The Supreme Court of Victoria recently had to determine
whether a Barnes v Addy claim fell
within the exceptions to indefeasibility of title under the Transfer of Land Act 1958.
In Mathieson Nominees
v Aero Developments & Ors [2016] VSC 131, Vickery J dealt with this
interesting issue.
Background
The Plaintiff (“Mathieson”) claimed that it was entitled to
an equitable charge over subdivisional land at Point Cook in Victoria (“the
Property”) and that, as a result, it had an interest in the land capable of
supporting a caveat.
The Property was vacant land, although a town planning
permit had been issued which permitted a 22 lot subdivision of the Property,
including 21 townhouse allotments and a larger allotment which was proposed to
include 125 apartments.
Sprint Homes Pty Ltd (“Sprint Homes”) planned to purchase
the Property from the Victorian Urban Development Authority (“VicUrban”). The
Property was undeveloped at that time. It needed to borrow funds to proceed
with the purchase and develop the Property.
Mathieson agreed to advance the necessary funds for the
deposit, as well as an additional amount to be put towards the working capital
of Sprint Homes. The loan (in the sum of $250,000) was effected by a deed made
on or about 18 April 2008.
Around 18 April 2008, Sprint Homes executed a fixed and
floating charge in favour of Mathieson over all of its present and future
property (the “Charged Property”) as security for the repayment of the Advance.
On or about 21 April 2008, Mathieson advanced to Sprint
Homes $250,000.
By the contract of sale dated 16 June 2008 (the “Contract”),
Sprint Homes purchased the Property from VicUrban for $4.5 million plus GST.
The Contract provided for payment of a deposit of $225,000, with settlement of
the balance falling due for payment within 9 months.
The deposit under the Contract of $225,000 was paid to the
VicUrban on or about 22 July 2008 out of the proceeds of the loan.
Sprint Homes failed to pay the residue of the purchase price
by 30 March 2009 and fell into default under the Contract.
On or about 15 June 2009, VicUrban served a notice of
rescission of the Contract.
Negotiations then ensued with the result that on or about 29
June 2009 VicUrban agreed to further extend the settlement date under the
Contract to 31 July 2009 and withdraw the notice of rescission dated 15 June
2009. A clause in the Contract as amended also entitled the purchaser to a
discount of $500,000 on the purchase price if the Contract was settled on or
before 31 July 2009.
On 3 July 2009, the First Defendant, Aero Developments Pty
Ltd (“Aero Developments”), was registered as a company. Mr Joe Katz (“Mr Katz”)
was appointed as solicitor for Aero Developments.
By a nomination in writing dated 3 July 2009, Sprint Homes
nominated Aero Developments as substitute purchaser under the Contract. The
nomination was executed by Mr Evans as the director of both Sprint Homes and
Aero Developments and was effected without notice to Mathieson.
On or about 17 July 2009, a Mr Tenuta, Aero Developments and
Mr Evans executed a written agreement. The principal objective of the 17 July
Agreement was to secure funding for Aero Developments, to facilitate completion
of the Contract.
On 21 July 2009, VicUrban agreed to amend the Contract by
adding Aero Developments as nominee.
However, Aero Developments failed to pay the residue of the
purchase price by the varied settlement date of 31 July 2009.
On 3 September 2009, VicUrban issued a second notice of
rescission.
Settlement of the sale of the Property to Aero Developments
finally took place on 17 September 2009. To facilitate the purchase, a net
amount of $3,600,000 was loaned to Aero Developments by the Bank of Queensland.
A further sum of $818,448 was provided at settlement by Mr Tenuta and Mr
Plevritis.
Aero Developments became registered as proprietor of the
Property on 16 October 2009, with a first mortgage in favour of the Bank of
Queensland being registered on the same day.
On 11 January 2010, administrators were appointed to Sprint
Homes.
On 22 January 2010, Mathieson lodged a caveat over the title
to the Property claiming an interest as chargee.
On 22 January 2010, Mathieson appointed a receiver and
manager of Sprint Homes pursuant to the Instrument of Charge.
On 10 February 2010, Sprint Homes was wound up pursuant to a
resolution of creditors.
On 15 February 2010, Aero lodged an application under s 89A
of the Transfer of Land Act 1958 (Vic) in respect of the Caveat, supported by a
certificate signed by Mr Katz.
By letter dated 15 February 2010 the Registrar of Titles
advised Mathieson that the Caveat would lapse unless proceedings were issued.
By Writ dated 24 March 2010 Mathieson commenced these
proceedings against Aero Developments, Cash Flow King and Mr Evans.
