Cross & Cross, Re; Re National Australia Bank Ltd [1992] QSC 60

I \ A..OP, \ IN THE SUPREME COURT OF QUEENSLAND O.S. No 204 of 1992 IN THE MATTER of the Real Property Acts 1861-1981 and IN THE MATTER of a caveat lodged by ERROL GEORGE CROSS AND PATRICIA ANNE CROSS and IN THE MATTER of an application by NATIONAL AUSTRALIA BANK LIMITED ACN 004 044 937 REASONS FOR JUDGMENT - COOPER J. Delivered the 10th day of March, 1992. There are two applications before the court. The first is for the removal of caveat K916056R over land described as Lot 7 on Registered Plan No. 142922, County of Marsh, Parish of Tewantin. The applicant for removal of the caveat is the National Australia Bank Limited. The second application is for the cross-vesting of the proceedings to the Federal Court of Australia to be heard with Federal Court proceedings G17 of 1992. The applicants for cross-vesting are the respondents to the application for removal of the caveat. On 5 July, 1983 the respondents executed a written guarantee to support loan arrangements between the applicant bank and Gold Coast Printing Co. Pty. Ltd. a company associated with the respondents. The guarantee was limited to an indebtedness of $77,000.00. Thereafter further guarantees were executed by the respondents as follows:- I -- 1 of 12 -- 2 Date Limit 20 August, 1984 $ 93,000.00 30 September, 1986 $176,000.00 15 July, 1988 $141,000.00 26 July, 1989 $200,667.00 10 January, 1990 $247,407.00 23 July, 1990 $363,026.00 21 August, 1990 $509,614.00 To support the guarantees the respondents gave mortgages on 20 August, 1984, 8 April, 1987 and 23 April, 1990. The last mortgage related to the subject land and a block of land at Tewantin. The company defaulted on its loan to the respondent bank. The bank has exercised its power of sale over certain of the properties and has received approximately $483,000.00. The respondents contend for reasons which will be touched upon below that their liability under such of the guarantees as the respondents acknowledge as valid was limited to a sum of approximately $240,000.00. The respondents ·therefore contend that the applicant bank has received approximately $243,000.00 of the respondents' property to which it was not entitled~ There is a dispute as to whether the respondents or their legal advisers received any notice (in relation to the Tewantin land) or timely notice (in relation to the Cooroy land) of intention to exercise the power of sale. In any event on 24 January, 1992 the respondents instituted proceedings in the Federal Court of Australia seeking that the Bill of Mortgage given on 23 April, 1990 and the guarantee of -- 2 of 12 -- 3 21 August, 1990 be set aside as being void ab initio. The respondents also sought damages for misleading and deceptive conduct. Before me counsel for the respondents submitted that the respondents' cause of action was based upon rescission of the mortgage and guarantee for misrepresentation, such rescission having occurred on 24 January, 1992 and alternatively was for relief under s. 87 of the Trade Practices Act 1974 based on misleading and deceptive conduct on the part of the applicant bank. On 24 January, 1992 the respondents lodged a caveat over Lot 7 on Registered Plan 142922 on the grounds:- (a) Bill of Mortgage K312697B is void; (b) No monies were secured by the Mortgage; (c) Any sale by the applicant bank would be unlawful. On 24 January, 1992 by fax the respondents gave notice of the Federal Court proceedings and the caveat to Raine and Horne, Real Estate agents of Tewantin, who were acting as agents for the applicant bank in relation to a proposed sale by public auction on 25 January, 1992. The· sale by auction proceeded on 25 January, 1992 and a contract was signed by the applicant bank and Martin Place Investments Pty. Ltd. as purchaser. By cl. 54 of the contract the purchaser acknowledges that the sale is a mortgagee's sale and that if the vendor cannot make title as provided in the clause within four months after the contractual completion date the sale shall be cancelled without liability to either party and all monies paid are to be refunded. -- 3 of 12 -- 4 There is nothing in that the purchaser was Federal Court proceedings. the material before me to suggest aware of either the caveat or the Counsel for the applicant bank has conceded that the material before me supports an arguable case support the proceedings in the Federal Court. foreshadowed proceedings to strike out the sufficient to Consequently, Federal Court action for disclosing no cause of action will not be proceeded with. The applicant argues that, even if the respondents succeed in the Federal Court:- (a) Having regard unlikely that to the interest of the purchaser it is the Federal Court would declare the mortgage void ab initio; (b) Damages would in all the circumstances be an adequate remedy; (c) The respondents have no property to give a worthwhile undertaking as to damages and cannot offer security or pay into court any substantial sum· to protect the interests of the bank. Counsel for the applicant bank submits that the balance of convenience wholly favours the applicant bank and that the caveat ought to be removed. Counsel for the respondents submits that the caveat ought to remain to preserve the status quo pending determination of the Federal Court proceedings. He submits that if the respondents succeed, the applicant bank holds approximately $243, 000. 00 of the respondents' property and that due to the -- 4 of 12 -- 5 rescission on 24 January, 1992, the purported exercise of the power of sale was invalid and of no effect and that the applicant ought not to be allowed to advance its position and the position of the purchaser by allowing completion of the sale and registration of the purchaser as the registered proprietor of an estate in fee simple. In support of their right to maintain the caveat the respondents rely upon the majority judgment in Forsyth v. Blundell (1972-1973) 129 C.L.R. 477. Walsh J. in Forsyth at pp. 497-499 said:- "If the purchaser is without notice of the relevant facts at the date of the contract, but the mortgagor takes action to challenge its propriety before completion and proves that on the part of the mortgagee it was improper, the question is whether the purchaser has a right which prevails over the right which the mortgagor would have, as between himself and the mortgagee, to restrain the completion of the contract. That is the question in this case. The mortgagor's interest was, of course, prior in time to any interest acquired by the purchaser. The right of the mortgagor was not merely an equity of redemption. The mortgages did not operate as transfers of his title to the land: see the Ordinance, s. 93(1). His title could be divested by a transfer in pursuance of a contract of sale made by the mortgagee in the exercise of the power of sale. But until that occurred, he retained a legal interest in the land. Even if the contest between these parties should be resolved on the basis that there is a competition between equitable interests, in my opinion the position of the purchaser, so far as the applicable general principles are concerned, would not be any better. In my opinion, the situation was not one in which it was open to the purchaser to claim that, although it had not acquired a legal estate, it could maintain, against a claim by the mortgagor to prevent the completion of the sale, a defence that ~t was a purchaser for value without notice. After a consideration of the decision and of the judgments in Latec Investments Ltd. v. Hotel Terrigal Pty. Ltd. (In Liquidation) (1965) 113 C.L.R. 265, I am of opinion that the circumstances in which the interest of the trustee for the debenture holders in that -- 5 of 12 -- 6 case was held to prevail over the claim of the mortgagor were so different from those upon whichthe contest here depends that the case is not anauthority upon which Shell can rely. I am of opinion, also, that the contest cannot beresolved in favour of Shell by the application of the principles upon which in Abigail v. Lapin [1934] A.C. 491 and in Breskvar v. Wall (1971) 126 C.L.R. 376 the claims of the parties whose interests were first in time were postponed to the claims of the other parties. This is not merely for the reason that in the present case Blundell had more than an equitable interest. If his interest is considered as being for present purposes no more than an equitable interest, his conduct did not contribute in my opinion, to any false assumption or belief upon which Shell acted in entering into thetransaction (see Breskvar v. Wall (1971) 126 C.L.R. 376) nor did it affect Shell in any other way which would make it inequitable to assert against Shell the interest of Blundell. By executing the mortgages and defaulting in payments under them, Blundell did bring about a situation in which A.S.L. was empowered to sell the property. But if the mortgagee did not act bona fide in the exercise of the power of sale, and the purchaser, being unaware of this, assumed that the mortgagee was acting bona fide, that assumption was not one which any conduct of Blundell caused the purchaser to make." Mason J. (as he then was) agreed in this much of Walsh J. 's judgment. In McKean's Caveat [1988] 1 Qd.R. 524 at 525 and Sinclair v. Hope Investments [1982] 2 N.S.W.L.R. 870 at 875 it was held, correctly in my view, that where it is sought to impeach a sale by a mortgagee, on the grounds of the mortgagees improperly exercising a power of sale, there exists a sufficient interest to support a caveat and an injunction. It was submitted by counsel for the applicant bank that Forsyth only applied to the situation of a sale at an under value, which was not alleged here, and that the contract was binding on the respondents (Forsyth at 499; McKean v. Maloney -- 6 of 12 -- 7 (1988) 1 Qd.R. 628 at 636). I do not agree that the impropriety referred to in Forsyth is limited to a sale at an under value. Where as in this case it is alleged that the mortgage was rescinded for misrepresentation prior to the contract being made, the purported exercise of the power of sale would be ineffective if the rescission was effective. In that sense the exercise of the power is improper because it had to the knowledge of the applicant bank, or its agent, been terminated ab initio by rescission. If the rescission was ineffective, nonetheless it is submitted that the exercise is improper because it was obtained by misleading and deceptive conduct and/or was being used for an improper purpose namely to secure a payment beyond the agreed limit of the guarantees. The test as stated by Walsh J. was:- "There may be an improper exercise of a power of sale (that is one which constitutes a breach of the duty owed to the mortgagor) where although there is no actual fraud (in the ordinary sense of the term) or any collusion between the mortgagee and the purchaser, there is improper conduct which goes beyond mere negligence in carrying out the sale. There may be impropriety of various kinds. " (emphasis added) If, as the respondents contend the mortgage and the guarantees were procured by misrepresentation or false and misleading conduct, then there is an argument that such conduct taints the purported exercise of any power of sale, sufficiently to entitle the respondents to restrain completion of the sale to protect their legal interest in the land. This is s~ irrespective of whether or not the purported rescission on 24 January, 1992 was effective. -- 7 of 12 -- 8 As to the balance of the applicant bank's submission, the proposition stated by Walsh J. in Forsyth and agreed in by McPherson J. in McLean v. Maloney was that a contract made by a mortgagee was binding, if the contract was properly made. This proposition was expressly reserved by Mason J. in Forsyth. In my view it is unnecessary to determine the question on this application because the respondents' case is that the contract of sale was not properly made. The respondents have made out an arguable case that they are entitled to protect their interest pending trial and that if successful may be entitled to an order restraining completion (see the forms of order in Goldcel Nominees Pty. Ltd. v. Network Finance Ltd. [1983] 2 V.R. 257 at 279). It was further submitted on behalf of the applicant bank that the Federal Court in exercising the discretion under s. 87 of the Trade Practices Act would look to the equitable principles concerning rescission as giving "safe, if not necessarily exclusive, guidance" (Munchies Management Pty. Ltd. v. Belperio (1989) A.T.P.R. 40-926 at ·50,038 per F.C.). The stricture of the binding nature of the equitable principles, as contended for on the basis of this observation in Munchies Management, was not agreed in by the Full Court of the Federal Court in Henjo Investments Pty. Ltd. v. Collins Marickville Pty. Ltd. (1988) A.T.P.R. 40-850 F.C. Lockhart J. at 49,158 was of the view that "under s. 87, the court is not resb;icted by limitations under the general law of a party's right to rescind for breach of contract or misrepresentation" (see also Foster J. at 49,163; Burchett J. left the issue open -- 8 of 12 -- 9 at 49,161). Whether or not the power under s. 87 is limited as contended for it is clear that the court will seek guidance in the equitable principles. In consequence the applicant bank submits that pu~~hA~~~ without because the purchaser is a third party notice for valuable consideration equity would not disturb the rights which it acquired under the contract of sale and would limit any relief to the respondents to an award of damages. I do not accept that such a consequence follows. If such a proposition were correct the reasoning of Walsh J. in Forsyth would not have stood against an innocent purchaser for value, which it expressly does. The proposition stated by counsel for the applicant bank is in my view too broad. Although the rights of innocent third parties are always of relevance to the proper exercise of discretion, they are not necessarily in themselves determinative of the relief available to a successful claimant in circumstances such as the respondents. It follows in my view that the alternative claim for relief under s. 87 of the Trade Practices Act for rescission ab initio is not necessarily doomed to failure as was submitted. I was pressed with the submission that damages were an adequate remedy in any event and further that no worthwhile undertaking as to damages could be given nor security made available. There is no suggestion on the material that the land at Cooroy will fall in value. The applicant bank holds secu~ity over a further property of the respondents at Southport and on the respondents' material this has a value of around $450, 000.00. The Southport property at this figure, -- 9 of 12 -- 10 together with the Cooroy property at the contract price more than covers the alleged indebtedness to the applicant bank, if the respondents fail in their action in the Federal Court. The applicant bank contends that it will be prejudiced in the realisation of its security over the Southport land because the respondents on 6 March 1992 entered an appearance to Writ of Summons No. 143 of 1992 filed by the applicant bank on 27 February 1992 to recover possession of the land. The respondents, through their counsel, have advised the Court that they do not challenge the validity of the mortgage as a valid and effective mortgage as such. Rather, the respondents contend that there is no present indebtedness in favour of the applicant bank entitling the applicant bank to exercise any rights under the mortgage. Their position is that the applicant bank has been paid to the limit of the sum agreed by the respondents to be guaranteed in relation to the indebtedness of Gold Coast Printing Co. Pty. Ltd. to the applicant bank. If the respondents succeed in establishing the limit contended for in the Federal Cour·t proceedings the bank will have no rights exercisable against the Southport land. If the respondents fail in the Federal Court proceedings the applicant bank will have its full rights against the land under the security. Once the rights of the parties are determined the applicant bank will be in a position to exercise such rights as it is legally entitled to do. All that has happened is that the respondents are resisting the further purported exercise of security rights by the applicant bank until the Federal Court proceedings are -- 10 of 12 -- 11 determined. The conduct of the respondents in entering an appearance to the Supreme Court proceedings does not affect the underlying value of the security and the material most recently filed by the applicant bank does not suggest that the value of the Southport land is at risk in the foreseeable future. The respondents cannot give a worthwhile undertaking or offer security because all they have is. secured to the applicant bank. If the respondents fail there is nothing to suggest that the applicant bank will be prejudiced in the ultimate realisation of its securities, even if the present contract of sale goes off because the applicant bank cannot make title within the contractual period. In my view, fairness to all parties is best served by leaving all interests in the land where they presently stand and not to advance the interests of any to the point of possibly extinguishing the respondents' present legal estate. Whether or not the respondents are bona fide as to their expressed view as to the use of the land at Cooroy, no compelling reason has been shown to me which would require that they should at this time have that interest substituted for a possible money sum in circumstances where there may be no security interest in the applicant bank at all and where the bank may without justification be in possession of substantial funds of the respondents as a result of the sale of other properties. In the circumstances set out above I do not intend to impose as a condition of maintaining the caveat that any sum be paid in or secured (see also Kennard v. A. G. C. Advances Ltd. ( 1986) 1 2 -- 11 of 12 -- 12 F.C.R. 6 at 9). Nor am I satisfied on the evidence that there is such a risk of prejudice to the applicant bank, pending a timely determination of the Federal Court proceedings, that the lack of a substantial undertaking as to damages would justify my refusing to maintain the caveat. Having determined the substantive application, the application to cross-vest the proceedings to the Federal Court becomes otiose. The application to remove the caveat is dismissed. I order the applicant bank to pay the respondents' costs of and incidental to the application to be taxed. The application to cross-vest the application to the Federal Court is dismissed. The issues raised on the cross-vesting application were subsumed in the arguments on the caveat removal and have not added to the proceedings before me in any significant way. Therefore, I make no order as to costs on the cross-vesting application. -- 12 of 12 --