Work Childcare Holdings Pty Ltd (In Liq) & Anor v Phillip Redmond Dwyer by his tutor Patricia Alice Clark

3 In submissions, counsel for the liquidator indicated that the fund to be established would include further moneys to be paid from rent which has been received by the liquidator. As I understand counsel's figures, the fund would amount to $106,871.55, being the amount the mortgagee stipulated as the amount due under the mortgage, less the $180,000 to be paid to him. The balance would be available to meet the liquidator's claim for costs, charges and disbursements. Any surplus after quantification of that claim would be paid to the mortgagee. 4 Mr Dwyer is prepared to give a registrable discharge of mortgage upon being paid the proceeds of sale after adjustments for rates and strata levies, and after payment of the agent's commission and reasonable conveyancing costs. Otherwise, he refuses to provide such a discharge unless ordered to do so. He denies that the liquidator is entitled to any amount for the cost and expenses claimed, in priority to his interest as registered mortgagee. 5 The property is subject to a registered lease for three years commencing on 1 November 2004, and terminating on 31 October 2007. The lease is to a company called Willy Wagtails Garden Pty Ltd. As might be guessed, the property is a childcare centre. 6 In 1997, Mr Dwyer instructed a Mr Connolly, who at one time practised as a solicitor, to act for him in relation to the renegotiation of an existing loan of $250,000. Interest was paid on that loan to Mr Dwyer until July 2005, although it was not paid to him directly by the company. The interest was not paid from bank accounts whose records became available to the liquidator. Mr Connolly told the liquidator that the moneys were paid directly by the lessee into his account and then transferred to Mr Dwyer's account in payment of interest on the mortgage. Mr Dwyer's tax returns and bank statements show the receipt of interest on the loan. 7 In March 2004, Mr Dwyer instructed Mr Connolly to seek repayment of the loan, but to allow the company time to sell the property or refinance the loan. Mr Connolly informed the company's then director, a Mr Warren Bain, of this requirement. Mr Dwyer was over ninety, and a tutor was appointed to act for him in these proceedings. On 7 March 2005, a notice under s 57(2)(b) of the Real Property Act 1900 (NSW) was given to the company by Mr Connolly on behalf of Mr Dwyer. The notice threatened to exercise the mortgagee's power of sale if the mortgage debt and interest were not paid. 8 Following his appointment as liquidator on 8 July 2005, Mr Pascoe sought to investigate the loan. He was suspicious because of Mr Connolly's involvement. Mr Connolly had formerly held office as a director of the company. He was suspicious as to whether any loan had in fact been made. The only evidence available to him at that time, although it was powerful evidence, was the 1997 mortgage from the company acknowledging receipt of an advance of $250,000. Considerable time was spent and expense was incurred by the liquidator in endeavouring to locate Mr Dwyer, and to obtain records and an explanation of the loan. 9 On 22 July 2005, Mr Connolly sent a copy of the s 57(2)(b) notice to the liquidator. He advised that Mr Dwyer intended to sell the property. The liquidator, through his solicitor, disputed the validity of the notice. He sought information in relation to the company's bank accounts. Through his solicitor, he asserted that Mr Dwyer was not entitled to exercise a power of sale over the property. On 29 July 2005, the liquidator's solicitors advised that the liquidator would be proceeding with the sale and would seek an accounting directly from the mortgagee in due course. 10 On 3 August 2005, the liquidator's solicitors, McLean & Associates, made various demands on Mr Connolly. They again asserted the invalidity of the s 57(2)(b) notice and asked for "an accounting of the loan to date". Mr Connolly replied on 21 September 2005. He said that he did not hold any files on behalf of the company, that the company's banking records were in the possession of its director, Mr Brain, that the mortgagee took issue with the comments made concerning the s 57(2)(b) notice, and that the principal loan advanced of $250,000 was outstanding, but loan interest payments were up-to-date on 1 July 2005. 11 On 16 October 2005, the solicitors for Mr Dwyer, Messrs Hansteins, gave notice pursuant to s 63 of the Real Property Act to the lessee requiring it to pay rent to Mr Dwyer as mortgagee. As I have said, it seems that until the company was wound up, Mr Connolly was receiving payments on behalf of Mr Dwyer directly from the lessee. However, on 21 October 2005, the lessee's solicitor advised Hansteins that the liquidator had directed that rent payments be made to him. They advised that the lessee was paying rent pursuant to that direction. Hansteins then demanded that the liquidator account for the money so paid. They asserted that the moneys received from the lessee by the liquidator after service of the s 63 notice were held on trust for Mr Dwyer. The liquidator has continued to receive the rents, although it does not appear on what ground he relies as justification for this, after service of the s 63 notice. 