No.
7411
of
2003
REAL PROPERTY - Warrant of sale and seizure - Service on Registrar of Titles -
Rights and interest of judgment creditor under the
warrant - Warrant does not
confer a security interest in or charge over, the land - Effect of warrant on
dealings and interests of
third parties - Application by registered
mortgagee to remove warrant - Whether maintenance and execution of warrant
futile - Where
title holder's equity in land is valueless - Where no reasonable
prospect that titleholder or associates will satisfy judgment debt
from other
resources - impact of maintenance and execution of warrant on mortgagees,
creditors and other parties.
- In this proceeding, the plaintiff, Capital Finance Australia
Ltd ("Capital") by amended originating motion between parties filed
5 September 2003, seeks an order removing the warrant of seizure and sale
("the warrant") obtained by the first defendants, The O'Bryan
Group Pty Ltd
("O'Bryan") in proceeding No. 6528 of 2001 by judgment made 9 May 2003
(and subsequent attachments made 4 August 2003
and 25 August 2003)
against the second defendant, 635 St Kilda Road Pty Ltd ("the
developer").
- The warrant authorised the fourth defendant, the Sheriff, to
levy execution for a judgment debt of $22,777.35 plus interest of $13,000
(totalling $35,777.35), costs to be taxed and sheriff's fees in respect of
certain nominated apartments and car spaces ("the apartments")
situated on land
("the land") now described in various certificates of title, of which the
developer is the registered proprietor
in fee simple.
- Capital also seeks a permanent injunction restraining O'Bryan
from requiring the developer's interest in the land to be the subject
of the
warrant or lodging the warrant on the land in future, and from selling the
developer's interest in any of the land.
- Further, Capital seeks liberty to apply to extend the above
orders to the interest of the developer in other properties or apartments
situated on the land which are, or may become, subject to the warrant. Capital
also seeks costs on an indemnity basis.
Facts and Background
- The developer is the registered proprietor of an estate in fee
simple of the land. It is the builder and developer of an apartment
complex
situated on the land at 635 St Kilda Road, Melbourne. The complex comprises
eight apartments and associated car spaces.
- Capital is the holder of a registered first mortgage ("the
first mortgage") over the land, securing advances made to the developer
under a
Facility Agreement, secured by both the first mortgage and a fixed and floating
charge over the assets of the developer.
The amount of indebtedness to Capital
currently secured by the first mortgage is $3,433,582.23.
- The Walter Construction Group ("Walter Construction Group")
collectively comprises the holders of second registered mortgages over
the land
(collectively referred to as "the second mortgage") securing advances to the
developer made by various members of the Walter
Construction Group. The
current amount of indebtedness to the Walter Group secured by the second
mortgage is $5,826,890.43.
- The total amount of indebtedness by the developer secured by
the first and second mortgagees together is $9,260,472.66.
- GIO General Limited ("GIO") is the holder of a third registered
mortgage over the land ("the third mortgage") securing liability
pursuant to a
bond issued by the Walter Construction Group.
- The developer supports Capital's application.
- Capital's application in this proceeding is also supported by
the second and third mortgagees. The priority between the mortgagees
inter
se is governed by a multi party priority deed between the mortgagees and
the developer.
- The Sheriff did not appear at the hearing of the application,
but by letter dated 3 September 2003 stated that he neither opposes
nor
consents to the orders sought by Capital. The fourth defendant, the Registrar
of Titles ("the Registrar") did not appear at
the hearing of the application.
By letter dated 3 September 2003 the Registrar stated that she neither
opposes nor consents to the
orders sought by Capital.
- Capital's application is supported by the affidavits of John
Thomas Byrne sworn 29 April 2003 and 9 September 2003 and the affidavit
of
Roger Phillip Timms sworn 15 September 2003.
- The developer is and has been in default under the facility
agreement since 27 March 2003. Demands and default notices were sent
on
27 March 2003 and 8 April 2003 respectively, and have not been
complied with. Capital is consequently empowered to enter into
possession and
to exercise its powers under the first mortgage, including the power of sale.
