Huizhong Investment Group Pty Ltd v Westpac Banking Corporation Ltd and Ors

In proceedings commenced by summons but proceeding on pleadings, with the plaintiff actively opposed by only the second and fourth defendants, questions have been stated, pursuant to rule 28.2 of the Uniform Civil Procedure Rules 2005 NSW, for separate determination.

The general issue underlying those questions is whether a second mortgagee of land registered under the Real Property Act 1900 NSW can, by invoking principles of subrogation, enforce a claim against parties who provided collateral securities in support of the mortgagor’s obligations to the first (but not the second) mortgagee, by:

If the sale proceeds were applied towards payment of the mortgage debts in their order of priority, the debt owed under the first mortgage would have been paid in full, effectively releasing the collateral securities from any exposure to a claim to meet that debt. However, the total debt secured by the two mortgages (or even that secured by the second mortgage on its own) could not be satisfied from the sale proceeds.

In the scheme of things, the plaintiff is the second mortgagee; the first defendant is the first mortgagee; the second defendant is a surety (provider of a guarantee and indemnity, secured by a mortgage over another property) in support of the principal debtor under the first mortgage; the third defendant is the principal debtor; the fourth defendant is a solicitor against whom the plaintiff asserts rights arising out of a transaction associated with the first mortgage but independent of it.

The subrogation principle relied upon by the plaintiff is that enunciated by the Privy Council in Ghana Commercial Bank v Chandiram [1960] AC 732 at 745 as “…. where a third party pays off a mortgage he is presumed, unless the contrary intention appears, to intend that the mortgage be kept alive for his own benefit. ...”.

The plaintiff paid out the first mortgage exercising (as Ball J found in Geitonia Pty Ltd t/as Trustee for the Annandale Unit Trust v Westpac Banking Corporation [2015] NSWSC 419 was open to it) a right available to it under the Conveyancing Act 1919, sections 94-95.

Those sections are in the following terms (with emphasis added):

Upon its payment to the first defendant of the amount due to the first defendant under the first mortgage ($2,421,417.43), the plaintiff, by the Memorandum of Transfer registered as dealing number AJ492453, took a transfer of the first mortgage.

In terms, Transfer AJ492453 recorded a statement to the effect that the first defendant, as transferor, acknowledged receipt of $2,421,417.43 as consideration and transferred to the plaintiff, as transferee, “all the transferor’s estate and interest in” the mortgage registered as AG523550.

Upon registration (as provided for in sections 41 and 46 of the Real Property Act 1900), the Transfer AJ492453 engaged sections 51 and 52 of the Act.

Those sections are in the following terms (with emphasis added):

In Queensland Premier Mines Pty Ltd v French (2007) 235 CLR 81 at [49]-[51], [55]-[57] and [59]-[60] the High Court of Australia held that the Queensland equivalent of sections 51-52 of the Real Property Act (section 62 of the Land Title Act 1994) did not operate so as to transfer a covenant to repay a debt separate from, but secured by, a mortgage the subject of a registered transfer.

A convenient elaboration of this state of the law can be found in Provident Capital Ltd v Printy [2008] NSWCA 131; 13 BPR [98301] at [31]-[32]:

In elaboration of its reasons in Queensland Premier Mines Pty Ltd v French the High Court referred, inter alia, to earlier judgments of the Court in Measures v McFadyen (1910) 11 CLR 723 and Consolidated Trust Company Ltd v Naylor (1936) 55 CLR 423. Those judgments reinforce the authoritative treatment of the topic in French.

The object of sections 51-52 of the Real Property Act is to transfer the estate or interest of a transferor with all the rights incidental to present and future possession of the estate or interest, not mere personal rights (such as a chose in action in respect of a past and completed breach of covenant): Measures v McFadyen (1910) 11 CLR 723 at 731, 733 and 737-738.

In Consolidated Trust Company Limited v Naylor (1936) 55 CLR 423 at 432 Starke J wrote:

At 55 CLR 434-435, Dixon and Evatt JJ wrote the following:

In Queensland Premier Mines Pty Ltd v French (2007) 235 CLR 81 the Court remarked (by reference, inter alia, to Groongal Pastoral Co Ltd (in Liq) v Falkiner (1924) 35 CLR 157 at 163 and Barry v Heider (1914) 19 CLR 197 at 213 and 216) that:

The central question for determination in these proceedings is whether the principle enunciated in Ghana Commercial Bank v DT Chandiram [1960] AC 732 at 745, in its application to payment out of a mortgage (registered under the Real Property Act), by the proprietor of a subsequent registered mortgage relying upon sections 94-95 of the Conveyancing Act and sections 51-52 of the Real Property Act to become registered as proprietor of the first mortgage, entitles the subsequent mortgagee who pays off the mortgage:

If that question is to be answered in favour of the plaintiff, the plaintiff can derive no support from the fact that it exercised a right available to it under the Conveyancing Act, sections 94-95.

In Challenge Bank Ltd v Hodgekiss (1995) 7 BPR [97, 561]; [1996] ANZ Conv R 364; (1995) NSW Conv R 55-756; BC 9505293 Young J made the following obiter observations (which I accept as correct) about the limits of section 94:

Young J’s description of the purpose of section 94 of the Conveyancing Act, evident on the face of sections 94-95 of the Act, reflects the judgment of the High Court in Ley v Scarff (1981) 146 CLR 56 at 60-62.

In Ley v Scarff the High Court considered the purpose and operation of section 94 of the Conveyancing Act in the context of section 93 of the Act. Section 93 provides a statutory entitlement to a mortgagor to redeem a mortgage before the time fixed by the mortgage for its redemption.

In its current form, section 93 is in the following terms:

Section 93 has no direct application to the case at hand, beyond the High Court’s coupling it with section 94 in exposition of section 94.

At 146 CLR 60-62 Barwick CJ (with whom the Court agreed) explained the background and purpose of sections 93-94 in the following terms (with emphasis added):

Upon the proper construction of sections 94-95 of the Conveyancing Act, the right conferred on a second mortgagee by section 95 can rise no higher than the right conferred on a mortgagor by section 94 of the Act. If a mortgagor has no right under section 94 to call upon the first mortgagee to transfer guarantees or other collateral securities, neither has a second mortgagee by virtue of section 95 alone.