12 On 18 October 2005, further information concerning Mr Dwyer's position was provided to McLean & Associates by Hansteins. They confirmed that they held the original mortgage and advised that Mr Dwyer had invested funds through a firm of solicitors, Salmon Connelly Doyle, of which Mr Connolly had been a partner for many years. They advised that they had prepared a form of contract and were instructed to proceed with the sale, and to account to the liquidator for any excess from the proceeds of sale. 13 On 26 October 2005, McLean & Associates asked for further information, including an accounting for the amount advanced by Mr Dwyer, pursuant to the loan, and supporting documents such as copies of cheques, bank statements and correspondence verifying the advance. They also foreshadowed bringing an application to this Court for payment of their costs from the proceeds of sale of the property, owing to the difficulties which the liquidator had encountered in the matter. 14 On 14 November 2005, Hansteins wrote to McLean & Associates in relation to the proposed sale of the property and advised that the auction of the property would proceed. They also stated that Mr Dwyer wished to make known that: " 1.) Mr Dwyer has no direct nor indirect beneficial interest in the mortgagee. 2.) He has never had such an interest. 3.) He has never been an office bearer or shareholder in that company. 4.) He loaned the amount of $250,000 out of his personal funds through his solicitors Salmon Connelly & Doyle to the mortgagee. 5.) Mr Dwyer has never met, nor otherwise contacted Mr Warren Brain the principal of the mortgagor either before or since the loan was first advanced. 6.) Interest payments on this loan have to the best of his knowledge and recollection been deposited into his personal bank account on or about the 1st day of each month of January, April, July and October of each year with the last payment being received in July 2005. " 15 After further correspondence from McLean & Associates, Hansteins advised, on 18 November 2005, that Mr Dwyer's financial records had been collated and would be supplied in the near future. They emphasised that he was "an elderly man and looked to Mr Connolly and his niece to manage his affairs." They suggested, despite the liquidator's objections to the validity of the s 52(2)(b) notice, the auction should proceed if the parties could agree upon a reserve. 16 On 30 November 2005, an offer for $300,000 was made to the agent handling the sale (on instructions from the mortgagee). On 7 December 2005, Hansteins sent to McLean & Associates copies of Mr Dwyer's tax returns for the years 2002 to 2004, and copies of relevant pages of his bank statements for that period. Those documents record Mr Dwyer having received interest on the loan during that period. For example, in his 2002 tax return Mr Dwyer recorded the receipt of interest totalling $18,583, which included $18,125 from "Child Workcare". 17 On 14 December 2005, the agent advised that the party offering $300,000 had said that the offer would only remain valid until 16 December 2005. This advice was sent by Hansteins to McLean & Associates, who responded by saying they were obtaining instructions. They asked for a copy of the draft contract of sale. In circumstances which are not entirely clear, between 16 and 20 December 2005, the conduct of the sale process was taken over by the liquidator. I infer that the mortgagee accepted the validity of the liquidator's objections to the s 57(2)(b) notice. 18 On 21 December 2005, McLean & Associates confirmed that the liquidator had agreed to the sale of the property for $300,000. They said that they had made appropriate amendments to the contract and would notify Hansteins once contracts had been exchanged. 19 On 20 January 2005, McLean & Associates said that before contracts were exchanged, they required the mortgagee's agreement in relation to certain matters concerning the future conduct of the matter. This included that the liquidator's costs and disbursements of "securing, protecting, investigating and sale of the property in the amount of $20,314" be paid to him with the same priority as selling costs from the proceeds of sale. They also sought Mr Dwyer's agreement to the net proceeds of sale being held in their trust account until Mr Dwyer was able to substantiate the advance and the balance owing to the liquidator's reasonable satisfaction, and if he was not so satisfied, that the net proceeds of sale be paid into Court. These proposed terms were not agreed to. Hansteins advised on 24 January 2006 that the mortgagee's interest was "confined to receipt of the outstanding principal, interest and costs to which he is entitled". They did not admit that the liquidator was entitled to set aside the sale proceeds in the manner proposed. 20 On 13 February 2006, the liquidator's solicitors advised, in substance, that as the sale would not be proceeding by agreement, the liquidator would proceed with his foreshadowed application to this Court. 21 On 13 March 2006, McLean & Associates asserted that Mr Dwyer had still not proved the debt, if any, owed to him and had failed to provide proper substantiation of the claim. On 22 March, they advised that the sale would proceed at a price of $275,000. Contracts for the sale of the property were exchanged by the liquidator on 2 May 2006. After further futile, but doubtless, expensive correspondence, these proceedings were commenced on 22 May 2006. Mr Dwyer did not agree that he would discharge his mortgage to enable the sale to be completed. He did not accede to the liquidator's attempt to impose conditions. 