FINANCE CORPORATION OF AUSTRALIA LTD v BENTLEY SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL KirBY P, MAHONEY and HANDLEY JJA 17 July 1991, 9 May 1991 [1991] NSWCA 94 MORTGAGES — equitable duties of mortgagee — financier owed two debts — each debt secured on the same land — each debt guaranteed by two guarantors — second debt guarantee of one guarantor secured over land in which guarantor's wife has an interest — financier sells land in exercise of power of sale as mortgagee — equitable requirements (if any) as to the application of the fund in discharge of the debts — whether (by way of analogy of marshalling or otherwise) financier/mortgagee obliged to discharge unsupported mortgage before it discharges the mortgage which has collateral support — trial judge (Needham J) holds that it would be inequitable for the financier/mortgagee to discharge the first debt, thereby extinguishing the interest of the guarantor's wife — appeal — held: (1) (per Mahoney JA) Handley JA concurring; Kirby P dissenting) Neither on the principles of marshalling nor by reference to the law protecting guarantors or sureties nor statutory provisions governing mortgagor and mortgagee was there any principle that rendered the proposed priority decided upon by the financier/mortgagee inequitable in the relevant sense. Banner v Berridge (1881) 18 Ch D 254, 279; Finance and Investments Pty Limited v Van Kempen (1984) 6 NSWLR 305, 310 applied; Duncan, Pox and Robinson and Co v The North and South Wales Bank and Ors (1880) 6 App Cas 1 at 12-12 (HL) considered; (2) Appeal accordingly allowed — short minutes ordered. PARTIES — absent party — party obviously affected by order omitted from proceedings — proper approach — reference by Kirby P to Taylor v Taylor (1979) 143 CLR 1, 4; Chapuis v Filo (1990) 19 NSWLR 490, 511 (CA). Supreme Court Act 1970, s75A,81. Supreme Court Rules Pt8 Rules6,7,8. Kirby P The facts are set out in the judgment of Mahoney JA. Mortgagee's claims - and the analogy of marshalling It was common ground of the parties both in this Court and at first instance before Needham J, that there was no authority which expressly decided the question posed by the case which Needham J was asked to decide. It is a mistake to criticise his Honour's conclusion upon the basis that it amounted to a misapplication of the equitable principles of marshalling. To say this is to raise a false issue. His Honour acknowledged that those principles had no application to the circumstances of the case. The doctrine of marshalling applies only where there are two claims against two funds of the same debtor. See R P Meagher, W Gummow and J Lehane, Equity Doctrines and Remedies (2nd ed) para 1108. It was never contended that this was such a case. Here, one of the funds was "owned" by Ruru Pty Limited (Ruru). The other fund was "owned" by Mr Sandor Bentley and in it Mrs Bentley had an interest. Needham J acknowledged that "of course" the doctrine of marshalling did not apply in the present case. But he concluded that it was inequitable for Finance Corporation of Australia Limited (FCA), in the circumstances, to discharge its unsupported mortgage before it discharged the mortgage which had collateral support. His only reference to marshalling was to what he described as "analogical reasoning" from that doctrine. But his conclusion was that the 2 UNREPORTED JUDGMENTS proposal of FCA was, in the circumstances, inequitable. It is that conclusion which must be undermined by the appellant for it to succeed in this appeal. Needham J was merely illustrating one instance of an equitable principle which, by analogy, he felt supported the conclusion which he had reached. His appeal was not to the doctrine of marshalling, as such, but to the general principles of equity from which he felt able to derive the conclusion that the contentions of FCA were inequitable. I agree with his Honour's conclusions, although I confess that it is difficult to express with precision the reason which has led me to the like conclusion. It is proper to point out that, despite repeated invitations from the Court, counsel for Mrs Bentley also had difficulty in expressing the applicable equitable principle with precision. Nor could he refer to clear authority covering the exact point. Mortgagee's duties - duty to act equitably to a mortgagor But he did refer to the general principle that a mortgagee cannot sacrifice the interests of a mortgagor in selling the mortgagor's property. See Forsyth v Blundell (1973) 129 CLR 477. Courts of equity have developed numerous principles to control the selfish acts of mortgagees in the pursuit of their own interests. Mortgagees are, for example, required, in the expenditure of money in developing property, to ensure that such expenditure is reasonable. See eg Southwell v Roberts (1940) 63 CLR 581; Matzner v Clyde Securities Limited [1975] 2 NSWLR 293. Mortgagees are not uncontrolled free agents let loose to pursue exclusively their own interests as they think fit. They are answerable to duties of conscience which will be enforced, ultimately, by courts applying equitable principles. See Banner v Berridge (1881) 18 CH D 254, 279. In the present case, it is not equitable for FCA to proceed in a way which deprives Mrs Bentley of her now disclosed and uncontested interest whilst FCA has an undoubted entitlement to pursue another party. FCA has already recovered a substantial part of the sum owing to it as mortgagee out of what may loosely be called the Bentley interests. It is equitable that, for the balance, it should look to the other party (Mr Climo). Otherwise FCA will succeed in applying the proceedings of the sale of that land in discharge of the first mortgage whilst, at the same time charging the cost of achieving the sale price of the Doonside land against the second mortgage and (by way of that mortgage) against Mrs Bentley's interest in the Northbridge land. If there had been no second mortgage, the development costs of the Doonside land would have been paid entirely from the proceeds of the sale of that land. What FCA is seeking to do is, in effect, to improve its position under the mortgage of the Doonside land by retaining the benefit of all the sale proceeds but shifting