Winau Aust Pty Ltd & Ors v LCC Property Development Pty Limited & Ors

This case concerns a consequence of fraud with which the courts are all too familiar: which of two innocent parties must bear the financial consequences of the misdeed? In these proceedings the choice falls between the mortgagees who believed they were making a loan secured by a registered mortgage to the mortgagor company, or the mortgagor company whose identity was in effect stolen by the fraudster purporting to be its sole director and shareholder.

The third plaintiff (“183 Eastwood”) owned three parcels of land at Eastwood which it intended to develop (the “Lands”). The third, fourth and fifth defendants (the “Mortgagees”) advanced $4,000,000 secured by three identical registered mortgages (the “Mortgages”), one over each parcel of the Lands. The second defendant (“Mr Chan”), who by his allegedly wrongful conduct was able to hold himself out as the sole director and shareholder of 183 Eastwood and obtain replacement certificates of title for the Lands, was a guarantor under the Mortgages. The funds advanced by the Mortgagees were paid into a bank account in the name of 183 Eastwood that had been set up by Mr Chan without the knowledge or authority of the true directors of 183 Eastwood.

No repayments were made to the Mortgagees. The funds that they advanced are gone. Mr Chan is the subject of a number of criminal charges which, so far as the Court is aware, have not yet proceeded to trial. In purported exercise of their rights, the Mortgagees sold the Lands. The proceeds of sale have been paid into Court.

Relying on the principle of indefeasibility derived from s 42 of the Real Property Act 1900 (NSW) (the “Act”), the Mortgagees submit that they are entitled to those proceeds. 183 Eastwood and the other plaintiffs submit to the contrary. The parties crystallised this aspect of the dispute by agreeing that the Court should answer this separate question:

The Court answers the question “No - the Registered Mortgage does not secure anything in favour of the Mortgagees against the Lands and against the proceeds of sale of the Lands”. That answer is the result of the application of basic principles of contract and legal personality to the terms of the Mortgages properly construed. If the Mortgages were to secure anything, it was the repayment of funds to be advanced to the Mortgagors or at their direction. Funds were advanced but, unbeknownst to the Mortgagees, not to 183 Eastwood or at its direction. On the proper construction of the Mortgages there is nothing for them to secure. Nor, for the same reason, does Mr Chan have any obligation to the Mortgagees as guarantor under the Mortgages. The proceeds of sale of the Lands held in Court should be paid to 183 Eastwood.

Dr M Sharpe of Counsel and Mr F Lim, Solicitor, appeared for the plaintiffs. Mr V Bedrossian of Counsel appeared for the Mortgagees. Mr H Altan appeared for the ninth defendant, the Registrar General. The other parties took no part in this aspect of the proceedings.

These proceedings have come before the Court on numerous occasions, with a number of procedural issues and interlocutory steps raised by the parties. A summary of the procedural background can conveniently be found in a judgment of Ward CJ in Equity: Winau Aust Pty Ltd v LCC Property Development Pty Ltd [2019] NSWSC 499.

For present purposes the following history will suffice:

On 28 October 2019, I made orders generally in a form agreed by the relevant parties pursuant to Rule 28.2 of the Uniform Civil Procedure Rules 2005 (NSW) for the determination of a separate question concerning the rights inter se of 183 Eastwood and the Mortgagees to the monies held in Court (being approximately $6,725,000 at the time). The question for consideration was:

As recorded by way of notation to the orders I made on that day, 183 Eastwood and the Mortgagees agreed that:

183 Eastwood and the Mortgagees further agreed that for the purposes of these proceedings, they would be bound by the facts contained in the following material that was put before the Court:

The Separate Question was set down for hearing on 28 November 2019. The claim for relief set out in prayer 3 of the Mortgagees’ Amended Motion (being the order for payment out to the Mortgagees) was also listed for hearing on the same date.

During the hearing on 28 November 2019, Mr H Altan, Counsel for the Registrar General, identified two additional questions for consideration by the parties:

Following that hearing, I directed further written submissions (including any subsequent submissions in reply) be provided on the two additional questions identified in the preceding paragraph.

It is appropriate to provide some detail – all of which derives from the agreed material the parties relied upon – as to the respective parties to the proceedings, both those formally joined to the proceedings as well as other key individuals who are important to understanding the factual background.

The third plaintiff, 183 Eastwood, was incorporated on 31 July 2016. 183 Eastwood was established by a group of investors as a property development company to purchase sites and develop multi-storey unit blocks in the suburb of Eastwood, NSW.

On 29 August 2016, the Eastwood Unit Trust (the “Unit Trust”) was declared and settled. It is not necessary to identify all unit holders for the Unit Trust, however they included:

On the same day, 183 Eastwood was appointed as the trustee of the Unit Trust.

Also on 29 August 2016, Mr Eric Naijing Lin and Mr John Tak Ching Lau were appointed as the directors of 183 Eastwood. Mr Steven Ju was appointed as the company secretary. Mr Lin and Mr Lau each held 50% of the shares in 183 Eastwood.

In September 2016, 183 Eastwood entered into three contracts for the sale of lands in writing to purchase the Lands on behalf of the Unit Trust. 183 Eastwood purchased the Lands unencumbered for a total consideration of $7,500,000 from funds contributed by the unit holders.

183 Eastwood became the registered proprietor of the Lands on 25 February 2017.

Since October 2016, 183 Eastwood had been carrying out works in preparation for the development of the Lands. These works included site preparation, making development applications and the selling of housing units off the plan.

As set out in paragraph [17(3)] above, LCC is a unit holder in the Unit Trust, for which 183 Eastwood was appointed as trustee. The directors of LCC were Mr Lin and Mr Chan.

Mr Chan had been a business partner of Mr Lin. It was through this connection that Mr Chan first came to know of the existence of the Unit Trust, 183 Eastwood and, in particular, the Lands.

