Surfers Paradise Investments P/L (in liq) v Davoren Nominees P/L [2003] QCA 458

[1] WILLIAMS JA: The relevant facts are set out in the reasons for judgment of Dutney J and I will not repeat them. Whilst I agree with his Honour's reasons, because the conclusion reached differs from that of the experienced learned judge at first instance it is desirable that I add some brief reasons of my own.

[2] The law has been clear since at least 1879; the passage from the judgment of Jessel MR in Moor v Anglo-Italian Bank (1879) 10 Ch D 681 at 689-90, quoted by Dutney J, has been universally accepted as stating the true legal position.

[3] The ultimate question will always be whether there has been an election to surrender the security and in lieu take a dividend as an unsecured creditor.

[4] The relevant procedure has now been part of statute law for well over 100 years. What is now s 554E of the Corporations Act 2001 (Cth) has always been part of the substantive law of Australia relating to bankruptcy and company liquidation. The provision was first found in the rules made pursuant to the Bankruptcy Act 1924 and then in s 80 of the Bankruptcy Act 1966. Various statutes dealing with company law prior to the 2001 Act incorporated the provisions of the bankruptcy legislation into the law relating to winding up.

[5] Over the years there have been many decisions involving a determination as to whether a creditor has elected to surrender a security and prove as an unsecured creditor. In Queensland reference can be made to Re Douglas Homes Qld Pty Ltd (in liq) [1980] Qd R 528 and Seventeenth Canute Pty Ltd v Bradley Air-Conditioning Pty Ltd (in liq) [1987] 1 Qd R 111. In the latter case I had occasion to review a number of authorities dealing with the question, and there is no need to repeat that analysis here.

[6] The answer to the question whether or not there has been an election will depend upon the application of general principle. In that regard the critical authorities are Tropical Traders Ltd v Goonan [1964] HCA 20; (1964) 111 CLR 41 per Kitto J at 55, Sargent v ASL Developments Ltd (1974) 131 CLR 634 per Stephen J at 646 and Khoury v Government Insurance Office (NSW) [1984] HCA 55; (1984) 165 CLR 622 at 633. In addition the passage from the judgment of Mahoney JA in Champtaloup v Thomas [1976] 2 NSWLR 264 at 274-5, quoted by Dutney J, is of critical importance.

[7] Unequivocal conduct communicated to the liquidator may constitute an election notwithstanding the fact that subjectively there was no intention to so elect. That must particularly be so where a statute defines conduct that ordinarily would have that result. It will only be where there is some evidence of equivocation that it would be possible for a court to conclude that the conduct, caught by the words of the statute, does not have that consequence. The decisions in Re Ferguson; ex parte Elders Trustee & Executor Co Ltd (1943) ABC 1, Douglas Homes [1980] Qd R 528, and Kelso v McCulloch (unreported, Young J, 24 October 1994, BC 9403180) are explained in that way.

[8] On the facts of the present case the question whether or not there was an election may be answered taking into account all the conduct of the respondent up to and including the acceptance of the dividend cheque by banking it. In my view, given the authorities to which I have referred, the conclusion is inevitable that there was unequivocal conduct on the part of the respondent amounting to an election to surrender the security and prove as an unsecured creditor.

[9] The reasoning of the learned judge at first instance was based largely on the circumstance that there were a number of individuals responsible for the respondent's relevant conduct. He said: "The fact there was divided responsibility for the particular transactions renders the possibility that there was organisational ataxia rather than a co-ordinated strategy to have the best of all possible worlds a more realistic possibility than it may otherwise have been." But that reasoning, in my respectful view, places insufficient weight on the objective test.

[10] Whilst for present purposes it is sufficient to conclude that there was an election at the time the dividend cheque was banked, that is not to say that the conduct of the respondent prior to that occurring was not capable of evidencing an unequivocal election to surrender the security. For obvious reasons it is not necessary for this court to consider whether or not there had been an effective election prior to the banking of the cheque. For the reasons I have given it is appropriate to determine whether or not there was an unequivocal election at the time the cheque was banked, but that should not be taken, in my view, as an indication that the earlier conduct was incapable of supporting a finding that there was such an election; it is not necessary for this court to consider that issue further.

[11] I agree that the appeal should be allowed, a declaration made in the terms referred to by Dutney J, and an order made that the respondent pay the appellant's costs of and incidental to the appeal to be assessed on the standard basis.