the burden of the development costs which produced those proceeds to the collateral mortgage over the Bentley's Northbridge land, by way of the second mortgage. I share Needham J's opinion that, in the circumstances, it is inequitable in the relevance sense to permit FCA to do this. The argument that there is no exactly applicable precedent is not an answer to the equitable requirements to which FCA, as mortgagee, is subject. I therefore agree with Needham J No sufficient reason has been shown to disturb his Honour's conclusion. It should be affirmed for the reasons which his Honour gave. It is inequitable for FCA in the present circumstance to discharge its unsupported mortgage before it discharges that mortgage which has collateral support. A procedural difficulty: an affected party is not joined This decision presents a procedural difficulty. It affects the rights and obligations of Mr Brian Climo, who should have been joined as a party to the proceedings at first instance and URJ FINANCE CORPORATION OF AUSTRALIA LTD v BENTLEY (Mahoney JA) 3 on the appeal. As Mahoney JA has pointed out, the circumstances in which Mr Climo was omitted from the proceedings have not been detailed. For the reasons explained by his Honour, the real contest in the appeal, and its whole practical point, was the resolution of the competing entitlements of Mrs Bentley, on the one hand, and Mr Climo, on the other. If the fund in which Mrs Bentley is interested, being the proceeds of the sale of the Northbridge land, is not to be applied towards discharge of the relevant mortgage, it is inevitable that FCA will seek to call upon the personal guarantee under the first (Doonside) mortgage, to which Mr Climo was a party. The Court proceeded to hear the appeal at the invitation of the named parties. The position reached by me is analogous to that reached by Priestley and Handley JJA in Chapuis v Filo (1990) 19 NSWLR 490, 511. In that case an essential party, affected by the order which their Honours reached, had not been shown to have received any, or any sufficient, notice of the existence of the appeal or of the date fixed for its hearing. Their Honours pointed out that the absent party would have a right to apply to have orders made against him set aside, so far as they were pronounced ex parte. Cf Taylor v Taylor (1979) 143 CLR 1, 4. The position may be different in the case of Mr Climo as he was not, formally, a party to the appeal. I say no more of that as mine is a minority opinion. It is enough to record that Mr Climo has not been heard in the appeal or to resist the orders which I would propose should be upheld and which may affect him. Order In my opinion the appeal should be dismissed with costs. Mahoney JA As the result of several transactions, Finance Corporation of Australia Limited ("FCA") was, at the times here relevant, owed two debts, each secured on the same land ("the Doonside land'). The debt first in time was guaranteed by Mr Sandor Bentley and Mr Brian Samuel Climo personally; the debt second in time was guaranteed by Mr Bentley and Mr Climo, but Mr Bentley's guarantee was secured over land in which Mrs Helen Bentley had an interest. Money became available to FCA to pay the debts: it came from the sale by FCA of the Doonside land in the exercise of its power as mortgagee. If the money be applied first in discharge of the first debt, Mrs Bentley's interest as part owner of the other land ("the Northbridge land") or the moneys which have been derived from the mortgagee's sale of it, will be used to contribute towards the discharge of the second debt; if the mon'ey from the Doonside land is applied first in discharge of the second debt, it is accepted that the money from the sale of the Northbridge land will not have to be used to discharge the second debt. FCA proposed to apply the money from the Doonside land first in discharge of the first debt. The question for determination in this appeal is whether Mrs Bentley may require that it not do so. The facts which have given rise to this question are of considerable complexity. However, counsel for the parties have placed the facts before this Court in a simplified form and have indicated that various matters are not in dispute. The Court has been invited to deal with the appeal accordingly. In order to indicate the basis upon which the argument has proceeded, it is proper to set forth the facts as they appear in the appeal papers or as they have been put to the Court in argument. Ruru Pty Limited ("Ruru") was a company in which Mr Bentley and Mr Climo were interested. The company was involved in a project for the subdivision and sale of land. To carry out the project it needed to borrow money. It borrowed money for the purpose in two stages. In 1974 it borrowed a primary sum of 4 UNREPORTED JUDGMENTS $95,200 and secured the borrowing by a mortgage over the Doonside land. Subsequently, in 1976, it arranged to borrow a further sum up to $139,000 and gave as security for that borrowing a separate and second mortgage over the Doonside land. In order to procure the second loan, Mr Bentley and Mr Climo were required to give guarantees and to support those guarantees by mortgages over land which respectively they held. Subject to what I shall say, the position of Mr Climo may be put aside: the present proceeding concerns only the position of Mr Bentley and his wife Mrs Helen Bentley. The land over which Mr Bentley gave security in support of his guarantee was registered in his name alone. It was, as is now accepted, held by him on trust for himself and Mrs Bentley in equal shares. At the time, that land, the Northbridge land, was already subject to a first mortgage in favour of Greater Newcastle Permanent Building Society Limited and a second mortgage in favour of a finance company. The mortgage given to FCA was a third mortgage. The subdivision project failed. FCA sold the Doonside land. It applied or proposed to apply the net proceeds of sale in payment, first, of the debt owed to it under the first mortgage. The surplus was insufficient to pay the full amount of the debt owed to it under the second mortgage. For reasons which do not appear, the first mortgagee of the Northbridge land, the building society, exercised