18 Woodville Holding Pty Ltd v Hua Cheng International Holdings Group Pty Ltd (in liq) (No 2)

By a summons filed on 19 November 2021 the plaintiff, 18 Woodville Holding Pty Ltd (18 Woodville), seeks possession of units A702, A703 and A801 in a mixed residential and commercial development in Hurstville, New South Wales, (the Development) which are currently occupied by the second to fifth defendants (the Active Defendants) or, in the case of unit A703, by a person who pays rent for the unit to the second defendant. In response, the Active Defendants have filed cross-claims in which they seek specific performance of contracts they say they entered into to buy the relevant units. Whether 18 Woodville is entitled to the relief it seeks or whether the Active Defendants are entitled to the relief that they seek turns largely on whether 18 Woodville’s interest as registered mortgagee of the units takes priority over the interests claimed by the Active Defendants in those units. There is also a question whether 18 Woodville is entitled to rely on breaches of the mortgage before it took an assignment of it.

The plaintiff also seeks an order for possession against the first defendant, Hua Cheng International Holdings Group Pty Ltd (Hua Cheng), which was the developer of the Development and is now in liquidation. It remains the registered proprietor of the units. Leave to proceed against Hua Cheng under s 500(2) of the Corporations Act 2001 (Cth) was given on 3 December 2021. It has filed a submitting appearance.

The sole director and shareholder of Hua Cheng was Xiaohui (Lawrence) Xu, who is now bankrupt.

On 31 August 2009, the fourth defendant, Zhe Tao, and fifth defendant, Jianmin Tao, entered into a contract to purchase off the plan unit A801 in the Development for $670,000. The fifth defendant is the fourth defendant’s father. Mr Xu is a maternal uncle of the fourth defendant. There is a question concerning the precise terms of the contract entered into by the fourth and fifth defendants. Two contracts for the sale of unit A801 to the fourth and fifth defendants are in evidence. One version names only the fifth defendant as the purchaser. It has not been signed by him, although it has been stamped. The second version names both the fourth and fifth defendants as purchasers and both of them signed that version. There are other differences between the contracts. However, none of those are material to the outcome of the case. It seems apparent on the evidence that the fourth and fifth defendants did enter a contract to buy unit A801, although there is a question whether and when they paid the full purchase price for the unit, and whether the contract was rescinded, to which it will be necessary to return.

A final occupation certificate in respect of the Development was issued on 20 October 2016 and the strata scheme was registered on 21 November 2016. On registration, unit A801 became lot 48 in the strata plan. It appears that the fourth defendant and his parents moved into the unit around that time. It is currently occupied by the fourth defendant and his wife and child. Hua Cheng remained and still is the registered proprietor of the lot.

In or around April 2013, the second defendant had recently started working as a real estate agent for WSPG Realty Pty Ltd trading as the World Square Property Group, which was the agent for the sale off the plan of units in the Development. At that time, the second defendant’s supervisor, Chuan (David) He, suggested that she consider buying an investment property in the Development. Mr He told the second defendant that she would be able to invest in the Development at a discount if she paid the whole purchase price immediately and agreed to it being released to the developer. The second defendant gives evidence, and I accept, that she decided to accept Mr He’s suggestion and to buy two units, one in her own name and one in the name of her son, Reynold Zhou, who is the third defendant.

It appears that there was some mix-up about which apartment the second defendant would buy and which her son would buy. In any event, on 26 September 2013, the third defendant entered into a contract to purchase off the plan unit A703 in the Development for $425,000 and on 1 October 2013, the second defendant entered into a contract to purchase unit A702 for $425,000. Again, there is a question whether and when the purchase price for each unit was paid, although it is the second defendant’s evidence that she paid the purchase price for both units in full at or about the time the contracts were exchanged. There is also a question whether the contracts were rescinded by Hua Cheng.

At about the time the second defendant signed the contract to purchase unit A702 she was advised by her solicitors of the dangers of agreeing to the release of the purchase price because of the risks that the Development would not proceed or that the developer would go into liquidation, with the result that she would not get her money back. The second defendant signed an acknowledgment dated 25 September 2013 to the effect that she had been given that advice. The acknowledgment concluded “I understand the risk; however I still want to go head [sic] releasing $425,000.00 to the developer”.

Shortly after the final occupation certificate was issued and the strata plan registered, Hua Cheng handed the keys to the two units to the second defendant, and the second and third defendants moved into unit A703, which became lot 45, and rented out unit A702, which became lot 44. The second and third defendants moved to unit A702 in around August 2021 and continue to live there. The second defendant rents out unit A703. Hua Cheng remained and still is the registered proprietor of both lots.

