The Commissioner for the Australian Federal Police v Robert Francis Agius

Supreme Court of NSW|2016-10-06|Before: Hall J, Mr P

Solicitors: Australian Federal Police (Plaintiff) Butlers Business Lawyers Pty Ltd File Number(s): 2008/00284246

The Proceedings

By an Amended Notice of Motion filed 30 June 2016, Butlers Business Lawyers Pty Ltd (Butlers) seeks declaratory relief in respect of a proposed transfer of a registered mortgage concerning a property located on Kent Street, Sydney (the Property) in circumstances in which this Court made a restraining order under the Proceeds of Crime Act 2002 (Cth) (the Act). The application is to be considered in the context of relevant factual matters and having regard to the terms of orders that have previously been made pursuant to the Act.
In this judgment, I will refer to the parties as follows: 1. The Commissioner for the Australian Federal Police: "the Commissioner"; 2. Robert Francis Agius: "the defendant"; 3. Butlers Business Lawyers Pty Ltd: "Butlers" or, alternatively, "the applicant"; and 4. Zenith National Pty Ltd: "Zenith" or, alternatively, "the respondent".

Legislative Provisions

In general terms the Act establishes a scheme to confiscate the proceeds of crime. It does that by a number of processes and procedures, the subject of Chapters 2 and 3 of the Act. Part 2-1 headed "Restraining Orders" includes s 17(1) which provides: "17(1) When a restraining order must be made a court with proceeds jurisdiction must order that: (a) … (b) Property must not be disposed of or otherwise dealt with by any person except in the manner and circumstances specified in the order. (c) … (d) a person has been convicted of, or has been charged with, an indictable offence, or it is proposed that he or she be charged with an indictable offence."
Section 17(2) provides that the restraining order must specify as property that must not be disposed of or otherwise dealt with, the property specified in an application for the order, to the extent that the court is satisfied there are reasonable grounds to suspect that the property falls within one or more of paragraphs (a) to (d) in s 17(2) of the Act.
Section 39(1) provides, inter alia, that the court may make any ancillary orders that it considers appropriate. Without limiting the generality of the court's power in that respect, s 39 sets out in paragraphs (a) to (g) specific types of ancillary orders. Subparagraph (a) provides that the Court may make a "an order varying the property covered by the restraining order"
Part 6-2, headed "Dictionary" includes s 338 which contains the dictionary to the Act. That section relevantly includes the following definitions: "deal": dealing with a person's property includes: (a) (Not reproduced) (b) (Not reproduced) (c) (Not reproduced) (d) If the property is covered by a restraining order - engaging in a transaction that has the direct or indirect effect of reducing the value of the person's interest in the property. "interest": in relation to property or a thing, means: (a) a legal or equitable estate or interest in the property or thing; or (b) a right, power or privilege in connection with the property or thing; whether present or future, and whether vested or contingent. "property": means real or personal property of every description, whether situated in Australia or elsewhere or whether tangible or intangible, and includes an interest in any such real or personal property.

Background

These proceedings were originally commenced by Summons filed on 28 April 2008 by the Commonwealth Director of Public Prosecutions (the CDPP), subsequently amended to the Commissioner.
The Summons sought a number of orders including restraining orders pursuant to s 17 of the Act and a pecuniary penalty order (PPO) pursuant to s 116 of the Act.
On 28 April 2008 this Court made three restraining orders pursuant to s 17, including in particular a restraining order in relation to the specified property as described in the First Schedule to the Orders in which the defendant had an interest. That specified property included the Property.
At the time the restraining order was made, there existed a registered mortgage to Perpetual Limited (Perpetual) on the title of the Property. The Perpetual mortgage was security for a loan of $350,000 which had been advanced to the First Defendant on 27 July 2006.
From about 1 September 2009 the First Defendant fell into default.
On 3 August 2010 Perpetual applied to this Court seeking an order that the restraining order be varied to permit it to sell the Property. The application was brought by Perpetual for the express purpose of enabling it to effect a sale of the Property. The net proceeds were to be applied to discharge the mortgage in favour of Perpetual.
Before Perpetual's application was heard, solicitors for the defendant entered into negotiations which led to the making of the order of 24 August 2010 varying the restraining order to permit the discharge of the Perpetual mortgage and to permit the First Defendant to enter into a mortgage with Zenith for an amount not exceeding $350,000.
On 24 August 2010 the Court, without admissions and with the consent of the parties pursuant to s 316 of the Act, made and entered, the variation order to the restraining order in relation to the Property (the variation order).
The variation order was expressly made pursuant to s 39 of the Act and contained a number of notations including the following: "NOTES: That on 21 July 2010 a Notice of Motion was filed by Perpetual Limited ('Applicant') seeking orders that the Restraining Order be varied, such that the Applicant, as the registered mortgagee of the Property under registered mortgage AC…389, be permitted to deal with the Property for the sole purpose of effecting its sale, subject to certain conditions..."
Order 4 of the variation order was in the following terms: "…pursuant to s 39 of the Act, the Restraining Order be varied to allow the First Defendant to deal with the Property for the purposes of discharging registered mortgage AC505389, permitting the First Defendant to enter into a mortgage with Zenith National Pty Ltd ACN 095 514 864 for the sum not exceeding $350,000 ('Zenith National Mortgage') and registering the Zenith National Mortgage on the Folio of the Register in respect of the Property..."
The Schedule to variation order specified the subject of the order (leaving aside identification details concerning the property) in the following terms: "The First Defendant's interest in the Property known as … Kent Street, Sydney, New South Wales being the whole of the property described in Folio Identifier xxx" (Folio Identifier details in the Schedule omitted).
Subsequently and in accordance with the variation order, a mortgage to Zenith was registered on the title to the Property.
On 31 July 2012 the defendant, following a five month trial, was convicted of two counts of conspiring to defraud the Commonwealth. He was sentenced on 23 August 2012 to a fixed single non-parole period of 6 years and 8 months, expiring on 30 March 2019.
On 28 August 2012 the CDPP served the defendant with a Notice pursuant to s 92A of the Act which stated that the property restrained, including the Property, would automatically forfeit to the Commonwealth at midnight on 22 February 2013 unless the Court made an order pursuant to s 94 of the Act excluding the Property from forfeiture or extending the time for automatic forfeiture to occur.
On 5 December 2012 the defendant filed a Notice of Motion seeking, inter alia, orders pursuant to s 94 of the Act to exclude property, including the Property, from automatic forfeiture.
On 3 May 2013 this Court, by consent, made an order pursuant to s 94 of the Act excluding, inter alia, the Property from automatic forfeiture.
An appeal by the defendant against his conviction and sentence was dismissed on 5 August 2015.
On 22 and 23 March 2016, the Commissioner's application for a PPO was heard by this Court (his Honour R A Hulme J).
On 1 July 2016, R A Hulme J handed down his decision and made a PPO, pursuant to s 116 of the Act. His Honour ordered that the defendant pay to the Commonwealth a pecuniary penalty in the amount of $580,295 and the Commissioner's costs of the proceedings: Commissioner of the AFP v Agius [2016] NSWSC 894.
Since the making of that order, the Commissioner has given notice that he intends to enforce the order. It appears that the Property is the only asset within the jurisdiction of sufficient value to satisfy the PPO. A charge reflecting the Commissioner's interest has been placed on the Property.