Ippin Textiles Pty Ltd, Jia He Family Investments Pty Ltd and M Wang Family Pty Ltd (the third, fourth and fifth defendants, and together the Mortgagees) were introduced to Mr Chan through a mortgage broker. They had no prior connection with him and had no knowledge of Mr Chan’s alleged wrongdoing.

CKC is a business registered with the Australian Securities and Investments Commission (“ASIC”), acting as an agent for companies making lodgements to ASIC.

CKC assisted Mr Chan in lodging various documents with ASIC in January 2018, which facilitated Mr Chan’s alleged wrongdoing. There is no suggestion that CKC was a knowing participant in that conduct.

The plaintiffs joined the Registrar General to the proceedings for the alternative purpose of making a claim on the Torrens Assurance Fund (the “Fund”) pursuant to s 129 of the Act on the basis that they, the plaintiffs, have been deprived of the Lands as a consequence of Mr Chan’s fraud.

The Registrar General initially opposed the plaintiffs’ application to join it to the proceedings, submitting that any such claim on the Fund (even if all of the allegations made by the plaintiffs in support of that claim were made out) was not available by operation of the disentitling provision set out in s 129(2)(o) of the Act. Any claim on the Fund remains to be resolved.

As set out in paragraph [11] above, for the purposes of these proceedings, 183 Eastwood and the Mortgagees agreed to be bound by the facts contained in certain evidentiary materials put before the Court. Relevantly, this included identifying the Plaintiffs’ Statement of Facts as agreed facts for the purpose of the hearing and determination of the Separate Question. What follows derives from the agreed materials.

I have already set out the facts concerning the incorporation of 183 Eastwood and the purchase of the Lands in paragraphs [16] to [22] above.

For reasons that will become evident, it is important to refer here to the bank account 183 Eastwood opened with the St George Bank in its name on or about 5 September 2016 (the “St George Bank Account”), shortly after the company was incorporated. Only Messrs Lin, Lau and Ju were authorised to operate the St George Bank Account.

183 Eastwood did not open or operate any other bank account.

On or about 22 January 2018, Mr Chan engaged a mortgage broker, Titan Lending Group Pty Ltd, to apply for a loan of $4,500,000 in the name of 183 Eastwood.

On or about 22 January 2018, Titan issued a loan approval, sent to Mr Chan, on the following terms:

On or about 23 January 2018, without the knowledge or approval of Messrs Lin, Lau or Ju, Mr Chan caused the lodgement of a Form 484 (dated the same date) that purported to inform ASIC that:

On 24 January 2018, Mr Chan opened a Westpac bank account in the name of 183 Eastwood (“Westpac Bank Account”). Despite bearing the name “183 Eastwood”, Mr Chan opened the Westpac Bank Account without the knowledge and approval of Mr Lin and Mr Lau. Mr Chan is the only person who controlled or otherwise had access to the Westpac Bank Account.

On 25 January 2018, without the knowledge or approval of Messrs Lin, Lau or Ju, Mr Chan caused the lodgement of a Form 484 (dated the same date) that purported to inform ASIC that:

Also on 25 January 2018, without the knowledge or approval of Messrs Lin, Lau or Ju, Mr Chan lodged an application with the NSW Lands Registry Services (NSW) for replacement Certificates of Title for the Lands. These replacement certificates were subsequently issued, printed and made available to Mr Chan for collection.

The Court accepts that at no point did Messrs Lin, Lau or Ju sign any documents or provide any authorisation for the matters referred to in paragraphs [36] to [39] above. Further, in relation to the Officer Change Notice and Share Change Notice in particular, the Court accepts:

On or about 29 January 2018, without the knowledge or approval of Messrs Lin, Lau or Ju, Mr Chan (in his purported capacity as the sole director and secretary of 183 Eastwood) executed the Mortgages over the Lands in favour of the Mortgagees to secure the advance described in the Mortgages as being for $4,000,000. Mr Chan also executed the personal guarantee that formed part of the Mortgages.

On 29 January 2018, without the knowledge or approval of Messrs Lin, Lau or Ju, Mr Chan signed cheque directions purportedly on behalf of 183 Eastwood authorising the Mortgagees to remit the available loan amount of $3,804,300 into the Westpac Bank Account (the “Cheque Directions”).

In accordance with the Cheque Directions, the sum of $3,791,266.88 was remitted into the Westpac Bank Account by the Mortgagees in 2 instalments:

It is not disputed by the parties that the funds were paid into the Westpac Bank Account. For completeness, it is also convenient to pause here and note that the St George Bank Account statement of 183 Eastwood for the period 24 January 2018 to 31 March 2018 shows that no part of the funds advanced by the Mortgagees was paid into the St George Bank Account.

On or about 6 February 2018, the Mortgagees registered the Mortgages and the common provisions to each mortgage. The relevant terms and conditions are set out commencing at paragraph [53] below.

At no point did Messrs Lin, Lau or Ju cause 183 Eastwood, or authorise Mr Chan, to borrow on 183 Eastwood’s behalf any sum of money from the Mortgagees or to enter into the Mortgages.

On 15 February 2018, 183 Eastwood’s accountant informed Mr Lin that a caveat had been lodged by Capital Empire Pty Ltd against the Lands. Mr Lin then engaged GEA Lawyers to conduct enquiries into the reason for that caveat. Through the enquiries made by GEA Lawyers, Messrs Lin, Lau and Ju became aware of what Mr Chan had allegedly done.

No repayments were made to the Mortgagees. Consequently, on or about 6 June 2018, the Mortgagees served a purported Notice of Default on 183 Eastwood in respect of the Mortgages. They subsequently purported to exercise their power of sale.

On or about 6 September 2018, the Mortgagees entered into a contract of sale to sell the Lands to Rong Sheng Eastwood Pty Ltd (“Rong Sheng”) for $6,880,000 (the “Lands Sale Contract”).