Hua Cheng arranged to obtain financing for the Development from Super Vision Resources Ltd (Super Vision), a BVI subsidiary of China Orient Asset Management (International) Holding Ltd (COAMI), a company based in the People’s Republic of China. The financing was obtained under a loan agreement dated 4 July 2014 (the Loan Agreement).

Mr Xu, who gave evidence for the fourth and fifth defendants, says that in or around February 2014, prior to the Loan Agreement being signed, he met with representatives of COAMI during which he said (in Mandarin) words to the effect of:

According to Mr Xu, Chen Guang Zhang, the General Manager of China Orient International Asset Management Limited (China Orient), the Hong Kong subsidiary of COAMI, who attended the meeting, replied that he agreed.

I do not accept Mr Xu’s evidence. I did not find him to be a satisfactory witness. On occasions, his answers were evasive. The evidence he gave in these proceedings was not consistent with evidence he gave in earlier proceedings. For example, in proceedings brought by Super Vision to enforce a guarantee given by Mr Xu, Mr Xu gave the following evidence in cross-examination:

The evidence Mr Xu gave is also not easy to reconcile with contemporaneous documentary evidence. In particular, before the Loan Agreement was signed, Super Vision arranged for King & Wood Mallesons (KWM) to conduct a legal due diligence. Their report dated 5 March 2014 states:

The letter referred to in the report from “the Company’s Solicitors” (Pancific Legal) relevantly says:

The Active Defendants submitted that this letter should be understood as stating, consistently with what Mr Xu says he said, that only contracts with a sunset date of 30 June 2012 had been rescinded. However, that is not a fair reading of the words “and there are no outstanding pre-exchanged contracts that remain effective”. Moreover, it is not consistent with the terms of the Loan Agreement itself and in particular the warranties set out in cl 9.1, which are referred to below. There is no other evidence that the contracts to purchase the three units were rescinded, and I do not accept that they were. The unavoidable conclusion is that Mr Xu misled Super Vision about the status of the contracts that had been signed.

After some delay, Super Vision and Hua Cheng entered into the Loan Agreement. Under its terms, Super Vision agreed to lend Hua Cheng the Hong Kong dollar equivalent of AUD73 million in two tranches, one (referred to as Tranche A) of AUD29,200,000 and the other (referred to as Tranche B) of AUD43,800,000. The limit of the facility was subsequently increased. The loan was secured by a mortgage over Hua Cheng’s interest in the land and fixtures that formed the Development and by a guarantee given by Mr Xu. The mortgage was registered on 4 July 2014. On 14 July 2014, Super Vision advanced Hua Cheng HKD211,588,672. On 24 November 2014, it advanced a further HKD105,779,334 and on 18 May 2016 it advanced a final tranche of HKD46,744,760.

Under cl 5.1 of the Loan Agreement, the loan was repayable on the date that was 30 calendar months from the date of the first drawdown for Tranche A. Under cl 4, interest was payable quarterly in arrears. In addition, under an Administrative Advisory Deed dated 4 July 2014, Hua Cheng International Holdings Limited (HCI HK) was required to pay Super Vision an “Advisory Fee” each quarter commencing 15 months after the first drawdown calculated by reference to the amount outstanding under the Loan Agreement. Under cl 13.1 of the Loan Agreement it was an Event of Default if an obligor (which included Hua Cheng and Mr Xu) did not “pay on time any amount payable by it under any Transaction Document in the manner required under it”. “Transaction Document” was defined to include the Administrative Advisory Deed.

Clause 9.1 of the Loan Agreement was relevantly in the following terms:

Under cl 9.3 the representations and warranties are given at each Drawdown Date, each Interest Payment Date, the Repayment Date and the first Business Day of each month during the term of the Facility.

Clause 10 of the Loan Agreement imposes various obligations on Hua Cheng including an obligation in cl 10.1(a) “to keep proper accounting records” and an obligation in cl 10.1(b) “to conduct its business (including collecting debts owed to it) in a proper, orderly and efficient manner”.

Clause 10.3 of the Loan Agreement relevantly provides that:

Under cl 10.5 of the Loan Agreement, Hua Cheng agreed to pay into a “Sale Proceeds Account” “all gross Sale Proceeds and amounts for a forfeited deposit or claim under a deposit bond or bank guarantee in relation to a terminated Pre-Sale Contract”.

Clause 12.3 of the Loan Agreement relevantly provides:

The general structure of these arrangements in relation to the pre-sale of units is reasonably clear. Before the Loan Agreement was entered into Super Vision was told that there were no contracts on foot for the sale of units in the Development. Hua Cheng (and for that matter Mr Xu by cls 9.2(k) and (l)) warranted in the Loan Agreement that that information was true. Hua Chang also warranted that it was the beneficial owner and had good title to all property held by it. Following entry into the Loan Agreement, Hua Chang was permitted to pre-sell units in the Development. Indeed, I accept the Active Defendants’ submission that it was obliged to do so as an aspect of its obligation to conduct its business in a proper and efficient manner. However, it was required to hold deposits on trust and to pay the gross proceeds of sale into a Sale Proceeds Account. It was also required to give Super Vision information about any pre-sales.

