Supreme Court New South Wales Medium Neutral Citation: Lym International Pty Limited v Westpac Banking Corporation [2011] NSWSC 927 Hearing dates: 06/06/2011 Decision date: 06 June 2011 Jurisdiction: Equity Division - Duty List Before: Brereton J Decision: Application to vary Court of Appeal order dismissed. Catchwords: PRACTICE AND PROCEDURE - Liberty to apply - order of Court of Appeal reserves liberty to apply to vary orders where changing circumstances render orders otiose - Court of Appeal order substantive not merely machinery - liberty to apply does not allow for substantive variations of rights. Legislation Cited: (NSW) Conveyancing Act 1919, s 37A (CTH) Income Tax Assessment Act 1936, s 254 Cases Cited: Chen v Marcolongo; Chen v Lym International Pty Ltd [2009] NSWCA 326 Lym International Pty Ltd v Chen [2009] NSWSC 98 Lym International Pty Limited v Chen [2010] NSWSC 875 Marcolongo v Chen (2011) 85 ALJR 380 Texts Cited: Fisher and Lightwood's Law of Mortgage, 2nd ed. Category: Procedural and other rulings Parties: Lym International Pty Ltd (plaintiff) Westpac Banking Corporation (defendant) Representation: Counsel: T Hale SC and D Mackay (plaintiff) B Coles QC, A Henskens and D Dinnen (defendant) Solicitors: Unsworth Legal Pty Ltd (plaintiff) Henry Davis York (defendant) File Number(s): 2011/ 63343 Judgment (ex tempore) 1HIS HONOUR: In 2006, Lym International Pty Ltd ('Lym') was the registered proprietor of two lots in a deposited plan situated at Golf Avenue Mona Vale, which is now comprised in twelve strata lots in Strata Plan 79487. On or about 15 August 2006, Lym transferred the property to a certain Mr Yu Po Chen. The property had been subject to a mortgage, to a finance company called Kingsway, which was discharged at the time of the transfer, at least in part with funds raised by Mr Chen on the security of a mortgage of its property to Westpac Banking Corporation ('Westpac'). 2In proceedings 2006/259402 (formerly 5533 of 2006), Lym alleged that the transfer to Mr Chen was procured by his breach of fiduciary obligations. That contention was upheld by Hamilton J, who on 18 March 2009, in Lym International Pty Ltd v Chen [2009] NSWSC 98, ordered that the transfer be set aside, and declared that the property was held by Mr Chen upon trust for Lym. His Honour further ordered that Mr Chen forthwith execute a transfer in registrable form of the units in favour of Lym and do all things and take all other steps necessary to convey the units to Lym, subject to the mortgage to Westpac and to existing tenancies. In the event that Mr Chen failed to comply with that order, then the Registrar was to be appointed to execute, for and on behalf of Mr Chen, the documents required to be executed by Mr Chen. 3In proceedings 5049 of 2007, Leonilda Marcolongo contended that the transfer of the property by Lym to Mr Chen was made with intent to defraud creditors, within the meaning of (NSW) Conveyancing Act 1919, s 37A. Those proceedings were heard by Hamilton J concurrently with the proceedings brought by Lym. His Honour upheld Mrs Marcolongo's contention, and on 18 March 2009, ordered that the transfer be set aside and, further, that Mr Chen forthwith execute a transfer of the units in favour of Lym and do all things and take all other steps necessary to reconvey the units to Lym, subject to the mortgage to Westpac and to existing tenancies. In the event that Mr Chen failed to comply with that order, then the Registrar was to be appointed to execute on behalf of Mr Chen the documents required to be executed by Mr Chen. 4It will be apparent from the foregoing that the transfer by Lym to Mr Chen was impugned on dual independent bases, each of which was upheld at trial, and orders for reconveyance of the property to Lym were made in each proceeding that were substantially identical in effect. 5Mr Chen appealed from Hamilton J's judgment in both proceedings to the Court of Appeal, which delivered its judgment on 13 October 2009: Chen v Marcolongo; Chen v Lym International Pty Ltd [2009] NSWCA 326. 6In the Lym proceedings, Mr Chen's appeal was unsuccessful in substance, but successful in relation to the mechanism for reconveyance of the property and the circumstances in which it should take place. The leading judgment was that of Young JA, who dealt with the matter particularly at paras [317] to [329]. His Honour said (at [325] to [327]): It seems to me that those cases tend to indicate that if the plaintiffs have actually received a benefit then that benefit must be neutralised at the time when the contract is set aside rather than there merely be an enquiry as to adjustments that should be made with the charge in the meantime. I consider that his Honour's approach is a significant departure from the norm without adequate reason for such departure. Although his Honour made a discretionary judgment, this court should adjust it. At the very least, Lym must discharge the Westpac mortgage. If it did not do this as a condition of getting the Units transferred to it then it, may have a windfall gain. 7The order for reconveyance made in the Lym proceeding by Hamilton J was therefore set aside, and in lieu thereof the following substituted: Order that upon the plaintiffs and Westpac Banking Corporation agreeing that there can be an assignment of registered mortgage AC 548062S to the first plaintiff with no future liability on the appellant or upon the first plaintiff paying to the second defendant the amount of money necessary to discharge the said mortgage, the Registrar be appointed to execute for and on behalf of the first defendant a transfer in registrable form of the Units in favour of the first plaintiff and do all things and take all other steps necessary to convey the Units to the first plaintiff but not so as to interfere with the completion of any contract for sale of a Unit entered into by the second defendant or any receiver appointed by the second defendant. 8I should add that some of that wording is not that of the original order of the Court of Appeal, but reflects amendments made by White J on 27 July 2010 in Lym International Pty Limited v Chen [2010] NSWSC 875, pursuant to liberty to apply, to which I shall come. 9In the Marcolongo matter, however, Mr Chen's appeal to the Court of Appeal succeeded, and the orders made by Hamilton J were set aside. From that decision, Mrs Marcolongo appealed to the High Court of Australia, which ultimately upheld her appeal was restored the orders of Hamilton J restored [ Marcolongo v Chen (2011) 85 ALJR 380]. 10Accordingly, the order in the Marcolongo proceedings for reconveyance of the property to Lym, referred to above, has been restored. It is, of course, no longer in identical terms to the corresponding order made in the Lym proceedings, because of the variations to the order made by the Court of Appeal. 11The orders in the Lym proceedings also provided for an inquiry into the amounts which Mr Chen had contributed and to which he would be entitled by way of just allowance in connection with the development of the property. That inquiry proceeded before Hallen AsJ, and his Honour certified that the amount of one dollar was due from Mr Chen to Lym on the taking of accounts, a consequence of which is that Mr Chen no longer has any beneficial interest in or claim to the property and that, subject to the interest of Westpac as mortgagee, the whole beneficial interest is now vested in Lym. 12Default having been made by Mr Chen under the Westpac mortgage, Westpac appointed receivers and managers of the property. So far, these receivers and managers have, sold eight of the twelve units. After repayment of the principal and interest secured by the mortgage, there appears to be a cash surplus of about $700,000. There also remain unsold four further units, each worth, very approximately in the order of a million dollars. 13Lym, in those circumstances, quite understandably wishes to have the remaining units transferred into its name as registered proprietor. However Westpac, the mortgagee, presently opposes that course. 14Amongst the orders made by the Court of Appeal in the Lym proceedings was a reservation of liberty to apply, now in the following terms: 24. Liberty to any party to apply to a Judge of the Equity Division on 5 days notice to discharge any order that may have become otiose by way of changing circumstances and generally including liberty to apply to vary any of these Orders in the event that the second defendant takes possession of or sells any of the units referred to in the declaration in Order 3. 15Westpac was the second defendant in the Lym proceedings. Westpac was not joined as a party to the Marcolongo proceedings. It should be observed that Westpac was heard by Hamilton J when the orders of 18 March 2009 were made, and the Court has been informed, without contradiction, that Westpac was content with the orders in the form in which they were then made. 16The present application by Lym is brought pursuant to the liberty to apply to which I have referred. The orders sought are set out specifically in Short Minutes of Order which have been provided to the Court, but for present purposes, it suffices to say that what is sought is to make Order 4 in the Lym proceedings once again conform to the corresponding order in the Marcolongo proceedings. The material effect of that would be to remove any requirement currently imposed by Order 4 in the Lym proceedings for the agreement of Westpac to an assignment of the mortgage to Lym with no future liability on Mr Chen, or payment to Westpac of the amount necessary to discharge the mortgage. No such requirements, are imposed by the order in the Marcolongo proceedings. However, Westpac was not a party to those proceedings, and if Lym were to procure a registrable transfer from Mr Chen, personally or through the agency of the Registrar, it would still be necessary for it to procure the production of the Certificate of Title presently in Westpac's custody. 17The liberty to apply provided by order 24 contemplates three circumstances in which it might be exercised. The first is if any order has become otiose by way of changing circumstances. The second is that the order has become otiose "generally". The third is an expansion of the general to the specific - that is, if Westpac takes possession of or sells any of the units. 18Westpac, and/or the receivers and managers appointed by it, are concerned that as a result of the sale of those units to obviate, taxation liabilities may have been incurred, for which the receivers and managers and/or Westpac may be liable, pursuant to (CTH) Income Tax Assessment Act 1936, s 254. Although little detail has been provided of it, it seems that Westpac has applied for a private taxation ruling in that respect, and that such a ruling has been given which does not exonerate the receivers and managers from liability, but indicates that they must take into account the receipts derived from the sale of the units and tax on them in determining whether and to what extent there is a surplus. 19Just as at general law a trustee is entitled to retain trust property against a beneficiary pending determination of contingent liabilities of the trust for which the trustee must be liable, so under Income Tax Assessment Act, s 254(1)(d), an agent or trustee is authorised and required to retain moneys sufficient to pay tax which is or will become due in respect of income, profits or gains made by the agent or trustee in a representative capacity. Moreover, a practical imperative to do so is established because the agent or trustee is made personally liable, by operation of s 254(1)(e), for tax in respect of income, profits or gains, to the extent not only of any amount retained but also of any amount that should have been retained for that purpose. 20As seems to me, the central issue between Lym and Westpac is whether Westpac - or its agents, the receivers and managers - have such a liability or potential liability for tax as to justify or require the withholding of funds or property until that liability has crystallised. Not much is required for a trustee to justify withholding in those circumstances: see Fisher and Lightwood's Law of Mortgage , 2nd ed., para 33.7. The evidence, limited as it is, in respect of the private taxation ruling, suggests that there would be sufficient grounds for Westpac to do so: but I refrain from deciding that issue because, as it seems to me, it does not arise on the present application, although it might on a subsequent application. 21The present application is one to vary, pursuant to the liberty to apply, an order made by the Court of Appeal. This order is not of a merely machinery nature. It in fact incorporates the substantive determination of the respective rights and liabilities of the parties on the hearing of the appeal. As the passages to which I have referred from Young JA's judgment indicate, the Court of Appeal took the view that, in the Lym proceedings, the orders made by Hamilton J were contrary to principle, and that different orders should be substituted. The order sought to be varied is the order that was substituted on that very basis. No appeal was ever brought from the orders of the Court of Appeal in the Lym proceedings. It is true that, in the Marcolongo proceedings, the High Court in restoring Hamilton J's orders did not see any necessity to impose similar constraints. That may well be because the issue was not raised; in any event, it is quite conceivable that when a transaction is set aside on two independent grounds, the conditions for restitution flowing from one of those grounds might differ from those for restitution flowing from the other. 22As it seems to me, nothing in the Court of Appeal's orders in the Lym proceedings affects in the slightest rights to enforce the orders made in the Marcolongo proceedings. It may well be, as has been suggested, that those approaching the Registrar to execute a transfer in the Marcolongo proceedings would prudently draw to the Registrar's attention the orders made in the Lym proceedings; but they might also draw to the attention of the Registrar my observations that the orders made in the Lym proceedings are irrelevant to enforcement of the orders made in the Marcolongo proceedings. The orders made in the Marcolongo proceedings can be enforced without reference to those made in the Lym proceedings. 23That said, the problem will remain that to obtain registration of a transfer it will be necessary to procure production of the Certificate of Title. It is on an application for production of the Certificate of Title that most of the issues that have been argued today - about matters of convenience, the impact on Westpac's rights as mortgagee, and any prejudice it may suffer - would properly be argued. 24What is quite clear is that this is not a case for exercise of the liberty to apply, so as to vary orders deliberately made by the Court of Appeal that were of a substantive and not merely machinery nature. It cannot be said that Order 4 substituted by the Court of Appeal has become otiose, just because it now appears that Mr Chen has no beneficial claim to the property at all. While it may be that protection of Mr Chen's interest was a substantial part of the rationale for that order, it seems to me that protection of the interests of the mortgagee - who had, or who had taken, an indefeasible interest - was also a relevant consideration. A general liberty to apply does not authorising to making substantive variations of the rights of parties under the orders deliberately made by the Court. Varying an order of the Court of Appeal, deliberately made and dealing with substantive rights, is not an appropriate exercise of the liberty to apply contained in order 24. 25I therefore dismiss the present application with costs. ********** 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. Decision last updated: 25 August 2011