its power of sale over that land. The proceeds of sale were applied successively in discharging the debt under the first mortgage on that land and the second mortgage. The balance of the proceeds were paid to FCA as third mortgagee. FCA proposed to use those moneys, as far as necessary, to discharge the balance of the debt owing to it under the second mortgage over the Doonside land. Mrs Bentley contends that it may not do so: at least, she contends that it may not do so in the manner that it proposes. The only issue in the present appeal is whether this contention is correct. The present proceeding was commenced in 1981. The events which occurred might have given rise to disputes in relation to a substantial number of matters. Had the proceeding been a suit in equity at earlier times, the suit would have raised for decision a large number of issues. However, the parties have, it would appear, sought to isolate for decision the issues which they have seen as essentially in dispute. In order to understand, and to prevent misunderstanding of, what has been done in the present appeal, it is relevant to refer briefly to certain background matters. The only parties formally upon the record as it is before this Court are FCA, Mrs Bentley, the building society, and the Official Receiver in Bankruptcy of the estate of Mr Bentley. Mr Climo 15 not a party to the proceeding. Upon a formal proceeding for general administration of the proceeds of sale of the Doonside and/or the Northbridge land, Mr Climo would have been a proper and, it may be, a necessary party. However, he has not been a party to the present proceeding and the proceeding and, in particular, this appeal have been conducted upon the basis that his interests may be put aside. The circumstances in which this has been done have not been detailed. In a sense, the contest is between Mrs Bentley and Mr Climo in that, if the money in which Mrs Bentley is interested, ie, the proceeds of the Northbridge land, are not to be applied towards payment of the Doonside second mortgage, the end result will be that FCA may call in the personal guarantee under the first Doonside mortgage to which Mr Climo was a party. URJ FINANCE CORPORATION OF AUSTRALIA LTD v BENTLEY (Mahoney JA) 5 However, it may be that, because of bankruptcy, these questions are academic. In the event, the parties have invited the Court to proceed upon the basis of the proceeding as now constituted. It is open to the Court to determine issues in the absence of parties, at least in the circumstances contemplated in the Supreme Court Act: see s81; and in the Rules: see Pt 8, rr6,7,8. The Court has accepted that it is appropriate, in the circumstances of this case, so to do. It is not necessary to consider the effect of orders made in this proceeding upon parties not parties to the proceeding. The building society, though a party on the record in this appeal, has not appeared. The Court has been informed that it has indicated that it has no interest in the matter. The Court has been informed also that the Official Receiver in Bankruptcy of the estate of Mr Bentley, though a party on the record, does not desire to make any submissions. And the position of Ruru, a company now in liquidation, has not been the subject of consideration. The parties have requested and the Court has accepted that, in the circumstances of this case, the issues be determined notwithstanding its absence. The plaintiff in the proceeding and the effective respondent to this appeal is Mrs Bentley. Her interest arises because of the way in which the Northbridge land was dealt with. That land was registered in the name only of Mr Bentley. However it is now accepted that at all relevant times he held the land on trust for himself and Mrs Bentley in equal shares. Her interest did not appear upon the register and, it is accepted, it was not known to FCA until after the sale of both the Doonside and the Northbridge lands. It was only when the proceeds of sale of the Northbridge land were received by FCA and it proposed to apply them in payment of the debt due to it under the second mortgage that Mrs Bentley brought to its attention her interest in the Northbridge land. Needham J held, and it is accepted for the purposes of this appeal, that she has the standing to bring the proceeding and to claim the relief now sought. I come now to consider the facts which give rise to the issues now before the Court. Mr Emmett QC and Mr McInnes QC have simplified the issues which remain to be determined and the facts to which it is necessary to refer in order to determine them. I am therefore able to state those facts without unnecessary elaboration. On 21 July 1974 Mr Bentley acquired the Northbridge land. On 31 July 1974 Ruru, then being the registered proprietor of the Doonside land, mortgaged the land to FCA. The mortgage was given in consideration of $95,200 stated to be lent to Ruru "at the request and by the direction of' Mr Climo and Mr Bentley. By CL18 of that mortgage, Ruru covenanted that it would, "not later than the thirty-first day of July one thousand nine hundred and seventy-five" cause a linen plan of subdivision to be lodged with the Blacktown Shire Council and that it would complete road works and other works required by that council. The clause provided that should Ruru fail to comply with "these covenants then at the mortgagee's election" the principal sum then outstanding should become immediately due and payable and: "(ii) the mortgagee by itself its servants or agents may enter upon the said land and complete any such works in any manner the mortgagee may see fit and any money so expended by the mortgagee shall be deemed to be principal moneys covered by this security and shall carry interest at the rate aforesaid". Mr Climo and Mr Bentley, in the 20th clause of the mortgage, covenanted to indemnify the mortgagee against all breaches and defaults by the mortgagee under the mortgage. 