Clause 2 of the mortgage provides:

Clause 19.4 of the mortgage provides:

Following registration of the strata scheme in respect of the Development, the mortgage was recorded against the lots that formed the strata scheme including Lot 48 (unit A801) and lots 44 and 45 (units A702 and A703 respectively).

The Loan Agreement was varied by a variation deed dated 16 May 2016. Under the terms of the variation deed, the Facility Limit was amended to include a Tranche C of the HKD equivalent of AUD8,280,000. A new cl 12.4 was added requiring Hua Cheng to ensure that the settlement of the sale of each lot was completed by 31 December 2016.

On 22 December 2016, Super Vision issued a notice of event of default in respect of Hua Cheng’s failure to pay interest and advisory fees on 5 July 2016 and 3 October 2016. On 3 February 2017, Super Vision served a second notice of an event of default on Hua Cheng in respect of its failure to repay principal in the amount of HKD166,863,764.00 on 14 January 2017, its failure to pay interest and advisory fees on 3 January 2017 and 14 January 2017 and its failure to ensure the settlement of the sale of each Lot by 31 December 2016.

On 21 April 2017, Ashurst, who had taken over acting for Super Vision in place of Minter Ellison, sent a letter to Hua Cheng, with a copy to its solicitors, Pancific Legal, demanding the payment of AUD35,432,087.37 and stating that Super Vision would exercise its rights, relevantly under the mortgage if that amount was not paid by 5.00 pm on 24 April 2017.

On 20 April 2017, the fourth and fifth defendants lodged a caveat over lot 48 claiming a “LEGAL AND EQUITABLE INTEREST PURSUANT TO CONTRACT OF SALE DATED 31 AUGUST 2009”.

At some time following the initial notice of default served on 22 December 2016, Super Vision suspended settlement of the sale of units. That prompted Mr Xu to fly to Hong Kong to meet with representatives of COAMI. The meeting was attended by Chun Ping Zhang, the newly appointed General Manager of China Orient. The meeting was also attended by Yiyi Zhang. According to Mr Xu, he raised what was said to have been Chen Guang Zhang’s previous promise to settle pre-sales contracts first. According to him, the conversation continued in the following terms:

Ms Zhang gives a somewhat different account of the meeting in an email she sent the following day to a number of recipients reporting on the meeting. Relevantly, her email said:

I prefer Ms Zhang’s account of the meeting. I have already explained that I found Mr Xu to be an unreliable witness. Ms Zhang was not called to give evidence, but her email is a contemporaneous record of what occurred. There is no reason to doubt its accuracy. It is to be expected that COAMI would be surprised to hear that 11 lots had been paid for in full before the loan was drawn down in light of KWM’s due diligence report. It is not plausible that Super Vision or COAMI would willingly have agreed to release its security over those lots without being paid. Moreover, Mr Xu is related to the fourth and fifth defendants. If the plaintiff succeeds, the fourth and fifth defendants stand to lose a substantial sum of money as a consequence of investing in the Development and trusting Mr Xu. Consequently, Mr Xu has a strong incentive to give evidence favourable to the fourth and fifth defendants’ case.

Following the meeting on 24 April 2017, there was a substantial amount of correspondence between the solicitors for Hua Cheng (Pancific Legal) and the solicitors for Super Vision (Ashurst) in relation to Super Vision’s continued refusal to permit any settlements to occur and the payment of the HKD30 million. In that correspondence, Super Vision stated that it was not willing to release the security it held over the fully paid lots unless and until it received payment in full. In fact, lots 44 and 45 were not included in a list that Pancific Legal provided to Ashurst of fully paid lots. Lot 48 was included in the list, but with a note stating “pay off, L wants to hold”. It is unclear what that note means.

Hua Cheng paid approximately HKD30,000,000 on 19 May 2017.

On 25 May 2017, Ashurst wrote to Pancific Legal pointing out that its client held certificates of title in respect of five lots, including lots 44 and 45, that had not been included on any of the lists provided by Hua Cheng. It asked for a report on the status of those five lots as a matter of urgency. It appears that no response was sent to that request.

There was further correspondence between the parties’ solicitors in June 2017. In that correspondence, Ashurst asserted that some of the lots had been sold at an undervalue and indicated that Super Vision would not attend settlement in respect of those lots. It also stated that Super Vision was prepared to provide discharge of its mortgages for lots which Hua Cheng had nominated as being ready for settlement and in respect of which Hua Cheng was able to produce the relevant contract for sale and a statement of all proposed deductions and adjustments. None of the three lots in question in this proceeding were nominated by Hua Cheng as being ready for settlement.

