Supreme Court New South Wales Medium Neutral Citation: Geitonia Pty Ltd t/as Trustee for the Annandale Unit Trust v Westpac Banking Corporation [2015] NSWSC 419 Hearing dates: 2 April 2015 Decision date: 16 April 2015 Jurisdiction: Equity Division Before: Ball J Decision: (1) Proceedings dismissed. (2) The plaintiff should pay the first and second defendants' costs. Catchwords: MORTGAGES – Mortgages and charges generally – Rights and liabilities of mortgagor and mortgagee – Conveyancing Act 1919 (NSW) ss 94, 95 – Whether second mortgagee can require first mortgagee to transfer its mortgage to second mortgagee – Meaning of expression "any third person" Legislation Cited: Conveyancing Act 1919 (NSW) Real Property Act 1900 (NSW) Cases Cited: Challenge Bank Ltd v Hodgekiss (1995) 7 BPR 14,399 First Chicago Australia Ltd v Loyebe Pty Ltd [1980] 2 NSWLR 703 Ley v Scarff (1979-81) 146 (CLR) 56 Sucrogen Australia Pty Ltd v Westpac Banking Corporation [2011] QSC 393 Category: Principal judgment Parties: Geitonia Pty Ltd as Trustee for the Annandale Unit Trust ACN 127 917 980 (First Plaintiff) G Capital Pty Ltd ACN 106 277 132 (Second Plaintiff) Bill Gertos (Third Plaintiff) Westpac Banking Corporation ABN 33 007 457 141 (First Defendant) Huizhong Investment Group Pty Ltd ACN 134 003 375 (Second Defendant) Representation: Counsel: S Galitsky (Plaintiffs) E Holmes (First Defendant) J R Williams (Second Defendant) Solicitors: Websters (Plaintiffs) Henry Davis York (First Defendant) Elson Pow & Associates (Second Defendant) File Number(s): 2015/91089 Publication restriction: Nil Judgment Introduction 1. This case raises a narrow question concerning the construction of s 94(1) of the Conveyancing Act 1919 (NSW) (the Act), which provides: Where a mortgagor is entitled to redeem the mortgagor shall by virtue of this Act have power to require the mortgagee instead of discharging, and on the terms on which the mortgagee would be bound to discharge, to transfer the mortgage to any third person as the mortgagor directs; and the mortgagee shall by virtue of this Act be bound to transfer accordingly. 1. "Mortgagor" is defined in s 7 of the Act to mean "any person from time to time deriving title to the equity of redemption under the original mortgagor, or entitled to redeem a mortgage, according to the person's estate, interest, or right in the mortgaged property". Consequently, a second mortgagee is entitled to the benefit of s 94(1). It, therefore, is entitled to require "the mortgagee" to transfer the mortgage "to any third person". Moreover, under s 95 of the Act a requisition by a mortgagee under s 94 prevails over a requisition of the mortgagor. That section provides: The right of the mortgagor under the last preceding section shall belong to and be capable of being enforced by each incumbrancee or by the mortgagor, notwithstanding any intermediate incumbrance; but a requisition of an incumbrancee shall prevail over a requisition of the mortgagor, and as between incumbrancees a requisition of a prior incumbrancee shall prevail over a requisition of a subsequent incumbrancee. 1. The question in this case is whether a second mortgagee can require a first mortgagee to transfer its mortgage to the second mortgagee or whether the second mortgagee must nominate a third person to whom the mortgage is to be transferred. Background 1. The relevant facts are not in dispute. 2. The first plaintiff, Geitonia, is the registered proprietor of a property in Annandale. On 6 September 2011, it granted a first ranking registered mortgage over the property to the first defendant, Westpac, to secure financial accommodation provided by Westpac under a facility agreement dated 23 August 2011, as subsequently varied. The amount owing to Westpac under the facility is currently in the order of $2.3 million. 3. On 6 September 2011, Geitonia also granted a second ranking registered mortgage to the second defendant, Huizhong, to secure financial accommodation provided under a loan agreement dated 6 September 2011. 4. Prior to the mortgages being granted, on or about 25 August 2011, Geitonia, Westpac and Huizhong entered into a subordination and priority deed, which relevantly prevents Huizhong from taking any enforcement action on its security without Westpac's prior written consent. 5. The Huizhong loan matured on 6 November 2012, at which time Geitonia was required to pay Huizhong the sum of $5.4 million. Geitonia failed to make that payment and has made no payments to Huizhong since the loan was first drawn down. 6. On 29 January 2015, Westpac declared events of default under its mortgage and made demand for all amounts due under its facility. On 6 February 2015, it served a notice under s 57(2)(b) of the Real Property Act 1900 (NSW). 7. In response, Geitonia purported to exercise its rights under s 94(1) of the Act by requiring Westpac to transfer its mortgage first to Geitonia and then to a company nominated by Geitonia known as Yellow Express Messengers Pty Ltd (Yellow Express). 