By an order made on 27 June 2017 and amended on 6 December 2017, and again on 19 September 2018, the Court ordered that the following questions be decided as separate questions in advance of any other questions for decision in the proceedings:

Proceedings on these separate questions have been conducted on the basis that the Court’s determination is to speak at the time of judgment. The ultimate question is not simply whether the plaintiff was subrogated to rights of the first defendant as at 15 May 2015, when it paid out the first mortgage. The ultimate question is whether the plaintiff is subrogated to those rights having regard to its discharge of the first mortgage and its purported appropriation of the proceeds of sale of the mortgaged property in reduction of second mortgage debt in the meantime. The parties have joined issue on whether the plaintiff is, in equity, entitled to claim rights of subrogation notwithstanding its discharge of the first mortgage and its appropriation of sale proceeds exclusively towards payment of second mortgage debt.

The primary relief claimed by the plaintiff in its further amended statement of claim filed 24 September 2018, dependent upon a favourable determination of the separate questions, is a declaration that the plaintiff “was and is subrogated to the rights and interests of the first defendant in respect of all securities given to the first defendant by the second and third defendants as security for the Westpac Finance Agreement”.

Although the further amended statement of claim does not expressly so confine the plaintiff’s case, implicitly the plaintiff seeks to recover from the second and third defendants (under collateral securities given in support of the first mortgage) the sum of $2,421,417.43 secured by the first mortgage at the time the first mortgagee was paid out by the plaintiff, together with an ongoing accrual of interest.

There is no basis, on the proper construction of the security documents, or in justice and good conscience, for attributing to the plaintiff an entitlement to recover, under securities collateral to the first mortgage, debt secured by the second mortgage. The first defendant’s collateral securities were given in support of the first mortgage alone. They were not given in support of the second mortgage. Any entitlement the plaintiff might have to be subrogated to rights of the first defendant under the first mortgage is limited to enforcement of debt secured by the first mortgage, not including second mortgage debt.

When the plaintiff, on 22 January 2016, served on the third defendant a notice expressed to be pursuant to section 57(2)(b) of the Real Property Act in aid of enforcement of the first mortgage, the amount it required the third defendant to pay had risen to $2,499,512.85.

The plaintiff contends that the principal sum, and interest, secured by the first mortgage continues to be due under the first mortgage because, when (in mid 2016) it sold the mortgaged property, by exercise of a power of sale under the second mortgage, it apportioned the whole of the proceeds of sale to reduction of the third defendant’s indebtedness under the second mortgage, without any reduction of the debt then due under the first mortgage.

By:

Whether it is entitled to do that is exposed for consideration by the separate questions stated for the Court’s determination.

There is no dispute between the parties that, by virtue of the combined operation of sections 94-95 of the Conveyancing Act and sections 51-52 of the Real Property Act, upon sale of the mortgaged property the plaintiff was entitled to recover from the mortgagor (the third defendant) or to enforce against the mortgaged property, under the first mortgage, the amount of the debt secured by the first mortgage. The focus for attention is upon whether, having appropriated sale proceeds exclusively in reduction of debt under the second mortgage, the plaintiff is entitled to recover the first mortgage debt (with accrued interest) under securities collateral to the first mortgage.

The critically contested questions are those numbered 3, 4 and 6. The other questions, which are able to be answered uncontroversially, provide context for a determination of those questions.

Uncontroversially:

The reference in the second of the separate questions to the “Westpac Finance Agreement” is a reference to the first defendant’s loan agreement with the third defendant that led to the first mortgage (dated 6 September 2011 and registered as dealing number AG523550) granted by the third defendant in favour of the first defendant.

Between 31 August 2012 and 5 June 2014 or thereabouts the Westpac Finance Agreement was the subject of the five variations, one consequence of which was that the second defendant on or about 1 November 2012 provided the collateral securities referred to in Question 3(a)-(c) of the separate questions.

The plaintiff’s second mortgage (also dated 6 September 2011, registered as dealing number AG544792) was accompanied by a deed (entitled “Subordination and Priority Deed”) between the plaintiff, the first defendant and the third defendant in which the plaintiff acknowledged the priority of the first defendant’s mortgage and (by clauses 5-6) agreed that its mortgage was unenforceable while ever any money remained owing to the first defendant under the first mortgage.

The existence of this deed (prudently required by the first defendant in agreeing to the grant of a second mortgage to the plaintiff) explains a commercial motivation of the plaintiff in paying out the first mortgage, and taking a transfer of the first mortgage: so that it could enforce its second mortgage, aided by control of any sale of the mortgaged property.

At the time of making the principal order for the determination of separate questions on 27 June 2017, the Court also made a formal notation to the effect that the plaintiff, the second defendant and the fourth defendant agreed, inter alia, that, if the separate questions are answered adversely to the plaintiff, the proceedings generally should be dismissed as against the second and fourth defendants.

Following a call by the Court for further submissions relating, inter alia, to the operation of sections 51 and 52 of the Real Property Act, the parties recast their pleadings and invited the Court to add questions 5 and 6 to the questions originally stated for determination.

The current pleadings comprise the plaintiff’s further amended statement of claim filed 24 September 2018; the second defendant’s further amended defence filed 25 September 2018; the fourth defendant’s amended defence filed 27 September 2018; the plaintiff’s reply filed 19 September 2018; and the second defendant’s rejoinder filed 27 September 2018.

The first defendant filed a submitting appearance. The third defendant has filed no defence, and it has taken no active step in the proceedings beyond appearances at early directions hearings.

The principles of subrogation, applicable in a range of established cases, are not helpfully described simply as if a “right“ to “subrogation” is available in the same sense as a “cause of action“ recognised at common law: Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 at [6].

In ATCO Controls Pty Ltd (In Liq) v Stewart [2013] VSCA 132; 31 ACLC 13-065 at [234]-[235] the Victorian Court of Appeal highlighted the equitable nature of principles of subrogation with the following observations (omitting footnoted citations to authority):

The (equitable) principle of subrogation invoked by the plaintiff is conveniently described, in a broader context, in the judgment of Santow JA (with which Hodgson JA agreed) in Highland v Exception Holdings Pty Ltd (In Liq) [2006] NSWCA 318; 60 ACSR 223; 24 ACLC 1576:

In the present proceedings, as in Highland v Exception Holdings Pty Ltd (In Liq), there is a focus on whether the intention of the third party who paid out a security is determinative of its claim to subrogation. In these proceedings, as in that case, there is also a focus on: (a) whether, in taking a transfer of the first mortgage, the plaintiff received all that it had bargained for; and (b) whether, in those circumstances, there is any occasion for the intervention of the Court by way of subrogation.

