Supreme Court New South Wales Medium Neutral Citation: Aged Care Services v Macedonian Aged Care [2012] NSWSC 531 Hearing dates: 28/03/2012, 29/03/2012 and 03/04/2012 Decision date: 04 April 2012 Jurisdiction: Equity Division Before: McDougall J Decision: Cross-claimant succeeds. Stand proceedings over for parties to bring in orders. Catchwords: [EQUITY] - interest - priorities - whether acknowledgement is effective to prove that a debt was owing - whether acknowledgment created an enforceable promise to give security over the land in the event that the debt was not paid by the specified date - whether first cross-defendant is entitled to be subrogated to the rights of the mortgagee bank - whether cross-claimant's equitable interest should be postponed to the equitable interest of the first cross-defendant. [PROCEDURE] - whether orders made on 3 and 21 June 2011 be set aside pursuant to UCPR r 36.15. Legislation Cited: Evidence Act 1995 (NSW) Real Property Act 1900 (NSW) Cases Cited: Associated Midland Corporation Ltd v Bank of New South Wales (1984) 51 ALR 641 Blatch v Archer (1744) 1 Cowp 63;98 ER 969 J&H Just (Holdings) Pty Limited v Bank Of New South Wales(1971) 125 CLR 546 Lapin v Abigail (1930) 44 CLR 166 State Bank of New South Wales v Berowra Waters Holdings Pty Ltd (1986) 4 NSWLR 398 Category: Principal judgment Parties: Aged Care Services Limited (ACN 134 548 182) (Plaintiff/First Cross-Defendant) Macedonian Aged Care & Accommodation Limited (ACN 108 568 190) (First Defendant/Second Cross-Defendant) Robert Tiricovski (Second Defendant) Slavicia Tiricovski (Third Defendant) Kanning Services Pty Limited (ACN 001 887 118) (Fourth Defendant/Cross-Claimant) Representation: Counsel: P H Blackburn-Hart SC / D M Roberts S Galitsky (Plaintiff/First Cross-Defendant) D Ziman (Solicitor) (First, Second and Third Defendants) Solicitors: Websters Solicitors (Plaintiff/First Cross-Defendant) Ziman & Ziman Solicitors (First, Second and Third Defendants) File Number(s): 2010/422352 Judgment 1HIS HONOUR: The cross-claimant (Kanning) and the first cross-defendant (ACS) each claims to have the benefit of security over land owned by the second cross-defendant (MACAL). It seems that the value of the land is insufficient to satisfy both claims. Whose claim should have priority? Background 2MACAL, a company associated with a Mr Robert Tiricovski and the Macedonian Orthodox Church, owned land at 202 West Street (the land) in a suburb variously described as South Hurstville, Carlton and Blakehurst. MACAL wished to develop that and adjoining land owned by Mr Tiricovski and his family for aged care accommodation. 3Over time, various entities have been involved in the proposed development. They include, as well as ACS, a company known as Carlton Aged Care Limited (referred to in these proceedings as CACL) and a company known as National Aged Care Limited (referred to in these proceedings as NACL). 4Ultimately, neither CACL nor NACL proceeded, although NACL had lodged a caveat to protect what it claimed was an interest in the land pursuant to a joint venture agreement that it had made with MACAL. 5Kanning provided services, including, it says, to MACAL, in connection with the proposed development. It claims that a balance of about $423,000 remains owing to it for those services, together with interest. 6Kanning says that on 13 August 2008, MACAL formally acknowledged its debt in writing, and agreed by that writing to provide security by way of mortgage over the land and a charge over all its assets in the event (which occurred) that the debt was not paid by a specified date. 7ACS became involved in discussions with MACAL for the development of the land. It made a joint venture agreement with MACAL on a date variously given as 26 August 2010 and 8 October 2010. The latter date is probably correct, but nothing turns on this. 8After the joint venture agreement was made, ACS paid out a debt owed by MACAL to Australia and New Zealand Banking Group Limited (ANZ) in the sum of about $792,000. ANZ held first mortgage security over the land for that debt. ACS procured the mortgage to be discharged. Nonetheless, it claims to be entitled by subrogation to the benefit of and the security and priority conferred by that mortgage. History of these proceedings 9The proceedings were commenced by ACS as plaintiff against MACAL, Mr Tiricovski and Mr Tiricovski's wife, Mrs Slavica Tiricovski, as defendants. The proceedings thus constituted were purportedly compromised on 3 June 2011, at a hearing of which Kanning had not been given notice and, hence, in which Kanning did not participate. 10The consent orders made on that day provide: 1. The Agreement that the second and third defendants shall indemnify the plaintiff in regard to any shortfall in respect of monies due under the mortgage in the event of sale. 2. The defendants shall use their best endeavours and shall do all things necessary and execute all documents promptly to cause the caveat of Kanning Services Pty Ltd (No AF899502) to be lapsed or otherwise removed or withdrawn. The Court Declares: 3. That the plaintiff is entitled by subrogation to the rights of the mortgagee Australia and New Zealand Banking Group Limited over the property in Folio Identifier 2/5/7754 being document No AD519408 in the office of L.P.I. 4. That the principal sum due and payable under the owed mortgage $792,188.08 to the subrogated mortgagee remains payable by the mortgagor together with interest costs and damages in accordance with the term of the mortgage. 