8. On 10 March 2015, Huizhong gave Westpac notice exercising its right under ss 94 and 95 of the Act requiring a transfer of Westpac's mortgage to it. 9. By a summons filed on 26 March 2015, Geitonia seeks a declaration that it is entitled to obtain a transfer of Westpac's mortgage to Yellow Express upon payment to Westpac of the balance owing to it. It also seeks an order giving effect to that declaration and interlocutory orders restraining Westpac and Huizhong from transferring Westpac's mortgage to Huizhong. Consideration 1. Geitonia's principal argument is that Huizhong is not permitted under s 94 of the Act to require the transfer of the Westpac mortgage to it. On the other hand, it submits that it is entitled to require Westpac to transfer the mortgage to Yellow Express and that the Court should give effect to that entitlement. 2. Originally, Geitonia also sought to advance an argument that Westpac had agreed to transfer the mortgage to a person nominated by Geitonia and the Court should give effect to that agreement. It is plain, however, that no such agreement was reached. Westpac simply took steps to comply with its obligations under s 94 of the Act and corresponded with Geitonia concerning those obligations. In any event, it is difficult to see how an agreement between Geitonia and Westpac could deprive Huizhong of its rights under ss 94 and 95 of the Act. In the end, I did not understand Mr Galitsky, who appeared for Geitonia, to press that argument. In any event, for the reasons I have given, there is no merit in it. 3. The remaining issue, then, is whether Huizhong is entitled to require the transfer of the Westpac mortgage to it. If it is, that entitlement clearly takes priority over any entitlement that Geitonia may have, and Geitonia is not entitled to the relief it claims. 4. The issue on which Geitonia's claim turns was considered by Kearney J in First Chicago Australia Ltd v Loyebe Pty Ltd [1980] 2 NSWLR 703 and has been considered in a number of other cases since. In First Chicago, Kearney J concluded that "[T]he reference to a third person in s 94 is intended to identify a person other than the original mortgagor named in the mortgage" (at [32]). Consequently, the section did not prevent a second mortgagee from requiring the first mortgagee to transfer its mortgage to it. In Challenge Bank Ltd v Hodgekiss (1995) 7 BPR 14,399, Young J doubted that that conclusion was still correct following the High Court's decision in Ley v Scarff (1979-81) 146 (CLR) 56. In expressing that view, Young J said this at p14,401: In First Chicago Australia Ltd v Loyebe Pty Ltd [1980] 2 NSWLR 703, 708, Kearney J did hold that the section enabled a second mortgagee to ask that the first mortgage be transferred to itself. That decision, which was delivered only days before Ley's case was argued and was not referred to in Ley's case, should be treated as having been partially overruled by Ley's case. It may be argued that the decision of Kearney J still stands, at least where there is no notice of a subsequent mortgage, but it seems to me that the words of Barwick CJ in Ley's case are so strong that one cannot agree with this argument. 1. Ley's case concerned an agreement by which first mortgagees of a property originally owned by Mr Ley's wife agreed to transfer their mortgage to Mr Ley, who had taken an assignment of the equity of redemption in the mortgaged property from his wife. A condition of the agreement was that there be no legal impediment to the transfer. The case turned on two issues. One was whether that condition had been satisfied in circumstances where the property was the subject of a second mortgage of which the first mortgagees were aware. Mr Ley had failed on that point at first instance and on appeal and the issue was not seriously in dispute before the High Court. The second issue, raised by Mr Ley before the High Court, was whether he was a guarantor of the obligations secured by the first mortgage, with the result that, on payment of the guaranteed amount, he was entitled to an assignment of the principal creditors' securities. Mr Ley failed on that issue at a factual level. There was no evidence that he had guaranteed his wife's obligations. In discussing the relevant principles, Barwick CJ (with whom the other members of the Court agreed) said (at 60-1): Prior to the enactment of ss 93 and 94 of the Conveyancing Act, 1919 (NSW), if a mortgagor found need to discharge a mortgage and to replace it with another to secure a like amount, it would be necessary to redeem the existing mortgage by payment, accept a discharge of the mortgage and then execute a new mortgage to a new lender. Apart from the expense of such a procedure, a particular problem presented itself where the mortgagor had executed a second mortgage. In this instance, to be in a position to give the new lender a first charge on the land, it would be necessary to negotiate with the second mortgagee to postpone his security to