Goldstein v Shyzi Pty Ltd

On 24 November 2015 various parties including the plaintiff, Mr Michael Goldstein, and the first defendant, Shyzi Pty Ltd (“Shyzi”), entered into a Deed of Settlement (“the Deed”). Under Recital I to the Deed the Page Entities, which include Shyzi, acknowledged the existence of a debt of $2.1 million to Mr Goldstein. By Recital J, the Page Entities agreed to cause the debt to be repaid to Mr Goldstein during and by the end of the Repayment Period. In the events which have happened, the Repayment Period ended on 24 May 2016. The debt was not repaid during that period. Some payments have since been made, but an amount of about $164,000 plus interest remains unpaid.

Mr Goldstein claims that pursuant to the Deed and a mortgage subsequently executed by Shyzi, he has certain security in the nature of a charge and an equitable mortgage over a property in Lewisham owned by Shyzi (“the property”).

In these proceedings, Mr Goldstein seeks, inter alia, to enforce the claimed security against the property. He seeks declaratory relief to the effect that the property stands charged with repayment of that part of the debt that remains outstanding. Orders for judicial sale of the property are also sought.

Shyzi denies that Mr Goldstein is presently entitled to enforce any security against the property. In short, Shyzi submits that the Deed only gives Mr Goldstein the right to register a mortgage over the property, and such mortgage is not able to be enforced unless and until it is registered. Shyzi submits that the parties did not intend that the mortgage it executed would at any time operate as an equitable mortgage.

The second defendant, Australia and New Zealand Banking Group Ltd (“ANZ”), holds a first registered mortgage over the property. There is evidence that in response to enquiries made by Mr Goldstein’s solicitors (after the commencement of the proceedings), ANZ has stated that it will not consent to the registration of a second mortgage over the property.

ANZ has in recent times served notices upon Shyzi pursuant to s 57(2)(b) of the Real Property Act 1900 (NSW) and may be proceeding to exercise a power of sale. For that and other reasons, including a lack of evidence concerning the value of the property, and some uncertainty about how much is outstanding under the ANZ mortgage, it was agreed that the issue of whether to make orders for judicial sale would be deferred for the time being. The hearing was thus confined to the issues raised by paragraphs 1 to 4 of the relief sought in the Statement of Claim, and costs.

The Deed contains the following provisions:

Following the making of the Deed, on about 24 November 2015 Shyzi executed a mortgage over the property in favour of Mr Goldstein. (The property was one of the properties listed in Schedule 1 to the Deed). The mortgage, which was substantially in the terms contained in the form of mortgage annexed to the Deed, incorporated the provisions of registered Memorandum AE720944W. The mortgage also contained an annexure which provided:

The Summary itself referred to a principal of $2.1 million, a date of repayment of 24 November 2016, and a higher rate of interest of 7% per annum. No lower rate of interest was specified. The Summary further indicated that there was a loan agreement dated 24 November 2015 “containing additional agreements”, and that collateral security was provided by Shyzi as set out in the Deed of Settlement dated 24 November 2015.

Memorandum AE720944W relevantly provides:

Also on about 24 November 2015 Mr Goldstein lodged a caveat over the property. The interest claimed was expressed as an equitable interest in the land by virtue of the Deed of Settlement dated 24 November 2015. The caveat appears to be in the form that was contained in Annexure 3 to the Deed.

On 1 June 2016 Mr Goldstein commenced proceedings in this Court (proceedings 2016/167966) against, amongst others, Essendon and Beelo. They are both Page Entities under the Deed. In those proceedings, Mr Goldstein sought to enforce security over a property in Hamilton owned by Essendon and over a property in Mayfield owned by Beelo. Shyzi was not a party to those proceedings.

In July 2016 Mr Goldstein was paid $1,050,000 from the proceeds of the sale of the Mayfield property.

On 8 September 2016 orders were made in the proceedings by Robb J including the following:

In September 2016 Mr Goldstein was paid $885,633.56 from the proceeds of the sale of the Hamilton property. No further payments have been received by Mr Goldstein in respect of the debt. Accordingly, an amount of principal of $164,366.44 remains outstanding. Mr Goldstein also claims interest calculated at the rate of 7% per annum on the amount of principal outstanding from time to time since 25 May 2016.

Stated broadly, the principal point of contention between Mr Goldstein and Shyzi is whether in the present circumstances Mr Goldstein is entitled to enforce rights as a secured creditor against the property, including by seeking the sale of the property, in order to obtain repayment of the outstanding debt.

Mr Goldstein contends that he has such rights in accordance with the terms of the Deed and the mortgage. He submits that he is entitled to enforce his security over the property as envisaged by cl 4(a)(ii) of the Deed, including by enforcement of the charge given by Shyzi under cl 2(c) of the Deed and by exercising the right to sell conferred by cl 10(j) of the mortgage.

