Barnes v Racster [1842] EngR 467; (1842) 1 Y & C Ch Cas 401; (1842) 62 ER 944; Webb v Smith [1885] UKLawRpCh 19; (1885) 30 Ch D 192; Jenkins v Brahe & Gair [1902] VicLawRp 23; (1902) 27 VLR 643; Lawrance v Galsworthy (1857) 3 Jur (NS) 1049; Commonwealth Trading Bank v Colonial Mutual Life Assurance Society Ltd [1970] TASStRp 9; [1970] Tas SR 120; Across Australia Finance Pty Ltd v Kalls [2008] NSWSC 783; (2008) 14 BPR 26,265; National Bank of New Zealand Ltd v Caldesia Promotions Ltd and Jenkins Roberts & Associates Ltd [1996] NZHC 1680; [1996] 3 NZLR 467, considered.

PRACTICE AND PROCEDURE - Issue on appeal not raised at trial - Issue goes to power of Court to make orders - Expedient in the interests of justice for argument to be permitted on appeal.

Water Board v Moustakas (1988) 180 CLR 491, applied.

1. This appeal concerns a dispute between two lenders which each held security over a property in Toorak and a property in St Kilda Road. The two properties were owned by and mortgaged in favour of the lenders by the same mortgagor. The applicant ('Sterling') held a first registered mortgage over both properties which secured a judgment debt and a second registered mortgage over the St Kilda Road property which secured a different debt. The respondent ('Callisi') held a second registered mortgage over the Toorak property. The two properties were sold and Sterling received the full net proceeds of sale. Callisi received no moneys.
2. The judge held that the equitable principles of apportionment applied. The judge treated the debt owed to Sterling under its first mortgages as if it had been apportioned rateably across the two properties. On this re-calculation, Sterling would only have received part of its debt out of the Toorak property (not the whole), leaving a balance of $830,375 available to Callisi under its second mortgage. The judge ordered that Sterling pay that amount to Callisi. The question in this Court is whether he was correct to do so.
3. Before this Court, the question was predominantly focussed on whether the judge lacked power to make those orders because there was no fund under the control of the Court such that the principles of apportionment did not apply. This was not an issue that was raised at trial. By the time of the trial, both properties had been sold and settlement had taken place. Consequently, the mortgages in favour of Sterling and Callisi no longer remained on title. The settlement proceeds of both properties had been disbursed and applied by Sterling in reduction of the debts owed to it. In these circumstances, the principles of apportionment had no application.
4. For the reasons which follow, and notwithstanding that the lack of power point was not raised or argued before the trial judge, we would grant leave to appeal and allow the appeal.

1. A mortgagor owned two properties - one in Toorak and the other in St Kilda Road. By the time the proceedings in the Trial Division commenced in December 2021, both properties were subject to various mortgages and charges in favour of various lenders, including Sterling and Callisi.
2. In respect of the Toorak property (which had a value of $3,250,000):

(a) Sterling held a first registered mortgage ('Sterling Toorak First Mortgage') which was cross-collateralised with a first registered mortgage over the St Kilda Road property ('Sterling St Kilda Road First Mortgage'). Both mortgages (which we will refer to as 'Sterling's First Mortgages') secured obligations under two loan agreements. By the time of the proceedings, the debts under these two agreements were the subject of a judgment entered against the mortgagor ('Judgment Debt');

(b) Callisi held a second-ranking registered mortgage over the Toorak property ('Callisi's Mortgage');

(c) another lender held an unregistered charge which was notified by a caveat on title; and

(d) Sterling held an unregistered interest as a mortgagee over the property ('Sterling Toorak Second Mortgage') which secured a separate debt under a separate loan agreement ('the Third Loan Agreement') that was not related to nor secured by Sterling's First Mortgages.

1. In respect of the St Kilda Road property (which had a value of $1,180,000):

(a) as referred to above, Sterling held the Sterling St Kilda Road First Mortgage;

(b) Sterling held the second ranking mortgage ('Sterling St Kilda Road Second Mortgage') over the property as security for the debt under the Third Loan Agreement. That mortgage did not secure the debt secured by Sterling's First Mortgages;

(c) the third ranking security holder (under a charge) was Callisi pursuant to Callisi's Mortgage; and

(d) the fourth ranking security holder (under a charge) was another lender.

1. The security position can be depicted as follows:

1. The mortgagor encountered financial difficulties and defaulted under various loan agreements and securities.
2. On 30 October 2021, Sterling as mortgagee in possession under the Sterling Toorak First Mortgage sold the Toorak property for $3.25 million with settlement due on 28 January 2022.
3. On 20 December 2021, Callisi began the proceedings below. By summons in the proceeding, Callisi sought orders restraining Sterling from completing settlement of the sale of the Toorak property, alternatively from paying itself a substantial portion of the proceeds of sale. That application was dismissed in mid-January 2022.
4. At about that time, the debt owing to Sterling and secured by Sterling's First Mortgages was approximately $3,050,000. The debt owing to Sterling and secured by the Sterling St Kilda Road Second Mortgage was approximately $1,750,000. The amount owing to Callisi at this time appeared to be about $1,500,000.
5. Settlement of the sale of the Toorak property took place on 3 February 2022. Callisi received no funds to reduce the debt owed to it and secured by the Callisi Mortgage. Rather, Sterling retained the net proceeds of sale in reduction of the debts owed under Sterling's First Mortgages. This left a small balance of the debt owing which was still secured by the Sterling St Kilda Road First Mortgage. Despite that debt, the Sterling St Kilda Road First Mortgage was discharged on 23 February 2022.
6. On 28 February 2022, the St Kilda Road property was sold for $1,180,000 by the receiver appointed some three years earlier by Sterling under the Sterling St Kilda Road Second Mortgage. Settlement took place on 29 August 2022. All of the net proceeds of sale from the St Kilda Road property were paid to Sterling in reduction of the debt secured by the Sterling St Kilda Road Second Mortgage. The consequence was that Callisi received no funds.
7. The security position in relation to the St Kilda Road property at the time of sale and settlement can be depicted as follows:

St Kilda Road property (at time of sale and settlement)

Sterling St Kilda Road First Mortgage (discharged)

Sterling St Kilda Road Second Mortgage (Third Loan)

1. At its simplest, the equitable doctrine of marshalling applies where a claimant may have recourse to two sources of payment from the same person and there is another claimant who may only have recourse to one of those sources. If the double claimant chooses the source of payment to which the single claimant may also have recourse, the doctrine of marshalling will apply so that the double claimant's choice does not disappoint the single claimant.[1] In that circumstance, in respect of any shortfall to it, the single claimant is entitled to access the other source of payment that was not previously available to it but was available to the double claimant. Marshalling is sometimes described as akin to subrogation.
2. The doctrine is most easily explained in relation to mortgaged property. An example is as follows:

1. In this example, if A takes payment out of Blackacre and there are insufficient funds to pay B the amount it is owed, then B may have recourse to Whiteacre. B steps into the shoes of A under its mortgage over Whiteacre, but only to the extent of the debt owed to B and only to the value of B's original security (in this example, Blackacre).
2. The situation becomes more complex when there is more than one single claimant as in this example:

1. In this example, if A has recourse to Blackacre alone for payment of the debt due, then B will be disadvantaged. If A has recourse to Whiteacre alone, then C will be disadvantaged. Consequently, in such circumstances, equity will step in and apportion the amount rateably between Blackacre and Whiteacre.[2] This then leaves B to the balance available from Blackacre and C to what is left of Whiteacre after the apportionment between the two properties of the debt owed to A. In this situation, the concept of a single claimant stepping into the shoes of the double claimant has less to recommend it. Where there is a double claimant and two single claimants, each with security over separate properties, the relevant principle is sometimes referred to as 'marshalling by apportionment' although it has also been described as better understood as an application of the principles of contribution.[3] It is this equitable principle that is at issue in this case.
2. Whether it is a case of pure marshalling (double claimant and one single claimant) or marshalling by apportionment (double claimant and more than one single claimant), the double claimant can choose which security it realises first.[4]

1. Callisi alleged that in retaining the whole of the funds from the sale of the Toorak Road property, Sterling preferred its own interests under the Sterling St Kilda Road First Mortgage to the interests of Callisi under the Callisi Mortgage. It relied upon the principles of marshalling of securities and sought a declaration and account as to its entitlement to the proceeds of sale (or a portion of them) of the St Kilda Road property. In essence Callisi argued that Sterling should have apportioned the debt owed to it and secured by Sterling's First Mortgages between the two properties with part of the proceeds of each going to repay those debts. This would have resulted in payment to Callisi under the Callisi Mortgage of some of the proceeds of sale.
2. The judge held in favour of Callisi.[5] He reasoned that Callisi (by virtue of the Callisi Mortgage) and Sterling (by virtue of the Sterling St Kilda Road Second Mortgage) were both liable to have the value of their respective securities rendered worthless depending solely on the order in which Sterling (by virtue of Sterling's First Mortgages) chose to realise its security.[6] The judge held that it was 'the commonality of their shared interest in that potential prejudice which gives rise in each of them to an equity' to seek an apportionment remedy.[7] Such a remedy required the debts secured by Sterling's First Mortgages to be apportioned rateably between the two properties by reference to their respective values. On this calculation, the Toorak property represented 73.36% of the total value of the properties and the St Kilda Road property represented 26.64%.[8] The debts secured by Sterling's First Mortgages then had to be apportioned using those percentages.[9] This method would have resulted in a higher amount than Callisi sought on the basis of a similar but not identical calculation. As a consequence, the judge made an order in favour of Callisi for payment of the lesser amount it sought being $830,375.[10]
3. In arriving at his conclusion, the judge rejected Sterling's contention that Callisi could not make a claim because the Sterling St Kilda Road First Mortgage was discharged with the consequence that there was no mortgage to which Callisi could be subrogated. The judge held that:

(a) such an argument arises in the context of marshalling in its pure sense, not apportionment;

(b) 'subrogation' describes the effect of the relief rather than a firm requirement that there be a mortgage into which the lower ranking mortgagee can step;

(c) Sterling discharged the Sterling St Kilda Road First Mortgage even though the debt secured by it had not been fully repaid and after Callisi had commenced the proceeding against it.[11]

1. In respect of this last point, the judge observed that although not fully articulated at that stage, Callisi was broadly complaining about the order in which the properties were sold and that it was prejudiced (as holder of the Callisi Mortgage) and Sterling advantaged (as holder of the Sterling St Kilda Road Second Mortgage). It followed, in the judge's opinion, that 'it would be a surprising outcome if the consequence that otherwise would follow would be avoided by Sterling as first mortgagee discharging its first mortgage.'[12] Sterling's knowledge of Callisi's claim was important and stood in contrast to a situation where there had been a third party who had received the proceeds of the sale unaware of Callisi's claim.[13]

1. There are two proposed grounds of appeal.[14] Essentially, they distil down to contentions that:

(a) as the Court had not taken control of or exercised control over the proceeds of sale of the St Kilda Road property, there was no fund and therefore no scope for the Court to grant a remedy to Callisi;

(b) at the time of the sale and settlement of the St Kilda Road property, there was only one mortgage over that property in favour of Sterling (the Sterling St Kilda Road Second Mortgage) and the basis for apportioning the proceeds of sale no longer subsisted.

1. As noted above, the first of these arguments was not raised at trial.
2. The parties agreed that the fact that Sterling is the same mortgagee in respect of two different debts and under two separate mortgages over the St Kilda Road property made no difference to the application of the principle of apportionment. At issue is the entitlement to the balance of the funds after payment of the debt secured by Sterling's First Mortgages. The two potential claimants are Callisi and Sterling (by virtue of the Sterling St Kilda Road Second Mortgage).