Receivers and managers were appointed to Hua Cheng on 22 June 2017. It went into liquidation on 21 July 2017.

On 7 July 2017, Super Vision served statutory notices on Hua Cheng in respect of the three lots under s 57(2)(b) of the Real Property Act 1900 (NSW) (the RPA) and s 111(2)(b) of the Conveyancing Act 1919 (NSW).

On 8 September 2017, the second and third defendants commenced proceedings against Hua Cheng, Super Vision and a number of other parties seeking an interlocutory injunction restraining any dealings in lots 44 and 45 and seeking an order for specific performance of the contracts of sale for those lots. On 18 September 2017, the third defendant lodged a caveat over lot 45 claiming an interest as “Owner of the entire equitable Interest”. The second defendant lodged a caveat over lot 44 in the same terms on the same day. The proceedings were ultimately dismissed with costs by Darke J on 11 October 2018 for want of prosecution. The second and third defendants appealed against the costs order, but not dismissal of the proceedings. The appeal in relation to costs was allowed by the Court of Appeal on 20 June 2019: Huang v Hua Cheng International Group Pty Ltd [2019] NSWCA 155.

By a Sale and Purchase Deed dated 24 September 2021 Super Vision agreed for the sum of $5,100,000 to assign to 18 Woodville the “Assigned Property”, which was defined to include:

Super Vision gave notice of the assignment to Hua Cheng on 28 September 2021. On 6 October 2021, 18 Woodville appointed Mr Patrick Loi to act as a receiver and manager of Hua Cheng. On 8 October 2021, a transfer of the registered mortgage was registered. Notice of the assignment was given to the second to fifth defendants on 14 October 2021. On 25 March 2022, Mr Loi gave notice to the second to fifth defendants terminating any tenancy at will.

Following recoveries from the sale of lots other than lots 44, 45 and 48 and the payment of dividends from the bankrupt estate of Mr Xu, the amount owing under the Loan Agreement as at 24 June 2022 was HKD95,963,344. According to evidence given by Mr To, 18 Woodville’s chief financial officer, 18 Woodville does not expect to make any further recoveries.

On 2 November 2021, 18 Woodville served further notices under s 111(2)(b) of the Conveyancing Act on Hua Cheng. Copies of those notices were sent to the Active Defendants.

The Active Defendants claim an interest in their respective lots on two bases. First, they claim that a tenancy at will arose from the fact that they were purchasers in possession before settlement. Second, they claim an equitable interest commensurate with the availability of specific performance.

It is convenient to deal with the first of these claims to the extent necessary later in this judgment when dealing with the question of what rights are said to arise from the tenancies at will. The second contention depends on the availability of specific performance of the contracts of sale, which in turn depends on whether the Active Defendants have paid the purchase price in full.

In its written submissions, 18 Woodville suggested that the right to specific performance may be defeated by delay, particularly in the case of the second and third defendants who previously sought specific performance but later abandoned that claim. However, that argument was not seriously pressed in oral submissions. In my opinion, whatever delay has occurred could not defeat an order for specific performance if the true position is that the Active Defendants have paid the full purchase price for their respective units and have been in possession of them since that time.

I am satisfied that the second defendant did pay the full purchase price for units A702 and A703. The second defendant’s evidence is that on 23 September 2013 she transferred an amount of $425,000 to an account of WSPG Realty Pty Ltd. That evidence is supported by a deposit receipt. The second defendant’s evidence also is that on 26 September 2013 she transferred the amounts of $35,000 and $388,000 to WSPG’s account and that she paid a further $2,000 in cash to Mr He on the same day. Again, the transfers are supported by deposit receipts. There is no reason to doubt the second defendant’s evidence that she paid the balance in cash. Accordingly, the second defendant paid a total of $850,000 which was the total purchase price for the two properties.

On the basis of evidence given by Mr Loi, 18 Woodville submits that it is not possible to identify amounts of $425,000 or amounts totalling $425,000 being paid into any account held by Hua Cheng in respect of each of units A702 and A703. However, WSPG was the selling agent for Hua Cheng. Absent any evidence to the contrary, it is reasonable to infer that it was Hua Cheng’s actual or ostensible agent for the receipt of money paid towards the purchase price of units that it sold off the plan. Accordingly, payment to WSPG was payment to Hua Cheng. The fact that receipt of those payments cannot be identified in the records of Hua Cheng is irrelevant.

The position in relation to the fourth and fifth defendant is less clear.