6 UNREPORTED JUDGMENTS That mortgage was registered under the Real Property Act 1900. It is accepted that Ruru did not complete the relevant works as it had covenanted to do. On 30 June 1976 Ruru gave a second mortgage to FCA. It has been suggested in argument that the parties entered into a separate second mortgage for reasons relating to stamp duty. Whether this was so does not appear. The memorandum of mortgage stated in terms that it was given in consideration of $139,000 "lent to the mortgagor at the request of and by the direction of' Mr Climo and Mr Bentley. It is accepted that the amount initially advanced was in fact $1872.50 (being an amount required to pay stamp duty) and that the balance of $139,000, viz, $137,125.50, was left to be, at the discretion of FCA, advanced by way of further advances from time to time: CL22). By CL24 of the second mortgage, Ruru agreed "not later than the thirtieth day of December one thousand nine hundred and seventy-six" to cause a linen plan of subdivision of the land to be lodged with the Blacktown Shire Council as there provided and to complete the road works and other works there referred to. It was provided that should Ruru fail to comply with that covenant then, at the election of FCA, the whole of the principal sum then outstanding should immediately become due and payable. It was further provided, in a form relevantly the same as that in the first mortgage, that FCA might enter on the land and complete the works and that any money so expended by the mortgagee should be deemed to be principal moneys covered by the security and carry interest at the rates referred to. The mortgage recorded that it was collateral to the mortgages of the same date given by Mr Climo and Mr Bentley in support of their guarantees of the second mortgage: CL25. And the mortgage provided in terms for guarantees by Mr Climo and Mr Bentley of the obligations contained in it: cll27-29. This mortgage to FCA was in due course registered under the Real Property Act. On the same date 30 June 1976 Mr Bentley gave to FCA the collateral security over the Northbridge land referred to in the second mortgage. That security was given by a form of memorandum of mortgage for use under the Real Property Act. It was expressed to be given "in consideration of... $139,000 lent to the mortgagor at the request and by the direction of Brian Samuel Climo (testified by his execution hereof)". It was accordingly in the form of a mortgage to secure a loan made to Mr Bentley as principal. However, it referred to the amount of $1872.50 and the balance of $137,127.50 referred to in the second mortgage of the Doonside land: cll21 and 22; and was expressed to be collateral to the mortgage by the company and by Mr Climo respectively to FCA. Mr Climo gave guarantees: cll25-27. The mortgage was not registered. Following the grant of the second mortgage and the collateral mortgage, FCA advanced to Ruru $16,881. Subsequently, default having taken place under the mortgages of the Doonside land, FCA entered into possession of it. Between 1 June 1977 and 14 September 1979, it expended $86,886.84 in completing works. It has been accepted that these amounts fall within the provisions of the second mortgage to which I have referred and that consequently the amount is deemed to be principal under that mortgage attracting interest in accordance with its terms. It is accepted that, at the time here relevant, the amount secured by the second mortgage, after proper adjustments, is of the order of $148,628. As at January 1979, the amount was of the order of $100,550. URJ FINANCE CORPORATION OF AUSTRALIA LTD v BENTLEY (Mahoney JA) 7 In or about December 1978 FCA, having exercised its power of sale of the Doonside land, received by way of proceeds of that sale, $179,000. It does not appear whether, when FCA sold the land, the power of sale which it purported to exercise was that arising under the first mortgage, the second mortgage, or both of them. But, however that be, FCA, in its accounting, appropriated from the proceeds of sale a sufficient amount to discharge the then existing debt secured by the first mortgage. There was an amount of the proceeds of sale remaining after so doing. The precise amount has not been specified but it was something less than $10,000. The amount was, in the records of FCA, credited against the then outstanding debt secured by the second mortgage. There therefore remained a substantial amount owing to FCA in respect of the debt secured by that mortgage. The Northbridge land was sold by the first mortgagee, the building society. In due course FCA, as third mortgagee, received the balance of the proceeds of sale, being an amount of the order of $142,361. FCA proposed to apply that sum, insofar as it was necessary to do so, to discharge the balance of the debt which had been secured by the second mortgage over the Doonside land. It is its proposal to do that which is the basis of Mrs Bentley's complaint in this proceeding. I come now to the issues which remain for determination in this appeal. Before Needham J, two issues were raised for decision: an issue in relation to the extent of the security granted by the second mortgage over the Doonside land; and the issue now before this Court. The first of these does not now arise for decision. It is now accepted that the second mortgage does not secure the debt secured by the first mortgage but only the debt resulting from the amounts advanced or expended pursuant to the second mortgage and interest upon them. And, it is accepted, the security granted by the second mortgage is limited to the total sum of some $139,000 and interest thereon charged in accordance with the terms of the second mortgage. It is agreed that those matters and the detail of them need not now be pursued. The second issue has been raised for Mrs Bentley in the following way. She contends that the proceeds of the sale of the Doonside land should have been applied by FCA first in discharge of the debt secured by the second mortgage over that land and then and only to the extent that the proceeds of sale extended, towards satisfaction of the debt secured by the first mortgage over that land. The result of that would have been, as the contention is, that the only debt secured by the collateral mortgage, viz, the debt secured by the second mortgage, would have been extinguished and consequently Mr Bentley would not have been obliged, under his collateral security, to provide any moneys because the collateral security was