Mathieson sought (among other things):
A declaration that the registration of Aero Developments as
proprietor of the Property was affected by fraud within the meaning of ss 42
and 44 of the Transfer of Land Act
1958 (Vic); and
A declaration that it was entitled to an equitable charge
over the Property.
By Counterclaim dated 13 July 2010, Aero Developments sought:
A declaration or order to the effect that the caveat lodged
by Mathieson is taken to have lapsed and is no longer of any force or effect
pursuant to s 89A(5)(b) of the Transfer of Land Act 1958 (Vic); and
An order or direction requiring the Registrar of Titles to
remove the caveat from and against the Property.
Neither the Original Loan, nor any part of it, was repaid to
Mathieson.
A preliminary question arose as to whether the Deed gave
rise to an equitable charge or an equitable mortgage.
After analysing various textbook definitions and cases, the
Honourable Justice Vickery concluded (at paragraph 80):
… a charge does not assign or
convey to the chargee any of the charged property. Rather, it secures the debt
against the charged property. It provides this security by empowering the
chargee, in the event of default or other defined event under the instrument of
charge, to seek orders from a court for a judicial sale and the appointment of
a receiver, or whatever other remedies are permitted by the charge.
Vickery J also noted (at paragraphs 81 to 82) that (emphasis
added):
Whether the instrument in
question is an equitable charge or an equitable mortgage, both have a
characteristic in common, namely that a
proprietary right is created in the charged property, as distinguished from a
bundle of contractual rights.
Further, if the charged property the subject of the security is real
property, the transaction will give rise to an interest in land sufficient to
support a caveat under the Transfer of
Land Act 1958 (Vic).
After that analysis, and looking at the terms of the Deed,
Vickery J concluded that the Instrument of Charge which gave rise to the
security claimed by Mathieson, when read as a whole, gave rise to an equitable
mortgage and not to an equitable charge.
Mathieson submitted that Sprint Homes became, upon execution
of the Contract, the equitable owner of the Property, by reason that the
Contract was specifically enforceable by Sprint Homes. At that point, Mathieson
had a security over Sprint Homes’ equitable interest in the Property pursuant
to the Instrument of Charge. The interest obtained by Sprint Homes pursuant to
the Contract, it was submitted, passed to Aero Developments when it became the
substituted purchaser under the nomination.
At paragraph 106, Vickery J concluded that Aero Developments
gained no enforceable right to enforce the Contract against the vendor,
VicUrban. Nor did it gain a purchaser’s lien, or any right to compel specific
performance of the Contract in its favour.
Next Mathieson argued that the nomination transaction gave
rise to an interest in the Property under the Instrument of Charge in favour of
Mathieson. It was submitted that this interest survived the nomination clause
and the subsequent registration of Aero Developments as the registered
proprietor. As a consequence, it claimed that the Instrument of Charge is
presently enforceable by Mathieson and gives it a caveatable interest in the
Property.
Vickery J rejected that argument. He concluded that
(emphasis added):
Even if Aero Developments became
a substituted purchaser of the Property through the nomination transaction
pursuant to a novated contract, upon
registration it took a transfer of the Property free from any other interests
by operation of the indefeasibility provisions of the Transfer of Land Act 1958
(Vic).
In the circumstances of this case, Aero Developments
acquired an indefeasible title upon becoming the registered proprietor of the
Property.
At paragraph 123, the Honourable Justice Vickery noted:
As is plain from these
authorities, except in cases of fraud or other instances provided for in s 42,
‘there is immediate indefeasibility of title by the registration of the
proprietor named in the register’ with the result that a registered interest
prevails over an encumbrance not recorded on the Register and prevails
unaffected by notice of the unregistered interest (Breskvar v Wall (1971) 126 CLR 376, 385 (Barwick CJ)).
This left Mathieson with only one argument: The in personam
exception to indefeasibility. It was said by the Privy Council in Frazer v Walker that indefeasibility ‘in
no way denies the right of a plaintiff to bring ... a claim in personam,
founded in law or equity, for such relief as a court acting in personam may
grant’ [1967] 1 AC 569, 585. However, such claims must be brought under
established causes of action, whether legal or equitable (Grgic v Australian & New Zealand Banking Group Ltd (1994) 33
NSWLR 202, 222–3).
