Re Westpac Banking Corporation (No 2)

The present case involves a contest between two sets of claimants as to who has priority to claim an amount of $59,053.63 that has been paid into court by Westpac Banking Corporation pursuant to s 98 of the Trustee Act 1925 (NSW).

The amount paid into court represented the surplus after Westpac sold the property known as 14/26-34 McElhone Street, Woolloomooloo (the Property) to repay the amount due to Westpac under a registered mortgage granted to it by the registered proprietors of the Property.

On 14 May 2015, Ms Somy Ros and Mr Brian Kelly filed a notice of motion by which they sought an order that the money in court be paid out to them. They claimed as equitable mortgagees under a mortgage in registrable form over the Property, which had been executed by the registered owners of the property (the Guarantors) on 22 June 2011 to support a guarantee granted by them in relation to an advance of $350,000 by Ms Ros and Mr Kelly to a company called Wholesum Pty Ltd (the Debtor), which was a development company controlled by the Guarantors. The mortgage was not registered against the title to the Property, so it remained an equitable mortgage.

On 19 May 2015, Dr David Wai also filed a notice of motion seeking an order that the money in court be paid out to him. Dr Wai claimed that he was entitled to the money in court as an equitable chargee under a document called an Investor Agreement dated 31 August 2010, in respect of an advance of $100,000 that he had made to the Debtor, which he claimed had been guaranteed to him by the same Guarantors. Dr Wai lodged a caveat against the title to the Property on 11 October 2011.

The two notices of motion came on for hearing before me on 19 June 2015. I published reasons for judgment on 3 July 2015: Re Westpac Banking Corporation [2015] NSWSC 869.

For reasons that I explained at [7] of my reasons for judgment, I was not able to deal on that day with the notice of motion filed by Ms Ros and Mr Kelly. I dealt only with Dr Wai’s notice of motion. Ms Ros and Mr Kelly had an interest in resisting Dr Wai’s claim that he was entitled to exercise a charge over the Property, and they argued that the Guarantors were not parties to, or bound by the Investor Agreement; and even if they were, on the proper construction of the Investor Agreement, the Guarantors did not grant a charge to Dr Wai over the Property, whether by reason of the lodgement of the caveat, or otherwise.

I held that the Guarantors were bound by the terms of the Investor Agreement, and also that the Investor Agreement gave rise to a charge over the Property in favour of Dr Wai, at least from the time that he lodged a caveat against the title to the Property.

It will be convenient at this point to set out the relevant terms of Dr Wai’s Investor Agreement. Clause 4 obliged Dr Wai to lend $100,000 to the Debtor for the purposes of a particular development project.

Clause 5 provided for the return on his investment to which Dr Wai was entitled in the following terms:

The Investor Finance is the advance of $100,000 (although the relevant amount is left blank in cl 1.1(f), and must be deduced from cl 4.2, where it is not blank). Clause 1.1(f) describes the Investor Finance as a “contribution of capital by the Investor to the Project in accordance with Clause 4”. There is no definition of “Investors Interest Return”. Clause 1.1(g) defines “Investor’s Return on Investment” as meaning the “amount outlined in Schedule 2 to this deed”.

Considerable difficulties arise in relation to ascertaining the meaning of cl 5. Schedule 2 is entitled “Investors Estimated Share of Project Profit”. It contains a table that describes three scenarios, A, B and C. The three scenarios are described respectively as involving the existing 8 apartments over a 6 month period, or alternatively the construction of 4 new apartments over a period of 12 months, or both over 12 months. For each scenario, there is an estimate of the profit, and then there are two columns in the Schedule called “Investors Interest rate %” and “Investors Estimated Project Profit”. The investors interest rate column contains the percentage 25% for each of the three scenarios. The table does not contain an estimate of the Investors’ profit for any scenario. It is very difficult to interpret Schedule 2, but the better view would be, subject to the effect of cl 5.3, that Dr Wai was promised a 25% share of the profit from the development project. The problem with this interpretation is that cl 5.3 provides that the Debtor (who is described as the Developer in the Investment Agreement) will be entitled to any profit received by it on completion of the Project. There is a real question as to whether cl 5 is sufficiently certain to be enforceable. However, this is a question that was not raised by the parties in these proceedings.

This difficulty appears to be obviated because of the strange terms of the Investor Agreement, which appear at the one time to treat Dr Wai’s payment of $100,000 as an investment of capital (cl 5) and a loan (cl 7). Clause 7 is headed “Risk” and provides:

In the present case, the development project undertaken by the Debtor failed, and I infer that the Debtor made a loss. Accordingly, the difficulties involved in construing cl 5 do not appear to be relevant. The Investor Agreement provides for Dr Wai’s advance of $100,000 to be treated as a debt due by the Debtor in the present circumstances.