The Present Application

On 21 June 2016, Butlers filed a Notice of Motion seeking, inter alia, a declaration that a transfer of Zenith's interest as mortgagee in the Property to Butlers would not contravene the restraining order made on 28 April 2008.
An Amended Notice of Motion was filed by Butlers on 30 June 2016 to name the plaintiff in the proceedings as the Commissioner. The Amended Notice of Motion was supported by the affidavits of Kym Gillen Butler, affirmed 1 July 2016 and 1 September 2016.
By its Amended Notice of Motion filed 30 June 2016 Butlers seeks: 1. A declaration that the proposed transfer to Butlers by Zenith of its interest in a mortgage over the Property would not contravene the restraining order in relation to the defendant's interest in the Property; 2. Alternatively, leave to apply for an order under s 39 of the Act for an ancillary order in terms of order 3 below; 3. An order pursuant to s 39 of the Act that the Respondent be permitted to transfer to Butlers a mortgage over the Property; 4. Further or other orders; and 5. Costs.
The Commissioner submitted that the Court should decline to make the orders sought for reasons set out in the Plaintiff's Outline of Submissions filed 23 September 2016.

Court Book

At the hearing a joint court book was tendered which was marked Exhibit "A". The court book contained copies of the relevant affidavits, other relevant materials and copies of the written submissions of the parties.
The Commissioner tendered a Notice to Produce to Butlers and attached documents in answer to the Notice; the Notice and associated documents became Exhibit 1 in the proceedings.

Affidavits of Ms Alana Claire Jessep

The affidavits of Alana Claire Jessep, solicitor employed by the Commissioner affirmed 15 August 2016 and 19 September 2016, were read on the application on behalf of the Commissioner, without objection. Ms Jessep's first affidavit outlined the relevant procedural background to these proceedings.
Ms Jessep noted that Mr Butler gave evidence in the proceedings concerning the PPO application and that during the course of his evidence he had stated: 1. That he regarded the defendant as a personal friend: (T52:19). 2. That the defendant and Mr Butler were co-directors of a company from 1993 to 1996: (T53:10).
Ms Jessep further noted that in those proceedings, Mr Butler stated in his affidavit affirmed on 16 March 2016 that he had acted as solicitor for the defendant in Federal Court taxation proceedings related to the defendant's criminal trial.
Ms Jessep's second affidavit and accompanying exhibited documents outlined the correspondence files compiled by the CDPP.

Affidavits of Mr Kym Gillen Butler

In support of the Amended Notice of Motion, and as noted above, the applicant, read and relied upon the affidavits of Mr Kym Gillen Butler affirmed 7 July 2016 and 1 September 2016.
In his affidavit affirmed 7 July 2016 Mr Butler stated that Butlers provided legal services to the defendant in connection with proceedings in the Administrative Appeals Tribunal and later in the Federal Court of Australia in respect of objections he had made to amended income tax assessments issued by the Federal Commissioner of Taxation (the income tax proceedings).
On or about 25 March 2015 Mr Butler said that the defendant notified Butlers that he was no longer able to pay the ongoing costs of legal services in respect of the income tax proceedings but wished to retain Butlers' services until the conclusion of the proceedings.
Mr Butler noted the fact that Zenith was a mortgagee of the Property following the variation order. He stated that the sole director of Zenith was Mr Simon Robert Agius, the defendant's son.
Mr Butler's evidence was that on or about 20 April 2015, Simon Agius attended his office and said to him words to the effect: "I am prepared to execute the transfer of Zenith's mortgage on Dad's unit to ensure your fees and the barrister's fees are covered for his tax matter": at [6].
Mr Butler said that the amount of the fees in respect of the income tax proceedings owed to Butlers and outstanding as at the date of his affidavit, including unpaid barristers' fees and interest, amounting to approximately $187,945.24.
Mr Butler said that on or about 22 March 2016 Zenith, Butlers and the defendant entered into a deed for the transfer of the Zenith interest in registered mortgage on the Property to Butlers, the proposed transfer being expressed as conditional upon the approval of the proposed transfer by a court with jurisdiction to make orders pursuant to the Act.
In his second affidavit, Mr Butler noted that he had omitted to annex the abovementioned deed to his previous affidavit. The deed was annexed (Annexure "A") to the affidavit, the contents of which are discussed below. Mr Butler provided further detail regarding Butlers' fees for work performed for the defendant