On 11 October 2018 the parties agreed to orders being made by Hallen J (see paragraph [8(2)] above), allowing the Lands Sale Contract to settle, and Rong Sheng to become the registered proprietor of the Lands, with the proceeds of sale to be held in a controlled monies account. As set out in paragraph [8(4)] above, these funds were subsequently paid into Court.

183 Eastwood has been placed into receivership and the development project it sought to undertake on the Lands has failed. 183 Eastwood, all unit holders in the Unit Trust and the Mortgagees are all facing significant losses.

Mr Chan was arrested by the NSW Police on 17 May 2019 and charged with offences arising from his alleged conduct which I have set out above. He was refused bail. His charges had not been heard at the time of the hearings before me.

The Mortgages are in identical terms, each relating to one of the parcels that comprise the Lands. It was accepted that Mr Chan (in his purported capacity as the sole director of 183 Eastwood) had signed the schedule to the Mortgages in favour of the Mortgagees. He had also signed them in his own right as a guarantor.

The Mortgages as registered relevantly comprised by express incorporation:

The three page mortgage was executed by Mr Chan purportedly on behalf of 183 Eastwood and described as “Sole director/Secretary”. The MCP contained no execution clauses. Schedule A was executed by Mr Chan purportedly on behalf of 183 Eastwood, which was described in a printed heading as “Borrower/Debtor/Mortgagor” (all of which were defined terms in the Mortgages) and by Mr Chan personally, under a printed heading “Guarantor/Debtor/Mortgagor” (all of which were defined terms in the Mortgages).

I will next set out the terms and conditions of the Mortgages relevant to the determination of the Separate Question.

Each of the three page mortgage documents included:

The Mortgages were in typescript, except for the words reproduced in italics above.

The MCP included:

Schedule A set out the following relevant provisions:

The parties accepted that answering the Separate Question was solely a question of the proper construction of the Mortgages. I propose to briefly set out the relevant legal principles as to construction, before dealing in turn with each of the issues raised by the parties, addressing the respective submissions put forward by the plaintiffs, Mortgagees and Registrar General.

The relevant legal principles were not in dispute. In relation to the construction of a commercial contract, the High Court said in Electricity Generation Corporation v Woodside Energy Ltd (2004) 251 CLR 640 (“Electricity Generation Corporation”), at [35] per French CJ, Hayne, Crennan and Kiefel JJ:

Where the construction of a forged mortgage is in question:

The parties’ submissions may be conveniently divided into three topics:

The bedrock of the plaintiffs’ submission is that the Mortgages, although indefeasible upon registration, secured nothing because – irrespective of what the Mortgages say - no money was ever advanced to nor received by 183 Eastwood. That is, without any advance to 183 Eastwood pursuant to the terms of the Mortgages, there is simply nothing to which the alleged debt can attach.

The plaintiffs’ submissions why the Mortgages secure nothing can be summarised as follows:

In particular, the plaintiffs relied on Perpetual Trustees Victoria Ltd v Cox [2014] NSWCA 328 (“Perpetual Trustees v Cox”). In that case, the debt of $598,500 was stated in the mortgage itself, with an acknowledgment of receipt by the borrowers. However, $253,000 of the debt was never received by the borrowers but was instead paid to their mortgage broker pursuant to a payment direction not signed by the borrowers.

In Perpetual Trustees v Cox, the relevant clause in the Memorandum of Common Provisions provided:

In what is a similar argument to that adopted by the plaintiffs, in his written submissions dated 6 November 2019, Mr Lim noted that the borrowers in Perpetual Trustees v Cox argued that they could not be liable for what they did not receive. Mr Lim submitted that the primary judge and Court of Appeal agreed with this reasoning, with Leeming JA (with whom Macfarlan and Emmett JJA agreed) saying (emphasis added):

The plaintiffs argued that 183 Eastwood did not receive any part of the Principal Amount allegedly advanced by the Mortgagees pursuant to the Mortgages and the terms of the MCP:

Further, it was submitted by the plaintiffs that nowhere in the Mortgages did the mortgagor (purportedly 183 Eastwood) expressly acknowledge receipt of the Principal Amount.

The Mortgagees submitted that the Separate Question should be answered in the affirmative. The Mortgagees pressed for the release of the entirety of the proceeds of sale to them, rejecting any suggestion that 183 Eastwood had any basis to contend that any of those funds ought to be held back from the Mortgagees.

Mr Bedrossian referred to the judgment of Davies J in Bay Bon Investments Pty Ltd v Sultana [2015] NSWSC 1797 at [26]-[30], which provides a summary of the position concerning indefeasibility of registered mortgages under s 42 of the Real Property Act, including in circumstances of alleged fraud by persons other than the mortgagee.

He contended that while it was certainly correct that the mortgagee must have provided the funds, which are said to be secured by the mortgage, that did not mean that the monies advanced by the mortgagee must have reached the registered proprietor of the mortgaged property. Reliance was placed on this observation of Pagone J in Solak v Bank of Western Australia Ltd [2009] VSC 82 at [16]:

The proper construction of the Mortgages can be ascertained by at least two different construction routes, both being submitted by Mr Bedrossian as “a straightforward mechanical process of tracing through contractual provisions” in the MCP and Schedule A.

The Mortgagees submitted that the first of these routes – “the short construction point” – leaves it entirely clear that the Mortgages expressly identified the secured obligation as including the obligation to pay $4,000,000, that being an obligation that was rendered indefeasible upon the registration of those Mortgages. This argument was made through the following sequence of references:

In response to the plaintiffs’ submission that there is no acknowledgement in the Mortgages that the Principal Amount was advanced, Mr Bedrossian submitted this was overcome by the word “stipulated” in the definition of “Principal Amount” itself, as set out in the MCP. It was the Mortgagees’ submission that the world “stipulated” required in the current case no more than showing an agreement to provide the funds (as opposed to actually providing them):

Reliance on the terms “Lender” and “Debtor” also goes to the second of the construction routes put forward by the Mortgagees – being “the longer construction point”. The consequence of this argument was said to be that the Mortgages secure the payment obligations not only of 183 Eastwood, but also those of Mr Chan himself.