Clause 7.1(b) refers to “any Interest that the Investor has earned”. “Interest” is defined in cl 1.1(l) as meaning “the amount outlined in Schedule 1 to this deed”. There is no Schedule 1, only a Schedule 2. It would appear to follow that the Investor Agreement did not identify the interest rate payable to Dr Wai. That would not appear to matter in the present case, because the amount of the advance was $100,000, and the amount that has been paid into court is only $59,053.63, which is insufficient to cover any interest that might have been payable under the Investor Agreement in respect of the $100,000 advance.

Clause 22 is entitled “Caveat” and provides:

There is no definition of “maturity date” in cl 1.1, and it follows that the term has the meaning set out in par (a). “Completion Date” is defined in cl 1.1(d) as meaning the date when the Debtor delivers written notice to the Investor confirming the Project has been completed. There is no reason explained by the evidence as to how it could have been expected that the event in par (b) could ever realistically have occurred before the event in par (a), but that does not appear to matter, as par (a) would have the effect that Dr Wai was permitted to lodge a caveat on the title to the Property, but only in the event that Dr Wai had not received repayment of the whole of the $100,000 advance by the date that was 4 months after the date of the Investor Agreement.

The result is that, notwithstanding the unsatisfactory wording of the Investor Agreement, as the development project failed, if the Debtor had not repaid the $100,000 to Dr Wai by 31 December 2010, Dr Wai was granted permission to lodge a caveat against the title to the Property.

In my earlier reasons for judgment, I principally relied upon the decisions of the Court of Appeal in Murphy v Wright (1992) 5 BPR 11,734; BC920350 and Troncone v Aliperti (1994) 6 BPR 13,291; BC94002483.

After I had stated my conclusion at [45] that the wording of cl 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, I made the following observations:

The applicants on both notices of motion appeared before me on 24 September 2015 to argue the point that I left open in my earlier reasons for judgment; that is, which of the applicants were entitled to priority in respect of payment out of court of the $59,053.63.

The position is that I have held that Dr Wai has an equitable charge over the Property to secure payment to him of the advance of $100,000. There is no contest about the validity of the equitable mortgage over the Property held by Ms Ros and Mr Kelly in respect of the advance of $350,000 made by them to the Debtor.

The parties are agreed that, as there are two competing equitable interests in the Property, and none of the applicants were guilty of any disentitling conduct, the maxim that, where the equities are equal, the first in time prevails, is applicable.

There is no doubt about the date on which Ms Ros and Mr Kelly’s equitable mortgage was created. It was the date of the mortgage document, being 22 June 2011. There is a doubt about the date when Dr Wai’s equitable charge was created. The alternatives are that the charge was created immediately after 31 December 2010, when Dr Wai first became entitled to lodge a caveat, and 11 October 2011 when Dr Wai’s caveat was lodged.

Dr Wai will be entitled to priority if his equitable charge was created immediately after 31 December 2010, while Ms Ros and Mr Kelly will be entitled to priority if Dr Wai’s charge was not created until 11 October 2011.

I have considered the reasoning in the two Court of Appeal decisions in my earlier reasons for judgment. The relevant contractual provision considered by the Court of Appeal in Murphy v Wright was:

The significant feature of this term for present purposes is that it authorised the lender to do two things; first, to attach the relevant debt to any assets of the guarantor; and secondly, to register a caveat against any property registered in the name of any guarantor.

Handley JA (with whom Priestley JA agreed; Sheller JA dissenting) said at 11,737 to 11,739:

The majority of the Court of Appeal in Murphy v Wright decided, in the application of cl 12 of the agreement:

In Murphy v Wright, the lender was authorised to attach the debt to any of the guarantor’s property. It seems obvious that, until an act of attachment occurred, there could not be a charge created in relation to any particular property. Otherwise, there would have been a charge over all of the guarantor’s property from the date of the agreement, even without an act of attachment.

The question is whether it is essential for the lender to lodge the caveat before the charge is created, even where the right to lodge the caveat is granted in the agreement only in relation to a single, identified Torrens title property.