given only in respect of the debt secured by the second mortgage. It is to establish this as the principle upon which the accounting should take place between FCA, Ruru and Mr Bentley that the plaintiff pursues the present appeal. Counsel for Mrs Bentley could not formulate the principle on which FCA should be required to account for the proceeds of the sale of the Doonside land in this way: he was not able to do so before Needham J. But, he submitted, in the end the accounting between a mortgagee creditor and the mortgagor and guarantor involved in the transaction is to take place according to what, in the relevant sense, is equitable: see Banner v Berridge (1881) 18 Ch D 254 at 279; Finance and Investments Pty Ltd v Van Kempen (1984) 6 NSWLR 305 at 310. And, the submission was, to account for the proceeds of the sale of the Doonside 8 UNREPORTED JUDGMENTS land in the way FCA had done was relevantly inequitable. He submitted that there was no authority to support his submission and he relied upon the contention that what FCA had done was, in the relevant sense, inequitable. He pointed to the fact that the great part of the debt secured by the second mortgage resulted from the expenditure by FCA of some $86,886 in the development of land upon which, before that expenditure, FCA had advanced only some $16,881. And, the submission suggested, the fact that FCA had made that expenditure was the reason why FCA was enabled to derive from the sale of the land the sum that it had. But such expenditure was made essentially to the debit of the debt secured by the second mortgage only. Yet, as it was suggested, the substantial part of the proceeds of sale derived had been used to pay off the debt secured by the first mortgage. The debt for which Mr Bentley had given the secured guarantee was therefore, in effect, incurred or substantially increased in a way which did not provide a corresponding benefit for Mr Bentley. It was, Mr McInnes QC submitted, upon such a basis that Needham J found for Mrs Bentley. His Honour, in dealing with this matter, said: "The amounts expended by FCA after the execution of the 1976 mortgage are, in my opinion, secured by that mortgage. FCA has, as I understand it, maintained its records on that basis. Up to the sum of $139,000, the Bentley mortgage is additional security. The issue here is how the proceeds of sale of the Doonside property should have been applied and, in addition, how the balance of the proceeds of the Northbridge property should be applied. There is, so far as I am aware, no principle of law which precisely answers this question, and I have been referred to no decisions and to no text books which attempt to do so. Accordingly, one must apply general principles of equity. The doctrine of marshalling prohibits a mortgagee with two or more securities from taking his debt out of one of those securities if another creditor has a right, subject to the rights of the first creditor, as against that security only. The first creditor must satisfy his claim out of the property encumbered only by his interest. That doctrine, of course, does not apply here, but it seems to me, on analogical reasoning, that it is inequitable for FCA in the present circumstances to discharge its unsupported mortgage before that mortgage which has collateral support. It is not without importance, I think, that it was the money expended pursuant to the 1976 mortgage which allowed the Doonside property to be sold. If the Bentley mortgage had not existed, FCA would have been entitled, as against Ruru Pty Ltd, to appropriate the proceeds of sale of the Doonside property to whichever mortgage it chose, but, in my opinion, the fact that the Bentley mortgage was taken as collateral security for the 1976 mortgage places upon FCA the equitable obligation to apply the proceeds of sale to the redemption of that mortgage in priority to the redemption of the 1974 mortgage." As I have said, counsel were not able to refer the Court to any principle upon which the result claimed by Mrs Bentley would be achieved and the learned judge concluded that there was none which "precisely answers this question". I have come to a conclusion different from that reached by the learned judge. This appeal is by way of rehearing: Supreme Court Act s75A; and the parties are entitled to have the benefit of such conclusion as is reached by this Court: Warren v Coombes 142 CLR 531. I have reached the conclusion I have only with considerable hesitation, having regard to the experience of the learned judge in matters of this kind. In deference to his conclusion, I shall outline the basis on which I have done so. URJ FINANCE CORPORATION OF AUSTRALIA LTD v BENTLEY (Mahoney JA) 9 The argument before this Court referred to three main aspects of the law: marshalling, guarantee and surety, and the relationship between mortgagor and mortgagee. 1. Marshalling: As I have said, the essential question in this case is how FCA may apply the moneys which it has obtained by the execution of its power of sale over the Doonside land: in particular, whether it may apply it first in satisfaction of the first debt owed to it (the debt secured by the first mortgage over the Doonside land) or whether it must apply that money first in satisfaction of the second debt owed to it (the debt secured by the second mortgage over the Doonside land). If, as Mrs Bentley contends and his Honour found, FCA must apply the money first in satisfaction of the second debt, it will lose the benefit of the secured guarantee it has of the second debt - it will not be necessary to call on it in order to satisfy the second debt - and so, as I understand the argument, FCA will not recover the total of the amounts due to it under the two debts. I do not think that the doctrine of marshalling, as it is described, produces this result. Conceptually, the term "marshalling" describes a process, not an entitlement. A process of marshalling is to be applied when there are reasons, within the principles of equitable and fair dealing established by Chancery jurisprudence, why the process should be applied. It is a process which applies, not merely in the more usual case where a creditor has access to two funds to satisfy his claim: see Meagher Gummow and Lehane, Equity Doctrines and Remedies, 2nd ed, at 299 et seq, pars 1101 et seq; Snell, Principles of Equity 27th ed, at 404; but also in other and different contexts: see, eg, Halsbury's Laws of England, 4th ed, Vol 16, par 1231. What is here in issue is not whether FCA, having two funds available to it (the proceeds of sale of the Doonside land and the proceeds of sale of the Northbridge land), must resort to the one rather than the other. There is no question but that FCA proposes to use the proceeds of the Doonside land. What is in issue is whether, in accordance with these principles, it is proper for it to apply the proceeds of the Doonside land first to the first debt rather than the second. When the learned trial judge referred to "analogical reasoning", ie, reasoning analogical to the doctrine of marshalling, which required FCA to apply the proceeds of the Doonside land first to the second debt, he was, I think, indicating that there were, within the principles so established in Chancery jurisprudence, reasons why that should be done. There are two matters which arguably might support Mrs Bentley's claim in this regard: (a) the fact that, as it was suggested to be, it was the borrowings upon the security of the second mortgage of the Doonside property which funded the development of the Doonside land and enabled there to be obtained from it on sale an amount more than otherwise would have been obtained from it; and (b) the duties imposed on a creditor where he has a guarantor of or a surety for his debt. In respect of each of these, it is, in my opinion, important to bear in mind the basis on which the appeal has been conducted. The argument (or at least the suggestion from it) was that, had the second debt not been created, ie, had the money not been borrowed on the second mortgage, the value of the Doonside land and so the proceeds from the sale of it would not have been sufficient to meet the first debt and that, because of this, the second debt should have been discharged before the first debt, at least, perhaps to the extent of the borrowings made for development purposes. The first debt was guaranteed by Mr Bentley and Mr Climo without security; the second debt was 10 UNREPORTED JUDGMENTS guaranteed by them but secured, inter alia, by the Northbridge land in which Mrs Bentley had a half interest. And, as the suggestion is, she therefore has the right in equity to have the debt secured on her land (the Northbridge land) discharged before the discharge of the debt secured by the first mortgage on the Doonside land. In this regard it is important to note that it is not claimed that, by the terms of the second mortgage on the Doonside land, any special right was created in respect of the moneys borrowed for development purposes and, in particular, any special right which would have preference, by way of security for the development borrowings, over the first debt (that secured by the first mortgage on the Doonside land). Nothing was urged to turn upon the terms of the second mortgage in this regard. Nor has there been any examination before this Court of the circumstances in which the moneys borrowed for development were borrowed: it was not suggested that the circumstances in which the borrowings were made would create or evidence such an equitable right as would warrant a process of marshalling or the requirement that the second mortgage be discharged first. The matter has been argued upon the basis merely that it is because of the fact that the borrowing for development purposes was secured on the second mortgage that the right claimed by Mrs Bentley arises. As I have said, it is proper to refer to these matters because, if it had been argued that from the terms of the second mortgage or from the circumstances of the borrowing such an equitable right had arisen, it would have been necessary to examine in detail the circumstances in which the second debt was created and/or increased and to determine whether there were reasons in those circumstances, or in what was known at the time of the creation of the second mortgage or the debt secured by it, which would warrant the creation of such equitable rights. It would also have been necessary to examine whether, if the fact of the borrowing for development purposes would alone have created the right claimed, the circumstances of the transactions would negative or qualify that right. I do not think that there is, in the facts so understood and so limited, anything to create the relevant equitable rights. The principles of equity do not operate to shift from a debtor all detriments which may arise as between him and the creditor in the course of the repayment of debts. Ordinarily, it would be expected that the proceeds of sale of land subject to two mortgages would be applied first in discharge of the first mortgage debt: at least this would be so where, as here appears to have been the case, the land has been sold free of both mortgages. There is, in my opinion, nothing in the Real Property Act or the Conveyancing Act 1919 which determines the rights of the parties in this regard. But, absent particular circumstances, the proper application of the proceeds of sale in such a case would be as here contemplated. Moneys advanced under a second mortgage or borrowed in accordance with its terms would ordinarily be seen as, on sale of the land, repayable only when the first mortgage has been discharged. Absent anything in the second mortgage or the circumstances which would create prior rights, there is, I think, nothing in the fact alone that the second mortgage borrowings have been used to increase the value of the land which changes this position. With respect, therefore, I see nothing in the facts as now relied upon to require that the proceeds of sale of the Doonside land be applied first in discharge of the second debt. URJ FINANCE CORPORATION OF AUSTRALIA LTD v BENTLEY (Mahoney JA) 11 On this basis, it is not necessary to consider the limitations upon the circumstances in which the process of marshalling will apply: see Meagher Gummow and Lehane, supra, at pars 1123-1130; and in particular the general rule that the process will not be applied to prejudice the right of the holder of a security to realise his securities as he pleases: Wallis v Woodyear (1855) 2 Jur (NS) 179; Snell, supra, at 404. 