Court of Appeal Supreme Court New South Wales

• Medium Neutral Citation: Residential Housing Corporation v Esber & Ors [2011] NSWCA 25
• Hearing dates: 28 July 2010
• Decision date: 21 February 2011
• Before: Campbell JA at 1; Macfarlan JA at 194; Sackville AJA at 195

Decision

(1) Leave to appeal be granted, if necessary;

(2) The appeal be dismissed with costs.

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

• Catchwords: TORRENS SYSTEM - MORTGAGES - SALE BY MORTGAGEE - DISPOSITION OF SURPLUS PROCEEDS OF SALE - RPA land subject to two registered mortgages and one unregistered mortgage - first mortgagee exercises power of sale and pays whole amount surplus to its entitlement to second mortgagee - second mortgagee pays whole amount surplus to its entitlement to third mortgagee - third mortgage later held to secure no debt, and third mortgagee becomes insolvent - whether second mortgagee obliged to compensate mortgagor for amount paid to third mortgagee - whether s 58(3) RPA applies at all to a mortgagee other than the mortgagee who exercises a power of sale - whether s 58(3) RPA requires payment of surplus proceeds to a mortgagee who is unregistered - comparison of s 58(3) RPA with s 88(1) Property Law Act 1974 (Qld) and s 135 Real Property Act 1886 (SA) - interaction of s 58(3) with equitable obligations of a mortgagee who holds surplus proceeds of sale; PROCEDURE - SUPREME COURT PROCEDURE - INTERPLEADER - payment into court in stakeholder's interpleader, and payment into court under s 95 Trustee Act 1925 compared and contrasted; EQUITY - FIDUCIARY OBLIGATIONS - OF MORTGAGEE HOLDING SURPLUS PROCEEDS OF SALE - obligation to pay each subsequent security holder and the mortgagee the amount each is owed, in their respective order of priority - explanation of Re Thomson's Mortgage Trusts [1920] 1 Ch 508 - if there is a statutory direction about order of payment of proceeds, whether the equitable obligation operates only after the statute has run its course, or whether the equitable obligation applies immediately to whoever holds the surplus proceeds of sale; APPEAL - POINT NOT TAKEN AT TRIAL - when point not only not taken, but conceded at trial - when point could not have been affected by evidence at trial [41]-[42] - when point is failure to prove an essential element of plaintiff's case, and there was concession at trial [175]-[177]; JUDGMENTS AND ORDERS - SATISFACTION OF - rule against double satisfaction applies universally - source of rule against double satisfaction
• Legislation Cited: Civil Procedure Act 2005; Conveyancing Act 1919; Conveyancing and Law of Property Act 1881 (Eng); Corporations Act 2001 (Cth); Land Administration Act 1977; Land Transfer Act 1952 (NZ); Property Law Act 1974 (Qld); Property Law Act 1974-1975 (Qld); Real Property Act 1862 (Tas); Real Property Act 1886 (SA); Real Property Act 1900; Real Property Limitation Act 1833; Strata Titles Act 1973; Supreme Court Act 1970; Transfer of Land Act 1893 (WA); Transfer of Land Act 1958 (Vic).; Trustee Act 1925; Trustee Act 1958 (Vic),; Uniform Civil Procedure Rules
• Cases Cited: Adams v Bank of New South Wales [1984] 1 NSWLR 285; Australia and New Zealand Banking Group Limited v Evans [1992] 2 Qd R 230; Avco Financial Services Limited v Commonwealth Bank of Australia (1989) 17 NSWLR 679; Bank of New South Wales v Adams [1982] 2 NSWLR 659; Banner v Berridge (1881) 18 Ch D 254; Barry v Heider (1914) 19 CLR 197; Baxter v Obacelo Pty Ltd (2001) 205 CLR 635; Baypoint Pty Ltd v Baker (1994) 6 BPR [97498]; Bofinger v Kingsway Group Ltd (2009) HCA 44; (2009) 239 CLR 269; Bracks v Smyth-Kirk [2009] NSWCA 401; (2009) 263 ALR 522; Brambles Security Services Ltd v Bi-Lo Pty Ltd (NSWCA 19 June 1992; Breskvar v Wall (1971) 126 CLR 376; Coulton v Holcombe (1986) 162 CLR 1; CSR Limited & v Maree Anne D'Arcy [1999] NSWCA 216; Emerson v Custom Credit Corporation Ltd (1991) Q Conv R [54-414]; Ex-parte Australian Co-operative Development Society Limited (in liq) [1978] Qd R 395; Fraser v Australian Securities & Investments Commission, in the matter of Lanepoint [2007] FCAFC 85; Frazer v Walker [1967] 1 AC 569 at 585; Haines v Bendall (1991) 172 CLR 60; Hope v Hope [1977] 1 NZLR 582; Hopkinson v Rolt (1861) 9 HL Cas 514; 11 ER 829; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; In re Bell; Jeffery v Sayles [1896] 1 Ch 1; Investmentsource v Knox Street Apartments [2007] NSWSC 1214; Investsource v Knox Street Apartments Corporation Pty Ltd (24 April 2008, revised 28 April 2008; Jones v Southall & Bourke Pty Ltd (2004) 3 ABC (NS) 1; Jovic v Lamont [2007] NSWCA 47; Kerabee Park Pty Ltd v Daley [1978] 2 NSWLR 222; Kimberley Securities Limited v Esber [2008] NSWCA 301; Lloyd's Bank NZA Limited v National Safety Council of Australia Victorian Division (in liquidation) [1993] 2 VR 506; Marcel Esber v Kimberley Securities Limited [2009] NSWSC 1422; Matzner v Clyde Securities Ltd [1975] 2 NSWLR 293; Mercantile Credit Ltd v Australia and New Zealand Banking Group Ltd (1988) 48 SASR 407; Midland Montagu Australia Ltd v Cuthbertson (1989) 17 NSWLR 309; Multicon Engineering Pty Ltd v Federal Airports Corporation (1997) 47 NSWLR 631; Provident Capital Ltd v Printy [2008] NSWCA 131; Re Hallet's Estate (1880) 13 Ch D 696; Re Morrison; Bennell v Smith (1962) Tas SR 337; Re Murrell; Ex parte Official Trustee in Bankruptcy (1984) 57 ALR 85; Re S & D International Pty Ltd (in liq) [2009] VSC 225; Re Thomson's Mortgage Trusts [1920] 1 Ch 508; Registrar-General (NSW) v Behn (1981) 148 CLR 562; Rockett v Moneycorp Securities Pty Ltd [2008] QFC 258; Thornborough v Baker (1676) 1 Ch Cas 508; 22 ER 364; United Australia Limited v Barclays Bank Limited [1941] AC 1; Water Board v Moustakas (1988) 180 CLR 491; West London Commercial Bank v Reliance Permanent Building Society (1885) 29 Ch D 954
• Texts Cited: Butt, Land Law, 5th ed (2006); CCH, NSW Conveyancing Law and Practice, [vol 2]; Croft and Johannsson, The Mortgagee's Power of Sale, 2nd ed, 2004; Hargraves and Helmore, An Introduction to the Principles of Land Law (NSW); Pearce & Geddes, Statutory Interpretation in Australia, 6th ed, para [4.6]
• Category: Principal judgment
• Parties: Residential Housing Corporation Pty Ltd (Applicant/Appellant); Marcel Esber (First Respondent); Casanda Pty Limited (Second Respondent)
• Representation: Counsel: G K Burton SC with him Mr P Bruckner and Mr E A Walker (Applicant/Appellant); T G R Parker SC with him Ms S Fendekian (Respondents); Solicitors: Bolzan & Dimitri (Applicant/Appellant); Sachs Gerace Lawyers (Respondents)
• File Number(s): 64152 of 2010

Decision under appeal

• Jurisdiction: 9111
• Citation: Esber v Kimberley Securities Limited [2009] NSWSC 1422
• Date of Decision: 2009-12-16 00:00:00
• Before: Hammerschlag J
• File Number(s): 50110 of 2006

JUDGMENT

1 CAMPBELL JA :

CONTENTS	Para No.
The First-Instance Proceedings	8
The Orders Appealed Against	16
Leave to Appeal	19
Relevant Statutory Provisions	22
PART A - CONSTRUCTION OF SECTION 58(3)
Construction of S 58(3) in the Court Below	26
The Issues on Appeal Concerning S 58(3)	37
Permit Argument Contrary to Concession in Court Below?	41
"Subsequent Mortgages, Charges and Covenant Charges":	44
"Subsequent Mortgages, Charges or Covenant Charges" - "Covenant Charge"	45
"Subsequent Mortgages, Charges or Covenant Charges" - "Charge"	49
"Subsequent Mortgages, Charges or Covenant Charges" - "Mortgage"	51
Does S 58(3) Apply to an Unregistered Mortgage?	53
Does S 58(3) Apply to a Non-Selling Mortgagee?	100
Obligation Under S 58(3) Requires Payment of Whole Surplus to Next Mortgagee?	105
Payment Into Court	110
Resi Entitled to Pay Kimberley in 2002 On What Was Then Known?	120
Conclusion re Application of S 58(3)	122
PART B - EQUITABLE OBLIGATIONS CONCERNING DISTRIBUTION OF PROCEEDS OF SALE	123
Obligations re Distribution of Sale Proceeds Under the General Law	125
Re Thomson's Mortgage Trusts	145
PART C - INTERRELATIONSHIP OF S 58(3) AND EQUITABLE OBLIGATIONS	154
Application of Principles to Facts of This Case	167
An Aspect of Ground 1	170
PART D - OTHER MATTERS
Failure to Prove Loss?	172
Disentitling Delay?	183
Wrongful Inclusion of Costs of Pursuit of Kimberley?	187
Orders	192

2 The Respondents (the "Esbers") were involved in Knox Street Apartments Pty Ltd ("Knox"), a company that embarked upon a real estate development. The Esbers owned two home units. Title to those units was held under the Strata Titles Act , and thus the Esbers' ownership arose by their being registered proprietors under the Real Property Act ("RPA"). Over each home unit there was a first registered mortgage to Permanent Trustee Australia Limited, and a second registered mortgage to the Appellant ("Resi").

3 When the development was partly complete, Kimberley Securities Limited ("Kimberley") entered into a Joint Venture Agreement with Knox. Kimberley's arrangement with Knox entitled it to various benefits, one of which was a $2m fee payable in certain events.

4 The Esbers provided a guarantee to Kimberley of certain of the obligations of Knox to Kimberley. One of those obligations was to pay to Kimberley certain amounts that Kimberley was to advance for the purpose of the development that fell within a defined term "Project Costs" . With the written consent of Resi, the Esbers also gave Kimberley a third mortgage over each of the home units in question, to secure their obligations under the guarantee. Though Resi had consented to the third mortgages being registered, in fact they remained unregistered. Kimberley never lodged a caveat claiming an interest under the mortgages.

5 Following default under the mortgages that the Esbers had granted to Permanent, Permanent exercised a power of sale over the home units. After payment of its secured debt from the proceeds of sale, Permanent paid to Resi the amount that remained from the proceeds of sale. Resi in turn appropriated the amount owed to itself under its mortgages. It then held an amount of $416,780.81 ("the Surplus Proceeds").

6 By that time, a dispute had arisen between the Esbers and Kimberley about who was entitled to the Surplus Proceeds. The Esbers called on Resi to pay the Surplus Proceeds to them. Kimberley called on Resi to pay the Surplus Proceeds to it. In a letter dated 13 February 2002 to the Esbers' solicitors, Resi's solicitors said that Resi "is not in a position at this stage to release any funds until such issue is resolved" and that Resi would not place itself in a position of risk from any dispute between Kimberley and the Esbers.

7 Notwithstanding that initial stance, on 28 February 2002, following a conversation between a director of Resi and a director of Kimberley, Resi and Kimberley entered into a deed of indemnity and release. Under it, Resi paid the Surplus Proceeds to Kimberley, on the basis of an indemnity from Kimberley for any loss it might suffer by so doing. The only limitation that that deed placed upon the use that Kimberley could make of the money was a covenant "that the Surplus Moneys must be utilised by Kimberley in reduction of its third mortgages" from Knox and the Esbers.

The First-Instance Proceedings

8 The Esbers began proceedings, number 50110 of 2006, in the Commercial List of the Equity Division of the Supreme Court of New South Wales. The defendants in those proceedings were both Kimberley and Resi. McDougall J determined some separate questions in those proceedings, and in another set of proceedings that related to the same real estate development: Investmentsource v Knox Street Apartments [2007] NSWSC 1214. Resi was not represented at that hearing - the contest was between the Esbers (plus a Mr Joseph Esber), Kimberley, and a Mr and Mrs Flexman, who had provided some finance for the development.

9 One of the questions before McDougall J concerned the amounts secured by the mortgages that the Esbers had given to Kimberley. His Honour recorded, at [243]:

"As best I understand the position taken by the mortgagors, they did not dispute that Kimberley, as third mortgagee, was entitled to hold the balance paid to it until all their liabilities to Kimberley that were secured by the mortgages had been discharged. They did however submit that on this analysis (which in effect treats the money as a replacement for the security over real property) they were entitled to the interest that accrued from time to time, in the same way as they would have been entitled to the rents and profits of the realty."

10 After holding that the mortgages did not secure payment of the $2m fee, his Honour said, at [269]:

"It would seem to follow that, whilst Kimberley may have been entitled to hold the net proceeds of sale until the extent of the Guaranteed Moneys could be determined, it was not entitled to do as it has done, and allow itself the beneficial use of them."

11 His Honour's ultimate holding was (at [272](8)):

"[T]he mortgages in question did not secure payment of Kimberley's fee. In principle, to the extent that Kimberley has not been reimbursed for any other Project Costs, the mortgages (or the net proceeds of sale now held in their place) secure any deficiency. The question of interest on those proceeds has not been resolved"

12 Kimberley appealed against the determination of McDougall J that I have just quoted. The Esbers were the only respondents to that appeal. The appeal was dismissed with costs: Kimberley Securities Limited v Esber [2008] NSWCA 301.