The Privy Council’s statement of the equitable principle of subrogation relied upon by the plaintiff is expressed emphatically in the form of a rule, justified by reference to Butler v Rice [1910] 2 Ch 277:

In Butler v Rice [1910] 2 Ch 277 at 282 Warrington J spoke in terms of a “well-known equitable doctrine that if a stranger pays off a mortgage on an estate he presumably does not intend to discharge that mortgage, but to keep it alive for his own benefit”.

In elaboration of that “doctrine”, his Honour dealt with two subsidiary questions, the only one of which is presently relevant was whether it was material that the owner of secured property (the mortgagor) had not requested the person who paid off a mortgage to make the payment. His answer to that question was as follows:

Australian law does not follow recent English cases in locating the jurisprudential foundations for principles of subrogation in the law of restitution: Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 at [6] and [85]-[98]. Nor is an actual or presumed intention on the part of the payer seen as conclusive: Challenger Managed Investments Ltd v Direct Money Corporation Pty Ltd [2003] NSWSC 1072 at [48]-[50]; Re Dalma No. 1 Pty Ltd (ACN 111 772 260) (In Liq) [2013] NSWSC 1335 at [32].

Australian Law finds a firmer foundation in prevention of: (a) conduct which is “unconscionable”(Cochrane v Cochrane (1985) 3 NSWLR 403 at 405B-E) or “unconscientious” (Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 at [8]); or (b) an “inequitable” outcome (Registrar General v Gill [1994] NSWCA 261; ATCO Controls Pty Ltd (In Liq) v Stewart [2013] VSCA 132; 31 ACLC 13-065 at [234]).

A payment out of a mortgage by a surety is treated differently from a payment out of a mortgage by a stranger. A surety who has paid the debt owed by the principal debtor to the secured creditor has a right (not in competition with the creditor) to the benefit of the remedies of the creditor: Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 at [7]-[8]. A stranger who has paid the debt owed by a debtor to the secured creditor is entitled to a rebuttable presumption that the payer intends the creditor’s securities to be kept alive for the payer’s own benefit: Denis SK Ong, Ong on Subrogation (Federation Press, Sydney, 2014), page 162.

I accept as accurate the following observations of Windeyer J in Saffron Sun Pty Ltd v Perma-Fit Finance Pty Ltd (In Liq) (2005) 65 NSWLR 603 at [21]:

In Taleb v National Australia Bank Ltd (2011) 82 NSWLR 489 at [69] Bryson AJ described “subrogation as a [well-established] principle which prevents a party from obtaining advantage at the expense of another which in the circumstances of the case is unconscionable, and in particular which keeps alive a security that has been paid out in favour of a lender who paid it out anticipating that like security would be forthcoming for himself”.

His Honour’s formulation of the equitable principle of subrogation reflects the exposition of the principle by Kearney J in Cochrane v Cochrane (1985) 3 NSWLR 403 at 405A-E (with emphasis added):

This approach was approved by the Court of Appeal in Highland v Exception Holdings Pty Ltd (In Liquidation) [2006] NSWCA 318; 60 ACSR 223; 24 ACLC 1576 at [102]-103] and [111]-[113].

In that case, the Court of Appeal also upheld the proposition that a third party lender who pays out a security may be held not entitled to subrogation if it has already obtained all the security bargained for: [2006] NSWCA 318 at [33], [89] and [111]-[113].

On or about 23 August 2011 the first defendant (as lender) and the third defendant (as borrower) entered into a loan facility (the Westpac Finance Agreement) for the purpose of development by the third defendant of the property known as 1-13 Parramatta Road, Annandale in the State of NSW (“1-13 Parramatta Road”).

Pursuant to the Westpac Finance Agreement, security given to the first defendant (in support of the loan facility) on or about 6 September 2011 included the following:

On or about 6 September 2011 the third defendant also entered into a loan agreement with the plaintiff whereby the plaintiff advanced to the third defendant, for the purpose of the third defendant’s development of 1-13 Parramatta Road, a sum (additional to that for which the Westpac Finance Agreement provided) secured by the second mortgage over 1-13 Parramatta Road (AG544792).

On or about 6 September 2011 the first defendant (as first mortgagee), the plaintiff (as second mortgagee) and the third defendant (as borrower and mortgagor under both mortgages) entered into a “Subordination and Priority Deed”, the terms of which included:

On or about 25 October 2012, the Westpac Finance Agreement was varied, as a consequence of which the securities granted by the Schultz Properties Pty Ltd in favour of the first defendant in support of the third defendant’s borrowings were released and, in substitution therefor, the second defendant (on or about 1 November 2012) granted to the first defendant:

In default of its obligations to the plaintiff under the loan agreement between them, the third defendant on 6 November 2012 failed to repay the sum lent to it by the plaintiff.

On 10 March 2015, the plaintiff’s solicitors wrote to the solicitors for the first defendant a letter, the substance of which comprised the following (with editorial adaptation):

Section 7 of the Conveyancing Act 1919 (to which this letter referred) defines “mortgage” as including “a charge on any property for securing money’s worth…” .

On 26 March 2015 the third defendant commenced proceedings in this Court against the plaintiff and the first defendant seeking: (a) an order for the transfer of the first defendant’s first mortgage to its nominee; and (b) an injunction restraining a transfer of that mortgage to the plaintiff.

Ball J dismissed those proceedings on 16 April 2015, determining that there was nothing to prevent the plaintiff from requiring the first defendant to transfer the first defendant’s first mortgage to it, and that the right of the plaintiff to require the first defendant to transfer the mortgage took priority over any right which the third defendant had: [2015] NSWSC 419 at [25]-[26].

On 12 May 2015 the solicitors for the first defendant wrote the solicitors for the plaintiff a letter (not in evidence) to which the solicitors for the plaintiff responded on the same date, by two letters.

With editorial adaptation, the first of the plaintiff’s solicitors’ letters was, in substance, in the following terms:

Section 46(1) of the Real Property Act, the provision to which the solicitors for the plaintiff referred, is in the following terms (with emphasis added):

Section 46(1) is predicated upon the existence of section 56(1) of the Real Property Act, which is in the following terms:

Sections 46, 51, 52 and 56 must be read with sections 36(9), 41(1), 42(1), 43(1), 43A(1)-(2) and 60 of the Real Property Act. Those provisions lie at the heart of the Torrens system of “title by registration” (Breskvar v Wall (1971) 126 CLR 376 at 385-386) and indefeasibility of title. So far as is material, they are in the following terms:

By a letter dated 13 May 2015, the solicitors for the first defendant responded to the plaintiff’s solicitors’ letters of 12 May 2015 in the following terms (with editorial adaptation):

The plaintiff “paid out” the first mortgage on 15 May 2015 (not 14 May 2015), taking a registrable transfer of the first mortgage (which became dealing number AJ492453) but no documentation effecting a transfer of rights referable to the collateral securities held by the first defendant as first mortgagee. The plaintiff (by its solicitors) and the first defendant (itself) exchanged correspondence on that date which, in terms, confirmed the sum of $2,421,417.43 as the amount owed, and paid, to the first defendant.

The Transfer of the first mortgage to the plaintiff (dealing number AJ492453) was registered on 18 May 2015.

By exchanges of correspondence between their respective solicitors in early September 2015, the plaintiff asserted (and the first defendant denied) an entitlement to be subrogated to the first defendant’s rights under collateral securities.

By a letter dated 9 September 2015, the plaintiff’s solicitors wrote to the solicitors for the first defendant in the following terms (with editorial adaptation):

By a letter dated 10 September 2015, the solicitors for the first defendant advised the solicitors for the plaintiff that, unless otherwise persuaded by the plaintiff or restrained by court order, the first defendant proposed to accede to a request by the third defendant that collateral securities held by the first defendant be discharged, and released, according to their nature.

By a letter dated 11 September 2015, the solicitors for the plaintiff, by reference to authorities which included Ghana Commercial Bank v Chandiram [1960] AC 735 at 745 as the principal authority, endeavoured to persuade the solicitors for the first defendant of the correctness of the plaintiff’s claim to the collateral securities.

In the event, the plaintiff commenced these proceedings by a summons filed on 16 September 2015, in response to which the first defendant in due course entered a submitting appearance.

On 22 January 2016 the plaintiff served on the third defendant two written notices, expressed to be pursuant to section 57 (2)(b) of the Real Property Act, in aid of a power of sale of the mortgaged property under section 58 of the Act.

The first was expressed to be a notice to the third defendant as mortgagor under the first mortgage (AG523550). It required the third defendant to pay $2,499,512.85, the sum secured by that mortgage.

The second was expressed to be a notice given to the third defendant as mortgagor under the second mortgage (AG544792). It required the third defendant to pay $14,266,706.34, the sum secured by that mortgage.

The third defendant’s continuing default under both mortgages, led to the property (an estate in fee simple) being sold by auction on 29 June 2016 for $7.9 million.

Clause 38.1 of the contract for sale bearing that date was in the following terms, with editorial adaptation:

So far as is material, clause 16.3 of the contract provided that “… on completion the vendor [that is, the plaintiff] must cause the legal title to the property (being an estate in fee simple) to pass to the purchaser free of any mortgage or other interest, subject to any necessary registration”.

The contract was completed on 1 July 2016. The memorandum of transfer in favour of the purchaser (in due course registered as dealing AK572743) recorded that the registered proprietor of the property was the third defendant and that the transferor in favour of the purchaser of the property was the plaintiff as mortgagee in mortgage AG544792.

The Transfer formally recited the following:

The plaintiff applied the proceeds of sale of the property in partial reduction of the second mortgage debt, with nothing applied towards reduction of the first mortgage debt, and with no surplus. Had the proceeds of sale been applied to payment of debt secured by the first mortgage that debt would have been paid in full.

On 27 July 2016 there were registered, in turn, the Discharge of the first mortgage (dealing number AK572740); the Discharge of the second mortgage (AK572741); and the Transfer to the purchaser from the plaintiff (AK572743).

Each Discharge of Mortgage recited, in terms and without qualification, that the mortgagee (named as the plaintiff) discharged the mortgage to which the Discharge related so far as the mortgage affected the mortgaged property.

The effect of registration of a discharge of mortgage is governed by section 65 of the Real Property Act, which is in the following terms:

In the absence of any qualifying words in the form of a Discharge of Mortgage then, on registration, a mortgagor is discharged from all covenants in the mortgage, as well as the property itself being discharged: Groongal Pastoral Company Ltd (In Liq)v Falkiner (1924) 35 CLR 157 at 164-165. That is what happened here.

A correct determination of the separate questions stated for decision focusses attention on two particular events.

The first in time was the payment out of the first mortgage by the plaintiff on 15 May 2015, and the associated transfer of that mortgage to the plaintiff registered on 18 May 2015.

The second in time was the plaintiff’s sale of the unencumbered fee simple in the mortgaged property by the contract of sale entered on 29 June 2016 and completed on 1 July 2016. A transfer of the property in favour of the purchaser was registered on 27 July 2016.

In relation to the first event, importance attaches to the following facts:

In relation to the second event, importance attaches to the following facts:

The particular significance of these facts is confirmed by noticing the following features of the factual matrix of the proceedings:

Notwithstanding the absence of any acceptance of its claim of entitlement on the part of the first, second and/or third defendants, the plaintiff claims to be entitled, according to principles of subrogation (essentially, by operation of law), to enjoy such (if any) rights as the first defendant has against the second and third defendants under those securities.

Questions about the operation of the subrogation principle enunciated by the Privy Council in Ghana Commercial Bank v Chandiram [1960] AC 732 at 745 must be addressed in the factual setting (including the legislative framework) in which the plaintiff (as a “third party” to the first mortgage between the third defendant as mortgagor and the first defendant as mortgagee) “paid off” the mortgage.

It is not enough, in the setting of these proceedings, that the plaintiff “intended that the mortgage be kept alive” for its own benefit, as it hoped. At its highest, the Privy Council’s statement of principle contemplates a rebuttable presumption (as to intention) at play in a field of operation governed by equitable principles. All the circumstances of the particular case must be consulted in accordance with those principles. The plaintiff’s intention is a material, but not a determinative, consideration.