The “longer construction point” relied on these steps:

Mr Bedrossian stressed that the defined terms in the MCP must be accorded the definition expressly attributed to them by the contract itself, and that there was “no basis for the Court to ignore the definition of a term expressly identified by the contract and instead to apply an entirely different (and narrower) interpretation”.

Pausing on the particular submission on the definition of “Debtor(s)” in Schedule A, Mr Bedrossian advanced that the reference to “183 Eastwood, Scott Chan” in the document was a clear identification of two separate debtors. This is to be contrasted with the alternative reading of that text as “183 Eastwood, Attention: Scott Chan”.

As I understood Mr Bedrossian’s submission, the Mortgagees contended that it did not matter if the Loan Amount advanced to the Westpac Bank Account was never received by 183 Eastwood. If it was received by Mr Chan in his capacity (albeit fraudulent) as director of 183 Eastwood, the Mortgagor’s obligations under the Mortgages were nevertheless enlivened and there was an obligation to repay the debt secured by the Mortgages.

In response to this, both the Mortgagors and the Registrar General countered that the only commercially sensible construction of the word “Debtor” (where “Debtor” also means “Borrower” and/or the “Mortgagor”) is for “Debtor” to mean only 183 Eastwood.

The Registrar General submitted that the answer to the Separate Question is that the Mortgages do not secure anything. The submissions of the Registrar General were generally to the same effect as the plaintiffs’ and adopted their written submissions.

Mr Altan referred to the following dictum of Young CJ in Equity (as his Honour then was) in Perpetual Trustees Victoria Ltd v Tsai [2004] NSWSC 745, at [20]-[21] (emphasis supplied):

Mr Altan went on to submit with the plaintiffs that “the mere identification of [the Principal Amount] does not overcome the fact… that in the instant case, there is no acknowledgement in the Mortgages (including the Memorandum) that the Principal Amount was advanced” (emphasis in original).

Further, Mr Altan’s submission noted that the MCP required “repayment” of the Principal Amount advanced. If there was no amount advanced to 183 Eastwood as the “Borrower” and “Mortgagor” under the Mortgages, then there was no money advanced to 183 Eastwood that could require “repayment”.

In response to the Mortgagees’ submission (set out at paragraph [81] above) that the definition of “Debtor(s)” in Schedule A is “183 Eastwood Pty Ltd ACN XXX XXX XXX, Scott Chan” (my emphasis) and subsequent reliance on the definition of “Mortgagor” in Schedule A as meaning “the Debtor(s)”, the Registrar General similarly emphasised that Mr Chan only signed the Mortgage in his capacity as purported “Sole Director / Secretary” of 183 Eastwood. As Mr Altan set out in paragraph [8] of his submissions on the Separate Question:

During the hearing on 28 November 2019, Mr Altan submitted that the real question, or the more “appropriate question”, is who “owned” the money deposited by the Mortgagees into the Westpac Bank Account opened by Mr Chan in the name of “183 Eastwood”. Put another way, to whom did the Mortgagees pay the monies that were deposited into that account?

Ms Sharpe, who appeared for the Plaintiffs at the 11 October 2019 hearing, submitted that the mere fact Mr Chan set up a bank account in the name of 183 Eastwood did not make it the company’s bank account.

In his written submissions in reply on behalf of 183 Eastwood dated 10 December 2019, Mr Lim argued that the money remitted by the Mortgagees into the Westpac Bank Account did not belong to 183 Eastwood and was not its asset or property because:

By reason of the above, Mr Lim submitted that 183 Eastwood could not be beneficially entitled to the Principal Amount remitted by the Mortgagees.

The Mortgagees submitted that the answer to the question of “who owned the money deposited into the Westpac bank account in the name of 183 Eastwood” was relatively straightforward – it was 183 Eastwood.

As was set out in the Mortgagees’ Supplementary Submissions provided by Mr Bedrossian on 9 December 2019, the Mortgagees argued that the funds credited to the Westpac Bank Account were ‘owned by’ 183 Eastwood (both beneficially and legally):

The Mortgagees submitted that although this point was unnecessary to their case, the advance of monies into a bank account in the name of “183 Eastwood Pty Ltd” did constitute an advance of monies to 183 Eastwood. As was set out by Mr Bedrossian’s submissions in respect of the Separate Question (emphasis in original):

Mr Altan set out the law and principles in support of the relationship between a bank and customer being essentially in contract. His submissions put that the corollary of this relationship is that:

Mr Altan submitted that in circumstances where there was no contract between 183 Eastwood and Westpac, it cannot be said that the Westpac Bank Account belonged to 183 Eastwood:

Further, Mr Altan submitted that nothing Mr Chan did in his dealings with Westpac could be traced back to the authority of 183 Eastwood:

He went on to submit:

During the hearing on 28 November 2019, Mr Altan raised for consideration whether the absence of the guarantor having an interest in the Lands meant that, insofar as the Mortgagees’ rights may arise by virtue of the guarantee obligations of Mr Chan, the Mortgages do not in fact achieve indefeasibility.

It is convenient first to set out the Registrar General’s submissions on this issue.

In Mr Altan’s supplementary submissions, it was advanced that even if it is true (which it denied) that Mr Chan was a Debtor because he is a guarantor and had a contingent liability, his obligation as a guarantor was not secured by the Mortgages. Further, in any event, Mr Chan had no liability as a guarantor because the Lender did not “advance the Principal Amount to the Borrower” as required by Clause 28.3(a) of the MCP.

Mr Altan submitted in paragraph [15] of his written submissions on this issue that:

No oral submissions were advanced for the plaintiffs on this issue during the 28 November 2019 hearing. In the supplementary submissions of 183 Eastwood prepared by Mr Lim, the plaintiffs adopted and supported the submissions of the Registrar General, contending that Mr Chan’s personal liability under the guarantee was not rendered indefeasible by registration of the Mortgages.