Shyzi denies that Mr Goldstein, at least presently, has the right to enforce any security over the property. It submits that cll 6(a)-(c) of the Deed (which should be read as forming part of the mortgage) have the effect that Mr Goldstein has no rights to enforce the mortgage unless and until he registers it. Shyzi submits that upon the proper construction of the agreements, the parties did not intend that the mortgage would in the meantime have operation as an equitable mortgage; rather, it was intended that the mortgage would have no legal effect prior to its registration. I understood Shyzi to further submit that cl 2(c) of the Deed did not confer a charge in addition to the registered mortgage security provided for in cl 6.

Shyzi’s argument focuses upon the language of cl 6 of the Deed, and is said to be reinforced by the provisions of cll 4(a)(ii) and (iii) which differentiate between Mr Goldstein enforcing his security over the property on the one hand, and Mr Goldstein commencing proceedings against Shyzi on the other. It was put that this was consistent with an intention that Mr Goldstein should not need to commence legal proceedings against Shyzi in order to enforce his security over the property. That would only be the case if Mr Goldstein was enforcing a registered mortgage.

It is clear that the failure of the Page Entities (including Shyzi) to repay the debt of $2.1 million within the Repayment Period (that is, by 24 May 2016) constitutes an Event of Default under the Deed. Moreover, having regard to the content of the Summary annexed to the mortgage, the Deed is both a Collateral Agreement and a Loan Agreement within the meaning of the mortgage. Accordingly, a failure by Shyzi to comply with the Deed constitutes a default under the terms of the mortgage (see paragraphs (a), (b) and (j) of the definition of default). The failure to repay the debt (by 24 November 2016) would also be a default under the mortgage (see paragraph (b) of the definition of default). That being so, cl 10 of the mortgage operates so that all monies owing become immediately due and payable.

It may not be strictly accurate to regard the provisions of cl 6 of the Deed as forming part of the mortgage itself. Nonetheless, the Summary annexed to the mortgage makes it clear enough that the Deed is a loan agreement “containing additional agreements”. The terms of the Deed form part of what has been agreed between Mr Goldstein and Shyzi, and are capable of affecting the enforcement of rights under the mortgage.

Clause 6(c), for example, specifically provides that the terms of the mortgage have no operation or effect unless an Event of Default has occurred. Clause 6(c) further provides that where an Event of Default has occurred, the mortgage operates “with full legal effect”. In those circumstances, cl 6(a) operates to confer upon Mr Goldstein an immediate and absolute right to register a mortgage over the property (generally on the terms of the mortgage annexed to the Deed) to secure payment of the unpaid amount of the debt. Clause 6(b) further provides that following registration of a mortgage, the mortgage will be taken to be in immediate default and Mr Goldstein may exercise the power of sale under the mortgage.

I do not read those provisions as having the effect that Mr Goldstein has no rights under the mortgage unless and until it is registered. Clause 6(c) provides that the terms and conditions of the mortgage operate “with full legal effect” as soon as an Event of Default occurs. It is contemplated that an Event of Default may occur prior to the registration of the mortgage. Accordingly, the parties appear to have intended that the terms of the mortgage have “full legal effect” independently of whether it is registered. That is, the terms of the mortgage have “full legal effect” as between the parties to the mortgage even if the mortgage is unregistered.

Shyzi emphasised the words “to secure payment of the Debt…” in cl 6(a) as evincing an intention that, until registration, the mortgage did not secure the debt. I do not think those words should be read in that way. To do so would be inconsistent with cl 6(c). To my mind, the words describe what the registered mortgage secures. They are not directed to what is secured by the mortgage prior to registration.

Clauses 6(a) and (b) seem to confer upon Mr Goldstein particular rights in aid of enforcement of the mortgage. Once an Event of Default occurs Mr Goldstein is permitted to immediately proceed to registration of the mortgage, and upon registration the mortgage is deemed to be in immediate default, so Mr Goldstein can proceed towards the exercise of a power of sale (see ss 57 and 58 of the Real Property Act). As pointed out by Shyzi, the institution of proceedings against Shyzi would not be required if the mortgage was enforced in that way.

Of course, even if the terms of the mortgage have “full legal effect” independently of whether it is registered, a question remains as to whether enforcement of the mortgage as registered is the only means of enforcement of security permitted by the agreements between the parties. For the following reasons, I do not think that is the case.

That particular means of enforcement is not expressly stated in the Deed, or the mortgage itself, to be the only one available. Further, the rights given to Mr Goldstein under cl 10 of the mortgage (which include the right to sell the property) are not expressed to be contingent upon registration of the mortgage. The rights of a mortgagee under an unregistered mortgage are not expressly excluded. Such rights should not in my view be taken to be impliedly excluded in circumstances where they can be readily accommodated in accordance with the terms of the mortgage and the Deed.