- O'Bryan is the project manager of the complex. It obtained a
judgment dated 9 May 2003 against the developer and another party.
O'Bryan caused the warrant of sale and seizure to be issued in respect of the
judgment debt of $22,777.35 plus costs, interests and
expenses. The total
amount now due to O'Bryan is $35,777.35. The developer has sold six of the
eight apartments pursuant to contracts
of sale which have not as yet settled.
Two apartments have not yet been sold.
- The warrant was attached to apartment 4A, extended on
4 August 2003 to apartments 17A and 18 and on 25 August 2003 to
apartments
18A and 14B.
- Each of the apartments is either subject to a contract of sale
or scheduled for sale. Capital contends that the amount owed to
it and to the
Walter Group collectively, secured by the first and second mortgages, exceeds
the net value of the land, after allowing
for the costs of sale and related
expenses.
- In consequence, Capital submits that the developer's equity of
redemption in the land is of no value. A Sheriff's sale of the developer's
interest in the land pursuant to the warrant will therefore be a futility.
- The writ of execution was served on the Registrar in respect
of one apartment on 25 June 2003 and in respect of the remaining seven
apartments on 25 August 2003. Its effect is to prevent the completion of
the sales, as the Registrar of Titles will reject any dealings
lodged after the
service of the warrant and before the lodgment or deemed lodgment of the
transfer under the warrant. There is,
in effect, a three months "freezing" of
the Register until 25 September 2003 in relation to one apartment and
until 25 November 2003
in relation to the remainder of the apartments.
- Although Capital is empowered to enter into possession and to
exercise its power of sale due to the default of the developer, it
is reluctant
to undertake that course, as an orderly sale conducted by the developer is
likely to result in a better return than
a "fire sale" or a sale in distressed
circumstances. The mortgagees already face a shortfall in the repayment of the
amounts secured
by their mortgages.
- The solicitors for the developer requested the removal of the
warrant in order to permit the settlement of apartment 4A, scheduled
for
5 April 2003, on the basis that the developer had no equity in the land,
as the indebtedness secured by registered mortgages
exceeded the value of the
land.
- O'Bryan did not comply with that request. Correspondence
between the solicitors for Capital and the solicitors for O'Bryan followed.
The solicitors for O'Bryan expressed concern as to how their client would be
paid. O'Bryan instructed the Sheriff to sell the developer's
interest in
apartments 4A, 5A, 7A, 17A and 18 if the amount for which the warrant was
issued was not paid by 25 August 2003.
- The solicitors for O'Bryan requested details of the amounts
outstanding on the mortgages and copies of the contracts of sale "in
order to
satisfy our client that there is no equity in the three properties referred to
... ".
- Capital provided the requested details by 29 August 2003, but
O'Bryan did not withdraw the warrant.
- Currently, there has been no advertisement of sale by the
Sheriff, but such an advertisement appears to be imminent.
- Capital submits that the maintenance of the warrant upon the
title constitutes a futility. It will not result in any return to
O'Bryan, but
will merely obstruct the sale of the apartments, further reducing the return to
the mortgagees and any other unsecured
creditors of the developer. Capital
alleges that O'Bryan is, in essence, holding the mortgagees to ransom, in order
to extract from
them payment of a relatively small debt, which O'Bryan would
otherwise fail to recover. It is said that such conduct amounts to
an abuse of
the processes of the Court. Capital therefore seeks its costs on an indemnity
basis.
- Capital contends that O'Bryan's refusal to remove the warrant
has prevented the settlement of the sales of the six apartments subject
to
contracts of sale, increased Capital's claim against the developer and
potentially jeopardised the sale of the remaining apartments.
Legislation and relevant legal
principles
- Section 52 of the Transfer of Land Act 1958 (Vic) ("the
Act") permits execution of a warrant issued under orders 68 and 69 of the
Supreme Court Rules after its registration by the Registrar
of Titles, by sale
of the judgment debtor's land.
- Section 52 of the Act provides:
"Sale under writ of fieri facias or decree of Supreme Court etc.
52. Sale under writ of fieri facias or decree of Supreme Court etc.
(1) Save as in this Division provided no execution or lis
pendens shall bind or affect any land under the operation of this Actvi.
(2) The Registrar, on being served with a copy of any judgment, decree, order
or process of execution of the Supreme Court or of
the County Court accompanied
by a statement signed by any interested party or his legal practitioner or
agent specifying the land
sought to be affected thereby and a statutory
declaration identifying to the satisfaction of the Registrar the judgment
debtor with
the registered proprietor of such land or (where the registered
proprietor is deceased) with his legal personal representative shall
mark upon
such copy the date of such service and make in the Register a recording of the
service of that copy.
(3) After any land so specified has been sold under any such judgment decree
order or process the Registrar shall, on lodgment of
a transfer thereof in an
appropriate approved form, register such transfer if lodged within the period
of three months from the day
on which the copy of such judgment decree order or
process was served on the Registrar, in which case no other instrument dealing
with the land lodged with the Registrar after the time of service of the copy
and before the lodging of the transfer shall be registered
or be deemed to have
been lodged for registration.
(4) On registration of such transfer the purchaser shall become the transferee
and be the proprietor of the land in all respects
as if the transfer were a
transfer for valuable consideration to the purchaser by the registered
proprietor, but until a recording
of the service of the copy has been made in
the Register as aforesaid no sale under the judgment, decree, order or process
shall
be made by the sheriff or other officer.
(5) Unless a transfer on sale under such judgment decree order or process is
lodged with the Registrar within the period of three
months from the day on
which the copy of such judgment decree order or process was served on the
Registrar such judgment decree order
or process shall cease to bind or affect
the land.
(6) Upon production to the Registrar of sufficient evidence of the satisfaction
of any judgment decree order or process a copy whereof
has been served as
aforesaid he shall make a recording in the Register to that effect, whereupon
such judgment decree order or process
shall cease to bind or affect the land.
(7) This section shall with such adaptations as are necessary extend and apply
to- (a) writs of fieri facias issued out of the High
Court of Australia and
decrees and orders of that Court and officers thereof."
- The judgment debtor's land, in this context, is limited to its
interest in land subject to any encumbrances, charges or interests
held by a
purchaser for valuable consideration.[1]
- The position of the judgment creditor is analogous to that of
a trustee in bankruptcy. The creditor stands in the shoes of the
judgment
debtor and is subject to all the interests, including unregistered and
uncaveated interests, which bind the debtor's interest
in the land. The
warrant authorises recovery only against the debtor's equity in the land after
satisfaction of the interests to
which it is subject.[2]
- In the present case, O'Bryan is limited to recovery against
the developer's interest in the land after satisfaction of the interests
of the
registered mortgagees and the equitable fees simple of purchasers under the
contracts of sale.
- The issue and registration of a warrant does not confer upon
the judgment creditor an interest in the land affected by the warrant.
The
judgment debtor does not obtain a charge or security, or other proprietary
interest in the land, but remains an unsecured creditor.[3]
- In the context of a subsequent insolvency of the debtor, in
contrast to a secured creditor, the execution by the judgment creditor
would
ordinarily be stayed. If the judgment creditor had already recovered payment
from the judgment debtor, the proceeds would
be subject to the "claw-back"
provisions of insolvency legislation.
- If the warrant were executed pursuant to s.52 of the Act, the
Registrar would register the transfer to the purchaser at the Sheriff's sale.
However, that purchaser would take its subsequent
interest subject to the
registered mortgages and the contracts of sale.
Futility of warrant
- In my opinion, the futility of maintaining and executing the
warrant depends on the establishment of two matters:
(1) First, that there is no reasonable likelihood of O'Bryan
recovering any payment from the sale, because the value of the land is
such
that the deduction of the proceeds necessary to satisfy priority interests will
leave a nil amount.
(2) Secondly, that the maintenance of the warrant will not be effective to
result in payment of O'Bryan's claim by the developer
from other resources, or
by persons who have an interest in maintaining the corporate developer's
solvency, commercial reputation,
or possibly in retaining the property until
the equity of redemption is of value.
- By order of Kellam J made 10 September 2003 the
plaintiff released the exhibits containing a valuation of the land, subject to
a confidentiality regime imposed by reason of the valuation's commercial
sensitivity.
- The total current liability secured by the first and second
mortgages is $9,260,472. After the paying out of the mortgages and the
estimated costs of sale and further interest, legal costs, default interest and
other adjustments, there would be an estimated deficiency
of $622,386. There
would be no equity remaining for satisfaction of O'Bryan's claim. If the
developer became insolvent, any amount
obtained by virtue of execution within
the statutory "claw back" period would be subject to reclamation.
- It is undisputed that the developer has not satisfied the
judgment debt of O'Bryan. Further, by his affidavit sworn 29 August 2003,
Mr Byrne deposed that the developer is in default under the mortgages and
that it is unable to fund this application. However, those
circumstances do
not constitute unequivocal evidence that the developer has no resources, other
than its interest in the land, from
which to satisfy the judgment
debt.
- By affidavit sworn 11 September 2003 Colman Moloney, the
solicitor for O'Bryan, deposed that O'Bryan's only knowledge of the financial
affairs of the developer was obtained through affidavits sworn in this
proceeding.
- Mr Colman also deposed that in the course of a
Magistrates' Court complaint against the developer, transferred to this Court
in
2001, the developer, up to March 2003, made representations that it was
solvent and had equity in the apartments. Further, in May
2002 the developer
successfully opposed an application for security for costs on the ground that
it was solvent.
- Mr Colman objected that Capital's material does not
demonstrate the insolvency of the developer or its inability to satisfy
O'Bryan's
liability pursuant to third party's obligations.
- Further, he deposed that the principal director of the
developer is a director of other companies and has real estate assets in
his
own name.
- It is well-established that the court has power to grant
relief in restraining abusive or futile applications of its processes.
In
Jago v District Court of New South Wales,[4] Mason CJ stated:
"It is clear that Australian courts possess inherent jurisdiction
to stay proceedings which are an abuse of process ... Subject to
statutory
provision to the contrary, a court also possesses the power to control and
supervise proceedings brought in its jurisdiction,
and that power includes
power to take appropriate action to prevent injustice".[5]
- His Honour observed that "injustice" in that context might
have a limited meaning, although the power is not to be confined to closed
categories.[6]
- In Commercial Credit Cooperative Ltd v Mancesvski[7] mortgagees sought to restrain the renewal of a
writ of Fi Fa. A proposed sale by the mortgagees could not be completed, due
to the
existence of the Fi Fa memorandum on the register book.
- Nathan J observed that the memorandum of Fi Fa was not an
encumbrance or an interest in land. He noted that the judgment creditor
could
not prevent a mortgagee from proceeding with the sale.
- Nathan J observed that, in the case before him, the valuation
evidence on the property indicated a market value well in excess of
the
mortgagee's claim. He noted that the judgment creditors had only one legal
remedy against the debtor by way of the writ of Fi
Fa. He was not satisfied,
on the evidence before him, that their hopes of recovery were so forlorn that
their interests should be
overborne in favour of the mortgagee.[8]
- A judgment creditor seeking to execute a warrant is an
unsecured creditor. Its claim is validated by a judgment and it is employing
a
legitimate statutory mechanism. The vulnerability of unsecured creditors, and
the pre-eminent position of secured creditors, on
insolvency is widely
recognised.
- The warrant provides an enforcement resource which, prior to
insolvency, may result in satisfaction of the judgment creditor's liability.
Once insolvency intervenes, the execution of the warrant is generally stayed;
or, if it is executed within the "clawback" period
prior to sequestration or
winding up, any proceeds can be reclaimed by the liquidator or the trustee in
bankruptcy.[9] In my opinion, the Court should
approach with caution an application by a secured creditor which will deprive
an unsecured creditor
of its entitlement to pursue a statutory mechanism which
provides some prospect of payment.
- Sometimes a debtor does not pay its liabilities for reasons
other than a want of resources. The debtor may be recalcitrant. In
such
circumstances, the warrant and the prospect of enforced sale may influence the
debtor, or persons associated with it, to pay,
in order to avoid detrimental
consequences. The pressure exerted on the debtor by the mere maintenance of
the warrant is not, in
my view, illegitimate, or an abuse of the statutory
enforcement procedure.
- In the light of such considerations, the maintenance and
execution of a warrant could not be considered futile or an abuse of the
court's processes unless there were no realistic prospect that it would either
result in payment to the judgment creditor from the
proceeds of the property or
influence the debtor or associated parties to satisfy the debt. So long as the
debtor appears potentially
able to pay from other resources, the prospect of
such payment cannot be discounted. The debtor may have an interest in
maintaining
its commercial reputation or in retaining its equity (even if
currently of no value) until a later date, when it may have recovered
some
value.
- Therefore, irrespective of whether the debtor has any equity
in the property, I would not be disposed to make an order depriving
a judgment
creditor of the only enforcement mechanism available to it, in the absence of
clear evidence that the judgment debtor
is unable to satisfy the claim from
other resources.
- At the hearing of the matter on 15 September 2003 I gave the
plaintiff leave to file and serve a further affidavit dealing with
the
financial status of the developer.
- By affidavit sworn 15 September 2003, Roger Phillip Timms
deposed that he is the accountant for the developer and familiar with
its
accounts, books and records. Mr Timms deposed that the developer has no
cash or other liquid assets apart from the proceeds
of sale of the apartments
as they are sold. He deposed to the interests of the mortgagees and to
unsecured creditors whose claims
total $3,670,408.17. He deposed that the
developer has no assets other than the land.
- Mr Lapirow, counsel for O'Bryan, submitted that if
financial incapacity were demonstrated, the court ought not to make an order
which might be said to assist in disguising the developer's poor financial
status from potential purchasers. He also submitted that
the maintenance of
the warrant might induce payment by a director Further, he contended that the
plaintiff should not be entitled
to the relief it seeks in the absence of
demonstrating that other avenues for recovering the debt secured by its
mortgage (such as
guarantees by third parties) are exhausted.
- Six of the properties have already been sold. I do not
consider that the withdrawal of the warrant would, in itself, cause prospective
purchasers to make positive assumptions about the developer's financial status.
Demonstrating exhaustion of all other avenues of
recovery is not a reasonable
pre-condition of the relief sought. Further, the mere possibility that the
maintenance of the warrant
might induce payment by a director should not
outweigh the serious and widespread detriment entailed.
Conclusion
- In all the circumstances, I am satisfied that the maintenance
and execution of the warrant is likely to result in significant and
widespread
detriment to the mortgagees, the purchasers, the developer and its unsecured
creditors and possibly other parties, without
conferring any concomitant
benefit or advantage upon O'Bryan.
- There is no realistic prospect that the maintenance and
execution of the warrants will fulfil any useful legitimate purpose, whilst
significant detriment will be inflicted on a considerable number of parties.
- In those circumstances, I consider it appropriate that the
plaintiff be granted relief broadly in the terms of the orders sought.
---
[1] Simpson v Forrester
[1973] HCA 4; (1973) 132 CLR 499.
[2] National Bank of Australasia v
Morrow (1886) 13 VLR 2.
[3] Sykes, E.I. and Walker, S. The Law of
Securities, 5th edn, at 23-24.
[4] [1989] HCA 46; (1989) 168 CLR 23.
[5] Ibid, at 25.
[6] Ibid, at 26.
[7] SCV 28 February 1986, Nathan J.
[8] Ibid, at 3.
[9] Corporations Act s.569-70;
Bankruptcy Act, s.118-119.
AustLII:
Copyright Policy
|
Disclaimers
|
Privacy Policy
|
Feedback
URL: http://www.austlii.edu.au/au/cases/vic/VSC/2003/355.html