In Wilson v Graham (1997) 10 BPR 19,051; BC9701840, Santow J (as his Honour then was) said at 19,052 in respect of this aspect of Murphy v Wright (in what appears to be an ex tempore judgment on an ex parte application):

Bergin J (as her Honour then was) referred to this passage with apparent approval in Nudd v Official Trustee in Bankruptcy [2002] NSWSC 399; (2002) 11 BPR 20,163 at [18].

In my view, the reasoning of Handley JA in Murphy v Wright has the effect that no charge will be created until the caveat is lodged, even where the agreement relates to a single, identified property. That is, where the owner of property authorises another party to create an estate or interest in the property after the occurrence of some condition, which gives the other party a choice as to whether or not to create the estate or interest, that estate or interest does not arise when the condition occurs, but when the right is exercised by the agreed method of exercise.

In Wilson v Graham, Santow J distinguished Murphy v Wright on grounds that do not require present consideration. It is true to say, however, that the clause under consideration by his Honour related only to a single identified piece of property. The facts in Nudd v Official Trustee in Bankruptcy were even further from the present, but it is also true in that case that only a single piece of property was involved. The two authorities provide some support for the proposition that Handley JA’s conclusion that there could be no charge over the property until the caveat had been lodged did not depend on the fact that the authority given to the lender related to all of the guarantor’s property, so that it was necessary in practical terms for the lender to attach the debt to particular property, but applies generally to cases where the right relates to a single, identified property.

I will return to this issue after I have considered the other decision of the Court of Appeal in Troncone v Aliperti.

In that case, the relevant clause provided as follows:

Again, the authority related to “any property” and involved an authorisation to lodge a caveat.

Mahoney JA said at 13,292:

Mahoney JA therefore held that the grant of the authority to lodge the caveat carried with it by implication “such an estate or interest in land as was necessary to enable that authority to be exercised”. His Honour has thus far not considered what the nature of the estate or interest was, or when it was created.

His Honour then addressed the question of the nature of the interest in the land that was created, at 13,292, 13,293:

It is not necessary for me in this matter to consider the correctness of his Honour’s observations concerning the nature of the interest in land that was implied by the grant. The observations are plainly obiter, as his Honour expressly acknowledged that it was not necessary for him to determine that question.

As I have noted, Mahoney JA did not advert to the issue of when the implied grant of an estate or interest necessary to support the lodging of the caveat was made. The clause in question did not make the right to lodge the caveat contingent on a default having occurred, as was the case for the provision considered in Murphy v Wright. The clause was, however, equivalent to that considered in Murphy v Wright in so far as it authorised the creditors to lodge a caveat “on any property owned by” the debtor. There was no suggestion, and there could hardly be any suggestion, that the intention was that the creditors would have an estate or interest by way of security in all of the property of the debtor. Implicitly, an act of attachment was necessary.

In my view, Mahoney JA’s reasoning must be interpreted as involving a conclusion that, even if the implied grant was made as an incident of the original agreement, which is consistent with the creditors not having to wait until a breach occurred before a caveat was lodged, the grant must have been contingent on the lodgement of the caveat.

Priestley JA agreed with Mahoney JA, and stated that “the case seems to me to raise much the same issues as this court decided in Murphy v Wright” and that “I do not see any material distinction in the present case from that one”.

Meagher JA also agreed with Mahoney JA. His Honour added that the interest in land intended to be granted by the owner could only be an equitable charge.

The position therefore is that in Murphy v Wright, the lender was authorised to lodge a caveat against any of the property of the borrower, but only after breach. The charge was only created at the time of lodgement of the caveat, as that was the means by which the option granted to the lender was required to be exercised. The creditors in Troncone v Aliperti were also authorised to lodge a caveat against any of the property of the debtor, but did not have to wait until a breach had occurred. Implicitly, lodgement of the caveat was required before the estate in any particular property was created, even though the grant of the right was made in the original agreement.

It will now be appropriate to consider the effect of the terms of the Investor Agreement on the issue of when Dr Wai’s equitable charge was created.

In the present case, the right granted to Dr Wai to lodge a caveat related to specific property, being the Property, and cl 22 of the Investor Agreement appears to create a contingency as to the timing for the lodgement of the caveat.

It will be convenient to repeat the statement of the condition contained in cl 22.1:

I have referred above to the unusual structure of the Investor Agreement, which appears to be intended to give Dr Wai a right to share in a percentage of the profit of the development project, if a profit was made (cl 5), and the right to be repaid his original investment as a debt plus interest, if the project did not make a profit (cl 7). I put aside the deficiencies in the drafting of the agreement.

Schedule 2 to the Investor Agreement contained estimates as to the expected time for completion of the project, but the agreement itself does not specify a completion date for the project.

