rare cases, such as the circumstance adverted to by Powell J in Re P R Clark Holdings Pty Ltd (1977) 2 ACLR 416 at 419, the court should not take the view that it can just leave one of its officers floundering, and that if the liquidator asks for advice then some advice and directions should be given."

I consider the liquidator's action in approaching the court for directions is appropriate.

5 The background facts are substantially taken from two affidavits filed by one of the liquidators, Mr Jeffrey Herbert.

6 Global Finance Group Pty Ltd ("GFG") is a finance broker. Its principal business is the placement of funds from private investors with borrowers for the purposes of facilitating real estate developments. Many of the private investors were formed into syndicates.

7 These loans were, for the most part, secured by registered mortgages over the properties the subject of the mortgages. GFG also acted as agent for the various investors by monitoring the performance of the investments and attending to the collection of interest payments from the borrowers and the payment of these moneys to the investors.

8 After concerns raised following an investigation of its affairs by the Australian Securities and Investment Commission ("ASIC"), at ASIC's request, on 19 February 1999, Mr Herbert and Mr Simon Andrew Read were appointed joint administrators of GFG.

9 On 20 April 1999 both Mr Herbert and Mr Read were appointed joint liquidators of GFG pursuant to a meeting of creditors.

10 As at 19 February 1999 GFG managed loans for 475 investors spread over 175 investment projects. The total value of the loans was $61,138,000.00 In pursuance of requirements under the Finance Brokers Control Act 1975, GFG operated a trust account into which was deposited monies relating to the loans. As at 19 February 1999 the total amount of funds held in trust was $1,598.960.69.

11 The liquidators have had limited opportunity to investigate the affairs of GFG and, in particular, the operation of the trust account.

12 While still acting as administrators they approached the court seeking directions including payment of their fees from the trust account.

"1. The following directions to take effect from 27 April 1999 unless there is an order to the contrary:

1.1 Subject to the Applicants rendering proper accounts, the Applicants are entitled to be indemnified from those assets held on trust by Global Finance Group Pty Ltd ("the trust assets") for their reasonable costs, charges and expenses of:

(a) identifying or attempting to identify the trust assets;

(b) recovering or attempting to recover the trust assets;

(c) realising or attempting to realise the trust assets;

(d) protecting or attempting to protect the trust assets; and

(e) distributing trust assets to the persons beneficially entitled to them.

1.2 Subject to the Applicants rendering proper accounts, the Applicants are entitled to be indemnified from the trust assets for their reasonable costs, charges and expenses of conducting investigations into the records pertaining to the trust account operated by Global Finance Group Pty Ltd.

2. Notice of the directions referred to in paragraph 1 be given to those creditors in attendance at the meeting of creditors on 20 April 1999.

3. Any interested party must apply to the Court by 27 April 1999 to vary or discharge this order, such application to be made by chamber summons in these proceedings.

4. The Applicants' chamber summons be otherwise adjourned sine die.

14 Subsequently applications have been made to vary or discharge those orders. These matters are still pending.

15 Shortly after the appointment of Mr Herbert and Mr Read as administrators, an application was made for the appointment of the Public Trustee as receiver of the property under the trust. This application was unsuccessful: Slater & Anor v Global Finance Group Pty Ltd & Ors, unreported; (Wheeler J); Library No 990156; 26 March 1999.

16 Although they have not completed their investigations, already Mr Herbert and Mr Read have found a number of irregularities in the GFG trust account.

17 These irregularities include the apparent mixing of funds between syndicates. It may be that up to 75 per cent of the investment syndicates are affected by the mixing of trust funds. It also appears that moneys may have been paid out of the trust account in breach of the terms on which those moneys were held and there may be a shortfall in moneys due to certain syndicates.

18 The difficulties are compounded because in a number of cases syndicate members have not been yet registered as mortgagees on the relevant certificates of title. In five cases, GFG is still registered as the mortgagee. In a further 17 cases, a wholly owned subsidiary of GFG, Global Mortgage Investments Pty Ltd ("GMI"), is registered as the mortgagee. It will be necessary in due course to determine which particular investors are entitled to be registered as mortgagees in respect of the mortgages held by GFG and GMI.

