Consideration
22 The question for resolution is whether Mrs Stolyar alone, or the Trustee and Mrs Stolyar in their respective ownership shares of the Campbell Parade Property as found in Stolyar (No 1), should bear the burden of the Discharge Sum as against their respective shares in the Campbell Parade Property proceeds of sale.
23 The applicable legal principles were not in dispute.
24 In Parsons v McBain (2001) 109 FCR 120 a Full Court of this Court (Black CJ, Keifel and Finkelstein JJ) considered competing claims to two properties in Tasmania. The appellants, Bronwyn Parsons and Cathryn Parsons, were each the registered proprietor of one of the two properties. The respondent was the trustee of the bankrupt estates of their respective husbands who, in that capacity, claimed the two properties. Each of Bronwyn Parsons and Cathryn Parsons had taken a transfer of their respective properties from their husbands. The primary judge declared each transfer to be void and had ordered the properties to be transferred to the trustee.
25 Relevantly, in 1992 both properties were mortgaged by the husbands to enable funds to be raised to support the family transport business which was trading unprofitably. The business failed, and the husbands became bankrupt. Before the primary judge each of Bronwyn Parsons and Cathryn Parsons contended that they had "an equity of exoneration" in respect of the 1992 mortgages, which equity entitled them to cast the burden of the debt upon their respective husband's interest, and since the amount of the loan secured by the mortgage exceeded the value in each case of the husband's interest, that interest had been extinguished.
26 The Full Court said at [18]-[21]:
18 … We can now consider each appellant's claim to ownership of the remaining half based upon the right of exoneration. The equity of exoneration is summarised in Fisher & Lightwood's Law of Mortgage (Aust Ed, 1995), par 30.7:
"It is a well established principle that a person who has mortgaged his property to secure the debt of another stands only in the position of a surety and is entitled to be exonerated by the principal debtor. In this position is a wife who has mortgaged her property to secure money raised for the benefit of her husband. There is a similar equity in favour of a husband.
Where the property of the wife, or property over which she has a power of appointment, is mortgaged, and the money is paid to her and her husband, or to him alone, it is considered prima facie that it was borrowed for his benefit, and his property is first applied, as for payment of his own debt, unless the presumption is rebutted by proof on the part of the husband, that the whole or some part of the money did not come to his hands. If the debt was not originally incurred for the benefit of the husband, this equity of exoneration does not arise by reason of his giving a covenant as additional security. The result will be the same, where the husband has paid off the mortgage, and has taken an assignment of it in trust for himself."
The authorities go back three centuries: Huntington v Huntington (1702) 2 Vern 438; 23 ER 881; Taite v Austin (1714) 1 P Wms 284; 24 ER 382; Parteriche v Powlet (1742) 2 Atk 383; 26 ER 632; Clinton v Hooper (1791) 3 Bro CC 201; 29 ER 490.
19 It was once thought that this doctrine was limited to husband and wife. This appeared to be the view of Ashburner in his Principles of Equity (2nd ed, 1933) at p 170. In Halsbury's Laws of England (4th ed, 1979), exoneration is discussed only under the title concerned with husband and wife (Vol 22, pars 1071-1076). However, the authorities show that the doctrine is not so limited, and will apply in other cases. That is what occurred in Gee v Liddell [1913] 2 Ch 62 and Caldwell v Bridge Wholesale Acceptance Corporation (Australia) Limited (1993) 6 BPR 13,539.
20 The equity of exoneration is an incident of the relationship between surety and principal debtor. It usually arises where a person has mortgaged his property to secure the debt of another, whether or not that other has covenanted to pay the debt. However, it will also arise in a case where, although not an actual suretyship, the relationship is treated as one of suretyship. This is Lord Selbourne's third class of suretyship mentioned in Duncan, Fox, & Co v North and South Wales Bank (1880) 6 App Cas 1 at 10. For the doctrine to apply in this class, the following facts will usually exist. First, a person must charge his property. Where the person is the beneficial owner of the property it will be sufficient if the charge is by his trustee. Secondly, the charge must be for the purpose of raising money to pay the debts of another person or to otherwise benefit that other person. Thirdly, the money so borrowed must be applied for that purpose. See generally Re Berry (a Bankrupt) [1978] 2 NZLR 373.
