FEDERAL COURT OF AUSTRALIA Prentice v Harrison [2000[ FCA 1764 PRACTICE AND PROCEDURE – applications for summary judgment and summary dismissal of cross-claim – whether arguable defence – whether cross-claim arguable – payment out of first mortgage using moneys payable to creditor of bankrupt - subrogation of creditor to security interest of first mortgagee. Bankruptcy Act 1966 (Cth), ss 120, 121, 122. Federal Court Rules, O 20 rr 1, 2. General Steel Industries Inc v Commissioner of Railways (NSW) (1964) 112 CLR 125, cited. Dey v Victorian Railway Commissioners (1949) 78 CLR 62, cited. Ghana Commerical Bank v Chandiram [1960] AC 732, cited. Cochrane v Cochrane (1985) 3 NSWLR 403, cited. Banque Financiere de la Cite v Parc (Battersea) Ltd [1999] 1 AC 221, cited. State Bank of New South Wales v Geeport Developments Pty Ltd (1991) 5 BPR 11-947, cited. I Jackman, The Varieties of Restitution (1998). MAXWELL WILLIAM PRENTICE AND MARK JULIAN ROBINSON in their capacity as trustees of the bankrupt estate of GREGORY HARRISON HEALEY v SISTER CONSTANCE MOIRA HARRISON N 7415 of 2000 SACKVILLE J 6 DECEMBER 2000 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 7415 OF 2000 BETWEEN: MAXWELL WILLIAM PRENTICE AND MARK JULIAN ROBINSON in their capacity as trustees of the Bankrupt estate of GREGORY HARRISON HEALEY AND: APPLICANTS SISTER CONSTANCE MOIRA HARRISON RESPONDENT SISTER CONSTANCE MOIRA HARRISON CROSS CLAIMANT COMMONWEALTH BANK OF AUSTRALIA CROSS RESPONDENT JUDGE: SACKVILLE J DATE OF ORDER: 6 DECEMBER 2000 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The applicants' amended motion filed on 17 October 2000 be dismissed. 2. The cross-respondent's motion filed on 1 September 2000 be dismissed. 3. The respondent/cross-claimant file and serve any amended defence and cross-claim on or before 31 January 2001. 4. The respondent/cross-claimant file and serve any further evidence on her behalf on or before 31 January 2001. 5. The proceedings be listed for further directions on 23 February 2001. 6. There be no orders as to the costs of the motions. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 7415 OF 2000 BETWEEN: MAXWELL WILLIAM PRENTICE AND MARK JULIAN ROBINSON in their capacity as trustees of the Bankrupt estate of GREGORY HARRISON HEALEY AND: APPLICANTS SISTER CONSTANCE MOIRA HARRISON RESPONDENT SISTER CONSTANCE MOIRA HARRISON CROSS CLAIMANT COMMONWEALTH BANK OF AUSTRALIA CROSS RESPONDENT JUDGE: SACKVILLE J DATE: 6 DECEMBER 2000 PLACE: SYDNEY REASONS FOR JUDGMENT the proceedings 1 The applicants in these proceedings are the trustees of the bankrupt estate of Gregory Harrison Healey ("the bankrupt"). They have instituted proceedings against the respondent ("Sister Harrison"), the aunt of the bankrupt. The applicants seek a declaration that the transfer by the bankrupt of 1,992 shares in AMP Ltd ("the Shares") to Sister Harrison is void as against them, by virtue of ss 120, 121 or 122 of the Bankruptcy Act 1966 (Cth) ("Bankruptcy Act"). They also seek an order that Sister Harrison account for the proceeds of sale of the Shares. 2 Sister Harrison has filed a cross-claim against the cross-respondent ("CBA"). There are some difficulties in identifying the precise claim Sister Harrison intends to make against the CBA. In substance, however, she claims to have a security interest in a property mortgaged by the bankrupt to the CBA. The security interest is said to have arisen by virtue of a transaction between Sister Harrison and the bankrupt, at a time when the bankrupt and his then wife were registered proprietors of the property. 3 The applicants have filed a motion, pursuant to Federal Court Rules ("FCR"), O 20 r 1, seeking summary judgment against Sister Harrison. The CBA has also filed a motion, pursuant to FCR, O 20 r 2, seeking an order summarily dismissing the cross-claim brought by Sister Harrison against it. Both motions were heard together. 4 The identification of the issues in the proceedings has been rendered more difficult by the fact that Sister Harrison, who is 79 years of age, was not legally represented in the proceedings until very shortly before the hearing of the motions (although she had solicitors acting on her behalf prior to the institution of proceedings). It appears that the defence and cross-claim may have been drafted with the assistance of a person who has at least some legal knowledge. Nonetheless, the documents are not easy to follow and, in important respects, are obscure. It is partly for this reason that what appears to be the major issue in the litigation only became apparent in the course of argument on the motions. the factual background 5 The CBA obtained a judgment in March 1998 against the bankrupt, who practised as a solicitor, for $3.85 million. It presented a creditor's petition against the bankrupt on 26 August 1998. On 16 June 1999, a sequestration order was made against the estate of the bankrupt. 6 On about 24 June 1998, some two months before presentation of the creditor's petition, the bankrupt transferred the Shares to Sister Harrison. There is no dispute that Sister Harrison did not make any payment to the bankrupt in respect of the Shares. At the date of the transfer, the Shares were worth approximately $39,300. It is also common ground that Sister Harrison subsequently sold the Shares and received proceeds amounting to approximately $38,600. 7 Under s 122(1)(b) of the Bankruptcy Act, the "relation-back" period in respect of the bankrupt commenced six months before the presentation of the creditor's petition. Subject to any statutory defences, a transfer of the Shares by the bankrupt in favour of Sister Harrison during that period is void against the trustee in bankruptcy, if the bankrupt was then insolvent and the transfer had the effect of giving Sister Harrison a preference, priority or advantage over other creditors: Bankruptcy Act, s 122(1). THE DEFENCE AND CROSS-CLAIM 8 As I have indicated, it is not easy to follow Sister Harrison's defence to the trustees' claim. She pleads, however, that she lent the bankrupt sums amounting to $76,000 in 1991, in consequence of two separate transactions. The defence also pleads that certain transactions took place in relation to a property located at 30 Fullers Road, Chatswood ("the Property"). Although it is not specifically pleaded, there is evidence that in April 1994, the bankrupt and his then wife were registered as proprietors of the Property, subject to a first mortgage in favour of the Advance Bank and a second mortgage in favour of the CBA. 9 The defence makes the following allegations in relation to the mortgage over the Property held by the Advance Bank: "10. In or about April 1994 the bankrupt caused the sum of $58,269.48 to be paid to the Advance Bank of Australia to pay out the First Registered Mortgage. 11. The bankrupt received a duly executed Discharge of the First Registered Mortgage dated 31 May 1994. 12. By further agreement between [Sister Harrison] and the bankrupt, [Sister Harrison] received and held a Discharge of First Registered Mortgage ("the original discharge") over the property. Particulars a. Of the sum payable to [Sister Harrison], an amount of $58,269.48 was remitted to the Advance Bank of Australia to pay out the First Registered Mortgage over the property. b. [Sister Harrison] received the duly executed original discharge of First Registered Mortgage as security for her advances." 10 The legal consequences that are said to flow from these allegations are expressed in language that is obscure at best. It is, however, apparently intended to suggest that Sister Harrison is entitled to invoke defences available under s 120(3), s 121(4) and s 122(2)(a) of the Bankruptcy Act. The availability of these defences to Sister Harrison will depend on findings being made in her favour that, at the time of the transfer of the Shares: · the bankrupt was solvent (s 120(3)(b)); · the bankrupt could not reasonably have inferred that the transferor was insolvent (s 121(4)(c)); or · the bankrupt did not know or have reason to suspect that the transferor was unable to pay his or her debts as they became due (s 122(4)(c)). 11 The cross-claim by Sister Harrison against the CBA repeats, albeit in slightly different language, the substance of the defence. The cross-claim further alleges that the CBA obtained a replacement discharge of mortgage from the Advance Bank in May 1997, the original having been retained by Sister Harrison. According to the cross-claim, the CBA registered the replacement discharge of mortgage in August 1997, thereby becoming registered as the holder of the first mortgage over the Property. The CBA is said (par 10) to have acted: "With knowledge that [Sister Harrison] had occasioned to be paid all monies due and owing to the Advance Bank of Australia pursuant to the First Registered Mortgage … ." 12 One consequence of the CBA's conduct is alleged to be that Sister Harrison lost the opportunity to prove as a secured creditor in the estate of the bankrupt. The relief claimed by her includes an order that the CBA account for the proceeds of sale for the Chatswood property, presumably (although this is not clear) to the extent of $58,269.48, plus interest. THE APPLICATION FOR SUMMARY JUDGMENT 13 Mr Newlinds, who appeared on behalf of the applicants, put the case for summary judgment very simply. He accepted, for the purposes of the summary judgment application, that Sister Harrison had lent the bankrupt amounts more than $39,300 and that these sums were due and payable as at June 1998, the date of transfer of the Shares. Nonetheless, it was clear, so he argued, that the transfer of the Shares by the bankrupt was void as against the trustees pursuant to s 122(1) of the Bankruptcy Act, since the evidence established that the transfer had taken place during the relation-back period, and the bankrupt was insolvent at the time. Moreover, he submitted, the transfer had the effect of giving Sister Harrison a preference over other creditors. 