Supreme Court New South Wales Medium Neutral Citation: Permanent Custodians Limited v Tong [2012] NSWSC 1373 Hearing dates: 23 November 2011 Decision date: 16 November 2012 Jurisdiction: Common Law Before: Adams J Decision: 1. Declare that the NSW Trustee and Guardian is entitled to receive the sum of $27,000 plus interest referrable to that sum. 2. Order the amount be paid out of court to NSW Trustee and Guardian. Catchwords: Criminal assets confiscation - restraining order - effect of caveat - forfeiture order - effect on equitable interests - effect on innocent creditors - effect of writ of execution issued before forfeiture. Legislation Cited: Civil Procedure Act 2005 Criminal Assets Recovery Act 1990 Conveyancing Act 1919 Real Property Act 1900 Uniform Civil Procedure Rules 2005 Cases Cited: Adams v Bank of New South Wales [1984] 1 NSWLR 285 Hall v Richards (1961) 108 CLR 84 Category: Interlocutory applications Parties: Permanent Trustees Limited (Plaintiff) Van Chinh Tong (First defendant/ second respondent) Duyen Dao Dang (Second defendant/ third respondent) NSW Trustee and Guardian (Applicant) Michael Sfar (First respondent) Representation: M Meek SC (Applicant) NSW Trustee and Guardian (Applicant) File Number(s): 2006/263927 Judgment Introduction 1The NSW Trustee and Guardian (referred to hereafter as "the State") seeks an order for the payment to it of money paid into court by Permanent Custodians Limited following a sale of property that was the subject of a forfeiture order after Permanent had deducted the amount it was owed. The respondents to the State's notice of motion are the previous owners of the property and a Mr Michael Sfar, who obtained a judgment against them and registered a writ on the title before the forfeiture order was made. None of the respondents appeared at the hearing of the motion, which proceeded in their absence. Timetable of events 2On 7 October 2005 the New South Wales Crime Commission obtained restraining orders against Van Chinh Tong pursuant to the Criminal Assets Recovery Act 1990 (all statutory references are to this Act unless otherwise indicated) in respect of his interest in any property including, in particular, a property in Cabramatta of which he and Duyen Dao Dang were registered proprietors. As mentioned above, the property was subject to a registered mortgage. On 11 October 2005 the Commission registered a caveat over the property in relation to its interest under s 15. Mr Sfar obtained a judgment in the Local Court on 13 February 2006 for $33,540 against the registered proprietors and, on 20 February 2006 a writ for the levy of property was issued by the Sheriff to cover that sum plus expenses, totalling $33,943. The application to record this writ on the certificate of title was made on 21 April 2006 and it was recorded on the title on 27 April 2006. 3On 9 May 2006 consent orders between the Commission and the registered proprietors were made in respect of their property, which included money in a bank account. The forfeiture order was subject to the payment of a sum for legal expenses, and the balance of the money in the bank account after this payment over $27,000 was to be held on trust for the children of the registered proprietors. Furthermore, following sale of the Cabramatta property, the children were to be paid the amount by which the net proceeds of sale exceeded $27,000. After the property was sold by the mortgagee the surplus of $34,084.63 was paid into court pursuant to s 58(3) of the Real Property Act 1900. The State applies for a declaration that it is entitled to receive the sum of $27,000 plus interest referrable to that sum and an order that this amount be paid out of the moneys in court to it. 4Mr Sfar had engaged a solicitor to act on his behalf in July 2011. On 26 August 2011 he was directed to file and serve the evidence upon which he proposed to rely by 7 October 2011. That order was not complied with. The solicitor gave notice of ceasing to act on 4 November 2011. On 11 November 2011, when the matter was listed before the Court, Mr Sfar did not appear, having told the State's solicitor that he would not be able to attend and wanted to have the matter adjourned. At the State's request, the Registrar listed the application for hearing on 23 November 2011 for referral to the Duty Judge and indicated that the Registry would notify Mr Sfar of that date. On 14 November 2011 the Registrar wrote to Mr Sfar informing him of these directions, as did the State. However, Mr Sfar did not appear when the matter was called before me. Accordingly, the hearing proceeded ex parte, Mr Meek SC appearing for the State. The forfeiture and creditors 5The question here is whether the State is entitled to preference over Mr Sfar as judgment creditor in respect of the funds in court, into which the registered proprietor's interest in the real property have been converted. The interest of the State depends entirely upon the forfeiture order, whose effect must depend upon the Act which authorised it. It would seem to be a surprising result if, by collusion, the State and the person against whom the forfeiture order is sought (called the "criminal") could combine to confiscate the interest of a judgment creditor of whose interest both must or ought to have been aware by virtue of the recording of his writ on