Simpson v Forrester

I would allow the appeal. If the respondent desires us to act on the concession made at the trial, I would vacate the declarations made by the learned trial judge and would order that the sale be set aside. If the respondent does not wish us to take that course, I would vacate only the first of the two declarations made by the learned trial judge, but would further declare that the appellant is entitled to the moneys in court.

This case concerns the purchase by a mortgagee, Simpson, of the interest of his mortgagor, Forrester, in the mortgaged property, a grazing farm lease, at a sheriff's auction following judgment for the mortgage debt and the issue of a writ of fieri facias at the instance of the mortgagee. The facts are stated in detail in the other judgments of the Court.

In essence the matters in issue in this trial were whether the mortgagee and execution creditor, Simpson, having bought the mortgaged property at the sheriff's sale, was entitled to the net proceeds of that sale and also to seek to recover the remaining balance of his judgment debt from the mortgagor, Forrester; or whether, on the contrary, because it was the mortgagee who became the purchaser at the sheriff's sale, the net proceeds of sale went to the mortgagor and the mortgage debt was extinguished. The learned trial judge, Skerman J., concluded that it was, in all the circumstances, these latter consequences which ensued and it is from his judgment and order that the mortgagee appeals.

It will be covenient if I state first what I regard as the result in law of a mortgagee purchasing his mortgagor's interest in the mortgaged property at an execution sale following judgment for the mortgage debt, give my reasons for those conclusions and then seek to apply them to the facts of the present case.

In my view, when a mortgagee makes such a purchase at a sheriff's auction the price bid by him, up to the amount of the judgment debt plus expenses of the execution, is payable by the sheriff to him, after deduction of those expenses, and will go in reduction or extinction of the judgment debt, any surplus proceeds over and above the judgment debt plus expenses going to the mortgagor.

If the net proceeds of sale are insufficient to satisfy the judgment debt nevertheless the mortgagee will not, thereafter, be entitled to enforce payment of the balance; by purchasing the mortgaged property he becomes liable to indemnify the mortgagor against any portion of the mortgage debt not satisfied out of the proceeds of sale and the consequence of this liability to indemnify, assumed when the mortgagee buys the mortgaged property, is that the balance of the mortgage debt is satisfied, so that the mortgagee can no longer recover it; at the same time he of course holds the property, as purchaser, free of the mortgage.

It is, no doubt, only infrequently that a mortgagee, having obtained judgment against the mortgagor for the mortgage debt in an action on the personal covenant and having caused a writ of fieri facias to issue by way of execution, will then bid at the execution sale and purchase the mortgagor's interest in the mortgaged property. However, in the absence of any statutory provisions to the contrary, and none such exist in Queensland, the mortgagee is free to do so.

An ordinary execution creditor may buy at the resultant sheriff's sale, he "cannot be in a worse position than any other purchaser" - per Mellish L.J. in Ex parte Villars; In re Rogers [43] , whose view in this respect was not contraverted by the outcome of the subsequent re-argument of that case before the full Court, and see generally Halsbury's Laws of England, 3rd ed., vol. 16, p. 57, par. 88.

What then of the special case where the execution creditor is the mortgagee whose judgment is for the mortgage debt, the property being sold by the sheriff being the mortgaged property? In Robertson v. Bank of Victoria [44] , it was assumed both by counsel and by Molesworth J. that there was no objection to such a purchase; Union Bank of Australia v. Atkins [45] , seems to be an authority to the same effect; and in the later case of Union Bank of Australia v. Harrison Jones & Devlin Ltd. [46] , although the Court was not concerned with any issue on this point, the Chief Justice, in the course of his judgment [47] referred without comment to the purchase by the mortgagee at the sheriff's sale, as did Barton J. [48] and Higgins J. [49] ; Simpson C.J. in Eq. at first instance [50] did likewise. In the United States reference to the annotations in American Law Reports, vol. 95, at p. 89, and to American Jurisprudence, 2nd ed., par. 1225, discloses that instances abound of such purchases without there being raised any question of their propriety; accordingly I think it clear that there is no principle upon which a judgment creditor-mortgagee is debarred from buying the mortgaged property at such a sheriff's sale.