Clause 7 also does not specify a date by which the Debtor was contractually obliged to repay Dr Wai. Clause 22.1(a) refers, however, to “the maturity date being 4 months from the date of this agreement”. It does not necessarily follow, however, that the effect of that provision was to make the debt repayable on 31 December 2010. The dual rights of Dr Wai in cl 5 and 7 must be borne in mind. The debt may have been repayable on 31 December 2010 but it does not follow that that result would necessarily arise, without some act of election by Dr Wai or the Debtor, because that might close off Dr Wai’s right to participate in a share of the profits under cl 5.

Paragraph (a) of cl 22.1 appears to relate to the situation where Dr Wai’s investment is to be treated as a debt, and par (b) relates to the situation where the investment is to be treated as a right to share in profits.

The use of the words “in the event that any or all of the following occur” in the chapeau appear to be intended to give Dr Wai a choice as to whether, once one of the events has occurred, he will lodge a caveat, or not. The wording of the Investor Agreement lacks clarity in many respects, but it appears to be intended to give Dr Wai two-dimensional investment rights that depend partly on the outcome of the development project, and partly on Dr Wai’s election.

It is at least true that Dr Wai was not required to lodge a caveat when the event in par (a) occurred, and if he was confident about the likelihood that he would become entitled to a share of 25% of the profit, he might have elected not to lodge a caveat until the event in par (b) occurred.

The parties did not address the issue of whether Dr Wai would have made an election under the Investor Agreement, if he had proceeded on the basis of par (a) rather than par (b), so I should not base my reasoning on an examination of that issue. It is only necessary for me to observe that it is a real issue. It is at least arguable, that once Dr Wai had lodged a caveat against the title to the Property after the time in par (a) had passed, he could not complain if the Debtor simply repaid his $100,000 (perhaps without interest in this case because of the absence of Schedule 1), and Dr Wai would then lose his right to share in 25% of any profit that was subsequently made. However, I mention this issue only to underscore the proposition that Dr Wai’s right to lodge a caveat based alternatively under par (a) or par (b) probably has commercial consequences. That provides some support for the conclusion that, on the proper construction of the Investor Agreement, the estate or interest in the Property that Dr Wai was authorised by cl 22.1 to create would only come into existence when Dr Wai lodged a caveat.

It must also be noted that cl 22.1 contains the words: “Granting of lodgement of such caveats will only be allowed in the event that any or all of the following occur… (Emphasis added)”. The authority to lodge the caveat is found earlier in cl 22.1 in the words: “The Developer grants permission to the Investor to lodge a caveat…” While it is questionable to attribute technical legal subtlety to the draughtsman of the Investor Agreement, the use of the word “granting” should not be ignored in a context where Dr Wai is first given the authority to lodge a caveat over the Property, and then there is a restriction as to when the grant may be allowed. Allowing for all of the imprecision of language, the wording of cl 22.1 on balance conveys the meaning that the estate or interest in the Property that Dr Wai is authorised to create will not come into existence until he exercises his authority when either the event in par (a), or the event in par (b) occurs, or alternatively after both events.

That conclusion, in a practical way, is reinforced by the consideration that the Property was owned by two guarantors, and as Handley JA observed in Murphy v Wright at 11,736, extracting the decision of the plurality in Ankar Pty Ltd & Arnick Holdings Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549 at 561:

The relevant doubt in the present case is as to whether, on the basis that I have found that the Guarantors were parties to the Investor Agreement, that the agreement had the effect that the Guarantors granted an equitable charge over the Property when the event in par (a) of cl 22.1 occurred, even if Dr Wai did not exercise his right to lodge a caveat against the property (when in fact he may have wished to pursue his right under cl 5 to receive a share of the profits from the development project), or whether he had to exercise that right which may have crystallised his rights against the Debtor, before the equitable charge arose. That doubt should be resolved in favour of the Guarantors, as otherwise they would have no practical way of knowing whether or not their title to the Property was subject to an equitable charge in favour of Dr Wai.

Construing the Investor Agreement in a manner that accords to it the greatest commercial common sense leads to the conclusion that, if the Guarantors’ property was to be bound by an equitable charge in favour of Dr Wai, he had to exercise his right to lodge a caveat on the title to the Property. That way the Guarantors would become aware that the Property had become subject to an equitable charge, when the Registrar-General gave the Guarantors the notice of the lodgement of the caveat required by s 74F(6) of the Real Property Act 1990 (NSW).

For the foregoing reasons the appropriate orders for the court to make are: