Scott (Trustee), in the matter of Stolyar (Bankrupt) v Stolyar

The parties' submissions 14 The Trustee submitted that no amount is payable to Mrs Stolyar from the sale of the Campbell Parade Property. Relying on a schedule prepared for the purpose of the hearing (which was marked as MFI-1) the Trustee noted that the total funds available from the sale of the Campbell Parade Property after deduction of all selling costs but adding back the Discharge Sum is $8,305,422.49. Based on the 6 September Orders and absent deduction of the Discharge Sum, the Trustee's share of 58.17 % would be $4,831,264.26 and Mrs Stolyar's 41.83% share would be $3,474,158.23. 15 The Trustee submitted that Mrs Stolyar's share would be entirely exhausted by, among other things, the whole of the Discharge Sum and the Kroger Settlement (which is no longer in dispute) and that any remaining balance would be subject to the Trustee's security over the Campbell Parade Property pursuant to Order 5(a) of the Orders made on 23 April 2020 in this proceeding (23 April Orders) and because Mrs Stolyar otherwise remains indebted to the Trustee pursuant to Orders 26 and 28 of the 6 September Orders for more than $5,544,782.46 plus interest. 16 In relation to the Discharge Sum the Trustee put his case on three bases: (1) he is entitled to be exonerated in respect of that part of the sale proceeds paid to the NAB and the right of exoneration is secured by an equitable charge over what would otherwise flow to Mrs Stolyar as co-owner; (2) in the alternative, the same result is achieved by the application of the doctrine of equitable contribution between parties subject to a common obligation; or (3) Mrs Stolyar's entitlement to any part of the net proceeds of sale would, in any event, and given her status as trustee of the property the sale of which produced the fund, be subject to her obligations to indemnify the trust estate for the use made by her of the trust property, i.e. the gross sale proceeds, to discharge a debt which was incurred solely for her benefit. That benefit was the acquisition of a property situated at Longworth Avenue, Point Piper, NSW (Longworth Avenue Property) of which Mrs Stolyar was and remains the sole legal and beneficial owner. 17 Mrs Stolyar made the following submissions. 18 In relation to her contention that the funds in the NAB Loan Account were intermingled such that the Discharge Sum should be borne in the proportion of the Trustee's and Mrs Stolyar's respective ownership share of the Campbell Parade Property as reflected in the 6 September Orders, Mrs Stolyar first relied on a transaction in the Offset Account. She submitted that: (1) on 30 September 2014 a deposit of $2,146,533 was made into the Offset Account; (2) I made findings in relation to the transfer of proceeds of sale from shares held by Fanchel in Westside Corporation Limited (WCL) to Mrs Stolyar at [393] of Stolyar (No 1) as follows: (1) it is presumed that a trustee who mixes his own funds with that of another, thereby creating a mixed fund, will draw out his own money first: see Re Hallett's Estate (1880) 13 Ch D 696. Thus the WCL shares which were part of the Transferred Shares and held by Fanchel subject to the Share Arrangement are presumed to have been disposed of last; (2) based on a schedule prepared by the Trustee of WCL shares held by Fanchel in the period from 17 April 2008, the date of transfer of the Transferred Shares, to 18 September 2014, its minimum holding was 1,308,213 WCL shares as at 6 April 2009; (3) as at the time of the takeover of WCL, Fanchel held 5,616,333 WCL shares which were acquired at $0.40 per share. Applying that amount per share, the value attributable to the 1,308,213 shares referred to in the preceding subparagraph is $523,285.20; (4) the proceeds of sale of Fanchel's WCL shares acquired in the takeover (including the $523,285.20 attributable to the 1,308,213 shares), being $2,246,533.20, were deposited into the Fanchel Transaction Account on 24 September 2014; and (5) those funds were then withdrawn by way of two cheques dated 29 and 30 September 2014, each made payable to Faina and signed by Ian, for $100,000 and $2,146,533 respectively. (3) I should readily infer that the deposit referred to at (1) above was the payment into the Offset Account of the proceeds of sale of Fanchel's WCL shares as found at [393(5)] of Stolyar (No 1); (4) as found at [393(2)-(3)] of Stolyar (No 1) 1,308,213 WCL shares were held by Fanchel to the account of Mr Stolyar and thus, of the total amount received on sale of those shares, $523,285.20 was the property of Mr Stolyar to be paid back to his bankrupt estate by Mrs Stolyar; and (5) it follows that the balance of the moneys received on the sale of the WCL shares ($2,246,533.20 less $523,285.20) was Fanchel's money and is not money to which Mr Stolyar (and thus the Trustee) has been found to have any proprietary claim. 19 Mrs Stolyar submitted that this was one of several transactions that demonstrate that there were significant funds paid into the NAB Loan Account and that she should not have to address every single movement in that account to demonstrate the intermingling of funds. She submitted that the Trustee is ignoring every payment made into the NAB Loan Account to reduce Mrs Stolyar's indebtedness and relies only on those that suit his case. 20 Insofar as the Trustee relies on the drawing of $3,211,677.75 from the NAB Loan Account on 3 December 2020 (December 2020 redraw), Mrs Stolyar does not accept that the sole reason for drawing those funds was to obtain a benefit for herself by purchasing the Longworth Avenue Property. Mrs Stolyar submitted that she had repaid the original borrowing used to fund the purchase of the Campbell Parade Property from her own funds prior to 2020. She submitted that the state of the NAB Loan Account as at 2020, which required those funds to be obtained by a redraw, as opposed to a draw from credit funds, was because of the lengthy, complex history of the account with money of both parties being paid in and out where some payments were the subject of findings in Stolyar (No 1) and some were unexplained and not the subject of prior examination. 21 Mrs Stolyar submitted that, but for the history of intermingled transactions, she would have been able to fund the purchase of the Longworth Avenue Property from her own resources. She was not in that position because of the complete history of the NAB Loan Account and thus the Court could not simply attribute the borrowing in that account to her account when the reason why she was "negative $3.2 million" was not because of the purchase of the Longworth Avenue Property but because she entered into each of those transactions which were not solely for her benefit but also for the benefit and on behalf of the bankrupts.