the title before the forfeiture order was made. Reference to the objects of the Act appears to justify this scepticism - 3 Principal objects The principal objects of this Act are: (a) to provide for the confiscation, without requiring a conviction, of property of a person if the Supreme Court finds it to be more probable than not that the person has engaged in serious crime related activities, and (a1) to enable the current and past wealth of a person to be recovered as a debt due to the Crown if the Supreme Court finds there is a reasonable suspicion that the person has engaged in a serious crime related activity (or has acquired any of the proceeds of any such activity of another person) unless the person can establish that the wealth was lawfully acquired, and (b) to enable the proceeds of illegal activities of a person to be recovered as a debt due to the Crown if the Supreme Court finds it more probable than not the person has engaged in any serious crime related activity in the previous 6 years or acquired proceeds of the illegal activities of such a person, and (b1) to provide for the confiscation, without requiring a conviction, of property of a person that is illegally acquired property held in a false name or is not declared in confiscation proceedings, and (c) to enable law enforcement authorities effectively to identify and recover property. 6The repetitious references to the characterisation of the person whose property is liable to confiscation as a criminal and the mode by which the property has been acquired appear to suggest that it is not intended that the property of other, innocent, persons is not at risk. Furthermore, s 22, permits application only for an "order forfeiting to, and vesting in, the Crown specified interests, a specified class of interests or all the interests, in property of a person" (emphasis added). The legal interest of another cannot be made the subject of an order, although if the criminal has an equitable interest in that property, that equitable interest can be forfeited. Similarly, an equitable interest held by another person in the legal property of the criminal cannot be subjected to a forfeiture order. Although the only property that can be lawfully restrained and confiscated is the property of the alleged criminal and that property alone is forfeited to the Crown, s 25, which permits a person whose interest might be subject to a restraining or forfeiture order or whose interest has been forfeited to apply for an "exclusion" order, appears to be predicated upon the possibility that someone else's interest in property might have been confiscated. Mention should also be made of s 26, which permits the Court to make a declaration that some part of the forfeited property "is not attributable to the proceeds of an illegal activity" and order that this be repaid. Time limits apply to applications under both ss 25 and 26, although these may be extended by leave of the Court. The conclusion that a forfeiture order is necessarily limited to the property of the criminal only, so that it cannot operate to confiscate the equitable interest of another person is reinforced by the terms of s 57, which permits the Court to make orders extending the forfeiture to other innocent interests in the property where, in effect, practicability and profitability are likely to be enhanced by overall disposal but the Court must consider the protection of the innocent person's interest and make appropriate ancillary orders to safeguard that interest. This section would not be necessary if a forfeiture order could otherwise confiscate the property of a person other than the criminal. 7It is clear that a bare creditor has no interest in the debtor's property. The effect of a forfeiture order is therefore to give the State preference over any creditors. So far as they are concerned, therefore, the confiscation of the assets of a criminal, operates to destroy any possibility of recovering any of the funds owed to them. Whilst one can readily accept that the legislation is intended to prevent criminals from keeping their ill-gotten gains, it is less obvious that, consistently with the stated objects of the legislation, innocent creditors should also be mulcted of their right to obtain payments of their debts. Does registration of a writ of execution of the title of the forfeited property make a difference? 8Section 112(1) of the Civil Procedure Act 2005 provides delivery of a writ of execution against land and "binds the land... in the same way as a writ of execution against goods binds the property in the goods". As Kitto J explained in Hall v Richards (1961) 108 CLR 84 (Dixon CJ and Windeyer J agreeing) at 91-92 this meant - ... [No] dealing with any of the goods which belong to the debtor when the writ becomes binding can alter the fact that they are goods which the writ requires the sheriff to seize and sell. It gives the creditor neither property in the goods nor possession of them (and consequently no lien in the sense of the Bankruptcy Acts), and as against an assignee in bankruptcy of the debtor it gives the creditor no right at all with respect to the goods: all the creditor has as against the assignee is his judgment; and it was early enacted, by s. 9 of 21 Jac. c. 19, that that, though called a security, should gain him no greater