13 McDougall J's judgment had left open the possibility that there might have been Project Costs secured by the mortgages that Kimberley held from the Esbers, or interest payable on all or part of the sum that Kimberley had received. Another judgment of McDougall J considered what amount the Esbers continued to owe to Kimberley: Investsource v Knox Street Apartments Corporation Pty Ltd (24 April 2008, revised 28 April 2008, unreported and no medium neutral citation). That judgment held, at [16], that the Esbers owed nothing to Kimberley. It is apparent from his Honour's reasoning that that zero balance owing applied as at 28 February 2002, as at 31 May 2002, and as at the date at which the judgment was delivered. Consequently, McDougall J directed entry of judgment for the Esbers against Kimberley in an amount to be agreed by the parties, or otherwise assessed. He ordered that each of those judgments bear interest from 28 February 2002 at the rates applicable under the Supreme Court Act or the Civil Procedure Act .

14 Hammerschlag J gave the decision now appealed from on 16 December 2009: Marcel Esber v Kimberley Securities Limited [2009] NSWSC 1422. By that time, Kimberley had been wound up in insolvency. Hammerschlag J found at [19]:

"Because of Kimberley's insolvency the Esbers have not recovered from it and there is no suggestion that they ever will. The second defendant's indemnity from Kimberley is apparently worthless."

15 Though the Esbers have an order for costs against Kimberley for the costs of the appeal from the decision of McDougall J it is not apparent, on the material before us, whether McDougall J has ever made an order fixing how the burden of costs of the proceedings before him should be borne as between the Esbers and Kimberley.

The Orders Appealed Against

16 In his admirably concise judgment, Hammerschlag J held that Resi owed fiduciary obligations concerning the Surplus Proceeds, that it did not act in accordance with either section 58(3) RPA or its equitable obligations in paying the Surplus Proceeds to Kimberley, and that in consequence it was obliged to compensate the Esbers. His Honour concluded, at [64], that there would be a judgment for the Esbers:

"a in the amount of $416,780.81; plus

b interest to be calculated from 28 February 2002; plus

c an amount to be determined as representing the costs properly and reasonably incurred by the Esbers in their unsuccessful pursuit of Kimberley; less

d the amount of $60.50 for stamp duty paid by the second defendant which discharged the Esbers' obligation to pay that impost."

17 On 12 February 2010 his Honour ordered a judgment for the Esbers against Resi in the sum of $724,296.66. He also ordered that there should be a judgment for the Esbers against Resi:

"For the costs properly and reasonably incurred by the [Esbers] in their unsuccessful pursuit of Kimberley Securities Limited, including in

(a) these proceedings 50110 of 2006; and

(b) Court of Appeal proceedings 40150 of 2008."

18 His Honour made an order referring the question of what was the amount properly representing those costs. His Honour reserved the costs of the proceedings and of the reference. Presumably because a question arises in this appeal about the correctness of the principle in accordance with which his Honour ordered Resi to pay the costs of the Esbers in their unsuccessful pursuit of Kimberley, no order for costs has been made in the proceedings below.

Leave to Appeal

19 Recognising the possibility that leave to appeal might be necessary if Hammerschlag J's orders of 12 February 2010 were properly to be regarded as interlocutory, Resi has sought leave to appeal.

20 At the time this Court made orders for a partial stay of the orders of Hammerschlag J, the Court noted that the Esbers consent to the grant of leave to appeal, if leave be necessary. Their written submissions on the appeal took a different stance. No reason was put forward for the change of stance. Of course, in any event, their consent would not be determinative of whether leave to appeal was granted.

21 In my view, the questions involved in the case are of sufficient importance to warrant the grant of leave to appeal, if leave be necessary. In that situation there is no point in considering whether leave is actually necessary.

Relevant Statutory Provisions

22 Section 58(3) RPA is one of the principal focuses of contention in this appeal. However, understanding it, and dealing with some of the arguments put in the appeal, requires several other provisions of the RPA to be taken into account.

23 For the purposes of deciding whether Resi acted contrary to its statutory obligations under RPA in paying Kimberley, it is the RPA as at the date of the payment that is determinative. Section 3(1) RPA as at February 2002 opened with the words:

"In the construction and for the purposes of this Act ... (if not inconsistent with the context and subject matter):

(a) the following terms shall bear the respective meanings set against them:

24 Section 3(1) contained the following definitions:

Charge -Any charge on land created for the purpose of securing the payment of an annuity, rent-charge or sum of money other than a debt.

Dealing -Any instrument other than a grant or caveat which is registrable or capable of being made registrable under the provisions of this Act, or in respect of which any recording in the Register is by this or any other Act or any Act of the Parliament of the Commonwealth required or permitted to be made.

Mortgage -Any charge on land (other than a covenant charge) created merely for securing the payment of a debt.

Mortgagor -The proprietor of land or of any estate or interest in land pledged as security for the payment of a debt.

Mortgagee -The proprietor of a mortgage.

Proprietor -Any person seised or possessed of any freehold or other estate or interest in land at law or in equity in possession in futurity or expectancy.

25 Other relevant provisions of RPA as at February 2002 were:

36 Lodgment and registration of documents

(9) Dealings registered with respect to, or affecting the same estate or interest shall, notwithstanding any notice (whether express, implied or constructive), be entitled in priority the one over the other according to the order of registration thereof and not according to the dates of the dealings.

41 Dealings not effectual until recorded in Register

(1) No dealing, until registered in the manner provided by this Act, shall be effectual to pass any estate or interest in any land under the provisions of this Act, or to render such land liable as security for the payment of money, but upon the registration of any dealing in the manner provided by this Act, the estate or interest specified in such dealing shall pass, or as the case may be the land shall become liable as security in manner and subject to the covenants, conditions, and contingencies set forth and specified in such dealing, or by this Act declared to be implied in instruments of a like nature.

42 Estate of registered proprietor paramount

(1) Notwithstanding the existence in any other person of any estate or interest which but for this Act might be held to be paramount or to have priority, the registered proprietor for the time being of any estate or interest in land recorded in a folio of the Register shall, except in case of fraud, hold the same, subject to such other estates and interests and such entries, if any, as are recorded in that folio, but absolutely free from all other estates and interests that are not so recorded except:

[various exceptions not presently relevant]

(2) In subsection (1), a reference to an estate or interest in land recorded in a folio of the Register includes a reference to an estate or interest recorded in a registered mortgage, charge or lease that may be directly or indirectly identified from a distinctive reference in that folio.

56 Lands under this Act: how mortgaged or encumbered

(1) Whenever any land or estate or interest in land under the provisions of this Act is intended to be charged with, or made security for, the payment of a debt, the proprietor shall execute a mortgage in the approved form.

56A Postponement of mortgages

(1) If two or more mortgages registered under this Act affect the same land, the mortgage which for the time being has priority over the other or others may, by a memorandum in the approved form registered under this Act, be postponed to the other or others in so far as the whole or a disposable part of that same land is concerned.

...

(2) A memorandum under this section shall not be registered when any registered mortgage intervenes between the mortgage to be postponed and the mortgage intended to have benefit of the postponement, unless the proprietor of the intervening mortgage joins in the memorandum.

(3) The Registrar-General shall register a memorandum under this section by making such recording in the Register with respect to the memorandum as the Registrar-General thinks fit.

(4) After registration of a memorandum under this section, the mortgages affected by the postponement shall be entitled in priority the one over the other as if they had been registered in the order in which by the memorandum they are expressed to have priority.

57 Procedure on default

(1) A mortgage, charge or covenant charge under this Act has effect as a security but does not operate as a transfer of the land mortgaged or charged.

(2) A registered mortgagee, chargee or covenant chargee may, subject to this Act, exercise the powers conferred by section 58 if:

[list of preconditions for exercise of those powers]

58 Power to sell

(1) Where a mortgagee, chargee or covenant chargee is authorised by section 57 (2) to exercise the powers conferred by this section, the mortgagee, chargee or covenant chargee may sell the land mortgaged or charged, or any part thereof, and all the estate and interest therein of the mortgagor, charger or covenant charger, ... all which sales ... shall be as valid and effectual as if the mortgagor, charger or covenant charger had made, done, or executed the same, and the receipt or receipts in writing of the mortgagee, chargee or covenant chargee shall be a sufficient discharge to the purchaser of such land, estate, or interest, or of any portion thereof, for so much of the purchaser's purchase money as may be thereby expressed to be received.

(2) No such purchaser shall be answerable for the loss, misapplication, or non-application, or be obliged to see to the application of the purchase money by the purchaser paid, ...

(3) The purchase money to arise from the sale of any such land, estate, or interest, shall be applied, first, in payment of the expenses occasioned by such sale; secondly, in payment of the moneys which may then be due or owing to the mortgagee, chargee or covenant chargee; thirdly, in payment of subsequent mortgages, charges or covenant charges (if any) in the order of their priority; and the surplus (if any) shall be paid to the mortgagor, charger or covenant charger, as the case may be.

59 Registration of transfer by mortgagee, chargee or covenant chargee

The Registrar-General shall, for the purpose of a sale authorised by section 58, register a transfer executed by a mortgagee, chargee or covenant chargee in the approved form and, upon that registration, the estate or interest of the mortgagor, charger or covenant charger in the land comprised in the transfer shall pass to and be vested in the transferee, freed and discharged from all liability on account of the mortgage, charge or covenant charge, or of any mortgage, charge or covenant charge registered subsequent thereto.

PART A - CONSTRUCTION OF SECTION 58(3)

Construction of Section 58(3) in the Court Below

26 Before the trial judge the Esbers contended that Resi held the Surplus Proceeds subject to an obligation to account for those funds to the person or persons who were entitled to them. The Esbers contended that that obligation arose under section 58(3) RPA , or alternatively (relevantly) in equity.

27 The Esbers contended that section 58(3) imposed an obligation concerning the manner of application of the proceeds arising from the exercise of a power of sale over RPA land. They contended the obligation was imposed on any person into whose hands the proceeds came. Thus, they contended, it bound Resi, even though Resi was not in the present case the mortgagee who had exercised the power of sale. Further, they contended that the obligation arising under section 58(3) to cause the proceeds of sale to be applied "thirdly, in payment of subsequent mortgages ... (if any) in the order of their priority" applied only to require payment of subsequent mortgages that were registered. Thus, in the present case, as Kimberley's third mortgage was not registered, the obligation under section 58(3) was for Resi to cause the proceeds of sale in its hands to be applied by payment to the mortgagor, ie, to the Esbers.

28 Alternatively, they contended that if section 58(3) permitted a payment to an unregistered mortgagee, the amount it required to be paid to the unregistered mortgagee was the amount actually secured by that unregistered mortgage. In the circumstance where nothing was owed to Kimberley, the Surplus Proceeds were still required by section 58(3) to be paid in their entirety to the Esbers.

29 In the further alternative, the Esbers contended that Resi, having received the amount that was surplus to the entitlement of the first mortgagee, was subject to an equitable obligation to account for that sum to the mortgagor. In making a payment in accordance with such an account, Resi was entitled to deduct the amount properly owed to it, but then, because nothing in truth was owed to Kimberley, its equitable obligation was to pay the Surplus Proceeds to the Esbers.

30 Before the trial judge, Resi also contended that section 58(3) imposed an obligation on it. It submitted, however, that those entitled to the proceeds of sale "thirdly" under section 58(3) included unregistered mortgagees. It contended that section 58(3) imposed a statutory obligation on it to pay the entirety of the proceeds of sale that were surplus to its own requirements to Kimberley as the subsequent mortgagee, and that it had acted in accordance with that statutory obligation. Further, it contended that, because the mortgages that the Esbers had given to Kimberley were "subsequent mortgages" , within the meaning of section 58(3), the statutory obligation bound it to pay the Surplus Proceeds to Kimberley even if no moneys were then actually due under the mortgages. Its implicit assumption seems to have been that the statutory obligation overrode any equitable obligation that, absent the statute, might have existed.

31 Hammerschlag J proceeded in accordance with the common ground that section 58(3) bound Resi. His Honour would have preferred the view that the "subsequent mortgages" in section 58(3) were confined to registered mortgages. However, in Re S & D International Pty Ltd (in liq) [2009] VSC 225 Robson J had held that "subsequent mortgages" in the Victorian equivalent of section 58(3) included unregistered mortgages. Some support could also be found for that view in Butt, Land Law , 5 th ed (2006) at [18174] and CCH, NSW Conveyancing Law and Practice , vol 2 at ¶35-440. Hammerschlag J concluded:

"... whilst I take a view different to that of Robson J, I do not consider that his Honour's view, supported as it is at least by obiter dicta and text writers, is so clearly wrong I should not follow it. The resolution of the difference is best left to an appellate tribunal."

32 The next question of construction concerned whether the payment of the Surplus Proceeds to Kimberley was "in payment of" a subsequent mortgage. Hammerschlag J held it was not. He said (at [60]):

"In my view 'payment of subsequent mortgages' means payment of money due or owing under such a mortgage or mortgages, that is, payment to someone beneficially entitled to the fund and for whose benefit the prior mortgagee holds it. It does not mean payment to whoever holds the next registered or equitable mortgage, irrespective of whether the holder is owed money."

33 In circumstances where, by that time, the decisions of McDougall J had made clear that no money was secured by Kimberley's third mortgages as at 28 February 2002, it followed that the totality of the Surplus Proceeds had been paid to a recipient who was not the recipient to whom section 58(3) required it to be paid.

34 Even though it was by application of section 58(3) that the Esbers succeeded before Hammerschlag J, his Honour noted at [47] that even if "subsequent mortgages" in section 58(3) meant only registered mortgages:

"... the section does not extinguish the rights of equitable interest holders or affect their priorities. If Kimberley had had an equitable interest in the disputed amount it would have been entitled, as against and in priority to the Esbers, to receive it."

35 He said, at [49] that if the position were to be governed by section 58(3) but by general principles of equity, the outcome would be no different from that which he had held arose under section 58(3). His reason for expressing that view was, at [56], that Resi:

"... was in a fiduciary position. It was a mortgagee who was paid more than it was entitled to retain and it had no beneficial interest in the excess (in this case the totality). It was in a position no different to a first mortgagee who exercises a power of sale where the purchase price received is more than the mortgage debt."

36 He said, at [57]:

"... Its debt having been paid, the second defendant held the disputed amount as trustee for the persons beneficially interested. In the present case that was the Esbers, not Kimberley. When faced with the competing claims, the second defendant's proper course and that which would have protected it, was to pay the disputed amount into court or to interplead. It chose instead to pay the money to Kimberley in return for an indemnity, when Kimberley was not entitled to receive any payment. It may have paid away the trust fund but its breach of duty was complete once it had done so."