19 I have set out sufficient facts to show that the failure of GFG is likely to cause hardship to many investors. The unravelling of its affairs will take some time and money. Many people may lose money which they have invested in good faith.

20 Adine Holdings Pty Ltd is the registered proprietor and the holder of an estate in fee simple of adjacent lots located off the Boyup Road, Donnybrook adjacent to the railway and being:

. portion of Wellington Location 2482 and being Lot 10 the subject of Diagram 95632 and being the whole of the land described in Certificate of Title Vol 2156 Folio 66.

. portion of Wellington Location 2482 and being the whole of the land described in Certificate of Title Vol 2156 Folio 67

21 These lots are the result of a subdivision from land originally owned by Adine Holdings Pty Ltd. The third lot has been sold. They are located off the Boyup Road, Donnybrook adjacent to the railway.

22 The lots are subject to a mortgage. The original mortgage G734872 over the land before subdivision was in the name of GM1.

23 On 28 January 1999, mortgage G734872 was transferred, in respect of all lots, to a syndicate in the following proportions of 520 shares.

24 All except one of the syndicate members have now terminated GFG's agency. The lots have been sold and settlement was due to be effected on 28 April 1999.

25 The position of the liquidators is that the affairs of GFG, especially the operation of the trust account, are complex and will take time to unravel. Because of the preliminary investigations indicating unlawful mixing of funds, there is a possibility that fraud may have occurred by GFG, the agent of some members now registered as mortgagees on certificates of title. There is a possibility that resort may need to be had to tracing of funds through the trust account into the hands of mortgagees to determine who truly owns the equity in the mortgage.

26 Therefore they propose that they retain all title documents. If the title documents are to be produced at settlement, this is only to be done on condition that the proceeds of settlement are placed in a trust account.

27 The liquidators then contemplate seeking directions from the court as the position becomes clearer. This was not always their position. At first they were prepared to let monies be released. This can be illustrated by reference to what happened to the third lot owned by Adine Holdings and mortgaged to the syndicate.

28 The lot was sold on 29 March 1999. The title documents were produced and Mortgage No G734872 was partially discharged. The proceeds attributable to the three mortgagees for when GFG was then acting as agent were placed into a trust account pending directions.

29 The balance of the proceeds were distributed to the mortgagees who had terminated GFC's agency.

30 Since that time however the liquidators have altered their position. They now propose to secure all moneys received at settlement by placing them in a trust account pending directions from the court that the monies may be distributed. The liquidators are not prepared to allow money to be released to mortgagees until they have conducted further investigations into the affairs of the company and obtained directions from the court.

31 On the other hand, individual mortgagees require their share of the proceeds to be paid directly to them at settlement.

32 In these circumstances, the liquidators have applied to this court for directions as follows:

"1. A direction that the Applicants are entitled to retain possession of Duplicate Certificates of Title, Vol 2156 Folio 66 and Vol 2156 Folio 67, and signed Discharge documents relating to Mortgage G734872 unless proceeds from the discharge of Mortgage G734872 are paid into a trust account nominated by the Applicants pending further directions from the Court as to the person or persons entitled to receive those proceeds.

2. Alternatively, a direction that the Applicants are entitled to release Duplicate Certificates of Title Vol 2156 Folio 66 and Vol 2156 Folio 67 and the signed Discharge documents relating to Mortgage G734872 to those persons named as mortgagees on the Duplicate Certificates of Title.

3. Such further directions or orders as the court thinks fit."

33 The issues raised in this application are starkly opposed, depending on the perspective of the observer.

34 The liquidators look at the corporate whole. GFG carried on business as a finance broker, bringing together investors and developers for mutual benefit.

35 The finance arranged for projects was secured in the normal way through mortgages over the land. GFG managed the funds and generally acted on behalf of the investors.