The Mortgagees argued that this was an irrelevant issue, with none of the contentions put forward by the Mortgagees relying upon Mr Chan’s personal guarantee being indefeasible.

Nevertheless, Mr Bedrossian submitted that the question properly put was not whether the personal guarantees of Mr Chan are rendered indefeasible, but “whether the definition of the monies and obligations secured under the Registered Mortgages included the personal obligations undertaken by Mr Chan”. Mr Bedrossian submitted it was clear that the definition of monies secured by the Mortgages encompassed the monies owed by Mr Chan personally, thus causing the Lands to be security for their payment to the Mortgagees:

Finally, the following submissions were advanced by the Mortgagees in respect of the Separate Question, which also go to the nature of Mr Chan’s personal obligations secured by the Mortgages:

With one exception (see paragraph [157] below), the Court generally accepts the submissions put on behalf of the plaintiffs and the Registrar General. However, it seems to me that the Separate Question is most conveniently answered by considering the following issues:

This might be described as a mixed question of fact and law. The undisputed primary fact is that the Mortgagees, purportedly pursuant to the Mortgages, paid $3,791,266.68 into the Westpac Bank Account. However, was this a payment to or at the direction of 183 Eastwood under the Mortgages? In arriving at the Court’s negative answer to this question, it is necessary to address the parties' arguments about corporate personality and the nature of the Westpac Bank Account.

Turning first to the question of corporate personality, in my respectful opinion, it is necessary to begin with the basic principle that a company is a separate legal entity which comes into existence as a body corporate upon registration (Corporations Act 2001 (Cth) (the "CA"), s 119) and which has the legal capacity and powers of a natural person and all the powers of a body corporate (CA, s124). This status has the consequence that a company can only act by agents, who may themselves be natural or corporate persons. For the company to be bound by the acts of an agent, the agent must have the actual or ostensible authority of the company to do the relevant act.

The most familiar agents of a company are its directors and officers. The facts of this case do not require consideration of the board as an organ of the company. Setting aside for the sake of simplicity the extended definition in the CA of "director", generally a director is a natural person appointed to be a director in accordance with the CA or the company's constitution. It is an unremarkable exercise of a director's agency to open a bank account on behalf of the company of which they are a director.

In this case, there is no doubt that Mr Chan was not a duly appointed director of 183 Eastwood and had neither actual nor ostensible authority to do anything on its behalf. Put simply, his acts were not those of 183 Eastwood and could not, in law, be attributed to 183 Eastwood. Contrary to the argument put for the Mortgagees, Mr Chan was not 183 Eastwood, and when Mr Chan did something it was not 183 Eastwood doing it. For example, he did not have the actual or ostensible authority of 183 Eastwood to receive any advance from the Mortgagees on its behalf or sign the Cheque Directions on its behalf. Critically for the purposes of this case, nor did Mr Chan have any such authority to establish the Westpac Bank Account on behalf of 183 Eastwood.

It is convenient at this point to record that during the course of argument Mr Bedrossian made it clear that the Mortgagees were not relying on the assumption under ss 128 and 129 of the CA. They were, with respect, correct not to do so. For example, because the Officer Change Notice was signed by Mr Chan - who was not a properly appointed director or officer of 183 Eastwood - and submitted on his instructions, the information in those notices was not "information provided by the company" for the purposes of s 129(2) of the CA and therefore could not be relied upon: Wood v Inglis [2008] NSWSC 1147; (2008) 68 ACSR 420 at [90] - [95] per Barrett J (as his Honour then was).

Turning to the legal nature of a bank account, the Court accepts the Registrar General's submissions set out in paragraphs [96] to [99] above. It is something of a legal misnomer to speak of "owning a bank account" because a bank account is not a type of property. A bank account is, in its basic form, a series of entries in the books of account of a bank recording credits and debits made to the account of a customer in accordance with the terms of the banker-customer contract. While the name of the account may include the name of the customer, that is not conclusive, but will be prima facie, evidence that the named customer is a party to the banker-customer contract. Similarly, the description of an account as being "X in trust for Y" is not conclusive, but will be prima facie, evidence of the existence of a trust or that X is the trustee. However, such evidence can be rebutted. Just because an account is opened in someone's name does not necessarily mean that in law it is "their" bank account or that they are legally entitled to be paid the funds in that account where there is a credit balance.

In this case the banker-customer contract which gave rise to the Westpac Bank Account was not between 183 Eastwood and Westpac because Mr Chan had neither actual nor ostensible authority to enter into such a contract by opening an account in 183 Eastwood's name. Although not strictly relevant to this part of the analysis, it can be noted that even as between Westpac and 183 Eastwood, Westpac would not have been able to rely on the publicly available information that Mr Chan was a director of 183 Eastwood for the reasons identified in paragraph [113] above.

I accept the Registrar General's submission that this case is on all fours with two English Court of Appeal cases where moneys were paid into a bank account set up by a fraudster in the name of a company: Robinson v Midland Bank Limited (1925) 41 TLR 402 and Stoney Stanton Supplies (Coventry) Ltd v Midland Bank Limited [1966] 2 Lloyd Rep 373. The conclusion of Danckwerts LJ in the latter case (at 385) applies equally to the case at bar: “…the moneys which were paid into the Bank were not the company’s moneys and there was never any relationship of customer and banker in regard to those moneys between the plaintiff company and the defendant bank”.

The payment by the Mortgagees into the Westpac Bank Account was not a payment to 183 Eastwood because there was no banker-customer contract in place between Westpac and 183 Eastwood. Nor, to the extent the money fell into the hands of Mr Chan, could it be said that the money was thereby paid to 183 Eastwood. Mr Chan had no authority to receive it on behalf of 183 Eastwood. In the absence of a banker-customer contract between Westpac and 183 Eastwood, the money which the Mortgagees paid into the Westpac Bank Account remained the Mortgagees’ until it was presumably withdrawn by Mr Chan purportedly as a director of 183 Eastwood.