right to get more than a ratable portion of his debt. But seizure by the sheriff under the fi.fa. is different. Though it does not give the execution creditor any property in the goods seized, it places those goods in custodia legis, the sheriff having the special property in them which is necessary for their safe custody and "to render the execution of his public duty useful to the judgment-creditor", as Tindal C.J. put it in Giles v. Grover [1832] EngR 61; (1832) 9 Bing 128, at p 267 [1832] EngR 61; (131 ER 563, at p 615). By the seizure the creditor acquires a legal right to have the sheriff's duty performed in respect of the particular goods: that is, a right to have them sold and to be paid out of the proceeds of sale; and a "binding" effect which goes as far as that is enough to constitute a "charge" and make the creditor a "secured creditor" within the definition, so that if it were not for such provisions as those of s. 92 of the... [Bankruptcy Act 1924-1958] he might realize his security... by completion of the execution (McQuarrie v. Jaques [1954] HCA 76; (1954) 92 CLR 262, at pp 273, 306). 9Section 7 defines "interest" in relation to property as meaning not only a legal or equitable estate or interest but also "a right, power or privilege in connection with the property". It seems to me that a writ of execution confers such an interest. It follows that Mr Sfar could have made application under s 25 or s 26; indeed (subject to a matter discussed below), he is not presently prevented from doing so, although he would first need to obtain the leave of the Court. One of the matters that would be necessary to take into account, in considering whether to grant leave, is the fact that the Commission failed to inform the Court, when the forfeiture order was made, of the existence of Mr Sfar's interest and that no notice of the application was given to him. It cannot be doubted, as I think, that he should have been given notice of the hearing and, even in his absence, his interest should have been brought to the Court's attention considering the likely effect of the making of the forfeiture order. The making of the forfeiture order by consent was, in effect, an ex parte application so far as Mr Sfar was concerned and carried with it the usual rules as to candour. On the other hand, he had notice of the present proceedings and chose not to appear. 10The recording of the writ on the title does not increase or enhance the interest: it merely engages the relevant procedural concomitants concerning the recording of inconsistent dealings as provided in ss 105, 105A of the Real Property Act 1900 (the Act). The effect of the caveat 11The lodgement of caveats against dealings is governed by Division 3 of the Act, which does not call for detailed consideration in the present circumstances, since the property has been sold. It is necessary only to make the point that recording a caveat on the title does not create an interest of any kind: it enables the caveator to vindicate a claim to an interest in the land in the event that an attempt to record a dealing inconsistent with the claim is made. In addition, the recording of a caveat gives notice of the adverse claim and is a material, often decisive, element in determining competing equitable interests. However, it is immaterial to the issue of whether any such equitable interest exists. Dealing with surplus funds 12The Act makes provision for dealing with surplus funds following the exercise by the mortgagee of the power of sale. Section 58(3) of the Act provides - The purchase money to arise from the sale of any such land, estate, or interest, shall be applied, first, in payment of the expenses occasioned by such sale; secondly, in payment of the moneys which may then be due or owing to the mortgagee, chargee or covenant chargee; thirdly, in payment of subsequent mortgages, charges or covenant charges (if any) in the order of their priority; and the surplus (if any) shall be paid to the mortgagor, charger or covenant charger, as the case may be." 13The terms "charge", "charger" and "covenant charger" are defined in s 3 of the Act. It is sufficient for present purposes to say that these references are irrelevant. (Section 112(4) of the Conveyancing Act 1919 should also be noted, pursuant to which the residue of the proceeds of sale, after payment of the mortgagee's or chargee's entitlements, "shall be paid to the person entitled to the mortgaged or charged property or authorised to give receipts for the proceeds of sale thereof", but this does not materially change the position). 14It is submitted by the State that the effect of the restraining order is prospectively to secure to it an interest in land under the forfeiture order and the prospective entitlement to that interest as signalled by the caveat was protected against loss of priority from other interests recorded on the title from the date of the lodging of the caveat and before the making of the forfeiture order. Since it is clear that a restraining order does not create an interest of any kind in any property but simply prevents the person subject to the order from dealing with it in any way inconsistent with the order, the notion that somehow the forfeiture order, when made, relates back to either the date of the restraining order or the recording of the associated caveat is plainly untenable. Thus, so far as the State is concerned, the mere fact that it had recorded a caveat on the title on the making of the restraining order and before the writ was recorded is immaterial. 