Nearhaze v The Official Trustee [1999] NSWSC 959

New South Wales Supreme Court CITATION : Nearhaze v The Official Trustee [1999] NSWSC 959 CURRENT JURISDICTION : Equity FILE NUMBER(S) : 3269 of 1998 HEARING DATE(S) : 9, 10 & 11/8; 16 & 17/9/99 JUDGMENT DATE : 24 September 1999

PARTIES : Nearhaze Pty Ltd & Anor v The Official Trustee - Bankrupt Estate of Michael Francis Byrne JUDGMENT OF : Bryson J at 1

COUNSEL : D.H. Murr S.C. with D. A. Smallbone for Plaintiffs M.R. Speakman for Second Defendant Doherty Partners for Plaintiffs SOLICITORS : Kemp Strang Lawyers for First Defendant McLaughlin & Riordan For Second Defendant Maurice May & Co. for Fourth Defendant CATCHWORDS : MORTGAGES - Equitable mortgage - mortgage constituted by two documents - informal mortgage of house jointly owned by H & W constituted by uncompleted form of mortgage incorporated in later letter - wife signed uncompleted form but was not proved to have authorised the later letter - mortgage only effective against interest of husband. ACTS CITED : Conveyancing Act 1919 Real Property Act Ghana Commercial Bank v Chandiram [1960] AC 732 CASES CITED : Cochrane v Cochrane (1985) 3 NSWLR 403 at 405 Young v Queensland Trustees Ltd (1956) 99 CLR 560 ANZ Banking Group v Widin (1990) 26 FCR 21 at 28 DECISION : See para 38

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

BRYSON J.

Friday 24 September 1999

3269/98 NEARHAZE PTY LTD & ANOR v THE OFFICIAL TRUSTEE - BANKRUPT ESTATE OF MICHAEL FRANCIS BYRNE

JUDGMENT 1 HIS HONOUR: The plaintiffs are two companies which are wholly under the control of Mr George Couri, a property developer who has many business interests. The plaintiffs claim that they are entitled to security under an unregistered equitable mortgage over the land in Folio Identifier 1/797924, the house at 20 Adolphus Street, East Balmain. The mortgagee named in the mortgage is Nearhaze the first plaintiff, and Lasovase the second plaintiff is not named in it. Mr Michael Francis Byrne and Mrs Catherine Mary Byrne were the registered proprietors as joint tenants of the house in 1996 when the form of mortgage was executed. On 21 October 1998, while these proceedings were pending the house was sold by ANZ Banking Group Ltd, which held a registered first mortgage, to purchasers unrelated to these parties for $770,000. After satisfying all its own claims ANZ held a surplus of $201,005.82, and paid that amount into court in proceedings 4813 of 1998 to avoid becoming involved in any dispute. The funds remain in court and the claims of the plaintiffs have become claims against that fund. 2 Mr Byrne formerly the first defendant became bankrupt by a Sequestration Order of the Federal Court of Australia on 15 March 1999; then the Official Trustee of his estate became first defendant in his stead. Lasovase Pty Ltd was added as second plaintiff by an amendment made on 25 June 1999. The third defendant was Obelisque Securities Pty Ltd and the fourth defendant is Politi Pty Ltd; these defendants claimed security interests under other mortgages. While the proceedings were pending the claim of Obelisque Securities were satisfied out of some collateral security, and the plaintiffs discontinued against it. During the hearing before me an agreement was reached between the plaintiffs, Mrs Byrne and Politi which compromised Politi's claim on terms which included payment of $45,000 to Politi out of funds in court. Politi had security which in time of advance and time of mortgage ranked later in priority than the plaintiff's mortgage; if Politi had defeated the plaintiffs' claim it would have had first claim on the fund. Politi's claim was disputed only in the respect that the plaintiffs claim priority over it; complete success for the plaintiffs would have depleted the fund. 3 To have access to the funds in Court the plaintiffs must establish that they had an equitable interest over the house against the registered proprietors. The plaintiffs could not get access to the funds in court if they established only that Mr Byrne or Mrs Byrne incurred personal liability for payment of a debt. No personal liability can be enforced against Mr Byrne except in the administration of his estate under Bankruptcy law. The Amended Statement of Claim did not allege that Mrs Byrne was a borrower. In my opinion there is no evidence of substance against Mrs Byrne which could establish that she was herself a borrower of funds from either of the plaintiffs and incurred personal liability. There are no more than shreds of material in evidence which could suggest that she incurred personal liability and these take forms which could not reasonably be the basis of a finding against her. One is that in an incidental reference in an affidavit Mr Byrne referred to the debts as "our borrowings" in a context which included Mrs Byrne. The other is that in ambiguous references in Mr Byrne's letter of 21 September 1996 he could be understood to have indicated that Mrs Byrne was or would be liable; however these references are equivocal and could allude to her contemplated liability under a future mortgage. Except for the shreds I have mentioned the evidence uniformly speaks of Mr Byrne as the borrower. There is no substantial evidence that Mrs Byrne or anyone on her behalf entered into an agreement to borrow money or actually received any money. The only manner in which she could be held liable is that property of which she was a joint owner may be charged under an equitable mortgage. So far as appears she was a volunteer in the dealings with Nearhaze; there is no evidence that she requested that advances be made to Mr Byrne or to another person or that she otherwise received consideration for the advances or had any interest in them. 4 The form of mortgage is very defective. It states that the mortgagee is Nearhaze: it does not mention Lasovase. It was made on a Real Property Act short form and signed by Mr and Mrs Byrne before a witness late in 1996. Vital parts of the form were left blank. It does not identify the debt which it secures, or contain any "all moneys" clause. Indeed it does not say that it secures any debt, or refer to any debt. Its printed terms provide for incorporation in it of provisions from another document, but there is no annexed document and no text which would identify any incorporated document. It is not possible to know what the mortgage secures from what it says, and it would not have prevailed in a competition of priorities with another unregistered mortgage, because it does not contain a provision identifying what is charged, which it is essential that a mortgage should have. 5 If an equitable mortgage is to be an enforceable charge against property and if it is to create rights higher than rights in personam it must comply with the formal requirements for writing in s.23C and s.54A of the Conveyancing Act 1919, and to do so a memorandum of a mortgage must contain all essential terms; the essential terms include identification of the loan or obligation which is secured. This view is based on the nature of a mortgage itself; there can be no mortgage without a debt charged. For this reason the form of mortgage was not, in my opinion, ever an enforceable charge. 6 If there had been an accidental omission there would be a need for rectification proceedings to supply the omission, and in my opinion a mortgage which does not comply with statutory requirements for writing and would only do so if assisted by rectification claim is no more than a mere equity and cannot prevail in a competition of priorities against a well-constituted mortgage later in date. The fact that Mrs Byrne is a volunteer means that there is no equity to obtain rectification. However there are no competing priorities and I am to consider only whether the mortgage created an effective security as between the parties to it. 7 The form of mortgage is not the only possible document which could have created an equitable mortgage. When the document is taken together with Mr Byrne's letter of 21 December 1996 there is a sufficient memorandum of an agreement by Mr Byrne that there would be a mortgage, that it would secure $285,000 and that it would be a mortgage for the benefit of Lasovase. Case law relating to taking two documents together for the purpose of the statutory requirement for a memorandum was reviewed by Hill J in ANZ Banking Group v Widin (1990) 26 FCR 21 at 28 and following. In this approach the memorandum is the letter of 21 December. The letter cannot be seen as incorporated by reference in the mortgage so as to bind Mrs Byrne, but the mortgage was incorporated by reference in the letter, so as to bind Mr Byrne and him only. 8 The course of dealing prior to the execution of the form of mortgage and the letter of 21 December 1996 show that notwithstanding its defects Mr Byrne and Mr Couri intended that the form of mortgage should secure whatever money Mr Byrne owed. When the mortgage was delivered to Mr Couri there were debts due from Mr Byrne to Nearhaze, and there had been discussions, not any concrete arrangement established by the evidence, about granting a mortgage to secure them. The mortgage actually granted does not accord exactly with the proposal discussed, but as a matter of probability it was intended at the time it was delivered that it should secure debts then owed by Mr Byrne to Nearhaze. There is an issue of fact about when it was delivered: Mr Couri's evidence is that the document was delivered to him late in December 1996 after Christmas, and Mr Byrne says in evidence that it was delivered earlier, in September or it may be October 1996. 9 This issue was largely to be resolved on the conflicting testimony of these two persons. Both were cross-examined and I had the opportunity to observe them. Neither of them exhibited any demeanour which I regard as significantly assisting me in deciding whether their evidence should be acted on; I observed nothing adverse to reliance on either witness in their demeanour and nothing which led me to have any confidence in either. Both behaved with astonishing inattention in serious business matters and failed to act with ordinary adult responsibility and prudence while handling business which related to significant sums of money. Neither made documents contemporaneous with the transactions which are intelligible or clear enough to establish their rights in transactions with large sums. When there are references to their transactions in correspondence or financial statements they are very difficult to understand. Cross-examination showed some difficulties of recollection and anomalies in Mr Byrne's evidence, not in any respect which I regard as clearly indicating that he was not reliable. I do not see any means of testing their evidence on any significant point of difference against what I could regard as objectively incontrovertible sources. I take a cautious approach to finding facts on the evidence of either of them. Where they are in conflict I am therefore left to act largely on my view about where the probabilities lie, and to act with less than complete certainty. 10 Acceptance of Mr Couri's case is rendered more difficult by the circumstance that the claims relate to large sums of money and a security interest which ordinary prudence as well as the law shows should be carefully recorded in writing; the fact that there were no documents contemporaneous with and creating a clear record of the transactions is a difficulty for accepting the account of the transactions he now gives. In common prudence a lender taking security would obtain a written record acknowledged by the signature of every person granting security, identifying the lender and clearly establishing the security and the amount. The plaintiffs are in a very poor position when asking for findings on the probabilities and basing themselves on strangely expressed letters and schedules of figures prepared by Mr Byrne which are equivocal in various ways and can only be understood if given highly sympathetic readings. 11 In my understanding it is not of great importance exactly when the mortgage document was handed over. However the probabilities appear to me to favour its having been handed over when Mr Couri says it was, late in December. At that time Mr Byrne was indebted to one or both of the plaintiffs for a number of different advances. Neither Mr Byrne nor Mr Couri could give a clear account of the loan transactions which led to the debt position as it was as of 30 December 1996. The best material available is a statement prepared by Mr Byrne at some time in 1997. Rough notes in two different forms on two different copies of Mr Byrne's letter to Mr Couri of 20 September 1996 supplemented by Mr Byrne's evidence show that late in December Mr Byrne was indebted to Nearhaze for (at least) $53,560 and that he had several different debts to Lasovase. I cannot confidently state the total but significant debts arose out of an advance of exactly or approximately $176,000 made on or about 4 November 1996, and somewhat reduced thereafter by repayment. By this time advancing money to Mr Byrne was Nearhaze's only business, and the advances were made out of its bank account, which was overdrawn $55,517.65 on 30 December 1996. There were also some significant debts then due to Lasovase. 12 On 30 December 1996 Lasovase borrowed $285,000 on a Commercial Bill from ANZ Banking Group. This was applied in a number of ways for the benefit of Mr Byrne. Part of it was applied to repay Nearhaze's overdraft, and I see this as having repaid Mr Byrne's debts to Nearhaze. The transaction must be understood as a loan by Lasovase to Mr Byrne of $285,000, part of which was used to pay his debt to Nearhaze. The transaction is referred to in a message from Mr Byrne to Mr Couri of 21 December 1996 headed "Second Unregistered Mortgage. 20 Adolphus Street, Balmain" with which he forwarded a repayment schedule. Mr Couri produced in evidence, belatedly, what he says is a copy of the repayment schedule and Mr Byrne has produced from his computer record what he says is an updated version (meaning a later version). Internal references appear to confirm that the version produced by Mr Couri could well have been prepared before 30 December 1996 while the version produced by Mr Byrne was made somewhat later. A great deal of the repayment schedule cannot be followed but it appears to confirm that of the advance of $285,000, $55,517.65 was used to repay Nearhaze's overdraft. (A corresponding credit appears in Nearhaze's bank statement). How the rest was applied is not clear; it seems that some or all was applied to pay out various debts which were then owing by Mr Byrne to Lasovase; in Mr Byrne's expression, to refinance them. I find that Mr Byrne's liability for principal debt was $285,000 when the transactions of 30 December 1996 closed, and it was a liability to Lasovase. 13 Although those transactions paid out the debt then owed to Nearhaze, it is not clear that it was the intention of Mr Byrne or of Mr Couri that those events should bring the operation of the form of mortgage to an end. The heading of Mr Byrne's message of 21 December 1996 appears to indicate that it was contemplated that the second unregistered mortgage was to be the continuing subject of their dealings. 14 The same letter ends "This letter is an acknowledgment that the mortgage as at 30 December 1996 will have a liability of $285,000." 15 The difficulty of accepting this statement, and attributing to it effect as against Mrs Byrne, is that the creditor after the events of 30 December 1996 was Lasovase Pty Ltd, which borrowed the money on the Commercial Bill and must be treated as having made the advance to Mr Byrne on that day. To the extent to which the advance was applied to pay off a debt secured by the form of mortgage to Nearhaze, the only mortgagee named in the mortgage, I am of opinion that Lasovase would be entitled to the benefit of security under the doctrine of subrogation stated thus by the Privy Council in Ghana Commercial Bank v Chandiram [1960] AC 732 at 745: "It is not open to doubt that 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 own benefit: see Butler v Rice [1910] 2 Ch. 277, 282, 283." See too Cochrane v Cochrane (1985) 3 NSWLR 403 at 405 (Kearney J). Further authorities are given in Fisher and Lightwood's Law of Mortgage, Australian Edition 1995, Tyler Young and Cross at para[14.6]. Nothing in evidence indicates a contrary intention. 16 The result is that notwithstanding that Nearhaze was paid all its debt on 30 December 1996, the mortgage, if it had effect as an equitable mortgage, would continue to have effect as an equitable mortgage for the benefit of Lasovase to the extent of the debt due to Nearhaze which had been paid out of Lasovase's advance. The last sentence of Mr Byrne's letter of 21 December 1996 which I have quoted shows that it was his intention then that Lasovase should have the advantage of a mortgage for $285,000. If this took effect there would be no room for subrogation to have any effect; it would give security for $55,517.65 which was part of the same $285,000. 17 Mr Byrne's intention expressed in his letter of 21 December 1996, which I attribute also to Mr Couri, could not have the effect of conferring on Lasovase a security interest as against Mrs Byrne and her interest in the house. The form of mortgage was, as its own terms plainly show, a mortgage granted to Nearhaze and to no one else. After the transactions of 30 December 1996 Nearhaze had no security interest over the property under the form of mortgage. Only by subrogation could any other creditor come to have the benefit of the security which it granted. Even if Nearhaze had a right to increase the debt which it secured (which would depend on some agreement to which Mrs Byrne was a party, and there is no evidence of one) it could not pass that advantage on and enable someone else to confer on itself an increased charge over Mrs Byrne's interest. There was nothing in the nature of an assignment of the mortgage. 18 Mrs Byrne, and also Mr Byrne whose interests have now passed to the Official Trustee, alleged in their Defences that in May 1997 the mortgage was discharged, the discharge took the form that Mr Byrne asked that the document be given to him by Mr Couri as the Nearhaze loan had been repaid; Mr Couri gave it to him and Mr Byrne tore it up. These events followed events in which, as Mr Byrne asserts, he arranged with Mr Couri that Mr Couri should have security for the amount outstanding to his companies in the form of a bank guarantee of $200,000, but Mr Byrne then could not obtain a bank guarantee for more than $100,000; he did that, and Lasovase had the benefit of that guarantee. (At a later time the bank in fact paid $100,000 under this guarantee to Lasovase and recouped itself out of the proceeds of sale of the house under the first mortgage. This has effected a $100,000 reduction in Lasovase's claims arising out of the advance of $285,000, a $100,000 increase in the amount recovered by the Bank under the first mortgage, and a $100,000 reduction in the amount paid into court. 19 Mr Couri gives an entirely different account; he placed the form of mortgage in his files, he is disorderly in keeping files and after searches he cannot now find the form of mortgage, and all that he is able to produce is a photocopy apparently made at fairly early stage by his accountant Mr Beath and kept in Mr Beath's file. It was put forward in the plaintiffs' case that Mr Byrne had access to Mr Couri's office and had an opportunity to remove the mortgage document without Mr Couri's authority. I do not regard the evidence as showing on the balance of probabilities that Mr Byrne removed the mortgage without authority. In so finding I have regard to the serious nature of the suggestion that Mr Byrne stole the document and destroyed it without authority. There is an unreconcilable conflict between the evidence of Mr Byrne about the document's being delivered to him under an arrangement to discharge it and then destroyed and Mr Couri's evidence that there were no such arrangement and delivery. 20 On the one hand the plaintiffs submitted to the effect that the onus of proof that an equitable mortgage was discharged rests on the defendants; on the other hand it was submitted for the second defendant that the plaintiffs bear the onus of proving not only that an equitable mortgage was created but that in all the circumstances it still exists and should be enforced as of the time of the hearing. It is well established that the burden of proof of payment lies on the debtor: see Young v Queensland Trustees Ltd (1956) 99 CLR 560, and it would follow in principle that the burden of proving that the debt has been discharged in any other way than by payment also rests on the debtor, and yet further that the burden of proof that the security conferred by an equitable mortgage has been discharged also lies on the mortgagor. I feel some disquiet about whether this approach is appropriate where the equitable mortgage was created as one step in a continuing series of informal transactions and was not created in a clear and regular way; a rule of law which imposed on the plaintiffs the burden of showing that upon the whole series of transactions they were at the time of hearing entitled to security would be supportable but I know of no authority for such a rule and I was not referred to any. In my view the burden of proof of discharge of the mortgage lies on the second defendant. 21 On behalf of the second defendant it was suggested that the circumstance that a bank guarantee for $100,000 was provided to support the obligation of Lasovase in May 1997 tends to show that there was no longer any need for Lasovase to have mortgage security, and assists the finding that there was then an agreement to discharge it. I do not accept this, as the bank guarantee was for less than the whole debt and was secured in priority to the equitable mortgage, thus diminishing the protection which it afforded while leaving some protection. 22 Another matter relating to the probabilities is that in Mr Byrne's bankruptcy Lasovase took the position and lodged a proof of debt on the footing that Lasovase was an unsecured creditor. The position which Lasovase took appears in an affidavit made by its solicitor Mr Wowk on 27 April 1998 in the bankruptcy proceedings - Exhibit 5 - in which he recounted that as proxy for the plaintiffs at a meeting of creditors on 2 March 1996 he said: "The clients whom I represent, Lasovase Pty Ltd and Nearhaze Pty Ltd are owed approximately $243,000.00. Lasovase and Nearhaze are separate legal entities. Each is entitled to prove with respect to the unsecured amount of the debt owed to it. In my opinion, Nearhaze has security against the property at Balmain for the full amount of the debt owed to it. The fact remains that Lasovase's debt was and is unsecured. Lasovase is entitled to vote for the full amount of the judgment debt." The minutes of the meeting show that Mr Wowk voted in respect of Nearhaze only, and did so for $1 on the footing that it had sufficient security. Mr Wowk held a proxy form executed under seal by Lasovase which asserted that Lasovase was an unsecured creditor for $243,759.43. In my finding the form of the proof of debt and Mr Wowk's conduct at the meeting were produced by doubt about which company was entitled to security and were not produced by any concession of the effect of some supposed discharge. 23 In the same bankruptcy proceedings on 28 April 1998 Mr Couri made an affidavit of 28 April 1998 on behalf of Lasovase (Exhibit 3) in which (para 5) he referred to proceedings 9637 of 1997 in which Lasovase sued Mr Byrne in the District Court at Sydney. The cause of action relied on was that Mr Byrne acknowledged by deed dated 20 May 1997 that Mr Byrne owed Lasovase $291,834.37 and agreed to pay that amount by instalments, yet only paid $65,000. Lasovase claimed $226,834.37 and interest, recovered default judgment for $239,763.16 for debt and $1,093 for costs, and proved for that debt in Mr Byrne's bankruptcy. In his affidavit Mr Couri said: "5. The applicant has not taken and does not have any security in respect of the judgment debt in proceedings no. 9637 of 1997 in the District Court of New South Wales.