This analysis means that for the purposes of the definition of “Principal Amount” in the MCP, there was never an “amount advanced by the Lender to the Debtor, the repayment of which is secure by this Mortgage”. As I explain further below (see paragraph [139] below), the “Debtor” in this expression must mean the “Borrower” (183 Eastwood).

Even if this last conclusion is wrong, such that “Debtor” in this definition includes Mr Chan, this still would not mean there was an advance to Mr Chan. The definition on its proper construction must mean an advance under the Mortgage and it would be a nonsense to conclude that is what occurred in this case. Even if he was relevantly the “Debtor”, the funds were not advanced to him under the Mortgage. Given the conclusion in paragraph [117] above that the money remained the Mortgagees’ once paid into the Westpac Bank Account and on the facts agreed between the parties for present purposes, Mr Chan stole it. It was not, and could not on any view be said to have been, “advanced” to him.

It also follows from the foregoing that the Court accepts the plaintiffs’ argument that there was never a “Commencement Date” and, therefore, no “Final Repayment Date”. This means that 183 Eastwood was never in breach of a repayment obligation that entitled the Mortgagees to exercise their power of sale over the Lands. Nor was there any such breach which would enliven Mr Chan’s obligations as guarantor.

This analysis means that, in the events which happened, the Mortgages did not secure anything and that it is 183 Eastwood and not the Mortgagees that is entitled to the proceeds of sale of the Lands currently paid into Court. This is sufficient to dispose of the Separate Question, but in deference to the arguments made and the possibility the matter may go further, I will set out my conclusions on the other issues.

Before turning to the proper construction of the Mortgages, two preliminary issues should be addressed: the significance of the “Overriding Intent” and the definition of “Debtor”.

It will be recalled that Clause 1.3 of the MCP provided that “This Memorandum and each of its terms shall be construed in accordance with and to give full effect to the Overriding Intent”. Clause 1.1 of the MCP included:

In my view this clause adds nothing, or almost nothing, to the approach the Court takes to the construction of commercial contracts at general law, which necessarily takes into account the background and purpose of the contract objectively determined (see paragraph [62] above). Nevertheless, I have consciously taken it into account in construing the Mortgages. Clause 1.3 is an indication of the agreement of the parties as to how they are to be taken objectively as having understood their agreement and, as such, is an indicium for the Court in arriving at the proper construction of the Mortgages in accordance with the objective theory of contract. However, it is not a licence to abandon the well understood approach to contractual interpretation to reach an outcome that does not accord with that approach. In other words, if the Court comes to the view that, properly construed, X means “black”, Clause 1.3 does not then require the Court to find it means “white” just because “white” may be thought better to reflect the “Overriding Intent”.

Because much of the argument focussed on “Debtor(s)” as identified in Schedule A, this aspect deserves particular attention. In Schedule A, "Debtor(s)" is recorded as "183 Eastwood Pty Ltd ACN XXX XXX XXX, Scott Chan". One question which can be immediately resolved is to express the Court's conclusion that the designation refers to 183 Eastwood and Mr Chan as two separate persons. It does not mean "183 Eastwood: attention Scott Chan". A straightforward and persuasive reason for this conclusion is that only four lines before in Schedule A, 183 Eastwood is listed as the Borrower without any reference to Mr Chan.

That point having been cleared away, it nevertheless seems to me, with respect, that the parties may have sometimes focussed their submissions too much on how the Debtors were listed in Schedule A rather than how "Debtor" was defined in the Mortgage as set out in clause 1 of the MCP. That definition is (emphases added):

In approaching this definition it must not be forgotten that the definition is itself part of an interpretation clause prefaced by the words "In the Mortgage, unless the context otherwise requires". These words are generally to be understood as a strong contractual indication that the definition is to be applied in almost all circumstances: Sir K Lewison, D Hughes "The Interpretation of Contracts in Australia", Law Book Co, 2012, 199-200.

The most important point to note for present purposes is that the collocation of "and/or" and "as the case may be" makes it clear that what "Debtor" means in any particular clause of the mortgage depends upon its context. The expression "and/or" was analysed by Santow J in Edmund-Jones Pty Ltd v Australian Women's Hockey Association Inc (1999) NSWSC 1014 at [211]-[214]. His Honour, one of Australia’s pre-eminent commercial solicitors before his appointment to the Bench, had no difficulty in concluding "and/or" had a clearly understood meaning in commercial agreements, despite longstanding criticism of it as inelegant or worse. That meaning is "X or Y or both". In the context of the Mortgages, this meant that, depending on the context, "Debtor" could mean the Borrower (183 Eastwood) or the Mortgagor (183 Eastwood and Mr Chan), or the Borrower and the Mortgagor (although in this case that combination yields the same result as Mortgagor).

Neither of the sub-paragraphs appended to the definition of "Debtor" are relevant to the present case. Sub-paragraph (a) does not apply because the Borrower and the Mortgagor are not the same person, given that Schedule A defines the Mortgagors to mean the Debtors (183 Eastwood and Mr Chan) whereas the Borrower is only 183 Eastwood.

Sub-paragraph (b) also does not apply because, while the Borrower and the Mortgagor consist of more than one person, this case does not give rise to any need to apply the somewhat curious words that follow (emphasis added): "The liability of those persons under this Guarantee shall be joint and several". While it does not matter for present purposes, it is not easy to see how the reference to "this Guarantee" makes sense given that the only guarantor was Mr Chan. This is not a drafting mystery which the Court is required to solve.

The importance of fixing on the definition of "Debtor" in Clause 1 of the MCP rather than the presence of that word in Schedule A is emphasised when it is appreciated that unlike the definitions of "Mortgagor(s)" and "Borrower(s)", there is no definition of "Debtor" by reference to Schedule A, i.e. there is no definition to this effect: ""Debtor" means the Person named in Schedule A as the Debtor". There are definitions in the MCP for "Debtor's Address" and "Debtor's Email Address" as being specified in Schedule A. However, those matters do not in fact appear in Schedule A. The sole significance of the designation of "Debtor(s)" in Schedule A is the definition that "Mortgagor(s)" means the Debtor(s)".

