Hatala v Graglee Pastoral Company Pty Ltd [2017] NSWSC 155

Supreme Court New South Wales

Medium Neutral Citation: Hatala v Graglee Pastoral Company Pty Ltd [2017] NSWSC 155 Hearing dates: 15 February 2017 Date of orders: 28 February 2017 Decision date: 28 February 2017 Jurisdiction: Equity Before: Darke J Decision: Declaration made that plaintiffs are equitable mortgagees of defendant's property; receiver appointed for sale of property. Catchwords: REAL PROPERTY – mortgages – equitable mortgage by deposit of title documents – whether certificate of title deposited with intention that property be security for debt – whether deposit effected by authorised agent of owner of property – whether inference as to existence of authority should be drawn Legislation Cited: Uniform Civil Procedure Rules 2005 (NSW) r 29.7(2) Cases Cited: Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345; [2012] HCA 17 Bank of New South Wales v O'Connor (1889) 14 App Cas 273 Jones v Dunkel (1959) 101 CLR 298 Theodore v Mistford Pty Ltd (2005) 221 CLR 612; [2005] HCA 45 Category: Principal judgment Parties: Vladimir Hatala (First Plaintiff) Bradley Daniel (Second Plaintiff) Graglee Pastoral Company Pty Ltd (Defendant) Representation: Counsel: A J Greinke (Plaintiffs)

Solicitors: Colquhoun Murphy (Plaintiffs) John Stonham & Company (Defendant) File Number(s): 2015/341941 Publication restriction: None

Judgment 1. The plaintiffs, Mr Hatala and Mr Daniel, seek a declaration that a property in Sutton Forest owned by the defendant, Graglee Pastoral Company Pty Ltd, is subject to an equitable mortgage in their favour. 2. The plaintiffs claim that the mortgage was created in May 2013 by the deposit of the certificate of title to the property with a solicitor, Mr Jeffrey Silk, in connection with a loan transaction whereby the plaintiffs lent $300,000 to Grag Group Pty Ltd. 3. At that time, Mr Geoff Coady was the sole director and secretary of Grag Group Pty Ltd. He also held the only share in the company. His wife, Mrs Gilian Coady, was the sole director and secretary of Graglee Pastoral Company Pty Ltd. She held the only share in that company. Mr and Mrs Coady were also the proprietors of the registered business name "Grag Group". 4. The defendant filed a Defence which denied the plaintiffs' claims, including that it deposited the certificate of title to the property with Mr Silk, and asserted that it did not agree to provide any security or mortgage over the property to the plaintiffs. Some evidence was thereafter filed by the defendant, but when the matter was called on for hearing on 15 February 2017 the defendant failed to appear. In accordance with Uniform Civil Procedure Rules 2005 (NSW) r 29.7(2), the hearing proceeded in the defendant's absence. 5. The evidence adduced by the plaintiffs establishes the following matters. 6. On 30 April 2013 Mr Silk sent an email to Mr Hatala and Mr Hatala's brother. The email included the following: I have a client who is looking to borrow funds of about $300,000.00 for 6 months, to complete a subdivision of 12 blocks land in Goulburn. He is willing to offer interest of 12% and give a security for the loan to the lender on a property at Sutton Forest, which is unencumbered, i.e. debt free. It is on the market for sale at $3.25 mill. … If you are interest one or both happy to discuss. I would get the title and hold it and can put caveat on title for the loan or maybe register a mortgage. 1. Mr Hatala's brother was not interested in the proposal but Mr Daniel, a business partner of Mr Hatala's, was. The matter was then discussed further with Mr Silk. 2. It appears from a note apparently taken by Mr Silk, that he met with the plaintiffs on 2 May 2013. I infer from the terms of the note that a question was asked whether the loan was a good deal, and Mr Silk said that he trusted Mr Coady and that he had acted on his purchase of Sutton Forest. It seems that Mr Silk also said, in relation to the Sutton Forest property, that he would "get the title" and hold it in his office. 3. It appears from another note apparently taken by Mr Silk, that later on 2 May 2013 he spoke to Mr Coady about the plaintiffs' interest in the proposed loan, and told Mr Coady that he would need to get the title to Sutton Forest and that Mrs Coady will have to sign "for Graglee securing the loan with title". 4. Mr Silk then proceeded to prepare a draft Loan Agreement. He sent the draft to Mr Hatala and Mr Coady on 3 May 2013, and sought comments "from either party". 5. On 4 May 2013 (a Saturday) Mr Silk sent an email to Mr Hatala in which it was stated that Mr Coady would "have title" at his office by lunchtime on Monday "with signatures on documents". 6. Late on the afternoon of 6 May 2013 Mr Silk sent an email to Mr Hatala confirming that he had the certificate of title and Loan Agreement. The email also contained details of a bank account of Mr Coady's at St George Bank. The account was in fact styled under the name of "Grag Group". 7. That email, and the various other emails sent by Mr Silk to Mr Hatala, were also received by Mr Daniel. Presumably they were forwarded to him by Mr Hatala. 8. It is clear from other notes apparently taken by Mr Silk, that earlier on 6 May 2013 Mr Coady delivered to Mr Silk's office the certificate of title for the Sutton Forest property together with the Loan Agreement. It further appears that Mr Coady told Mr Silk that Mrs Coady would "come to sign tomorrow" and that Mr Coady then proceeded to sign the Loan Agreement on behalf of Grag Group Pty Ltd. 9. On 7 May 2013 first Mr Daniel, and later Mr Hatala, attended Mr Silk's office. They each signed the Loan Agreement. Before doing so, Mr Silk showed each of them a certificate of title and a title search for the Sutton Forest property. It appears from another note apparently taken by Mr Silk that he may have also told them that Mrs Coady had not signed the Loan Agreement "but will come in and sign". 10. The Loan Agreement was between Grag Group Pty Ltd as borrower, Graglee Pastoral Company Pty Ltd as security provider, and Mr Hatala and Mr Daniel as lenders. The agreement relevantly provides: RECITALS A) The lenders have agreed at the request of the borrower to lend the sum of three hundred thousand dollars ($300,000.00) ("the principal amount") to the borrower for a short term, of approximately six months from the date of the Agreement. B) The borrower has agreed to pay interest on the principal amount in a fixed amount of $20,000.00 ("the interest amount") which is payable at the end of the loan when the principal amount is repaid. C) The borrower has agreed that the interest amount will be paid even in the event that the principal amount is paid out early. D) The parties agree that if the loan, consisting of the principal amount and the interest amount, ("the combined loan") have not been repaid within six (6) months of the loan being provided then the interest rate will be fifteen percentum per annum (15% p.a) calculated on daily rests on the combined loan. E) The Security provider is a company operated by the wife as Director and having the beneficial ownership of the Director and beneficial owner of the borrower. F) The Security provider agrees to provide the certificate of title to the property known as Graglee, 54 Village Road, Sutton Forrest New South Wales ("the Sutton Forrest property"), better known as Lot 6 in DP 815530 as security for the loan and acknowledges that the lenders have a genuine interest in securing the money lent herein and agrees that this constitutes a caveatable interest in the Sutton Forrest property and to allow the lenders to register a mortgage over the title to the Sutton Forrest property. G) the parties acknowledge and agree that it is not intended to borrow against the Sutton Forrest property or use the Sutton Forrest property as security for any other loan during the term of this Agreement. … NOW THIS DEED WITNESSETH: Upon the premises set forth above, … 5. Each party agrees, that except as permitted herein, not to use the Sutton Forrest property as security for any loan, nor charge, mortgage or encumber the land nor allow a caveat to be lodged against it and will take action to have any encumbrance or caveat removed as soon as the party whose actions or omissions have given cause for the caveat or encumbrance to be registered or lodged over the Sutton Forrest property is made aware that it is encumbered or caveated, except if permitted herein. … 10. The parties agree that the certificate of title shall remain in the custody of Jeffrey Silk, Barrister and Solicitor, except as shall be required to be lodged with Land and Property Information for the purpose of lodging a mortgage or caveat. 1. After signing the Loan Agreement Mr Hatala and Mr Daniel each proceeded to transfer $150,000 into the Grag Group account at the St George Bank. Prior to the first transfer of $150,000, the balance in the account was only $1873.43. Soon thereafter, some of the proceeds of the loan were transferred by Mr Coady to an account held by Mrs Coady at the ANZ Bank. $9,500 was transferred on 8 May 2013, $8,000 was transferred on 9 May 2013, and $4,500 was transferred on 13 May 2013. Prior to the first of those transfers, the balance in Mrs Coady's account was only $1436.96. It is clear that Mrs Coady dealt with the transferred funds, including by making a payment to herself on 21 May 2013 of about $2,700. 2. On 9 May 2013 Mr Silk sent an email to Mr Coady in which he requested that Mr Coady get Mrs Coady to sign the Loan Agreement and have the document sent back to him. However, there is no evidence that Mrs Coady ever signed the Loan Agreement on behalf of the defendant. 3. Grag Group Pty Ltd has not repaid any of the loan or any interest upon the loan. It went into liquidation in October 2014. Mr Hatala and Mr Daniel have not received any money out of the liquidation. 4. Neither of them ever authorised Mr Silk to release the certificate of title of the Sutton Forest property. 5. Mr Hatala and Mr Daniel lodged a caveat over the Sutton Forest property in September 2015, claiming an interest as equitable mortgagees by virtue of the deposit of the certificate of title with Mr Silk on about 6 May 2013. 6. It is well established that an owner of land may create an equitable mortgage over the land by the deposit of title documents with the intention that the land shall be security for the payment of a debt (see Theodore v Mistford Pty Ltd (2005) 221 CLR 612; [2005] HCA 45 at [22]). A mortgage of that type may be created even if the deposit of the document of title occurs without writing signed by the owner (see Bank of New South Wales v O'Connor (1889) 14 App Cas 273 at 282-3 per Lord Macnaghten – cited in Theodore v Mistford Pty Ltd (supra) at [24]). 7. In the present case the critical issue is whether it has been established that the delivery of the certificate of title by Mr Coady to Mr Silk amounts to a deposit of title documents by the defendant with the intention that the Sutton Forest property shall stand as security for the loan the subject of the Loan Agreement. 8. I do not think there is any doubt that Mr Coady delivered the certificate of title to Mr Silk with the intention of having the Sutton Forest property stand as security for the loan. That is how Mr Silk evidently understood it. However, it is necessary to determine whether Mr Coady had authority from the defendant to so deposit the certificate of title as security for that loan. There is no direct evidence of such authority. If it is to be found, it must be based on inference drawn from the proven facts of the case. 9. Counsel for the plaintiff pointed to various aspects of the evidence which, he submitted, showed that Mrs Coady (the sole director and shareholder of the defendant) is likely to have known about the loan transaction. He also pointed to aspects of the evidence which showed that Mr Coady had previously acted as agent for the defendant, and that Mr Silk had a connection with the defendant as its solicitor. It was submitted that the overall circumstances permitted the Court to infer that the defendant, by Mrs Coady, authorised Mr Coady to deliver the certificate of title for the Sutton Forest property to Mr Silk so the property would stand as security for the loan Mr Coady was arranging. It was submitted that this scenario was much more likely than the competing scenario, namely, that Mr Coady, in dealing with the certificate of title, was acting without his wife's knowledge and approval in a wrongful, indeed fraudulent, manner. 10. There is evidence which suggests that it is likely that Mr Coady was acting with Mrs Coady's knowledge and approval. Mr and Mrs Coady were not only married; they were both involved in the conduct of the family's business affairs. They were the joint proprietors of the business name "Grag Group". They each had control of a family owned company. It is thus likely that they discussed the business affairs of the family. 11. The proceeds of the loan were directed into an account in the name of Grag Group (noting there is no evidence as to whether Mrs Coady was able to operate the account), and an amount of $22,000 was promptly transferred into an account held by Mrs Coady. It is unlikely that those transfers would have been made if Mr Coady was acting in a covert manner. The receipt and subsequent use of those funds by Mrs Coady is a further indication that Mrs Coady was likely aware of the loan transaction and approved of it. 12. The registered office of the defendant has throughout been an address of Mr Silk's. There is evidence that he acted on the purchase by the defendant of the Sutton Forest property, on the instructions of Mr Coady. It appears that he also acted for the defendant in 2016, on the purchase of a property from Grag Group Pty Ltd (in liquidation). It may be inferred that Mr Silk had some familiarity with the business affairs of the Coady family. There is nothing to suggest that he perceived anything untoward in Mr Coady's conduct in relation to the Loan Agreement. 13. The evidence going to the question whether Mr Coady had the defendant's authority to deposit the certificate of title as security for the loan the subject of the Loan Agreement is not extensive. Nevertheless, I consider that when the evidence is viewed in its entirety, it is open to the Court to infer that in depositing the certificate of title with Mr Silk as security for the loan (which he most certainly purported to do), Mr Coady was acting with Mrs Coady's knowledge and approval. That is to say, it is in my view open on the evidence to infer that Mrs Coady knew that her husband was arranging a loan for Grag Group Pty Ltd for which the Sutton Forest property would stand as security, and consented to him depositing the certificate of title with Mr Silk accordingly. 14. I have concluded that those inferences should be drawn. To do so is not to engage in mere conjecture, or speculation. They are inferences drawn from the totality of the evidence which suggests that it is likely that Mr Coady was acting with Mrs Coady's (and hence the defendant's) knowledge and approval. Of course, such inferences may be drawn with more confidence in circumstances where the defendant has failed to appear and has not adduced any evidence from those most able to testify as to what took place between Mr and Mrs Coady; and the Court may infer that the evidence of the absent Mr and Mrs Coady (who would be expected to be called by the defendant) would not have assisted the defendant's case (see Jones v Dunkel (1959) 101 CLR 298 at 308, 312 and 320-1; Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345; [2012] HCA 17 at [232]). Moreover, they are inferences which in my opinion are considerably more probable than any inferences involving Mr Coady engaging in wrongful or dishonest conduct. 15. For the above reasons, I have concluded that the plaintiffs have established that the delivery of the certificate of title by Mr Coady to Mr Silk amounted to a deposit of title deeds by the defendant with the intention that the Sutton Forest property stand as security for the loan Mr Coady was arranging. 16. The plaintiffs seek declaratory relief to the effect that they are equitable mortgagees of the Sutton Forest property, and that such mortgage secures the obligations of Grag Group Pty Ltd under the Loan Agreement. They also seek the appointment of a receiver for the sale of the property, and ancillary orders. The Court will give the relief sought, and also order that the defendant pay the plaintiffs' costs of the proceedings.