The Issues on Appeal Concerning Section 58(3)

37 Some of Resi's grounds of appeal challenge those matters relating to the construction of section 58(3) that the primary judge found against it. In addition Resi seeks to argue that section 58(3) does not apply to it at all. By Notice of Contention, the Esbers submit that the judge should have held that section 58(3) RPA refers only to registered mortgages.

38 The issues that arise concerning section 58(3) are thus:

1. Should Resi be permitted to argue that section 58(3) does not apply to it when that argument is contrary to its concession in the court below?

2. If yes to 1, does section 58(3) apply to a non-selling mortgagee?

3. Does section 58(3) apply to an unregistered mortgage?

4. Does section 58(3) require a mortgagee to whom it applies to pay the whole amount surplus to its own claim to the next mortgagee in order of priority?

5. Was Resi entitled, on what it knew on 28 February 2002, to pay the Surplus Proceeds to Kimberley?

39 The conclusions at which I have arrived are:

1. Yes

2. Yes

3. No

4. No

5. No

40 It is convenient to consider those issues in a slightly different order to that set out above. Considering those issues also involves considering the scope of the expression "subsequent mortgages, charges and covenant charges" in section 58(3).

Permit Argument Contrary to Concession in Court Below?

41 In the court below Resi accepted that section 58(3) applied to it. Indeed, it contended that section 58(3) bound it to pay the whole of the proceeds to Kimberley, as the next mortgagee in priority. On the appeal, Resi sought to argue that section 58(3) imposed obligations only on a selling mortgagee, and as it was not a selling mortgagee it could not possibly be in breach of section 58(3).

42 Mr Parker SC, Senior Counsel for the Esbers, submits that Resi should not be permitted on the appeal to argue that section 58(3) does not apply to it. He disavows any submission that relevant evidence could have been admitted if the point had been taken below. However, he submits that this is a case where it would be contrary to the interests of justice to allow a new point to be taken on appeal, even if evidence at the trial could not have affected it: Multicon Engineering Pty Ltd v Federal Airports Corporation (1997) 47 NSWLR 631. He points out that what Resi is seeking to do is not only raise a new point on the appeal, but to repudiate a stance deliberately adopted in the court below. He submits that his clients mortgaged their property many years ago and had been seeking ever since to recover what they can of it, that they are not a large financial institution like Resi, and that, as well as Resi's change of tack involving the incurring of extra costs, there is a public interest in requiring the issues in litigation to be identified completely at first instance. There is no apparent reason for the concession made in the court below being withdrawn at this stage, beyond the fact that Resi's counsel on the appeal are different to its counsel in the court below.

43 In my view, those arguments are powerful, and in many cases they might prevail. However, in the present case, even if this particular point were not permitted to be taken on appeal, it would still be necessary for the court to construe section 58(3), and to consider the manner in which it interacts with equitable principles. That task would not be appreciably shortened by refusing to permit the new point to be raised on appeal. As well, it is common ground that there is no authority on the question of whether section 58(3) applies to a mortgagee other than a selling mortgagee. In any event I have concluded that the appellant's argument fails. In those circumstances, it is preferable to permit the argument to be raised, and to give the reasons why it fails.

"Subsequent Mortgages, Charges and Covenant Charges"

44 I turn to the construction of the expression "subsequent mortgages, charges and covenant charges" in section 58(3).

"Subsequent Mortgages, Charges or Covenant Charges" - "Covenant Charge"

45 Section 87A Conveyancing Act 1919 contains the following definition:

" public positive covenant , in relation to land, includes a covenant which imposes obligations requiring:

(a) the carrying out of development on or with respect to the land, within the meaning of the Environmental Planning and Assessment Act , 1979

(b) the provision of services on or to the land or other land in its vicinity, or

(c) the maintenance, repair or insurance of any structure or work on the land,

or imposes any term or condition with respect to the performance of or failure to perform any such obligation."

46 Section 88A Conveyancing Act enables certain easements in gross (ie easements without a dominant tenement) to be created in favour of a limited class of public authorities. Section 88BA enables positive covenants for maintenance or repair of the site of the easement to be imposed concerning, inter alia, an easement without a dominant tenement created in favour of a prescribed authority under section 88A. Section 88F confers on the prescribed authority having the benefit of a public positive covenant, powers to carry out certain types of action that the proprietor of the servient tenement is required by the covenant to carry out, but has failed to carry out, and to recover the cost of so doing. Section 88F(4) enables a public authority who has made such a payment, and obtained a judgment for an amount payable to it concerning that payment, to lodge with the Registrar General an application for registration of a charge over the land for the judgment debt. For RPA land, the registration takes place in the Register maintained pursuant to the RPA . For old system land, the registration takes place, under section 187 Conveyancing Act , in the General Register of Deeds. When registered, such a charge operates as a charge on the land for the amount to which it relates.

47 It is this type of charge that falls within the definition of "covenant charge" in section 3 RPA . There has never been a covenant charge over the mortgaged land that is presently the subject of dispute.

48 In oral argument Mr G Burton SC, for Resi, submitted in aid of his argument that section 58(3) permitted payment to a subsequent unregistered mortgagee, that there could be a covenant charge that was not registered under RPA . It is true that there can be a covenant charge that is not registered under RPA , namely one that is over old system land, and is registered in the General Register of Deeds. However, that is not a relevant covenant charge, for the purpose of section 58(3). The "subsequent mortgages, charges and covenant charges" in section 58(3) must all be mortgages, charges or covenant charges over the land that has been sold. When RPA land has been sold by a mortgagee, any covenant charge that exists over that land must be registered pursuant to RPA .

"Subsequent Mortgages, Charges or Covenant Charges" - "Charge"

49 In Avco Financial Services Limited v Commonwealth Bank of Australia (1989) 17 NSWLR 679, at 682, Young J (as his Honour then was) said:

The word 'charge' is defined by s 3(1) of the Real Property Act as 'any charge on land created for the purpose of securing the payment of an annuity, rent-charge or sum of money other than a debt'. It should be realised that what happened in the 1979 amendment to the Real Property Act was that the word 'charge' replaced the old word 'encumbrance'. The definition covers the liability to pay a periodical sum but it does not cover the situation where a principal sum is charged on land: see the notes in Woodman and Nettle on the Torrens System in New South Wales (1985) at 114, a note that originated in the first edition of Baalman on the Torrens System in New South Wales (1951) at 13."

50 The rights that Kimberley had under its unregistered mortgage in the present case, secured the repayment of "the moneys due and owing by the Mortgagor as Borrower to that Mortgagee as Lender pursuant to the Deed of Loan and Guarantee of even date" . Those moneys included the principal amount that the Esbers had guaranteed. Thus, the mortgage that Kimberley held over the land was not a "charge" within the meaning of the definition of that word in section 3 RPA .

"Subsequent Mortgages, Charges or Covenant Charges" - "Mortgage"

51 It will be recalled that the definition of "mortgage" in section 3 RPA is "any charge on land (other than a covenant charge) created merely for securing the payment of a debt" . The word "charge" in that definition could not have been intended to have the defined meaning of "charge" . That is because the defined meaning of "charge" specifically excludes a charge on land created for the purpose of securing a debt, while the definition of "mortgage" requires there to be a charge on land created for securing the payment of a debt. In both the definition of "charge" and the definition of "mortgage" the word "charge" itself appears. In both those definitions, it bears its ordinary meaning of an act in the law by which an item of property is made available as a source from which some legal obligation can be met.

52 The definition of "mortgage" in section 3 RPA can include unregistered mortgages. It is used with that extended meaning when the expression "unregistered mortgage" or one of its cognates appears in section 57(2)(b1)(ii), and section 61(2)(d)(iii) RPA .

Does Section 58(3) Apply to an Unregistered Mortgage?

53 It is another question whether "mortgage" is used in its full defined sense in section 58(3). For the reasons that follow, it would be inconsistent with the context and subject matter for it to bear its full defined sense in section 58(3). Rather, section 58(3) is concerned only with registered mortgages.

54 Section 41(1) RPA has the effect that a dealing not only does not pass any estate or interest in Torrens system land until registered, but also that the dealing does not render the land liable as security for the payment of money until it is registered. It might happen that a transaction, such as a contract, that is evidenced by the dealing gives rise to a security in the eyes of equity, but that happens outside the scope of the RPA itself, and does not affect the construction of RPA .

55 Section 36(9) RPA makes clear that it is the dates of registration of dealings, not the dates of creation, that determine their respective orders of priority. Section 56A provides a means by which the holders of registered mortgages can alter their priority inter se , by registration of a particular type of memorandum in the approved form.

56 When there is an unregistered mortgage, the registered proprietor of the land holds his estate or interest in the land free from that mortgage, pursuant to section 42(1) RPA , except in the case of fraud. It is uncontroversial that the registered proprietor is also subject to any personal equities ( Frazer v Walker [1967] 1 AC 569 at 585; Barry v Heider (1914) 19 CLR 197 at 213; Breskvar v Wall (1971) 126 CLR 376 at 385) but what matters for the present task of statutory construction is that these personal equities arise outside the statute, not within its structure.

57 Section 56(1) RPA requires Torrens title land to be mortgaged using a mortgage in the approved form.

58 Section 57(2) sets out various preconditions for the exercise of the powers under section 58. As the opening words of section 58(1) make clear, the power of sale can be exercised only when the preconditions laid down in section 57(2) have been met. The chapeau of section 57(2) makes clear that the only type of person eligible to fulfil those preconditions is "a registered mortgagee, chargee or covenant chargee" . Thus, the only mortgagee who can exercise the power of sale under section 58 is a registered mortgagee. Powell J expressly so decided in Midland Montagu Australia Ltd v Cuthbertson (1989) 17 NSWLR 309 at 313.

59 Section 58(3) only comes into operation once the power of sale under section 58(1) has been exercised. The opening phrase of section 58(3), "the purchase money to arise from the sale of any such land, estate or interest" , refers back to the type of land, estate or interest that is capable of being sold under section 58(1), which is only Torrens system land.

60 In the order of application of proceeds laid down by section 58(3), the second application of money, after the expenses, is "in payment of the moneys which may then be due of owing to the mortgagee, chargee or covenant chargee" . The "mortgagee, chargee or covenant chargee" there referred to is the mortgagee, chargee or covenant chargee who has exercised the power of sale - ie, necessarily someone with a registered mortgage, charge or covenant charge.

61 Next in line is "in payment of subsequent mortgages, charges or covenant charges (if any) in the order of their priority" .

62 There was some mention in argument of the possibility that, when those subsequent interests are to be paid "in the order of their priority" that is a reference to the priority that they are accorded by the RPA itself. The argument is that whether their order of priority arises solely under section 36(9) from the order of their registration, or is also affected by the registration of a memorandum under section 56A, that order of priority exists only amongst registered mortgages.

63 Provisions somewhat analogous to section 58(3) RPA , namely section 135 Real Property Act 1886 (SA) and section 88(1) Property Law Act 1974 (Qld), have been held to be intended "not to establish priorities but to provide the machinery for giving effect to the priorities otherwise legally established" : Mercantile Credit Ltd v Australia and New Zealand Banking Group Ltd (1988) 48 SASR 407 at 410 per King CJ; Australia and New Zealand Banking Group Ltd v Evans [1992] 2 Qd R 230 at 233 per de Jersey CJ; Emerson v Custom Credit Corporation Ltd (1991) Q Conv R [54-414]; Rockett v Moneycorp Securities Pty Ltd [2008] QFC 258 at [15]-[16]. In Mercantile Credit v ANZ King CJ said, at 410, that such a provision was not:

"... apt to create a priority which would not otherwise exist. Its broad effect is to provide that the moneys are to be applied in payment of the mortgages according to the priorities established by law, the balance being paid to the mortgagor."

64 Thus, Mercantile Credit v ANZ held (as Holland J had previously held in Matzner v Clyde Securities Ltd [1975] 2 NSWLR 293) that where a first registered mortgage contains an all moneys clause, a second mortgage is later registered, and the first mortgagee then makes further advances, the equitable rule in Hopkinson v Rolt (1861) 9 HL Cas 514; 11 ER 829 could operate to limit the priority of the first mortgage to the amount that the first mortgagee had advanced at the time of acquiring notice of the second mortgage. (Notice of the second mortgage does not always have that effect - there can be reasons, as were found to exist in Matzner , that outweigh in equity's eyes the significance of the first mortgagee having notice of the second mortgage.) As de Jersey CJ put it in Australia and New Zealand Banking Group Limited v Evans [1992] 2 Qd R 230 at 233, the order of priority referred to in section 88(1) of the Queensland legislation is not "the priority prima facie established by the order of registration, but the true priority, however lawfully it is achieved".

65 In my view the Queensland decisions that I have cited in [63] are not determinative of the point presently in issue.

66 Like section 58(3) RPA , section 88(1) Property Law Act 1974-1975 (Qld) required the surplus moneys received by a mortgagee to be held in trust and applied by him in accordance with the section. Section 88(1) ended:

"(c) Thirdly, in payment of any subsequent mortgages or encumbrances:

and the residue (if any) of the money so received shall be paid to the person entitled to receive or entitled to give receipts for the proceeds of sale of the mortgaged property."

67 However, section 88 appeared in Part 7 of the Act, which commenced by saying:

77(1) This Part-

(a) applies to unregistered land and to any mortgage of such land; and

(b) applies to land and any mortgage of land which is subject to the provisions of-

(i) the Real Property Acts; or

(ii) the Land Act; or

(iii) the Miners' Homestead Leases Act; or

(iv) the Mining Act; or

(v) the State Housing Act; or

(vi) any other Act, and any repealed Act which continue to apply to such land or mortgage made before that Act was repealed; and

(c) subject to any other Act, apply to any other mortgage whether of land or any other property.

(2) In this Part-

"instrument of mortgage" includes-

(a) a bill of mortgage and a bill of encumbrance within the meaning of the Real Property Acts; and

(b) a memorandum of mortgage under the Land Act, the Miners' Homestead Leases Act, or the Mining Act;

"mortgagee" includes an encumbrancee under a registered bill of encumbrance;

"mortgagor" includes an encumbrancer under a registered bill of encumbrance;

"principal money" includes any annuity, rent charge or principal money secured or charged by a bill of encumbrance registered under the Real Property Acts.

68 It is significant that section 88 Property Law Act 1974 (Qd) is a provision that, by reason of section 77, is expressly made applicable to land under both a Torrens title and a non-Torrens title, and to registered and unregistered mortgages. That is not the case with section 58(3) RPA.