Ground 1: Must a court controlled fund exist before equitable relief will be granted?

Relevant authorities concerning the need for a fund

1. Reference to the necessity of a fund under control of the court is found in many of the authorities, some of which are in the context of marshalling claims, while others concern marshalling by apportionment.
2. In Webb v Smith[15] the Court of Appeal of England and Wales observed that the doctrine of marshalling 'applies when the funds are in Court, and when the Court can exercise a jurisdiction over them.'[16] In Jenkins v Brahe & Gair,[17] a'Beckett J spoke about the jurisdiction of the Court not being ousted 'when the Court can obtain control of the assets which the mortgagee could have applied to the discharge of his debt and out of which other creditors can be satisfied.'[18] In some of the authorities, the prerequisite seems to have been modified so that if the funds are not in court but are either held by a third party or by a solicitor for one of the parties with an undertaking to the court not to dispose of the fund until determination of the proceeding, then this will be sufficient. In this regard, in Lawrance v Galsworthy[19] a double claimant was entitled to recover his debt from the realisation of household effects and from the proceeds of a life insurance policy. The single claimant only had a right to recover the debt owed to him from the household effects. The double claimant recouped his debt from the household effects and then sold the policy to his solicitor at an undervalue. The single claimant commenced proceedings and included the insurer as a party to the litigation. The sale of the insurance policy was set aside. After deduction of its costs, the insurer was ordered to pay the net proceeds of the policy into court with those proceeds to be applied first in payment of the amount due to the single claimant. Sir John Stuart VC treated the insurance moneys as funds under the control of the court.[20]
3. The requirement for the fund to be in control of the court was emphasised in Commonwealth Trading Bank v Colonial Mutual Life Assurance Society Ltd.[21] In that case, a debtor obtained a loan from Colonial Mutual. The debt was secured by a mortgage in favour of Colonial Mutual over a property that the debtor owned in Bellerive. Colonial Mutual also took as security an assignment of an endowment policy that it had issued on the life of the debtor. Some years later, Commonwealth Trading Bank granted a loan to the debtor and took as its security a second mortgage of the Bellerive property. The debtor defaulted under the first mortgage and Colonial Mutual exercised its rights and sold the Bellerive property. It also re-assigned the endowment policy to the debtor, accepted a surrender of the policy and paid the surrender value to the debtor. A few months later, having retained the amount due to it, Colonial Mutual paid the Bank the balance of the proceeds of sale of the Bellerive property. The Bank suffered a shortfall on its debt. Sometime later, the Bank commenced proceedings against Colonial Mutual claiming a declaration that at the time of the reassignment and surrender of the endowment policy, Colonial Mutual held the policy in trust for the Bank. The Bank sought an account aimed at ascertaining what it was owed by Colonial Mutual by reason of the trust and orders for payment of that amount. In the alternative, the Bank claimed payment of the balance due on its mortgage or damages for breach of trust. Neasey J rejected the Bank's claim. He held that no trust existed and that the principle of marshalling did not confer an equitable right of property and stated that 'it is no more than a right to seek from the Court in its equitable jurisdiction the modern remedies which perform the same function as did the decree of a court of equity formerly'.[22] In his Honour's view, 'the operation of the marshalling principle depends upon the assets being subject in some way to the control of the court.'[23] This reinforced his Honour's view that the doctrine depends upon the grant of an equitable remedy in certain circumstances rather than upon the creation of an equitable interest in the fund in favour of the security holder (in that case the Bank) seeking to invoke the doctrine.[24]
4. In Equity: Doctrines and Remedies, the authors note the observation of the Court of Appeal in Webb v Smith,[25] that the doctrine of marshalling applies only if 'the funds are in Court, and when the Court can exercise a jurisdiction over them.'[26] The authors go on to state:

This attitude has been reflected on other occasions, including Commonwealth Trading Bank v Colonial Mutual Life Assurance Society Ltd, and accurately describes the position in an administration of assets in a deceased estate or in bankruptcy. But there is no reason why this need be an essential element of marshalling. If the right of the single claimant is seen as one of subrogation to the claim of the double claimant against the second fund, then there is no reason for a curial administration before marshalling is available. The single claimant may wish to marshall securities in a situation short of the debtor's actual sequestration and there is no good reason to prevent that happening. Perhaps the true meaning of the concept of the 'control' of funds by the court appears from the judgment of Sir John Stuart VC in Laurance v Galsworthy ... The 'fund' concerned was moneys owing by the insurer upon the death of the debtor ... These were of course not 'in Court' any more than the funds in Webb v Smith. But Sir John Stuart VC took the requirement as meaning that any third party having control of the fund in dispute should be a party to the suit so that any order made by the court would bind it. 'The Court had the means, having the funds under its control, of making such a decree as would secure the plaintiff's title ...'. The same view was taken by Neasey J in the Commonwealth Trading Bank case. Neither Lord Eldon LC nor Sir William Grant MR in Trimmer v Bayne so confined the doctrine. This gives a convincing meaning to the reference to control by the court, and it is to be regretted that it was not cited in Webb v Smith.[27]

Perhaps the position is better expressed by saying that if the subject matter of the claims is not in the administration of the court as with a deceased estate, the rights of the single claimant must be enforceable in respect of distinct property of the debtor, as opposed to a merely personal claim against the debtor. If this were not so there would be little point in the single claimant seeking to have the double claimant pursue one claim rather than another.[28]