21 An equity of exoneration operates in the nature of "a charge upon the estate of the principal debtor by way of indemnity for the purpose of enforcing against that estate the right which [the beneficiary] has, as between [the beneficiary] and the principal debtor, to have that estate resorted to first for the payment of the debt": Gee v Liddell at 72. Thus, where co-owners mortgage their property so that money can be borrowed for the benefit of one mortgagor, the other has an interest in the property of the co-mortgagor whose property is to be regarded as primarily liable to pay the debt.
27 In an earlier decision, Official Trustee in Bankruptcy v Citibank Savings Ltd (1995) 38 NSWLR 116, Bryson J explained the principle in the following way at 125-126:
Clearly enough, there are cases where a person falls under a common liability but is not obliged to contribute equally to the liability. To take a grossly simple illustration, if two join in borrowing money but the money borrowed is applied for the purposes of only one of them, obviously enough the borrower who obtained the money is categorised as the principal borrower and the other is categorised as a surety for the purpose of adjustment of rights between them, whether or not they were expressly so categorised by the terms of their contract with the creditor, and whether or not there was any express arrangement excluding contribution or any actual advertence to the question of contribution at all. The court would have no difficulty in categorising one as principal and one as a surety, and in recognising that they do not stand in a position of equality so that there could be no claim for contribution by the principal, while the other would be entitled to an indemnity. Further, if both gave security over property the surety would be entitled to a charge over the charged property of the principal. That these observations are not an exercise in the excessively obvious is shown by the arguments put to the Chancery Division (Foster J and Fox J) in Re A Debtor; Ex parte Marley v Trustee of the Property of the Debtor [1976] 1 WLR 952; [1976] 2 All ER 1010. In that case the standing of one co-owner as surety was established by a concession, but, I would think, could not fairly have been disputed.
28 At the time of the borrowing the Trustee was a co-owner of the Campbell Parade Property, having succeeded to the interest of the bankrupts under the resulting trust which binds Mrs Stolyar (see [598(2)] of Stolyar (1)). Though not a co-borrower, the Trustee was nevertheless a co-surety of the NAB Mortgage for this reason: see Ogilvie v Ferry [2010] NSWSC 379 at [75]-[80]; Padovan v MCG Group Pty Ltd (in Liq) & Ors [2011] NSWSC 1080 at [26]-[27].
29 The equitable right of exoneration can apply so that a borrowing and the resulting debt can be sub-divided to identify what part of the borrowing was applied for the mutual benefit of both mortgagors and what part was applied for the benefit of only one of them: see Farrugia v Official Receiver in Bankruptcy (1982) 58 FLR 474 at 477. As the Full Court noted in Parsons v McBain at [23], the question to be asked is "who got the money"? If both parties, that is the bankrupts and Mrs Stolyar, received a benefit from the loan or "got the money", the Trustee will be prevented from claiming exoneration.
30 I turn to consider the facts. In that regard it is necessary to consider the NAB Loan Account. The principal withdrawals from and deposits into that account and to an extent the associated Offset Account are explained by the Trustee.
31 As set out above, the NAB Loan Account was initially drawn in the sum of $3 million inclusive of fees for the purpose of funding the acquisition of the Campbell Parade Property: see Stolyar (No 1) at [214].
32 On 20 May 2009 $2.2 million was paid into the NAB Loan Account. That payment was made by the bankrupts (or alternatively Mr Stolyar), using monies redrawn from the bankrupts' various home loan accounts: see Stolyar (No 1) at [480].
33 Between June 2009 and June 2010 the NAB Loan Account was redrawn to just below its original $3 million balance by way of a series of redraws into the Offset Account which, in turn, were paid out as withdrawals principally to Shaw Stockbroking. The evidence relied on by Mrs Stolyar at the trial which gave rise to Stolyar (No 1) was that Mrs Stolyar's purpose in making these withdrawals was to purchase shares in the name of her company, Stoligor Investments Pty Ltd.
34 On 29 October 2010 a payment of $1.1 million was paid into the NAB Loan Account. That sum came from the bankrupts: see Stolyar (No 1) at [498].
35 On 5 November 2010 and 31 March 2011 there were two further redraws from the NAB Loan Account for $1.3 million and $1.732 million respectively. Those funds were applied to the purchase of a property situated at 5/6 Buckhurst Avenue, Point Piper, New South Wales (Point Piper Property): see Stolyar (No 1) at [449]. In relation to those payments I found at [499] of Stolyar (No 1) that:
It follows from the findings set out above that the funds drawn from the Campbell Parade Mortgage Account were redraws of Ian and Beth's money and did not give rise to any relevant indebtedness to Faina. Thus the second registered mortgage granted by Ian and Beth over the Point Piper Property to Faina did not secure any indebtedness and the payment of the Point Piper Repayment Amount to Faina following the sale of the Point Piper Property, which was apparently in discharge of Ian's and Beth's purported indebtedness to Faina, ought not to have been made.
36 On 19 December 2013 $3,932,500 was paid into the NAB Offset Account. This sum came from the Point Piper Property proceeds of sale and is referred to in Stolyar (No 1) as the Point Piper Repayment Amount: at [464]. At [500] of Stolyar (No 1) I held that Mrs Stolyar held the Point Piper Repayment Amount on a resulting trust for the bankrupts.
37 On 29 April 2020 $10,414,810.95 was paid into the Offset Account with narrative "Settlement fun Sydney Law Pract" and on 5 May 2020 $3,210,000 was transferred from the Offset Account to the NAB Loan Account and largely discharged the balance of the NAB Loan Account, leaving it with a balance of $30,190.26. These transactions, as explained by the Trustee, concern dealings with the sale proceeds of a property situated at 2C Dumaresq Avenue, Rose Bay, New South Wales (Rose Bay Property). Pursuant to the 23 April Orders Mrs Stolyar was required to apply the proceeds of sale from the Rose Bay Property to, among other things, discharge of the NAB Mortgage.
38 The NAB Loan Account balance remained at about the balance referred to in the preceding paragraph until 3 December 2020 when the December 2020 redraw occurred leaving a balance owing in the NAB Loan Account of $3,242,093.07. The December 2020 redraw was paid into the Offset Account.
39 It was not in dispute that the December 2020 redraw was made pursuant to Orders made by the Court on 14 December 2020 including relevantly that:
1. The Orders made on 23 April 2020 (as varied on 30 October 2020) be varied so that the first respondent is entitled to apply the following amounts towards the completion of the first respondent's purchase of the property known as 3/10 Longworth Avenue, Point Piper NSW 2027 (New Property), on condition that upon purchase of the New Property it is not to be security for any loan or loan facility:
(a) up to $6,000,000 by drawing from the first respondent's Commonwealth Bank of Australia bank (CBA) account;
(b) up to $1,300,000 by drawing from the first respondent's account held with the CBA into which she deposited the sum of $1,300,000 as withdrawn from her account number 0041337957YX01 held with the Adelaide Bank on 10 December 2020; and
(c) up to $3,200,000 by way of a drawing upon the existing loan facility secured upon the property known as 701/152-162 Campbell Parade, Bondi Beach (Campbell Parade).
2. The first respondent is to notify the applicant of completion of the purchase of the New Property on the day on which it occurs and, on that same day, is to provide the applicant with a copy of the settlement statement in respect of the purchase.
40 That is, the December 2020 redraw was for the purpose of Mrs Stolyar acquiring the Longworth Avenue Property. It was also not in dispute that Mrs Stolyar is the sole legal and beneficial owner of the Longworth Avenue Property. The Trustee has a charge over the Longworth Avenue Property but has a charge over it created by the 6 September Orders.
41 From the time of the December 2020 redraw until payment of the Discharge Sum, interest continued to accrue on the NAB Loan Account. Interest instalments were paid from the Offset Account, but many of these were immediately reversed with a narrative "082401 Refer to Cust".
42 On 3 March 2023, upon settlement of the sale of the Campbell Parade Property, the NAB Loan Account balance was reduced to zero and the account closed.
43 There is no evidence to support Mrs Stolyar's submissions about the purpose for which moneys were drawn from the NAB Loan Account and/or the Offset Account. The inference urged by Mrs Stolyar that the funds of the bankrupts, on the one hand, and of her, on the other, were so intermingled that no conclusion could properly be drawn that the December 2020 redraw was for her benefit alone is not available on the face of the bank statements nor when combined with my findings in Stolyar (No 1). Mrs Stolyar gave no evidence about the transactions and movements in the NAB Loan Account or the Offset Account that would permit such an inference to be drawn.
44 The December 2020 redraw was paid for Mrs Stolyar's benefit. The payment of those moneys permitted her to purchase the Longworth Avenue Property. It follows that the Trustee is entitled to be indemnified for the whole of the Discharge Sum from Mrs Stolyar's share of the proceeds of sale of the Campbell Parade Property.