36 But all is not well. The investment funds for many syndicates may have been improperly mixed so that land may be secured by mortgage on behalf of certain investors when, in fact, some or perhaps all of the monies advanced were advanced by syndicates not named on the mortgage because of the possible negligent or fraudulent actions of GFG.

37 Therefore it is reasonable to freeze all funds until the competing claims can be crystallised and assessed.

38 From the observation point of an investor, the matter is equally simple. GFG was employed to broker a deal between the land holder and the investing syndicate. This was done. The syndicate is now registered as mortgagee on the certificate of title.

39 In Australia, registration brings certain fundamental rights including indefeasibility of title (subject to fraud in a special sense).

40 The problems created by GFG are not the consequence of anything done by the syndicate, nor its concern.

41 The agency having been revoked, the liquidators have no right to retain the title and must give it up on demand. In consequence the liquidators have no right to demand that the proceeds on discharge of a mortgage be dealt with in any particular way.

The Court's approach to directions of this nature

42 Because of the pressure brought about by the already postponed settlement of the contract of sale of the two lots and the pendency of the liquidators' application to incur costs and expenses in fully investigating the trust account, a cautious approach is indicated.

43 In Re G B Nathan & Co Pty Ltd (In liq) (1991) 5 ACSR 673, McClelland J dealt with an application for directions by a liquidator as to his entitlement to deal with certain moneys and securities being held on trust. McClelland J traced the origin of the then Companies Act s479 now Corporations Law s511. In particular, he dealt with the nature and status of directions. In a passage which bears reproducing extensively, at 678 he said:

"Modern Australian authority confirms the view that s479(3) 'does not enable the court to make binding orders in the nature of judgments' and that the function of a liquidator's application for directions 'is to give him advice as to his proper course of action in the liquidation; it is not to determine the rights and liabilities arising from the company's transactions before the liquidation' : see Re Security Provident Fund Limited (in liq); Rodger v Gourlay (1984) 9 ACLR 56; Murdoch v Crawford [1986] VicRp 10; [1986] VR 97, 99; Re Sportsmen's Leisure and Hobby Warehouse (1989) 7 ACLC 1270 at 1273-4; and Re Byron Moore Journeaux Ltd (in liq) [1989] 1 ACSR 181-182; see also Re TTC (SA) Pty Ltd (in liq) (1983) 7 ACLR 784 at 787, and in relation to a receiver's application for directions : Re Odessa Promotions (1979) ACLC 32103 at 32105-6. Canadian authority is to similar effect. In Re Ward (1987) 66 CBR 165 at 171, Dickson J of the Supreme Court of New Brunswick said in relation to the equivalent provision under the (Canadian) Bankruptcy Act:

'It seems well settled in law that in an application under section 16 of the Act a court must confine itself, in giving directions, to matters concerning administration of the estate and has no authority to resolve substantive matters in dispute between a trustee and a third party.'

The primary matters of significance in the present application arising from the above considerations are that any directions which may be given to the liquidator

(a) will not give rise to any conclusive determination as between GBN and its clients as to

(i) whether particular assets held by GBN are held in trust for those clients or

(ii) whether any such trust assets may be properly applied by the liquidator in payment of his remuneration and expenses; and

(b) will not protect the liquidator against the claims of clients asserting that assets held by GBN are held in trust for those clients.

However if the liquidator acts in accordance with any such directions (assuming full and fair disclosure of the material facts) he will be protected from claims by unsecured creditors or by contributories (or by the company itself), of any alleged breach of his duties as liquidator by so acting."

44 This passage is of considerable persuasive authority, especially as it deals with a similar position to that presently facing the court and liquidators here. Although my decision may not be binding in relation to the rights of competing interests, the practical effect may be to allow the proceeds of a mortgage discharge to be put beyond immediate reach of a potential claimant.

45 I am conscious that the directions I give in this case may have ramifications beyond these parties. I am also aware that there has been no opportunity for others affected by the collapse of GFG to make submissions before me. However the liquidators, in adopting their position, are acting to protect the interests of those who may be affected.