5. The Joint Venture Agreement with annexure referred to in the Exhibit as "D16" affidavit of DIMITRI AMARGIANTAKIS sworn 4 April 2011 in the within proceedings set aside ab initio. 6. That the defendants are to pay the Plaintiffs costs. 11A little later, on 21 June 2011, further orders were made by consent. The means by which those orders came to be made is not entirely clear. Those orders provide: 1. Memorandum of Mortgage Registered Number AD519408 between the first defendant as mortgagor and Australia and New Zealand Banking Group Limited (ACN 005 357 522) as mortgagee be reinstated to the Register. 2. The first plaintiff be substituted for Australia and New Zealand Banking Group Limited (ACN 005 357 522) as mortgagee in Memorandum of Mortgage Registered Number AD519408. 12Again, Kanning had no notice of the application for those orders (which seems to have been an application made by notice of motion filed on 21 June 2011) and, hence, no opportunity to be heard in opposition to them. 13The Registrar General has acted on the orders of 21 June 2011. Thus, ACS is registered as first mortgagee of the land, and its interest as first mortgagee has priority over any equitable interest that Kanning may have. The issues 14Mr Blackburn-Hart of Senior Counsel, who appeared with Mr Roberts of Counsel for Kanning, summarised the issues as follows: (1) was the "acknowledgement" (as I shall call it) of 13 August 2008 effective to prove that the debt stated in it was owing by MACAL to Kanning, and was it effected to create an enforceable promise to give security over the land in the event that the debt was not paid by the specified date? (2) Is ACS entitled to be subrogated to the rights of ANZ, as first mortgagee, so that it has priority over any interest of Kanning? (3) Should the orders made on 3 and 21 June 2011 be set aside, pursuant to UCPR r 36.15 or otherwise? (4) If there is a competition between equitable interests (i.e. of Kanning on the one hand and ACS on the other), which has priority? 15Mr Galitsky of Counsel, who appeared for ACS, agreed that this was a sufficient statement of the real issues for decision. However, as became clear in the course of the hearing, the first issue, insofar as it related to the acknowledgement of the debt, was said to conceal a factual question as to whether services were in fact rendered by Kanning to MACAL, so that MACAL became liable to pay for them. This issue was not specifically raised on the pleadings, but was dealt with in evidence and submissions. First issue: effect of the acknowledgment Terms of the Acknowledgement 16The acknowledgement was written on the letterhead of MACAL addressed to Mr David Smith as a director of Kanning. It set out the business name under which Kanning operated. It was signed by Mr Tiricovski purportedly as chairman of MACAL. I note that, elsewhere in the evidence, Mr Tiricovski is described as the CEO of MACAL and as the sole director of MACAL. The acknowledgment stated (omitting formal parts): We refer to your letter dated 5 August, 2008 which outlined the extent of unpaid, now outstanding Professional Fees and Charges due and payable to your Company for services rendered in support of this Project up to and including 30 June, 2008. Macedonian Aged Care and Accommodation Limited (MACAL) is indebted to Kanning Services Pty Ltd, Trading as: Community and Aged Care Consulting Services (CACCS) as at 30 June, 2008 for a total of Four Hundred and Eighty Two Thousand Three Hundred and Thirty Seven Dollars and Forty Six Cents ($482,337.46). This amount being comprised of Four Hundred and Twenty Three Thousand One Hundred and Nineteen Dollars and Thirty Nine Cents ($423,119.39). This debt is in respect of consultancy services and other fees and charges incurred and/or earned by CACCS. The Board of Directors have recognized this debt as owing to CACCS and will make provision for its full satisfaction. MACAL will be in receipt of some Two Hundred and Fifty Thousand Dollars ($250,000) by not later than 31 August, 2008 when loan funds are provided for its use. Upon these funds becoming cleared at the Bank, One Hundred Thousand Dollars ($100,000.00) of the amount presently owed to CACCAS will be paid. The balance of funds then owed will be paid by instalment by MACAL as such funds become available. In the interim period all amounts owed to CACCS will attract and continue to attract interest at the rate of interest applicable to Overdraft Facilities of One Hundred Thousand Dollars or more for the Westpac Banking Corporation, plus an allowance of Two Per Centum per annum to compensate CACCS. In the event that monies owed to CACCS are not fully repaid by 30 September, 2008 CACCS will be entitled, with the full support of the Board of Directors to immediately secure Caveats, whilst mortgage documents are prepared and registered in its favour securing MACAL real estate and supported by a Fixed and Floating Charge over all of the assets of MACAL. ... The parties' submissions 17Mr Blackburn-Hart submitted that the acknowledgement operated both as an acknowledgement of debt and as a promise to give security for it in certain circumstances. 18Mr Galitsky submitted that, at most, the acknowledgement was effective as an acknowledgement. However, he submitted, when one considered the evidence as a whole, there was raised and left unanswered a doubt as to whether in fact there was any indebtedness as purportedly acknowledged. 19The invoices on which Mr Galitsky relied were addressed to Mr Robert Tiricovski personally. There is no explanation of why this is so. However, those invoices do not appear to relate to the amounts particularised in the acknowledgement. 