Tsatsoulis & anor v Trigamist Holdings Pty Limited

SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

1393/00 GEORGE TSATSOULIS and ANOR -V- TRIGAMIST HOLDINGS PTY LIMITED JUDGMENT

1 MASTER: These proceedings were instituted by summons filed by the Plaintiffs, George Tsatsoulis and Mary Tsatsoulis, on 17 February 2000. The Defendants named in that summons are Trigamist Holdings Pty Limited, John Niccolo Cosco and Kay Violet Cosco. By that summons the Plaintiffs seek various items of relief in respect to three specified mortgages (two of those mortgages were over property at Rutherford and one over property at Newcastle). The First Defendant was the mortgagee in possession of those properties, over which it subsequently exercised its power of sale. 2 The relief presently sought consists essentially of orders for an accounting in respect to those mortgages, in particular in respect to rentals received by the First Defendant as mortgagee in possession of the two properties. 3 The Plaintiffs are the executors of the estate of their late son Sam Tsatsoulis, who died on 1 September 1994 (and to whom I shall refer as "the Deceased"). 4 The Deceased was one of the registered proprietors of each of the two parcels of land which were the subject of the three mortgages referred to in the summons (the other registered proprietor being Harry Sialepis). 5 On 19 February 1997 the present Plaintiffs commenced proceedings in the Commercial Division of the Supreme Court, being proceedings 50033 of 1997. The Defendants named in those proceedings (to which I shall refer as "the Commercial Division proceedings") were Westpac Banking Corporation, Ironaid Pty Limited, John Niccolo Cosco, Kay Violet Cosco, James John Smiles and Trigamist Holdings Pty Limited. 6 An application in the Commercial Division proceedings was heard by Rolfe J on 24 and 25 February 1999. His Honour delivered his reserved judgment therein on 15 March 1999. That judgment sets forth the background to and the procedural history of the proceedings before His Honour. Those proceedings related to a challenge on the part of the Plaintiffs therein (who, it will be appreciated, are the Plaintiffs in the present proceedings) to the validity of two of the mortgages which are the subject of the present proceedings. 7 The matter which was before His Honour was an application by the Defendants to those proceedings for an order, pursuant to Part 13 Rule 5 of the Supreme Court Rules, that the Further Amended Summons be dismissed and, pursuant to Part 15 Rule 26, that that pleading be struck out. Orders were also sought, pursuant to Part 5 Rule 12 and Part 33 Rule 6, that the proceedings be dismissed for want of prosecution. 8 His Honour, for the reasons given by him on 15 March 1999, refused to dismiss the proceedings for want of prosecution, refused to grant leave to the Plaintiffs to rely on the Further Amended Summons which had been filed in Court on 19 June 1998, but granted to the Plaintiffs leave to re-plead. His Honour made consequential orders in respect to costs and other procedural matters. 9 Apparently in consequence of the foregoing decision of Rolfe J, when the matter was again before His Honour on 30 April 1999 Counsel for Mr and Mrs Tsatsoulos informed the Court that he was instructed to say that there would be no further proceedings brought by his client against the Defendants in relation to the causes of action which had been pleaded and which relate to certain mortgages (those, I would here interpolate, are two of the three mortgages which are the subject of the present proceedings before me), or in relation to the loan agreements entered into between Mr Sialepis and the Deceased of 26 May 1992 and 30 June 1992 or in relation to certain deeds of transfer of debts and securities dated 2 May 1995 made between various Defendants and other parties. 10 His Honour stated in the judgment delivered by him on 30 April 1999 that the principal questions which had arisen for decision that day were, firstly, whether, as was submitted by the Plaintiffs before His Honour, the proceedings should be discontinued or whether, as the Defendants before His Honour submitted, the proceedings should be dismissed, and whether, there not having been a final adjudication, such dismissal should be on the basis that the Plaintiffs be precluded from bringing any further proceedings based on the causes of action arising out the matters and circumstances to which His Honour had just referred. 11 In the light of the subsequent procedural history of the matter from 15 March 1999 until 30 April 1999, which was recounted by His Honour in his judgment of that latter date, His Honour concluded that he should order that the proceedings be dismissed. 12 His Honour adverted to the consequence that the dismissal of the proceedings did not of itself automatically mean that the Plaintiffs would not be entitled to bring further proceedings based upon the same causes of action or essentially the same causes of action, and made reference to the provisions of Part 40 Rule 8 (1) of the Supreme Court Rules. The question then arose as to whether His Honour should impose a condition that no such fresh proceedings be brought. 13 The order which was then made by His Honour was stated by him as follows: I order that the plaintiffs' claim herein and the proceedings generally be dismissed and the plaintiffs be precluded from bringing any further proceedings against the first defendant in connection with or in any way related to or arising out of the Newcastle mortgage No. Y450652, the Rutherford mortgage No. I565317; the loan agreements made between the first defendant, Harry Sialepis and Sam Tsatsoulis, dated 26 May 1992 and 30 June 1992, and the deeds of transfer of debts and securities dated 2 May 1995 made between the first defendant and the second defendant (and other parties) in these proceedings. 14 His Honour also made an order that the Plaintiffs pay the Defendants' costs on a party and party basis. 15 Subsequently the matter came before His Honour on 21 May 1999, in consequence of an apparent discrepancy between the foregoing order set forth in the body of the reasons for judgment given by His Honour on 30 April 1999, and the wording, as follows, of that order appearing at the conclusion of the judgment, I order that the proceedings be dismissed and that the plaintiffs be precluded from bringing further proceedings in the terms to which I have referred. 16 His Honour was of the view that the more limited terms of the order appearing in the body of the judgment ("the Plaintiffs be precluded from bringing any further proceedings against the First Defendant") was not a correct statement of his intention which, as His Honour said in his reasons for judgment delivered on 21 May 1999 "was intended to apply to all Defendants". His Honour thereupon made an order in terms that the plaintiffs be precluded from bringing any further proceedings against the defendants in connection with or in any way related to or arising out of [the various mortgages, loan agreements and deeds already referred to]. 17 That order was entered on 26 May 1999. 18 At the conclusion of his reasons for judgment delivered on 21 May 1999 His Honour said, Miss Hawes, who appears on behalf of the plaintiffs, has said that her clients wish to reserve in some way a right to bring an action in respect of an account for rentals. Whether that is a right which her clients have, by having regard to the orders I have made, may well be a matter to be debated on another day. 19 The matter thus described by His Honour is one of the matters which has been the subject of the proceedings which have been argued before me. 20 The two questions which must be decided in the present proceedings are, firstly, whether the Plaintiffs are precluded by the orders of Rolfe J from obtaining the relief which they presently seek. Secondly, whether, in any event, the Court in its discretion should grant that relief. 21 It was submitted on behalf of the Plaintiffs in the present proceedings that the causes of action in the Commercial Division proceedings were all aimed at challenging the validity of the mortgages, and in those proceedings the Plaintiffs did not seek relief relating to an account for rental. 22 It was further submitted that the First Defendant in the present proceedings, being Trigamist Holdings Pty Limited (to whom the mortgages which had originally been granted by the Deceased and Harry Sialepis had been assigned), despite requests going back to September 1996, did not ever provide information of the nature now sought by way of an account until 17 April 2000, that being precisely two months after the institution of the present proceedings on 17 February 2000. 23 It was submitted on behalf of the Plaintiffs that they seek now nothing more than their rights as mortgagors - rights to have mortgagees in possession account for rentals which those mortgagees have received. 24 It was submitted that it was significant that no evidence had been filed on behalf of the Defendants in the present proceedings. (It should here be recorded that in support of the summons there was filed an affidavit by the Second Plaintiff Mary Tsatsoulis, sworn on 8 February 2000, and that Mrs Tsatsoulis was cross-examined upon her affidavit.) 25 I have had the benefit of receiving a written Outline of Defendants' Submissions prepared by Senior Counsel for the Defendants, dated 14 July 2000. That Outline will be retained in the Court file. 26 I am in agreement with the submission made on behalf of the Defendants that there is no accounting relationship between the Second and Third Defendants on the one hand and the Plaintiff on the other hand, which would, in any event, entitle the Plaintiffs to claim against the Second and Third Defendants relief of the nature sought in the summons. The Second and Third Defendants are not mortgagees. They were not parties to the mortgages, nor were they assignees of the mortgages. The fact that they are directors of the First Defendant, the assignee of the mortgages, does not place them in an accounting relationship with the Plaintiffs. 27 Indeed, it may be queried whether any of the substantive items of relief sought in the summons has application to the Second and Third Defendant, since prayer 1 refers to amounts due under registered mortgages, whilst by prayers 2, 3 and 4 the Plaintiffs seek relief against the "mortgagee". I am satisfied that no relief of the nature sought in the summons is available against the Second and Third Defendants. It would appear that their joinder as parties to the proceedings was unnecessary. 28 It remains then to consider whether the Plaintiffs are entitled to the relief sought in the summons against the First Defendant, that being the only Defendant in an accounting relationship to the Plaintiffs. 29 Whilst there is potentially an accounting relationship between the First Defendant (as mortgagee by assignment) and the Plaintiffs (as representing one of the mortgagors), the question here arises as to whether, in the circumstances of this case, the Plaintiffs are precluded, by dismissal of the Commercial Division proceedings brought by them against the Defendants, and the terms upon which those proceedings were dismissed, from now claiming an accounting to which they might otherwise be entitled. 30 The possibility of such an accounting being sought was recognised by Counsel for the Plaintiffs who appeared before Rolfe J on 21 May 1999, and that foreshadowed possibility was recorded by His Honour (who, whilst recognising the problem confronting the Plaintiffs in regard to such an action, expressed no view concerning their entitlement to such relief). 31 It should be appreciated that at least from 21 May 1999 the Plaintiffs were on notice of the possibility that the effect of the order made by His Honour on that date was to preclude them from obtaining relief of the nature which they now seek against the First Defendant. 32 But on that date (it will be recognised that His Honour was on 21 May amending an order which he had made on 30 April, but which had not yet been entered) the Plaintiffs did not seek to have the terms of the order varied, so as not to preclude the Plaintiffs from obtaining relief in the nature of an accounting, or to have the order set aside. I note that the order was not entered until 26 May 1999, so that until that latter date a further application could have been made to His Honour to vary the terms of the condition imposed by His Honour which had the effect of precluding the Plaintiffs from bringing fresh proceedings or claiming the same relief in fresh proceedings. Neither have the Plaintiffs since the entry of the order on 26 May 1999 appealed, or sought leave to appeal, from that order. 33 It should also be appreciated that in the Further Amended Summons in the Commercial Division proceedings (Exhibit 1) the Plaintiffs in their description of the nature of the dispute state (at page 3), "Neither the First, Second or Seventh Defendants have accounted to the deceased or the estate for the rental income or benefits received from the said properties", and later (at page 17) state that "the Plaintiffs seek an accounting by the Second and Seventh Defendants as to half of all rental income received or other benefits obtained by them while in control of the properties" (paragraph 51), and seek an accounting for rental income (paragraph 52.3). 34 It is abundantly clear that the claim of the Plaintiffs in respect to an accounting for rental income, being a subject of the Commercial Division proceedings, grounded upon the various documents referred to in Order 2 made in those proceedings, is encompassed within the relief in respect to an accounting for rentals sought in the present proceeding. 35 It has not been suggested on behalf of the Plaintiffs that the entitlement, if any, of the Plaintiffs to the relief presently sought for an accounting in respect to rentals received by the First Defendant from the Rutherford property is affected by the fact that there were two separate mortgages over that property. 36 In my conclusion the relief which the Plaintiffs presently seek in the summons for an account in respect to amounts due and outstanding under each of the three mortgages contravenes the terms of the order of Rolfe J of 21 May 1999 in respect to two of those mortgages ("in connection with or in any way related to or arising out of the Newcastle Mortgage No. Y450652, the Rutherford Mortgage No. I565317"), which expressly precludes the relief sought in respect to an accounting in relation to rental income from the Union Street property and the Rutherford property. 37 As I have already observed, any entitlement which the Plaintiffs may have to an accounting in respect to rentals received is not, in the case of the Rutherford property, enhanced or diminished by the fact that the First Defendant has received those rentals as mortgagee in possession under not one, but two mortgages. That relief, whether grounded upon one or both of the mortgages over the Rutherford property, clearly falls within the preclusion set forth in the order of 21 May 1999. 38 As I understand it the Plaintiffs have not sought to differentiate between the effect of the orders of Rolfe J in respect to the two mortgages specifically referred to in Order 2 of 21 May 1999, and the subject matter of the three mortgages in respect of which relief is sought in the present summons. 39 In my conclusion, therefore, the institution of the present proceedings by the summons filed by the Plaintiffs on 17 February 2000 constitutes a contravention by them of Order 2 made by Rolfe J on 21 May 1999. 40 However, even if (contrary to the foregoing conclusion which I have just expressed) the institution of the present proceedings is not precluded by the order of 21 May 1999, it is still necessary to consider whether the Plaintiffs have established an entitlement to an accounting of the nature sought in the summons. 41 I should, at the outset, dispose of one area of dispute between the parties. There was a suggestion made on behalf of the Defendants that the document (described during the hearing as a spreadsheet) headed "Schedule of Mortgage Interest Calculations" (part of Exhibit 6) constituted an accounting of the nature presently sought by the Plaintiffs, with the consequence that the Defendants, having fulfilled their legal obligations in that regard, were not required to give such a further accounting. 42 I am in agreement with the criticisms made on behalf of the Plaintiffs in respect to that document. It does not differentiate between the two properties. It does not purport to be an accounting in respect to rents received from the two properties. No prima facie case has been made out that provision of that document constitutes an accounting of the nature to which the Plaintiffs may be entitled. 43 If, ultimately, I arrive at the conclusion that the Plaintiffs are entitled to an accounting, I do not accept the submission made on behalf of the Defendants that such an accounting has already been provided to the Plaintiffs in the form of that document.

44 The mere existence of the relationship of mortgagor and mortgagee does not of itself give to the mortgagor an entitlement to an order for an account. That entitlement arises in cases of foreclosure and redemption in Court (not relevant to the present proceedings) and also in the case where the mortgagor is seeking to recover surplus proceeds of a sale carried out by the mortgagee under the mortgagee's power of sale. (See Sykes and Walker, The Law of Securities, 5ed. (1993), 142; Fisher and Lightwood's Law of Mortgage, Australian Edition (1995), Chapter 39.) 45 In that latter case the basis upon which the mortgagor is entitled to an accounting is that, once the mortgagee has from the proceeds of sale repaid to himself the amount outstanding under the mortgage, he holds any surplus upon trust for the mortgagor (see Adams v Bank of New South Wales [1984] 1 NSWLR 285 at 295 per Hutley JA, where His Honour quoted with approval Charles v Jones (1887) 35 ChD 544 at 549-550 per Kay J). 46 It is not appropriate to order the taking of an account unless it be established that there is, or is likely to be, a surplus after the satisfaction of the mortgage debt (see Batthyany v Walford (1887) 36 ChD 269 at 276 per Cotton LJ, with whom Bowen and Fry LLJ agreed). 47 It should be emphasised that an order for the taking of an account is discretionary (Part 48 Rule 1 of the Supreme Court Rules). 48 It will be appreciated that in the instant case the Plaintiffs first requested an account on 20 September 1996, before the First Defendant had exercised its power of sale in respect to either of the properties. 49 It is a rule of substantive law, not merely of practice or procedure, that where accounts are sought by a mortgagor before the mortgagee exercises its power of sale the mortgagor must make an offer to redeem. In Kennedy v General Credits Ltd (1982) 2 BPR 9456 Hope JA said, at 9462, In cases where it is alleged that upon the taking of accounts it will or may be found that the mortgage has been paid off, the mortgagor should nonetheless offer to redeem if, upon the taking of accounts, money is still found to be due. Futhermore, in many although not all cases, a mortgagor is required to pay into court the money prima facie payable to the mortgagee as a condition of his getting relief: see Inglis v Commonwealth Trading Bank of Australia (1972) 126 CLR 161 at 164-165; Harvey v McWatters (1948) 49 SR (NSW) 169...It is not necessary to pursue these matters save to emphasise that the law in these respects is not merely procedural but substantive, and that the appellants' proceedings should have failed in limine because of their failure to comply with its requirements. 50 Hutley JA in Adams v Bank of NSW, supra, at 296 said, There is authority in this Court for the view that the bar to the obtaining of a declaration as between mortgagor and mortgagee, except where there is an offer by the mortgagor to redeem, is not merely procedural, but substantial, that is, the only circumstances under which a mortgagor can call upon a mortgagee to account is where the mortgagor is prepared to make an offer to redeem: Kennedy v General Credits Limited (Court of Appeal), 14 May 1982, unreported). The reason is simple - any other rule would enable a mortgagor to involve a mortgagee in futile litigation because the result could have no effect upon the legal rights of the parties. In Colin D. Young Pty Limited v Commercial and General Acceptance Limited (Court of Appeal, 24 August 1982, unreported) Hutley JA, with whom the other members of the Court agreed, said: "...a party cannot, as it were, have little bits of accounts. There is one account and one account only and the issue is what is owed and what is not owed. The declaratory procedure cannot be used to get declarations about little bits of accounts because the proceedings may become, in relation to a total account, otiose." 51 Neither when they first sought an account, on 20 September 1996, when neither property had yet been sold, nor when she next sought an account, on 5 May 1999, when one property still remained unsold, did the Plaintiffs offer to redeem. 52 Nevertheless, after a power of sale has been exercised, there is no absolute requirement on a mortgagor seeking an account to make an offer to redeem (Maher v Network Finance Limited [1982] 2 NSWLR 503 at 505 per McLelland J). However, in the instant case the failure of the Plaintiffs to make an offer to redeem at a time when the accounting was originally sought and before the Defendant had exercised its power of sale is a consideration relevant to the exercise of the discretion of the Court in respect to the relief sought. 53 It has been submitted on behalf of the Defendants that it is relevant to the granting of the discretionary relief of an order for an accounting that the Plaintiffs have made no offer, have entered into no agreement, and have disclosed no capacity to repay such a deficiency. It is here relevant to record that during the course of her cross-examination Mrs Tsatsoulis firstly said that she did not know if she could pay the sum of $276,000, if required to pay that amount, and then stated that she was not in a position to pay that amount. She also said that she does not offer to pay into Court that amount as a condition of any order for an account. 54 Evidence was placed before the Court concerning the assessment of costs awarded against the Plaintiffs in the Commercial Division proceedings, and a statement made in a letter dated 12 May 2000 by their solicitors (Exhibit A) concerning "their present difficult financial circumstances". 55 The Plaintiffs however submitted, in regard to the exercise of the discretion of the Court to order an account, that the impecuniosity of the Plaintiff should not preclude them from approaching a Court of Equity seeking a remedy, and that impecuniosity is not a bar to justice. 56 The Plaintiffs referred to what they described as a lack of clean hands on the part of the Defendants in regard to the communications between the parties. It must, however, be appreciated that the concept of "clean hands" is one that applies to a moving party in Equity proceedings ("He who seeks Equity must come with clean hands"), and does not, as I understand it, have any relevance to the conduct or intentions of a party brought into the proceedings as a defendant. 57 I appreciate that it has not been established that the Plaintiffs, or either of them, are impecunious, only that there are presently on foot bankruptcy proceedings against one or both of the Plaintiffs. 58 I am in agreement with the submission of the Defendants that the authorities establish that the Plaintiffs cannot be entitled to an account unless they can demonstrate a surplus or a reasonable likelihood of a surplus. Further, I am in agreement with the submission of the Defendants that prima facie there would appear to be a deficiency, after the sale, of an amount of $276,000. (The decision of Santow J in Pangas v Permanent Trustee Australia Limited (10 March 2000, unreported) does not support the proposition of the Plaintiffs that there can be an accounting in the absence of a surplus: in that case there was a surplus.) 59 In the instant case I consider that matters which are relevant to the exercise of the Court's discretion to order an accounting include the fact that prima facie there is a deficiency of $276,000 upon the sale of the subject properties; that the Plaintiffs are in a state of impecuniosity (if not of insolvency), and that bankruptcy proceedings have been brought against them; that the Plaintiffs have in the Commercial Division proceedings sought an account of the nature which is presently sought in the present proceedings and that that claim has been dismissed; that it is unlikely that the Plaintiffs would be able to pay the costs which have already been awarded against them in the Commercial Division proceedings, and in respect of which bankruptcy proceedings have now been instituted against them. 60 I am in agreement that in the foregoing circumstances it would be a futile exercise, indeed bordering on the vexatious, to require the First Defendant to give an account, especially when there is no evidence of a surplus or the likelihood of a surplus. 61 Accordingly, if it became necessary for me to do so, in the exercise of my discretion I would decline to grant the relief sought by the Plaintiffs. 62 However, it will be appreciated, that in the light of my original conclusion herein, that the present proceedings are precluded by the terms of the order of Rolfe J of 21 May 1999, it is unnecessary for me to decide the present suit upon the application of the foregoing discretionary considerations. 63 The Defendants, in their written submissions, seek an order that the Plaintiffs should pay their costs on the indemnity basis. Whilst I consider that the Defendants are entitled to a costs order against the Plaintiffs, I am not presently persuaded that there is any basis for those costs to be paid otherwise than on the party and party basis. The mere fact that the Plaintiffs have not been successful, and that the Defendants have been successful, in the present proceedings does not of itself justify a departure from the normal, party and party, basis for a costs order in favour of the successful party against the unsuccessful party. 64 Unless any party within seven days of the date hereof arranges with my Associate for the matter to be listed for argument as to costs, I make the following orders: 1. I order that the summons be dismissed.

2. I order that the Plaintiffs pay the costs of the Defendants, such costs to be on the party and party basis.

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