46 The key to the resolution of this case lies in the indefeasibility of title in the mortgage by the syndicate.

47 The syndicate is entitled to rely upon mortgage G734872, which was transferred to them. There is no evidence other than that they were bona fide purchasers for value of the mortgage.

48 While fraud may defeat indefeasibility and may be a live issue in other cases in due course, in the present case the ledger card, which is some evidence of the facts, does not indicate that any funds other than those provided by the syndicate, were advanced for the mortgage.

49 It is timely to revisit the principles of indefeasibility of title under the Torrens system to some extent.

50 As Barwick CJ pointed out in Breskvar and Wall (1971) 126 CLR 376, at 385:

"The Torrens system of registered title of which the Act is a form is not a system of registration of title but a system of title by registration. That which the certificate of title describes is not the title which the registered proprietor formerly had or which but for registration would have had. The title it certifies is not historical or derivative. It is the title which registration itself has vested in the proprietor."

With that in mind, I turn to the Transfer of Land Act, s63, which reads:

"No certificate of title created and registered upon an application to bring land under this Act or upon an application to be registered as proprietor on a transmission shall be impeached or defeasible by reason or on account of any informality or irregularity in the application or in the proceedings previous to the registration of the certificate; and every certificate of title created and registered under any of the provisions herein contained shall be received in all courts of law as evidence of the particulars therein set forth or incorporated and of the entry thereof in the register, and shall be conclusive evidence that the person named in such certificate as the proprietor of or having any estate or interest in or power to appoint or dispose of the land therein described is seized or possessed of such estate or interest or has such power."

51 Section 68 relevantly provides:

"Notwithstanding the existence in any other person of any estate or interest whether derived by grant from the Crown or otherwise which but for this Act might be held to be paramount or to have priority the proprietor of land or of any estate or interest in land under the operation of this Act shall except in case of fraud hold the same subject to such encumbrances as may be notified on the registered certificate of title for the land; but absolutely free from all other encumbrances whatsoever ..."

52 The syndicate members therefore have a powerful argument in favour of the release of the certificates of title to them.

53 The question of the fraud exception has been discussed in very many cases over the years.

54 The classical citation usually given is that from Lord Lindley in Assets Company Limited v Mere Roihi [1905] AC 176, at 210:

"... fraud in these Acts is meant actual fraud, ie, dishonesty of some sort, not what is called constructive or equitable fraud - an unfortunate expression and one very apt to mislead, but often used, for want of a better term, to denote transactions having consequences in equity similar to those which flow from fraud. Further, it appears to their Lordships that the fraud which must be proved in order to invalidate the title of a registered purchaser for value whether he buys from a prior registered owner or from a person claiming under a title certified under the Native Land Acts, must be brought home to the person whose registered title is impeached or to his agents. Fraud by persons from whom he claims does not affect him unless knowledge of it is brought home to him or his agents. The mere fact that he might have found out fraud if he had been more vigilant, and had made further inquiries which he omitted to make does not of itself prove fraud on his part. But if it be shewn that his suspicions were aroused, and that he abstained from making inquiries for fear of learning the truth, the case is very different, and fraud may be properly ascribed to him." (My emphasis).

This passage was cited with approval by Hayne JA in Pyramid Building Society (In liq) v Scorpion Hotels Pty Ltd (1998) VR 188. In that case, Hayne JA, with whom Brooking JA and Tadgell JA agreed, held that the title obtained by a mortgagee on registration under the Transfer of Land Act upon a forged instrument of mortgage cannot be defeated on grounds of fraud if the mortgagee was not party or privy to the fraud.

55 It is true that in Assets Co Lord Linley speaks of both the principal and the agent. However, in my opinion, agency is only relevant where the principal has knowledge of the actions of the agent or directs the agent in the actions to be taken. Assuming for the moment that CFG engaged in fraud by improperly mixing investors' funds prior to registration, that act of fraud would not defeat the estate of those whose names appear on the title. The reason for that is, absent knowledge or wilful blindness on the part of the principal investors who were registered, the acts of CFG are so far beyond the agency as to sever connection with the principal. In Schultz v Corwill Properties Pty Ltd (1969) 90 WN (NSW) 529, Street J decided the case, in the manner I have just outlined after reference to Assets Co.