[12] JERRARD JA: In this appeal I have read the reasons for judgment of Williams JA and Dutney J, and the orders their Honours suggest be made. I respectfully agree with their reasoning and the view that s 554E of the Corporations Act 2001 (Cth) prohibited the respondent from proving for the balance of the outstanding debt without first realising, valuing, or surrendering Lot 4 as security. I also agree that the respondent's conduct showed an unequivocal election by it to surrender Lot 4, prove for that balance, and retain the dividend payment. I agree with the orders their Honours propose.

[13] DUTNEY J: The appellant was the registered proprietor of Lots 4, 5 and 6 on Registered Plan 213382. The land comprised a large vacant corner allotment on the corner of Brown Street and Central Street at Labrador.

[14] The appellant mortgaged the land in favour of the respondent as security for an advance of $1.8 million.

[15] On 25th February 2000 an administrator was appointed to the appellant. On 10th March 2000 the respondent served a notice of exercise of power of sale on the appellant. On 5th May 2000 a liquidator was appointed to the appellant.

[16] On 19th June 2001 the respondent contracted to sell Lots 5 and 6 for $1.3 million. This compared with a kerbside valuation obtained by the liquidator which valued all three lots together on a forced sale basis at between $900,000.00 and $1 million.

[17] On 3rd August 2001 the liquidator invited creditors of the appellant to lodge formal proofs of debts. A proof of debt was received from the respondent under cover of a letter dated 10th August 2001. The proof of debt showed the indebtedness of the appellant to the respondent in the sum of $2,205,498.00. The mortgage was disclosed over Lots 4, 5 and 6 but no value was attributed to it.

[18] Under cover of a letter dated 13th September 2001 the respondent enclosed a Notice of Completion of Sale in these terms:

"TAKE NOTICE that property described as Lots 5 and 6 RP 213382 County Ward Parish of Barron contained in Certificate of Title Reference 17-8-43 and 17080044 comprising the whole of the property subject to Mortgage No 703385419 as (sic) sold by private contract to Aldi Foods Pty Ltd ACN 010 940 128 for a price of $1,300,000.00 and that such sale was completed on the 12 September 2001." (underlining added).

[19] Upon receipt of this notice the liquidator wrote a letter to the respondent dated 18th September 2001 seeking details of the current debt. The respondent then provided a schedule setting out movements in the account and showing the debt as $1,101,887.66.

[20] On 11th February 2002 the liquidator forwarded a dividend cheque to the respondent in the sum of $53,992. The notice under regulation 5.6.67(3) of the Corporations Regulations which accompanied the cheque identified the sum as representing a dividend of 4.9 cents in the dollar on an admitted debt of $1,101,887.66. The respondent banked the cheque. The respondent has never returned the proceeds of the cheque to the liquidator, and offered to do so only when pressed during the course of the hearing below on 16th January 2003. There was no communication between the appellant and the respondent between the 11th February 2002 when the respondent received and banked the cheque and mid November 2002.

[21] On 13th November 2002 the liquidator wrote to the respondent again in these terms:

"Further to my previous correspondence, would you please advise whether the properties located in Brown Street have been sold and whether there are any surplus funds available after discharging the mortgage to your company.

In order to assist me in my deliberations, would you please advise the current value of the property, if it has not been sold."

"We confirm that the properties have been sold, and that there is no surplus."

[23] The respondent had entered into a contract to sell Lot 4 for a price of $950,000.00 on 12th February 2002. There is no suggestion the liquidator was aware of this sale before November 2002.

[24] The appellant sought a declaration that the respondent had surrendered its mortgage over Lot 4 and other ancillary relief.

[25] The appellant's assertion that the mortgage had been surrendered is based on

s 554E of the Corporations Act 2001 (Cth) which provides as follows:

(1) In the winding up of an insolvent company, a secured creditor is not entitled to prove the whole or a part of the secured debt otherwise than in accordance with this section and with any other provisions of this Act or the regulations that are applicable to proving the debt.

(2) The creditor's proof of debt must be in writing.

(3) If the creditor surrenders the security to the liquidator for the benefit of creditors generally, the creditor may prove for the whole of the amount of the secured debt.

(4) If the creditor realises the security, the creditor may prove for any balance due after deducting the net amount realised, unless the liquidator is not satisfied that the realisation has been effected in good faith and in a proper manner.

(5) If the creditor has not realised or surrendered the security, the creditor may:

(b) prove for the balance due after deducting the value so estimated.

(6) If subsection (5) applies, the proof of debt must include particulars of the security and the creditor's estimate of its value.