14 Mr Newlinds further submitted that the evidence read on behalf of Sister Harrison, taken at its highest, was incapable of establishing that she was a purchaser in the ordinary course of business who acted in good faith and who gave consideration at least as valuable as the market value of the shares. It was thus impossible for her to establish the defence available under s 122(2)(a) of the Bankruptcy Act. Her own evidence showed that she was aware prior to the transfer that the CBA had obtained judgment against the bankrupt. It was therefore inevitable that the Court would find that she had reason to suspect that the bankrupt was unable to pay his debts as they fell due. It followed, so he argued, that the stringent requirements for summary judgment laid down in General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125, at 129 and Dey v Victorian Railway Commissioners (1949) 78 CLR 62, at 91, were satisfied. 15 Except for one matter, there would be considerable force in Mr Newlinds' submissions. Indeed, as I understood Mr Waterstreet, who appeared for Sister Harrison, he did not suggest that the pleadings or evidence, in their current form, raise an arguable statutory defence under the Bankruptcy Act. Mr Waterstreet indicated that Sister Harrison wished to have an opportunity to reformulate her pleadings and evidence in order to invoke the statutory defences. Of course, this course of action would entail an adjournment of the application for summary judgment and, at the least, would be likely to involve an adverse costs order being made against Sister Harrison. 16 As I have indicated, the matter to which I have referred only became apparent in the course of argument. The difficulty confronting the summary judgment application is that, on one view of the defence and Sister Harrison's evidence, she has demonstrated that she has an arguable defence to the applicants' claim independently of any of the specific statutory defences available under the Bankruptcy Act. The defence that may be available to her is based on the principle laid down in Ghana Commercial Bank v Chandiram [1960] AC 732, at 745: "where a third party pays off a mortgage, he is presumed, unless the contrary appears, to intend that the mortgage shall be kept alive for his benefit". See also Cochrane v Cochrane (1985) 3 NSWLR 403, at 405, per Kearney J; cf Banque Financiere de la Cite v Parc (Battersea) Ltd [1999] 1 AC 221, at 229, 234. The principle has been explained this way: "[A] person who pays off a mortgage with the intention of keeping the mortgage alive for his own benefit is entitled in equity to be subrogated to the position of the original mortgagee, and that person is assisted by a presumption of fact that this was his intention. In this case, the conscience of the mortgagor is affected so as to cause the mortgage to be kept alive, that being the intention of the person advancing the funds. When that is not the relevant intention, as where the plaintiff lends money on an unsecured basis to the mortgagor who then uses those funds to pay off the mortgagee, then the equity does not arise" (Citations omitted). I Jackman, The Varieties of Restitution (1998), at 94-95. 17 The argument based on the Ghana Bank principle as put (or at least adopted) by Mr Waterstreet is as follows: · In April 1994, the bankrupt was indebted to Sister Harrison in sums exceeding $58,269.48. · In that month, at the request of the bankrupt, Sister Harrison consented to portion of the amount then due and payable to her, namely $58,269.48, being paid to the Advance Bank to discharge its first mortgage over the Property. · It was agreed between the bankrupt and Sister Harrison that, in consideration of her agreement to this course of action, she would be subrogated to the security held by the Advance Bank over the Property. · The agreement was evidenced by the fact that by Sister Harrison, rather than the bankrupt, received the registrable discharge of mortgage executed by the Advance Bank. · In consequence of these arrangements, Sister Harrison was subrogated to the security interest of the Advance Bank. The transfer of the Shares to her in June 1998 was therefore in partial satisfaction of her entitlement as a secured creditor of the bankrupt and could not have constituted a preference over unsecured creditors. 