69 For mortgages over land that is not Torrens land, and for priorities between unregistered mortgages, priorities must be decided through the general law, not by inspecting a Torrens register. The meaning of section 88(1)(c) must be ascertained in a way that takes account of this wide scope of application of section 88(1)(c) - the provision cannot have a different meaning when applied in one factual situation to when it is applied in a different factual situation. However, there is no similar necessity for section 58(3) RPA to accommodate, as a matter of its construction, priorities ascertained other than by the Torrens register.

70 If section 58(3) were to be construed in the way section 88(1) has been construed in Queensland, the relevant order of priorities would include the priority between a registered and an unregistered mortgage, and an unregistered mortgage would then be part of the "subsequent mortgages, charges or covenant charges" . However, so construing it would produce a significant anomaly. It would make the scope of the phrase "subsequent mortgages, charges or covenant charges" extend beyond the registered interests in land to which all six of the previous references in section 58 to "mortgages, charges and covenant charges" (or cognates of that expression) refer, when there is no indication in either the text or the context that a different meaning is intended. It has long been a principle of construction that a word or phrase is assumed to be used consistently in legislation, and (unless the word or phrase appears in contexts that show that different meanings are intended) it should be given the same meaning in the various places at which it appears: Pearce & Geddes, Statutory Interpretation in Australia, 6 th ed, para [4.6] and cases there cited. That principle has special force when the same word or phrase is used several times in the one section.

71 The way in which the situation of the unregistered mortgagee is accommodated is not through the construction of section 58(3), but by equitable principle operating to modify the operation of section 58(3) to prevent it being used to produce inequitable results.

72 It is necessary for equitable principles to be called into play in deciding priorities between NSW registered mortgages because section 58(3) does not deal with all the possible situations in which proceeds of sale might come to be distributed amongst a mortgagor and mortgagees. If it is a second registered mortgagee who sells, section 58(3) says nothing about the first registered mortgagee being paid out (because it is not a "subsequent mortgage" ). Clearly the first mortgagee would have priority even over the second mortgagee (absent an agreement altering the priority arising from registration) but it is equitable principles, not section 58(3) that requires it to be paid to give effect to that priority.

73 Further, it is possible, by agreement between the mortgagor, all registered mortgagees, and a lender whose security interest is unregistered, for the unregistered interest-holder to be given whatever priority the parties might choose. If the chosen priority was subsequent to that of the selling mortgagee, and (contrary to my view) the Queensland construction of its section 88(1) were to apply to section 58(3) RPA , that unregistered mortgage would be one of the "subsequent mortgages, charges or covenant charges" within section 58(3). Section 58(3) would then require payment to it, in its appropriate order of priority. However, if the parties by agreement gave the unregistered interest a first priority, section 58(3) would not address that situation at all, because the unregistered interest was not a "subsequent" mortgage. In that situation the unregistered mortgagee would ultimately be accorded first priority, by equity enforcing the priority agreement as giving rise to a personal equity that bound the registered mortgagees. If equitable principle is needed to accommodate the unregistered mortgage in one of these situations, it is a more harmonious construction to also bring it into play in the other.

74 Another reason why equitable principle is needed to supplement the words of section 58(3) arises from the fact that the "surplus" referred to in section 58(3) is the surplus after payment of the previous three items listed in section 58(3). In other words, the amount that section 58(3) requires to be paid to the mortgagor, charger or covenant charger is an amount ascertained without deduction of any amount that a mortgagor or charger might have agreed, in an unregistered document, the land in question would be security for.

75 When the words of section 58(3) must be supplemented by equity, the preferable construction of them, in accordance with the usual principle of statutory construction, accords the same meaning to different instances of a phrase being used in the one section.

76 As the decision in Mercantile Credit v ANZ is a decision of the South Australian Full Court, and I can see no relevant difference between section 135 of the South Australian legislation and section 58(3) RPA , particular attention must be paid to precisely what it decided. While King CJ expressed the view about what section 135 did not do (namely, create a priority which would not otherwise exist), and about the "broad effect" and the "purpose" of section 135, he did not, as I read his judgment, decide that section 135 had a meaning different to that which seems to me to be the correct meaning of section 58(3). The other judge who wrote his own judgment, Mohr J, said expressly (412):

"Although there are, as pointed out in argument, some ambiguities and uncertainties in the language of section I find it unnecessary to resolve that in the instant case. Here the facts are clear and the answer to the special case will not depend on any interpretation of S135. "

77 The remaining judge, Millhouse J, (who was the third and last of the judges to give judgment) said only "I agree" , without saying with which aspects of which judgment or judgments he agreed, beyond (obviously) the result. In the circumstances I see nothing in the decision in Mercantile Credit v ANZ that stands in the way of the construction of section 58(3) RPA that seems to me to be correct.

78 It remains to consider Re S & D International Pty Ltd (in liquidation) (Receiver and Manager Appointed) , the decision that deflected Hammerschlag J from his own preferred course ([31] above). There, Robson J considered a situation where there were two properties, each subject to a registered first mortgage. Other claims over the properties arose from an unregistered mortgage, an unregistered charge, a trustee's lien, and a liquidator's lien for fees and expenses. One of the properties had been sold by the first mortgagee, the other remained unsold but in the hands of a receiver appointed by the first mortgagee. The manner of disposition of the proceeds of a mortgagee sale was laid down by section 77(3) Transfer of Land Act 1958 (Vic).

79 Relevant provisions of the Transfer of Land Act 1958 (Vic) include:

74(1) The registered proprietor of any land -

(a) may mortgage it by instrument of mortgage in an appropriate approved form;

(b) may charge it with the payment of an annuity by instrument of charge in an appropriate approved form.

(2) Any such mortgage or charge shall when registered have effect as a security and be an interest in land, but shall not operate as a transfer of the land thereby mortgaged or charged.

...

76(1) If default is made in payment of the principal sum interest or annuity secured or any part thereof or in the performance or observance of any covenant express or implied in any such mortgage or charge and continues for one month or such other period as is therein expressly fixed, the mortgagee or annuitant may serve on the mortgagor or grantor of the annuity and such other persons as appear by the Register to be affected notice in writing to pay the money owing or to perform and observe the covenants (as the case may be).

...

77(1) If within one month after the service of such notice or demand or such other period as is fixed in such mortgage or charge the mortgagor grantor or other persons do not comply with the notice or demand the mortgagee or annuitant may, in good faith and having regard to the interests of the mortgagor grantor or other persons, sell or concur with any other person in selling the mortgaged or charged land ...

(3) The purchase money received arising from the sale shall be applied-

(a) firstly in payment of all costs charges and expenses properly incurred incidental to the sale and consequent on such default;

(b) secondly in payment of the moneys which are due or owing on the mortgage or charge;

(c) thirdly in payment of moneys owing under or in respect of subsequent mortgages and charges in the order of their respective priorities;

(d) fourthly in payment of the residue (if any) to the mortgagor or into the Supreme Court under the provisions so far as they are applicable of section sixty-nine of the Trustee Act 1958 and the rules referred to therein ...

80 After an extensive review of the authorities, Robson J at [159](c) concluded that, "the reference to subsequent mortgages and charges in s 77(3)(c) of the TLA includes unregistered mortgages and charges." The authorities cited for that conclusion were: Ex parte Australian Co-operative Development Society Limited (in liq) [1978] Qd R 395; Avco Financial Services Limited v Commonwealth Bank of Australia ; and Fraser v Australian Securities & Investments Commission, in the matter of Lanepoint [2007] FCAFC 85.

81 I agree with Hammerschlag J that these authorities do not support the conclusion that Robson J drew from them. In Ex parte Australian Co-operative Development Society Limited Hoare J considered a situation where a registered first mortgagee had exercised a power of sale. The applicant held an unregistered second mortgage.

82 Hoare J said, at 396:

"The original scheme of the Real Property Acts equated a bill of encumbrance with a bill of mortgage. It is difficult to see why provisions of the Property Law Act should apply to an unregistered bill of mortgage but only to a registered bill of encumbrance. While one can readily see the creation and enlargement of doubts by the provisions of s. 77(2) of the Property Law Act , nevertheless, I find it difficult to see why the provisions of s. 88(1)(c), at any rate as they apply to a bill of mortgage should be restricted to a registered bill of mortgage. At the same time it would, on the face of it, be absurd if the bill of encumbrance is, by the operation of s. 77(2), to be placed, as it were, in a different category and with separate provisions applying to a bill of encumbrance. It is not necessary for me to determine this aspect of the matter on this application but it may be that the operation of s. 77(2) is sufficiently restricted by the words, 'unless the contrary intention appears.' However, I say no more of the bill of encumbrance but it does seem to me that, having regard to the existing law which is so well established, I can see no good reason why s. 88(1)(c) as far as its application to a mortgage is concerned, should be restricted to a registered mortgage and I so hold."

83 As shown earlier ([66]-[69]), on its correct construction section 88(1) Property Law Act (Qld) applies to both registered and unregistered mortgages. However that is a result of a peculiarity of the drafting of the Queensland legislation that is not reflected in either section 58(3) RPA or section 77(3) Transfer of Land Act (Vic). Section 77(1) Transfer of Land Act operates by reference to " such mortgage or charge ", which refers back to section 74, which relates only to registered mortgages.

84 Avco Financial Services Limited v Commonwealth Bank of Australia arose after a registered mortgagee who had exercised a power of sale paid a surplus into court. A lender who had an unregistered equitable charge over the land applied to Young J (as his Honour then was) under section 98 Trustee Act 1925 for the payment out to it of the money in court. By the time of the hearing the only other potential claimants to that money were the mortgagors. They had left Australia and were probably living permanently in the Philippines. The applicant had obtained a default judgment against them, for more than the amount of the sum in court. Young J said, at 682, that Ex parte Australian Co-operative Development Society was:

"... one of the particular wording of the Queensland Act, but nonetheless it goes some way to persuade one that the words in the New South Wales statutes should be liberally construed. Especially is this so when one can see in s 58, a distinction made between a mortgage charge or covenant charge on the one hand and a registered mortgage charge or covenant charge on the other. Section 56 B again appears to recognise an unregistered mortgage as a mortgagee under the Act."

85 After holding that the equitable charge of the applicant was not a "charge, within the meaning of the definition of that term in section 3 RPA " his Honour said, at 682-3:

"Accordingly, although I lean to the view that one should read the word 'mortgage' in s 58(3) as including an equitable mortgage, because I do not consider that the equitable charge in this case is a charge within the meaning of the Real Property Act , the statutory trust in that former subsection does not avail the plaintiff."

86 His Honour referred to Hope v Hope [1977] 1 NZLR 582, in which Wilson J had upheld the claim of an unregistered subsequent mortgagee to part of the surplus. He quoted Wilson J's statement (at 583) that the section:

"... does not vest the surplus from a mortgagee's sale in the mortgagor free from all equities but subject to them. In equity the equitable charge on the land is converted, on the sale of the land, to a charge on the proceeds."

(The relevant New Zealand section, section 104(1) Land Transfer Act 1952 (NZ) differed from section 58(3) RPA only in that the third payment to be made is "of subsequent registered mortgages or incumbrances (if any) in the order of their priority" .)

87 His Honour concluded, at 683:

"Accordingly, the Court will, outside s 58(3) find that there is virtually a sub-trust whereby the equitable charge created by the mortgagor which enures against the fund produced by the mortgagee sale is enforced in personam against the mortgagor.

It follows that the plaintiff has a better title in equity to the fund than the mortgagor ..."

88 Thus, the inclination (not final view) that his Honour expressed about section 58(3) extending to unregistered mortgages was not part of the ratio of the case.

89 Fraser v ASIC arose when the director of two associated companies in receivership requested the receivers to advance money from company funds for the purpose of conducting various pieces of litigation that the director wished to bring relating to the affairs of the companies. The receivers refused the request. Each company had given to the bank that had appointed the receivers both Real Property mortgages and a debenture over its undertaking and assets to secure their respective borrowings ([43], [49]). One of the companies, Lanepoint Enterprises Pty Ltd had also given a second fixed and floating charge over its assets to Perpetual Nominees Limited. A first instance judge, hearing an application by the director that was treated as an appeal under section 1321 Corporations Act 2001 (Cth) against a refusal of the receivers to advance funding for the litigation in question, had authorised a particular advance to be made. That order was reversed on appeal.

90 Section 105 Transfer of Land Act 1893 (WA) provided:

"(1) The proprietor of land under the operation of this Act may -

(a) mortgage the land; or

(b) charge the land with the payment of an annuity.

(2) A mortgage or charge shall be in an approved form."

91 Section 106(1) provides:

"Subject to Division 2 of Part 6 of the Land Administration Act 1997 in the case of conditional tenure land, a mortgage and a charge under this Act shall when registered as hereinbefore provided have effect as a security but shall not operate as a transfer of the land thereby mortgaged or charged; and in case default be made in payment of the principal sum interest or annuity secured or any part thereof respectively or in the performance or observance of any covenant expressed in any mortgage or charge or hereby declared to be implied in any mortgage and such default be continued for one month or for such other period of time as may therein for that purpose be expressly fixed the mortgagee or annuitant or his transferees may serve on the mortgagor or grantor or his transferees notice in writing to pay the money owing on such mortgage or charge or to perform and observe the aforesaid covenants (as the case may be)."

92 Section 109(1) provides, so far as relevant:

"The purchase money arising from the sale of the mortgaged or charged land shall be applied as follows: -

If the sale be by the mortgagee or his transferees -

First in payment of the expenses of and incidental to such sale and consequent on such behalf; secondly in payment of the moneys which may be due or owing on the mortgage; thirdly in payment of subsequent mortgages and of any money which may be due or owing in respect of any subsequent charge in the order of their respective priorities; and the surplus (if any) shall be paid to the mortgagor. Provided always that if the sale be made by a mortgagee or his transferees and there is a subsequent charge the purchase moneys after there shall have been made thereout all proper prior payments shall be deposited by him or them in the manner and names and for purposes corresponding with those after mentioned.