1. An example of moneys held on trust pending the outcome of the proceedings is Across Australia Finance Pty Ltd v Kalls.[29] In that case, National Australia Bank Limited held a first mortgage over two security properties. Mr Hill held security over one of the properties and Across Australia held security over the other. The properties were sold under direction of the Court. The Bank received all of the net proceeds of sale from the property over which Mr Hill held his security. The Bank recouped the balance of the debt owed to it from the proceeds of sale of the other property. There was a surplus of about $285,000 which was held by the lawyers for Across Australia in their trust account. The lawyers gave the Court an undertaking which made the proceeds subject to the Court's control. Bryson AJ described marshalling in the following terms:

The application of marshalling involves assuming, for the purposes of accounting for moneys under the court's control, that satisfaction of first mortgages made the same impact proportionally on the net proceeds of the sale of each of the two securities. The order in which the first mortgagee had access to the securities does not govern puisne mortgagees' rights. Under marshalling the second mortgagees are treated as between themselves as if the first mortgagee had treated each of the funds in the same way and taken the same proportion of each fund. Equity is equality.[30]

1. His Honour accepted that the characterisation of the rights of claimants seeking marshalling orders was uncertain and observed:

...courts of equity have marshalled funds and claims, in the absence of an altogether satisfactory exposition of the juridical basis for doing so, for about three centuries at least. There are several strands of grounds upon which equity has traditionally acted; the accidental nature of the impact of the actions of the prior creditor, a wish to avoid the defeat of a later claim by the decision or caprice of a prior creditor, a close but not altogether satisfactory analogy with subrogation, the court's concern to deal justly when establishing entitlements to funds under its control, and the maxim that Equity is equality, leading to decisions which gave similar treatment to persons with closely similar interests. It is enough for me that courts of equity have for a very long time applied principles of marshalling, themselves not highly defined, to problems of this kind. The present controversy relates only to rights as between puisne mortgagees who have mortgages over different properties but are both affected by the way in which the first mortgagee has been satisfied under mortgages which the first mortgagee has over both properties. Where (as in this case) security properties have been sold under the control and direction of the court, the court cannot in my opinion do otherwise than address whether marshalling is appropriate when asked by one of the puisne mortgagees to do so.[31]

1. His Honour's focus was on whether it mattered that the properties had not been sold by the Bank as first mortgagee. Having quoted the observations of Neasey J in Commonwealth Trading Bank,[32] that marshalling depends upon the assets being in some way subject to the control of the court, Bryson AJ stated:

The present case falls within this limitation, as the properties were sold in accordance with directions of the court. The control of the court is enhanced by the funds being held under an undertaking. Necessarily proceedings for judicial sale involve determination of the rights of all persons who have security interests or other interests in the properties. Resolving all interests is an application of the obscurely expressed maxim 'Equity delights to do justice'.[33]

1. Bryson AJ concluded that it would be inappropriate for Mr Hill or Across Australia to be disadvantaged or advantaged because of the way that the Bank had been repaid. He held that the appropriate equitable disposition was for the Court to carry out an accounting or reckoning of the funds to which each was entitled on the basis of a rateable proportion of the Bank's debt over the two properties.[34]
2. A case in which it appears there was no fund under the court's control or distinct property of the debtor is National Bank of New Zealand Ltd v Caldesia Promotions Ltd and Jenkins Roberts & Associates Ltd.[35] In that case, a Master had refused an application to strike out the statement of claim. The Master's decision was reviewed by Elias J (as she then was). The facts were that Jenkins Roberts & Associates Ltd held a first registered mortgage over two properties. National Bank held an unregistered mortgage (protected by a caveat) over the first property with Jenkins Roberts holding a later ranking mortgage over that property (protected by a caveat). Jenkins Roberts also held a second registered mortgage over the second property. Both properties were sold. Jenkins Roberts was paid the net proceeds of the first property under its first registered mortgage with the balance of the debt being paid to it from the sale proceeds of the second property. The balance of those proceeds of sale were applied by Jenkins Roberts in reduction of the debt secured by its second ranking mortgage over the second property. The consequence was that National Bank did not receive any of the proceeds of sale. The Bank claimed that Jenkins Roberts was required to account to it for a share of the surplus from the sale of both properties, apportioned according to the purchase price obtained for each. There were three pleaded causes of action. The first and the second depended upon the application of the principles of apportionment. Elias J noted that sometimes the relevant principle is referred to as marshalling by apportionment and at other times is referred to as an application of the principles of contribution.[36] Her Honour stated that whatever its proper classification, it was a principle of general application that operated 'wherever a double claimant can disappoint another creditor by electing to satisfy his claim from one fund or security.'[37] Jenkins Roberts contended that the principle did not apply on the facts for three reasons; first, the principle only applied where the double claimant could recoup its full debt from the property that is not charged to the single claimant seeking apportionment; second, the principle has no application in respect of Torrens title property; third, Jenkins Roberts should be treated as one entity with no differentiation between its rights as first and second registered mortgagee over the second property. Each of these arguments was rejected by Elias J and she held that on the basis of the pleaded facts, marshalling applied to apportion the surplus available in the ratio of the value of the two lands. Consequently, her Honour held that Jenkins Roberts failed in its application to strike out the statement of claim on the basis of the first and second pleaded causes of action. In her reasons, Elias J referred to the decision of Neasey J in Commonwealth Trading Bank[38] but not to that aspect of the judgment referring to the operation of the marshalling principle depending upon the assets being subject in some way to the control of the court. Seemingly, no argument was put to Elias J, that on the facts pleaded in the case before her, there was no fund or property subject to the control of the court.
3. Elias J was therefore concerned with whether a claim should be struck out in circumstances where the need for a fund was not a point raised for consideration. The Caldesia decision simply does not address that point and does not stand for the proposition that no fund is necessary. Moreover, as set out above, the preponderance of authority clearly suggests that it is.

1. Proposed ground one is that the judge erred in failing to find that Callisi was not entitled to any remedy in respect of any equity which it had against Sterling, in circumstances where there was no fund produced as a result of the sale of the St Kilda Road property which was under the control of the Court.
2. As noted above, the proceedings were commenced in late 2021. In early January 2022, Callisi made an application to restrain the settlement of the sale of the Toorak property. That application was dismissed on 13 January 2022.
3. The following day, Callisi sought an undertaking from Sterling that it would not distribute the proceeds of sale of the St Kilda Road property after settlement of its sale. It will be recalled that the property was sold by the receiver who had been appointed by Sterling under the Sterling St Kilda Road Second Mortgage. Sterling refused to give the undertaking that Callisi sought in respect of the proceeds of sale. Sterling notes that Callisi did not make an application to the Court to restrain Sterling from receiving the proceeds of sale of the St Kilda Road property. In fact, after settlement, Sterling received the net proceeds of sale and applied them in partial reduction of the debt owed to it under the Sterling St Kilda Road Second Mortgage.
4. Callisi's first contention in relation to this ground is that it is a new point not argued before the judge and that Sterling should be held to the case it ran at trial. Callisi submits that if the argument had been run before the judge, it is at least possible that it would have been met by an argument that the absence of a fund is in part caused by Sterling's decision on 23 February 2022, after settlement of the sale of the Toorak property shortly before, to discharge the Sterling St Kilda Road First Mortgage (despite there still being part of the debt secured by that mortgage) and to use its capacity as holder of the Sterling St Kilda Road Second Mortgage to appoint the receiver and ultimately receive the entirety of the proceeds of sale of the St Kilda Road property. In essence Callisi says that had the argument been put, it would have been open to it to plead (by way of reply or amendment of the statement of claim) and argue that Sterling had a limited fiduciary obligation which had been breached. It made passing reference to a thesis postulated in Equity: Doctrines and Remedies to the effect that there might be a 'middle ground' of 'attaching to the double claimant a personal liability of a fiduciary character to account to the single claimant for loss occasioned by releases of the first charge or a proprietary interest in moneys received by the double claimant upon exercise of that charge, without conceding any proprietary interest in the property against third parties.'[39] The authors observe that such a view was implicitly rejected by Neasey J but that there may be some support in other authorities although in those cases the point did not have to be determined.[40]
5. Callisi also says it may have raised allegations that the conduct of Sterling amounted to fraud. However put, Callisi says that it would have been necessary to explore the factual questions surrounding the choice made by Sterling on 23 February 2022 to give up its rights. Callisi goes on to say that it may also have been necessary to explore Sterling's state of mind when it decided to discharge its mortgage. Callisi maintained that the time for assessment of the right to relief was at the time the proceeding was issued. But if it is wrong about that, Callisi submits that one of the matters that could have been explored at first instance if the point had then been taken, is whether a fund comprising the net proceeds of sale of the St Kilda Road property existed at the time of trial.
6. A party will ordinarily only be permitted to rely on an argument on appeal that was not put before the judge at first instance if the party can show that it is expedient in the interests of justice, a test which will only be satisfied in exceptional circumstances.[41]
7. In essence, the critical issue before the Court here is whether there was power to grant the orders that were made. As such, it is in the interests of justice to permit Sterling to raise its arguments on appeal even though they were not run at trial. The Court could not let stand an order that was made without power.
8. In any event, even if power was not at issue, Callisi has been unable to express clearly what its case would have been had the argument been raised below. Nor has Callisi articulated what evidence would likely have been called. At best, Callisi has said that it may have run one or more different cases and that may have required evidence going to those cases. The suggestion of a case somehow based on fraud was mentioned only in the vaguest of terms. This was despite the fact that Callisi had been given notice of the point at the time the application for leave was served many months before the hearing of the appeal.
9. Had Callisi chosen to do so, it would have been open to it to have raised through a notice of contention, or possibly by clearly articulated submission, that on the undisputed facts there was a limited fiduciary duty owed by Sterling to it that would support the basis for the orders that were made. It could have supported its argument with a draft proposed amended statement of claim. No additional evidence was needed to run that alternative argument. Who held what mortgage over which property was known as was the security position in respect of each property at the dates of sale and settlement. Sterling's knowledge that Callisi claimed an interest could not be disputed. Callisi chose not to make an argument based on a fiduciary relationship but rather merely hinted at that as something which may have been explored at trial had Sterling's arguments been raised below.
10. As noted above, given that the point goes to the question of power, it is appropriate to entertain Sterling's new argument.

Is Callisi entitled to any remedy absent a fund?

1. Sterling contends that it was the subject of orders made against it in its capacity as the holder of the Sterling St Kilda Road Second Mortgage. It says that notice of an entitlement to apportionment or some other basis of entitlement to share in the proceeds does not provide a sufficient foundation for the imposition of a personal remedy (the obligation to pay $830,375) or an obligation to account in equity against Sterling in favour of Callisi. Sterling submits that the right to account in equity is not a general remedy. Rather, it submits that the party seeking the account must establish the existence (through a cause of action in respect of the matters the subject of the proposed account) of a right to be paid some amount of money. In Sterling's submission, no duties, whether fiduciary, contractual or otherwise, were owed by it to Callisi at the time of sale of the St Kilda Road property, settlement of that sale, receipt of the proceeds of sale or use of those proceeds to reduce the debt owed to it under the Sterling St Kilda Road Second Mortgage. Consequently, Sterling contends that there was no relationship between Callisi and it that could give rise to an obligation to account which, in Sterling's submission, is the only personal remedy which would justify an in personam order against it.
2. Sterling relies on Commonwealth Trading Bank.[42]
3. Moreover, Sterling submits that it has changed its position by the receipt of the proceeds of sale of the St Kilda Road property which were applied in part repayment of the debt secured by the Sterling St Kilda Road Second Mortgage. As such, Sterling contends that there is no fund in respect of which anything can operate - Sterling appropriated the fund in discharge of the debt and is free to use the money as it sees fit.
4. Callisi contends that Commonwealth Trading Bank[43] can be distinguished on the basis that the Bank alleged that Colonial Mutual held the Bellerive property on trust for the Bank. Callisi says that is not an argument that it makes. Moreover, it contends that the observations made by Neasey J about the need for there to be a fund under the control of the court were expressed in less than certain terms in reasons not necessary for the decision.
5. Callisi submits that it is unnecessary that the funds actually be held in court or within the court's direct control, for example, through an injunction preventing the fund from being paid away. So it says, the equitable remedy of marshalling or marshalling by apportionment is not susceptible to form over substance arguments or to rules which do not have an equitable basis. According to Callisi, a rule that a fund must exist before relief can be granted would not serve any equitable purpose and is without any equitable basis. Callisi submits that what is important is to have the right party before the court against whom it is appropriate to grant a remedy because it is the party that would otherwise benefit from the first mortgagee's choice to the disadvantage of the other second mortgagee. Here, at all relevant times, the proceeding was on foot: before either property was sold; at the time Sterling discharged Sterling's First Mortgages; and at the time the receiver settled the sale of the St Kilda Road property and handed over the net proceeds of sale to Sterling. Callisi relied on the passage from Equity: Doctrines and Remedies set out in [32] and also [44] _Caldesia._44 In respect of the passage from Equity: Doctrines and Remedies set out in [33], Callisi submits that the reasoning is unsound and only contemplates the simple form of marshalling claim where the claim is against the debtor and where there are only two mortgagees - one with security over two properties and the other with security over only one of those properties. In those circumstances, Callisi contends that marshalling is only relevant where the debtor is insolvent and as such, a claim against the debtor is probably of no moment. Callisi says that in the situation where there are three mortgagees - one with a mortgage over two properties, the other two mortgagees having a mortgage over one property each - there is a very real and desirable potential of the mortgagee who is out of money being able to pursue an in personam claim against one of the other mortgagees.
6. Callisi also submits that there may be circumstances where the marshalling claimant cannot bring a claim when a fund exists. It gives the example of a marshalling claimant who is unaware of the other security until after it has been realised. As another example, Callisi hypothesized a situation where the first mortgagee acts so quickly to realise one property and put the other property in control of another mortgagee that there is no real opportunity for the disappointed second claimant of the first property to step in and seek a remedy before that occurs. In those circumstances, Callisi says there is no good reason why the marshalling claimant should be shut out unless it would be unjust to allow it - for example, if it would infringe the rights of others such as the purchaser of the secured property or another mortgagee which has already been paid and which has released its security and given up its rights.
7. Callisi contends that it sits ill in the mouth of Sterling which resisted the application to bring the Toorak property proceeds of sale under the direct control of the Court to now rely on the fact that there is no fund in existence or under the Court's control. Here, Sterling was on notice of Callisi's claim before applying the proceeds of sale to its own debts. In those circumstances, Callisi submits that there is no warrant to withhold from it the equitable relief by way of marshalling to which it was otherwise entitled.
8. Callisi also contends that there is no need for an equitable obligation to exist between the parties in this case for the principle of marshalling or marshalling by apportionment to found the relief it sought. In this regard, Callisi observed that marshalling is not dependent on establishing any wrong or equitable duty to account. The doctrine is re-allocative in nature based upon an equitable apportionment of a fund generated in certain circumstances.
9. In any event, it says that Sterling is wrong when it says that the orders were made against it in its capacity as the holder of the Sterling St Kilda Road Second Mortgage. Callisi says that the orders were made against Sterling in its capacity as the mortgagee of the first mortgages it held over the Toorak property and the St Kilda Road property. It is the relationship as first mortgagee that Sterling had with Callisi that is the relevant relationship according to Callisi.
10. Callisi also contends that the distinction between when an in rem remedy will be granted and when an in personam remedy will be granted is not a relevant distinction to be made. Callisi notes that none of the authorities use that language and rather make orders for the payment of money. In Callisi's submission, it is not a proprietary remedy and it is sufficient to order the party that received the fund and held it to pay an amount of money with the appropriate adjustment in a case of marshalling by apportionment.
11. Callisi submits that there are no cases where an order for apportionment has been refused because no fund in the control of the court existed. Consequently, Callisi contends that the limits, if any, of the requirement of a fund have not yet been identified or determined.

1. Callisi did not submit in writing or orally that the Court should find a liability based on the 'middle ground' fiduciary duty and there was no articulation as to the basis upon which such a duty ought to be imposed and operate.[45] Rather, Callisi contended that as a matter of principle, the Court should not limit the doctrine of marshalling only to where the funds are under the control of the court; it is sufficient if a party or parties to the proceeding have or had the fund.
2. We do not accept Callisi's submissions. The rights of the first mortgagee are not affected through marshalling nor marshalling by apportionment. The first mortgagee is entitled to sell whichever security it chooses first. It is entitled to retain the proceeds of sale in discharge of its debt and no orders can be made requiring the first mortgagee to disgorge amounts it has received. The first mortgagee is entitled to be kept whole. In a simple case where a double claimant obtains payment of its debt from one property leaving the second secured property untouched, the mortgages are marshalled for the benefit of the single claimant who steps into the shoes of the double claimant under its mortgage over the untouched property. Where both properties have to be sold to expunge the debt owed to the first mortgagee, any surplus is treated as available to the single claimant. In either situation, the competing parties are the single claimant and the debtor (either as to the untouched property or the surplus if both properties have been sold). In a case of apportionment, the competing parties increase to include the second single claimant.
3. There is also no proper basis to distinguish between the Court's powers in respect of marshalling and marshalling by apportionment. In both cases, there must be something that exists (that is, either a security or fund from the realisation of the security) which can be marshalled. The only difference in application is in respect of the type of calculation that is undertaken to ascertain to whom the fund should be paid. If the fund has been paid into Court, or if it is held in trust pending the outcome of the dispute with an undertaking given to that effect, or if a third party holds the fund and is a party to the litigation, then the Court has power to make orders in respect of the surplus. There is something to marshall and equity will intervene. If the surplus has been disbursed then there is nothing to marshall and, in the absence of any duty or fraud being established, there is no basis upon which the Court can make orders for the payment of any amount by any mortgagee nor can it order an account. In this regard, in Associated Alloys Ltd v ACN 001 452 106 Pty Ltd the majority observed that before 'a party can be ordered to account, liability to account must be established'.[46] Examples of when an account might be ordered include: on the dissolution of a partnership; where a trustee has breached its fiduciary duty; where fraud or wilful default has been established; as part of the administration of a deceased's estate by an executor; and when a mortgagee sells property subject to its mortgage. In respect of this last example, the obligation to account is owed to the mortgagor and others who hold security over the same property (not, as in this case, to a mortgagee over a separate property). It may be accepted that the class of cases in which an account may be ordered is not closed, but any new class must have a principled basis.
4. As noted above, the decision in Caldesia[47] does not stand for the proposition that no fund is necessary - that point was not addressed. Rather, the weight of authority supports the need for a fund.
5. True it is that the right party may have been before the Court in this case (although it may also have been necessary to join the receiver and the mortgagor), but what was not before the Court was the asset to be divided. That asset did not transform into a personal right against Sterling enforceable by court order. Rather, as we have said, once the asset was gone, in the absence of fraud or some other identified legal wrong, so too went the equitable rights of Callisi. In this regard, it matters not whether the orders were made against Sterling in its capacity as first mortgagee over both properties or second mortgagee over the St Kilda Road property.
6. Dependent upon the individual facts of the case, the right to marshall might be protected through interlocutory injunction. While the subsequent mortgagee has no proprietary interest in the property or the proceeds of sale of the property over which it holds no security, it may have a right to marshall (either in the pure sense or by way of apportionment). In the case of marshalling by apportionment, on the application of a mortgagee who may be disappointed by the choice of the first mortgagee as to which property to realise first, a court may be willing to make orders to preserve the net proceeds of sale until the rights of competing mortgagees have been determined. In this regard, Fullagar J in Deta Nominees Pty Ltd v Viscount Plastic Products Pty Ltd postulated that equity may restrain a double claimant from discharging its charge over a fund where the right of a single claimant to marshall existed.[48] Here, Callisi did seek some interlocutory relief but it was not directed to protecting its right to marshall by apportionment. It did not make any application directed towards protecting the surplus funds from the sale of the properties after payment of the amount due to Sterling under Sterling's First Mortgages. Rather, as noted above, Callisi sought orders seeking to restrain Sterling from settling the sale of the Toorak property. While it did seek an undertaking from Sterling (which was not given), it did not seek any orders in respect of the St Kilda Road property or its proceeds of sale. Sterling having appropriated the proceeds of the sale of that property, no identifiable fund exists in respect of which the Court might make orders.
7. It may be that a first mortgagee may act quickly thereby depriving the disappointed subsequent mortgagee of the opportunity to protect its right to marshall. That 'right' does not materialise into something concrete until it is invoked. And the 'right' can be lost if it is not invoked while there is something to marshall. Unless there is agreement between the mortgagees or an order is made, all that the subsequent mortgagee has is a mere equity; it has no equitable interest. Of course, the situation would be different where fraud on the part of the first mortgagee was involved.
8. This is not a case where form trumps substance. As described above, the power to make orders must rest either on the existence of an identifiable fund in respect of which the Court may make orders, or on the existence of some obligation owed by Sterling to Callisi.
9. As highlighted already, on the hearing of this appeal, Callisi chose not to formulate or argue any such obligation. In particular, Callisi chose not to run an argument to the effect that Sterling owed some identified fiduciary duty to it that would found the basis for an account or money order. Callisi referred merely to the possibility that it may have done so if the lack of an identifiable fund had been pleaded and argued at trial. It needed to do more than that, for although the 'middle ground' thesis described in Equity: Doctrines and Remedies has been referred to in various authorities, it has not yet been necessary to determine whether a limited fiduciary obligation exists between mortgagees in respect of property over which only one of them holds security. And what is not touched upon at all is whether there is any obligation owed by second mortgagees to one another where they each have security over separate properties.
10. For the reasons given, we would therefore grant leave to appeal in respect of ground one and would allow the appeal on that ground.

Ground 2: Did the discharge of the Sterling St Kilda Road First Mortgage before the sale of the St Kilda Road property mean that the doctrine of apportionment did not apply?

1. In view of our conclusion in respect of ground one, it is unnecessary to decide ground two. Nevertheless, we will address it briefly.
2. That proposed ground is that the judge was in error in applying the doctrine of apportionment when the Sterling St Kilda Road First Mortgage had been discharged before the sale of the St Kilda Road property.[49] In essence, the argument is put that there was no basis for applying apportionment to give a remedy to Callisi against Sterling as the holder of the Sterling St Kilda Road Second Mortgage where Callisi's remedies in respect of the Sterling St Kilda Road First Mortgage and Sterling (as holder of that first mortgage) had been discharged on 23 February 2022. Sterling relies on the arguments in respect of ground one described in [50] and says that there is no basis in this case to diverge from the accepted principles as to the operation of the equitable doctrine whether described as apportionment or marshalling by apportionment.
3. As argued in respect of ground one, Callisi contends that Sterling has the wrong characterisation of the capacity in which the orders were made against Sterling. Callisi also contends that the nature of a marshalling claim is such that it is not concerned with the actual order and timing of the sale of multiple secured assets and the application of their proceeds to secured debt but as to what application of proceeds of sale of those assets would be equitable in circumstances where there are one or more subsequent security holders. Callisi submits that the argument which is the subject of ground two was comprehensively and appropriately disposed of by the judge.[50]
4. Callisi also contends that the relevant time for assessing whether a second mortgagee has an entitlement to apportionment is when the first mortgagee over both properties makes a decision as to the property from which its debt will be repaid. In this case, that decision was made by Sterling when it received the proceeds of sale of the Toorak property.
5. We do not think that Callisi's right to marshall by apportionment was necessarily lost when Sterling's St Kilda Road First Mortgage was discharged. At that stage, that property remained in the hands of the receiver (presumably as agent for the mortgagor although they were appointed by Sterling under its second mortgage). Apportionment merely required a calculation to be performed, rather than for Callisi to step into the shoes of Sterling as the first mortgagee. Had the proceeds of sale of the St Kilda Road property been paid into Court, we do not doubt that the Court could have made orders regarding their disbursement based on a calculation such as the judge undertook. However, the difficulty is that there was no fund subsisting at the time of trial.
6. Had it been necessary to decide, we would have granted leave to appeal in respect of this ground but would not have allowed the appeal on that basis.

1. Leave to appeal will be granted and the appeal allowed in respect of ground one.
2. It is unfortunate that the arguments upon which Sterling has succeeded were not ventilated at trial. It is only on the basis of those arguments that the orders below will be set aside. Subject to submissions by the parties, it would seem appropriate that Sterling be ordered to pay the costs of the trial.

[1] Miles v Official Receiver in Bankruptcy [1963] HCA 24; (1963) 109 CLR 501, 510-11 (Dixon CJ, Menzies and Windeyer JJ).

[2] Barnes v Racster [1842] EngR 467; (1842) 1 Y & C Ch Cas 401; (1842) 62 ER 944.

[3] John Dyson Heydon, Mark James Leeming and Peter G Turner, Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (LexisNexis Butterworths, 5th ed, 2015) 427 [11-110] ('Equity: Doctrines and Remedies').

[4] Miles v Official Receiver in Bankruptcy [1963] HCA 24; (1963) 109 CLR 501, 510-11 (Dixon CJ, Menzies and Windeyer JJ); Mir Bros Projects Pty Ltd v Lyons [1977] 2 NSWLR 192, 196-7 (Waddell J).

[5] Callisi Pty Ltd v Sterling & Freeman Advisory Pty Ltd (2023) 71 VR 478; [2023] VSC 300 (M Osborne J) ('Reasons').

[14] On the hearing before this Court, Sterling abandoned two other proposed grounds of appeal - grounds 3 and 4.

[15] [1885] UKLawRpCh 19; (1885) 30 Ch D 192 (Brett MR, Cotton and Lindley LJJ).

[16] Ibid 199 (Brett MR); 200 (Cotton LJ) to similar effect.

[17] [1902] VicLawRp 23; (1902) 27 VLR 643 (a'Beckett J).

[18] Ibid 648. Jenkins v Brahe & Gair was the subject of criticism in In re Crothers; Crothers v Crothers [1929] VicLawRp 48; [1930] VLR 49 (Cussen, MacFarlan and McArthur JJ), but not in this respect.

[19] (1857) 3 Jur (NS) 1049 (Stuart V-C).

[21] [1970] TASStRp 9; [1970] Tas SR 120 (Neasey J) ('Commonwealth Trading Bank').

[25] [1885] UKLawRpCh 19; (1885) 30 Ch D 192 (Brett MR, Cotton and Lindley LJJ).

[27] Equity: Doctrines and Remedies, 425 [11-090] (citations omitted).

[28] Ibid 425 [11-095] (citations omitted).

[29] (2008) 14 BPR 26,265; [2008] NSWSC 783 (Bryson AJ) ('Across Australia').

[32] [1970] TASStRp 9; [1970] Tas SR 120, 128.

[33] Across Australia [2008] NSWSC 783; (2008) 14 BPR 26,265, 26,271 [26]; [2008] NSWSC 783.

[35] [1996] NZHC 1680; [1996] 3 NZLR 467 (Elias J) ('Caldesia').

[38] [1970] TASStRp 9; [1970] Tas SR 120 (Neasey J).

[39] Equity: Doctrines and Remedies, 420 [11-040].

[40] Sarge Pty Ltd v Cazihaven Homes Pty Ltd (1994) 34 NSWLR 658 (Young J); Chase Corporation (Australia) Pty Ltd v North Sydney Brick and Tile Co Ltd (1994) 35 NSWLR 1 (Cohen J); Oamington Pty Ltd (Rec & Mgr Appointed) v Commissioner of Land Tax (1997) 98 ATC 5051 (Hamilton J); cf Naxatu Pty Ltd v Perpetual Trustee Co Ltd [2012] FCAFC 163; (2012) 207 FCR 502 (Dowsett, Jagot and Yates JJ).

[41] Water Board v Moustakas (1988) 180 CLR 491, 497 (Mason CJ, Wilson, Brennan and Dawson JJ); Sambucco v Sambucco [2023] VSCA 199, [29] (McLeish, Walker JJA and Gorton AJA).

[42] [1970] TASStRp 9; [1970] Tas SR 120 (Neasey J).

[44] [1996] NZHC 1680; [1996] 3 NZLR 467 (Elias J).

[45] See [43] as to the passing reference made to the 'middle ground' thesis.

[46] (2000) 202 CLR 588, 613 [56] (Gaudron, McHugh, Gummow and Hayne JJ).

[47] [1996] NZHC 1680; [1996] 3 NZLR 467 (Elias J).

[48] [1979] VicRp 17; [1979] VR 167, 192.

[49] Appeal Ground 2 reads: The primary judge erred at paragraphs [109], [112], [113], [120] and [121] of the Reasons in applying the doctrine of apportionment to give a remedy to Callisi against Sterling as the holder of the "Sterling St Kilda Road Mortgage", in circumstances where the first mortgage over the St Kilda Road property was discharged on 23 February 2022, prior to the time of its sale by Sterling's receiver on 28 February 2022.

[50] See [24]-[25]; Reasons, 500-2 [114]-[119].