Clause 4(a) of the Deed, which sets out the sequence of stages which Mr Goldstein must follow in seeking repayment of the debt, itself speaks (in sub-paragraphs (i) and (ii)) in general terms of “enforcing his security” over certain properties. I do not think that the evident dichotomy between enforcing security over the property and commencing proceedings against Shyzi “for an Event of Default for the balance of the Debt” (see sub-paragraph (iii))requires the general references to enforcement of security to be read as confined to enforcing the mortgage as registered. The essential distinction drawn seems to be between enforcement of security over the property on the one hand, and “pursuing” Shyzi personally to recover the outstanding debt on the other. That is to say, recourse against Shyzi personally for the debt must await completion of the enforcement against the property.

The foregoing analysis is supported by cl 6(d) of the Deed, which relevantly provides that Shyzi grants a caveatable interest over the property to be mortgaged. The caveatable interest is said to be in the nature of an equitable interest granted under the Deed (see the form of caveat contained in Annexure 3 to the Deed). That indicates that Mr Goldstein was to have a proprietary interest (short of a legal interest) in the property. The interest of a mortgagee under an unregistered mortgage is consistent with that evident intention. So, too, would be the interest of a chargee of the property.

In fact, by cl 2(c) of the Deed, Shyzi charged the property in favour of Mr Goldstein for the amount of the debt. Shyzi further acknowledged that the charge given in cl 2(c) gave Mr Goldstein a caveatable interest in the property. That grant is apparently separate from any rights conferred upon Mr Goldstein under the mortgage. Accordingly, in my view it would have been open to Mr Goldstein to lodge a caveat claiming an interest as a chargee. It is noteworthy that the Summary annexed to the mortgage indicates that the Deed provided for certain collateral security. That would seem to be a reference to security given by Shyzi to Mr Goldstein “in addition to” the mortgage to better secure the obligations of Shyzi (see the definition of “collateral security” in the mortgage). The reference is apt to include the charge given under cl 2(c) of the Deed.

In my opinion, prior to any registration of the mortgage, Mr Goldstein has rights as a mortgagee under the unregistered mortgage, and also has rights as a chargee under the charge conferred under cl 2(c) of the Deed. Moreover, the provisions of cll 6(a)-(c) do not have the effect that he may only enforce registered mortgage security against the property. It seems to me that cll 6(a)-(c), when viewed in the context of the Deed and the mortgage as a whole, should be read as identifying specific rights given for the benefit of Mr Goldstein in relation to the enforcement of his security, rather than as provisions circumscribing the means by which his security may be enforced.

It follows from the above that despite the fact that the mortgage remains unregistered, Mr Goldstein has rights as a secured creditor pursuant to the unregistered mortgage and the charge. However, such rights may only be exercised in accordance with the priority regime set forth in cl 4 of the Deed. Clause 4 operates despite any clause to the contrary in the Deed.

It is common ground that Mr Goldstein has completed enforcement against the properties owned by Beelo and Essendon, as envisaged by cl 4(a)(i). As the debt has not been repaid in full, it is now open to Mr Goldstein to proceed to enforce his security over the property (including by exercising rights given under the mortgage). In my view, those rights may be enforced even where enforcement requires the commencement of proceedings against Shyzi, but Mr Goldstein is not yet entitled to commence proceedings against Shyzi personally to recover the outstanding debt. If the debt has still not been paid in full following completion of enforcement against the property, Mr Goldstein would then (and only then) be entitled to commence proceedings against Shyzi personally for the then outstanding balance of the debt.

In the light of the conclusions set out above, it would be appropriate for declarations to be made largely as sought in paragraphs 3 and 4 of the Statement of Claim. That is, declarations to the effect that the property is subject to an equitable mortgage in favour of Mr Goldstein on the terms of the mortgage executed on about 24 November 2015, and that the property stands charged with repayment of the outstanding debt (and interest) and the payment of costs as provided for in the mortgage.

As enforcement of security against the property has not been completed, Mr Goldstein is not entitled to commence proceedings against Shyzi personally for the outstanding debt. I therefore do not think that Mr Goldstein is entitled to orders in accordance with paragraphs 1 and 2 of his Statement of Claim.

I direct the parties to bring in Short Minutes of Orders within seven days to give effect to these reasons. The Short Minutes should contain proposed forms of the declarations to be made, and should also deal with costs. If agreement cannot be reached on costs, directions will be made for written submissions to be provided with a view to determining the question on the papers. The balance of the proceedings will stand over for directions on 28 April 2017.