Questions about whether the plaintiff was, and is, subrogated to rights of the first defendant under securities collateral to the first mortgage are mediated, if not governed, by statutory provisions (particularly, sections 94-95 of the Conveyancing Act and sections 51-52 of the Real Property Act) applicable to transfer of the first mortgage by the first defendant to the plaintiff and by other statutory provisions (particularly, sections 57-58 and 59-60 of the Real Property Act) applicable to an exercise of a mortgagee’s power of sale under a Torrens title mortgage.

Sections 94-95 of the Conveyancing Act and sections 51-52 of the Real Property Act have been extracted earlier in this judgment. Sections 57-58 and 59-60 of the Real Property Act (with emphasis added) are in the following terms:

A mortgage under the Real Property Act is a creature of statute, and a distinct interest that survives a common ownership of it and other interests in the land the subject to the statutory charge for which it provides: English and Scottish Australian Bank Ltd v Phillips (1937) 57 CLR 302 at 321-325; Shell Co of Australia Ltd v Zanelli [1973] 1 NSWLR 216 at 220E.

Accordingly, the first and second mortgages the subject of consideration in these proceedings remained separate and distinct despite the fact that, on 18 May 2015, when the first defendant’s transfer of the first mortgage in favour of the plaintiff was registered, they came under common ownership.

By virtue of section 36(9) of the Real Property Act, a registered first mortgage has priority over a registered second mortgage in the exercise of their respective statutory powers of enforcement (including the power under section 60 to enter into possession and the power of sale under section 58): Zanzoul v Westpac Banking Corp (1995) 6 BPR [97549]; Reliance Finance Corporation Pty Ltd v Orwin (1964) 82 WN (PT 1) (NSW) 11 at 14-15; King Investment Solutions Pty Ltd [2005] NSWSC 1076; 13 BPR [98296] at [125].

As explained in ELG Tyler, PW Young, and CE Croft (eds), Fisher and Lightwood’s Law of Mortgage (3rd Australian ed, 2014) at paragraph [10.10], entitled “Sales by second mortgagee”:

In the context in which they appear, these observations are to be read as applicable to land registered under the Real Property Act.

Baalman’s The Torrens System in New South Wales (Law Book Co, Sydney, 2nd ed, 1974) makes the following observations (at pages 274-275):

Edwards v McDowell and R v Registrar of Titles; ex parte Watson were approved by the Court of Appeal in Sussman v AGC Advances Ltd (1995) 37 NSWLR 37. The principle that a mortgagor cannot evade his obligations to puisne mortgagees by purchasing the land on a sale by the first mortgagee is equitable in character.

The plaintiff’s exercise of its right under sections 94-95 of the Conveyancing Act to compel the first defendant to transfer the first mortgage to it did not, of itself, entitle the plaintiff to require the first defendant to transfer to it anything other than the mortgage. Section 94 entitles a mortgagor to require a mortgagee to transfer a mortgage to a third person, in lieu of a discharge of the mortgage, upon payment out of the mortgage; it does not extend to an entitlement in the mortgagor to call upon the mortgagee to transfer guarantees or other collateral securities: Challenge Bank Ltd v Hodgekiss (1995) 7 BPR [97,561]; [1996] ANZ Conv R 364; (1995) NSW Conv R 55-756; BC 9505293. The right of a subsequent mortgagee under section 95 can rise no higher than the right of the mortgagor under section 94.

Sections 51 and 52 of the Real Property Act permit the transferee of a mortgage, upon registration of the transfer, to have the benefit of the mortgage security and a right to enforce the debt secured by the mortgage; but they do not, of themselves, effect a transfer of a guarantee or any other collateral security: Measures v McFadyen (1910) 11 CLR 723 at 731, 733 and 737-738; Consolidated Trust Company Ltd v Naylor (1936) 55 CLR 423 at 432 and 434-435; Queensland Premier Mines Pty Ltd v French (2007) 235 CLR 81 at [49]-[51] and [55]-[57]. Rights of subrogation are not of a kind falling within the scope of the Real Property Act: Consolidated Trust Company Ltd v Naylor (1936) 55 CLR 423 at 434-435.

Sections 51-52 of the Real Property Act are not inconsistent with a right of subrogation arising upon payment out of a mortgage by a third party, and a subsequent registration of a transfer of the mortgage in favour of the third party; but they are not, of themselves, an independent source of an entitlement to subrogation residing in the third party.

In circumstances in which: (a) the plaintiff and the first defendant effected a transfer of the first mortgage pursuant to their correlative right and obligation under sections 94-95 of the Conveyancing Act, without more; and (b) the plaintiff refused to pay the price required by the first defendant for an assignment to it of collateral securities held by the first defendant (namely, a grant of an indemnity against future loss), there is no basis for a finding that, by operation of law, the plaintiff should be treated as if an equitable assignee of the first defendant’s collateral securities.

What is the equity which the plaintiff seeks to enforce? In paying out the first mortgage pursuant to sections 94-95 of the Conveyancing Act and registering a transfer of the mortgage that engaged sections 51-52 of the Real Property Act, it obtained (in the first mortgage) all the security bargained for: Highland v Exception Holdings Pty Ltd (In Liq) [2006] NSWCA 318; 60 ACSR 223; 24 ACLC 1576 at [33], [89] and [111] -[113]. There is no occasion for equity to intervene by way of subrogation because there was available to the plaintiff a remedy at law (namely, enforcement of the first mortgage as registered transferee) sufficient to avoid an unconscionable result: Cochrane v Cochrane (1985) 3 NSWLR 403 at 405E. By taking a transfer of the first mortgage the plaintiff acquired power to enforce its second mortgage and to control a sale of the mortgaged property unconstrained by the first defendant.

Although payment out of a mortgage by a third party might, in principle, entitle the payer to the benefit of collateral securities held by the outgoing mortgagee (Saffron Sun Pty Ltd v Perm-Fit Finance Pty Ltd (In Liq) (2005) 65 NSWLR 603 at [21]), the question whether the payer is entitled to the benefit of collateral securities depends upon whether, in the particular circumstances, it would be unconscionable to deny the payer a right of subrogation to those securities.

In this case, there is no unconscionability involved in the plaintiff being confined to the statutory entitlement it exercised, and what it bargained for: an entitlement to enforce the first mortgage against the third defendant and the mortgaged property.

The plaintiff cannot circumvent this line of reasoning (as it seeks to do in its reply filed 19 September 2018) by pointing to covenants by the second and third defendants, in collateral securities, giving promises to “[the first defendant],its successors and assigns”.

The plaintiff took no assignment of anything but the first mortgage from the first defendant. It had no connection with the first defendant or the first defendant’s corporate identity to justify characterisation of it as a “successor” of the first defendant. The fact that, upon registration of the transfer of the first mortgage to it, it became a successor-in-title to the first defendant as proprietor of the mortgage did not, of itself, carry with it an entitlement to subrogation to rights of the first defendant under the first defendant’s collateral securities. The plaintiff acquired no entitlement to stand in the shoes of the first defendant. It cannot pull itself up by its bootstraps.

Upon an assumption (contrary to my finding) that, in May 2015, the plaintiff became subrogated to rights of the first defendant under collateral securities held by the first defendant:

Although the plaintiff sold the property in exercise of a power of sale under the second mortgage, it sold the unencumbered fee simple in the mortgaged property. It did not sell that property subject to the first mortgage. It sold the freehold unencumbered by any mortgage.

As a Torrens title mortgagee, it did not own the freehold: English Scottish and Australian Bank Ltd v Phillips (1937) 57 CLR 302 at 321. Its power to sell the freehold was governed, and constrained, by sections 57-58 of the Real Property Act.

Upon an assumption that the plaintiff was subrogated to the first defendant’s rights under securities collateral to the first mortgage when, and by reason of the fact that, it paid out the mortgage, equitable principles were in operation at several levels when the plaintiff completed its sale of the fee simple of the mortgaged property in exercise of its power of sale as second mortgagee.

First, and foremost, any entitlement to subrogation enjoyed by the plaintiff was, and remains, equitable in character in the absence of a formal assignment by the first defendant to the plaintiff of rights under collateral securities.

In Highland v Exception Holdings Pty Ltd (In Liq) [2006] NSWCA 318; 60 ACSR 223; 24 ACLC 156 at [92], Santow JA was content to adopt the description of subrogated rights (in Burston Finance Ltd v Speirway Ltd (In Liq) [1974] 1 WLR 1648 at 1652) as the equivalent of those of an equitable assignee of rights of a secured creditor.

The plaintiff’s joinder of the first defendant in these proceedings (the principal object of which is to enforce collateral securities provided by the second and third defendants to the first defendant) is consistent with treatment of any rights the plaintiff has, by reason of subrogation, as equivalent to those of an equitable assignee from the first defendant: Long Lys Co Pty Ltd v Silkdale (1991) BPR [97374], citing Norman v Federal Commissioner of Taxation (1963) 109 CLR 9 at 29-30.

Secondly, in its application of proceeds of sale of the mortgaged property under the second mortgage, the plaintiff was bound in equity to give effect to the priority to repayment of the first mortgage debt.

In Residential Housing Corporation v Esber (2011) 80 NSWLR 69 at 72 Campbell JA (with whom Macfarlan JA agreed) made the following observations (by way of obiter) about the operation of section 58(3) of the Real Property Act in the context of a sale of mortgaged property by a second mortgagee (with emphasis added):

Apart from the fact that the plaintiff appropriated proceeds of sale exclusively in reduction of debt owing under the second mortgage (so that, ostensibly, there was no reduction in debt due under the first mortgage) there is nothing in the evidence evidencing an agreement altering the priorities arising from registration of the first and second mortgages. There was no registered memorandum under section 56A of the Real Property Act postponing the first mortgage in favour of the second so as to reverse their order of priority. Absent such a registered memorandum, the plaintiff could not agree with itself to reverse the order of priority of the mortgages.

Collateral securities given to the first defendant in support of the first mortgage could not, in justice and good conscience, be enforced in support of that mortgage postponed to the second mortgage without the consent of the second and third defendants as grantors of the securities. Nor can the plaintiff, in justice and good conscience, achieve a similar outcome by a claim of subrogation to rights of the first defendant under the first mortgage coupled with enforcement of the second mortgage debt in advance of a claim against securities collateral to the first mortgage. The first defendant’s collateral securities were given in support of the first mortgage, not the second.

A second mortgagee cannot complain where a surety utilises by subrogation the security held by the first mortgage; the second mortgagee took its interest with notice of the first mortgage and associated security interests: Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 at [9]. By its appropriation of proceeds of sale received upon exercise of a power of sale under the second mortgage the plaintiff sought to deny the second defendant (in particular) any entitlement it may have had, as an incident of a security collateral to the first mortgage and in priority to the second mortgage, to be subrogated to the rights of the first defendant under the first mortgage on payment of the first mortgage debt.

In Residential Housing Corporation v Esber the Court of Appeal analysed the consequences of a sale by a second mortgagee, vis a vis the priorities due to a first mortgage, by reference to equitable principles rather than by reference to the terms of section 58(3). It did not analyse a second mortgagee sale by reference to other provisions of the Real Property Act (such as section 36(9)) bearing upon the priority of a first mortgagee. More particularly, though, it did not say that the first limb of section 58(3) has no role to play in the distribution of proceeds of a sale by a second mortgagee.

Section 58(3) of the Real Property Act interacts with equitable principles, not by permitting the section to operate in its entirety before equity intervenes, but with equity intervening in the operation of the section to prevent the statute being used in an inequitable way: Residential Housing Corporation v Esber (2011) 80 NSWLR 69 at [166].

In my opinion, the priority claim of debt secured by a first mortgage, upon a sale of the mortgaged property by a second mortgagee, can be accommodated within the first limb of section 58(3). A second mortgagee cannot compel a first mortgagee to submit to a sale of the unencumbered fee simple otherwise than (as discussed in King Investments Solutions Pty Ltd v Hussain [2005] NSWSC 1076; 13 BPR [98296] at [86]-[99]) by a judicial sale. Ordinarily, if a second mortgagee exercises a power of sale, a sale of the unencumbered fee simple comes at the price of paying out the first mortgage from the proceeds of sale.

Having sold the unencumbered fee simple pursuant to a power of sale governed by section 58 of the Real Property Act, the plaintiff was bound to apply the proceeds of sale in accordance with section 58(3) of the Act. As characterised by Basten JA (with whom Tobias and McColl JJA agreed) in Provident Capital Ltd v Printy [2008] NSWCA 131; 13 BPR [98301] at [30], section 58(3) provides for a “statutory allocation” of proceeds of sale following a sale governed by sections 57-58 of the Real Property Act.