22 By the originating process the liquidator sought the following orders: " 1. A declaration that Scott Darren Pascoe is entitled to proceed with and complete the sale of property located at 1/2-4 Kent Road, Dapto and known as folio identifier 1/SP51068 (the "Property"). 2. A declaration that Scott Darren Pascoe is entitled to continue to receive rent payable by the Lessor of the Property until further order of the Court; 3. The further rent received by Scott Darren Pascoe be held in the account of the first plaintiff until determination of these proceedings; and 4. Willy Wagtails Garden Pty Limited pay to the Liquidator future rent payments payable under the lease. 5. The defendant provide to plaintiffs an executed discharge of mortgage for the purpose of settlement of the sale of the Property. 6. The defendant deliver up to the plaintiff the original certificate of title of the Property within 14 days if the date of this order. [sic] 7. The proceeds of the sale of the Property be held in the bank account of the first plaintiff, until such time as the second plaintiff is satisfied of the claim of the defendant or otherwise until further order of the Court. 8. The plaintiff's costs and expenses incurred in the winding up be paid out of the Property of the company in priority to any secured creditors or Phillip Redmond Dwyer. 9. The Liquidators just and reasonable costs, charges and disbursements of and incidental to: a. the care protection and investigation into the Property; b. the costs and disbursements relating to or associated with any sale or attempted sale of the Property; c. the investigation and location costs of the defendant and the defendants alleged interest in the Property; and d. these proceedings; be treated as part of the Liquidators costs in the winding up of Work Childcare Holdings Pty Ltd (In Liquidation) and be paid out of the proceeds of the sale of the Property, in priority to any claim of the defendant or any secured or unsecured creditor of the first plaintiff. 10. Upon completion of these proceedings, that all other amounts received by the second plaintiff pursuant to order four above be released to the second plaintiff to deal with in the ordinary course of the winding up." 23 Various subpoenas were issued and other interlocutory steps taken. The parties were ordered to file points of claim and points of defence. On 13 September 2006, the liquidator filed points of claim. He pleaded his appointment as liquidator, the company's ownership of the property and the mortgage. He alleged, in substance, that:

(a) he had sought information to evidence the transaction represented by the acknowledgement in the mortgage that the company had received $250,000; (b) the defendant had not provided such information; (c) he had issued various subpoenas and a notice to produce to obtain documents to evidence the mortgage and the loan; (d) no document produced on subpoena or pursuant to the notice evidenced the advance; (e) the mortgage was signed for the mortgagee by Mr Connolly, who was then a director of the company; (f) the land in question had been developed before 1997; (g) the company's bank accounts did not record the receipt of the advance of $250,000; (h) the mortgage purportedly required repayment of the alleged advance in September 2000; (i) the rent paid by the tenant up to 2005 was paid to Mr Connolly; (j) he was unable to verify the truth of the acknowledgement in the mortgage that $250,000 had been advanced to the company; and (k) therefore (sic) the mortgage secured no obligation to the defendant by the company. 24 Alternatively, the liquidator pleaded that he had spent time and expense in realising the land, in corresponding with the defendant about the claimed debt, in maintaining the land, in communicating with the tenant in relation to rent and sale, and in paying strata levies, council rates and other outgoings. The liquidator alleged that by reason of these matters he was entitled to be paid his remuneration and expenses for such work in priority to the defendant upon completion of the contract for sale. 25 The plaintiffs no longer maintain that no advance was made by Mr Dwyer. As a result of evidence filed for the defendant, the liquidator now accepts that the advance of $250,000 was made. He does not allege that any part of the principal was repaid. He does not dispute that interest is unpaid from July 2005. 26 Counsel for the liquidator contended that the liquidator was entitled to an equitable lien over the property in priority to the mortgagee to secure his reasonable remuneration and expenses in caring for, preserving and realising the land. The liquidator's estimate of the amounts to which he would be entitled on the taking of an account of such alleged work and his description of the work were as follows: " 8. Those costs are again summarised below: a. $ 4,432.00 Liquidators costs of the care, protection and investigation into the property; b. $ 3,890.00 Estimated disbursements in relation to the care protection and investigation into the property including, land tax, strata levies, council rates, and water rates c. $ 5,000.00 Estimated legal costs and disbursements in relation into the care, protection and investigation into the property; d. $ 5,943.00 Liquidators costs relating to or associated with the sale of the property; e. $17,318.75 Estimated actual and anticipated disbursements in relation to or associated with the sale of the property including agents costs, advertising and legal costs on the sale of the property; f. $ 8,304.00 Liquidators costs in relation to the investigation and location of the defendant; g. $ 5,000.00 Estimated legal costs and disbursements in relation to the investigation and location of the defendant; h. $ 9,710.00 Liquidators costs of an occasioned by these proceedings; i. $52,287.20 Estimated legal costs and disbursements in relation to an occasioned by these proceedings; j. $ 2,418.00 Contingent claim by Caldwell Chau 9. The types of work and disbursements included in those summaries may be generally categorised as follows and includes but is not limited to:- a. Locating the directors, discussions and negotiations with the tenant and its solicitor, property searches, correspondence with former solicitor for the company, discussions and correspondence with the managing agent for the strata, attending to payment of the strata fees; b. As described above; c. Estimate from my solicitor; d. Attendance at the property, discussions with the agent regarding sale, advertising costs and agency agreement, signing agency agreement, review of sale contract including discussions with the plaintiff's solicitor, discussions with tenant in relation to a purchase by the tenant, numerous discussions with agent regarding sale process and finalization of offers; e. As described above; f. Conducting numerous searches on electronic white pages, internet searches, review of property searches and mortgage, discussion with solicitor regarding method of location, legitimacy of mortgage, discussions with solicitor regarding liquidators responsibilities regarding the inability to locate the mortgagee and its effect on a proposed sale of the property, correspondence to John Connolly, instructing solicitor in relation to locating mortgagee; g. Estimate from my solicitor; h. Liaising, corresponding, discussing, instructing and meetings with solicitor and Counsel in relation to the commencement and continuation of the Court proceedings, reviewing drafts in finalization of affidavit material, attendances at Court, meeting John Connolly, corresponding with former directors and Warren Brain, correspondence and discussions with the first plaintiff's banker. " 27 The contingent claim by Caldwell Chau referred to above is a claim made by that firm for expenses in relation to documents in response to the liquidator's subpoena. It should be added to his claim for costs of the proceedings. 28 Counsel for the liquidator relied upon in Re Universal Distributing Co Ltd (In Liq) (1933) 48 CLR 171 at 174 where Dixon J allowed a liquidator his reasonable remuneration and expenses in the care, preservation and realising of the company's assets to raise a fund, which enured for the benefit of debenture holders entitled to a charge over the company's assets, in priority to the debenture holders. That principle has been applied many times. A liquidator entitled to such a claim has an equitable lien over the funds so realised. The claim is in the nature of "salvage". It ensures that those who have the benefit of the liquidator's administration bear the burden (Shirlaw v Taylor (1991) 31 FCR 222 at 230-231). 29 Where such a lien is asserted over land held under the Real Property Act, the claim to an equitable lien will prevail over the estate of a registered mortgagee only if there is a personal equity operating as an exception to indefeasibility. Such an equity may arise e.g. if the work done by the liquidator, for which remuneration is claimed and which gives rise to the lien, was done at the express or implied request of the mortgagee. That is not this case. It can also arise when the work done is for the incontrovertible benefit of the mortgagee, such that it would be unconscionable for the mortgagee to retain the benefit conferred by the labour or expenditure of the liquidator without paying for it (Monks v Poynice Pty Ltd (1987) 8 NSWLR 662; Dean-Willcocks & Anor v Nothintoohard Pty Ltd (in liq) & Ors (2005) 53 ACSR 587; cf Jefferson v Shirlaw (2006) 24 ACLC 848). 30 An example is found in a case upon which counsel for the liquidator relied, namely, Re Conlan [2001] WASC 230. There, liquidators were appointed to a company which owned a vineyard. The land was subject to a "pooled mortgage". There were 108 separate mortgagees. The vineyard was a wasting asset. Money was spent by the liquidators in caring for, preserving, and selling some of the land. The land had to be maintained to maximise the return from sale. Owen J held that the liquidators were entitled to an order for payment out of the proceeds of sale of the land, in priority to the mortgagee, of their reasonable costs and expenses in caring for, preserving and realising the land. 31 However, this principle is remote from the facts of the present case. The principle does not mean that a liquidator who merely sells land without first obtaining the consent of the mortgagee can compel the mortgagee to discharge the mortgage on receipt of less than the mortgage debt because the liquidator has incurred costs of sale. The mortgagee did not consent to the liquidator's sale. Mr Dwyer had embarked on his own attempts to sell the property until the liquidator objected to the validity of the s 57(2)(b) notice. It was common ground that the property was sold by the liquidator to the same purchaser as had been identified by the agent acting on the instructions of the mortgagee. 