According to evidence given by the fourth and fifth defendants, the fifth defendant and his wife lent Mr Xu $100,000 in cash in connection with the Development. Some support for that evidence is to be found in a handwritten receipt in Chinese by which Mr Xu acknowledges a loan of AUD100,000 from “family”. According to the fifth defendant, Mr Xu agreed to pay the deposit of $67,000 for unit A801 in partial repayment of that loan. There appears to be little doubt that the deposit was in fact paid. A controlled money statement of More Legal Pty Ltd, which was acting for Hua Cheng on the sale, shows that on 4 September 2009 the amount of $67,000 was paid into a controlled money account held in the name of “MORE Legal CMA as trustee for Hua Cheng International P/L & Tao”. The payee is said to have been Hua Cheng and the payment is described as “deposit under contract for sale of land”. The timing of the payment, the name of the account and the amount strongly suggest that the payment was for the deposit for unit A801. That amount was paid to Hua Cheng’s HSBC bank account on 17 November 2009.

On 1 December 2015 a payment of $67,985 was deposited into Hua Cheng’s Westpac Business One account by Xiaochua Xu, the wife of the fifth defendant. On 4 December 2015, an amount of $67,985 was deposited into the same account by Xiaofei Xu, the fifth defendant’s brother-in-law. It is reasonable to infer that both of those payments were made towards the purchase price of unit A801.

On 21 October 2016, the fourth defendant made two payments into Hua Cheng’s Westpac Business One account, one of $300,000 and the other of $134,000, making a total of $636,970. That left a balance owing on the purchase price of $33,030. According to the fourth defendant, that amount was to be paid by Mr Xu from the balance of the $100,000 that he borrowed from his sister (the fourth defendant’s mother). There is no evidence that that amount was paid to Hua Cheng.

However, according to the fourth defendant, on 21 October 2016 he and his parents went to Hua Cheng’s offices. At that time, they were handed the keys to unit A801 and Mr Xu handed them a document on Hua Cheng’s letterhead headed “Acknowledgment of Receipt”, which refers to unit A801 and states:

I am prepared to accept that Hua Cheng is bound by the terms of the receipt. Mr Xu, as the sole director and shareholder of Hua Cheng, clearly had authority to give the receipt on its behalf. I accept that Mr Xu borrowed $100,000 from his sister and that he arranged for the deposit for unit A801 to be paid from the amount that he owed. It was reasonable for the fourth and fifth defendants to expect that Mr Xu would pay the balance of the purchase price in discharge of the amount that he still owed. That he had done so was confirmed by the receipt. Even if, as a matter of fact, Mr Xu did not pay Hua Cheng that amount, it was reasonable for the fourth and fifth defendants to proceed on the basis that he had, which is what they did. Had they known that the full purchase price had not been paid, it is reasonable to expect that they would have taken steps to procure its payment. Consequently, in my opinion, in an action for specific performance, Hua Cheng would be estopped from asserting that it had not been paid in full.

Section 42 of the RPA relevantly provides:

It is common ground, and in any event plain from the terms of s 42, that that section confers priority on a registered mortgagee over any other unregistered interest claimed in the relevant land, except to the extent that one of the exceptions contained in the section applies. The Active Defendants rely on two exceptions. One is the exception created by s 42(1)(d). The other is the fraud exception.

On the face of it, s 42(1)(d) only creates an exception in respect of tenancies for a term which, together with any option, does not exceed three years. The exception is only available if the registered proprietor had notice of the tenancy before he or she became the registered proprietor. The exception compliments s 53(1) of the RPA, which provides that “When any land under the provisions of this Act is intended to be leased or demised for a life or lives or for any term of years exceeding three years, the proprietor shall execute a lease in the approved form.”

The Active Defendants contend that the exception created by s 42(1)(d) has a much broader operation than is apparent on its face. That contention depends on a submission that the section is analogous to s 42(2)(e) of the Transfer of Land Act 1958 (Vic) (TLA) and should be interpreted in the same way.

Like s 42(1) of the RPA, s 42(1) of the TLA provides for the paramountcy of registered interests over other interests except in the case of fraud. Section 42(2) creates a number of exceptions to that principle. The exception created by s 42(2)(e) is in the following terms:

That exception has been given a broad interpretation. The phrase “the interest … of a tenant in possession of the land” and similar expressions in predecessor legislation have been interpreted to include any equitable interest to which the possession is incident. It has also been held that the effect of the section is “to strip the registered proprietor of benefits of registration so that the competition between interests [is] to be decided on general law principles”: Perpetual Trustee Co Ltd v Smith (2010) 186 FCR 566; [2010] FCAFC 91 at [60] per Moore and Stone JJ, discussing Burke v Dawes (1938) 59 CLR 1; [1938] HCA 6. That interpretation of the exception was developed in relation to predecessors of s 42, including s 72 of the Transfer of Land Act 1928 (Vic) (the 1928 Act). The exception has been held to apply to the equitable interest of a purchaser under a contract who is given possession by the vendor and is only a tenant at will: see Robertson v Keith (1870) 1 VR (E) 11; Commercial Bank of Australia Ltd v McCaskill (1897) 23 VLR 10 at 12–13 per Hodges J, with the result that the competition between the mortgagee of a registered mortgage and a person who has such an interest is to be decided by reference to general law principles. The broad interpretation was approved by the High Court in Burke v Dawes (which concerned the 1928 Act). As Dixon J explained in that case (at 18):

As the decision in Perpetual Trustee Co Ltd v Smith demonstrates, the broad interpretation of the exception has been adopted in relation to s 42(2)(e) of the TLA. See also Australian Securities and Investments Commission v Money for Living (Aust) Pty Ltd (administrators appointed) (No 2) (2006) 155 FCR 349; [2006] FCA 1285 at [24] per Finkelstein J.

In my opinion, there is no basis for applying the accepted interpretation of s 42(2)(e) of the TLA to s 42(1)(d) of the RPA. Section 42(1)(d) of the RPA creates an exception in respect of a tenancy that has certain characteristics — namely, the tenant must be in possession or entitled to immediate possession and the term of the tenancy must be less than three years. Significantly, the interest that is protected is a tenancy, not some other interest. In contrast, s 42(2)(e) of the TLA creates an exception in respect of the interest of a tenant in possession. That exception invites consideration of the nature of the interest held by the tenant; and what is protected is that interest, not simply the tenancy. To interpret s 42(1)(d) of the RPA as picking up other interests that the tenant might have is to imply words into the section that are simply not there.

The conclusion of the previous paragraph is supported by two other considerations. First, the interpretation is supported by the legislative history of s 42(1)(d). Prior to 1930, the RPA contained no exception that corresponded to para (d) of s 42(1). That paragraph was inserted by the Conveyancing (Amendment) Act 1930 (NSW). It is apparent from the record of the Legislative Council Committee meeting that considered the Bill that the amendment was introduced to address a particular problem with short term tenancies. The Hon FS Boyce, who moved the amendment, explained the reasons for it in these terms (New South Wales, Legislative Council, Parliamentary Debates (Hansard), 13 May 1930 at 5019–20):

Second, counsel for the Active Defendants were unable to point to any case decided by reference to s 42(1)(d) of the RPA that has adopted the broader meaning given to s 42(2)(e) of the TLA. The obvious explanation is that it has never been thought that the two provisions were analogous. Indeed, in Ong v Luong (1991) 9 BPR 16,759 at 16,763 McLelland J stated that “There is however no equivalent of s 42(2)(e) of the Victorian Act in the New South Wales Real Property Act …”.

Even if s 42(1)(d) of the RPA is to be interpreted in the same way as s 42(2)(e) of the LTA, the question still remains whether, absent registration of the mortgage, the rights of the Active Defendants would take priority over the rights of 18 Woodville. In my opinion, they would not.

18 Woodville’s rights arise as the assignee of the rights of Super Vision. As I pointed out in Barlin Investments Pty Ltd v Westpac Banking Corporation (2012) 16 BPR 30,671; [2012] NSWSC 699 (Barlin) at [39], “at common law, a person who claims an interest through a person who is a bona fide purchaser for value and without notice is entitled to the same protection as the protection afforded to the person through whom the interest is claimed, even if the person making the claim acquired his or her interest with notice: Wilkes v Spooner [1911] 2 KB 473”. Accordingly, 18 Woodville is entitled to the same protection as Super Vision.

In Barlin, I described the general principles relating to the priority of equitable interests in these terms (at [31]):

One very relevant factor in determining who has the better equity is whether the earlier interest holder has taken steps to protect his or her interests by, for example, lodging a caveat: see Butler v Fairclough (1917) 23 CLR 78; [1917] HCA 9 at 91 per Griffith CJ.

On the findings I have made, Super Vision had no notice of the contracts entered into by the Active Defendants at the time it registered its mortgage and advanced very substantial sums of money in order to enable the Development to occur. The Active Defendants were obviously not in possession of the units they had agreed to purchase. Apart from the payment of a deposit, the fourth and fifth defendants had not paid any money for unit A801. Plainly, the Active Defendants were not, at the time Super Vision acquired the rights it did under the mortgage, entitled to obtain specific performance of the contracts they had entered into. They had not lodged caveats to protect their interests, although it appears that they were entitled to do so: see Forder v Cemcorp Pty Ltd (2001) 51 NSWLR 486; [2001] NSWSC 281. Super Vision had undertaken enquiries concerning the existence of other interests and had been told that there were none, apart from 11 contracts which had been rescinded. Having regard to those matters, in my opinion, the interests of the Active Defendants were postponed to the interests of Super Vision and therefore 18 Woodville.

The Active Defendants submit, relying on the decision in Oversea Chinese Banking Corporation (OCBC) v Malaysian Kuwait Investment Co Sdn Bhd (MKIC) [2003] VSC 495 (OCBC), that knowing of the interests of the 11 purchasers, Super Vision should have made its own enquiries of those purchasers to satisfy itself that their interests had been extinguished. I do not accept that submission. In OCBC, the bank held an existing first ranking mortgage. The loan was repaid in full and the bank subsequently made a fresh advance. In the intervening period, third parties had entered into contracts for the sale of the mortgaged property with the mortgagor. The question was whether their interests took priority over the interests of the bank. In holding that they did, Redlich J said (at [169]–[170]):

In the present case, there is no evidence that it would be usual for a mortgagee to make enquiries of each purchaser off the plan in a large strata development of whether their respective contracts remained on foot, and any such enquiries would have been impractical. Moreover, unlike in OCBC, there was nothing at the time when Super Vision took its mortgage to cause it to be suspicious of Hua Cheng. Consequently, there is no reason why it should not have accepted what it was told by Hua Cheng and Hua Cheng’s solicitors. Finally, in contrast to the position of the bank in OCBC, Super Vision in this case sought information and advice from its solicitors and arranged for them to conduct detailed enquiries, including title, planning, company, litigation, bankruptcy and Personal Property Securities Register searches.

At the heart of “fraud” for the purposes of s 42 of the RPA is “actual fraud, personal dishonestly or moral turpitude”: Bahr v Nicolay (No 2) (1988) 164 CLR 604; [1988] HCA 16 at 614 per Mason CJ and Dawson J, 630 per Wilson and Toohey JJ; Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 at [192] per Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ. Fraud for the purposes of s 42 includes wilful blindness — that is, a failure to make enquiries for fear of discovering fraud: Koorootang Nominees Pty Ltd v Australia and New Zealand Banking Group Ltd [1998] 3 VR 16 at 125–6 per Hansen J; Young v Hoger (2001) Q Conv R 54-548; [2000] QSC 455 at [42] and [49] per Douglas J. The fraud must be “brought home to” the registered proprietor or his or her agent: Assets Co Ltd v Mere Roihi [1905] AC 176 at 210 per Lord Lindley; Young v Hoger at [42]; Schultz v Corwill Properties Pty Ltd [1969] 2 NSWR 576 at 582–3 per Street J.

Mere knowledge of an unregistered interest or of the fact that registration will defeat that interest does not of itself amount to fraud: Bahr v Nicolay (No 2) at 613 per Mason CJ and Dawson J, 630 per Wilson and Toohey JJ, 653 per Brennan J. However, fraud will exist where a purchaser has given an assurance or acknowledgment that an unregistered interest will be preserved. As Brennan J explained in Bahr v Nicolay (No 2) at 655:

After reviewing the relevant authorities, including Bahr v Nicolay (No 2), Young CJ in Eq in The Presbyterian Church (NSW) Property Trust v Scots Church Development Ltd (2007) 64 ACSR 31; [2007] NSWSC 676 summarised the position in these terms:

The Active Defendants contend that in this case 18 Woodville took an assignment of the mortgage from Supervision under s 12 of the Conveyancing Act. That section relevantly provides:

The Active Defendants contend that, as a consequence, 18 Woodville acquired its rights subject to any rights the Active Defendants had against Super Vision. Super Vision was not entitled to the benefit of indefeasibility conferred by s 42 of the RPA because it was guilty of fraud in that it undertook to take its rights subject to those of the Active Defendants but despite that undertaking refused to complete the contracts for the sale of units A702, A703 and A801. That undertaking was given (1) to Mr Xu at the meeting in February 2014; (2) by the terms of the Loan Agreement which permitted, and indeed required, Hua Cheng to enter into Pre-Sale Contracts; and (3) at the meeting in Hong Kong on 24 April 2017 at which it is said that Super Vision agreed that in exchange of the payment of HKD30 million, Super Vision would complete the sale of the units.

There are two insuperable problems with this submission.

First, s 42 of the RPA plainly applies to a mortgage and to 18 Woodville as the registered mortgagee: see Sidoti v Hardy (2021) 105 NSWLR 1; [2021] NSWCA 105 at [169] per Brereton JA. As some of the submissions made by the Active Defendants recognise, the section is unaffected by s 12 of the Conveyancing Act: see RPA s 42(3). Section 42 confers paramountcy on 18 Woodville’s interest unless 18 Woodville was guilty of fraud. As Butt’s Land Law (7th ed, 2017, Lawbook Co) explains at [11.760]:

These principles are illustrated by the decision in PT Ltd v Maradona Pty Ltd (1992) 25 NSWLR 643. In that case, a 75-year-old woman signed a guarantee and gave a mortgage over a property she owned when asked to do so. The Court held that she was entitled to a non est factum defence arising from the fact that she had suffered a stroke, was confused and unable to maintain a train of thought. The mortgage was registered and then subsequently transferred to the plaintiff. The Court held that, upon registration, the plaintiff obtained an indefeasible title that would overcome any non est factum defence: at 675–6. The claim nevertheless failed because the mortgage only secured the amount owing under the guarantee and since the guarantee was liable to be set aside there was no amount owing under it.

It is unclear how it is said that 18 Woodville was itself guilty of fraud. The Loan Agreement was not assigned to it; and it did not become bound by its terms. Rather, relevantly, what was assigned were the rights under the mortgage, which includes the right to sue to recover any debt secured by it and to enforce the mortgage: see RPA s 52(1), which provides that by virtue of the transfer of mortgage “the right to sue upon any mortgage or other instrument and to recover any debt, sum of money, annuity or damages thereunder … and all interest in any such debt, sum of money, annuity, or damages shall be transferred so as to vest the same at law as well as in equity in the transferee thereof”.

Nowhere in their submissions do the Active Defendants explain what conduct 18 Woodville engaged in that amounted to fraud. The Active Defendants’ pleaded case is that 18 Woodville knew all of the matters pleaded in relation to Super Vision. So, it is pleaded that 18 Woodville knew (1) the terms of the Loan Agreement; (2) what happened at the meetings in February 2014 and April 2017; (3) despite those matters, that Super Vision asserted priority over the Active Defendants; (4) that the Active Defendants had paid the full purchase price for their respective units; (5) that the Active Defendants believed that they were entitled to receive the properties they had paid for; and (6) that by enforcing its rights it would obtain priority over the Active Defendants. However, no attempt was made to establish these allegations. At most, all that could be said is that 18 Woodville took an assignment of the mortgages knowing of the Active Defendants’ claims. But that does not amount to fraud. There is nothing that the Active Defendants are able to point to that could amount to some sort of assurance by 18 Woodville that it would take its mortgage subject to the Active Defendants’ rights.

Second, and in any event, in my opinion Super Vision was not guilty of fraud. To the extent that the case that it was depends on Mr Xu’s account of the meetings in February 2014 and April 2017, I have already rejected those accounts. On the facts as I have found them, Super Vision gave no undertaking at either of those meetings to be bound by the interests of the Active Defendants.

The Active Defendants assert that an assurance that Super Vision would preserve the interests of the Active Defendants can be implied from the terms of the Loan Agreement and, in particular, the provisions of the Loan Agreement relating to Pre-Sale Contracts. One problem with this submission is that the assurance, if it was given, was given to Super Vision and not the Active Defendants. That problem aside, in my opinion, no such assurance can be implied from the terms of the Loan Agreement. Any assurance arising from the Loan Agreement could only operate in respect of interests that arose after the Loan Agreement was entered into. At the time the Loan Agreement was entered into, Super Vision was told and was entitled to believe that there were no other interests in the mortgaged property. Super Vision was not guilty of fraud in taking its mortgage on that basis.

Two other arguments were advanced by the Active Defendants which should be mentioned.

First, by an Amended Commercial List Response, they plead a claim that 18 Woodville engaged in unconscionable conduct in contravention of s 20 of the Australian Consumer Law or s 12CA of the Australian Securities and Investments Commission Act 2001 (Cth). Again, although not abandoned that claim was not advanced in written or oral submissions. The relevant conduct is said to be the same conduct as amounts to fraud for the purposes of s 42 of the RPA. No explanation was given of how in the circumstances of this case the case based on unconscionable conduct could succeed if the case based on fraud failed. In any event, for the reasons already given, the factual contentions on which the claim was based are not made out.

Second, the Active Defendants claim that 18 Woodville is not entitled to exercise its rights under the mortgage because there is no subsisting breach. That claim must be rejected. The contention is based on s 52 of the RPA and the principle that that section does not cause any rights relating to an anterior breach to pass to an assignee unless the breach is of a continuing nature: Measures v McFadyen (1910) 11 CLR 723; [1910] HCA 74. However, a failure to pay an amount secured by a mortgage is not a breach that only occurs on the date the payment is due. Rather, it is a breach that continues until payment is made. Moreover, as 18 Woodville points out, following the assignment, it appointed Mr Loi as receiver and issued unsatisfied notices under s 111(2)(b) of the Conveyancing Act. They were further breaches that occurred after the assignment.

It follows that 18 Woodville is entitled to the orders it seeks. Those orders should be stayed for a month to permit the current occupants of the units to find alternative accommodation. There is no apparent reason why the Active Defendants should not pay 18 Woodville’s costs. However, I did not hear submissions on costs. Consequently, I propose to give the parties an opportunity to seek some different costs order.

Accordingly, the orders of the Court are: