New South Wales Supreme Court CITATION : IMB Limited v Nallathambi & Anor [2009] NSWSC 1387 This decision has been amended. Please see the end of the judgment for a list of the amendments. HEARING DATE(S) : 8-9 October & 8 December 2009 JURISDICTION : Equity JUDGMENT OF : Slattery J at 1 EX TEMPORE JUDGMENT DATE : 8 December 2009 DECISION : Order the funds that were paid into court on or about 1 June 2009 and 3 July 2009 totalling the sum of $137,261.27 together with any interest accrued thereon be paid out of court to the applicant Booksan Pty Ltd. CATCHWORDS : MORTGAGES - mortgages and charges generally - first mortgagee exercises power of sale - pays surplus proceeds into Court - second mortgagee applies for payment of surplus funds out of court - matters to be established - no competing claims - entitlement to funds made out - order for payment out made LEGISLATION CITED : Real Property Act 1900 (NSW) s 58 Trustee Act 1925 (NSW) ss 95, 98 CATEGORY : Principal judgment CASES CITED : AVCO Financial Services Limited v Commonwealth Bank of Australia (1989) 17 NSWLR 679 Plaintiff: IMB Limited First Defendant: Pappathevar Nallathambi Second Defendant: Parameswari Nallathambi PARTIES : Applicant on the Motion: Booksan Pty Limited First Respondent: Australian Securities and Investment Commission Second Respondent: Perpetual Nominees Ltd Third Respondent: Vertzayas Lawyers Pty Ltd formerly known as Hellas Income Tax Consulting Services Pty Ltd FILE NUMBER(S) : SC 3044/09 COUNSEL : Applicant: Mr A Chee SOLICITORS : Applicant: Veritas Legal - 11 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION DUTY LIST SLATTERY J TUESDAY 8 DECEMBER 2009 3044/09 IMB LIMITED v NALLATHAMBI & ANOR JUDGMENT [Ex Tempore] 1 HIS HONOUR: - Introduction 2 Until April this year Pappathevar Nallathambi and Parameswari Nallathambi were the registered proprietors of a property in Wentworth Street, Strathfield. They and their family company, PN Associates Pty Limited as trustee for the Thevar Trust, entered financial transactions that resulted in the creation of mortgages and caveatable interests over this Strathfield property. By late 2008 Mr and Mrs Nallathambi were substantially in default on their first mortgage to IMB Limited. IMB exercised its power of sale over the Strathfield property and sold it at auction on 7 March this year. The sale settled on 30 April and IMB collected the sale proceeds. After the deduction of IMB's mortgage debt, sales expenses and the disbursements chargeable under the IMB mortgage, a surplus of $136,890.28 remained. 3 After the sale IMB corresponded with the second mortgagee, Booksan Pty Limited and several other caveators about their respective entitlements to the surplus. No agreement was reached among the parties who had a potential interest in the surplus. Section 58 (4) of the Real Property Act 1900 (NSW) requires IMB to account for the surplus to subsequent mortgagees and chargees and then to the registered proprietors. Under the general law, as trustee of the surplus, IMB paid the funds into court pursuant to s 95 Trustee Act 1925 (NSW). It did so as plaintiff by summons joining Mr and Mrs Nallathambi as defendants. On 8 October 2009 in the equity duty list Booksan applied by motion for payment of the surplus out of court. 4 Due to the press of business in the duty list I was not able to give judgment that day. I sought further submissions on one matter from Mr Chee, counsel for Booksan. He provided those submissions. Then judgment was fixed for today. The Issues 5 Booksan's motion seeks the payment of $137,261.27 plus interest out of court. The motion raises two issues. The first is whether Booksan has a valid claim to a proprietary interest in the funds in court. The second issue is whether adequate enquiries have been made as to whether there are claimants to the funds in court, who may still be pressing competing claims. I will deal with each of these issues in turn. First though there are two preliminary matters. Two Preliminary Matters 6 The first preliminary matter is reference in this judgment to the Strathfield property and several other properties. This Court has a policy of reducing the risk of identity theft through the Court's published judgments. This judgment does not publish personal information or the precise address details of any properties, the publication of which may heighten the risk of identity theft. I will refer throughout this judgment to the property at Wentworth Avenue Strathfield as 'the Strathfield property'. Other properties will only be described by their suburb or street. More precise details can be obtained from the court file if required. 7 The second preliminary matter is the calculation of the precise amount to be paid out of court. This judgment records above that the sum of $136,890.28 was paid into court. Booksan's motion is to pay out of court $137,261.27 plus interest. A later receipt explains the difference of $370.99. After the solicitors for IMB, Messrs Bransgroves Lawyers, paid the $137,261.27 into court, an amount of $610.79 was refunded by the insurer of the Strathfield property. The payment was on account of the cancellation of insurance on the property upon the sale. After deducting their legal fees for processing the $610.79, Bransgroves paid the balance of $370.99 into court pursuant to Part 4 of the Trustee Act. I now return to the main issues on this application. A Proprietary Interest in the Funds in Court 8 To obtain an order for payment out of court Booksan must establish a proprietary interest in the funds in court. Booksan had a registered second mortgage over the Strathfield property (dealing AC996417D), securing obligations between Booksan and Mr and Mrs Nallathambi. The mortgage is dated 29 December 2006. It was apparently executed by the mortgagor and stamped for New South Wales stamp duty on 29 December 2006. 9 Booksan claims that the mortgage was taken out to secure obligations under a loan agreement made between Booksan as lender and PN Associates Pty Limited and Mr and Mrs Nallathambi as borrowers. When Booksan was putting its case orally on 8 October 2009, I was initially concerned about the lack of internal cross-reference between the second mortgage instrument and the obligations created in the loan agreement. The mortgage instrument does not clearly identify a "principal sum" that would obviously include the money Booksan had advanced under the loan agreement. 10 Booksan has the obligation to show on an application such as this that there is an amount outstanding in respect of an obligation which is secured by the mortgage. There is a reference in the mortgage document to memorandum Q860000 filed at Land and Property Information New South Wales. This has now been tendered in evidence. 11 After reviewing memorandum Q860000 and receiving further written submissions from Mr Chee, I am satisfied that there is a strong inference that the parties intended that the mortgage should secure the obligations created under the loan agreement. This is so for several reasons. 12 First, there is strong internal evidence that the amount for which the mortgage instrument was stamped at $1.510 million is the same amount as the amount of credit IMB advanced to Mr and Mrs Nallathambi and PN Associates under the loan agreement. 13 Secondly, as well as providing for the advance of the $1.510 million the loan agreement required a second mortgage over properties including the Strathfield property. The mortgage over the Strathfield property is a second ranking registered mortgage taken out in the apparent performance of this agreement. The loan agreement also required a first ranking mortgage over two properties at Condamine Street, Manly Vale and at Barker Road, Strathfield, which will respectively be referred to as the Manly Vale property and the Barker Road property. 14 Thirdly, there is also a clear identity between the mortgagors under the mortgage and two of the borrowers under the agreement. The parties created the mortgage and the loan agreement at the same time in December 2006. 15 Fourthly, the mortgagors acknowledged Booksan's rights as mortgagee of the Strathfield property when in February 2009 the mortgagors agreed upon the sum outstanding on the loan agreement and compromised the proceedings for possession that Booksan had brought for the Strathfield property, the Manly Vale property and the Barker Road property. This acknowledgment is consistent with a recognition by the mortgagors that the mortgage was intended to secure the monies advanced under the loan agreement. 16 Fifthly, there is reference in memorandum Q860000 to the mortgagee's advance of the principal sum to the mortgagor and the obligation to repay the same. The apparently contemporaneous execution of the mortgage and the loan agreement create a strong inference that the mortgage was taken out to secure the borrower's obligations to the lender under the loan agreement. There are also references in the memorandum to the "principal monies secured by the mortgage". It is difficult to make sense of such language unless the mortgage was intended to secure the advances under the loan agreement. There is no evidence of any other obligation existing between IMB and these parties to which these words would apply. 17 I conclude that the mortgage secures the repayment of the monies advanced under the loan agreement. Amount outstanding to Booksan exceeds the amount of Funds in Court 18 Before turning to the question of any competing claims for the funds in court, it is also necessary for Booksan to show that there are still monies outstanding from Mr and Mrs Nallathambi to Booksan under the loan agreement. Booksan has established this by the following evidence. 19 Mr and Mrs Nallathambi not only sought credit of $1.510 million, they committed themselves to pay a compound monthly interest rate of 4%. By the time of the sale of the Strathfield property, accumulated interest resulted in Booksan claiming approximately $2.3 million from them. 20 In proceedings in the common law division of this Court Booksan sought to exercise rights to possession under the first mortgage over the Manly Vale property and the second mortgage over the Barker Road property. Booksan acknowledged that it could not get an order for possession of the Strathfield property because IMB was exercising its power of sale. These common law proceedings were settled on 9 February this year. Parts of that settlement agreement are of relevance to the state of accounts between the mortgagors and Booksan. 21 After dealing with the Manly Vale property and the Barker Road property, the short minutes of order in the common law proceedings provided for the Strathfield property the following way. "7. The court notes that the first mortgagee of the land comprised in certificate of title [the Strathfield property] has taken possession of that land and that hence the plaintiff does not now seek possession of that land." 22 At the time these orders were made, Booksan on the one part and PN Associates Pty Ltd and Mr and Mrs Nallathambi of the other part agreed on a summary of the state of accounts between the parties as follows: "2. Booksan and the borrowers agree that Booksan shall accept and the borrowers shall pay the sum of $2.3 million in full and final settlement of all debts owing from any of the borrowers to Booksan as at the date of this agreement." 23 The borrowers consented to judgment for possession in respect of the Manly Vale property and the Barker Road property and other machinery orders. 24 One of those machinery orders dealt with Booksan's continuing rights as a mortgagee in the following way: "11. Booksan hereby releases each of the borrowers and each of the borrowers hereby releases Booksan of all claims save for the debt due under this agreement (and Booksan's rights as a mortgagee with respect to the recovery of that debt) and the parties' rights to enforce this agreement." 25 Thus a debt of $2.3 million due under the agreement was the final state of agreed accounts between the parties. That debt was to be partly satisfied by sale of the Manly Vale property and the Barker Road property. Those sales occurred after February 2009. After crediting the proceeds of those sales to the outstanding $2.3 million, Booksan's evidence is that there is a sum of approximately $1,225,307.80 still currently due as at 9 September 2009. 26 Booksan's entitlement as a second mortgagee to an interest in the Strathfield property is transformed on established principles into a claim maintainable against the funds in court: AVCO Financial Services Limited v Commonwealth Bank of Australia (1989) 17 NSWLR 679. 27 I find therefore that Booksan has a valid proprietary claim against the funds in court in a sum of at least $1,225,307.80. The funds in court are significantly less than that sum. Booksan's claim will exhaust that fund if there is no competition for it or if the claim ranks ahead of any competing claims. Competing Claims to the Funds in Court 28 IMB exercised its powers under Part 4 of the Trustee Act to pay funds into Court because there were disputes between the borrowers and Booksan about entitlement to the proceeds. Those disputes have now settled. 29 On 3 July 2009 the solicitors for the borrowers wrote to the solicitors for Booksan in the following terms: "Our clients instructed us that our clients have no objection to your client's claim on the surplus from the auction of [the Strathfield property]. The surplus amount should be adjusted towards the debt of our clients under agreement dated 9 February 2009." 30 Mr and Mrs Nallathambi have not appeared in these proceedings. This letter from their solicitor and the solicitor for PN Associates is sufficient statement of their final acceptance of Bookson's claim. 31 There is still the question of whether or not adequate notice has been given to potential competing claimants to the funds in court other than the registered proprietors of the Strathfield property. 32 The starting point for examination of the evidence on this issue is the obligation of an applicant under s 98 of the Trustee Act to deal with position of other claimants. The relevant principles were stated by Justice Young in Avco Financial Services v Commonwealth Bank of Australia (1989) 17 NSWLR 679. His Honour there says that on an application under s 98 of the Trustee Act if the court cannot be satisfied that there is no other claimant or that all other possible claimants have been notified and have not come in, the matter should ordinarily be referred to a Master to make such inquiries as he considers appropriate. 33 In this case the evidence I am about to detail shows that all other applicants have been notified. Extensive inquiries have been made on behalf of Booksan and the potential claimants identified and contacted. 34 The logical starting point to look for other claimants is the Certificate of Title of the Strathfield property itself. That Certificate of Title shows the following in the second schedule: 1. RESERVATIONS AND CONDITIONS IN THE CROWN GRANTS(S) 2. 7836756 MORTGAGE TO IMB LIMITED 3. AC996417 MORTGAGE TO BOOKSAN PTY LIMITED 4. AD253189 CAVEAT BY NORTH SHORE MORTGAGE FINANCIAL SERVICES AS REGARDS THE INTEREST OF PAPPATHEVAR NALLATHAMBI 5. AD996743 CAVEAT BY BOOKSAN PTY LIMITED 6. AE111811 CAVEAT BY PERPETUAL NOMINEES LIMITED AS REGARDS THE INTEREST OF PAPPATHEVAR NALLATHAMBI 7. AE311291 CAVEAT BY HELLAS INCOME TAX CONSULTING SERVICES PTY LIMITED AS REGARDS THE INTEREST OF PAPPATHEVAR NALLATHAMBI 35 Booksan as applicant on the motion for payment out of Court has joined the Australian Securities and Investments Commission as first respondent, Perpetual Nominees Ltd as second respondent and Vertzayas Lawyers Pty Ltd formerly known as Hellas Income Tax Consulting Services Pty Ltd as third respondent. All of these caveators are potential competing claimants for the funds in court. I will deal with each of them in turn. 36 First, North Shore was a mortgage broker through whom Mr and Mrs Nallathambi sought to source a loan in July 2007. North Shore's caveat related to a loan procurement fee. North Shore has since become a deregistered company. Booksan discovered this after it attempted to serve North Shore at the address of its registered office and could not effect service. Booksan then served ASIC with notice of these proceedings. 37 In its letter dated 6 October 2009 [Exhibit A] ASIC indicated that after deregistration of North Shore ASIC is the only party legally able to deal with the assets of the company. ASIC's position was that, "… ASIC comes as a stranger to these proceedings and neither consents nor opposes the orders sought. ASIC will abide by the decision of the court in these proceedings. Kindly advise ASIC as to the outcome of these proceedings and provide a copy of the caveat." 38 Booksan has adequately run to ground the interests of North Shore. ASIC is not opposing the application. There is no contesting interest from North Shore that would displace Booksan's claim. 39 The second caveator was Perpetual Nominees, another lender to Mr and Mrs Nallathambi under a loan agreement dated 13 April 2007. Booksan served Perpetual Nominees with notice of these proceedings. Perpetual Nominees indicated its consent to the orders now sought through its solicitor Mark Petrucco [Exhibit B]. 40 Finally, notice of the proceedings was given to the third respondent which has changed its name from Hellas Income Tax Consulting Services Pty Ltd to Vertzayas Lawyers Pty Ltd [Exhibit D]. The third respondent also consents to the orders sought in these proceedings through its legal representative, Mr Dion Vertzayas [Exhibit C]. 41 Thus, in summary, the evidence advanced by Booksan accounts for the potentially competing interests of the registered proprietor and all the other caveators on the property at the time of sale. 42 The searches Booksan undertook and its correspondence with those other parties gives not the slightest suggestion of there being any other claimant to the funds in court. I am satisfied that all proper inquiries have been made to identify potentially competing claims to the funds in court. Orders 43 Accordingly, I order the funds that were paid into court in these proceedings on or about 1 June 2009 and 3 July 2009 totalling the sum of $137,261.27 together with any interest accrued thereon be paid out of court to the applicant Booksan Pty Ltd. ********** 14/12/2009 - Amendment to month - Paragraph(s) 2 15/12/2009 - Incorrect sum - Paragraph(s) 27 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.