the first mortgage to be given to the second lender, because otherwise on the discharge of the first mortgage the second mortgage would become the first charge on the land. Failing successful negotiation with the second mortgagee, it might prove necessary to discharge that security by payment. After setting out ss 93 and 94, the Chief Justice continued (at 61-2): The law now gives the mortgagor the ability to maintain the position of the first mortgage at no greater expense than the cost of the assignment of the existing security to the new lender. This maintains the priority of that security and obviates any negotiation in dealing with the subsequent mortgage. The legislation in terms provides for the assignment of the security to "any third person as the mortgagor directs". Such a third person, in this context, does not include a person who is no more than the alter ego of the mortgagor. It refers to the new lender who, of course, must be nominated by the mortgagor, who has arranged the loan to pay out the existing mortgagee. The sections, in my opinion, have no relevant function where the mortgagor is providing the funds to pay out the first mortgagee. 1. The issue with which the current case is concerned then arose directly again in Sucrogen Australia Pty Ltd v Westpac Banking Corporation [2011] QSC 393. Following a detailed and helpful examination of the authorities, Applegarth J concluded that Kearney J was correct, that Young J's comments were obiter and that the decision of the High Court in Ley's case was not on point. 2. In substance, Mr Galitsky's submission was that I should not follow the decision of Applegarth J because it was a decision not supported by the text of s 94(1) of the Act. I do not accept that submission. 3. The expression "any third person" in s 94(1) may mean (1) any person other than the original mortgagor named in the mortgage; or (2) any person independent of the mortgagor; or (3) any person independent of the person giving the direction; or (4) any person who does not already have an interest in the property. 4. In my opinion, (2) is most consistent with the purpose of the requirement that the transfer be to any third person. 5. As Barwick CJ explained in Ley's case, s 94 was part of reforms intended to improve the position of mortgagors. However, the reforms were not intended to provide a mechanism by which a mortgagor could defeat or interfere with the rights of second or subsequent mortgagees. Yet that would be the effect if the mortgagor could itself obtain an assignment of the first mortgage. That is why s 94 requires the transfer to be to a third person; and why the expression "third person" has been interpreted as a person genuinely independent of the mortgagor. 6. On one reading, Kearney J in First Chicago appears to have adopted the first possible interpretation of "any third person". However, as the facts of Ley's case demonstrate, that interpretation may be overly narrow. There could be cases where a person entitled to exercise the rights of mortgagor is not the original mortgagor named in the mortgage. Barwick CJ's comments were obviously not confined in that way. In Sucrogen, Applegarth J accepted that "any third person" must be interpreted as a person who is not "the original mortgagor, that mortgagor's assignee, successor in title or other 'alter ego'" (at [59]) – which, in substance, is another way of describing interpretation (2) of the expression "any third person". In my opinion, he was correct to do so; and it may well be that that is what Kearney J meant. Certainly, that is the way that Applegarth J interprets Kearney J's judgment. 7. On the other hand, consistently with the policy of the legislation, there is no reason to adopt interpretations (3) or (4) of "any third person". The third interpretation makes little sense. In theory, at least, it would permit a mortgagee exercising a right under s 94 to give a direction for the transfer of the mortgage in respect of which the right is exercised to the mortgagor. That could not have been intended. On the other hand, the fourth interpretation would prevent transfer of a mortgage to an existing mortgagee. What policy objective such a requirement would have is not apparent. Again, as Applegarth J points out, the obvious transferee of a mortgage is likely to be another lender who has already provided finance on security of the property. It makes no commercial sense, and it is inconsistent with the policy behind s 94, if the borrower has to enter into a new agreement and a fresh mortgage with such a lender but could require the transfer of an existing mortgage to an entirely new lender. 8. It follows that there is nothing to prevent Huizhong from requiring Westpac to transfer Westpac's mortgage to itself. That right takes priority over any right Geitonia has. Orders 1. The proceedings should be dismissed. The plaintiff should pay the first and second defendants' 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: 20 April 2015