93 The debenture that Lanepoint had given to the first mortgagee stated that funds obtained from the sale of the charged property should be applied in the same way as was provided for in section 109:

94 Finkelstein J held that, concerning the surplus that the receivers would eventually hold there would be two claimants, one of them a guarantor that had made a payment under its guarantee and would be subrogated to the first mortgagee's securities, and Perpetual. As Perpetual's only security interest over the land arose from its fixed and floating charge, in the ordinary course of things that interest would be purely an equitable security. His Honour said at [53]:

"Perpetual is a claimant because of the common law rule that once a receiver has paid the amount due to his principal he must account for the surplus to second and subsequent mortgagees before any funds are paid to the mortgagor: Re Thomson's Mortgage Trusts [1920] 1 Ch 508; Kerabee Park Pty Ltd v Daley [1978] 2 NSWLR 222 , 228. It could also rely on s 109 of the Transfer of Land Act ."

95 His Honour held that a payment to the director out of that surplus was a payment that the receivers would not be permitted to make even if they were of the opinion that it was desirable to make the payment. His Honour said, at [54]:

"The receivers would not be permitted to make the payment because it would be inconsistent with both s 109 of the Transfer of Land Act and the mortgage instrument. Thus the first effect of the order was to require the receivers to make a payment which was both in breach of statute and in breach of the mortgage."

That reasoning contemplates that Perpetual could fall into the order of application of funds laid down by section 109.

96 Ryan and Gilmour JJ gave a different reason why the order of the primary judge was incorrect. Their Honours said, at [38]:

"We are prepared to assume, without deciding, that receivers may have a discretion, once they are satisfied that they will have a surplus of funds after their secured creditor has been paid in full and after all the costs and expenses of the receivership have been met, to make a payment in advance of their retirement to the mortgagor company. That discretion is apparently qualified by the duty owed to second or subsequent mortgagees or other encumbrancers of the company's assets which has been identified by Finkelstein J in his separate reasons at [53] below; see Re Thomson's Mortgage Trusts [1920] 1 Ch 508 and the other authority there cited. However, even if there were no second mortgagee or subsequent secured creditor of whom the receivers had notice, they would not be entitled to pay funds under their control to the mortgagor company on the condition that it apply those funds in a certain way or for some specified purpose. Such a condition could potentially cut down the rights of secured creditors of whom the receivers had no notice or of any unsecured creditors and might, if it matters, constitute a preference."

97 Their Honours' statement "that discretion is apparently qualified ..." is less than adoption of [53] of the judgment of Finkelstein J. Further, the reason that their Honours give for the payment by the receivers being beyond power is one that applies "even if there were no second mortgagee or subsequent secured creditor of whom the receivers had notice" . In those circumstances, [53] of the judgment of Finkelstein J is not part of the ratio decidendi of the case.

98 Finally, in my view, section 109 Transfer of Land Act applies only to registered mortgages. The Division in which it occurs relates, as section 105 makes clear, only to registered land. The type of " charge " that the Division (and thus section 109) is concerned with is identified by a 105(1)(b) as a charging of the land with payment of an annuity. It is that type of charge that is referred to by the provision in section 109 for the " thirdly " payment to be made to " any subsequent charge ". Similar considerations of consistency in language use to those that apply under section 58(3) RPA make preferable the construction that section 109 does not extend to the payment out of subsequent unregistered equitable interests in the land. While some of the other provisions in the Division are subject to an exception concerning land under the Land Administration Act 1977 , section 109(2) says that section 109 does not apply to the application of proceeds of sale by a mortgagee in accordance with section 77 Land Administration Act . Thus I respectfully disagree with the view that an unregistered mortgage could fall within the order of application of funds laid down by section 109.

99 In these circumstances I would not follow the aspect of Re S & D International that held that section 77(3) Transfer of Land Act authorised the payment to subsequent unregistered mortgages and charges. I uphold the Notice of Contention. On its true construction, section 58(3) RPA does not authorise the payment out of subsequent unregistered mortgages.

Does Section 58(3) Apply to a Non-Selling Mortgagee?

100 Mr Burton submits that section 58(3) does not apply to Resi, because it was not the mortgagee who exercised the power of sale over the land.

101 Clearly, he submits, it is the mortgagee who exercises the power of sale who will first have the purchase money arising from the sale in his hands, and who would, in the ordinary course, make payment of the expenses occasioned by the sale. The payment second in line, of "the moneys which may then be due or owing to the mortgagee, chargee or covenant chargee" refers, he submits, to the mortgagee, chargee or covenant chargee who exercises the power of sale.

102 He goes on to submit that the payment "thirdly" is likewise one that the mortgagee exercising the power of sale should make. Even if (contrary to another of his submissions) the obligation to make payment "of subsequent mortgages, charges or covenant charges ... in the order of their priority" is an obligation to pay the amount correctly owing to each successive mortgagee, chargee or covenant chargee, that is an obligation that it was Perpetual's task to perform, and that it failed to perform by paying the entire amount to Resi. Thus, he submits that Resi was not in breach of any obligation imposed on it by section 58(3) when it paid the whole of the surplus to Kimberley when, as it turned out, Kimberley was not entitled to it.

103 I do not accept this argument. In Provident Capital Ltd v Printy [2008] NSWCA 131 Basten JA (with whom Tobias and McColl JJA agreed) at [30] referred to section 58(3) as effecting a "statutory allocation of the proceeds" . While it is correct that the task of dividing the purchase money would ordinarily fall to the mortgagee who exercised the power of sale, section 58(3) is cast in the passive voice. It says that the purchase money shall be applied in a particular fashion, but does not say by whom it shall be so applied. It is a statutory diktat , about how Parliament requires this aspect of the world's affairs to be carried out.

104 In my view, the preferable construction is that section 58(3) has the effect that whenever the purchase money arising from the exercise of a power of sale comes into someone's hands, that person comes under an obligation to dispose of the purchase money in accordance with section 58(3). That obligation would be subject to any more specific countervailing statutory obligations, such as the statutory obligation of a solicitor who receives money from a client on trust to disburse it in accordance with the directions of the client: Adams v Bank of New South Wales [1984] 1 NSWLR 285.

Obligation Under Section 58(3) Requires Payment of Whole Surplus to Next Mortgagee?

105 Mr Burton submitted that, even if section 58(3) is capable of applying to a non-selling mortgagee like Resi, its obligation was satisfied by handing over the entire amount of the surplus, after meeting its own secured debt, to the next mortgagee in line. My upholding of the Notice of Contention provides a reason why, even if this argument were correct, it would not avail Resi in the present case because Kimberley, as an unregistered mortgagee, is not a "subsequent mortgagee" within the meaning of section 58(3).

106 Apart from this, I do not accept that the argument is correct. The language of section 58(3) is loose in some respects. Once the time comes for distribution of the purchase money arising from a power of sale, there are no "subsequent mortgages, charges or covenant charges" on foot - they have all been discharged by the exercise of the power of sale, and converted into a proprietary right in the proceeds of sale. Further, a mortgage under the RPA is, even while it is still on foot, an interest in land consisting of a charge. It is not possible, literally, to pay an interest in land. However it is a common enough use of language to talk, for example, of paying the credit card or the electricity bill, when one does not mean that payment is to be made to a piece of plastic or paper, but rather that the amount that is owing on the credit card or the electricity bill is to be paid. As Mr Parker rightly points out, the obligation under section 58(3) is to pay the subsequent mortgage, not to pay the subsequent mortgagee. The construction that best makes sense of section 58(3) is that it is the obligation that was secured at the time of the sale by that interest in land which is to be paid, to the extent to which it has priority. That is not to say that the only amount to be paid is the number of dollars that were owing at the time of sale - the relevant obligation includes incidental covenants like those for payment of interest or enforcement expenses.

107 Another problem for this construction is that section 58(3) has a positive requirement that "the surplus (if any) shall be paid to the mortgagor..." . If, as seems to me to be correct, section 58(3) imposes an obligation on anyone into whose hands the proceeds of the sale come, but the requirement of the section was for a mortgagee whose own debt had been paid to pass the entire amount that was surplus to his own requirements to the next mortgagee in line, it would not be possible for anyone but the last mortgagee in line to perform the obligation of paying the surplus to the mortgagor. When section 58(3) imposes obligations on all mortgagees, the obligation to arrange matters so that "the surplus (if any) shall be paid to the mortgagor ... " cannot be performed by the selling mortgagee, or any mortgagee but the last in line. Section 58(3) should not be interpreted as imposing an obligation that cannot be performed.

108 Mr Burton submits that significant practical problems would arise if a mortgagee with purchase money in his hand was required to ascertain correctly the amount owing to each subsequent mortgagee. He points out, correctly, that a mortgagee has no power to require documents from subsequent mortgagees, or from mortgagors, to ascertain the private arrangements between them in order to determine what are the covenants to which their security relates and what are the amounts owing under these covenants. He points out, correctly, that even if the amount that is owing to a subsequent mortgagee seems clear at the time the power of sale is exercised, a claim might later be made that it was not the amount that then seemed clear. He points out, correctly, that it is not unusual for mortgages to secure amounts that fluctuate from time-to-time.

109 These difficulties are capable of applying equally to subsequent registered and unregistered mortgages. I doubt that in practice they would cause real difficulty as often as Mr Burton suggests. In any event, for both types of mortgage, if a mortgagee holding a surplus is in real doubt about how much to pay to whom, and it is not possible for agreement to be reached between the mortgagor and all subsequent mortgagees about how much is owing to the respective mortgagees, the procedure for payment into court provides the solution.

Payment Into Court

110 Uniform Civil Procedure Rule 43.1 defines "stakeholder" as meaning "a person (other than the Sheriff) who is under a liability in respect of a debt or other personal property." A mortgagee who had sale proceeds in his hands, after payment of his own secured debt, would be a stakeholder within this definition both by reason of his statutory obligations under section 58(3) and by reason of his fiduciary obligation.

111 Uniform Civil Procedure Rule 43.1 also provides:

"claimant means a person by whom a stakeholder ... is being sued, or expects to be sued, in proceedings before a court.

disputed property means any debt or other personal property in respect of which a stakeholder ... is being sued, or expects to be sued, by two or more persons in proceedings before a court."

112 Uniform Civil Procedure Rule 43.2(1) provides:

"If, in relation to disputed property, a stakeholder is sued, or expects to be sued, in any court by two or more claimants, the court may, on application by the stakeholder, grant relief by way of interpleader."

113 Uniform Civil Procedure Rule 43 contains a procedure whereby the stakeholder can pay the disputed amount of money into court, and the court can set in motion a procedure for giving notice to the rival claimants and requiring them to litigate their claims, or be barred from prosecuting the claim against the applicant and those claiming under the applicant. It is also possible under UCPR 43 for the stakeholder to keep the property while the dispute is being resolved, upon giving security to the value of the subject matter to the satisfaction of the court ( UCPR 43.2(3)(c)). Such a procedure might be available if the applicant consented, and a better rate of return could be obtained if the disputed fund remained in the applicant's hands, held on a suitable trust, than would be obtained if it were paid into court.

114 Before these provisions can be availed of, the person paying in needs to qualify as a person " being sued, or who expects to be sued ". If the stakeholder is not actually being sued, often (though maybe not inevitably) that would require the stakeholder to have had enough communication with at least one of the claimants to have a basis for expecting to be sued.

115 An alternative procedure is available under section 95 Trustee Act 1925 . That section empowers trustees to pay trust moneys into court. Section 99 Trustee Act provides that, for the Part within which section 95 falls, "trustee includes every implied or constructive trustee without any exception". That unusually emphatic definition exists because section 5 Trustee Act provides that, unless the context or subject matter otherwise indicates or requires,

" Trust does not include the duties incident to an estate conveyed by way of mortgage; but, with this exception, includes implied and constructive trusts, and cases where the trustee has a beneficial interest in the trust property, and the duties incident to the office of legal representative of a deceased person.

Trustee has a meaning corresponding with that of trust; and includes legal representative and the NSW Trustee and a trustee company."

116 The purpose of the "without exception" in section 99 is to remove the exception concerning the duties incident to an estate conveyed by way of mortgage that appears in the definition of "trust" in section 5. It is clearly established that a mortgagee holding surplus funds following exercise of the power of sale is at the least constructive trustee of those funds: see [142] below. Thus a mortgagee holding surplus proceeds of sale can pay into court under this provision, without needing to establish that he is being sued or expects to be sued. The procedure for payment into court under the Trustee Act , and administration of those funds once in court, appears in UCPR 55.8-55.12.

117 Once the procedures under section 95 Trustee Act or UCPR 43 have been availed of, section 171 Conveyancing Act provides:

"Payment of money into court under the provisions of this or any other Act shall effectively exonerate therefrom the person making the payment."

Payment into court under UCPR 43 is "under" an Act because UCPR 43 is delegated legislation made under Civil Procedure Act 2005 , section 9.

118 When section 171 Conveyancing Act provides this statutory exoneration to a person paying into court, a New South Wales mortgagee who pays a surplus into court is just as effectively protected as is a Victorian mortgagee who pays into court pursuant to the express option given to him to do so under section 77(3)(d) Transfer of Land Act 1958 (Vic).

119 While funds paid into court by a mortgagee holding a surplus can earn interest ( UCPR 41.5-41.8) the rate might not be as attractive as a rate obtainable by another form of investment, and there can be costs associated with making the payment in and obtaining the payment out (eg UCPR 41.8-41.145, 55.8-55.12). Thus it may be more advantageous for the disputants to agree upon a regime for keeping the funds secure and invested out of court.

Resi Entitled to Pay Kimberley in 2002 On What Was Then Known?

120 A further argument that Mr Burton puts forward is that even if it is now clear that Kimberley's mortgage over the land secured nothing at the time it received the surplus in February 2002, that situation was not known in February 2002. Indeed, even at the time that McDougall J gave his 2007 judgment he recognised a possibility that, even though the $2m fee was not secured by Kimberley's mortgages, there might be other Project Costs that were so secured. That possibility was not eliminated until McDougall J's April 2008 judgment.

121 That state of affairs is merely one particular example of the many different reasons why a person with surplus proceeds of sale in his hands might not be able to ascertain the precise amount owing to a subsequent security holder. Faced with that situation, Resi could not tell what its obligation was under section 58(3). That provided a good reason for it to pay the surplus into court. It provided no justification for Resi paying the entire surplus to Kimberley on the terms it did.

Conclusion re Application of Section 58(3)

122 If section 58(3) were the only relevant legal obligation on Resi, it has paid the surplus to someone who is not a "subsequent mortgagee" within the meaning of section 58(3). Thus it will have performed its duty only if there is an intervention of equity in the operation of section 58(3), which results in a different conclusion. I turn to consider that topic. In light of the way the case was argued, where the only remedy asserted on the appeal was an equitable one, there is no occasion to consider whether section 58(3) by itself gives rise to a common law remedy if it is breached.

PART B - EQUITABLE OBLIGATIONS CONCERNING DISTRIBUTION OF PROCEEDS OF SALE

123 Mr Burton submits that the judge was mistaken in holding that if the position were governed not by section 58(3) but by the general principles of equity, the outcome would be no different.

124 He submits that, under the general law, Re Thomson's Mortgage Trusts [1920] 1 Ch 508 is authority that a first mortgagee who exercises a power of sale is required to pass the whole net surplus to the next encumbrancer as the person entitled to the mortgaged property or authorised to give receipts for the proceeds of sale thereof. Croft and Johannsson, The Mortgagee's Power of Sale, 2 nd ed, 2004 , at [12.1], 186 also incline to that view, though they say that the matter is not free from doubt.

Obligations re Distribution of Sale Proceeds Under the General Law

125 Before considering Thomson , I will set out what other authorities show to be the position under the general law. The position under a general law mortgage was explained in West London Commercial Bank v Reliance Permanent Building Society (1885) 29 Ch D 954 at 962. That case arose when a mortgagor of land sold it with the concurrence of the first mortgagee. The first mortgagee had been given notice of the existence of a second mortgage, but by the time of the sale the relevant officers of the first mortgagee had all forgotten about it.

126 In accordance with the usual way that old system conveyancing was carried out, it was necessary for the first mortgagee to provide the deeds that he was holding to the mortgagor to enable the mortgagor to complete the sale. As well, the first mortgagee affixed its seal to a deed that recited that the mortgagor had, with the concurrence of the first mortgagee, agreed with the purchaser to give him a title to the property free from encumbrances. The deed then provided that, in consideration of £X paid by the direction of the mortgagor to the first mortgagee, and of the further sum of £Y to the mortgagor, the first mortgagee and the mortgagor conveyed the property to the purchaser (961). The one solicitor acted for both the mortgagor and the first mortgagee. Upon completion the balance of the purchase money, after payment of the first mortgage, was handed to the mortgagor.

127 The second mortgagee sued both the mortgagor and the first mortgagee. The mortgagor did not appear. The Court of Appeal held that the first mortgagee was liable to make good to the second mortgagee the amount of its security, to the extent of the balance of the purchase money. Counsel for the first mortgagee submitted:

"It has never been decided that notice to a first mortgagee of a second mortgage makes him a trustee for the second mortgagee or imposes on him any duty as such; it only prevents him from tacking further advances against the second mortgagee: Hopkinson v Rolt 9 HLC 514."

128 A fallback argument of the first mortgagee was:

"We cannot be held liable to account for more of the purchase money than we actually received."

129 Both arguments were rejected. Cotton LJ said, at 961-2:

"... when the first mortgagee, as owner of the property and having the control over it, turns the land into money-for the owner of the equity of redemption cannot, without the concurrence of the first mortgagee, himself turn the land into money-if he, the first mortgagee, does so with knowledge that the money is not going to be applied in a proper manner , he is, in my opinion, as liable for the money as if he had received it under an express obligation to give it to the person properly entitled to it . It is conceded that if he exercises his power of sale as mortgagee, whether under the terms of the mortgage deed or by statute, he is answerable for the money he receives if he pays it to the wrong person , that is to say, if he passes over the second mortgagee and pays it to the mortgagor who has no right to receive it. Ought we, then, to make any distinction between such a case and the present? Here the first mortgagees, though they did not concur with the mortgagor in putting up the property for sale, did concur with him in the conveyance. Having done so with the knowledge that part of the purchase-money was going to be applied in violation of a right of which they had had notice, they are, in my opinion, just as liable as if they had received the whole of the money. Not being able to give a good receipt for the whole of the money, they must be held liable for that portion of it for which they could not give a good receipt, for it was in their power to refuse to concur in the sale unless the whole of the purchase-money was properly applied ." (emphasis added)

130 Lindley LJ said that if the first mortgagee had present to its mind at the time of the sale the existence of the second mortgage:

"[w]ould it not then be a clear case, both in law and in morality, against the society? They, with full knowledge of the facts, would then have paid the money or allowed it to be paid to the mortgagor."

131 He rejected an argument that the solicitors who acted for both the mortgagor and the first mortgagee on the sale had authority from the first mortgagee only to receive the amount actually owing to the first mortgagee because:

"... they, as agents for the first mortgagees, facilitated the payment of the balance of the money to the mortgagor and allowed it to go in the wrong direction : consequently, as regards this balance, the first mortgagees are liable for the act of their agents." (emphasis added)

132 The various passages that I have emphasised strongly suggest that the obligation of a holder of mortgage proceeds is to pay to each subsequent security holder and to the mortgagor the amount that each is owed, in their order of priority.

133 In Kerabee Park Pty Ltd v Daley [1978] 2 NSWLR 222 Holland J gave a reason why a subsequent mortgagee was not entitled to interfere in a proper exercise by a mortgagee of its power of sale:

"As well as being required by s 58(3) to apply surplus proceeds in payment of subsequent mortgages, the first mortgagee is liable by the general law to account to the holder of a subsequent encumbrance of which he has notice: West London Commercial Bank v Reliance Permanent Building Society (1885) 29 Ch D at 954."

Holland J is saying here that the obligation to account is owed to any subsequent encumbrance holder of whom the selling mortgagee has notice, not just to the next one in line.

134 In Banner v Berridge (1881) 18 Ch D 254 Kay J said, at 269, that when there is a surplus upon a sale of a mortgaged personalty:

"... there is sufficient fiduciary relation between the mortgagor and mortgagee to make the mortgagee constructively a trustee of the surplus, in case it is shewn there is a surplus. But that seems to me to be a case not of express trust at all but of constructive trust, that is to say, a case of a trust which only arises on proof of the fact that there was a surplus in the hands of the mortgagee after paying himself."

135 In re Bell; Jeffery v Sayles [1896] 1 Ch 1 held the person entitled, under a will trust, to receive £1,000, had mortgaged it to Jeffery, then assigned his rights subject to that mortgage. The will trustees had notice of the assignment. Jeffery's mortgage secured considerably less that £1,000. The court rejected his contention that the will trustees should pay him the whole £1,000, and permit him to administer what remained after paying off his own security.

136 In Lloyd's Bank NZA Limited v National Safety Council of Australia Victorian Division (in liquidation) [1993] 2 VR 506, Marks J at 511 and JD Phillips J (with whom Fullagar J agreed) at 514 collect extensive authority dating from Thornborough v Baker (1676) 1 Ch Cas 508; 22 ER 364 that under the general law, and independent of any statutory provision, a constructive trust is impressed on surplus money received from the sale of mortgaged property, whether the property be land or chattels (though Marks J thought that its characterisation "in modern terms may well be a resulting trust" ). That constructive trust was held to exist in favour of the mortgagor. (The case did not involve any mortgagee subsequent in priority to the selling mortgagee.) See also Baypoint Pty Ltd v Baker (1994) 6 BPR [97498] per Young J, at 13,689, recognising "under the general law, a trust of the surplus in favour of the subsequent encumbrancers and the mortgagor" .

137 Adams v Bank of NSW arose when a registered first mortgagee exercised a power of sale, at a time when there was also a registered second mortgage. Hutley JA, at 295, said that in that situation:

"Upon the sale being completed, the mortgagee is bound to furnish to the person or persons entitled to receive those moneys an account, if demanded, of his claims under the mortgage in respect of principal, interest and costs: Coote on Mortgages , 9th ed (1927) at 945, 946. His position after sale, qua a second mortgagee, is clearly stated by Kay J, in Charles v Jones (1887) 35 Ch D 544 at 549, 550:

'His duty is to say, 'I have paid my debt: this property which is pledged to me, and in respect of which I now hold this surplus in my hands, is not my property. I desire to get rid of this surplus, and hand it back to the person to whom it belongs.' ...

I hold, therefore, that the Defendant Jones is liable to pay interest at 4 per cent upon the money remaining in his hands after he had paid himself his debt and costs. That amount is now known, and he must be charged with interest upon it from the date of the completion of the sale, and, as I have said, I cannot give him any costs of the accounts.'

...

The second mortgagee has no claim against the fund beyond what he was entitled to up to 2 May 1980 because the balance was held on trust for the mortgagor. Any delay in payment by the first mortgagee attracts interest which the first mortgagee has to pay, but his default cannot penalize the mortgagor."

138 Hutley JA, at 299, said that the first mortgagee:

"... as a trustee, was bound to produce accounts to beneficiaries. It has been held that similar words to those appearing in the Real Property Act 1900 , s 58, in the Real Property Act 1862 of Tasmania did not alter the mortgagee's duties as trustee from those which would have obtained in equity: Re Morrison; Bennell v Smith [1962] Tas SR 337. Asquith J in Weld-Blundell v Synott [1940] 2 KB 107 at 115 said:

'That duty is to hold the balance of the proceeds after satisfying his own debt in trust for those encumbrancers, but I do not think there is on him an additional duty comparable to that of the army paymasters in the two cases I have cited, at his peril to inform the second mortgagee correctly of the true state of the account.'

This was a case of a first mortgagee who had had exercised a power of sale accounting to a second mortgagee for a sum in excess of what the second mortgagee was in fact entitled to and his Lordship's remarks were in answer to a defence of estoppel. They cannot, in my opinion, be used to exempt the first mortgagee from the duty to account in his capacity as a trustee, a duty established as early as 1714: Wilson v Tooker 5 Bro PC 193; 2 ER 622."

That passage is referred to with apparent approval in Bofinger v Kingsway Group Ltd (2009) HCA 44; (2009) 239 CLR 269 at footnote 51, though Bofinger (at 291) left undecided whether the relationship was a trust relationship rather than a fiduciary relationship. Similarly in Adams v Bank of NSW Moffitt P at 289 specifically left open whether section 58(3) created a trust.

139 Bofinger now puts beyond doubt that a mortgagee holding surplus proceeds owes an obligation to account to all subsequent interest-holders. In Bofinger Gummow, Hayne, Heydon, Kiefel and Bell JJ said, at [35]:

" Adams v Bank of New South Wales [1984] 1 NSWLR 285 is authority that s 58 is to be read in a manner consistent with the equitable duty of the first mortgagee to account to puisne mortgagees as a trustee for any surplus. The position in equity was described as follows by Kay J in Charles v Jones (1887) 35 Ch D 544 at 549-550 as follows:

'I have never heard it doubted that where a mortgagee sells, and has a balance in his hands, he is a trustee of that balance for the persons beneficially interested. He takes his mortgage as a security for his debt, but, so soon as he has paid himself what is due, he has no right to be in possession of the estate, or of the balance of the purchase-money. He then holds them, to say the least, for the benefit of somebody else, of a second mortgagee, if there be one, or, if not, of the mortgagor. What, then, is he to do? Surely he has a duty cast upon him. His duty is to say, "I have paid my debt: this property which is pledged to me, and in respect of which I now hold this surplus in my hands, is not my property. I desire to get rid of this surplus, and hand it back to the person to whom it belongs." ... The duty of this mortgagee was at least to set this money apart in such a way as to be fruitful for the benefit of the persons beneficially entitled to it. To that extent and in that manner he was, according to my understanding of the law, in a fiduciary relation to the persons entitled to the money . It was so held in the case of Quarrell v Beckford (1816) 1 Madd 269 and so far as I know has always been so held, and although I quite agree that the Court is very reluctant to treat a mortgagee as being a trustee in any sense while any money is due to him, still when he has paid himself, and has money remaining in his hands which is no longer his property, how can he be treated as other than a trustee of such money? (emphasis added)"

140 Their Honours recognised at [47]:

"... that the term 'constructive trust' may be used not with respect to the creation or recognition of a proprietary interest but to identify the imposition of a personal liability to account upon a defaulting fiduciary."

141 At [48] their Honours quoted with approval the remarks of Crennan J in Jones v Southall & Bourke Pty Ltd (2004) 3 ABC (NS) 1 at 17, that:

"... the term 'constructive trust' covers both trusts arising by operation of law and remedial trusts. Furthermore, a constructive trust may give rise to either an equitable proprietary remedy based on tracing or, whether based on or independently of tracing, an equitable personal remedy to redress unconscionable conduct. The equitable personal remedies include equitable lien or charge or a liability to account."

142 The obligation of the mortgagee to account was held by their Honours at [49] to be "fiduciary in character" . Their Honours concluded at [50]:

"In respect of its misapplication of the surplus moneys and securities and the consequent loss to the appellants the first mortgagee is to be treated as a constructive trustee to the extent that it must account to the appellants as a defaulting fiduciary. It is unnecessary to seek to determine upon the agreed facts whether the first mortgagee was a trustee in a fuller sense which afforded the appellants a beneficial interest in the assets in question."

143 It is not necessary for the purpose of the present appeal to decide the question that their Honours left undecided in Bofinger , of whether a mortgagee holding surplus proceeds of sale is a fully-fledged trustee. The authorities that I have set out make clear that a mortgagee who holds surplus proceeds of sale is under a fiduciary obligation to all subsequent interest holders to account to them for the manner in which the surplus is disposed of, and not to prejudice their interest in the surplus by the manner in which he disposes of it.

144 Though the existence of this fiduciary obligation on a mortgagee is clearly established by authority, its basis in principle is not hard to find. The selling mortgagee who holds a surplus, or a subsequent mortgagee to whom the selling mortgagee hands more of the proceeds of sale than that subsequent mortgagee is entitled to, are each in the position of holding property that is not their own. That position of control of the property gives rise to a fiduciary obligation not to harm the interest of the person beneficially entitled to the property. It is analogous to the fiduciary obligation that a bailee has to the owner of the goods bailed ( Re Hallet's Estate (1880) 13 Ch D 696 at 708-709; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 101 per Mason J; Brambles Security Services Ltd v Bi-Lo Pty Ltd (NSWCA 19 June 1992) at 31 per Clarke JA, with whom Kirby P agreed; (1992) Aust Tort Rep 81-161). It is the sort of obligation that arises from holding property one knows is not one's own. Thus, it is capable of applying to any subsequent mortgagee into whose hands the surplus proceeds come.

Re Thomson's Mortgage Trusts

145 Thomson needs to be understood against the background of the principles I have just been setting out. In Thomson , Edward Thomson had granted a first mortgage that came to be held by Bruty, a second mortgage to his wife Helen Thomson, then a third mortgage to Offin. Some years later, Helen Thomson submortgaged the principal sum of £200 owing on the second mortgage, and the security for it, to Wood to secure a loan of £100 to Edward Thomson. Helen Thomson paid no interest to her husband, but the interest on the submortgage to Wood had been paid until April 1918. Offin had submortgaged the principal sum of £300 owing on the third mortgage and the security for it to Duffield and Bruty. While the report is not explicit, it seems that after Duffield's death, the whole of that submortgage of the third mortgage was held by Bruty.

146 Bruty sold the mortgaged property under the statutory power of sale conferred by the first mortgage, and had a surplus of nearly £500 in his hands.

147 The plaintiffs in the action were the legal personal representatives of Helen Thomson, and Wood. They claimed to be entitled to the whole of the £200 principal secured by the second mortgage, together with 20 years' of unpaid interest, making a total of £400. Bruty claimed that they were entitled only to six years' arrears of interest by reason of the Real Property Limitation Act 1833 . That aspect of the case is a distraction from what it stands for as a matter of principle, because Eve J held that, in any event, no question arose under the limitation statute because there was a sufficient acknowledgement of the debt when the submortgage to Wood was executed (512).

148 Bruty did not suggest that he held the balance other than as first mortgagee, but submitted that he was entitled to retain the fund and leave the plaintiffs to take proceedings to recover, if they could, more than six years' interest. Eve J said, at 513:

"I do not think this attitude of the defendant Bruty can be justified. I think he is and always has been since his claims as first mortgagee were satisfied under a statutory obligation to pay the surplus to the plaintiff Wood as the person then entitled to the mortgaged property and authorized to give a receipt for the proceeds of sale thereof: see Conveyancing and Law of Property Act 1881 , s 21, sub-s 3, and s 22 . Bruty had not, in my opinion, any right as a satisfied prior incumbrancer to retain the surplus proceeds as against Wood, and in retaining them he has really been asserting on behalf of the mortgagor and those claiming under him by title subsequent to the plaintiffs' title a right as against the plaintiffs to have paid to them the whole surplus after deducting principal and six years' arrears of interest only. If the fund were in Court and the mortgagor or the defendants applied for payment out on this footing, it is I think clear from what was said by the Court of Appeal in In re Lloyd [1903] 1 Ch 385, 403 that the application would not be successful even though the mortgagees against whom the application was made had never had in their hands the proceeds of sale of the mortgaged property. Is the position of the defendants strengthened by the fact that the fund is not in Court but has remained throughout in Bruty's hands, or are the plaintiffs prejudiced by the fact that it is they and not the defendants who come to ask for payment of the fund to them? I think not. Bruty's possession, in the view I take of the statutory obligation which arose on his prior claims being satisfied, must be treated as the possession of the person rightfully entitled to have the fund handed to him, that is, no more to be treated as an action to recover interest within the meaning of s 42, than was the position for payment out in Edmunds v Waugh (1866) LR 1 Eq 418." (emphasis added)

149 The significance for Mr Burton's argument is that it appears to have been Eve J's view that Wood was entitled to have the entire surplus handed to him - and it was Wood alone, not all of the plaintiffs (who between them held all the interests comprised in the second mortgage), who had that entitlement. The amount owed to Wood was considerably less than the surplus that Bruty held.

150 The relevant provisions of the Conveyancing and Law of Property Act 1881 (Eng) are:

"21(3) The money which is received by the mortgagee, arising from the sale, after discharge of prior incumbrances to which the sale is not made subject, if any, or after payment into Court under this Act of a sum to meet any prior incumbrance, shall be held by him in trust to be applied by him, first, in payment of all costs, charges, and expenses, properly incurred by him, as incident to the sale or any attempted sale, or otherwise; and secondly, in discharge of the mortgage money, interest, and costs, and other money, if any, due under the mortgage; and the residue to the money so received shall be paid to the person entitled to the mortgaged property, or authorised to give receipts for the proceeds of the sale thereof.

...

22(1) The receipt in writing of a mortgagee shall be a sufficient discharge for any money arising under the power of sale conferred by this Act, or for any money or securities comprised in his mortgage, or arising thereunder; and a person paying or transferring the same to the mortgagee shall not be concerned to inquire whether any money remains due under the mortgage.

(2) Money received by a mortgagee under his mortgage or from the proceeds of securities comprised in his mortgage shall be applied in like manner as in this Act directed respecting money received by him arising from a sale under the power of sale conferred by this Act; but with this variation, that the costs, charges, and expenses payable shall include the costs, charges, and expenses properly incurred of recovering and receiving the money or securities, and of conversion of securities into money, instead of those incident to sale."

151 A provision substantially the same as section 21(3) Conveyancing and Law of Property Act 1881 (Eng) continues to operate in relation to old system land under section 112(4) Conveyancing Act 1919 (NSW).

152 An old system mortgage took the form of a conveyance of the land itself, subject to a contractual right of redemption in the mortgagor. A second mortgage likewise took the form of a conveyance of the land itself, subject to the first mortgage, and subject also to a contractual right of redemption: Hargraves and Helmore, An Introduction to the Principles of Land Law (NSW) p126. The second mortgage took this form even though, because of the prior first mortgage having been created, all that the mortgagor had to mortgage was his equity of redemption. Under this manner of conveyancing, when a first mortgage was discharged, the person entitled to the mortgaged property was the next mortgagee in order of priority. If the second mortgage had been submortgaged (by the second mortgagee conveying the land subject to the first mortgage, and subject to a contractual right to redeem) then, once the first mortgage had been paid off, it was the submortgagee of the second mortgage who would have the legal estate in the land. Because of section 22(1), once a first mortgage had been discharged, the person who was "authorised to give receipts for the proceeds of sale thereof" was (or, if the first mortgage was paid following exercise of a power of sale, would have been if the property had not already been sold) Wood as the submortgagee of the second mortgagee. These textual matters in section 22(1) provide some justification for the view at which Eve J arrived in Re Thomson's Mortgage . Eve J did not go on to consider how the statutory rights and obligations might be affected by equitable rights and obligations that made adherence to the strict statutory regime unconscionable. In these circumstances Re Thomson's Mortgage does not provide a reason for doubting that a mortgagee holding surplus proceeds of sale is subject to a fiduciary obligation to do nothing that would prevent the surplus from being paid into the right hands.

153 Even assuming, without deciding, that Eve J's construction of section 21(3) of the 1881 English legislation is correct, there is a significant difference between it and section 58(3) RPA . The requirement of section 58(3) for the proceeds to be paid "thirdly, in payment of subsequent mortgages, charges or covenant charges (if any) in the order of their priority" refers to payment of amounts, while section 21(3) of the English legislation requires payment of a person identified by a particular description; "the person entitled to the mortgaged property, or authorised to give receipts proceeds of the sale thereof" . That is a fundamental difference for present purposes. In light of it, the conclusion arrived at in Re Thomson's Mortgage would not be arrived at if the mortgages in question were RPA mortgages, and the order of application was decided (at least in the first instance, before any equitable modification) by section 58(3) RPA .

PART C - INTERRELATIONSHIP OF SECTION 58(3) AND EQUITABLE OBLIGATIONS

154 Re Morrison; Bennell v Smith (1962) Tas SR 337 arose when a registered first mortgagee of Real Property Act land exercised a power of sale. The mortgagor having in the meantime become bankrupt, the first mortgagee paid the surplus proceeds beyond its debt to the Official Receiver. A moneylender, Bennell, had an unregistered second mortgage over the land. The Official Receiver had notice at the time he received the surplus, that the moneylender claimed to have an unregistered mortgage. Crawford J, having held that the unregistered mortgage conferred a right of property that did not vest in the Official Receiver upon a sequestration order being made, held that the second mortgagee was entitled to be paid the secured debt out of the funds held by the Official Receiver.

155 At the relevant time, section 54 Real Property Act 1862 (Tas) was in terms not materially different, for present purposes, to section 58(3) RPA . Crawford J said, at 343-4:

"A sale by a mortgagee constitutes the mortgagee, a trustee of the surplus proceeds ( Wilson v Tooker (1714) 5 Bro PC 193; Banner v Berridge (1881) 18 Ch D 254; Weld-Blundell v Synott [1940] 2 KB 107).

Mr Bushby, counsel for the Official Receiver, claimed otherwise. He claimed that Bennell's only right, now, was a statutory right to damages against the first mortgagee under [the Tasmanian equivalent of s 58(3)].

In my opinion the words used in the section that the money, 'shall be applied' does not alter the position that in equity the mortgagee is a trustee in respect of the proceeds of sale. It follows that Bennell has the right to follow moneys wrongfully applied or to which he has any right in equity into the hands of the Official Receiver, particularly as the Official Receiver had notice of the existence of Bennell's mortgage before he received the money. It is plain that a person entitled in equity, such as Bennell (subject to the questions of uncertainty and illegality) is entitled to an order in equity against the Official Receiver, that he account for the money sufficient to satisfy his security."

This decision was not based upon the equivalent of section 58(3) applying directly to the Official Receiver. Rather, it is based on the Official Receiver being bound by the trust obligations of the selling mortgagee concerning the surplus. However neither does it decide that someone other than a selling mortgagee into whose hands surplus sale proceeds come is not within the scope of the section. While the decision upheld the right of the unregistered mortgagee to be paid second in priority, that right arose as a matter of an equitable overlay to the operation of the section, not as a matter of the section on its proper construction applying to unregistered mortgages.

156 In Re Murrell; Ex parte Official Trustee in Bankruptcy (1984) 57 ALR 85, Smithers J considered a situation where a registered first mortgagee had exercised a power of sale, and paid half the surplus to the Official Trustee in the bankruptcy of one of the two mortgagors. The two mortgagors had given an unregistered charge over the land to Esanda, and there was also an equitable purchaser's lien over the land relating to a deposit paid by an intending purchaser of the land under a contract for sale that had not proceeded. After the bankruptcy had ended, the bankrupt claimed entitlement to be paid the moneys held by the Official Trustee, with no deduction relating to any interests of Esanda or the intending purchaser of the property. His contention was that section 77(3) Transfer of Land Act 1958 (Vic) contained mandatory and unambiguous provisions, that the "subsequent mortgages and charges" referred to in it were exclusively registered mortgages and charges, and thus the Official Trustee had a statutory duty to pay the surplus to him. The only difference between section 77(3) of the Victorian Act and section 58(3) RPA was that section 77(3) made express provision for the payment of the residue to be made to the mortgagor, or into court, under the provisions of section 69 Trustee Act 1958 (Vic), and (as explained earlier at [118]) that difference is not a material one.

157 Without deciding that question of construction of the statute, Smithers J rejected that argument, at 90, saying:

"On their face the provisions of s 77(3) are mandatory. Nevertheless where there were in fact subsisting equities in the proceeds of sale which a Court of Equity would recognize and enforce it is difficult to contemplate that, while the surplus proceeds are in the hands of a mortgagee, a Court of Equity would not give the equitable owners access to it."

158 After citing the passage from Hope v Hope that I have set out at [86] above, Smithers J concluded at 91-2:

"...while the surplus was in the hands of the mortgagee it was subject to the enforceable equitable interest of the party having such interests, in priority to the interests of the mortgagor.

It is unnecessary for the purposes of the Torrens system that provision be made for the payment to a mortgagor of a sum of money being the proceeds of an interest in land in respect of which the mortgagor had given security to persons who had given valuable consideration therefor to him. The notion that for the purpose of maintaining the purity of the register Parliament might, in effect, abrogate lawful interests arising from transactions entered into in good faith is unacceptable. It is not the purpose of the Torrens system as exemplified in the TLA to destroy, as between a registered proprietor and a person doing business with him, an equitable interest created by the registered proprietor in the ordinary course of business. To destroy such an interest where it was an encumbrance on the land subject to a mortgage pursuant to which a power of sale had been exercised, but not otherwise, would be remarkable indeed. The section may be construed therefore as operating subject to valid claims of third persons against the mortgagor, in respect of a surplus of proceeds from a sale of the property by the mortgagee, as exist according to law. Where a construction consistent with this view is open it should be adopted. It appears to me that the provision for payment into court at the option of the mortgagee is made to deal with cases in which there are conflicting claims to a surplus in the hands of a mortgagee. There is, therefore, no burden on a mortgagee who is faced with such claims.

To give to s 77(3) a mandatory force according to its literal terms would create difficulties where, for instance, the mortgagor had assigned for value his interest in the surplus arising from the mortgagee's sale. An assignee could surely step into the shoes of the mortgagor although not within contemplation of the literal terms of the section. The view adopted by Wilson J, appears to me to be tenable and correct."

159 It is noteworthy that Smithers J held that the equities attached to the surplus even when it was in the hands of the selling mortgagee - it was not a matter of letting the order of application of funds laid down by the section run its course, and then imposing the equities on the person who then ended up with the money.

160 Bank of New South Wales v Adams [1982] 2 NSWLR 659 arose from some irregular conveyancing. An intending purchaser of land took an assignment of a registered first mortgage that the intending vendor had given, but the intending purchaser never became registered proprietor. At a time when there was a registered second mortgage on the property, the first mortgagee sold the land in purported exercise of a power of sale in the first mortgage. Acting on his client's instructions, the solicitor for the first mortgagee had remitted the entire purchase price, after expenses, to the first mortgagee. Helsham CJ held the first mortgagee liable to account to the second mortgagee for the amount properly owing to the second mortgagee. At 663 Helsham CJ in Eq said that section 58(3) places on a selling mortgagee:

"... a duty ... to apply it in payment to certain persons (if there is an excess) and it gives a right to such persons to be paid out of that particular sum of money. Although it is an involuntary duty and obligation imposed on a person with respect to property received by him, this does not prevent equity from placing a trust responsibility upon the person who receives the proceeds of sale. I think equity would operate in that fashion with respect to the proceeds of a mortgagee's sale in order to supplement the law for the protection of subsequent mortgages."

161 While the Court of Appeal in Adams v Bank of NSW set aside the judgment against the first mortgagee, it did so because the second mortgagee, unnecessarily, had put its claim as a claim to be paid a specific sum of money that it asserted was the amount secured by its mortgage. As Hutley JA said at 299,

"The [second mortgagee] took upon itself the burden of proof that there was a surplus, whereas, if an order that the appellant account as trustee for [the second mortgagee, the registered proprietor, and a first mortgagee who had not been sued] had been sought, the [selling first mortgagee] would have had to produce his accounts."