2. Guarantee or surety: There are circumstances in which a guarantor or surety is entitled to invoke the processes of marshalling or similar processes to ensure that the duty of the creditor to the guarantor or surety is fulfilled: see, eg, Heyman v Dubois (1871) 8 Eq 158. Mrs Bentley was not a guarantor or surety of the second debt. But the land in which she had an interest was charged to secure the second debt under the guarantee given by Mr Bentley and Mr Climo. In my opinion, a person in her position would prima facie have rights analogous to those of a guarantor or surety in this regard. The obligations of a creditor to a guarantor - surety may operate to restrict what otherwise the creditor could do under his securities or, at least, enable a process having similarities to marshalling to be applied. In Duncan, Fox and Co and Robinson and Co v The North and South Wales Bank and Ors (1880) 6 App Cas | at 12-13, Lord Selborne LC said: "Tt is, however, consistent with this that the person who, as between himself and another debtor, is in fact a surety (though the creditor is no party to that contract of suretyship), has, against that other debtor, the rights of a surety; and that this creditor, receiving notice of his claim to those rights, will not be at liberty to do anything to their prejudice, or to refuse (when all his own just claims are satisfied) to give effect to them. The judgment of Lord Justice Turner, in Davies v Stainbank 6 D M and G 694 and the cases of Ex Parte Hippins and Harrison 2 Glyn and Jameson 93 and Liquidators of Overend, Gurney and Co v Liquidators of Oriental Financial Corporation Law Rep 7 H L 348 are founded, as I understand them, on this view of the law. In such cases the equity is direct in favour of the surety-debtor against the principal debtor; but it affects the creditor towards whom they are both principals only as a man who has notice of the obligations of one of his own debtors towards the other. As between the two debtors, the 'established principles of a Court of Equity, ' to which Sir Samuel Romilly referred in his argument in Craythorne v Swinburne 14 Ves 162, judicially approved by Lord Eldon 14 Ves at 165, are fully applicable. 'Natural justice' (it was there argued) 'requires that the surety shall not have the whole thrown upon him, by the choice of the creditor not to resort to remedies in his power.' In Aldrich v Cooper 8 Ves 382, 389, Lord Eldon speaks of a surety's equity as resting upon the same principles with that of marshalling, when one creditor of the same debtor is able to resort to either of two funds, and another creditor to only one. 'It is not, ' (he says) 'by force of the contract, but that equity, upon which it is considered against conscience that the holder of the securities should use them to the prejudice of the surety; and therefore there is nothing hard in the act of the Court placing the surety exactly in the situation of the creditor.' And soon afterwards (where he speaks of marshalling), "The principle, in some degree, is that it shall not depend upon the will of one creditor to disappoint another;' and 8 Ves at 391, 'The Court has said that if a creditor has two funds, the interest of the debtor shall not be regarded, but the creditor having two funds shall take to that which, paying him, will leave another fund for another creditor.' 12 UNREPORTED JUDGMENTS And in Younge v Reynell 9 Hare 819 Vice-Chancellor Turner said: "When Lord Eldon says it is against conscience to sue the surety, it must be considered what is the meaning of that expression, and why this Court considers it against conscience that the surety should be sued; and I take it to be because, as between the principal and surety, the principal is under an obligation to indemnify the surety; and it is, I conceive, from this obligation that the right of the surety to the benefit of the securities held by the creditor is derived. The principle is not, I think, much dissimilar to that which applies where a man directs part of his estate to be employed in carrying on a trade, in which case the creditors of the trade have a right to resort to that part of the estate, because the trustees have a right to be indemnified out of it.' It appears to me that these principles of Equity are not less applicable to cases of the third class, - cases in which there is, strictly speaking, no contract of suretyship, but in which there is a primary and secondary liability of two persons for one and the same debt, by virtue of which, if it is paid by the person who is not primarily liable, he has a right to reimbursement or indemnity from the other, - than to those of the second class, in which there is a contract of suretyship to which the creditor is not a party. To this third class of cases, the rights of an indorser against an acceptor of a bill of exchange may most property be referred." As T have said, the Northbridge land in which Mrs Bentley had an interest was subjected to the charge to support the guarantee of the second mortgage given by Ruru over the Doonside land in circumstances of which Mrs Bentley was not aware. It may be that those circumstances would have created rights against Mr Bentley and/or Mr Climo. And that her equity might have been seen as better than theirs as guarantors under the first mortgage. Whether the effect of that would have been relevant for present purposes does not appear. However, such rights as Mrs Bentley might have had in this regard would have depended upon the particular circumstances affecting the creation of the two mortgages and the subsequent borrowings under them. The effect of such circumstances upon such rights as Mrs Bentley might otherwise have had has not been the subject of consideration before this Court or, as far as appears, before the learned judge. On the hearing of the appeal, the Court was informed that no reliance was placed upon matters arising from such relationship of guarantor-surety as existed. In all the circumstances, I do not think that the Court should on appeal conclude that Mrs Bentley's position as part owner of land charged to support a guarantee requires that FCA apply the proceeds of sale of the Doonside land in the manner suggested by her and with the detriment to it which would flow from that application. 