1. (1867) 4 W.W. & a'B. (E.) 85. 2. (1900) 10 Q.L.J. (N.C.) 11. 3. (1910) 11 C.L.R. 492. 4. (1910) 11 C.L.R., at p. 499. 5. (1910) 11 C.L.R., at p. 507. 6. (1910) 11 C.L.R., at p. 524. 7. (1910) 10 S.R. (N.S.W.) 266, at p. 271.

However the notion of the mortgagee becoming the purchaser at such an execution sale raises what may, at first sight, appear to be certain difficulties when it is sought to apply to the resultant situation the well established equitable doctrine, enunciated by Lord Eldon in Waring v. Ward [51] , that the purchaser of an equity of redemption must indemnify the mortgagor against liability for the mortgage debt secured on the mortgaged property.

This doctrine applies equally to the purchase of an equity of redemption in the case of a mortgage at general law and to the purchase of the mortgagor's interest in property subject to a mortgage which takes the form of an hypothecation, as does the familiar Torrens System mortgage: Fink v. Robertson [52] . The mortgage in the present case contemplated by s. 275 of The Land Acts 1962 to 1968 Q. is of this latter character. The origin of the doctrine appears to lie in the obligation which is placed upon the conscience of the buyer of an equity of redemption to indemnify the vendor when he buys subject to the existing mortgage and takes subject to the encumbrance, the existence of which will be reflected in a reduction of the purchase price; having done so it would be against conscience that he, not being liable to the mortgagee on the personal covenant, should be permitted to profit from the mortgagor being compelled to pay under the personal covenant, thus discharging the encumbrance the existence of which operated to reduce the price the buyer had to pay for the property.

In Waring v. Ward [53] Lord Eldon said, in explaining equity's insistence upon the imposition of such an indemnity, that the buyer of the equity of redemption, "means at the time of the contract to buy the estate subject to that mortgage". In the American case of Stevenson v. Black [54] , Chancellor Vroom said of the doctrine [55] :

As between the mortgagor and the purchaser of a simple equity of redemption, where the mortgage money constitutes, in fact, a part of the actual consideration of the purchase, the mortgagor has a just right to be indemnified by the purchaser against all personal liability on the bond ; for having become owner of the estate, he must be supposed to intend to indemnify the vendor against the mortgage. In Adair v. Carden [56] , the Master of the Rolls considered in detail the doctrine of Waring v. Ward [57] and said [58] , that a man, buying subject to a mortgage and not otherwise evincing an intention to transfer the mortgage debt to himself but paying a less price for the property in consequence of that mortgage, must indemnify the vendor, that is the mortgagor, against the mortgage debt although he does not take the debt upon himself personally. His Lordship thus regarded the indemnity as flowing from the payment by the purchaser of a less price in consequence of the burden of the mortgage existing on the land which was bought. In Mills v. United Counties Bank Ltd. [59] , the matter was put thus by Cozens-Hardy M.R.: If a property is worth £10,000 and is subject to a mortgage of £5,000 and the purchaser only pays the vendor £5,000 and gets the property, it would be almost shocking to say that in that case the vendor would be liable on the covenant to pay the full sum of £5,000 to the first mortgagee and that the purchaser was under no obligation to indemnify him. and Farwell L.J. said [60] : Generally speaking, when A. sells and B. buys an equity of redemption, i.e., in other words property subject to a charge, it is against conscience and honesty for B. to set up that he has bought the property free from the charge at A.'s expense. In In re Mainwaring; Mainwaring v. Verdon [61] , Romer L.J. said that the doctrine depended upon the sale being expressed to be a sale subject to the mortgage in question and in Conlon v. Biggs [62] , Mayo J. spoke of the doctrine as arising because "the purchaser is presumed to take the property cum onere". 1. (1802) 7 Ves. Jun., at p. 337 [32 E.R., at p. 137]. 2. (1831) 1 N.J. Eq. ( Saxt.) 338. 3. (1831) 1 N.J. Eq. (Saxt.), at p. 342. 4. (1892) 29 L.R. Ir. (Ch. D.) 469. 5. (1802) 7 Ves. Jun. 332 [32 E.R. 136]. 6. (1892) 29 L.R. Ir. (Ch. D.), at pp. 485-487. 7. [1912] 1 Ch. 231, at p. 237. 8. [1912] 1 Ch., at p. 243. 9. [1937] 1 Ch. 96, at p. 103. 10. [1943] S.A.S.R. 103, at p. 121.

These passages are I think consistent with the view that the indemnity obligation arises to overcome what would otherwise be the unconscionable advantage gained by a purchaser who, having bought a property at a discounted price reflecting the amount of the charge to which it is subject, thereafter profits at the mortgagor's expense from the enforced payment off of the charge by the mortgagor at the suit of the mortgagee.

An execution sale held in order to satisfy the mortgagee's judgment debt for the mortgage moneys gives rise to quite special considerations which affect the extent of the obligation to indemnify which equity otherwise casts upon the purchaser of an equity of redemption. In such a case the special character of the judgment debt is critical; the purpose of such a sale is to enable the net proceeds to go to the execution creditor-mortgagee in reduction, or if sufficient, in extinction of the mortgage debt. To the extent that the mortgage debt is thus reduced the mortgagor needs no indemnity from the buyer; the burden on the property is diminished in a manner in no way inequitable to the mortgagor, the purchase price is applied in reduction of his liability to the mortgagee and at the same time potential buyers, knowing, as they should, that whatever they bid, up to the amount of the mortgage debt, will go in reduction of the mortgage, will be encouraged to bid up to the full market value of the property so that any margin between mortgage debt and market value, representing his equity in the property, will be available to the mortgagor. Only to the extent, if any, to which the mortgage debt remains unsatisfied by the net proceeds of the sale will it then be inequitable that the buyer should not indemnify the mortgagor and the indemnity will be limited accordingly.

This appears to me to be the principle upon which, when an execution sale takes place to satisfy a judgment for the mortgage moneys, the buyer, be he mortgagee or stranger, should be held liable to indemnify the mortgagor, the liability being limited to the amount of the mortgage debt remaining after the net proceeds of the sale have been applied in reduction of the judgment debt for the mortgage moneys. It is, I think, equally applicable whether the successful bidder at the sheriff's sale be the mortgagee or a stranger. If the principle of indemnity operates as I think it does neither will have any inherent advantage over the other in bidding and the resultant competition can only redound to the advantage of the mortgagor in producing a price more closely approximating to the market value of the property.

So far as I am aware, with only one exception, neither the Australian nor the English courts have had occasion to consider the application of this indemnity doctrine to the case of a purchaser at a sheriff's sale held in execution of a mortgagee's judgment debt. The exception is the decision of Molesworth J. in Robertson v. Bank of Victoria [63] to which I have already referred; however it is by no means clear from the short judgment which is reported what were the grounds upon which the decision was based. None of the recognized texts on the subject appear to deal with the matter. The view I have formed is, I think, consistent with what was said by Lord Eldon in Waring v. Ward [64] concerning the grounds upon which the Court would impose upon a purchaser the obligation to indemnify the mortgagor. It is clear both from the words of Lord Eldon and from what was said in Mills v. United Counties Bank Ltd. [65] that the principle of Waring v. Ward [64] is, like other principles in equity, not inflexible but "must of course bend to the circumstances of the particular case" - per Cozens-Hardy M.R. [66] . The circumstance that the net proceeds of a sale will go in reduction of the mortgage debt and thus, for the reasons already stated, remove the need for equity's intervention to the extent of that reduction provides an instance of a situation in which the flexibility to which the Master of the Rolls referred must be availed of. As both he and Fletcher Moulton L.J. said in that case [67] the whole doctrine is based on good sense and when, as here, good sense calls for a limited application of the doctrine then it will only be in that limited form that it will apply. Accordingly I conclude that when land subject to a mortgage is sold at a sheriff's sale and the net proceeds to to the mortgagee in reduction of the mortgage debt the occasion for an indemnity disappears, whether the buyer be the mortgagee or a stranger, to the extent to which the mortgage debt is diminished by the net proceeds of the sale.