Having drawn attention to this definition of "Debtor", it is then necessary to identify which of the three possible meanings of "Debtor" applies in any particular place. This will primarily depend upon the context in which it appears. However, that context must itself be assessed by reference to the nature of the commercial transaction which the Mortgages are intended to record, that intention being itself objectively determined, and taking into account Clause 1.3. All of the evidence points to only one conclusion in that regard, being that the Mortgages are intended to give effect to an entirely familiar and unremarkable transaction: a loan by a lender to a borrower company secured by, first, mortgages over the company's land, and, second, a guarantee by the company's (purported) director. This understanding is confirmed by clause 28.3(a) of the MCP (the guarantee) that "the Guarantor [Mr Chan]…enters into this Guarantee because it has a desire that the Lender [the third to fifth defendants] advance the Principal Amount to the Borrower [183 Eastwood only] under this Mortgage". The items in square brackets record the designations given to those parties in Schedule A. This understanding has informed the Court’s approach to construing “Debtor” in any particular clause of the Mortgages.

In the events which have happened, answering this question will be determined by asking whether, on their proper construction, the security constituted by the Mortgages has effect even when, as the Court has found, no funds were in fact or law advanced to 183 Eastwood under the Mortgages?

The Court accepts the submissions put on behalf of the plaintiffs as to why, on their proper construction, the Mortgages do not create an indefeasible security interest over the Lands in circumstances where there has been no advance to 183 Eastwood. However, the Court primarily takes a simpler route to reach that conclusion which focuses upon precisely what it is, on their proper construction, the Mortgages secure. In setting out that reasoning in what next follows, it will also be apparent why the Court rejects the Mortgagees’ arguments based on the use of the word “stipulated” in the definition of “Principal Amount” in clause 1.1 of the MCP.

Turning first to the three page mortgage document (see paragraph [57] above), it specified that the "mortgagor mortgages the estate and/or interest in Lands specified in its mortgage to the mortgagee as security for the debt or liability described in the terms and conditions set out or referred to in this mortgage". It follows that it is necessary to identify what is the "debt or liability described in the terms and conditions set out or referred to in this mortgage". Although a few lines later in "Redacted Schedule A", the "Principal Amount" is listed as $4,000,000, this does not in and of itself identify a debt or liability. It is necessary to look elsewhere.

That “elsewhere” is clause 2.1 of the MCP:

It will be recalled that the "Secured Money" is defined in Clause 1.1. of the MCP to mean "the aggregate of all monies which the Debtor is, at any time may become, actually or contingently liable to pay the Lender for any reason or on any account whatsoever and includes, without limitation: (1) The Principal Amount”. It is an “all monies” mortgage.

In their argument, the Mortgagees did not suggest that there was any particular sum which the Court should consider other than the "Principal Amount".

Two parts of the definition of "Principal Amount" are relevant. The first is that in clause 1.1 of the MCP, "Principal Amount" is defined to mean "the amount stipulated in Schedule A as the principal amount advanced by the Lender to the Debtor, the repayment of which is secured by this Mortgage". In this context, for the reasons given in paragraphs [125] to [132] above, in my opinion “Debtor” must mean only 183 Eastwood (the Borrower). (If I am wrong both about this and in my conclusion in paragraph [117] above that no money was “advanced” to Mr Chan, I nevertheless consider the possibility that it also means Mr Chan in paragraphs [151] to [157] below.)

However, I do not accept that "stipulated" has the effect for which the Mortgagees contend, being that the stipulation means that there is no need to prove that any amount has been advanced to 183 Eastwood. I do not accept that argument because it does not read "stipulated" in context. That context is provided by the words which follow, being "in Schedule A as the Principal Amount advanced by the Lender to the Debtor, the repayment of which is secured by this Mortgage" (emphasis added).

As it happens, and without suggesting that I am bound by the decision given that every contract must be construed according to its terms and in its context, I consider that the significance attached to the word "repay" by the Court of Appeal in Perpetual Trustees v Cox (see paragraph [69] above) compels the same result in the case at bar. It is the use of the word "repayment" which, in my respectful view, makes it clear that the reference to an amount "advanced by the Lender to the Debtor" means an amount that has actually been advanced. If the amount had not in fact been advanced, then it would make no sense to talk about its "repayment" being secured by the Mortgage.

This construction is fortified by the balance of the definition, which provides that if no amount is specified in Schedule A, then the expression is to mean "any amount advanced by the Lender to the Debtor …". This must refer to an actual amount that had been advanced because only such an amount would be capable of ascertainment for the purposes of enforcement. In reaching this conclusion, I make four further observations.

First, I accept as correct the Mortgagees' explication of the meaning of "stipulated" as "specified".

Second, I do not think my conclusion is in any way affected by the further stipulation or specification of $4,000,000 as the "Principal Amount" in Schedule A.

Third, the construction which the Court has preferred accords with the approach identified by the High Court in Electricity Generation Corporation (see paragraph [62] above). A reasonable business person looking at the Mortgages would, with or without Clause 1.3, have understood that their commercial purpose was to provide for a loan to be made to the borrower in return for security being provided to the lender (see paragraph [132] above). I do not think that such a reasonable business person would have considered it to be a sensible or commercial outcome that the security would be effective to give rights over the Lands to the Mortgagees even if no advance had been made to anyone at all or if, by error or otherwise, the funds had been provided to someone other than the intended borrower.

Fourth, I do not think that the requirement to construe the MCP "in accordance with and to give full effect to the Overriding Intent" warrants a different construction to that which I have reached. That is because the "Overriding Intent" relates to "any and all amounts forming part of the Secured Money or any other amounts that the Lender is entitled to under this Mortgage". Setting aside the circularity of the reference to "Secured Money", as I have set out in paragraph [124] above, I do not understand the requirement to give effect to the "Overriding Intent" to require words or phrases to be given meanings which they just cannot bear. With or without the "Overriding Intent", the use of "repayment" in the definition leads to the same interpretative outcome.