56 There is no question that on occasions where there has been a mixing of funds, there may be constructed a trust for the benefit of those investors whose money was improperly used. However, the difficulties of establishing such a trust are considerable, especially in circumstances where there is little evidence of knowledge on the part of the syndicate members. As was put by Winneke P in Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133, at 136:

"It is, I concede, logically attractive to argue that legitimate equitable claims should not be emasculated by setting the threshold level of conduct, short of statutory fraud, too high; on the other hand it is, in my view, an argument of equally compelling force that the threshold should not be set so low as to defeat the concept of indefeasibility which is entrenched in and central to the Torrens system of registration of interests in land; a system which itself recognises that the register is paramount and that, save in exceptional circumstances, those who have suffered loss, without any fault on their own part, will have to content themselves with compensation out of the fund made available for the purpose. If, therefore, the registration of a mortgage over trust property is to be regarded as 'a knowing receipt of trust property' the balancing of the competing philosophies requires, in my view, that the registration has been achieved as a result of conduct by the mortgagee amounting to a want of probity before its registered interest can be defeated."

This passage is sufficient to outline the difficulties of those asserting the creation of a constructive trust. Nevertheless, I acknowledge that, after further investigation, it may be possible to establish that some syndicates, and perhaps this syndicate in particular, have held land in circumstances which amounted to a trust. For this reason, consistent with the caution I have earlier expressed, I make no declaration in relation to either fraud or constructive trust.

57 It is sufficient to note that in the event of a subsequent finding to either effect, there remain in the hands of investors rights in personam against a relevant syndicate. Furthermore, defeating the title may not be the only method of providing equitable relief: Guimelli v Guimelli [1999] HCA 10; (1999) 73 ALJR 547.

58 In my view the title deeds are not assets of the company.

59 Once the company's agency is revoked by the syndicate, the liquidators have no further claim on the documents and should surrender them on demand.

60 As a consequence, the liquidators cannot impose conditions upon the mortgagees in respect of the proceeds of the discharge of the mortgage.

61 The result of this decision may lead to a disorderly winding up where a syndicate with the happenstance of security will be advantaged over the syndicate which has advanced money but, perhaps through default of its agent GFG, is not registered as a mortgagee.

62 That is the consequence of indefeasibility of title.

63 The liquidators are only trustees of the amount presently in the trust fund.

64 While I can conceive of a constructive trust arising in the proceeds of a tainted mortgage, the legal and factual hurdles to such a claim are considerable.

65 Much work to be done before the factual circumstances are clarified.

66 The better course, at least in the case of mortgages which do not appear tainted, is to allow full reign to the indefeasibility of the title.

67 There will still be remedies available for unsecured mortgagees should the facts in respect of these mortgages subsequently indicate a taint of fraud.

68 Of course these remedies will be less efficacious than a pro rata division of assets inclusive of the proceeds of other mortgages. Nevertheless they are available.

69 On the one hand there is the elegant certainty of the indefeasible title. On the other is an amorphous uncertainty of potential fraud by the agent GFG; whether the fraud affects the title; difficulties legal and factual as to tracing the amounts into the hands of investors. Added to these is the possibility, as asserted by counsel for the liquidators, that valuations which formed the basis of the mortgage advance, may be incorrect so that parties may realise less than the amount advanced by way of mortgage.

70 I therefore make a direction that the liquidators are entitled to release duplicate Certificate of Title Vol 2156 Folio 66 and Vol 2156 Folio 67 and the signed discharge documents relating to Mortgage G734872 to those persons named as mortgagees on the duplicate Certificates of Title.

71 Because I consider this application is properly made by the liquidators, I am prepared to order that their costs be paid from the assets of GFG.