Commercial Law Update - Barnes v Addy claims and indefeasibility of title

The case also illustrates when a security interest described as an “Instrument of Charge” may, despite the words used, give rise to an equitable mortgage, rather than a charge. The case is Mathieson Nominees Pty Ltd v Aero Developments Pty Ltd [2016] VSC 131.

The case involved a claim by the plaintiff (Mathieson Nominees) that it was entitled to an equitable charge over vacant subdivisional land at Point Cook in Victoria (the Property), and that it had an interest in the land capable of supporting a caveat.

Broadly, the facts of the case were these:

The plaintiff Mathieson Nominees had loaned funds of $250,000 to a company called Sprint Homes Pty Ltd to enable it to pay the deposit to purchase the Property from VicUrban. Sprint Homes was unable to raise the funds to pay the balance of $4.5m plus GST and settle the purchase. Its director registered a new company Aero Developments Pty Ltd (the defendant) and Sprint Homes nominated this company to take the transfer of land as nominee under the contract of sale (without notifying Mathieson Nominees).  The defendant Aero Developments subsequently completed the purchase, after a change of ownership and directorship, and became registered on title.

Mathieson Nominee’s loan to Sprint Homes for the deposit had been supported by several securities. One of these was a fixed and floating charge granted by the borrower Sprint Homes under an executed Instrument of Charge. The terms of this instrument included that the Charged Property was all the present and future property of Sprint Homes, wherever situated, that it was a fixed charge on all present and future estates and interests in land, and that Sprint Homes must not, without the consent of Mathieson Nominees, dispose of or otherwise deal with the Charged Property. The Instrument of Charge was registered with ASIC.

Within 6 months – Sprint Homes went into voluntary administration, Mathieson Nominees lodged a caveat over the Property claiming an interest as chargee and appointed a receiver and manager over Sprint Homes, Sprint Homes went into liquidation, and Aero Developments lodged an application with the Registrar of Titles to have Mathieson Nominees’ caveat removed. Mathieson Nominees commenced these proceedings.

In this proceeding, Mathieson Nominees sought various declarations and orders, including –

• that Mathieson Nominees is entitled to an equitable charge over the Property, and
• (in summary) that it have possession of and be at liberty to sell the Property.

(It abandoned an allegation 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 TLA. It also at trial did not pursue its claims against two other defendants, being the director of Sprint Homes and a related company.)

In the judgment, the Court dealt with a number of issues worth noting.

1. Whether the Instrument of Charge gave rise to an equitable mortgage rather than an equitable charge? 

Even though the relevant instrument was termed an “Instrument of Charge”, there was a question in this case as to whether it instead gave rise to an equitable mortgage. Vickery J observed that this is a matter of the proper construction of the relevant instrument.(See [65]-[89])

His Honour discussed the four kinds of consensual security over property – pledge, contractual lien, equitable charge and equitable mortgage, and noted that an equitable lien may also arise by operation of law. Vickery J canvassed the authorities, particularly as to equitable charges and equitable mortgages.

In relation to equitable charges, his Honour in reviewing the authorities cited inter alia cited the description of the essence of an equitable charge given by Gillard J in AVCO Financial Services v White [1977] VicRp 62; [1977] VR 561, 563 –

“An equitable charge for a debt is a security whereby only a right to payment of the debt out of the property is conferred by the owner of the property to the holder of the security. The remedy of the holder of the security on default in payment of the debt was to apply to a court of equity to have the property sold and the proceeds paid into court.”

Vickery J also noted that an equitable charge is to be distinguished from a purely contractual arrangement giving rise to no proprietary right.

As to the distinction between a charge and equitable mortgage, his Honour quoted from Sykes and Walker where the authors observe:

“The most important result, so far as the difference in substance is concerned, is that the equitable mortgagee has the potentiality of full beneficial ownership through the process of foreclosure; the equitable charge as such can never attain to the position of full beneficial owner.”

His Honour noted the authors of Fisher and Lightwood’s Law or Mortgage state that:

“The principal remedies of the charge are [judicial] sale and the appointment of a receiver.”

His Honour then considered the facts in this case, and held that the Instrument of Charge which gave rise to the security claimed by Mathieson Nominees, when read as a whole, gave rise to an equitable mortgage and not an equitable charge. It gave immediate rights to Mathieson Nominees in the event of default, including the right to take possession of the property. Although Mathieson Nominees could seek a court order in aid of the enforcement process, this was not a pre-condition to enforcement. Its remedies were not confined to a judicial sale and the appointment of a receiver. (See [84]-[87]) However, little turned on this conclusion, in the end. (See [89])

2. Whether the Instrument of Charge became enforceable against the nominated purchaser Aero Developments

Mathieson Nominees argued that the Property was subject to a charge in favour of Mathieson Nominees when it was purchased by Sprint Homes, and the charge remained in place as an encumbrance on the Property, despite the nomination of a substitute purchaser.

In short, after a consideration by Vickery J of the contractual effect of the nomination, this contention was defeated by his Honour’s conclusion that Aero Developments acquired an indefeasible title upon becoming the registered proprietor of the Property pursuant to ss 40-43 of the TLA.

In the oft-cited passage from the judgment of Barwick CJ in Breskvar v Wall (1971) 126 CLR 376, 385-6, the effect of the Torrens scheme of registration of land was described thus –

“The Torrens system of registered title of which the Act is a form is not a system of registration of title but a system of title by registration. That which the certificate of title describes is not the title which the registered proprietary formerly had, or which but for registration would have had. the title it certifies is not historical or derivative. It is the title which registration itself has vested in the proprietor.”

His Honour observed that the scheme of the Torrens legislation is such that, with very few exceptions, a purchaser who becomes the registered proprietor of an interest in land title takes free from all unregistered interests, whether he has notice of them or not (see [128]).

Vickery J noted that the statutory fraud exception arises where there is dishonest conduct on the part of the registered proprietor whose title is challenged. The emphasis in the authorities is on actual fraud on the part of the registered proprietor, although his Honour commented it has been suggested that it may be based on actual knowledge that a fraud was committed or wilful blindness to that possibility (see [124]).

Here statutory fraud was not pressed by the plaintiff, but the in personam exception to indefeasibility was sought to be relied upon. As the Privy Council said in Frazer v Walker, 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“. However such claims must be brought under established causes of action, whether legal or equitable. Not all established causes of action, however, will found an exception on indefeasibility of title (see issue 4 below).

Thus the answer to this question of whether the Instrument of Charge became enforceable against the nominated purchaser Aero Developments, depended upon the answer to the next question.

3. Whether Mathieson Nominees had an in personam right capable of defeating the title of Aero Developments

(a) Was there any conduct on the part of Aero Developments giving rise to a personal equity which could defeat indefeasibility of title?

Vickery J held that there was no conduct on the part of Aero Developments, either before registration of its interest or after it, which gave rise to any personal equity in Mathieson Nominees such that the interest of Aero Developments as registered proprietary ought to be rendered subject to the Instrument of Charge (see [131]).

Aero Developments had changed hands and had new directors shortly before taking transfer of the land from VicUrban, and the evidence was that when it did so, it took title without any knowledge of any intention on the part of Sprint Homes or its director Mr Evans to defeat the claims of Mathieson Nominees, if ever that was their intention (see [133]). His Honour held that Aero Developments took the transfer of the Property without notice, actual or constructive, of the equitable mortgage comprised in the Instrument of Charge of Mathieson Nominees ([135] and [153]-[154]). In doing so, he noted that when Aero Developments took its transfer there was no caveat lodged against the title by Mathieson Nominees ([136]).

(b) Did Mathieson Nominees have a Barnes v Addy claim for knowing receipt and/or knowing assistance against Aero Developments

Vickery J considered the pleadings, arguments, authorities, and evidence, and held that they did not ([155]-[197]).

I pause here to note:

For those unfamiliar with what a Barnes v Addy claim is – it is a claim brought by a plaintiff not against the wrongdoer who has acted in breach of trust or of fiduciary duty, but against a third party. Third party liability is more commonly pursued by claimants where misdirected funds or property has ended up in the hands of a third party, and/or where the wrongdoer is insolvent or bankrupt. However, certain elements must be established before such a claim can succeed.

In 1874 Lord Selborne made his now famous remark in Barnes v Addy as to the liability of third parties for the breaches of duty of others in two types of cases. What he actually said was this –

“[S]trangers are not to be made constructive trustees…unless [they] receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.”

Stemming from this brief, deceptively simple remark, much case law and academic writings have ensued. There have been shifting doctrinal analyses about the two “limbs” ofBarnes v Addy (being “knowing receipt” or “knowing assistance”), debate as to the level of knowledge required under each limb (largely now settled in Australia) and debate as to the level of “dishonest and fraudulent” design required to be shown on the part of the party who acted in breach of trust or fiduciary duty as an element of the “knowing assistance” limb (there is something of a WASCA (Bell) v NSWCA (Hasler) battle being waged on this issue; I am inclined to see Hasler as the better view (link)).

Returning to the present case, here Mathieson Nominees had argued that the director of Sprint Homes Mr Evans in breach of his fiduciary duty to Sprint Homes had procured for the benefit of Aero a windfall to the detriment of Sprint Homes and its creditors ([158]). However his Honour held that on the evidence there was no breach of any relevant fiduciary duty on the part of Mr Evans to his company Sprint Homes ([171]-[194]). There were sound commercial reasons for the nomination of Aero Developments to complete the contract, and no breach of duty arose.

There having been no breach of trust, there was none of which Aero Developments, its directors and relevant agents could have known. There was no Barnes v Addy claim available to Mathieson Nominees, under either limb ([196]-[197]).

4. A Barnes v Addy claim does not defeat indefeasibility of title under the TLA

Importantly, Vickery J went further and confirmed that it has been authoritatively determined that a claim under Barnes v Addy is not a personal equity which defeats the indefeasibility provisions of the TLA, observing that “the dust has settled” on the issue ([198]-[206]).

In Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133 Tadgell JA, with whom Winneke P agreed, held at 156-7 that a claim under Barnes v Addy was not a personal equity which defeated indefeasibility of title, saying:

“[T]o recognise a claim in personam against the holder of a mortgage registered under the TLA, 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 andBreskvar 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.”

While there had been some debate about this in Queensland ([199] and [203]) and in Western Australia where four judges of the Full Court of the WA Supreme Court followed the reasoning of Tadgell JA and Winneke P in Macquarie Bank v Sixty-Fourth Throne ([204]), in Farah Constructions v Say-Dee [2007] HCA 22; 230 CLR 89, 140 [193]-[196] the High Court resolved the question by adopting the observations of Tadgell JA in Macquarie Bank, and applying it –

“In Macquarie Bank v Sixty-Fourth Throne Pty Ltd Tadgell JA (Winneke P concurring, Ashley AJA dissenting) held that a claim under Barnes v Addy was not a personal equity which defeated the equivalent of s 42(1) in Victoria, namely the Transfer of Land Act 1958, s 42(1)… (at [193])

“That reasoning…applies here…”. (at [194])

“Although the Court of Appeal [ie the NSW Court of Appeal in Farah Constructions v Say-Dee] referred to Macquarie Bank v Sixty-Fourth Throne Pty Ltd on another point, it did not refer to that case or LHK Nominees Pty Ltd v Kenworthy in relation to indefeasibility. It ought to have followed those cases.” (at [196])

Vickery J concluded that although this outcome has been the subject of academic criticism, Farah Constructions v Say-Dee on the issue of indefeasibility has settled the law in Australia. [206]

In the end, his Honour held, Mathieson Nominees’ claims under Barnes v Addy must fail. The caveat was ordered to be removed from the title to the Property.

Take-aways

This decision is a useful reminder of the importance for lenders of lodging caveats on the title of property when a caveatable interest in property is created in their favour. In this case, the Instrument of Charge was executed by Sprint Homes on 18 April 2008, registered with ASIC on 2 June 2008 , but a caveat on the title of the Property (for the payment of the deposit on which the funds had been loaned) was not lodged until 22 January 2010 – 11 days after administrators were appointed to Sprint Homes and 3 months after Aero Developments had been registered on title.

It also contains a useful consideration of when an instrument of security may give rise to an equitable charge or an equitable mortgage, which can run contrary to the name given to the security by the parties, as it did here, and will turn more upon the proper construction of the instrument and the rights that accrue to the secured party under the agreement.

Finally, this judgment confirms that it is settled law in Australia, since the High Court’s decision in Farah Constructions v Say-Dee in 2007, that a claim under Barnes v Addy is not a personal equity which can defeat indefeasibility of title in Torrens land (see [205]-[206]).

There may remain those who will still seek a way to argue around this conclusion, but the High Court’s decision in Farah v Say-Dee – which dealt with both limbs of Barnes v Addy – is likely to present a sizeable road-block to such an attempt.

For more about Barnes v Addy claims (both limbs), the level of knowledge required to establish them (of the Baden categories of knowledge) and the dishonest and fraudulent design on the part of the party in breach of trust or fiduciary duty required to be established for the “second limb”, knowing assistance, see my 2012 article reviewing the Full Court of the Federal Court’s decision in Grimaldi v Chamelon Mining NL (No 2) [2012] FCAFC 6, which may be read here.

Comment

It is not only freehold titles to which these principles apply. Registration of leases of greater than 3 years under s 66 of the TLA also operate to confer leasehold title upon the registering lessee, and indefeasibility of that title under ss 40-44 of the TLA (see Karacominakis v Big Country Developments Pty Ltd [2000] NSWCA 313 at [51]) and Quest Rose Hill Pty Ltd v The Owners Corporation of Strata Plan 64025 [2012] NSWSC 1548 at [72]-[78]. Similarly, a mortgage acquires indefeasibility upon registration, pursuant to s 74 and ss 40-44 of the TLA: see Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133 at 156-7, where the registered title in question was that of a mortgagee. And by way of a recent illustration, last year in Perpetual Trustees Victoria Ltd v Xiao [2015] VSC 21, Hargrave J confirmed that the fact that the mortgagor’s signature on a mortgage did not, in the absence of fraud on the part of the mortgagee finance company, affect the indefeasibility of the mortgage when registered (see [82]) or the ability of the financier to enforce the mortgage (but only to the extent of the covenant for payment contained in the mortgage – see [83]-[85] – referring to Pyramid Building Society (in liq) v Scorpion Hotels Pty Ltd [1998] 1 VR 188, 196) – see further [86]-[107].