32 Counsel for the liquidator submitted that the liquidator had preserved the property, or preserved its value from erosion, through his ensuring that the tenant continued to occupy the property and pay rent. The property was already tenanted under a long-term lease. It appears that rent had been regularly paid. There is no evidence that the lessee threatened to breach the lease. There is no evidence of the liquidator having done anything to ensure that the tenant did not breach the lease. Indeed, the liquidator demanded that the tenant pay rent to him rather than to the mortgagee, notwithstanding service of the s 63 notice by the mortgagee. In other words, his dealings with the tenant were contrary to the mortgagee's wishes and, apparently, contrary to the requirements of the Real Property Act. It is impossible to say that his dealings with the tenant were of incontrovertible benefit to the mortgagee. 33 The property in question is not a wasting asset. It was used by the lessee as a childcare centre. There is no evidence of the liquidator having done anything to the property to preserve it for the benefit of the mortgagee. 34 I do not accept that the payment of rates or strata levies provides such an incontrovertible benefit to the mortgagee that the liquidator is entitled to a lien to recoup moneys paid by the company for levies or rates. Those were obligations of the company. Nor do I accept that the selling costs, such as advertising costs, if any, which may have been incurred by the liquidator, are recoverable under the principle which the liquidator invokes. Even if he had been selling with the mortgagee's consent, I do not accept that the mortgagee could be required to meet the mortgagor's costs of sale merely because the proceeds of sale are to be applied in reduction of the mortgage debt. 35 Nor was the mortgagee benefited by the time and costs spent by the liquidator in locating and quizzing the directors and former directors of the company, or in seeking to identify the residential address of Mr Dwyer, or in investigating whether an advance had been made, and the amount of the outstanding loan. Nor did the institution of these proceedings provide any such benefit to the mortgagee. I do not regard any of the work for which the claim is made as providing such a benefit to the mortgagee. It is not unconscionable for Mr Dwyer to insist on payment of the mortgage debt as a condition for the discharge of the mortgage, without deduction or setting aside of moneys to meet the liquidator's claim. 36 In any event, even if the liquidator were entitled as against the mortgagee to a lien to secure reasonable remuneration and expenses, I do not consider that the liquidator is entitled to the relief presently sought. The suit is in the nature of a redemption suit involving the taking of accounts. In such a suit a mortgagee is entitled to be secured for his claim, including costs of the suit. The Court may order that a mortgage be discharged in return for a sum which, when invested, will equal the amount secured plus interest with a proper margin for the mortgagee's costs (Project Research Pty Ltd v Permanent Trustee of Australia Limited (1990) 5 BPR 11,225; Conveyancing Act 1919 (NSW), s 66). The liquidator's proposal makes no allowance for the continued incurring of interest on the mortgage debt to the extent that it is unpaid, nor for the mortgagee's costs of the present suit, nor for the mortgagee's costs of a hearing to assess the reasonableness of the liquidator's claim for remuneration and expenses. 37 For these reasons, I refuse the claims for relief in paras 5, 6, 7, and 9 of the originating process. The balance of the claims in the originating process were not pressed. Therefore, I order that the originating process be dismissed. 38 There is no cross-claim by the defendant in respect of its claim that the plaintiffs hold the rent received from the tenant after service of the s 63 notice on trust for the defendant. In the originating process, the liquidator made a claim for those moneys. That claim has not been pressed. There has been no argument in relation to this question and I make no order about it. 39 There remains the question of costs. I have deferred dealing with those as counsel for the defendant indicated that the defendant would seek to rely upon a Calderbank letter. The parties have made written submissions on the question of costs. I will receive any further evidence which the parties wish to tender on the question of costs. Unless there are any further submissions to be made orally, I will deal at a more convenient time with the question of costs. 40 I direct any further submissions on the question of costs to be made in writing and be forwarded to my associate by 5.00 pm tomorrow.

At a glance

Court

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Before

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Judgment (14 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (4)

Cited By (2)