Annexure "A" to Mr Butler's Second Affidavit - the Deed of Assignment of Debt

The Deed of Assignment of Debt (the Deed) was entered into on an unspecified date in 2016 between Zenith (Assignor), Butlers (Assignee) and the defendant (Debtor).
The Deed contains a number of recitals. Recital B refers to the fact that the Assignor is the lender and that the Debtor is the borrower, under a loan contract dated 12 August 2010 for the amount of $350,000 (the Debt).
Recital D states that the Assignor agrees, subject to the condition precedent referred to in Recital F, to assign the Debt and transfer the mortgage to the Assignee.
Recital E notes that the Property is the subject of the restraining order made on 28 April 2008.
Recital F is in the following terms: "It is a condition precedent to all obligations under this Deed, except the obligations in cl 3(b), that the assignment of the Debt and transfer of the Mortgage to the Assignee is approved by the Supreme Court of New South Wales, or any other Court with jurisdiction to make orders pursuant to [the Act], and that such approval has the consequence that the assignment of Debt and transfer of Mortgage does not contravene the Restraining Order."
The operative provisions include clause 2(a) which states that the consideration for the assignment as $1.
By clause 2(b) the Assignor agreed to transfer all of the Assignor's right, title and interest under the mortgage and would execute a Transfer of Mortgage in registrable form in favour of the Assignee as Mortgagee.
Clause 2(c) contains a covenant by the Assignor with the Assignee and its successors and assigns, inter alia, "(1) The Debt is still due and owing in full".
Clause 3(a) states that parties agree that the assignment and transfer of the Assignor's interest under the Deed and the Mortgage is conditional upon this Court or any other Court with jurisdiction making an order under the Act or otherwise making a notation confirming such an assignment and transfer is not in breach of the restraining order.
Attached to the Deed is a copy of the Loan Contract between Zenith and the defendant as borrower in the amount of $350,000 "…and interests and other charges stated below".
The loan contract provides for a total of 80 payments to be made at the specified interest rate. The first payment was stated as due on 28 August 2010.
By clause 5 of the loan contract, the borrower undertook repayment of the loan and any pro-rata interest due at the close of business on 11 August 2015.
By clause 9, Default, in the event of a default by the Borrower, it is stated that the Lender may demand immediate repayment of the loan and if the full amount of the loan has not been paid when the final payment is due the Lender is entitled to charge interest on the unpaid balance at 12% per annum.

Cross Examination of Mr Butler

Mr Butler attended for cross-examination on his affidavits: (T6-23). He said that he is a solicitor and is a qualified chartered accountant.
He conceded that prior to the PPO being made by his Honour RA Hulme J, he was aware that such an order would be made by the Court. He stated that the issue in the proceedings was the amount of any order to be made.
He said that although he understood that Mr Agius Junior had not enforced rights of Zenith under the mortgage notwithstanding his father's defaults under the terms of the loan, he did not have any actual information as to the position in that respect.
He said he understood that one of the defendant's sons had been staying in the Property. He said he also understood that members of the defendant's family had had the use of the Property since the defendant he had been imprisoned.
He agreed that in relation to outstanding legal fees owed to him by the defendant, he did not intend to waive the fees but wanted to recover them: (T 9).
It was put to him that if the Court made the order it was his intention to take steps to enforce any default and to charge interest. Mr Butler replied that he did not know that but acknowledged that once the matter had been resolved, he would get paid.
It was put to him: "Q. Can I suggest to you that if the mortgage is transferred, if an order is made in these proceedings, that you, like Perpetual, could apply to this Court for an order permitting you as the new mortgagee to sell the unit? A. I didn't realise I had the capacity to be honest. I assumed I would have to wait until the unit was sold and the mortgage was paid out but I haven't considered that, no.": (T 9)
He was asked as to his intention in relation to recovering interest, in particular, whether it was his intention to charge interest pursuant to the mortgage if the order was made. He replied that he was going to charge interest at a rate as per Law Society rates "…just the normal invoices". He confirmed that he would be charging interest: (T 10). It was put to him: "Q. Do we take it you will give notice if there is any default and act on any default to the extent that you can? A. Under the mortgage? Q. Yes. A. Well I didn't realise I had any capacity to do that." (T 10)
He said he had explored alternative means to obtain payment of his fees.
He confirmed that all services rendered to the defendant were performed as legal services and not in his capacity as an accountant: (T 11).

SUBMISSIONS

The applicant relied upon the written submissions of Mr N Kulkarni of counsel dated 5 September 2016 and his oral submissions made on 6 October 2016.
The plaintiff relied upon the Plaintiff's Outline of Submissions dated 23 September 2016 of Mr P McGuire SC together with his oral submissions made on 6 October 2016.
The applicant also relied upon the Applicant's Submissions in Reply dated 29 September 2016.

Applicant's Submissions

The applicant's written submissions recite the background events to which reference has been made above and set out the terms of the restraining order made in respect of the Property as varied.
The applicant's written submissions identified the following issues: 1. Whether the proposed transfer of the mortgage by Zenith to Butlers would constitute a contravention of the restraining order because it is a dealing with the defendant's interest in the Property? (Issue 1). 2. If Issue 1 is answered in the affirmative, whether the restraining order should be varied pursuant to s 39 of the Act to permit Zenith to give effect to this transfer? (Issue 2).
The definitions of the terms "property" and "interest" are set out in s 338 of the Act, which have been reproduced above.
It was noted that the definition of "property" includes an interest in property and that a restraining order under s 17 may be made with respect to such an interest.
Accordingly, it is essential that the relevant property or interest in property the subject of the restraining order be identified. A distinction existed, it was noted, between cases where a restraining order is made with respect to a certain property in its physical sense so that the restraint applies "to the property as a whole", and other cases where the order is made only with respect to "a particular interest" in a property: Director of Public Prosecutions for Victoria v Le (2007) 232 CLR 562; [2007] HCA 52 at [16]-[21], [81]-[84], [89]-[90].
In the present case it was common ground that the restraining order applied by its terms to the defendant's interest in the property - not the property itself. It was noted that the restraining order could have been cast in terms so as to apply to "the Property" but it was not so expressed.
As submitted by Mr Kulkarni, and as accepted by Mr McGuire, the relevant interest of the defendant is his interest as registered proprietor of the Property. Section 42 of the Real Property Act 1900, Mr Kulkarni observed, provides that the registered proprietor of any estate or interest in land shall hold the estate or interest subject to other estates and interests recorded in the relevant folio, but absolutely free from all other estates and interests that are not so recorded.
A mortgage is defined in s 3(1) of the Real Property Act as a charge on land created "…for securing the payment of a debt" but as noted in the applicant's submissions, it constitutes a distinct interest in land that represents "a limitation on the estate of the registered proprietor": Provident Capital Ltd v Printy [2008] NSWCA 131 at [23]-[25] (Basten JA).
It was observed that by reason of the variation order, the statutory charge in favour of Zenith, to which the defendant's interest in the Property was made subject, only operates as security for an amount not exceeding $350,000. Accordingly, Zenith's interest in the Property as registered mortgagee is capped or limited to that amount.
Reference was also made to the consequences of the transfer of a mortgage as set out in ss 51 and 52 of the Real Property Act. It was submitted that the proposed transfer of the Zenith mortgage to Butlers would not have the effect of reducing the value of the defendant's interest in the Property. The defendant's interest would remain subject to the security interest not exceeding $350,000.
It was contended that all that will occur on a transfer of the mortgage from Zenith would be a change in the identity of the person to whom the defendant is indebted and in whose favour the security over the Property will operate. It was submitted that his interest in the Property would not be affected in any way and, accordingly, it would not be "dealt with" by reason of the transfer.
In relation to Issue 2, it was submitted that it would be appropriate in the circumstances for an ancillary order under s 39 of the Act to be made to permit Zenith to give effect to the transfer of the mortgage: at [26]-[28].
Mr Kulkarni's oral submissions addressed the following additional matters at T 24-31: (1) The scope of the restraining order The critical words in the restraining order, it was contended, were the words "the First Defendant's interest". The restraining order, on its terms, only applied to the defendant's interest in the Property, namely, his interest as registered proprietor. One identifies the applicant's prospective interest in the Property as mortgagee by taking into account the limitation on the present registered mortgagee's interest. Accordingly that interest is defined as a legal interest that is subject to the relevant statutory charge: (T 25). (2) The assignment of the mortgage It was submitted that all that would occur by virtue of the proposed conditional assignment and transfer of the mortgage would be a change in the identity of the mortgagee. By reason of the provisions of the Real Property Act relating to transfers of mortgage, there is no change in the extent or nature of the mortgage interest. Accordingly, prior to the transfer of the registered mortgage, the registered proprietor holds a legal interest subject to a statutory charge. After the transfer, he would hold the legal interest subject to the same statutory charge, albeit that it would then be held by or operate in favour of the transferee of the mortgage. In summary, the extent or character of the registered mortgage transferred will not have changed at all. (3) Limitation on quantum secured by the mortgage It was submitted, as noted above, that the variation to the restraining order resulted in the mortgage that was granted to Zenith being limited in quantum to $350,000. Accordingly, the mortgage can only ever secure an amount up to $350,000. The submission accordingly was that if one characterises the registered mortgage as a limitation of the estate of the registered proprietor, one concludes that that limitation cannot exceed the amount of $350,000. Hence, the registered proprietor's legal interest is never subject to anything under the mortgage exceeding $350,000: (T 26).
Submissions were then made in relation to the decision of the High Court in Le, supra: at (T 26-27) and referred to below.

Submissions for the Commissioner

The written submissions for the Commissioner detailed the background as well as the terms of the restraining order, the variation order and the relevant details concerning the PPO.
The documents relating to the variation order were said to establish a number of propositions including in particular the following: 1. The application was brought by Perpetual for the express purpose of enabling it to effect a sale of the Property; 2. The net proceeds of the sale were to be applied to discharge the mortgage in favour of Perpetual; 3. The Perpetual mortgage was security for a loan of $350,000 which had been advanced to the defendant on 27 July 2006; 4. From about 1 September 2009 the defendant fell into default on his obligations to make repayments as and when they became due under the loan; 5. Loan statements show that the variable interest rate applicable to the loan varied from 7.23% to 10.31% per annum; 6. At the time of Perpetual's application, as a result of the defendant's default, the full amount owing under the loan and mortgage was due and payable, totalling $359,032.90, together with an amount of $14,446.43 for arrears, with interest accruing at the continuing rate of $87.48 per day. 7. Perpetual's intention had been to commence proceedings for recovery of the mortgage debt and for possession of the Property and, on obtaining possession, to realise that security by exercising the mortgagee's right of sale.
It was submitted at [14] that: "Before Perpetual's application was heard, solicitors who then acted for the First Defendant entered into negotiations which led to the making of an order on 25 August 2010 varying the restraining order to permit the discharge of the Perpetual mortgage and to permit the First Defendant to enter into a mortgage with Zenith for an amount not exceeding $350,000. Documents relating to the Zenith variation application establish the following propositions: (a) the First Defendant entered into negotiations with Perpetual in the hope that their notice of motion, to ultimately permit a mortgagee's sale of the Property, would be unnecessary; (b) the First Defendant paid out the Perpetual loan by way of refinance, with funds sufficient for that purpose being paid by Zenith into the solicitors' trust account on or about 9 August 2010; (c) Zenith is owned and controlled by the First Defendant's family; his son Simon Agius is the sole director and his three sons, Daniel Agius, Simon Agius and Elliot Agius, are the only shareholders; (d) the loan contract entered into between the First Defendant and Zenith was on terms which were more favourable to the First Defendant than the Perpetual loan; (e) the terms of the Zenith loan included: (i) the purpose of the loan was to replace a secured loan from Macquarie Bank administered by Perpetual which was then in default; (ii) the Property was security for the Zenith loan; (iii) the First Defendant was obliged to make 60 monthly repayments to Zenith; (iv) the applicable interest rate was 0.75% above the RBA official rate, commencing at 5.25% (v) 11 August 2015 was the final repayment date for the amount of the loan and any pro-rata interest due; and (vi) Zenith could act on any failure to pay on time by demanding the immediate payment of the entire remaining balance of the loan and charge interest on any unpaid amounts at the rate of 12% per annum."
In was contended that the Zenith loan and the Zenith mortgage were not, in all of the circumstances, contracts at arm's length: at [17]. They were not, it was submitted, on normal commercial terms and were not intended to be enforced in the event of any breach or default. It was noted that loan/mortgage transaction with Zenith had not been enforced despite the defendant's breaches which have persisted for six years.
It was also noted at that by operation of s 24(2)(ca) of the Act the Court cannot release property from a restraining order unless it is satisfied that the expense or debt does not relate to legal costs that the person has incurred in connection with proceedings under the Act or proceedings from an offence against a law of the Commonwealth, a State or a Territory: at [21].
It is convenient at this point to refer to the applicant's written submissions in reply dated 26 September 2016. There it was submitted that reference in the Commissioner's submissions to s 24 of the Act was misconceived. It was argued for the applicant that the Court is not concerned with an application for an expense or debt to be met out of property covered by a restraining order. As noted in the applicant's written submissions, the only property covered by the restraining order is the defendant's interest in the Property. The mortgage to Zenith was a distinct interest "which may be dealt with apart altogether from the fee simple or other estate or interest mortgaged": English Scottish and Australian Bank Ltd v Phillips (1937) 57 CLR 302 at 321; [1937] HCA 6. Accordingly, in the applicant's submissions in response to those made on behalf of the Commissioner, it was argued that no issue arises in those proceedings as to whether the Court should "allow" an expense or debt incurred by the defendant.
The question as to whether or not Mr Butler's legal fees or expenses, or some of such fees or expenses, were related to the PPO proceedings, requires resolution of the question as to whether or not the amended Notice of Motion seeks an order in respect of expenses in contravention to the operation of s 24(2)(ca). That matter is dealt with below.
It was also argued in the Commissioner's written submissions that the effect of the transfer and assignment from Zenith to Butlers as sought by Butlers in effect requires there to be a discharge of the Zenith mortgage over the Property and a mortgage entered into with Butlers. It was argued that, as with the previous transfer from Perpetual to Zenith, such dealings relate to restrained property and directly or indirectly affect the defendant's interest in the Property: at [23].
At paragraphs [21] to [25] of the Commissioner's written submissions reference was made to relevant statutory provisions contained in the Act, including in particular to the definition of "dealing" in s 338, which includes: "(d) If the property is covered by a restraining order - engaging in a transaction that has the direct or indirect effect of reducing the value of the person's interest in the property." (Emphasis added).
It was submitted for the Commissioner at [26]-[28]: "The transactions contemplated by the present application represent such a dealing because they would directly or indirectly reduce the value of the First Defendant's interest in the Property, by replacing a non-arm's length mortgagee which has made no effort to enforce the loan or mortgage or acted on persistent defaults with a mortgagee who expressly intends to use the assignment as a means to recover unpaid legal expenses. Further, it is submitted that, in the circumstances, the orders sought are an attempt to frustrate the Plaintiff's ability to enforce the recent PPO by sale of the Property."
It was submitted, in the circumstances, that the orders sought were an attempt to frustrate the Commissioner's ability to enforce the recent PPO by a sale of the Property.
On these two bases, the defendant's interest in property (determined as his interest that is subject to the mortgagee's interest) could not, if transferred by Zenith to Butlers, be reduced in value, whether directly or indirectly, by reason of the combined operation of these two matters.
It was additionally submitted for the Commissioner that there was no basis for an order under s 39 of the Act as an alternative form of relief. It was submitted that the alternative relief sought under s 39 was based on a misconceived basis for reasons set out at [29] and [30] of the Commissioner's written submissions. The Commissioner in conclusion stated that the Court should decline to make the orders sought for the reasons set out in the submissions relied upon.

Summary Points in the Oral Submissions for the Commissioner

During the course of oral submissions, Mr McGuire submitted that by reason of the nature and character of the proposed change "…from a complacent, compliant family-related mortgagee who has taken no steps to exercise any rights to Mr Butler who is commercially interested in recovering his fees and will charge interest, that the charging of that interest as secured by this proposed mortgage, will have the direct effect of reducing the residual, perhaps the equity that's left in the hands of the First Defendant in relation to this property.": (T 37: 20-30).
Mr McGuire, as I understood him, accepted that his submission was in essence that the value of the Property or the defendant's equity over and above the $350,000 would be eroded in the event that Butlers became the mortgagee and then by an exercise by it of the power of sale: (T 37: 30-40). Mr McGuire accepted that the prospect or right of Mr Butler to sue for interest was "…certainly the main component of it". (That is of the contention that it would amount to a 'dealing' with the defendant's interest): (T 37:43)
The following matters were advanced on behalf of the Commissioner by Mr McGuire in his oral submissions: (T 33-34) 1. The broad definitions of the words 'deal' and 'interest' are to be noted. 2. Specifically the word 'interest' is defined to include rights, powers or privileges whether present or future and whether vested or contingent and is not limited to legal or equitable estates to which the Real Property Act refers. 3. The broad definitions are to be considered in light of the objects of the Act - to deprive persons who have engaged in offences from having access to or use of their assets and funds. 4. The Deed and transfer of mortgage was entered into on or about 22 March 2016. That date is also the date the hearing of the PPO proceedings commenced before RA Hulme J. 5. It was conceded on that date that a PPO would be made. The issue in the proceedings was its quantum. 6. The effect of the assignment or transfer would be to replace "a compliant related mortgagee" who would not act to enforce rights under the mortgage. 7. This proposed transfer had a direct and possibly an indirect effect on the defendant's interest in the Property - the transfer occurring at a time Perpetual had applied for an order permitting it to exercise the mortgagee's power of sale. Perpetual was acting on its rights as "the aggressive mortgagee". 8. Whilst, as the applicant emphasised, the Commissioner joined in the making of the variation for the restraining order by consenting to it - it acted to "protect it [the Property] from an aggressive mortgagee who was about to exercise the mortgagee's power of sale": (T 35-36). 9. The character and identity of Zenith were noted - its "complacency and non-activity in relation to its mortgagee's rights…" (T 36: 5-12). 10. In relation to the proposed transfer to Butlers, Mr Butler's evidence made clear that he wished to enforce the debt under the mortgage and thereby in effect recover for Butlers' legal fees. He also said he would seek to recover interest. This, it was said, was a contrast to the "compliant" mortgagee transferor, Zenith and represents "powerful evidence" that Zenith had never acted "in the true position of a mortgagee": (T 36: 40-45). 11. The Commissioner did not seek to set aside the documents (the Zenith loan/mortgage) as "uncommercial". The "privileges" that the defendant has enjoyed (non-enforcement of the mortgage) will not continue if the mortgage is transferred to Butlers. 12. The charging of interest "as secured by this proposed mortgage will have the direct effect of reducing the residual, perhaps the equity that's left in the hands of the First Defendant in relation to the Property": (T 37: 25-30).

The Applicant's Submissions in Reply

It was contended for the applicant that the Commissioner erroneously described the restraining order as having been made with respect to "property" in which the defendant had an interest. It was submitted that the restraining order was not made with respect to the whole of the Property. In that respect reliance was placed upon the applicant's first set of submissions: at [19]-[20].
It was contended that it was entirely unsurprising that Zenith had not taken steps to enforce its rights in respect of the loan or to exercise its powers as registered mortgagee. This was so, given that the restraining order prohibited Zenith from exercising a power of sale over the Property: at [2].
It was also submitted for the applicant that, given that Perpetual consented to the variation order and its mortgage was subsequently discharged, there could be little doubt that Zenith advanced the sum of $350,000 on behalf of the defendant by paying off the loan from Perpetual. Upon registration, the mortgage to Zenith became an indefeasible interest in the Property.
The applicant relied upon the following additional submissions and contentions: 1. The only property that was covered by the relevant restraining order is the defendant's interest in the Property. The mortgage to Zenith is a distinct interest. It was capable of being dealt with apart from the fee simple or other estate or interest mortgaged: English Scottish and Australian Bank Ltd v Phillips, supra, at 321. 2. Invoices issued by Butlers were in part as an expert accountant in relation to the application for a PPO (totalling $7,812.83). The invoices relating to such expenses are not "legal costs" within s 24(2)(ca) of the Act. 3. Other invoices issued by Butlers comprise the overall debt owed to that firm. Those invoices related to work performed in connection with the income tax proceedings and so fall outside s 24(2)(ca). 4. Upon the condition precedent to the assignment being met, Butlers would be entitled to sue the defendant to recover the debt due under the loan. By the transfer of the mortgage from Zenith to Butlers, the debt will be secured against the Property in an amount not exceeding $350,000. 5. The previous transfer from Perpetual to Zenith involved a discharge of the previous mortgage and the grant of a new mortgage, not a transfer of the existing mortgage. However, the proposed assignment in the present case would involve a transfer of the mortgage from Zenith to Butlers, not a discharge of the mortgage and the new grant of a mortgage. 6. Whilst a discharge and a new grant would involve a "dealing with" the defendant's interests in the Property, that is not the case with a transfer of an existing mortgage. 7. Any suggestion that the proposed transfer of mortgage would effect a change to the character of the mortgage to which the defendant's interest is subject is erroneous. As a transferee of the mortgage, Butlers will not obtain an interest superior to that which was held by Zenith. That being so, the proposed transfer of the mortgage would not reduce the value of the defendant's interest in the Property. 8. The evidence contradicts the allegation that the present application was motivated by a desire to frustrate enforcement of the PPO made on 1 July 2016. The evidence on the contrary establishes that the application was brought as a result of Butlers, as a bona fide creditor, taking steps to protect its interests. 9. The present application is not one to allow payment of legal expenses and s 24 of the Act is not relevant. The deed in question and, accordingly, the present application, relates to the debt under the relevant loan, not the debt owed under invoices issued by Butlers. 10. In addition, although Butlers will, upon satisfaction of the condition precedent, be the "proprietor" of the interest under the mortgage, by reason of the terms of the restraining order, Butlers will not be able to enforce its security interest by exercising a power of sale over the Property. There is no question of "payment" to Butlers. Rather, as and when the Commissioner wishes to enforce the PPO, by seeking a sale of the Property pursuant to the charge created by s 142(1) of the Act, it will then be a question of priority of the proceeds of sale. That question will be resolved by s 142(3) of the Act.

CONSIDERATION

Three documents that are central in the resolution of the application made by way of the Amended Notice of Motion. They are: 1. The restraining orders made pursuant to s 17 of the Act made on 28 April 2008. In particular, the restraining order made in paragraph [2] of the orders and the terms of the First Schedule; and 2. The terms of the Deed entered into between Zenith, Butlers and the defendant (undated); and 3. The variation order made on 24 August 2010, in particular Order 4, which is extracted at [17] above.
The notation to the variation order, as noted above, made reference to a Notice of Motion filed by Perpetual seeking orders that the restraining order be varied such that Perpetual, as the registered mortgagee of the Property, be permitted to deal with the Property for the sole purpose of effecting its sale, subject to certain conditions.
The variation order did not otherwise limit or constrain the terms or operation of the restraining order. Accordingly, subject to the variation made on 24 August 2010, operation of that order continued to apply on and from the date of the variation order, such that the specified property "…is not to be disposed of or otherwise dealt with by any person".
Given the continued operation of the restraining order in the event that the assignment of the debt and the transfer of the mortgage was permitted or authorised by order of this Court, it would of course remain the case that the proposed assignee/transferee (Butlers) could not exercise the power of sale under the mortgage without a variation or ancillary order.
Relevant authority identifies the importance of the terms of a restraining order that determine the scope or the effect of a restraint that operates pursuant to the order. In Le, supra, the High Court considered the transfer to the respondent, Mrs Le, by her husband of a half share of his interest in an apartment in a Melbourne suburb, and the consequences for that transfer of the Confiscation Act 1997 (Vic). The resolution of the appeal turned on the proper interpretation of s 52 of that Act and the extent of the exclusion from automatic forfeiture effected by that section.
On 23 June 2003 Mr Le had been charged with several offences, including trafficking in not less than a commercial quantity of a drug of dependence. He was convicted and sentenced.
On 29 August 2003 pursuant to the Transfer of Land Act 1958 (Vic), Mr Le was the sole registered proprietor of the apartment in question, which was the matrimonial home. On that date Mrs Le was registered as joint proprietor of the apartment. The property was the subject of a registered mortgage, and the mortgagee consented to the transfer. Mr Le had conveyed the fee simple to Mrs Le and himself as joint tenants for a consideration stated in the transfer to be "natural love and affection". Mrs Le did not pay any money for the transfer.
After the transfer but before Mr Le's conviction, the Director of Public Prosecutions applied pursuant to s 16(2) of the abovementioned Act for a restraining order.
The restraining order made in Le relevantly specified the property by its street address and by reference to the identified Certificate of Title. Gummow and Hayne JJ observed at [16]: "…the description of the relevant property in those terms made it clear that the restraint was sought with respect to the property as a whole, and not with respect to any particular interest therein. It may be added that the forfeiture of the property as 'tainted property' served to emphasise that the property was being spoken of in the physical sense… 17. The order could have been, but was not, made with respect to Mr Le's interest alone, and the reason for not doing so is plain."
Gummow and Hayne JJ thereafter observed that there was no requirement that the defendant's "interests" equate to the entirety of ownership of the property.
As their Honours observed at [28] the extent of the exclusion of property was to be determined, not by definitions of "property" or "interests" in the abstract, but rather by the content of the particular restraining order: at [28].
In these proceedings, once the PPO was made on 1 July 2016, the defendant's interest in the Property was subject to both the charge subject to the then existing mortgage and, by virtue of s 142 of the Act, the statutory charge that was created on the defendant's interest in the unit premises.
Section 142(3) provides that the charge is subject to every encumbrance on the Property (other than an encumbrance in which the person referred to in paragraph 142(1)(a) has an interest) that came into existence before the charge and that would, apart from that subsection, have priority over the charge.
Accordingly, in the present case, the charge created under s 142(1) was one subject to the mortgage to Zenith. What is now sought to be transferred by the Deed is the loan and mortgage that was granted to Zenith. In that respect the proposed transfer of the mortgage to Zenith up to a limit of $350,000 remains. The only point of difference will be the fact of Butlers replacing Zenith as mortgagee. In other words, the Deed is directed towards the transfer of existing rights and liabilities under the mortgage, to the proposed mortgagee.
As was submitted for the applicant, what is proposed is that, by the transfer of the mortgage, the applicant seeks to occupy the position that arose by reason of the operation of s 142 which gives priority to the mortgage held by Zenith.
There was no challenge made as to the validity of the loan or mortgage arrangement with Zenith and, as earlier noted, it was the subject of the consent variation to the restraining order.
A fundamental fact is that, on the evidence, Zenith paid out the prior mortgagee (Perpetual). A debt then arose between the parties, the defendant and Zenith. There is no evidence that contradicts the fact that a loan was created in favour of Zenith secured by the mortgage.
Whilst it was emphasised by the plaintiff that the loan mortgage arrangement between Zenith and the defendant did not result in Zenith as mortgagee taking action against the defendant, I accept as argued on behalf of the applicant that Zenith was not in a position to enforce payment (including the final repayment). That is, it could not take enforcement steps without application to the Court permitting it to effect a sale of the Property.
As extracted above at [18], the scope of the restraining order that was made in this case is of central importance. The Schedule to the restraining order identified, the 'specified property', inter alia, as: "The First Defendant's interest (within the meaning of 'interest' as defined in s 338 of the Act) in the following… Lot…in Strata Plan… at Sydney, Local Government Area: Sydney, being…Kent Street, Sydney, New South Wales…"
Accordingly, the restraining order is expressly operated in relation to the defendant's "interest" as defined, and not to the physical property itself.
As discussed earlier, the applicant's "interest" in the Property is an interest as registered proprietor of the Property being an interest that is subject to the limitation of the registered mortgagee's interest. In that sense, the interest is a legal interest subject to a statutory charge.
The proposed assignment in question relates specifically to "…the assignment of the Debt and transfer of the mortgage to the assignee…": Recital F to the abovementioned Deed. The assignment and transfer would not involve a change or alteration to the extent or the nature of the mortgagee's interest. The position in that respect, accordingly, is that prior to the transfer of the registered mortgage, the registered proprietor of the Property (the defendant) holds a legal interest subject to a statutory charge. If there is a lawful transfer of the mortgage as sought in the present application then after the transfer the defendant would hold the legal interest subject to the same statutory charge, though one that operates in favour of the proposed transferee of the mortgage (Butlers).
Pursuant to the terms of the variation order, the mortgage was granted to Zenith was limited in quantum to $350,000. The mortgage security accordingly did not apply in respect of a loan amount in excess of that amount. It could only ever secure "…for a sum not exceeding $350,000". It did not secure any other debt or other amount that may become due and owing by the defendant in excess of that sum.
Mr McGuire acknowledged in his written submissions that in terms of the Act the central issue in the present application is whether or not the proposed transfer would have the effect of reducing the value of the defendant's interest in the Property, that is, affect his interest in the Property directly or indirectly: (T 33: 1-10). The submission for the applicant was that the proposed transfer would have neither a direct nor an indirect effect of reducing the defendant's interest in the Property: (T 33: 25-30).
As noted above, Mr McGuire in his submissions attached significance to the fact that the Deed was entered into on or about 22 March 2016, the date upon which the PPO proceedings commenced (the defendant conceding that the making of a pecuniary penalty order was inevitable). In addition to the issue of timing, it was noted that the transfer to Zenith had occurred when Perpetual was acting on its rights under the mortgage "as an aggressive mortgagee": (T 35: 10-40). It was submitted that the Commissioner consented to the transfer from Perpetual to Zenith "…in order to protect the asset", namely, the Property, from an aggressive commercial mortgagee who wished to exercise the mortgagee's power of sale. It was argued that it is relevant to contrast the character and identity and nature of the mortgagee Zenith with respect to its "non-activity" in relation to its rights as mortgagee with that of Perpetual. Accordingly default interest could be charged: (T 36: 5-15). However, Zenith had taken no action in relation to its rights as mortgagee.
Mr McGuire's submission was "What is about to change if your Honour were to make the orders permitting the transfer, is that the compliant complacent family-related entity that doesn't charge interest and doesn't act on default is about to be replaced by Mr Butler's law firm. Mr Butler fairly conceded that the whole purpose of this transaction from his firm's point of view, is so that he could enforce the debt and recover his legal fees. He also conceded that he had the intention of charging interest.": T 36; 15-25.
These submissions were directed at emphasising that for the past six years, notwithstanding failure to pay principal interest, the defendant has enjoyed a privilege that would not otherwise have been the case had there been what was described in the submissions as a commercial or "aggressive" mortgagee. The submission in effect was that the substitution of Butlers as mortgagee would effectively amount to a material change. Thus, Mr McGuire stated: "Those privileges, the plaintiff submits, are privileges that will not continue if the Court were to permit the transfer of the mortgage because Mr Butler, as opposed to Zenith, proposes to charge interest. Mr Butler, as opposed to Zenith, has conceded the whole purpose of this security so that it can be enforced to pay his legal fees. One can infer from that, that he will act on any default, albeit that a court order will be needed for any sale to occur.": (T 37; 1-12).

Conclusions

As observed by Mr McGuire in his oral submissions the central issue in the present application is whether or not the proposed transfer of the assignment and transfer of mortgage, directly or indirectly, would have the effect of reducing the value of the defendant's interest in the Property: (T 33: 5-10).
In determining whether the proposed transfer of the mortgage would amount to a "dealing" with the defendant's interest in the Property (i.e. a transaction that would have a direct or indirect effect of reducing the value of his interest in the Property), two matters are noted.
First, as Mr Kulkarni submitted, and as Mr McGuire acknowledged, Zenith could not have taken steps to have enforced the mortgage without approaching this Court for an order permitting it to exercise its power of sale: (T 30: 10-20). Secondly, the extent of the mortgagee's interest (whether considered as Zenith's interest or as the proposed transferee's interest) is capped or limited to the amount of $350,000 specified in the restraining order as varied.
The proposed assignment and transfer relates to the debt owed to Zenith, which debt came into existence upon payment by it of the amount required to discharge the debt owed by the defendant to Perpetual.
In the event of Butlers as mortgagee of the Property seeking to recover an amount for interest due under the mortgage any amount owing in excess of $350,000 would only be recoverable as an unsecured amount and not pursuant to any exercise of the mortgagee's power of sale or from proceeds of a sale by the Commonwealth.
An assignment and a transfer of the existing mortgage held by Zenith as security for a sum not exceeding $350,000 in accordance with the varied restraining order would not constitute "engaging in a transaction that has the direct or indirect effect of reducing the value of [the First Defendant's] interest in the property" within paragraph (d) of the definition of the term 'deal' in s 338 of the Act, given that the transaction could not result in or permit any such direct or indirect effect.
Given the existence and operation of the restraining order made under s 17 of the Act, a transfer of the mortgage could not place Butlers in any better position than Perpetual or Zenith have occupied. As observed in the oral submission for the Commissioner, Perpetual acted on its rights as mortgagee and brought proceedings by way of Notice of Motion observing "…it is likely that Perpetual would have, if permitted by court order, acted in accordance with the intent that it displayed in the court documents by selling the unit…": (T 35: 40-45).
Butlers, following any transfer of mortgage, would be in no better position, requiring an order of the Court to exercise its power of sale with priorities determined under s 142(3) of the Act.
In accordance with s 142(2), the charge that was created upon the making of the PPO continues until any other of the circumstances referred to in s 142(2) of the Act occur. As noted above, regarding any future sale of the Property, I note that in the Commissioner's written submissions at [20] it is submitted that the Commissioner has given notice that he intends to enforce the PPO, including by the sale of the Property.
Accordingly, in the event of a sale of the Property, the mortgagee's interest would be no greater than $350,000, the charge under s 142 of the Act operating in favour of the Commonwealth with respect to the balance of the proceeds of any sale.
Notwithstanding the emphasis placed in the submission for the Commissioner to the prospect of Butlers suing for interest under the loan/mortgage, the terms of the variation order limiting the mortgage to the amount of $350,000 prevents, whoever be the mortgagee under the mortgage, from using the mortgagee's power of sale to secure any amount above that limit. Any interest that may have fallen due in accordance with the terms of the loan that increases the overall indebtedness of the defendant beyond $350,000 would be an unsecured debt, not a secured amount. Accordingly, whatever be the terms of the mortgage the restraining order, as varied, operates at law as the overriding constraint or limit that protects the defendant's interest in the Property from being reduced, directly or indirectly.
The proposed transfer under the Deed of the right title and interest of Zenith under the Loan Contract referred to in Recital C to the Deed would not, in my opinion, if permitted, constitute a transaction that would have the direct or indirect effect of reducing the value of the defendant's interest in the Property. It would not, in other words, constitute "a dealing" within s 338 of the Act.
I have accordingly concluded that the applicant is entitled to declaratory relief giving effect to that conclusion.
I direct the parties to bring in short minutes of order to give effect to these reasons.
The proceedings will be re-listed at 9.30am on 13 December 2016 for the purpose of making final orders.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 01 December 2016

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (18 paragraphs)

Parties

Legislation Cited (3)

Cases Cited (6)