Supreme Court New South Wales Medium Neutral Citation: Australia and New Zealand Banking Group Ltd v Fairfield City Council [2016] NSWSC 668 Hearing dates: 4 May 2016 Date of orders: 26 May 2016 Decision date: 26 May 2016 Jurisdiction: Equity - Commercial List Before: Emmett AJA Decision: (1) Declare that: (a) by way of first registered mortgage, the plaintiff had an interest in the property contained in folio identifier 29/609330 known as 128 Hemphill Avenue, Mount Pritchard NSW 2170 (the Property) immediately before the sale of the Property on 31 October 2014 by the defendant for unpaid rates and charges (the Sale); (b) the plaintiff is entitled to the balance of the proceeds of the sale, held on trust by the defendant in the amount of $332,398.75. (2) Order that, from the balance of the proceeds of the Sale held on trust by the defendant in the amount of $332,398.75, the defendant: (a) pay the amount of $329,398.75 to the plaintiff by way of electronic transfer made into the trust account of the solicitors for the plaintiff, Kemp Strang; and (b) retain the amount of $3,000 for payment of its solicitor's costs. Catchwords: CONTRACTS – effect of liquidator's disclaimer under section 568A(1) of the Corporations Act 2001 (Cth) EXECUTION – whether guarantee was binding on parties when not executed as a deed REAL PROPERTY – whether after escheat the property the subject of the mortgage vested in the Crown in right of New South Wales or the Commonwealth LOCAL GOVERNMENT – exercise of the council's power of sale under section 713 of the Local Government Act 1993 (NSW) Legislation Cited: Corporations Act 2001 (Cth) Local Government Act 1993 (NSW) Real Property Act 1900 (NSW) Cases Cited: Barrak Corporation Pty Ltd v Jaswil Properties Pty Ltd [2016] NSWCA 32 Re Middle Harbour Investments Ltd (in liq) and the Companies Act [1977] 2 NSWLR 652 Re Weiland (1945) 13 ABC 220 Category: Principal judgment Parties: Australia and New Zealand Banking Group Ltd (Plaintiff) Fairfield City Council (Defendant) Representation: Counsel: O Small (solicitor for the Plaintiff) M Hodges (solicitor for the Defendant) Solicitors: Kemp Strang (Plaintiff) Mark Hodges Solicitors (Defendant) File Number(s): 2016/78175 Publication restriction: Nil Judgment 1. HIS HONOUR: These proceedings arise out of a disclaimer under s 568 of the Corporations Act 2001 (Cth) (the Corporations Act), by the liquidator of Haddad Property Investments Pty Ltd (the Company), of the interest of the Company in land situated at Mount Pritchard, NSW 2170 (the Property). The Property was the subject of a mortgage in favour of the plaintiff, Australia and New Zealand Banking Group Ltd (the Bank), to secure indebtedness of the Company under a Cross Guarantee and Indemnity (the Guarantee). The Property was sold by the defendant, Fairfield City Council (the Council), because rates payable by the Company in respect of the Property under the Local Government Act 1993 (the Local Government Act) remained unpaid. The question in these proceedings is whether the Bank is entitled to the surplus of the sale proceeds after payment of expenses and the unpaid rates. Background 1. The Property is subject to the provisions of the Real Property Act 1900 (NSW) (the Real Property Act). By Memorandum of Transfer dated 20 November 2002, the then registered proprietor of the Property transferred the Property to the Company. That Memorandum of Transfer was registered on 22 November 2002, and the Company thereupon became the registered proprietor of an estate in fee simple in the Property. 2. The Guarantee bears the date 11 March 2003 and there is no reason to doubt that it was executed on that date. The parties to the Guarantee were the Bank, on the one hand, and on the other; the Company, Haddad Import & Export Pty Limited (Haddad Import) and Mr Maz Elhaddad. It was signed by Mr Elhaddad in three capacities, first as a director of the Company, secondly as a director of Haddad Import and finally in his personal capacity. 3. By clause 3.1 of the Guarantee, each of the Company, Haddad Import and Mr Elhaddad (the Guarantors) guaranteed that the Bank would be paid all "the guaranteed money when it should be paid". The term "guaranteed money" was defined as all money that any of the Guarantors owes to the Bank for any reason, whether the Guarantor owes money alone or jointly or as principal or as surety. 4. The Guarantee was expressed to be signed, sealed and delivered by Mr Elhaddad in his personal capacity, and it was signed by him in the presence of a witness. Accordingly, it was properly executed by him as a deed. The Guarantee was also expressed to be executed as a deed by the Company and Haddad Import. Relevantly, the Guarantee stated that the common seal of the Company had been affixed in the presence of, and the sealing had been witnessed by, Mr Elhaddad. At that time, Mr Elhaddad was the only director of the Company and was the only secretary of the Company. However, the common seal of the Company was not in fact fixed to the Guarantee. A question therefore arises as to whether the Guarantee was executed in a manner that was binding on the Company. I shall return to that question below. 5. On 31 March 2003, the Company, as mortgagor, executed a Memorandum of Mortgage over the Property in favour of the Bank (the Mortgage). The Mortgage was expressed to be executed on behalf of the Company by Mr Elhaddad as the sole director and secretary of the Company. The Mortgage incorporated the terms of Memorandum 2433990P, Part 3 of which provided that the Mortgage was security for payment to the Bank of "the secured money", which was defined as all money which the mortgagor owes to the Bank for any reason. On 31 March 2003, the Company acknowledged to the Bank that it had deposited the Mortgage with the Bank in support of the Guarantee. Clearly, if the Company had a liability under the Guarantee, that liability was secured by the Mortgage. 6. On 21 July 2003, the Bank wrote to Mr Elhaddad offering a business loan facility of $1 million. The offer provided that security for the facility was to include the Guarantee and a First Registered Mortgage of the Property by the Company. On 22 July 2003, Mr Elhaddad accepted the offer and, on 29 July 2003, an advance of $1 million was made by the Bank to Mr Elhaddad under the facility. The advance was repayable on 29 July 2004. In the meantime, repayments of $7,063.00 per month were to be made. 7. It appears that there was default on the part of Mr Elhaddad, and, on 28 June 2004, the Bank made demand on Mr Elhaddad for payment of the sum of $1,007,957.96, being the principal of the advance together with interest and charges to that date. As at 3 May 2016, the sum of $911,609.77 was still owing to the Bank by Mr Elhaddad under the facility. 8. On 6 October 2005, Mr Ozem Kassem (the Liquidator) was appointed as liquidator of the Company. On 12 March 2007, the Liquidator served on the Bank notice of disclaimer in respect of the Property. The notice was given under s 568A(1) of the Corporations Act on the basis that the Property consisted of land burdened with onerous covenants. 9. On 17 December 2009, the Company was deregistered under s 509 of the Corporations Act. Under s 509, as soon as the affairs of a company are fully wound up, the liquidator of the company must make up an account showing how the winding up has been conducted and how the property of the company has been disposed of. The liquidator must then convene a general meeting of the company and lodge a return stating that the meeting has been duly convened. The Australian Securities and Investment Commission (ASIC) must deregister the company at the end of the period of three months after such a return is lodged. That occurred in relation to the Company. 10. On 13 September 2012, Mr Mark Hodges, the solicitor for LegalForce, a collection agency appointed by the Council, wrote to the Bank asserting that, by the operation of relevant provisions of the Local Government Act, the Bank was to be regarded as the owner of the Property and was therefore liable to pay rates outstanding in respect of the Property. The solicitors for the Bank responded, disputing that the Bank was an owner of the Property within the relevant provisions of the Local Government Act. Nothing further appears to have been done in relation to the claim that the Bank was liable for the outstanding rates. 11. On 24 September 2013, the Council resolved to sell the Property in accordance with s 713 of the Local Government Act. Under s 713(2), a council may sell any land, including vacant land, on which any rate or charge has remained unpaid for more than 5 years from the date on which it became payable. Under s 723, a conveyance or transfer under s 713 vests the land in the purchaser for an estate in fee simple, freed and discharged from all trusts, obligations, estates, interests, contracts and charges. 12. Under s 717(2), the purchase money for land sold under s 713 must be paid to the council and the council's receipt is a discharge to the purchaser in respect of all expenses, rates, charges and debts referred to in s 718. Section 718 relevantly provides that the council must apply any purchase money received by it on the sale of land for unpaid rates and charges in or towards payment of: * first, the expenses of the council incurred in connection with the sale; and * secondly, any rate or charge in respect of the land due to the council. 1. Under s 720, any balance of the purchase money received by a council must be paid into that council's trust fund and held by the council in trust for the persons having estates or interests in the land immediately before the sale, according to their respective estates and interests. The council may pay the balance of the purchase money, or any part of the balance, to or among the persons who are, in its opinion, clearly entitled to it, and the receipt of the person to whom any payment is so made is an effectual discharge to the council for it. 2. On 30 April 2014, the Property was sold at public auction, when a contract for the sale of the Property was entered into between the Council, as vendor, and Mr Han Lang Lam (the Purchaser), as purchaser, for a total sale price of $357,000. On 31 October 2014, that contract for sale was completed and a transfer to the Purchaser, which was executed by the Council, was lodged with the Registrar General. That resulted in the Purchaser becoming the registered proprietor of the Property free from the Mortgage, and occurred without the requirement of producing the original Certificate of Title or a discharge of the Mortgage to be lodged. After payment of legal fees, outstanding rates and charges and agents fees, a surplus of $332,398.75 remained from the sale proceeds. The Proceedings 1. The Bank claims to be entitled to the whole of the surplus of $332,398.75. The Council, however, apparently has some concern as to the entitlement of the Bank in all of the circumstances. That led to the filing by the Bank, on 11 March 2016, of a summons seeking a declaration that it is entitled to the sum of $332,398.75 held by the Council and an order that the Council pay that sum to the Bank. No other defendant has been joined in the proceedings, although steps have been taken by the Bank to notify possible interested parties, as outlined below. The Council does not oppose the making of the orders sought. 2. I had three reservations concerning the orders sought by the Bank, as follows: * Whether the Guarantee was executed in a manner that was binding on the Company; * Whether disclaimer affects the right of a registered mortgagee; and * Whether the Crown should be joined as a party. I shall deal with each of those concerns separately. Execution of the Guarantee 1. As I have said, the Guarantee was signed by Mr Elhaddad in three capacities, first as a director of the Company, secondly as a director of Haddad Import and finally in his personal capacity. The question is whether the Guarantee was binding on the Company, having regard to the manner of its purported execution on behalf of the Company. 2. Section 127(1)(c) of the Corporations Act relevantly provides that a proprietary company that has a sole director who is also the sole company secretary may execute a document without using a common seal if the document is signed by that director. Further, under s 127(2)(c), a company that has a sole director who is also the sole company secretary, being a company with a common seal, may execute a document if the seal is fixed to the document and the fixing of the seal is witnessed by that director. As I have said, the common seal of the Company was not affixed to the Guarantee. On the other hand, it is clear that the Guarantee was signed by Mr Elhaddad in his capacity as a director of the Company. Accordingly, it follows that the Guarantee, as a document, was effectively executed by the Company by the operation of s 127(1)(c). 3. Nevertheless, while s 127(3) relevantly provides that a company may execute a document as a deed if the document is expressed to be executed as a deed and is executed in accordance with s 127(1)(c) or s 127(2)(c), the execution of the Guarantee was not effective to constitute it a deed, because it was expressed to be executed under the common seal of the Company but was not in fact so executed. By way of contrast, although the printed form of the Mortgage, as executed by Mr Elhaddad on behalf of the Company, provided for the affixing of the common seal, that provision was struck out by hand, otherwise, there may have been a question as to whether or not the Mortgage was properly executed so as to be registrable under the Real Property Act. [1] 4. It is clear that Mr Elhaddad executed the Guarantee in three different capacities, including on behalf of the Company. The question is whether it was executed on behalf of the Company in a manner that created liability as a surety, in circumstances where it was executed as a document but was not executed as a deed. 5. There is no requirement that a guarantee be executed as a deed. A guarantee will be enforceable against a guarantor if the guarantee is given for valid consideration. Under clause 2.1 of the Guarantee, the Company agreed that it had given the Guarantee in clause 3.1 in return for the Bank agreeing, at the request of the Company, to consider requests that any of the parties to the Guarantee may make for banking accommodation or other banking services. While clause 2.2 of the Guarantee provided that the Bank did not have to give or to continue to give accommodation or any other banking services, that promise by the Bank to agree, at the request of the Company, to consider requests that Mr Elhaddad might make for banking accommodation or other banking services, was valid consideration for the giving of a guarantee by the Company, as surety. Accordingly, I consider that, whether or not the Guarantee was effectively executed by the Company as a deed, it gave rise to a binding obligation on the part of the Company as a guarantor under the Guarantee. Effect of Disclaimer 1. Section 568(1)(a) of the Corporations Act relevantly provides that a liquidator of a company may, at any time, on the company's behalf, disclaim property of the company that consists of "land burdened with onerous covenants". Under s 568A(1), the liquidator must, as soon as practicable after disclaiming property, give written notice of the disclaimer to each person who appears to the liquidator to have an interest in the property. Under s 568B(1), a person who has an interest in disclaimed property may apply to the Court for an order setting aside the disclaimer before it takes effect, but may only do so within 14 days after the liquidator gives such notice to that person. Under s 568C(1), a disclaimer takes effect if, and only if, relevantly, no such application is made to the Court. Under s 568C(3), such a disclaimer is taken to have taken effect on the day after the day when the liquidator gave notice under s 568A(1). 2. Under s 568D(1), a disclaimer is taken, as from the day on which it is taken to take effect by the operation of s 568C(3), to have terminated the company's rights, interests, liabilities and property in or in respect of the disclaimed property. However, a disclaimer does not affect any other person's rights or liabilities, except so far as necessary to release the company and its property from liability. 3. Under s 568E, a person who has, or claims to have, an interest in disclaimed property may apply to the Court, with the leave of the Court, for an order setting aside the disclaimer after it has taken effect. The Court may set aside a disclaimer only if satisfied that the disclaimer has caused, or would cause, to persons who have, or claim to have, interests in the property, prejudice that is grossly out of proportion to the prejudice that setting aside the disclaimer would cause to the company's creditors and persons who have changed their position in reliance on the disclaimer taking effect. Finally, s 568F relevantly provides that the Court may order that disclaimed property vest in, or be delivered to, a person entitled to the property or a person to whom it seems to the Court appropriate that the property be vested or delivered. 4. The purpose of providing for disclaimer by a liquidator in a winding up is to enable the liquidator to rid the company of burdensome financial obligations that might otherwise continue to the detriment of those interested in the winding up of the affairs of the company. The power to disclaim is given to enable the liquidator to advance the prompt, orderly and beneficial administration of the winding up of the affairs of the company [2] . 5. The second question of concern was whether a mortgage containing covenants to pay rates and maintain the mortgaged property falls within s 568(1)(a) of the Corporations Act. The language of "land burdened with onerous covenants" might be understood as suggesting the notion of covenants the burden of which runs with the land. Nevertheless, the words are appropriate to cover land in respect of which there exist onerous covenants from which financial liabilities might arise that constitute a burden on the land, in the sense that they may be enforced against the land. The better view, therefore, is that where land is subject to a mortgage securing an amount greater than the value of the land and liabilities for interest that continue to run are being added to the secured debt, and rates under the Local Government Act continue to accrue in respect of the land, s 568(1)(a) will be applicable. Thus, the estate or interest of the Company in the Property that was the subject of the Mortgage, given by the Company to the Bank, is land burdened with onerous covenants within the meaning of s 568(1)(a). [3] 6. However, following a disclaimer, a mortgagee retains its rights in respect of principal, interest and charges secured by a mortgage that have become due at the date of disclaimer. Such a mortgagee can enforce its claim against the land and, in so far as the land proves insufficient to meet the amount due, the mortgagee would be entitled to prove as an unsecured creditor in the winding up [4] . 7. In the present case, of course, the Bank's remedy of enforcing its claim against the Property has been foregone. Whereas, prior to the intervention by the Council in exercising the power under s 713 of the Local Government Act, the Bank could have exercised its power of sale in respect of the Property, that power was extinguished by the valid exercise of the power of sale by the Council. Clearly, however, any balance of the proceeds of the sale by the Council, after payment of the costs and expenses of sale and the outstanding rates, would belong to the persons who had a proprietary interest in the Property. That is the clear intent of s 720 of the Local Government Act, in providing that the proceeds are to be held by the Council in trust for the persons having estates or interests in the land immediately before the sale. That raises the question as to who is entitled to the balance of the proceeds of sale. 8. The exercise of the power of sale conferred by s 713 of the Local Government Act might be regarded as analogous to the exercise of a power of sale by a mortgagee. Where, for example, a senior mortgagee exercises a power of sale and a surplus is generated after the senior mortgagee's secured debt has been discharged in full, the surplus belongs to the next puisne mortgagee, to the extent of the amount secured by that puisne mortgagee's mortgage. It is only if the claims of all mortgagees are satisfied from the proceeds of sale and a surplus remains, that any surplus would be payable to the mortgagor, or registered proprietor of land under the Real Property Act. In effect, the scheme of the relevant provision of the Local Government Act puts a council in the position of a senior mortgagee as regards all registered mortgagees. 9. Accordingly, it is clear that any surplus resulting from the exercise by the Council of the power under s 713 of the Local Government Act in respect of the Property belongs to the Bank, as registered mortgagee of the Property, to the extent of the liability secured by the Mortgage. In the present instance, the amount secured by the Mortgage far exceeds the balance of the sale proceeds held by the Council on trust under the Local Government Act. Accordingly, s 720(2) the Local Government Act would operate to authorise the Council to pay the balance to the Bank, which is clearly entitled to it. The Council could not rationally have an opinion that any other person had any entitlement to the balance of proceeds held by it in its trust account. Joinder of the Crown 1. The Mortgage was registered under the Real Property Act. However, that registration did not operate as a transfer of the fee simple in the Property to the Bank, as it would in relation to a mortgage of old system land. Rather, by the operation of s 57 of the Real Property Act, the Mortgage took effect as a security. The third question that arises is what happens to the estate in fee simple in land of which a company in liquidation is the registered proprietor when its liquidator disclaims that estate. 2. There are substantial reasons for concluding that the Crown in right of New South Wales became entitled to the fee simple in the Property as bona vacantia by the doctrine of escheat, and that the Company became, by implication of law, a trustee of the Property for the Crown, subject to the Bank's rights as mortgagee under the Mortgage [5] . That is to say, where escheat occurs, and freehold land reverts to the Crown, the Crown will ordinarily take the land subject to any mortgages or charges upon the land that may have been created. Where, following disclaimer, a company's name remains on the register kept under the Real Property Act, with nothing more entered than a notation of the disclaimer, the rights of a mortgagee under its security will not be destroyed or substantially impaired [6] . 3. The Corporations Act, of course, is an Act of the Commonwealth Parliament and not of the New South Wales Parliament, albeit in the exercise of legislative power referred by the States. For that reason, it may be arguable that escheat of the Property was to the Crown in right of the Commonwealth, rather than the Crown in right of the State. However, it is the Crown in right of the State that alienates land in New South Wales. Notwithstanding that the disclaimer may be effective by reason of the Corporations Act, the Property became bona vacantia as a consequence of disclaimer. I would be disposed to conclude that, being land in New South Wales, the Property escheated to the Crown in right of New South Wales, subject to the Mortgage. It would follow that, if no liability to the Bank was secured by the Mortgage, the Crown in right of New South Wales would be entitled to any surplus generated by the sale under s 713 of the Local Government Act. Accordingly, I had a reservation as to whether the Crown should have been joined as a contradictor. 4. In that regard, it is relevant that, on 14 March 2016, the solicitors for the Bank served on the State Crown Solicitor a copy of the summons filed on 11 March 2016, together with the affidavits of Michael William Joseph sworn 9 March 2016 and Craig James Martin sworn 8 March 2016 and the exhibits to those affidavits. The Bank's solicitors received an email communication from the Crown Solicitor confirming that service of the documents was accepted on behalf of the State of New South Wales. By email of 6 April 2016, the Crown Solicitor confirmed his instructions that the State of New South Wales did not oppose the orders sought in the summons. There was similar exchanges between the solicitors for the Bank, on the one hand, and ASIC and the Australian Government Solicitor, on the other. The material was served on ASIC because property vested in a company that is deregistered vests in ASIC, although in this case the Company's interest in the property had escheated before deregistration. Neither ASIC nor the Commonwealth opposed the orders sought in the summons. 5. The Crown has indicated that it does not oppose the orders sought in the summons. While the possibility that the Guarantee was not properly executed on behalf of the Company was not a matter drawn to the attention of the Crown Solicitor, all of the evidence before me, including a copy of the Guarantee with execution clauses described above, was served on the Crown Solicitor, the Australian Government Solicitor and ASIC. Notwithstanding that, in the circumstances, there is a theoretical possibility that the Crown could claim entitlement to the funds presently held by the Council, on the basis that there was no liability of the Company secured by the Mortgage, I have concluded for the reasons indicated above, that the Guarantee imposed liability on the Company and there is no prospect of any surplus being available for the Crown. In the circumstances, I have concluded that there is no need for the Crown to be joined as a contradictor. Conclusion 1. For the reasons indicated above, I propose to make orders as asked by the Bank. The orders are as follows: 1. Declare that: 1. by way of first registered mortgage, the plaintiff had an interest in the property contained in folio identifier 29/609330 known as 128 Hemphill Avenue, Mount Pritchard NSW 2170 (the Property) immediately before the sale of the Property on 31 October 2014 by the defendant for unpaid rates and charges (the Sale); 2. the plaintiff is entitled to the balance of the proceeds of the sale, held on trust by the defendant in the amount of $332,398.75. 1. Order that, from the balance of the proceeds of the Sale held on trust by the defendant in the amount of $332,398.75, the defendant: 1. pay the amount of $329,398.75 to the plaintiff by way of electronic transfer made into the trust account of the solicitors for the plaintiff, Kemp Strang; and 2. retain the amount of $3,000 for payment of its solicitor's costs. ********** Endnotes 1. See Barrak Corporation Pty Ltd v Jaswil Properties Pty Limited [2016] NSWCA 32 at [45]. 2. See Re Middle Harbour Investments Limited (in Liq) and the Companies Act [1977] 2 NSWLR 652 at 657. 3. Ibid at 659 and 660. 4. Ibid at 660. 5. See Re Weiland (1945) 13 ABC 220 at 225. 6. See Re Middle Harbour Investments Limited (in Liq) and the Companies Act [1977] 2 NSWLR 652 at 662-663. 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: 26 May 2016