The plaintiff could not complete its sale of the mortgaged property without a discharge of the first mortgage, which secured the debt which the plaintiff now seeks to enforce under securities collateral to that mortgage. Payment of that debt was, in terms of section 58(3), an “expense occasioned by” the sale.

Thirdly, in its application of the proceeds of its sale of the fee simple of the mortgaged property under the second mortgage, the plaintiff was bound to act in a way which was consistent with equitable notions of justice and fair dealing as between competing interests: Matzner v Clyde Securities Ltd [1975] 2 NSWLR 293 at 299B, 300B, and 305C-E; Sussman v AGC Advances Ltd (1995) 37 NSWLR 37 at 43G, 44G, 46E-F and 51C-D. It would be inequitable if the plaintiff were to be permitted to subvert the order of priority of mortgages which governs the distinct interests of the first and second mortgages (with attendant consequences for sureties of the mortgagor under only the first mortgage) by exercising a power of sale of the unencumbered fee simple of the mortgaged property under the second mortgage, with a receipt of sale proceeds in excess of the sum secured by the first mortgage, without allowing to the mortgagor (and sureties of the first mortgage) the benefit of a discharge of the first mortgage.

In effecting a sale of the fee simple in the mortgaged property as a mortgagee pursuant to a power of sale under the mortgage, the plaintiff was dealing with property which was owned, not by it, but by another (the third defendant). By virtue of the first and second mortgages, it enjoyed a statutory charge over the gross proceeds of sale, but not ownership of the fee simple. It was bound, in equity and by virtue of section 58(3) of the Real Property Act, to apply those proceeds in accordance with the scheme for which section 58(3) provided.

Whether this obligation is properly characterised as the obligation of a trustee (Adams v Bank of New South Wales [1984] 1 NSWLR 285 at 289G) or, more broadly, as the obligation of a fiduciary (Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 at [50]), it was an incident of empowerment of the plaintiff to deal with the property of another.

There is no challenge made by the defendants in these proceedings to the validity of the sale of the mortgaged property by the plaintiff. Nor is complaint made about the price at which the property was sold. The defendants’ complaint is that the plaintiff acted unjustly, and against conscience, in selling the property in exercise of a power of sale under the second mortgage; discharging the first mortgage ostensibly without recompense; and applying the whole of the proceeds of sale exclusively in reduction of the second mortgage debt. In that context, and for that purpose, they refer to Forsyth v Blundell (1973) 129 CLR 477 at 493-494, 496-497, 500 and 506 as authority for the proposition that the plaintiff, as a mortgagee exercising a power of sale, was under an obligation to exercise its powers in good faith (that is, not recklessly sacrificing the interests of the mortgagor). In my opinion, the point is well made.

A mortgagee exercising a power of sale is free to consult its own interests, but is bound to do so, conscientiously, within a legal framework that includes safeguards (such as section 58(3) of the Real Property Act and equitable principles) for the protection of competing interests. In Fiduciary Obligations (Law Book Co, 1977; Federation Press, 2016), at [17], Professor Paul Finn wrote the following:

Fourthly, upon a mortgagee sale being completed, a selling mortgagee is bound to furnish to the owner of the property sold (in this case, the fee simple) and to each other person who may be entitled to receive proceeds of the sale an account, if demanded, of the mortgagee’s claims under the mortgage in respect of principal, interest and costs: Cf, Adams v Bank of New South Wales [1984] 1 NSWLR 285 at 295C. A fiduciary’s obligation to account extends to the provision of information, not merely the payment of money (Residential Housing Corporation v Esber (2011) 80 NSWLR 69 at [167]), although the nature and extent of the obligation to account in this sense is governed by considerations of utility and reasonableness in the particular case.

Recognition of a selling mortgagee’s obligation to provide information about its dealing with sale proceeds, by way of accounting for its dealing with the gross proceeds of sale of a mortgaged property, assumes significance in a case such as the present because: (a) the first call on gross proceeds of sale is payment of the expenses occasioned by the sale (Real Property Act, section 58(3); Adams v Bank of New South Wales [1984] 1 NSWLR 285 at 290B); (b) in a sale by a second mortgagee, expenditure required to effect a discharge of the first mortgage is, or may be, an expense occasioned by the sale; and (c) if the selling mortgagee is to be held accountable for the conduct of a proper sale, decisions made about when, how, and in favour of whom sale proceeds are applied need to be transparent.

Although considerations of utility and reasonableness may set practical limits to a selling mortgagee’s obligation to account in the sense of providing information, the absence of a net surplus on the sale of mortgaged property provides no absolute bar to the imposition on a mortgagee of an obligation to disclose the fact and nature of decision-making processes affecting the disposition of gross proceeds of sale.

Any obligation of a mortgagee to account following a mortgagee sale arises (under section 58(3) of the Real Property Act, if not in equity), upon the mortgagee’s receipt of proceeds of sale: Tyler, Young and Croft, Fisher and Lightwood’s Law of Mortgage (3rd Australian ed, 2014), paragraph [20.44].

An obligation to account uncontroversially attaches to a selling mortgagee’s receipt of funds surplus to the amount secured by the mortgagee’s security: Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 at [35], [50] and [144].

The judgment of Macready AsJ in C2C Developments Pty Ltd v Commonwealth Bank of Australia [2012] NSWSC 1162; 16 BPR [98586] goes further. It denies any obligation in a selling mortgagee to account (even in the sense of requiring a mortgagee to provide information about a sale and associated costs and expenses) unless there is a surplus: [27]-[28]. His Honour left a mortgagor to its own devices in trying to ascertain the details of a sale, recommending a search of public records and available bank statements, and, if need be, the commencement of proceedings for preliminary discovery under the Uniform Civil Procedure Rules 2005 NSW, rule 5.3.

In principle, if accounting obligations attach to, and at the time of, a mortgagee’s receipt of sale proceeds, this line of reasoning cannot, without qualification, be correct. Nor is it axiomatically just, in the practical administration of a secured loan, to subordinate a mortgagor or other interested parties to the position of a complete stranger to a mortgagee sale, obliged to engage in adversarial litigation to obtain basic information about a sale.