The in personam exception, as it is called, operates so that
the registered proprietor is not protected from the consequences of his own
actions where those actions give rise to a personal equity in another. In Bahr v Nicolay (No 2) Wilson and Toohey
JJ observed [1988] HCA 16; (1988) 164 CLR 604, 638 (emphasis added):
The point being made by the Privy
Council [in Frazer v Walker [1967] 1
AC 569, 585] is that the indefeasibility
provisions of the Act may not be circumvented. But, equally, they do not protect a registered proprietor from
the consequences of his own actions where those actions give rise to a personal
equity in another. Such an equity may arise from conduct of the registered
proprietor after registration: Barry v
Heider [1914] HCA 79; (1914) 19 CLR 197. And we agree with Mahoney JA in Logue v Shoalhaven Shire Council (1979)
1 NSWLR 537, 563 that it may arise from conduct of the registered proprietor
before registration.
Vickery J concluded (at paragraph 131) that there was no
conduct on the part of Aero Developments, either before registration of its
interest or after that time, which gave rise to any personal equity in
Mathieson such that the interest of Aero Developments as the registered
proprietor ought to be rendered subject to the Instrument of Charge.
Aero Developments only acquired its rights on settlement of
the Contract when it took the transfer from VicUrban in its favour on 17
September 2009. Vickery J concluded (at paragraph 133) that when it did so, it
took title without any knowledge of any intention on the part of Mr Evans or
Sprint Homes to defeat the claims of Mathieson, if ever that was their
intention, which in any event was not accepted on the evidence.
At the time of settlement of Property in favour of Aero
Developments on 17 September 2009, the Honourable Justice Vickery accepted that
the company and its directors had no knowledge of any prior dealings between
Sprint Homes and Mathieson (including the Loan Agreement and the Instrument of
Charge). There was no dishonesty on their part, or through them, on the part of
Aero Developments. Accordingly, he found that Aero Developments took the
transfer of the Property without notice, whether actual or constructive notice,
of the equitable mortgage comprised in the Instrument of Charge.
Vickery J observed that when Aero Developments took its
transfer of the Property, it did so without any caveat having been lodged
against the title to the Property by Mathieson. Such a caveat, had it been
lodged, would have served to give notice to Aero Developments of the interest
in land under the equitable mortgage comprised in the Instrument of Charge, and
it would have taken the Property subject to that interest.
It was further submitted on behalf of the Plaintiff that
Mathieson had a claim under one or other of the equitable causes of action in Barnes v Addy. This was said to be an
enforceable personal equity of the type contemplated in Bahr v Nicolay (No 2).
In Barnes v Addy
Lord Selborne said: (1874) LR 9 Ch App 244, at 251–2 (words in brackets added):
Strangers are not to be made
constructive trustees merely because they act as the agents of trustees in
transactions within their legal powers, transactions, perhaps of which a Court
of Equity may disapprove, unless those agents receive and become chargeable
with some part of the trust property, [knowing receipt] or unless they assist
with knowledge in a dishonest and fraudulent design on the part of the trustees
[knowing assistance].
A claim for knowing receipt arises where a person knowingly
receives property in breach of trust. A claim for knowing assistance arises
where a person has knowingly assisted a trustee to carry out a ‘dishonest and
fraudulent design’. Barnes v Addy
liability has been applied beyond breaches of express trusts to breaches of
fiduciary duty on the part of directors and other persons standing in a
fiduciary relationship Farah
Constructions v Say-Dee [2007] HCA 22; (2007) 230 CLR 89, 140 at [113]; Consul Development v DPC Estates Pty Ltd
[1975] HCA 8; (1975) 132 CLR 373.
Knowledge is an essential requirement to be assessed by
courts in governing the boundaries of liability under both limbs.
Vickery J conducted an analysis of the High Court’s
unanimous joint judgment (of Gleeson CJ, Gummow, Callinan, Heydon and Crennan
JJ) in Farah Constructions Pty Ltd v
Say-Dee Pty Ltd (‘Farah Constructions’), [2007] HCA 22; (2007)
230 CLR 89, and concluded (at paragraph 165) that the tests as to knowledge
under limbs of Barnes v Addy appear
to be the same.
The claim under Barnes
v Addy in this case was put on the basis of an alleged breach of s 180 of
the Corporations Act 2001 (Cth),
being an alleged breach of fiduciary duty owed by Mr Evans to his company
Sprint Homes arising from his position as a director of the company.
The conduct said to amount to a breach of Mr Evans’
fiduciary duty was essentially that the conduct relied upon amounted to a
contention that Mr Evans orchestrated a transaction pursuant to which Sprint
Homes parted with the Property in favour of Aero Developments for no valuable
consideration, effectively providing them with a windfall.
Vickery J was not satisfied that any such claim as alleged
under Barnes v Addy could possibly be
established on the facts of this case. He concluded that there was no breach of
any relevant fiduciary duty on the part of Mr Evans to his company Sprint
Homes.
The transaction in question was designed to rescue Sprint
Homes from a serious commercial predicament.
The surrounding circumstances all pointed in one direction —
Sprint Homes was unable to secure loan funds to enable it to settle the
Contract with VicUrban. It was facing not one, but a second successive
rescission notice, and was likely to not only lose the purchase, but also face
the loss of its deposit and be exposed to a claim for damages and additional
costs of a re-sale in the event that the Property was put up for a further sale
by VicUrban and a lower purchase price achieved.
In the circumstances, Sprint Homes was compelled to
extricate itself from the Contract in order to avoid loss of its deposit and
exposure to a damages claim if the notices of rescission had been acted upon by
the vendor, VicUrban.
The outcomes of the transaction comprised in the Share Sale
Agreement dated 15 September 2009, pursuant to which the purchasers of the
shares in Aero Developments, Mr Tenuta and Mr Plevritis purchased Mr Evans
shares in the company for $1.00, included an obligation on the part of the
purchasers to refund to Sprint Homes the deposit of $225,000 which it had paid
to VicUrban under the Contract, together with interest.
Sprint Homes secured significant commercial advantages for
itself by the Share Sale Agreement.
Vickery J was satisfied that by the means described, Mr
Evans acted responsibly as a director of Sprint Homes by extricating it from a
disastrous Contract which it could not settle, securing the return of its
deposit together with interest, and putting in place a structure which
facilitated settlement of the Contract with VicUrban on 17 September 2009,
thereby avoiding any exposure of Sprint Homes to damages. In these
circumstances a finding cannot be made that Mr Evans breached any fiduciary
duty he owed to Sprint Homes as its director.
It follows that, at the time of receiving the Property, Aero
Developments, its directors and relevant agents, including its solicitor Mr
Katz, could not have known of any relevant trust arising from any breach of
fiduciary duty owed by Mr Evans to Sprint Homes — simply because there was no
such breach. Similarly it could not have known of any misapplication of the
trust property as this never occurred.
Vickery J concluded on the facts of the case that Aero
Developments did not knowingly receive the Property in breach of any trust. The
Plaintiff’s claim under the first limb of Barnes
v Addy must fail on this basis.
Further, even if the case of the Plaintiff was advanced on
the basis of the second limb of Barnes v
Addy, being knowing assistance, the same considerations apply, with the
result that it has not been established that Aero Developments knowingly
assisted in any breach of trust.
Of most interest to readers is the conclusion by the
Honourable Justice Vickery (at paragraph 198) that (emphasis added):
… it has been authoritatively
determined that a claim under Barnes v Addy is not a personal equity
which defeats the indefeasibility provisions of the Transfer of Land Act 1958 (Vic) (Macquarie Bank v Sixty-Fourth Throne [1998] 3 VR 133, 156-157; Farah Constructions [2007] HCA 22;
(2007) 230 CLR 89, 169–71).
The argument that a claim based on Barnes v Addy would be inconsistent with the principle of
indefeasibility and would undermine the certainty of the Torrens register and
hence the system of title by registration was accepted by the majority of the
Court of Appeal of Victoria in Macquarie
Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133 where Tadgell JA
held (and Winneke P agreed at 156–7):
[T]o recognise a claim in personam against the
holder of a mortgage registered under the Transfer
of Land Act, dubbing the holder a constructive trustee by application of a
doctrine akin to “knowing receipt” when registration of the mortgage was
honestly achieved, would introduce by the back door a means of undermining the
doctrine of indefeasibility which the Torrens system establishes. ... In truth,
I think it is not possible, consistently with the received principle of
indefeasibility as it has been understood since Frazer v Walker and Breskvar
v Wall, to treat the holder of a registered mortgage over property that is
subject to a trust, registration having been honestly obtained, as having
received trust property. The argument that the appellant is liable as a
constructive trustee because it had “knowingly received” trust property should
in my opinion fail.
At paragraph 206, Vickery J notes:
Although this outcome has been
the subject of academic criticism, Farah
Constructions on the issue of indefeasibility has settled the law in
Australia.
As a result, Mathieson’s alleged in personam claim against
the registered proprietor of the Property (Aero Developments) failed.
The issues to take away from this decision are:
- Lodge a caveat early – as soon
as your entitlement to make a claim arises. In this case, if Mathieson had
done so, Aero would have been on notice of its interest and Aero would not
have been able to settle the purchase of the Property without Mathieson’s
agreement (or a payment being made to Mathieson); and
- Any claim under Barnes v Addy based on alleged
knowledge of a breach of trust will not override the principles of
indefeasibility established under the Torrens system of title by registration.
WG Stark
Hayden Starke Chambers
No comments:
Post a Comment