The Elusive [2010] NSWSC 525

Supreme Court of NSW|2010-05-17|Before: Rein J, Hammerschlag J

Background 2 The plaintiff bank ("the Bank") holds a chattel mortgage over the vessel (see Tab D in Exhibit B1, the witness statement of Mr Anthony Bova dated 12 May 2010), which it obtained in connection with a loan of $1,250,000 to Trelat Pty Limited ("Trelat") to be used in connection with the purchase of the vessel from MFA. The chattel mortgage was signed by Mr Terrence Druce ("Mr Druce") and Mr David Druce as directors of Trelat and in their individual capacities as guarantors. Guarantees were also given by Druce Corporation Pty Ltd ("DCPL") and T R Druce Pty Ltd. 3 The loan funds were paid by cheque from the Bank to MFA on 30 April 2009. The total cost of the vessel was $3,250,134.36. Trelat went into liquidation on 23 December 2009, and the Bank relies on that event as a trigger under clause 14 of the chattel mortgage for its asserted right to take possession of the vessel and effect a sale. 4 Subsequently, a second security, a ship's mortgage, was prepared and signed by Mr Druce on behalf of Trelat: see Tab N in Exhibit B1. The ship's mortgage appears to have been prepared in a form that would meet the requirements for registration on the Australian Register of Shipping, but the vessel was not registered and the Bank bases its claim on the chattel mortgage. 5 A Notice of Charge was lodged by the Bank with the Australian Securities and Investments Commission on 11 August 2009: see Tabs S1 and S2 in Exhibit B1. 6 Between May 2009 and September 2009, monthly payments were made by Trelat, although one of the cheques (on 3 September 2009) was dishonoured, and following that, payments to the Bank were made by DCPL.

8 There are two proceedings in connection with the vessel. The first are in rem proceedings. The second proceedings are in personam proceedings brought by the Bank against the Druces. Those proceedings were appropriately brought because Mr Druce, at the time of the arrest, claimed that he was the real owner of the vessel and because the Druces were living on the vessel at the time the proceedings were commenced.

9 Shortly after the proceedings were commenced, Mr Druce, who was at that time represented, sought to be joined and was joined in the in rem proceedings and filed a Defence to the Bank's claim in the in personam proceedings, asserting that he was the owner of the vessel and entitled to retain possession of it, and that the Bank was estopped from asserting otherwise because: (a) prior to the liquidation of Trelat, the Bank "was advised that Trelat Pty Limited would be placed into liquidation"; and (b) the Bank "agreed that the loan agreement would continue and its rights under the Chattel Mortgage would not be exercised if the loan repayments were made by Druce Corporation Pty Limited". 10 The liquidator of Trelat, Mr Peter Krejci, who was informed of these proceedings, has indicated that he has no desire to take part in them and that he consents to the Bank taking possession of the vessel and "control of all matters involved with securing and realising the Yacht": see letter dated 29 March 2010 from BRI Ferrier to BOQ Equipment Finance Limited at Tab 12 in Exhibit C. He did ask that Trelat's equitable interest be noted, and the Bank accepts that Trelat has an equity of redemption under the chattel mortgage. 11 On the hearing of these matters on 17 May 2010, Mr Nell SC appeared for the Bank. When the matters were called in Court and outside Court on Monday, there was no appearance by Mr Druce. Mr Druce was represented in the proceedings until 5 May 2010, when his solicitor on the record, Mr Sachs, filed a Notice of Removal indicating that his retainer had been withdrawn. Mr Sachs gave as the address for Mr Druce Level 2, 273 Sussex Street, Sydney NSW 2000, which is the address of a firm of accountants, R J Chalmers & Co Pty Limited.