Care needs to be taken to address different meanings attributed to the word “account” and its derivatives. Campbell JA was alive to this in Residential Housing Corporation v Esber (2011) 80 NSWLR 69 at [167] when, discussing the disposition of surplus proceeds of a mortgagee sale, he distinguished between: (a) a fiduciary obligation “to account for the disposition” of surplus proceeds “in the sense of informing” a party “what had become of the surplus proceeds; and (b) a fiduciary duty “to account to” the party “in the sense of paying” an amount to which a party was entitled.

Confusion arises from a failure to distinguish between “an order for the taking of an account” (necessarily a formal and, often, a highly bureaucratic judicial remedy) and the provision of information in a more informal way by an accounting party.

One of the authorities cited by Macready AsJ is a judgment of Master McLaughlin in Tsatsoulis v Trigamist Holdings Pty Ltd [2000] NSWSC 900.

There Master McLaughlin dealt with an application for an order for the taking of an account under the equivalent of Part 46 of the Uniform Civil Procedure Rules 2005 (Supreme Court Rules 1970 NSW, Part 48). He held that a mortgagee’s informal provision of a limited form of spreadsheet entitled “schedule of mortgage interest calculations” did not constitute “an accounting of the nature” sought by the executors of a deceased mortgagor sufficient to discharge the mortgagee from any obligation to provide a further, formal accounting. In his discretion, in the absence of evidence of a surplus or the likelihood of a surplus and concerned about the utility of a formal accounting process, he declined to make an order for the taking of an account.

In the course of his judgment, at paragraphs [44]-[47], he made the following observations about the principles to be applied:

His Honour’s reference to Batthyany v Walford (1887) 36 Ch D, 269 at 276-277 is instructive because, although not a mortgage case, it demonstrates greater flexibility in judicial procedures relating to the provision of information by way of an accounting than is sometimes conveyed by a bald assertion that, if there is no “surplus”, a mortgagee exercising a power of sale has “no obligation to account”.

An assessment of what is useful and reasonable in response to a request for accounting information might well focus in large measure on costs involved in the provision of information. A refusal, if not an inability, on the part of a party who requests accounting information might be sufficient of itself to justify refusal of an order for an account, if not a refusal to provide information informally. However, if a mortgagee’s sale is to be reasonably open to review a practical means for an interested party to obtain basic information about the sale needs to be available.

The plaintiff’s obligation to account for its receipt and disposition of the gross proceeds of its sale of the mortgaged property, in company with a requirement that it particularise its claim against the second and third defendants under securities given by them collateral to the first mortgage, operated to expose to critical review the steps taken by the plaintiff in its appropriation of sale proceeds, thereby aiding the Court to hold it to a standard of conduct upon which the practical operation of the Torrens title system of land registration depends.

By selling the mortgaged property in the exercise of a power of sale under the second mortgage, by discharging be first mortgage and by appropriating the whole proceeds of sale in reduction of second mortgage debt before it looked to recover money from the second and third defendants on securities collateral to the first mortgage, the plaintiff acted against justice and good conscience by depriving the second and third defendants of the benefit of a discharge of the first mortgage and any prospect of enforcing rights of subrogation they would have under the first mortgage if they paid the debt which the plaintiff now claims an entitlement to enforce.

Operating within the constraints of sections 57-58 of the Real Property Act, in circumstances in which the first mortgage secured a priority debt which was separate and distinct from any debt secured by the second mortgage, it was not open to the plaintiff to appropriate the sale proceeds to an account of its choice. Cf, Tyler, Young and Croft, Fisher & Lightwood’s Law of Mortgage (3rd Australian ed, 2014), paragraph [32.53]. Exercising a statutory power of sale, the plaintiff was constrained to deal with the proceeds of sale in a manner consistent with section 58(3).

Fifthly, to allow the plaintiff to recover the debt secured by the first mortgage from parties who gave to the first defendant securities collateral to that mortgage (after the plaintiff has sold the unencumbered fee simple of the mortgaged property for a sum in excess of the debt secured by the first mortgage and applied the sale proceeds exclusively in reduction of debt secured by the second mortgage) would, in substance, be to allow the plaintiff to recover the amount of the first mortgage debt twice. The equitable doctrine against double satisfaction (Registrar General v Gill (1994) NSWCA 26; Baxter v Obacelo Pty Ltd (2001) 205 CLR 635 at [55]-[62]; Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 208 CLR 516 at [99]) operates to prevent this as unjust enrichment, against justice and conscience.

The plaintiff sought to draw support from principles governing the marshalling of securities: PW Young, C Croft and ML Smith, On Equity (Law Book Co, Sydney, 2009), paragraph [12.910] et seq; JD Heydon, MJ Leeming, and PG Turner (eds), Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies (5th ed, Lexis Nexis Butterworths, Australia, 2015) , chapter 11.

Upon an assumption (contested by the defendants) that those principles might otherwise have scope for operation to the facts of this case, they can be put to one side because:

When the plaintiff received proceeds of sale in excess of the debt secured by the first mortgage and, in return, discharged the first mortgage, the securities collateral to the first mortgage were released, by the action of the plaintiff, from any liability to pay or bear the first mortgage debt. Any entitlement the plaintiff had to be subrogated to rights under the collateral securities was lost and, along with it, any equity upon which the plaintiff could claim relief.

What is described in paragraph 19 of these reasons as the central question for determination must be answered in the negative. By its payment out of the first mortgage, taking a transfer of that mortgage pursuant to sections 94-95 of the Conveyancing Act and sections 51-52 of the Real Property Act, without more, the plaintiff did not become entitled to enjoy the benefit of collateral securities held by the first mortgagee. Nor was its sale of the unencumbered fee simple of the mortgaged property pursuant to a power of sale under section 58 of the Real Property Act referable to the second mortgage, and its application of the sale proceeds to reduction of the second mortgage debt, consistent with retention of subrogated rights of the first mortgagee to enforce securities collateral to the first mortgage.

The questions stated for separate determination (by an order made on 27 June 2017, amended on 6 December 2017 and 19 September 2018) are answered as follows:

It follows from the agreement between the parties that, the separate questions having been thus answered, the proceedings must be dismissed as against the second and fourth defendants, if not generally.

The parties will be allowed an opportunity to confirm the form of dispositive orders to be made and to make submissions about costs.