Westpac Banking Corporation

By a summons filed on 8 April 2015, Westpac Banking Corporation paid into Court $59,053.63 pursuant to s 98 of the Trustee Act 1925 (NSW).

That amount represented the surplus after Westpac sold the property known as 14/26-34 McElhone Street, Woolloomooloo (the Property) under a registered mortgage granted to it by the registered proprietors of the Property, Regina Sonari Thei and Brett James Firman, after payment of all monies due to Westpac under the mortgage.

There were before the Court two notices of motion that sought payment of the funds in Court out to the applicants.

One of the notices of motion was filed by Dr David Wai on 19 May 2015. The other notice of motion was filed on 14 May 2015 by Somy Ros and Brian Kelly.

The applicants each claimed an entitlement to the surplus funds on the basis that they had a security interest in the Property that ranked after the mortgage to Westpac.

Ms Ros and Mr Kelly challenged Dr Wai’s claim that he was entitled to the equitable security over the Property that he claimed.

Initially it was proposed that the Court would determine both notices of motion by a hearing in the Applications List. However, Dr Wai informed Ms Ros and Mr Kelly that he would object to their evidence that they paid the money they say constituted the loan that was secured by the equitable mortgage granted to them over the Property. Ms Ros and Mr Kelly were not in a position to prosecute their notice of motion in these circumstances, and the hearing of their motion was adjourned.

In these events, the Court has only heard Dr Wai’s notice of motion.

Dr Wai’s claim arises out of a loan of $100,000 that Dr Wai advanced to a company called Wholesum Investments Pty Ltd (Wholesum) under a deed dated 31 August 2010, called the Investor Agreement.

The purpose of the Investor Agreement was to assist Wholesum to undertake the development of a block of 6 units located at 275 Avoca Street, Randwick. Wholesum has since been deregistered.

Dr Wai understood that, at the time, the directors of Wholesum were Ms Thei and Mr Firman, who were the registered proprietors of the Property. It appears, however, from the records maintained by ASIC, that Mr Firman ceased to be a director of Wholesum on 1 August 2010.

Dr Wai’s evidence was that a person named Fred Klein acted as an intermediary between Dr Wai and Wholesum, for the purpose of negotiating the advance. Dr Wai understood that Mr Klein was the company’s accountant, and also that he did Ms Thei’s and Mr Firman’s personal taxes.

Initially, Dr Wai was disinclined to make any investment in relation to the development of the property at Randwick, because he thought it was too risky. In the course of discussions with Mr Klein, Dr Wai said that he would need personal guarantees from Ms Thei and Mr Firman, a high interest rate of 25% per annum; and the advance would need to be secured by caveat over their personal property, and the loan would only be for a very short term of four months.

Dr Wai repeated that statement at a meeting that he had on 26 June 2010 that he attended with Ms Thei, Mr Firman and Mr Klein. Dr Wai said that Ms Thei and Mr Firman responded by agreeing to personally guarantee the loan, and to grant a security over the Property.

Dr Wai relied upon an email that he wrote on 28 June 2010 to two persons with whom he was apparently discussing the commercial prospects of success of the proposed development. The email includes the statement: “[Mr Klein] is getting caveats and personal guarantees over the developers, to reassure me”.

The Investor Agreement dated 31 August 2010 was expressed to be between Wholesum, described as “Developer”, and Dr Wai, described as “Investor”. Mrs Thei and Mr Firman were not stated to be parties.

Under clause 4 of the Investor Agreement, Dr Wai agreed to pay the sum of $100,000 to Wholesum on the date of the agreement, to be used by Wholesum “for the purpose of the project related expenses”.

Under clause 5, Wholesum was entitled to any profit received by it on completion of the project, but it was obliged to pay to Dr Wai, after completion of the project, an amount described in clause 5.1 as the “Investors Interest”. The Investors Interest was explained in schedule 2. Schedule 2 set out three scenarios as to how the development would take place. It also set out three estimates of projected profit; one for each scenario. The estimated project profit increased from one scenario to the next. There is a column in schedule 2 called “investors interest rate”. The rate is stated as being 25% for each scenario. The final column is called “investors estimated project profit” based upon the particular investment. That column is blank.

Clause 7 is headed Risk, and provided as follows:

Clause 22 is entitled Caveat and provided:

The Investor Agreement was expressed to be a deed. It was signed by Ms Thei and Mr Firman on behalf of Wholesum as “Director/Secretary”. Dr Wai also executed the document.

Dr Wai also executed a redeemable preference share subscription agreement with Wholesum, dated 15 August 2010. Under the agreement Wholesum would, in consideration of the payment of $100,000, issue 100,000 class A redeemable preference shares to Dr Wai. The maturity date for the redeemable preference shares was expressed to be 4 months from the date of issue. The shares were to be redeemed at the original value plus a dividend, being 25% of the subscription price.

Dr Wai simply annexed the redeemable preference share subscription agreement to his affidavit, together with the Investor Agreement. He described the Investor Agreement and the redeemable preference share subscription agreement together as simply being “a copy of the Investor Agreement” that he signed. The evidence did not explain whether the redeemable preference share subscription agreement was implemented. The significance of that agreement is unclear.

Ms Ros and Mr Kelly did not challenge any of the evidence given by Dr Wai. Their position was that the Investor Agreement between Dr Wai and Wholesum did not have the effect of creating a charge in favour of Dr Wai over the Property. That was primarily because the registered proprietors of the Property were not parties to the Investor Agreement, and because, on its proper construction, clause 22 did not create a charge over the Property.

The Investor Agreement clearly defines Wholesum as the Developer. In addition, the only party other than Dr Wai who appears to have executed the Investor Agreement was Wholesum. It would ordinarily be appropriate to find that Ms Thei and Mr Firman were not parties to the deed, and they did not undertake any obligations, or create any interest in the Property under it.

However, there is authority for the proposition that, if on the proper construction of a document that appears only to have been executed by a company, in circumstances where the directors sign the agreement in the usual way, the directors may also be parties to the agreement, and bound by it, if in fact that was the intention of the parties: See Padstow Corporation Pty Ltd v Fleming (No 2) [2011] NSWSC 1572; (2011) 86 ACSR 636 per Gzell J at [12] to [22]. I refer in particular to the following extract from his Honour’s judgment:

The Victorian Court of Appeal also accepted the statements of principle made by McHugh JA (as his Honour then was) and Giles J (as his Honour then was) in Bond v Rees Corporate Advisory Pty Ltd [2013] VSCA 13 at [57] to [59].

I have noted the submission made on behalf of Ms Ros and Mr Kelly that the facts in Padstow were different, and perhaps clearer, than the present case, in that the lease in that case, although not apparently signed by the guarantor, contained a clause that stated that the guarantee provisions in the lease were to apply if the guarantor was named in the schedule to the lease, and the schedule contained an item that clearly identified the defendant as the intended guarantor.

In the present case, clause 22 expressly grants to Dr Wai a right to lodge a caveat over the Property. Wholesum had no interest in the Property. The only parties who could authorise any other party to lodge a caveat against the title to the Property were Ms Thei and Mr Firman. That is an indication that Ms Thei and Mr Firman intended to grant that right.

That conclusion is supported by the strange circumstance that, in the chapeau to clause 22.1, where it first appears, the word “Developer” is used, and where it secondly appears, the word “Developers” (plural) is used. The use of the singular and the plural in the chapeau is inconsistent. The use of the plural may only be a typographical error, in what is an inexpertly typed document. However, it was the case that the two persons who signed the deed on behalf of Wholesum were the registered proprietors of the Property. It cannot be ruled out that the use of the plural was intentional. In any event, the use of the plural introduces an element of ambiguity into the wording of the deed.

At the hearing of his notice of motion, Dr Wai did not specifically rely upon a claim that, if the Investor Agreement did not grant him a valid right to lodge a caveat against the title to the Property that bound Ms Thei and Mr Firman, he was entitled to have the deed rectified, because the prior oral agreement that he reached with Ms Thei and Mr Firman was that they would guarantee the debt of Wholesum, and grant him a right to lodge a caveat over the title to the Property. Nor did he put an argument that the inclusion in the Investor Agreement of clause 22 had the effect that the deed was highly ambiguous, so that the Court should construe the deed having regard to parole evidence of what the parties intended. That is likely to have been a result of the summary way that parties are encouraged to approach applications for payment to them of money paid into Court under section 98 of the Trustee Act, when those applications are dealt with in the Applications List.

In the present case, I think it is legitimate for the Court to take into account the fact that the evidence establishes that the Investor Deed was apparently prepared by Mr Klein, who was not legally qualified, and it was intended to put into effect the oral agreement that was reached between Dr Wai and Ms Thei and Mr Firman.

This conclusion finds some support in the terms of clause 7 of the Investor Agreement. While, in the ordinary case, it would be appropriate to construe the deed on the basis that Wholesum was the only Developer, because that is the way the term Developer is defined, there are indications in the wording of the deed, which is not clearly drawn, that suggests that the parties probably intended to use the expression Developer to refer to Wholesum on the one hand, and Ms Thei and Mr Firman on the other, interchangeably.

Clause 7.1(b) contains an obligation on the “Developer” to repay the Investor Finance, even if the project suffers a loss and there is no profit. Given that provision, it must be asked why clause 7.1(c) whereby: “The Developer guarantees to repay the Investor Finance to the Investor” was also necessary. The existence in clause 7 of both an obligation to repay the debt, and a separate guarantee of repayment, suggests on balance that in clause 7.1(c), “Developer” was intended to refer to Ms Thei and Mr Firman, and to create a guarantee on their part that Dr Wai would be repaid the amount payable under the Investor Agreement.

The wording of the Investor Agreement is plainly ambiguous and unclear, but in the light of the earlier oral agreement, and the inclusion of clause 7.1(c) and clause 22, I have concluded that the proper construction of the Investor Agreement is that it included a guarantee by Ms Thei and Mr Firman, and also a grant by them to Dr Wai of the right to lodge a caveat against the title to the Property on the terms set out in clause 22.

The next question is, in view of the unclear wording of the Investor Agreement, did it create a charge over the Property in favour of Dr Wai?

Although the Investor Agreement was made on 31 August 2010, a caveat was not immediately lodged against the title to the Property. Dr Wai gave evidence that he was told by Mr Klein on numerous occasions that Ms Thei and Mr Firman were taking steps to lodge the caveat. However, after some time he learned that the caveat had not been lodged, and on 11 October 2011 he caused his solicitors to lodge a caveat in which he claimed an “equitable estate and interest” in the Property under the Investor Agreement.

In Murphy v Wright (1992) 5 BPR 11,734; BC920350, Handley JA (with whom Priestley JA agreed; Sheller JA dissenting) held that the twelfth clause in the document in question in that case conferred upon the lender an option that could be exercised on default, for the lender to attach the debt to any one of the guarantors’ assets, and which could be exercised by lodging a caveat against the property. The act of lodgement by the lender created an equitable charge over the property.

The term of the agreement that was considered by the Court of Appeal was in the following terms:

Handley JA said at BC9203050 p 6 to 10:

This decision should be considered in the light of the decision of the Court of Appeal in Troncone v Aliperti (1994) 6 BPR 13,291; BC9402483, where Mahoney JA said (with the agreement of Priestley JA and Meagher JA) at BC9402483 p 2, 3;

White J considered the meaning of Troncone v Aliperti in Redglove Projects Pty Ltd v Ngunnawal Local Aboriginal Land Council [2004] NSWSC 880; (2004) 12 BPR 22,319, where his Honour said:

The authorities establish that, where the only right given to the creditor is to lodge a caveat, it might be difficult to determine whether the parties intended the lender to have a charge over the relevant property. A mere right to lodge a caveat, without more, may not give the creditor a charge: see Taleb v National Australia Bank [2011] NSWSC 1562; (2011) 82 NSWLR 489 at (61); cf Coleman v Bone (1996) 9 BPR 16,235 and Iaconis v Laza [2007] NSWSC 1103; (2007) 13 BPR 24,937. However, it may be, when all of the circumstances are considered, and the relevant term is construed in its context, the Court should find by implication that the parties intended that the creditor would be entitled to a charge: see Murphy v Wright.

Lastly, I will refer to the decision of Ward J (as her Honour then was) in Bondi Beach Astra Retirement Village Pty Ltd v Hohman [2010] NSWSC 260, where she said:

In my view, the wording of clause 22 of the Investor Agreement had the effect of authorising Dr Wai to create a charge over the Property by lodging a caveat against the title. Clause 22 must have been inserted in the Investor Agreement for some purpose. If that purpose was not to permit Dr Wai to create an equitable charge over the Property, if there was a default, then it had no purpose. The fact that the right to lodge the caveat is only given in the context of a default suggests that Dr Wai was intended to be able to create a security for the debt. In this case I have concluded that I should presume that an equitable charge was impliedly granted to Dr Wai. That implication is consistent with the statements made by Ms Thei and Mr Firman before the Investor Agreement was signed.

However, the judgment of Handley JA in Murphy v Wright would suggest that the charge was not created by clause 22 alone, but by the lodgement of the caveat as authorised by that clause. If that is correct, the charge over the Property to which Dr Wai is entitled was not created until 11 October 2011.

On the other hand, it is arguable that Troncone v Aliperti has the effect that an implied charge is created at the time the debtor authorises the creditor to lodge a caveat, because the interest in the land necessary to support the caveat must be created by the agreement, even if only by implication.

The issue of when the charge is created is likely to depend upon the proper construction of the relevant agreement, and the circumstances in which, and the time at which, the creditor is authorised to lodge the caveat.

The parties to Dr Wai’s notice of motion did not address the question in their submissions of the time when Dr Wai’s charge was created. As Ms Ros and Mr Kelly’s notice of motion was not dealt with, the parties also have not dealt with the issue of the priority of the two charges, assuming that Ms Ros and Mr Kelly can substantiate the charge upon which they rely.

As the parties have not had an opportunity to make submissions, I will not enter into any further consideration of the question of when Dr Wai’s charge was created.

As both charges, if valid, are equitable, the priority issue is likely to be determined by the maxim: where the equities are equal, the first in time prevails.

I have therefore concluded that it would be premature for the Court to make any final determination or orders in respect of Dr Wai’s notice of motion. As I have found that Dr Wai had a charge over the Property, and accordingly has a charge over the money that is now in Court, it will be necessary for the Court to address not only the validity of the charge claimed by Ms Ros and Mr Kelly, but if that charge is found to be valid, it will also be necessary for the Court to determine the priority issue.

I will therefore not make any order at this stage. It will be necessary for the hearing of the two notices of motion to be relisted, so that the balance of the issues can be determined.