1. (1867) 4 W.W. & a'B. (E.) 85. 2. (1802) 7 Ves. Jun. 332 [32 E.R. 136]. 3. [1912] 1 Ch. 231. 4. (1802) 7 Ves. Jun. 332 [32 E.R. 136]. 5. [1912] 1 Ch., at p. 237. 6. [1912] 1 Ch., at pp. 237, 241.

If what I believe to be the applicable principles are applied in the present case the consequence would be that an obligation to indemnify would arise only in respect of the diminished liability of the mortgagor, Forrester, after the net proceeds of sale are paid to the mortgagee, Simpson, by the sheriff and satisfy, in part, the judgment debt. Accordingly Simpson would, as execution creditor, be entitled to the net proceeds of the execution sale and the effect of the indemnity would be to then extinguish Forrester's liability to him for the balance of the judgment debt. The registered memorandum of mortgage would remain on title but would be of no effect, the proprietorship of the leasehold title and of the registered mortgage being identical and it being open to Simpson to adopt the course referred to in the joint judgment of Dixon, Evatt and McTiernan JJ. in English Scottish and Australian Bank Ltd. v. Phillips [68] , where their Honours said:

When a mortgage comes into the same proprietorship as the fee simple a discharge may be executed by the proprietor in his two capacities and registered. 1. (1937) 57 C.L.R. 302, at pp. 322- 323.

The financial consequences to the parties of the foregoing are not easy to assess since the market value of the property at the date of the auction is not known. However if it be assumed, as the sheriff appears to have done, that the property was still worth about what Forrester had paid when he bought from Simpson some eighteen months earlier, about $75,000, it is apparent that Forrester has suffered substantially as a result of the sheriff's sale. He has lost his property, in which he had an equity of some $15,000 over and above the amount due to his mortgagee, Simpson. A like result would have ensued whatever amount was bid at the sale unless it exceeded the amount due to Simpson, almost $60,000, plus expenses of sale.

The reason for this is, I think, to be found in the conduct of the sheriff's sale. The sheriff's officer failed to explain at the auction that the amount of the successful bid would go in reduction of the amount charged on the property; on the contrary, by stating the amount of the charge, declaring the mortgagor's equity to be about $16,000 and saying that he would accept a bid in the vicinity of $15,000 or $16,000, he clearly conveyed to bidders that the buyer would acquire a property subject to a charge undiminished by the proceeds of the sale. It was no doubt this which resulted in there being only one bidder, the mortgagee. If the property was, as the sheriff apparently thought, worth in the vicinity of $70,000 bids of up to something approaching that amount should have been anticipated instead of the mortgagee's lone bid of $20,000. But what did in fact occur was precisely what might have been anticipated from the erroneous impression created by the statements of the sheriff's officer.

This raises the question whether the sale itself should be set aside at the instance of the respondent. The respondent originally sought that relief in the alternative should he fail to obtain declarations that he was entitled to the proceeds of sale and to an indemnity against liability for the mortgage moneys. In my view, the only declaration which the respondent may have is one declaring him to be entitled to an indemnity from the appellant in respect of the mortgage moneys outstanding after payment to the appellant of the net proceeds of sale of the property; there should also be a declaration in favour of the appellant that he is entitled to those net proceeds of sale and an order for their payment to him. In these circumstances, having had the advantage of reading the reasons for judgment of my brother Gibbs, I agree, for the reasons there stated by him, that the respondent should be afforded an opportunity of determining whether he desires an order that the declarations made by the learned trial judge be vacated and the sale be set aside in accordance with the concession made at the trial by the appellant and the sheriff. If the respondent does not seek such an order then, in allowing the appeal, I would order in the terms referred to above.