18 Mr Newlinds very fairly conceded that, if Sister Harrison wished to put forward to a Ghana Bank defence, she should have the opportunity to do so. He also accepted that, if the case were properly pleaded and supported by evidence, it would not be appropriate to make an order for summary judgment. He contended, however, that the appropriate orders were to adjourn the application for summary judgment in order to give Sister Harrison an opportunity to replead her case and to put on further evidence. If she was able to advance an arguable case, the motion for summary judgment would then be dismissed. In the meantime, however, it was appropriate that Sister Harrison pay the costs of the hearing of the motion. 19 In my view, it is neither necessary nor appropriate to adjourn the motion. A fair reading of the defence filed by Sister Harrison, bearing in mind that she was not legally represented at the time it was prepared, suggests that she intends to make out a defence substantially to the effect outlined by Mr Waterstreet. Certainly the particulars to par 12 explicitly allege that Sister Harrison received the original discharge of mortgage as security for "her advances". While the defence is clumsily expressed, it seems to me to signal reliance on the Ghana Bank principle. 20 An affidavit of Sister Harrison filed on 15 August 2000 (before the motion for summary judgment was filed) is also important. The most significant paragraphs in the affidavit are these: "22. In approximately May 1994 certain moneys which were due to me were used, with my consent, to avoid a mortgagee sale of the [Property] by the Advance Bank. 23. As a consequence of this arrangement, a sum of $58,269.48 was paid to the Advance Bank of Australia to pay out the First Registered Mortgage. 24. I was provided with a Discharge of Mortgage from the Advance Bank, the First Mortgagee of the [Property]…. 25. I did not take any further action as I held the discharge document relating to the Advance Bank mortgage and I was to be repaid when the [Property] was sold." These paragraphs, while ambiguous in some respects, suggest clearly enough that Sister Harrison and the bankrupt made an agreement whereby funds due to her were to be used by him to pay out the Advance Bank's mortgage, in return for which she was to receive an interest by way of security over the Property. 21 Moreover, the substance of Sister Harrison's defence was explicitly foreshadowed in a letter to the solicitors for the CBA written by her then solicitors on 3 August 1999. A copy of the letter was annexed to Sister Harrison's affidavit. It was therefore available to the applicant's legal representatives before the original motion for summary judgment was filed on 30 August 2000. The letter made the following assertions: "The discharge of the Advance Bank Mortgage…was deliberately not registered. To have done so would have been to defeat our client's rights under the doctrine of subrogation. [The letter then quoted the passage from Ghana Bank, referred to at [16] above.] Registration of the Discharge of Mortgage by our client would have been, perhaps, evidence of an intention, contrary to her objective, of keeping the mortgage alive for her own benefit…. In fact, had she proceeded to register the document, her position would have been seriously disadvantaged". 22 In my view, despite defects in the pleaded defence and ambiguities in the evidence, Sister Harrison has shown that she has an arguable defence to the applicants' claim based on the Ghana Bank principle. Moreover, the fact that she intended to rely on that defence was ascertainable by the applicants before they filed the motion for summary judgment. Accordingly, the appropriate course is to dismiss the application for summary judgment. 23 There was some debate about the costs order that should be made. In my view, an order for costs should not be made in favour of the applicants, since they have failed to obtain an order for summary judgment against Sister Harrison. On the other hand, the applicants' fallback position was an order striking out portion of the defence. Mr Waterstreet has conceded that the defence requires considerable amendment, so that, in effect the applicants have had some measure of success. It is also fair to say that the deficiencies in the pleading contributed to the applicants' failure to appreciate the significance of the Ghana Bank issue. In my opinion, there should be no order for costs in respect of the summary judgment application. the summary dismissal application 24 Much of what I have said applies to the CBA's application for summary dismissal of the cross-claim. However, Mr Burton, who appeared for the CBA, contended that Sister Harrison could not rely on the Ghana Bank principle to support the cross-claim. He submitted that, on Sister Harrison's own evidence, this was simply a case in which she had lent money to the bankrupt without any indication as to how it was to be used. In those circumstances, so he contended, the authorities make it clear that no security interest would be created in her favour: see, for example, State Bank of New South Wales v Geeport Developments Pty Ltd (1991) 5 BPR 11-947, at 11-952. 