Against the possibility that this matter proceeds further, I should record that if I had accepted the construction advanced on behalf of the Mortgagees, I would necessarily have found that those provisions of the Mortgages had the benefit of the indefeasibility created by s 42(1) and (2) of the Act. That is because, pursuant to s 56 of the Act, a mortgage in the Torrens system operates as a statutory charge over the Lands or estate or interest in the Lands to the extent of the debt payment of which it secures. If what has occurred in this case fell, on its proper construction, within the definition of "Secured Moneys" as comprised by the "Principal Amount" having been advanced to 183 Eastwood, then those terms would be indefeasible because they "delimit or qualify the estate or interest or are otherwise necessary to assure that estate or interest to" the Mortgagees: PT Ltd v Maradona Pty Ltd (1992) 25 NSWLR 643 at 679 per Giles J.

The final issue arises from the Mortgagees’ submission that the Mortgages secure Mr Chan's obligations as guarantor.

The first point to note is that, for the reasons set out in paragraph [119] above, the funds were never advanced to Mr Chan pursuant to the terms of the Mortgage. Against that background, these further questions need to be answered:

Mr Chan's obligations as guarantor are set out in clause 28 of the MCP:

The answer to the first question posed in paragraph [149] above is “no”. Conformably with the view which I have expressed in paragraph [132] above, the proper construction of "Debtor" wherever it appears in the three sub-paragraphs just quoted, is a reference to the "Borrower", being 183 Eastwood. This is because in these clauses it would make neither commercial nor legal sense for there to be any identity between the “Guarantor” and the “Debtor”. Because the funds have not been advanced in accordance with the terms of the Mortgage and no repayment obligation has arisen (see paragraphs [117] to [120] above), no matter has arisen in respect of which Mr Chan has a liability as Guarantor under the Mortgages. On the assumption that Mr Chan has fraudulently misappropriated the funds purportedly advanced under the Mortgages, Mr Chan has obligations at general law to repay that amount to the Mortgagees. However, they are not obligations derived from the Mortgage and do not meet the definition of "Obligation" in the Mortgages (see paragraph [59] above).

It is therefore not necessary for me to answer the other two questions posed in paragraph [149]. However, I will do so against the possibility that my answer to the first question is incorrect.

Assuming, contrary to the conclusion I have just expressed, Mr Chan has obligations as guarantor under the Mortgages, the next question posed in paragraph [149] above is whether those obligations are secured by the Mortgages. The answer to this depends upon clause 2.1 of the MCP:

It may be accepted that under Schedule A, Mortgagor means the Debtors, prima facie being 183 Eastwood and Mr Chan. However, even allowing for the limiting effect of the expression "unless the context otherwise requires" (see paragraph [127] above) and the obligation in clause 1.3 to give full effect to the "Overriding Intent", in my respectful view the context plainly requires "Mortgagor" to be understood as 183 Eastwood, the Borrower. That is because it is only 183 Eastwood that can grant the mortgage over the Lands. Any other construction makes no commercial sense.

In my view, it also follows that what is secured by the grant of the Mortgages by 183 Eastwood is the payment by 183 Eastwood of the Secured Money and the performance by it of its Obligations for the purposes of clauses 2.1(a) and (b). The Court is fortified in this construction by the fact that as guarantor, Mr Chan is not required to pay the "Secured Money". His obligation under clause 28.6 is that if 183 Eastwood does not pay the "Secured Money", then under clause 28.6 Mr Chan must pay "the amount that the Debtor [which in this context must mean 183 Eastwood only as Borrower and not Mr Chan – see paragraph [151] above] fails to pay to the Lender" and "any amount that will result in the Lender being fully indemnified for the Debtor's [which, again, in this context must mean 183 Eastwood only as Borrower and not Mr Chan – see paragraph [151] above] failure to meet any of the Obligations". This division accords with the structure of clause 28.6 in 28.6(a) and (b) and then (i) and (ii) reflecting the purpose of the grant of security in clause 2.1, being in relation to the Secured Money (clause 2.1(a)) and the performance of the Obligations (clause 2.1(b)).

Finally, if I am wrong in relation to both of the foregoing conclusions, I turn to the question of indefeasibility. If Mr Chan does have any obligations as guarantor under the Mortgages, then the satisfaction of those obligations is secured by the Mortgages against the Lands (or the proceeds of sale of the Lands) because what, on this (contrary) view of the proper construction of clause 2.1, is included as being the subject of the security extends to Mr Chan's obligations as guarantor, because it "delimit(s) or qualif(ies) the estate or interest or (is) otherwise necessary to assure that estate or interest to" the Mortgagees: PT Ltd v Maradona Pty Ltd (1992) 25 NSWLR 643 at 679 per Giles J.

In expressing this alternative conclusion if my primary views are wrong, I do not accept the plaintiffs’ submission on this point. I acknowledge this conclusion is contrary to the view that generally guarantees are collateral personal obligations that do not obtain the benefit of indefeasibility. This view derives from Consolidated Trust Co Ltd v Naylor (1936) 55 CLR 423 (see, for example, at 433 per Starke J) as noted by Gibbs J (as his Honour then was) in Mercantile Credits Ltd v Shell Co of Australia Ltd (1975-1976) 136 CLR 326 at 343. However, neither of those authorities suggests that the question is anything other than one of the proper construction of the relevant instrument in a given case. On this alternative hypothesis, the proper construction of clause 2.1 would have the effect set out in the preceding paragraph.

The Separate Question will be answered: “No - the Registered Mortgage does not secure anything in favour of the Mortgagees against the Lands and against the proceeds of sale of the Lands”. The parties will be given an opportunity to consider what other orders should be made, including as to costs.