15It was held in Residential Housing Corporation v Esber & Ors [2011] NSWCA 25 by Campbell JA (with whom Macfarlan JA and Sackville AJA agreed) that the person into whose hands the purchase money arising from the exercise of a power of sale comes is under an obligation to dispose of it in accordance with s 58(3) of the Act - subject to any more specific countervailing statutory obligations such as the statutory obligation of a solicitor who receives money from a client on trust to disperse it in accordance with the directions of the client: Adams v Bank of New South Wales [1984] 1 NSWLR 285. 16As Black J said in Re St George Bank - A Division of Westpac Banking Corporation [2011] NSWSC 730 at [16] the fourth limb of s 58(3) (which is the limb in my view relevant here) - contemplates that any [remaining] surplus arising on the sale... is to be paid to the mortgagor... [but] the operation of that limb of s 58(3) can be modified by the intervention of equity so that the section does not vest the surplus from a mortgagee's sale in a mortgagor free from all equities but subject to them: Avco Financial Services Ltd v Commonwealth Bank of Australia (1989) 17 NSWLR 679 at 683; Residential Housing Corporation Ltd v Esber above (at [166] - [168]). 17The question whether the interest of the Commission in the surplus funds has priority over that of Mr Sfar depends upon the nature of the interest created by the issuing of a writ of execution. Since it does not confer any equitable interest in the property, his rights depend upon the construction of the Criminal Assets Recovery Act. 18I note, by the way, that the restraining order necessarily prevented the Sheriff from attempting to dispose of the property pursuant to the writ but, of course, did not prevent recording of the writ on the title. Assuming that there had been no mortgage and the property were sold by the NSW Trustee and Guardian, an attempt made to register the transfer during the protected period, s 105A(2) of the Act would have been prevented unless the writ were "referred to in the dealing as if it were a prior encumbrance". Section 105A(6) of the Act deprives the writ of this effect after the expiration of the protected period, when a dealing (such as a transfer by the NSW Trustee and Guardian) lodged for registration may be registered notwithstanding the presence of the writ on the title. Here, however, as I have said, it was not possible for the Sheriff to execute the writ because of the restraining order. So far as equity is concerned, it is difficult to accept that, where the party who seeks to sell the property and transfer it to a third party has acted to prevent the execution of the writ, it is entitled to take advantage of the expiration of the protected period, even more where the forfeiture order is obtained by consent without notice being given to the judgment creditor whose writ is recorded on the title. Conclusion 19The crucial question is whether the interest (as defined in s 7) of Mr Sfar, as created by the issuing of the writ, survived the making of the forfeiture order. This interest, if it created an equity, would I think entitle Mr Sfar to priority over the State in respect of the funds in court but it is clear that no equity was created. However, the character of the interest in property by virtue of the writ is, so far as the forfeiture machinery is concerned, not limited to a legal or equitable interest but as defined by s 7 and, as mentioned above, comprehends the right conferred by the issue of the writ to its execution by the Sheriff against the property. Since it is not a legal or equitable interest, it seems to me that the only mode provided by the Act and therefore potentially available for Mr Sfar to exclude the judgment debt from the effect of the forfeiture is provided by the mechanisms made available in ss 25 and 26. This procedure, so far as any such application is concerned, depends upon the existence of an operative writ. In this respect it is important to note that the writ was in force for the period only of 12 months unless it were renewed by the court: Rule 39.20 of the Uniform Civil Procedure Rules 2005, so that it lapsed on 19 February 2007. It may be that Mr Sfar can obtain another writ but, for the present, he does not have the interest which the existence of a writ would confer and, accordingly, is not in a position to make any application for exclusion of his judgment debt from the forfeited property. 20Accordingly, the State is entitled to payment out of the sum of $27,000 plus interest. I order that a copy of this judgment is to be served on Mr Sfar. 21In the circumstances, the State should consider payment to Mr Sfar of the amount it receives from the Court if it be established that the debt reflected work actually performed by him without notice of the alleged criminal activities of the registered proprietor. Of course, I cannot make any order that this should be done; it must be left to the good sense and fair mindedness of those responsible for these matters. ********** 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: 10 December 2012