20The letters of demand on which Mr Galitsky relied were made by or on behalf of Kanning to various individuals, including Mr Robert Tiricovski, Mr Vlado (Vic) Tiricovski, the Metropolitan of the Macedonian Orthodox Church and even (for reasons that are entirely unclear) the Greek Orthodox Church. 21Further, Mr Galitsky submitted, the acknowledgement had no promissory effect. He noted that it was not in form a deed, that it was not expressed to be a contract, and said that even if some promise could be spelled out of it, there was no consideration given by Kanning for that promise. 22On the question of the underlying debt, Mr Blackburn-Hart referred to a bundle of invoices produced through Kanning's solicitor, Mr Busuttil. Those invoices were the subject of evidence from Mr Smith. They were invoices on the letterhead of Kanning addressed to Mr Tiricovski in his capacity as a director of MACAL. Decision 23Logically, the first question to be considered is whether any debt was owed. That is to be decided, not by reference to whether there is some overall doubt, but whether I am persuaded, on the balance of probabilities, that there was, as acknowledged, an indebtedness. 24The evidence was confused, and in some ways unsatisfactory. I suspect that this unfortunate state of affairs arose because, as I have noted, MACAL did not specifically plead a case of "no indebtedness". It merely traversed - "does not admit" - the allegations of indebtedness. It neither pleaded nor particularised the matters on which Mr Galitsky later relied. 25I take that history into account in assessing the evidence. No doubt, as Lord Mansfield CJ observed in Blatch v Archer (1744) 1 Cowp 63 at 64; 98 ER 969 at 970, all evidence is to be assessed according to the power of one party to produce it and of the other to contradict it. But that test in turn is to be assessed by reference to the clear issues raised on the pleadings. 26To my mind, the acknowledgement must be given substantial weight. It is a formal and considered document. It is on the letterhead of MACAL; it is addressed to Kanning; and it is signed by Mr Tiricovski as chairman of MACAL. 27MACAL is a party to the proceedings, including as a cross-defendant to Kanning's cross-claim. Indeed, it defended the cross-claim until, at the commencement of the hearing on the cross-claim, its solicitor Mr Ziman sought leave to withdraw on the basis that he had no instructions. 28The acknowledgement is therefore capable of being an admission by MACAL. It is clearly adverse to MACAL's defence of the cross-claim, and thus to its interest in the proceedings on the cross-claim. The acknowledgement is thus evidence of the truth of the representations stated in it. That is the effect of ss 81 and 87 of the Evidence Act 1995 (NSW) in the circumstances that I have just described. 29The acknowledgement is corroborated by the invoices, which I note support all but the first three of the unpaid amounts particularised in the acknowledgement. Those invoices afford some basis for inferring the existence of an underlying contract between the parties described in invoice. See Gibbs CJ (who gave the judgment of the Court) in Associated Midland Corporation Ltd v Bank of New South Wales (1984) 51 ALR 641 at 643-644. 30I accept that the absence of direct proof of any underlying contract raises a doubt. So, too, does the form of some of the invoices delivered by Kanning to Mr Tiricovski, and the form of the letters of demand. 31I take into account, as Mr Galitsky submitted, that on any view Kanning started to perform services for Mr Tiricovski and his brother, Mr Vlado Tiricovski, personally before MACAL was incorporated. However, the amounts particularised in the acknowledgement all relate to a period after MACAL came into being. 32There was some perceived advantage in billing MACAL. It was thought (it seems incorrectly) that if the services were rendered to MACAL and MACAL was liable to pay for them, there might be no liability for GST because MACAL was a registered charitable organisation. The evidentiary value of that fact is slight, but it does tend towards acceptance of the proposition that, by some unexplained process, MACAL became the contracting parties for whom Kanning rendered services, and by whom the charges for those services were to be paid. 33It is not appropriate to look at the evidence in discrete portions. It must be considered overall. Doing so, and taking into account, as I have said, the formality of the acknowledgement and the fact that it is substantially corroborated by underlying invoices, I conclude on balance there was an underlying debt as acknowledged in that document. 34I add that this conclusion is fortified by the evidence-in-chief, but particularly in cross-examination, of Mr Smith. Although there were times during his cross-examination when I thought that Mr Smith may have been somewhat guarded in his responses, I have concluded overall that I should accept the substance of his evidence. That evidence is consistent with the proposition that the acknowledgement was of a debt then properly owing to MACAL and was not a sham. Indeed, the proposition that it was a sham was not put directly to Mr Smith. 35I turn to the question of whether the acknowledgement had an operative or promissory effect. On its face, it did. MACAL promised to give security if a described event - clearance of the debt - did not occur by a stated time. Why should that promise not be read according to its terms? 36It is clear, looking at the context in which the acknowledgement was given, that the debt acknowledged was well and truly overdue for payment, and that Kanning was pressing for payment. It is equally clear that Kanning was prepared to wait a little longer for payment on the terms of the acknowledgement (which I should have said was prepared by Mr Smith). 37In my view there is a clear inference of forbearance on the basis of the promise, of provision of security for the debt, contained in the letter. 38The promise to clear the debt, being no more than a promise to do what MACAL was, in any event, bound to do, might not amount to consideration. But the promise to provide security is, in my view, good consideration for the promise to forbear, and the promise to forbear is good consideration for the promise to give security. 39On that basis, it is not necessary to conclude whether, in addition, the doctrine of accord and satisfaction may have some application. 40There is no doubt that the obligation to give security crystallised, and that Kanning has demanded that MACAL should honour that obligation. 41In those circumstances, I conclude the acknowledgement should be held to constitute both an admission of the debt and a recognition of the obligation to pay interest on it, and to create an agreement to give security. 42In my view, that agreement, to the extent that it creates a specifically enforceable obligation, gives rise to an equitable interest in the land. That interest is one which arose either when the obligation crystallised on non-payment of the debt, according to the terms stated in the acknowledgement, or, at the latest, when demand was made on MACAL to execute and deliver a mortgage and charge. 43Mr Galitsky did not submit that if I were to reach the conclusions that I have set out, there was any other reason why Kanning should not have specific performance of the obligation to give a mortgage. Second issue: subrogation 44The key question is whether the payment made by ACS to ANZ was made under or pursuant to, or in partial performance of, the joint venture agreement. If it were, then the entitlements of ACS are those (if any) flowing from the joint venture agreement. The joint venture agreement 45The joint venture agreement seems to have been prepared and executed without the benefit of legal advice. It has some curious features, including that some at least of the recitals were, as is common ground, of operative effect. 46The parties to the joint venture agreement were ACS and Kanning. The recitals read as follows: A. The tenement at 202 West Street CARLTON NSW 2218 and described as Lot 2 Section 5 in DP 7754 is beneficially owned by MACAL. B. The tenement at 200 West Street CARLTON NSW 2218 and described as Lot 1 Section 5 in DP 7754 is beneficially owned by Robert Tiricovski and Slavica Tiricovski. C. MACAL will purchase the tenement at 200 West Street CARLTON NSW 2218 and described as Lot I Section 5 in DP 7754 from Robert Tiricovski and Slavica Tiricovski and discharge all encumbrances registered or unregistered against the tenements. MACAL will purchase the tenement at 202 West Street CARLTON NSW 2218 and described as Lot 2 Section 5 in DP 7754 from Dragica Mircevski and discharge all encumbrances registered or unregistered against the tenements. D. ACS will pay the amount of $4.5 million to MACAL as a Joint Venture Land Use Fee ("JVLUF"). The JVLUF is to facilitate the purchase of Lot 1 Section 5 in DP 7754 from Robert Tiricovski and Slavica Tiricovski 4 and discharge all encumbrances registered or unregistered against and Lot 2 Section 5 in DP 7754. E. The JVLUF will be released to MACAL AND upon release of the JVLUF, MACAL will irrevocably undertake to apply the JVLUF to the purchase of Lot I Section 5 in DP 7754 from Robert Tiricovski and Slavica Tiricovski and discharge all debt and encumbrances on Lot 2 Section 5 in DP 7754. G. MACAL grants a first mortgage to a mortgagee nominated by ACS and a caveatable interest and or second mortgage to ACS over Lot I Section 5 in OP 7754 and Lot 2 Section 5 in DP 7754 (herein after tenement) for the full amount of the loan provided by the third party described as "the mortgagee AND MACAL confirms that it has no legal constraints providing the third party mortgage or charges over its assets. H. The participants have agreed to: (i) from a joint venture to carry out the project and (ii) Appoint a suitably qualified project development manager as their agent to conduct the project, on the terms and conditions set out in this Agreement. (iii) Engage as joint ventures with each other in future and now unspecified Aged Care and/or retirement villages incorporating the terms of this Agreement as the Joint Venture Agreement. 47It is clear that at least recitals C to G were intended to have operative effect. 48Clauses 2 to 4 (first appearing), provide for the formation and term of the joint venture and for the relationship created between the venturers. It is not necessary to set out all of those clauses in full. 49I note, however, that cl 2(3) provided for MACAL to give an equitable charge to ACS at some time in the future: 2(3) MACAL confirms with respect to the tenement that they own or will own the tenements in their own right. In respect of the buildings erected thereon the Joint Venture participants will grant at Deed of Equitable Charge over the property to ACS a copy of which is annexed hereto as Annexure G. 50It is clear that the Schedule G charge was not to be granted until, at least, the full sum of $4.5 million had been paid by ACS to MACAL. There is no need to set out the terms of that charge. 51Clause 4 (secondly appearing) provided for each party to give security to the other for the purpose of its obligations: Cross Charge and Encumbrances 4. (2) Contemporaneously with execution of this agreement, each participant must execute and deliver a deed of charge and cross charge in the form of the deed forming Schedule E, which deed will: (a) encumber the participant's interest and interest in any contracts for [the sale of lease, entitlements or otherwise encumbrances to he tenement to and in favour of each of the other participants as security for performance of its duties and obligations arising under or by virtue of the project agreements; and (b) Rank ahead of any and all other encumbrances given, created or entered into by the participant. 52I do not think that it is necessary to do more than set out cl 2(1) of the Schedule E charge: The Charge 2. (1) To secure the rights of the parties in relation to payments by each party and the performance by each party of its other duties and obligations under the project agreements, each party hereby covenants with each other party and the manager to pay all due amounts and to perform all duties and obligations on its part to be-paid or performed under the project agreements, and to secure such covenants hereby as beneficial owner charges the charged property in favour of each other party and the manager. Background to the payment by ACS 53MACAL did not make the payment promised to Kanning in the acknowledgement. Kanning lodged a caveat on 17 November 2009. The interest claimed, and the way in which it arose, were described as follows: Nature of interest charged Equitable interest pursuant to formal undertaking By virtue of the instrument referred to below Nature of instrument Date Parties Formal undertaking 13 August 2008 Kanning Services Pty Limited ACN 001 887 118 David Anthony Smith, Robert Tiricovski and Macedonian Aged Care and Accommodation Limited ACN 108 568 190 54It was not until 28 April 2010 that Kanning made a demand on MACAL for MACAL to execute and deliver a mortgage and charge. 55In about May 2010, ANZ decided to exercise its power of sale. At some point, it entered into a contract for sale with Mrs Dragica Macevski , who was the mother of Mrs Slavica Tiricovski. 56As part of the normal conveyancing routine, ANZ or its lawyers caused a lapsing notice to be issued and served on Kanning. Mr Smith decided to let the caveat lapse. He was wise to do so, in the face of the lapsing notice and the registered interest of ANZ. The caveat lapsed on about 25 or 26 June 2010. 57Settlement of the sale from ANZ to Mrs Macevski was fixed for 20 August 2010. Completion did not proceed on that date. Ultimately, ANZ terminated the contract and forfeited the deposit paid by Mrs Macevski. 58Also on 20 August 2010, Mr Smith learned that the sale had fallen through or, as it was put, "been cancelled". He learned that because, both before and after that date, he had from time to time followed up with ANZ the progress of the matter. He was told on 20 October 2010 that the property was off the market. Despite that knowledge, Mr Smith took no step to lodge a fresh caveat on behalf of Kanning until 25 November 2010. On that day, and pursuant to leave granted by this Court under s 74 O of the Real Property Act 1900 (NSW), Kanning lodged a further caveat. The interest claimed and the basis for it were described as follows: Nature of the estate orders interest in the abovementioned land As mortgagee and chargee of the land under instruments. Agreement to grant mortgage dated 30.9.2008 and Fixed and Floating Charge Registered No. 2020368 dated 21.7.2010 By virtue of the instrument referred to below Nature of Instrument Date Parties Agreement: 30.9.2008 Registered Proprietor and Caveator Fixed and Floating Charge 21.7.2010 Registered Proprietor and Caveator 59The application under s 74 O was provoked because Mr Smith had learned, a few weeks earlier, that ANZ had been paid out. 60Mr Dimitri Amargianitakis, a director of ACS, described the circumstances in which, according to him, that happened. He said that after the joint venture agreement was made, Mr Tiricovski asked him to "pay out the mortgage ASAP" because "ANZ is breathing down our necks". According to Mr Amargianitakis, he said that Mrs Macevski could be lent the entire amount, but that he wanted security and an amount on account of interest. In the course of those discussions, according to Mr Amargianitakis, he said: "We will pay out the loan if we get a caveatable interest. Until the whole deal is put together I want to be a secured lender in place of the bank". 61Mr Amargianitakis said that Mr Tiricovski agreed, saying "You will be secured". 62A few days later, Mr Tiricovski proposed a different plan: namely, that the bank be paid out without the intervention of his mother-in-law. According to Mr Amargianitakis, he replied: "We will still need a caveatable interest over the property and one over your house". 63On that basis, Mr Amargianitakis said, he arranged for ACS to procure a bank cheque in favour of ANZ for the required amount, attended at the office of ANZ, handed over the cheque and received "the discharge documents". 64Mr Amargianitakis did not suggest that, at any time up to this point, he had obtained a recent search of the property which disclosed the state of affairs, including as to caveats and the like. 65After those events had happened but apparently on the same day, Mr Amargianitakis said that he went to the Land and Property Information office to arrange for registration of the discharge of mortgage. He apparently found out there, by viewing information on a screen, that the NACL caveat was still on the title. According to Mr Amargianitakis he was not greatly concerned about that. Observations as to Mr Amargianitakis' evidence 66I am not prepared to accept his evidence at face value. Mr Amargianitakis was cross-examined. I found aspects of his cross-examination unconvincing, to say the least. I refer, by way of example only, to: (1) his assertion, volunteered in the witness box, that in about May or June 2010 he had obtained a search of the land that showed no caveat (at least by Kanning). No such evidence had been given in Mr Amargianitakis' affidavits. No such search was produced. Further, if Mr Amargianitakis had procured such a search, he would have been aware of the NACL caveat and would not have been surprised by it (as he says he was) when he went to register the discharge of mortgage. (2) His evidence as to, or attempts to explain, why it was that the NACL caveat caused him no concern whatsoever, whereas he would have been concerned had any caveat by Kanning been shown on the screen. That evidence was entirely unconvincing. 67I had the clear impression, listening to Mr Amargianitakis, that he sought to tailor his evidence in cross-examination to meet what he perceived to be arguments adverse to the interests of ACS. I had the clear impression that in some respects at least expediency rather than the truth was the lodestar by which he plotted his evidentiary journey. Reading the transcript of his evidence had done nothing to dispel those impressions. 68In my view, the clear inference is that when Mr Amargianitakis paid over the money required to discharge the ANZ mortgage, without having undertaken or caused to be undertaken any other search, he did so in the light of what he then perceived to be a lucrative investment opportunity. 69I do not accept the evidence given by Mr Amargianitakis (and hence do not accept the submissions put on his behalf in this respect) that he did not regard the payment made to ANZ as one made under the joint venture agreement. To my mind, that was a clear example of tailoring an answer to suit a perceived need; or of expediency over truth. 70There are three pieces of contemporaneous evidence that speak to the contrary of what Mr Amargianitakis said. Two of those emanate from ACS (Mr Amargianitakis) or its lawyers. 71The first is a caveat prepared by the solicitor for ACS, Mr Mitchell, on about 25 October 2010. The interest claimed and the basis for it were described as follows: Nature of estate or interest in the abovementioned land Principal under a joint venture agreement By virtue of the instrument referred to below Nature of Instrument Date Parties JOINT VENTURE AGREEMENT 8 October 2010 Age Care Services Pty Ltd (ACN 134 548 182) and Macedonian Aged Care and Accommodation Limited (ACN 568 190) 72I do not accept that a solicitor, who had been informed of what Mr Amargianitakis now says were the circumstances in which and reasons for which ACS paid out the ANZ loan, would not have been alive to at least the possibility of an equitable interest by way of subrogation. 73The second document is a draft heads of agreement prepared by Mr Amargianitakis for the consideration of MACAL on 18 November 2005. That document includes the following: 3. ACS has advanced MACAL $792,000 under the joint venture agreement to allow MACAL to repay a loan on the property at 202 West Street Blakehurst NSW. ... 5. ACS agrees to pay Tiricovskis interest on a housing loan to the value of $1,200,000 orders such other amount as mutually agreed until payment of the $1,750,000 in liv) above. 74The third piece of evidence is a letter from Ziman & Ziman, the solicitors for MACAL at the time, to ACS which constituted, among other things: 1. Pursuant to the Agreement you have paid an amount of $792,188.08 on account of the sum of $4,500,000.00 that you agreed to pay. 2. You have failed to pay the balance of $3,707,811.92 which is due and payable under the Agreement. This constitutes a default under the Agreement. 3. You have sought our client's agreement to an alteration to the terms of the Agreement which our client has declined. 75To my mind, those documents are far more reliable as evidence of why it was that ACS paid out the ANZ mortgage than the self-interested explanation prepared by Mr Amargianitakis for the purposes of litigation. The parties' submissions 76Mr Blackburn-Hart submitted that ACS had no entitlement to be subrogated because the payment it had made was one made under the joint venture agreement, on account of its obligation to pay a total of $4.5 million. It followed, he submitted, that the only entitlement of ACS was to have whatever it was in exchange (for example, the Schedule E charge) for which the joint venture agreement provided. Mr Blackburn-Hart relied on the documents to which I have referred already. 77Mr Galitsky submitted that I should accept the evidence of Mr Amargianitakis as to the reasons why the payment was made. If that were accepted, he submitted, what was offered and paid was not something contemplated by the joint venture agreement. Decision 78I have said already that I do not accept the evidence of Mr Amargianitakis as to the reasons why ACS made the payment. 79When one views the evidence overall, it is clear, in my view, that the payment was one made pursuant to, and not in addition to or outside, the joint venture agreement. That follows both from the terms of the documents created by or on behalf of ACS and from the view expressed by MACAL in its solicitor's letter, to which I have referred. 80The joint venture agreement contained the terms on which security would be given to ACS for the performance of MACAL's obligations. That security was to be, in the first instance, the Schedule E charge; and on payment of the full amount of $4.5 million and the satisfaction of the other conditions, the schedule G charge. 81The joint venture agreement did not provide that, upon making a payment on account of the $4.5 million, ACS was to be entitled to some additional security. 82I accept that there is a presumption in favour of subrogation which Kanning needs to rebut. That presumption arises simply because ACS, as a third party (leaving aside the joint venture agreement) has paid out a secured debt owed by MACAL. But the impact of the joint venture agreement is twofold. First, it means that ACS is not properly to be regarded as a "third party" for the purposes of the presumption in favour of subrogation. The second, and related, aspect of significance is that it explains why the payment was made, and provides for the consequences that will follow from the making of the payment. 83That analysis seems to me to be consistent with the undoubted fact that ACS caused the discharge of mortgage to be registered. The effect of registration is to destroy the charge created by the mortgage. See State Bank of New South Wales v Berowra Waters Holdings Pty Ltd (1986) 4 NSWLR 398. Destruction of the charge means, of course, that there is nothing to which ACS, as payer, could be subrogated. 84If ACS intended to be secured by taking over the rights of ANZ as mortgagee, that could have been accomplished by taking a transfer of the mortgage. Registration of such a transfer would have given ACS what Mr Amargianitakis now says it had bargained for. But it did not do that. Instead, it took a course entirely inconsistent with that supposed bargain. 85I conclude that ACS is not entitled to be subrogated to the rights of ANZ. Third issue: should the orders of June 2011 be set aside? 86In the end, there was no real contest on this point. 87This is clearly a case of an irregularity for the purposes of UCPR r 36.15: 36.15 General power to set aside judgment or order (cf DCR Part 13, rule 1, Part 31, rule 12A; LCR Part 11, rule 1, Part 26, rule 3) (1) A judgment or order of the court in any proceedings may, on sufficient cause being shown, be set aside by order of the court if the judgment was given or entered, or the order was made, irregularly, illegally or against good faith. (2) A judgment or order of the court in any proceedings may be set aside by order of the court if the parties to the proceedings consent. 88There are two reasons why there is an irregularity. The first is that an entity directly affected by the orders (in particular, that those of 21 June 2011) and in any event known to be claiming an interest in the subject of the orders, was not given any opportunity to be heard. 89The second is that the orders of 21 June 2011 must have been based on s 138 of the Real Property Act 1900 (NSW). That section applies "in proceedings for the recovery of any land, estate or interest from the person registered as proprietor of the land". However, the section only applies where there are proceedings of that nature. Section 118(1) of the Real Property Act provides that such proceedings do not lie except in the circumstances described in pars (a) to (f). It was not suggested that the proceedings between ACS and MACAL fell within any of those paragraphs. It follows that there were no proceedings of any kind to which s 138 could apply. 90Further, in my view, the circumstances in which both sets of orders were made amounted to want of good faith. Both MACAL and ACS were aware of Kanning's claimed interest. It is clear that they pushed through their settlement in a rush. I infer that they hoped thereby, in particular from the orders of 21 June 2011, to rid themselves of Kanning's claim. Mr Amargianitakis' affidavit sworn 4 April 2000 provides (perhaps inadvertently) some support for this inference in par 25. He there said, amongst other things, that on 25 January 2011 he became "formally aware" that MACAL and Mr and Mrs Tiricovski were seeking to defeat "Smith's caveat". 91There is a question as to whether all the orders should be set aside or only the later ones. It is only the orders of 21 June 2011 that have any legal impact on Kanning's rights. Of course, the declaration made on 3 June 2011 may be inconsistent (and in my view it is inconsistent) with Kanning's rights. But Kanning is not bound by that declaration, for the obvious reason that it was not a party to the proceedings when the declaration was pronounced. Fourth issue: priority 92On the conclusions that I have reached so far, Kanning has an equitable interest under the acknowledgement and ACS has either an equitable interest or an equity under the joint venture agreement. 93For the purposes of what follows, I proceed on the basis that the interest of ACS is an equitable interest; but since it is not necessary to decide that, I do not do so. 94It was common ground that if Kanning had an equitable interest, that interest arose before the interest of ACS. 95The general rule as to priorities between competing equitable interests is that the first in time prevails. 96That general rule may not apply in circumstances where the conduct of the prior "owner" is such that its interest should be postponed to that of the subsequent "owner". As Dixon J said in Lapin v Abigail (1930) 44 CLR 166 at 204, in a passage cited with approval by Barwick CJ, with whom McTiernan and Owen JJ agreed in J&H Just (Holdings) Pty Limited v Bank of New South Wales (1971) 125 CLR 546 at 554-555: In general an earlier equity is not to be postponed to a later one unless because of some act or neglect of the prior equitable owner. In order to take away any pre-existing admitted title, that which is relied upon for such a purpose must be shown and prove it lies, and ... it must amount to something tangible and distinct, something which can have the grave and strong effect to accomplish the purpose for which it is said to have been produced: per Lord Cairns L.C. in Shropshire Union Railways and Canal Co. v. The Queen.... The act or default of the prior equitable owner must be such as to make it inequitable as between him and the subsequent equitable owner that he should retain his initial priority. This in effect means that his act orders default must in some way have contributed to the assumption upon which the subsequent legal owner acted when acquiring his equity. 97A number of things follow. First, the conduct relied upon must be clear and significant. Secondly, that conduct must make it inequitable for the prior owner to insist on its priority. Thirdly, at least in the usual case, that conduct must have contributed in some way to the assumption (as to title) on which the subsequent owner acted when acquiring its interest. Fourthly, the onus of proven postponing conduct lies (as one would expect) on the person asserting it. 98Mr Galitsky submitted that Kanning's failure to perfect its interest, either alone or coupled with its failure to maintain a caveat, amounted to postponing conduct. He submitted that this permitted Mr Tiricovski to misrepresent the true position to Mr Amargianitakis, a misrepresentation confirmed when Mr Amargianitakis checked the computer screen at the LPI office before lodging the discharge of mortgage for registration. 99That submission fails, for the obvious reason, that, as I have said, I do not accept the evidence of Mr Amargianitakis to the effect that he would have acted differently had the search revealed the caveat by Kanning. The very fact that he handed over the money without bothering to check the register provides strong support for this view. 100There are other problems. One, following from what I have just said, is that whatever interest ACS has arose when it handed over the money to ANZ. That was not done on the faith of the register, or in reliance on the absence for any caveat. Nor was there any other act or omission by Kanning (which, it should be recalled, had no knowledge of what was going on) that was said to have caused Mr Amargianitakis to act as he did. 101Nor, I think, is the failure of Kanning to perfect its interest in any way of significance. On the contrary, it is that very fact - that the interest was not perfected, by the grant and registration of a mortgage - that leads to the present conflict between competing equitable interests. 102Kanning did, of course, lodge a caveat. It allowed that caveat to lapse. In my view, it had no other choice. ANZ was the first registered mortgagee. The interest protected by Kanning's caveat could not have prevailed over the bank's interest. 103Mr Smith kept on checking on progress with ANZ. He could not lodge a further caveat without the leave of the Court. Such leave would not have been granted (or should not have been granted) so long as ANZ was registered as first mortgagee. 104Mr Galitsky made submissions as to other steps that (he said) Kanning could have taken. For example, he submitted it could have provided a letter to the Registrar General consenting to the registration of any transfer by ANZ as first mortgagee. Quite what the significance of such a letter would have been, in circumstances where the lapsing notice would have worked its magic in the absence of any order by the Court extending the caveat, is difficult to fathom. 105Again, Mr Galitsky submitted, Mr Smith could have arranged with ANZ's lawyers to attend settlement and hand over the discharge of mortgage in return for some amount of money. Perhaps he could have done so. But it can hardly be said that this is an arrangement to which ANZ would have been required to consent. At the risk of repetition: there was a lapsing notice which was in the process of expiring, and which inevitably would have rendered it otiose for Mr Smith to attend any settlement unless the caveat were extended. It is difficult to understand on what grounds the caveat might have been extended. 106I do not propose to go through the other submissions on the same point. It is sufficient to say that, considering them both individually and together, to the extent that there were further things that Kanning might have done (in the face of the lapsing notice, which would operate of its own accord) the failure to do those things did not contribute to the decision of Mr Amargianitakis to pay the money over. Conclusion and orders 107Kanning is entitled to succeed. However, the precise form of orders to be made will depend to some extent on the progress and completion of a contract for the sale of the land, which ACS has made, apparently in the exercise of its power as a registered mortgagee. 108I stand the matter over to 9.30 am on 2 May 2012 for orders. 109I reserve liberty to apply on 24 hours' notice. 110I reserve all questions of 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: 23 May 2012