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.

Improvements made to the Campbell Parade Property 45 As set out above, Mrs Stolyar also contends that she is entitled to contribution from Mr Stolyar's and Ms Nguyen's bankrupt estates for the money she expended in making improvements to the Campbell Parade Property. 46 To that end, Mrs Stolyar submitted that a balcony was added to the Campbell Parade Property and that she paid for its addition. In making that submission Mrs Stolyar conceded that there was no evidence before me to support it. Notwithstanding that she submitted that there was no opportunity, prior to the hearing on 1 March 2024, to put her position. 47 Senior counsel for Mrs Stolyar submitted that, given the net proceeds of sale were in an interest-bearing account, there could be no prejudice to the Trustee in permitting his client a short opportunity to file evidence in support of her contention in circumstances where there will be no dispute as to principle. 48 I disagreed and refused to permit an adjournment to allow Mrs Stolyar to file further evidence in support of this contention. The proceeding has a lengthy history. The Trustee's IA and Mrs Stolyar's IA were originally listed for hearing on 30 November 2023 but paragraphs 1, 3 and 4 of the Trustee's IA and paragraph 3 of Mrs Stolyar's IA were adjourned for case management hearing to 7 December 2023 because they were not reached on that day. The hearing of the balance of the Trustee's IA and Mrs Stolyar's IA took longer than anticipated. Notwithstanding that, both the Trustee's IA and Mrs Stolyar's IA should have been ready for hearing on 30 November 2023 in their entirety. 49 Following the case management hearing on 7 December 2023, at which Mrs Stolyar did not appear, I made the 7 December Orders which adjourned paragraphs 1, 3 and 4 of the Trustee's IA and paragraph 3 of Mrs Stolyar's IA for hearing to 1 March 2024 and provided for their further preparation (see [12] above). 50 Despite the adjournment and the orders made for Mrs Stolyar, among other things, to file further evidence she failed to do so. I accept that for a period Mrs Stolyar was unrepresented and that the solicitors who appeared for her at the hearing on the Trustee's IA and Mrs Stolyar's IA had only recently come on to the record. However, there was no evidence to explain what had happened since the 7 December 2023 Orders were made, the nature of the further evidence which Mrs Stolyar sought to file and how long it would take her to do so.

Distribution of the Campbell Parade Property proceeds of sale 51 It follows from the above that a declaration should be made that the Trustee is entitled to be exonerated by Mrs Stolyar in respect of the NAB Mortgage until its discharge on 3 March 2023. The effect of such a declaration is that the whole of the Discharge Sum is to be applied against Mrs Stolyar's 41.83% share in the gross proceeds of sale from the Campbell Parade Property. 52 In addition, as conceded by senior counsel for Mrs Stolyar, the whole of the Kroger Settlement is to be borne by Mrs Stolyar from her share of gross proceeds of sale from the Campbell Parade Property. 53 Once these two amounts are deducted from Mrs Stolyar's 41.83% share in the gross proceeds of sale from the Campbell Parade Property, there will only be a small balance remaining of approximately $29,000. 54 As set out at [15] above, the Trustee submits that no amount is payable to Mrs Stolyar following the sale of the Campbell Parade Property. I accept that is so. As the Trustee explained: (1) pursuant to Order 5(a) of the 23 April Orders, as confirmed by Order 25 of the 6 September Orders, the Trustee was granted security over the Campbell Parade Property for any amount to which he is found by the Court to be entitled in respect of, among others, the Rose Bay Property; (2) in Stolyar (No 1) I held that the Trustee had a 38.1% beneficial ownership in the Rose Bay Property and was thus entitled to be paid 38.1% of the proceeds of sale from that property: see Stolyar (No 1) at [598(6)] and Order 31 of the 6 September Orders; (3) that entitlement is to be quantified by the taking of accounts before a Registrar of this Court which is to be heard on 5 and 12 April 2024; (4) the Trustee deposes that Mrs Stolyar contends in her evidence filed for the purposes of the taking of accounts referred to in the preceding subparagraph that the sale proceeds were $5,655,786.16, implying that his 38.1% share is $2,154,854.53 (before pre-judgment interest). While there is a dispute about the amount of the sale proceeds the Trustee notes that, having been admitted, the sum of $2,154,854 may be accepted as his minimum entitlement; and (5) accordingly, to the extent that any residual amount might otherwise have been payable to Mrs Stolyar after deducting the Discharge Sum and the Kroger Settlement, that amount is instead captured by the Trustee's security, and is payable to the Trustee rather than Mrs Stolyar.

Conclusion 55 It follows that no amount is payable to Mrs Stolyar following the sale of the Campbell Parade Property and a declaration and order should be made in accordance with paragraphs 1 and 3 of the Trustee's IA. 56 As Mrs Stolyar has been unsuccessful she should pay the Trustee's costs of paragraphs 1 to 4 of the Trustee's IA and paragraph 3 of Mrs Stolyar's IA. 57 I will make a declaration and orders accordingly. I certify that the preceding fifty-seven (57) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Markovic.