3. Mortgagor and mortgagee: Reference was made in argument to provisions of the Real Property Act 1900 and the Conveyancing Act 1919 which deal with the application of the proceeds of sale in discharge of mortgage debts and obligations. As I have said, I do not think that these provisions or the principles of law on which they are based determine the present issue. Those provisions and principles would, in the ordinary course, be qualified by such equitable rights as the parties might have. In the absence of such equitable rights, there is in my opinion nothing in the provisions or the principles which would assist Mrs Bentley. There has been said to be, in equity, the power to scrutinise the claims made in accounting between mortgagor and mortgagee and to disallow inequitable claims: see Banner v Berridge (1881) 18 Ch D 254 at 279. If and insofar as the power would otherwise extend to a claim made in this kind of context, I do not URJ FINANCE CORPORATION OF AUSTRALIA LTD v BENTLEY (Handley JA) 13 think that what FCA proposes to do is, in the relevant sense, inequitable. In the circumstances to which I have referred, it would not be so. And such a claim was not, it would appear, litigated at the trial. For these reasons, I am of opinion that the appeal should be upheld with costs. Reference was made in argument to the terms of the first and second orders made by the learned judge, as finally formulated. Reference was made to the possibility that the parties might desire to reconsider the form of these orders notwithstanding that they are not formally the subject of appeal. In the circumstances, the proper order to be made is that the appellant bring in short minutes of orders to give effect to the conclusions reached by this Court. Those short minutes should be brought in within fourteen (14) days from the date on which this judgment is delivered. Handley JA In this matter I have had the benefit of reading in draft form the reasons for judgment prepared by Mahoney JA. I agree generally with those reasons and with the orders that he has proposed. I wish to add only some brief remarks of my own. The respondent Mrs. Helen Bentley was an equitable tenant in common of the Northbridge land which was registered in the name of her husband. This land was mortgaged to the appellant to secure the liability of Mrs. Bentley's husband to the appellant under his guarantee of the second mortgage given by Ruru Pty Limited over the Doonside land. Since the property of Mrs. Bentley (her equitable interest as tenant in common) formed part of the collateral security given to the appellant in respect of its second mortgage she became, to the extent of that interest, a surety for that second mortgage although she undertook no personal liability for the repayment of the mortgage debt. See Re Conley; Ex parte The Trustee v Barclay's Bank Limited [1938] 2 All ER 127 and Jowitt v Callaghan (1938) 38 SR(NSW) 512 at 516. For this purpose it does not matter that the appellant had no notice of her interest when it took its registered mortgage. The dispute before the Court in this appeal relates to the manner in which the appellant as the first and second mortgagee of the Doonside land should apply the proceeds of the realisation of its securities over that land. Prima facie the appellant was entitled to apply those proceeds first in discharging the first mortgage and only then in partial satisfaction of the second mortgage. Mrs. Bentley as a surety for the second mortgage was not entitled to be subrogated to the benefit of the appellant's securities over the Doonside land unless and until the first and second mortgages had both been fully satisfied and then only to the extent that her own property had been used for that purpose. The effect of the orders made in the Equity Division is to postpone the appellant's first mortgage to its second mortgage so that the latter is discharged in full out of the proceeds of the sale of the Doonside property leaving a substantial unpaid balance owing under the first mortgage. The result is of course to exonerate Mrs. Bentley and her property from all liability as surety for the second mortgage. Another way of viewing the effect of the orders made below is that they treat Mrs. Bentley as if she had guaranteed the first rather than the second mortgage. Independently of contract a first mortgage may be postponed to a second or later mortgage if the owner's misconduct has made it inequitable for him to insist upon his priority. The misconduct which could have this effect must involve fraud, estoppel, or certain forms of gross negligence in relation to the custody of title deeds. See Meagher, Gummow and Lehane "Equity Doctrines and Remedies" 2nd ed. 1984 at pp 238-9. In the present case no such claim was ever 14 UNREPORTED JUDGMENTS pleaded or litigated, it was not relied upon either by the trial judge or by senior counsel for the respondent and in any event there is no evidence to support it. The orders appealed from might possibly have been supported on the basis that the further advances made by the appellant to complete the Doonside subdivision which were prima facie made under the second mortgage were not secured by that mortgage for some reason but were either unsecured or secured by a third unregistered equitable mortgage. Again however no such claim was ever pleaded or litigated, it was not relied upon either by the trial judge or by senior counsel for the respondent and there is no evidence to support it. In my opinion there is no other equitable principle which could support the relevant orders made by the trial judge. I agree therefore that the appeal must be allowed. Appellant to bring in short minutes of orders to give effect to the conclusions reached by the Court; such short minutes to be brought in within fourteen days from the date on which judgment is delivered. Counsel for the Appellant: AR Emmett QC / LG Foster Counsel for the Respondent: A McInnes QC / P Dowdy Solicitors for the Appellant: Hickson Lakeman and Holcombe Solicitors for the Respondent: Lee Rigg and Co