[26] In summary, the appellant argues that the respondent has made a binding election to surrender the security, which election is discernable from the fact that the respondent:

* lodged the proof of debt dated 9th August 2001 identifying the mortgage but not attributing any value to it;

* provided a Notice of Completion referring to the sale of Lots 5 and 6 and describing those lots as constituting "the whole of the property subject to[the] mortgage";

* lodged the amended schedule of debt with the liquidator on 24th September 2001 which schedule must be regarded as amending the earlier proof of debt without attributing any value to the mortgage over Lot 4;

* received and banked the dividend cheque for $53,992.00 based on the whole of the remaining indebtedness without any allowance for the security over Lot 4.

[27] The only basis on which the respondent was entitled to receive and retain the dividend payment was if the debt on which the dividend was based was the balance due after realising, valuing or surrendering the security. The security in relation to Lot 4 had not been realised. No value was placed on the security for the purpose of the proof of debt. The principle in relation to s 554E is materially unchanged for well over 100 years. In Moor v Anglo-Italian Bank (1879) 10 Ch D 681 at 689-690, in a passage to which the learned primary judge referred, Jessel MR said:

"In bankruptcy, if a secured creditor wants to prove, he must do one of three things: he may give up his security altogether and prove for the full amount, or he may get his security valued and prove for the difference, or he may sell and realize his security and then prove for the difference. If, without doing either of the latter two things, he proves for the full amount, as he cannot prove for the full amount and receive a dividend except on the theory of giving up the security, he shews by that an intention to give up his security; and, if he so proves and receives a dividend or votes, he shews pretty conclusively that he has finally elected to give up his security and take his dividend; in other words, having two funds to resort to, the bankrupt's general estate, so as to get a dividend on the whole amount of his debt, or his security, he elects to take the bankrupt's estate, and in that way gives up his security. It is not forfeiture, it is election; but, the petitioning creditor gets nothing unless he proves. There is no obligation on the petitioning creditor to prove; he may make the man a bankrupt, and then he may be satisfied as far as he is concerned, and leave other creditors to prove; he does not elect simply by making a man a bankrupt."

[28] The learned primary judge dealt with the application in paragraphs [14], [18] and [19] of his judgment. There His Honour said:

"[14] As is said in that passage [from Moor] the decision that a secured creditor has surrendered his security involves a finding that the debtor has elected to give up the security. Objective evidence that the creditor has sought to avail himself of rights and remedies available to unsecured creditors is evidence tending to suggest an intention to give up the security and prove as an unsecured creditor. However, that inference may be displaced by other evidence.

[18] In Seventeenth Canute[1], by contrast with Douglas Homes[2] and Kelso[3], the unchallenged evidence was held to clearly establish that the proof of debt in the form in which it was submitted was a carefully considered act on the part of the respondent. Seventeenth Canute is not inconsistent with the notion that the question of surrender is ultimately a factual one. Even though facts may objectively point to the conclusion that the security has been surrendered, subjective factors of sufficient weight may displace that inference.

[19] ... There is evidence that at all times the respondent was pursuing sale of the mortgaged properties. The efforts were continuing at the time when the proof of debt was lodged. On the evidence as it stands I am not satisfied that there was at any time an intention to surrender the security to the liquidator."

[29] The appellant did not criticise the finding below that the respondent in fact did not intend to surrender the security. Rather the argument advanced was that the relevant test was whether objectively viewed from the perspective of the liquidator the respondent clearly evinced an intention to surrender the security. If the facts are approached in this way the continuing efforts to sell the property become irrelevant since they were not communicated to the liquidator. The actual subjective intention of the respondent if unexpressed is equally irrelevant.

[30] It was common ground that the appeal falls to be decided by reference to principles applicable to election.

[31] A convenient starting point is in the well known passage from the judgment of Stephen J (with whom McTiernan J agreed) in Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 646:

"The words or conduct ordinarily required to constitute an election must be unequivocal in the sense that it is consistent only with the exercise of one of the two sets of rights and inconsistent with the exercise of the other; thus for a lessor to continue to receive rent under a lease will be consistent only with his rights as lessor and inconsistent with the exercise of a right to determine the lease... However, less unequivocal conduct, only providing some evidence of an election, may suffice if coupled with actual knowledge of the right of election... There need be no expressed intention to elect, nor will an express disclaimer of such an intention be of any avail in preserving one right if in fact there be an exercise of another inconsistent right... For an election there need be no actual, subjective intention to elect ... an election is the effect which the law attributes to conduct justifiable only if such an election had been made..."

[32] In Champtaloup v Thomas [1976] 2 NSWLR 264 Mahoney JA (with whom Street CJ agreed) at 274-5 identified two types of election:

"First, it may be exercised by a conscious act of election. The party having the right may actually determine on his election and, in so far as communication may be necessary ... communicate it to the other party, and an election is thereby made.

Second, the party may do some act which is of such a nature that, irrespective of his actual intention or determination, the law treats him as having exercised his election. This imputation of an election may occur even though the party does not subjectively know that he has the right to elect, or even where he does not intend to elect."

[33] There is no question of the first type of election being made here. There is no doubt on all the evidence before the primary judge that any election made was contrary to the respondent's subjective intention. If an election has been made it can only be of the second type. An election of the second type requires unequivocal conduct[4] in the face of a necessary choice. In other words the circumstances faced by the electing party must require an election to be made between inconsistent positions.[5]

[34] The distinction between an unequivocal election and something falling short is illustrated by a comparison of the decisions in Re Douglas Homes and Seventeenth Canute. In the former, the conduct to which the liquidator could point was limited to the submission of a proof of debt in which the creditor failed to value the security but which was otherwise silent on the question of surrender. DM Campbell J observed at 530 that "[w]hile the proof of debt is evidence of an election to surrender the security... it is not conclusive evidence." This was also in a context where the mortgagee had entered into possession of the mortgaged property on the same day as the incomplete proof of debt was lodged; such conduct being inconsistent with an election to abandon the security. In Seventeenth Canute, by contrast, the subcontractor lodged a proof of debt in a scheme of arrangement without attributing any value to the subcontractor's charge. In answer to a question concerning any security held for the debt the subcontractor answered "nil". The subcontractor subsequently received and accepted the dividend paid under the scheme.

[35] Seventeeth Canute is not entirely comparable with this case because the subcontractor did not seek to establish that the proof of debt was based on some mistake or inadvertence.

[36] The two questions here are whether the respondent was required to elect to surrender the security or not and if so, whether its conduct was unequivocal. If both questions can be answered in the affirmative then it seems to me that the law will deem an election to have been made notwithstanding the primary judge's finding as to the subjective intention of the respondent.

[37] A point at which it became necessary in this case to make an election was, in my view, when the dividend cheque was received. At that point in time the respondent was required to make a choice between accepting the cheque or returning it and notifying the liquidator that a mistake had been made in relation to the proof of debt. Having received the cheque, a payment to which the respondent was entitled in the circumstances of this case only by surrendering the security, the respondent had to decide whether to keep it or return it. The assertion of a right to retain the dividend evidenced by banking the cheque and retaining the proceeds was in my view also sufficient to constitute an affirmative answer to the second question. I regard the assertion of such a right by accepting and retaining the dividend in the context of the earlier communications between the liquidator and the respondent as the unequivocal adoption of one of two inconsistent rights. I do not consider that other conduct unknown to the liquidator but inconsistent with an election to surrender the security can affect the position. In the circumstances the learned primary judge was in error in considering whether there was as a subjective fact, an intention to elect. The election took place by operation of law and the actual intention was no longer relevant.

[38] No argument was addressed to us as to whether, if an election was deemed to have been made, the consequences of it could be avoided by resort to the doctrine of mistake. That question was expressly left open by the High Court in Immer[6]. The application of the doctrine to a matter like the present where there has been a deemed election between inconsistent rights would be awkward and seems inconsistent with the existence of a form of deemed election contrary to a party's actual intention. In the absence of the issue being raised, however, it is unnecessary to consider it.

[39] For the reasons given I consider the appeal should be allowed. It should be declared that in the events that have happened Davoren Nominees Pty Ltd has surrendered Registered Mortgage No 703385419 over Lot 4 on registered plan 213382, County of Ward, Parish of Barron as security for any principal and interest outstanding pursuant to the mortgage. It should be further declared that as against the respondent the appellant is entitled to the net proceeds of sale of Lot 4 on registered plan 213382. I order that the respondent pay the appellant's costs of the appeal and of the application below to be assessed on the standard basis.

[1] Seventeenth Canute Pty Ltd v Bradley Air-Conditioning Pty Ltd (in liq) [1987] 1 Qd R 111.

[2] Re Douglas Homes Qld Pty Ltd (in liq) [1980] Qd R 528.

[3] Kelso v McCulloch (unreported, SCNSW Equity Division, No 3832 of 1994, Young J, 24 October 1994).

[5] See Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) [1993] HCA 27; (1993) 182 CLR 26 at 42-43; Khoury v Government Insurance Office (NSW) [1984] HCA 55; (1984) 165 CLR 622 at 633-634.