25 The difficulty with this submission is that Sister Harrison's evidence, on a fair reading, suggests an arrangement whereby moneys due and payable by the bankrupt to her were to be specifically applied to the discharge of the Advance Bank mortgage on terms that she was to acquire a security interest over the Property. Her evidence goes much further than merely suggesting that she lent moneys to the bankrupt and that he used those unfettered funds to pay out the Advance Bank. I am not, of course, concerned at this stage with whether Sister Harrison's account of events will be accepted. It is enough that the evidence supports an arguable claim put forward on her behalf. 26 Mr Burton raised two other contentions. First, he submitted that Sister Harrison's evidence suggested that some of the moneys she lent to the bankrupt had been repaid and that the balance of the so-called loans was in truth a payment for which Sister Harrison was to receive a commercial return. This contention seems to me to raise factual issues that ought to be explored at a trial. The evidence on this topic, as on others, is far from clear. In my opinion, it falls well short of establishing beyond argument that the bankrupt did not owe Sister Harrison an amount exceeding $58,269.48 at the time the Advance Bank mortgage was discharged. In addition, although not pleaded, there is some evidence that Sister Harrison advanced funds to the bankrupt over and above those advanced to him in 1991. 27 Secondly, Mr Burton argued that, even if Sister Harrison had acquired a security interest in the property by way of subrogation to the Advance Bank's mortgage, that security interest could not prevail against the CBA. This argument was founded on the proposition that Sister Harrison, at best, had a personal equity which could not prevail against the CBA's prior registered interest as mortgagee. 28 This argument also seems to me one that should be addressed at a trial. Its force may depend upon findings made as to the precise arrangements made between Sister Harrison and the bankrupt. Moreover, the cross-claim alleges that the CBA obtained a registrable discharge of the Advance Bank's mortgage by way of misrepresentation. If this allegation is made out, it may have a bearing in determining the priority between Sister Harrison's security interest (if any) and the CBA's interest as the holder of a registered first mortgage over the Property. Issues may also arise as to whether, depending upon the CBA's knowledge of any security interest held by Sister Harrison, it was bound by an equity in personam notwithstanding its status as registered mortgagee of the Property. 29 In my opinion, the CBA has not satisfied the requirements for summary dismissal of the cross-claim. Accordingly, the CBA's motion should be dismissed. 30 For similar reasons to those I have given in relation to the applicants' motion for summary judgment, there should be no order for costs. Indeed, if anything, the CBA's position in relation to costs is less favourable than that of the applicants. The CBA was on notice as early as August 1999 that Sister Harrison intended to make out a claim based on the Ghana Bank principle. In these circumstances, it was at best hazardous to seek summary dismissal of the cross-claim substantially on the basis of ambiguities in the evidence put forward by an apparently unrepresented party. Nonetheless, as Mr Waterstreet accepted, the cross-claim will need to be reformulated so that it is pleaded with greater precision and clarity than is presently the case. FURTHER DIRECTIONS 31 It is necessary for directions to be made for the further conduct of the proceedings. Accordingly, I direct that Sister Harrison file and serve any amended defence and cross-claim on or before 31 January 2001. I also direct that any further evidence on her behalf be filed and served by the same date. The proceedings will be listed for further directions on 23 February 2001. 32 I add the following comment. The amounts involved in the proceedings are modest. The costs already incurred by the parties, particularly the applicants and the CBA, are likely to constitute a significant percentage of the amounts in dispute. This is a case in which strenuous efforts ought to be made by the parties and their representatives to resolve the dispute without the need for the matter to proceed to trial. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice SACKVILLE. Associate: Dated: 6 December 2000 Counsel for the Applicants: Mr C R Newlinds Solicitor for the Applicants: Henry Davis York Counsel for the Respondent/ Cross-Claimant: Mr C Waterstreet Counsel for the Cross-Respondent Mr G Burton Solicitor for the Cross-Respondent Shaw McDonald Date of Hearing: 30 November 2000 Date of Judgment: 6 December 2000