12 The Bank's solicitor had the matter re-listed last Tuesday because Mr Druce had failed to file and serve the Cross-Claim which had been foreshadowed, or serve any evidence in support of his Defence and Cross-Claim. I made orders (with which the Bank has complied) for Mr Druce to be served with any proposed witness statements of the Bank and with a letter from the Bank's solicitor advising him that the matters would proceed on 17 May whether or not he was represented and whether or not he was present, and also that he had been given leave to seek an extension of time for putting on his Cross-Claim and evidence. 13 At the commencement of the hearing, the plaintiff tendered a letter (see Exhibit A) from Mr Druce's former accountant, Mr Chalmers (there is evidence that he was also the accountant of DCPL), by which Mr Chalmers returned to the Bank's solicitor the documents which had been served on Mr Druce at the address given. Mr Chalmers gave no useful details as to where Mr Druce could be served with documents, and in any event, the Bank was entitled to serve Mr Druce at the address for service given by Mr Sachs.

The Bank's case 14 The Bank's case is straightforward. It has a chattel mortgage executed by Trelat. The entry of Trelat into administration triggered the right of the Bank to take possession of the vessel. Two other matters are also relied on, namely the failure of Trelat to renew insurance on the vessel and an attempt by Mr Druce to "gift" the vessel to a third party on 26 November 2009 by means of a document entitled "Deed of Gift" dated 26 November 2009 (see Tab U in Exhibit B1), both being matters of which the Bank has only recently become aware. An amount of $1,262,079.04 in respect of the original loan and interest remains unpaid (see paragraph 18 of the witness statement of Mr Bova dated 12 May 2010). The Bank seeks possession so that it can exercise its power of sale. The vessel has an estimated value of between $3.5 million and $4 million, it having been valued as at 23 April 2009 at "in the vicinity of $4.33 million dollars AUD". The Bank relies on clause 15 of the chattel mortgage, which empowers it to take possession of the vessel and sell the vessel and which is in the following terms: " 15 Powers on Default 15.1 At any time after an Event of Default has occurred, in addition to all other powers conferred on us, we have the following powers: (1) to take possession of the Goods and, for that purpose, to take any proceedings in your name or otherwise and to give valid receipts; (2) subject to obligations imposed by law, to sell or concur in selling the Goods or any interest in the Goods for cash, debentures, shares, other obligations or valuable consideration by public auction, private treaty, public tender or otherwise and at a price payable in a lump sum or by instalments spread over any period; (3) to carry into effect a sale under clause 15.1(2) by conveying or transferring the legal and beneficial title in your name and on your behalf or otherwise, and to do anything we consider desirable to complete the sale; (4) to exercise the power of sale given by the Mortgage in respect of part or all of the Goods together with any other goods and apportion the costs of sale between those goods and to give any options to purchase (5) to enter into, rescind or vary a contract for sale and to resell without being responsible for loss".

15 The introduction and relevant subclauses of clause 14 are: " 14 Default 14.1 If an Event of Default occurs or is taken to have occurred then, in addition to the rights provided by any Collateral Security, at our option, without any demand or notice, the security provided by this Mortgage immediately becomes enforceable. 14.2 The following are Events of Default: ... (9) an Insolvency Event occurs in respect of you".

16 Since there can be no doubt that the appointment of a liquidator for Trelat was an "Insolvency Event" as defined in the chattel mortage (that is, Trelat became an externally-administered body corporate under the Corporations Act 2001 (Cth): see clause 39.1(11) of the chattel mortgage), and hence that there was a default permitting the Bank to exercise its powers under clause 15 of the chattel mortgage, it is not strictly necessary to consider the other acts of default. I think, however, it is established on the balance of probabilities that Trelat failed to renew insurance on the vessel: see paragraph 4 of the affidavit of Ms Taentzer sworn 13 May 2010 at Tab 11 in Exhibit C, coupled with the fact that the policy was to be renewed in April this year, and that Trelat, in whose name the policy had been effected, was placed in liquidation in December last year, and the liquidator's request on 29 March 2010 that the Bank arrange the necessary insurance (see Tab 12 in Exhibit C). The attempt by Mr Druce to gift the vessel to a third party (see Tab U in Exhibit B1) carries with it the implication that Trelat, through Mr Druce as director, had purported to give himself title to the vessel. Any such act would be inconsistent with the rights of the Bank and amount to an attempt to create an "Encumbrance", as defined in s 39.1(7) of the chattel mortgage. I do not therefore need to consider whether the combination of the attempt to gift and other information which came to the attention of the Bank led the Bank reasonably to conclude that the value of the security or the vessel itself were in jeopardy, The "Manor" [1907] P 339 being relied on in this connection. 17 Mr Nell, recognising that he proceeds on a claim that in practical terms is undefended, sought to articulate possible arguments that might be raised by Mr Druce against the Bank's claim that it has title in the vessel and can exercise its power of sale. The evidence of the Bank (principally the witness statements of Mr Bova, Exhibits B1 and B2), the truth of which Mr Bova averred in the witness box, also deals to an extent with the assertions made by Mr Druce in his Defence. I shall set out below the various arguments that have been articulated either in the Defence or by Mr Nell, and indicate my conclusions in respect of these, although none of these other matters are pleaded in the Defence, and in my view, save for issues of leave, they would have to have been pleaded if Mr Druce wished to rely on them. The defence of ownership 18 Mr Druce asserts that at all material times, he was the owner of the vessel and entitled to retain possession of it, and he denies that Trelat "ever had a proprietary interest in the vessel that it could give [the Bank]". 19 There is, in Exhibit B1, evidence that there was a contract between MFA and Mr Druce for the construction of the vessel. There is other evidence which points to there having being a novation of that agreement: (1) a tax invoice from MFA to Trelat dated 9 January 2009: see Tab G in Exhibit B1; (2) insurance of the vessel was obtained in the name of Trelat: see Tab H in Exhibit B1; (3) some payments were made to the Taiwanese shipyard by Trelat: see Tab K in Exhibit B1; (4) Mr Chalmers advised the Bank that Trelat would be using the vessel for business purposes and that the "expenses of the vessel can be legitimately claimed through the business against any income through charter by Trelat Pty Limited": see Tab L in Exhibit B1; (5) Trelat borrowed the $1.25 million from the Bank and authorised repayments by a direct debit request: see Tab M in Exhibit B1. (6) Trelat entered into the chattel mortgage and the ship's mortgage, and Mr Druce and Mr David Druce signed on behalf of Trelat; (7) charges were registered by the Bank with ASIC, and no steps were taken by Trelat to have those charges removed; (8) although MFA wrote on 16 March 2009 that upon payment of the $1.25 million by the Bank, it would have no security and possession would pass to Mr Druce, it did not state that title would pass to Mr Druce: see Tab J in Exhibit B1; and (9) repayments of the loan were made by Trelat until September 2009. 20 I am satisfied on the balance of probabilities that the vessel was owned by Trelat at least on and from 30 April 2009. 21 In connection with the payment by Trelat to MFA, Mr Nell referred me to Associated Midland Corporation Ltd v Bank of New South Wales (1984) 51 ALR 641; HIH Casualty & General Insurance Limited v General Reinsurance Australia [2008] NSWSC 461 at [81]; and General Reinsurance Australia Ltd v HIH Casualty & General Insurance Ltd (in liquidation) [2009] NSWCA 22 at [64] and [81]-[82], which hold that payment by a party for goods pursuant to an invoice is relevant in determining whether title has passed to that party. As there were some payments made by Mr Druce as well as Trelat and the invoice was issued later, I do not place any weight on those cases.

22 Even if Trelat were not at law the owner of the vessel and Mr Druce was the owner, his application for finance for purchase of the vessel on behalf of Trelat and his execution of a document describing Trelat as mortgagor of the vessel would satisfy the requirements of estoppel: see A K Turner, Estoppel by Representation (3rd ed, 1977), Butterworths, London at [20]. His representations, I infer, induced the Bank to lend money in return for security over the vessel understood to be owned by Trelat, and it would be unconscionable for Mr Druce to resile from that representation: see Waltons Stores (Interstate) Limited v Maher (1988) 164 CLR 387 at 404, 419; Commonwealth of Australia v Verwayen (1990) 170 CLR 394 at 409, 431, 453-454. Assertions by Mr Druce 23 I have referred to the allegations made by Mr Druce in his Defence. He has provided no evidence to support these allegations. The Bank has refuted the existence of any agreement: see paragraph 14 of Mr Bova's witness statement dated 12 May 2010. There is no basis for concluding that the Bank reached any agreement with Mr Druce of the type alleged or that there was any consideration for such an alleged agreement. Mr Bova's evidence is that the Bank made enquiries about Trelat's status, having received a call on 22 March 2010 from Mr Vic Bates of MFA telling him that Mr Druce owed MFA money and warning him that Mr Druce might be going on a long trip.

24 I now turn to the matters which Mr Nell raised as possible impediments to the Bank's claim of legal ownership and entitlement to possession.

Absence of registration 25 The vessel was not registered in the Australian Register of Shipping (see the affidavit of Ms Roslyn Diesner sworn 13 May 2010 at Tab 12 of Exhibit C). Mr Nell pointed out that whilst the Shipping Registration Act 1981 (Cth) permits ships that are less than 24 metres in length and ships used for recreational purposes (even if let or chartered) to be registered, it does not mandate the registration of such ships: see ss 12-14. The vessel is 24.08 metres long, so it is not exempted by reason of its length, but it is a ship that appears to be designed for recreational purposes, and I infer on the balance of probabilities that was its intended use. It follows that the absence of registration has no effect on the chattel mortgage and the ship's mortgage granted by Trelat.

The nature of the chattel mortgage 26 By clause 6 of the chattel mortgage, Trelat agreed, in return for the advance or loan of the $1.25 million: "to transfer to [the Bank] by way of mortgage all your present and future right and title to the Goods, and agree that you will, immediately we ask you to do so, sign all other documents we think are necessary to perfect the transfer of the Goods to us." 27 The mortgage is a common law chattel mortgage. The effect of it is that the Bank "acquired the legal title to the yacht as security" and Trelat "retained the right to redeem the mortgage", to cite the words of Finkelstein J in The Advertising Department Pty Ltd v The Ship MV "Port Philip" (2004) 141 FCR 251 at 252, who cites in support The "Shizelle" [1992] Lloyd's Rep. 444, which in turn relied on a statement of principle by Lindley J (as his Lordship then was) in Keith v Burrows (1876) LR 1 CPD 722 at 733. 28 Trelat, through the liquidator, has accepted that the Bank is the legal and beneficial owner of the vessel: see Tab 12 in Exhibit C. Is a bill of sale required in relation to the acquisition of title by Trelat? 29 Where the Shipping Registration Act applies, s 37(1) requires a bill of sale for transfer, although s 36 is subject to s 37, which permits use of a declaration of transmission. We are here concerned with the position at common law. There is, as Davies and Dickey point out in Shipping Law (3rd ed, 2004), Lawbook Co., Sydney, some authority for the proposition that even at common law, a bill of sale is required for a transfer of property in ships (see page 92), but the learned authors conclude that recent Australian authority supports the view that a bill of sale is not required: Devine Shipping Pty Ltd v BP Melbourne (1994) Tas R 456 at 464. In Devine, Zeeman J considered these authorities and concluded that cases from 1848 onwards held that a bill of sale is not required to pass title to an unregistered ship, relying on Union Bank of London v Lenanton (1878) 3 CP 243 at 248; Benyon v Cresswell (1848) 12 QB 899 at 903-904, 116 ER 1107 at 1109; Manchester Ship Canal Co v Horlock (1914) 2 Ch 199 at 207, The James W Elwell (1921) P 351 at 368 and 695113 Ontario Ltd v Commissioner of Stamps (1990) 53 SASR 274. In Sirius Shipping Corporation v The Ship "Sunrise" [2006] NSWSC 398, Young CJ in Eq (as his Honour then was), came to the same conclusion: see [68]. 30 Even the earlier authority to which Zeeman J refers seems to focus on the need for a bill of sale where there is a purchase and sale.

31 I would respectfully adopt the approach of Zeeman J in Devine and Young CJ in Eq in Sunrise, but in any event, even if a bill of sale were required for a purchase and sale, that is not what occurred here. Rather, what seems to have occurred is that Mr Druce, having entered into the purchase agreement, nominated Trelat as the purchaser and that there was a novation of the existing agreement with the consent of MFA.

The effect of the Security Interests in Goods Act 2005 (NSW) ("the SIG Act") and the Registration of Interests in Goods Act 1986 (NSW) ("the RIG Act") 32 Although the SIG Act, in s 3(1), contains a wide definition of "goods", it appears to be concerned only with agricultural and aquacultural goods. The RIG Act appears to be concerned only with motor vehicles, although regulations may expand the scope at some future time. Section 5(1) of the SIG Act provides that the Act "does not affect any principle or rule of the common law or equity in relation to security interests in goods except to the extent that this Act provides otherwise (whether expressly or by necessary implication)" and both Acts create priority schemes. Neither Act appears to have any relevance to the present proceedings or precludes reliance on the chattel mortgage. I should note that although the Personal Property Securities Act 2009 (Cth) and a related Act received Royal Assent on 15 December 2009, there is a period of time yet to pass before commencement, which from the material to which Mr Nell has made reference appears to be at the earliest May 2011, and hence these Acts of the Commonwealth Parliament are not relevant. The absence of leave 33 Mr Nell pointed out that no leave has been obtained by the Bank for the in rem proceedings. He drew attention to ss 471B, 471C and 500(2) of the Corporations Act, which are in the following terms: "471B Stay of proceedings and suspension of enforcement process While a company is being wound up in insolvency or by the Court, or a provisional liquidator of a company is acting, a person cannot begin or proceed with: (a) a proceeding in a court against the company or in relation to property of the company; or (b) enforcement process in relation to such property; except with the leave of the Court and in accordance with such terms (if any) as the Court imposes.

471C Secured creditor's rights not affected Nothing in section 471A or 471B affects a secured creditor's right to realise or otherwise deal with the security. 500 Execution and civil proceedings (2) After the passing of the resolution for voluntary winding up, no action or other civil proceeding is to be proceeded with or commenced against the company except by leave of the Court and subject to such terms as the Court imposes.

34 I think it is clear that the Bank is a secured creditor so that s 471B does not apply, by virtue of s 471C. It is not necessary to consider whether proceedings in rem by a person who is not a secured creditor would require leave. 35 Section 500, unlike s 471B, does not mention property. I am of the view that an action in rem, being an action against the ship itself, is not caught by s 500 as it is not a proceeding "against the company", and therefore leave is not required.

36 The proceedings in rem did become, in part, proceedings in personam when Mr Druce appeared: see the Admiralty Rules 1998 (Cth); The "Tatry" [1992] 2 Lloyd's Rep. 552; and N Meeson, Admiralty Jurisdiction and Practice (3rd ed, 2003), LLP, London at 3.17, but Trelat never became a party to the in rem proceedings, and the liquidator declined to become involved. 37 I should mention in the context of the distinction between in rem and in personam claims that, to the extent that The "Indian Grace" (No. 2) [1998] AC 878 propounded the view that the distinction between in rem and in personam claims is artificial (see the discussion in at Meeson supra 3.4), this is not an approach adopted in this country: see Comandate Marine Corp v Pan Australia Shipping Pty Ltd (2006) 157 FCR 45 at 74 ([99]), 79-81 ([120]-[128]) per Allsop J (as his Honour then was), with whom Finn and Finkelstein JJ agreed. Allsop J's approach is wholly consistent with the Admiralty Act 1988 (Cth), which accepts and proceeds on the basis that the distinction is a real one: see also my decision in Rail Equipment Leasing Pty Ltd v CV Scheepvaartonderneming Emmagracht [2008] NSWSC 850 at [33].

38 Had I come to a different view about s 500, I would have no hesitation in granting leave nunc pro tunc, since the liquidator of Trelat, by consenting to the principal relief sought by the Bank, must implicitly have accepted that the proceedings do not require leave, or if they do, to leave being given.

Form of orders 39 The solicitor for the Bank has already given an undertaking to meet the costs and expenses of the Marshal relating to the arrest and its aftermath. I have no doubt that the undertaking will be honoured, but I am inclined to the view that it is appropriate for an order to be made in similar terms to those made by Dowsett J in Thor Shipping A/S v The Ship "Al Duhail" [2008] FCA 2007 so that finality can now be reached in respect of monies owing in respect of the arrest, that is: "Upon either payment of the Admiralty Marshal's costs and expenses in connection with the custody of the ship " Elusive " whilst under arrest (including any costs associated with the release of the ship from arrest) or the Plaintiff's solicitors making arrangements satisfactory to the Marshal for the payment of those costs and expense, the ship be released from arrest and the Marshal deliver the ship into the custody of the Plaintiff or its nominated representative."

40 Subject to that order, in my view, the Bank is entitled to have orders in the form sought by it. The Bank's solicitors should prepare a form of orders, including the order set out above and dealing with the notice referred to in the paragraph below. 41 I am aware that MFA commenced proceedings in relation to a claim for payment of the balance of the purchase price: see Monte Fino Australia Pty Limited v Terrence Richard Druce (unreported, Supreme Court of New South Wales, Hammerschlag J, 29 March 2010), which proceedings were dismissed. The liquidator of Trelat has indicated that Trelat will seek payment to it of the net proceeds from the sale of the vessel (since Trelat has an equity of redemption in the vessel) and the Bank does not, as I have noted, dispute Trelat's entitlement to the balance of funds after the debt to the Bank and all costs associated with the arrest and sale have been met. It may be necessary for these third parties to be given an opportunity to ventilate competing claims to the balance of the funds in due course, and a direction should be made in regard to notice by the Bank to the liquidator of Trelat and MFA following sale of the vessel and recoupment of the monies owing to the Bank.

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.

Security Interests in Goods Act 2005(NSW)

Registration of Interests in Goods Act 1986(NSW)

Admiralty Rules 1998(Cth)

Associated Midland Corporation Ltd v Bank of New South Wales (1984) 51 ALR 641 Benyon v Cresswell (1848) 12 QB 899 Comandate Marine Corp v Pan Australia Shipping Pty Ltd (2006) 157 FCR 45 Commonwealth of Australia v Verwayen (1990) 170 CLR 394 Devine Shipping Pty Ltd v BP Melbourne (1994) Tas R 456 HIH Casualty & General Insurance Limited v General Reinsurance Australia [2008] NSWSC 461 Keith v Burrows (1876) LR 1 CPD 722 Manchester Ship Canal Co v Horlock (1914) 2 Ch 199 Monte Fino Australia Pty Limited v Terrence Richard Druce (unreported, Supreme Court of New South Wales, Hammerschlag J, 29 March 2010) Rail Equipment Leasing Pty Ltd v CV Scheepvaartonderneming Emmagracht [2008] NSWSC 850 CASES CITED : Reinsurance Australia Ltd v HIH Casualty & General Insurance Ltd (in liquidation) [2009] NSWCA 22 Sirius Shipping Corporation v The Ship "Sunrise" [2006] NSWSC 398 The Advertising Department Pty Ltd v The Ship MV "Port Philip" (2004) 141 FCR 251 The "Indian Grace" (No. 2) [1998] AC 878 The James W Elwell (1921) P 351 The "Manor" [1907] P 339 The "Shizelle" [1992] Lloyd's Rep. 444 The "Tatry" [1992] 2 Lloyd's Rep. 552 Thor Shipping A/S v The Ship "Al Duhail" [2008] FCA 2007 Union Bank of London v Lenanton (1878) 3 CP 243 Waltons Stores (Interstate) Limited v Maher (1988) 164 CLR 387 695113 Ontario Ltd v Commissioner of Stamps (1990) 53 SASR 274

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