162 The evidence was such that the Court could not be satisfied that there was a surplus at all, let alone a surplus of the amount for which Helsham CJ in Eq had entered judgment. The Court of Appeal did not disapprove the aspect of the judgment of Helsham CJ in Eq that I have quoted, and indeed the approach of the Court of Appeal is consistent with it. It provides an example of how equity intervenes to impose an obligation on whoever is at any time holding proceeds of a mortgagee's sale that are surplus to their own entitlement.

163 In Adams v Bank of NSW Moffitt P said, at 290:

"It is the mortgagee as vendor who receives the money. For s 58(3) to operate, a division of the money received has first to be made. The first call on it is to meet the expenses incurred by the first mortgagee in selling the property. Then the mortgagee retains the amount of money owing to him as mortgagee and in this case mortgagee in possession. Then finally, as the person who has received the money, he has to account for any residue to the persons entitled. If on its true construction the section imposes a trust, it is the first mortgagee as vendor who is and has the obligations of a trustee. There is nothing in s 58(3) which places on others an obligation where none is placed under the general law eg where there is a trust under a settlement. A solicitor by receiving the money from a client who is the trustee and accordingly puts it in a separate account, namely an account exclusively for the client trustee, does not himself become a trustee of the money in either class of trust. He is neither required nor entitled to inquire into the rights of beneficiaries to the trust money. He is neither entitled nor bound to take steps to ensure that the money is dealt with for the benefit of such beneficiaries."

164 The purpose of those remarks was to make clear that the solicitor for the first mortgagee, who received the proceeds of sale into his trust account and was thereby bound to disburse them in accordance with his client's directions, did not thereby become a trustee bound by section 58(3). The sentence "there is nothing in s 58(3) which places on others an obligation where none is placed under the general law" is carefully written. As, under the general law, a mortgagee subsequent to a selling mortgagee, who receives part of the proceeds of sale, owes an equitable obligation to mortgagees subsequent to him and to the mortgagor concerning the manner of disposition of any surplus, that remark is not inconsistent with the construction of section 58(3) that I have adopted.

165 The appellants in Bofinger were guarantors, who had paid part of the debt secured by the first mortgagee's mortgage. The High Court held that the appellants were, to the extent of their payment, subrogated to the first mortgagee's rights, and to that extent (at [79]):

"... the first mortgagee was required by equity to account for the net surplus to the appellants. That obligation was imposed upon the enjoyment by the second mortgagee of its entitlement under s 58(3) of the RP Act ."

166 This provides another illustration that the way in which section 58(3) interacts with equitable principles is not that section 58(3) is permitted to operate in its entirety, and an equitable personal obligation is then imposed on a person in whose hands money ends up - rather, equity intervenes in the operation of section 58(3) to prevent the statute being used in an inequitable way.

Application of Principles to Facts of This Case

167 I conclude that Resi, as the person into whose hands the Surplus Proceeds had come, was subject to a fiduciary duty to the Esbers, and also a fiduciary obligation to Kimberley, to account for the disposition of the Surplus Proceeds (in the sense of informing them what has become of the Surplus Proceeds). It was also subject to a fiduciary duty to account to them, in the sense of paying to each the amount to which each was respectively entitled. I also conclude that in the circumstance of the present case Resi was also subject to an equitable obligation not to prejudice the right of both Kimberley and the Esbers to receive that part of the Surplus Proceeds to which each was respectively entitled. In the circumstance that Kimberley was owed nothing under its equitable mortgage each of these duties owed to the Esbers was breached when Resi paid Kimberley the whole of the Surplus Proceeds on the terms it did. The Esbers were entitled to equitable compensation for each breach.

168 While the equitable obligations that Resi owed to Kimberley might, in some different factual situations, have had the effect of modifying Resi's obligation under section 58(3) to pay the whole of the Surplus Proceeds to the Esbers, in the circumstance that Kimberley was owed nothing no such modification took place.

169 Though upholding the Notice of Contention has the effect that the judge's statement that the same result is arrived at under section 58(3) as under general equitable principles operates in a slightly different way to the way that the judge intended, it is still correct to say that the same result is arrived at under section 58(3) as would be arrived at by general equitable principles.

An Aspect of Ground 1

170 Part of ground 1 of the Amended Notice of Appeal contends that the judge was wrong in finding at [56] "that section 58 [ RPA ] imposes a fiduciary obligation on a subsequent mortgagee who receives more than is owed under the covenant(s) secured by that subsequent mortgage." What the judge said at [56] was:

"The second submission did not identify any juridical basis for why the second defendant was not in a fiduciary position in relation to the disputed amount, whether or not the first mortgagee incorrectly paid it to the second defendant. Clearly it was in a fiduciary position. It was a mortgagee who was paid more than it was entitled to retain and it had no beneficial interest in the excess (in this case the totality). It was in a position no different to a first mortgagee who exercises a power of sale where the purchase price received is more than the mortgage debt. I accordingly do not accept the second submission."

171 That is not a finding that the fiduciary obligation arises from section 58. I see no error in what the judge there said.

PART D - OTHER MATTERS

Failure to Prove Loss?

172 In its Second Amended Commercial List Response, Resi pleaded that the Esbers "have suffered no loss, or alternatively they have not suffered the loss alleged" . The particulars to that allegation made clear that it was based upon the Esbers having a judgment against Kimberley for the Surplus Proceeds. There was no evidence in the court below concerning whether Kimberley would be likely to pay the judgment debt in whole or part.

173 Mr Burton submits that, in the absence of proof about the ability of Kimberley to satisfy the judgment debt, the Esbers' claim should have failed, or alternatively should have been for a lesser amount than that actually awarded, namely the amount not paid by Kimberley.

174 Resi's Statement of Issues in the court below included as issues:

"6 Have the plaintiffs suffered a loss for which Resi is liable?

7 If so, what is the loss?"

175 However Resi addressed no written submission to those issues. When Resi's counsel in the court below (not the same counsel who appeared on the appeal) was invited to give the judge a brief opening, he did so, but said nothing about those issues. Nor was anything said about them later in the trial.

176 Mr Parker submits that the point is one that cannot be taken on appeal, because, had it been taken below it might possibly have been met with further evidence: Coulton v Holcombe (1986) 162 CLR 1; Water Board v Moustakas (1988) 180 CLR 491.

177 Mr Burton's submission is to the effect that the Esbers failed to prove an essential element of the case that they as plaintiffs were required to prove to succeed, and that was in issue on the pleadings. That is the type of point that, absent any special reason why not, a defendant to proceedings who has lost at first instance can raise for the first time on appeal: Jovic v Lamont [2007] NSWCA 47 at [67]-[73] and cases there cited.

178 One special reason why this situation might not obtain is if, notwithstanding the pleadings, there has been a concession in the court below that dispenses with the need to prove an element of the cause of action. There was such a concession in the present case. The judge stated it at [23] as that Resi "accepts that it is liable to pay equitable compensation if what it did was not in compliance with s 58(3)" , and referred to it again at [48] in similar terms. The transcript at 62-64 bears out his Honour's understanding of the concession, and also shows that the liability in question was to repay the whole amount that Resi had paid to Kimberley. At transcript 57, the judge put to counsel for Resi the way the judge understood Resi's position. The judge's statement included:

"You don't seek to establish that Kimberley was owed any money. In fact you accept that Kimberley was not owed any money but you say there was no breach by your client of any trust obligation to the plaintiff or any obligation where your client was presented with a document albeit unregistered in Real Property mortgage form in favour of Kimberley as the mortgagee and was called on by that mortgagee to pay the proceeds in its hands over to it?"

The response by Resi's counsel was "Yes" .

179 At transcript 74 the judge said to counsel for the Esbers, that Resi's counsel "doesn't seek to challenge that there was no debt" . Resi's counsel never corrected that statement.

180 Mr Parker also submits that the point is in any event unsound. I agree. The obligation that Resi owed to the Esbers included an obligation to account to them for the Surplus Proceeds. In circumstances where there is no doubt about the amount that Resi should have paid to the Esbers, and no multiplicity of dealings between the Esbers and Resi that might give rise to more than one item that should be taken into a statement of the balance of account between them, the appropriate remedy is to require Resi to make the payment that it failed to make, together with interest for the period during which it failed to make the payment. In the present case, the legal costs of pursuing Kimberley have also been added to the judgment amount. That addition is justified in principle, as equitable compensation for Resi's breach of its fiduciary duty. Adding that item is consistent with the basis on which equitable remedies are granted, of making whatever orders are needed, crafted to meet the circumstances of the particular case, that will so far as is practicable undo any breach of equitable obligation that has occurred.

181 The remedy that the Esbers obtained by suing Kimberley is not inconsistent with the remedy it seeks against Resi. Rather, the Esbers are entitled to obtain judgment against both Kimberley and Resi, for the full amount of their respective claims against each. Having obtained both judgments, it is a matter for them to choose which judgment they will seek to execute first. The rule against double satisfaction will then ensure that, as a result of those two judgments, the Esbers do not obtain more than the amount of their actual loss. However, If they actually obtain money as a consequence of executing one of the judgments, they can then execute the other judgment only to the extent that they have not received payment under the first: Baxter v Obacelo Pty Ltd (2001) 205 CLR 635 at [39], [47].

182 Though Baxter was a case concerning alternative judgments in tort against joint tortfeasors, the rule against double satisfaction is "universal" : Haines v Bendall (1991) 172 CLR 60 at 63; Baxter at [57]. Whether the source of the rule against double satisfaction is in equity ( United Australia Limited v Barclays Bank Limited [1941] AC 1 at 20; CSR Limited & v Maree Anne D'Arcy [1999] NSWCA 216 at [45] per Mason P (with whom Beazley JA and Brownie AJA Agreed); Baxter v Obacelo at [58], [64] per Gummow and Hayne JJ (cf [89] per Kirby J); Bracks v Smyth-Kirk [2009] NSWCA 401; (2009) 263 ALR 522 at [161] per Young JA) or in the court's power to prevent an abuse of its process ( Registrar-General (NSW) v Behn (1981) 148 CLR 562 at 569), it would apply as between the judgments that the Esbers have obtained against Kimberley and against Resi. These considerations are a sufficient reason, quite independent of the concession made below, why it is incorrect to argue that the failure of the Esbers to prove the amount they are likely to receive under their judgment from Kimberley is a reason why they should not receive a judgment in the present proceedings for the full amount concerning which Resi has wrongly failed to account to them.

Disentitling Delay?

183 Mr Burton submits that, if it is the case that Kimberley can no longer pay or no longer pay except to a limited extent, then that situation has been brought about by the Esbers taking no action for six years, notwithstanding their knowledge, on 28 February 2002, that the money was about to be paid to Kimberley, and, soon after, that it had actually been so paid.

184 There seem to be two separate arguments intertwined in this submission. The first is to the effect that the Esbers are the authors of their own loss, because they failed to seek relief from the court to protect the Surplus Proceeds pending a determination of their claim. Such a contention was explicitly raised in para 6B of the Second Amended Commercial List Response in the court below. It was also referred to at [40] of Resi's written submissions below. However the concession by Resi's counsel (para [178] above) dispensed with it as a live issue.

185 In any event, the argument is unsound. For Resi to pay the Surplus Proceeds to Kimberley was a breach of its duty to the Esbers. The victim of such a breach of duty is not denied a remedy for that breach of duty on the ground that it failed to seek interlocutory relief to prevent the breach of duty occurring, or to require the recipient to set aside in a separate account the money that was wrongfully paid to it.

186 The second argument in effect raises a laches defence. No such argument was foreshadowed in the Second Amended Commercial List Response of Resi, in its Statement of Issues, in its Outline of Submission. Nor was it made in oral argument in the court below. That the point, if taken below, could have been met by evidence (para [176] above) is a sufficient reason for not permitting it to be taken at this stage.

Wrongful Inclusion of Costs of Pursuit of Kimberley?

187 Mr Burton points out that the Esbers' litigation against Kimberley occurred in the self-same proceedings as those that Hammerschlag J decided. While admittedly the expenditure occurred in litigation that was a determination of separate issues in those proceedings, and an appeal from one of those separate issues, it was nonetheless in the same proceedings. He submits that in deciding which of the parties to proceedings should bear the costs of those proceedings, the court should proceed by exercising the discretion concerning costs that is conferred by section 98 Civil Procedure Act 2005 . He submits that there has been no attempt to identify the costs that the Esbers incurred concerning the issue of whether any money was secured by the Kimberley mortgages (and thus to what extent Kimberley had received an overpayment that it was obliged to pay to the Esbers) as opposed to the other issues that McDougall J determined. He submits that the costs incurred in determining whether any money was secured by the Kimberley mortgage, and if so how much, ought not be payable by Resi because those questions would have had to be determined even if Resi had paid the money into court rather than paying it to Kimberley.

188 Resi's counsel in the court below made a concession on this topic. The judge recorded it in [24] of his reasons:

"The second defendant also accepts that if the Esbers are otherwise entitled to succeed, the equitable compensation to which they are entitled includes the costs of its unsuccessful pursuit of Kimberley. There is, however, an issue between the parties as to what should properly be included in those costs. The Esbers chose to have a separate hearing against Kimberley before finally pursuing the second defendant. Cleary there was some benefit in doing so because they established (and it is now not disputed) in that hearing that nothing was owed by them to Kimberley. But the second defendant says that costs would have been saved if the Esbers had chosen to have one hearing against both. The parties are agreed the exercise of quantifying the costs should be referred to a referee for investigation and report."

189 That concession was made in the course of a lengthy discussion between Resi's counsel and the judge on 7 December 2009, transcript 9-11. That discussion included:

"HIS HONOUR: ... You say that if the plaintiff succeeds here part of its loss and damage attributable to the second defendant's breach is the cost of the plaintiff incurred in pursing Kimberley, but what those costs are, having regard to the fact that two sets of proceedings were run when all issues could have been determined in one hearing, is a matter for assessment.

COUNSEL: Yes

...

HIS HONOUR: What that really means is that you say that the costs that they would have been incurred in pursuing you and Kimberley in the same proceedings would have meant that the costs against you here may not be as high as the costs there, that there might have been some savings if these proceedings had run together?

COUNSEL: Yes.

...

HIS HONOUR: ... You want me to refer out the quantum of the loss but on the footing that you accept that if the plaintiff succeeds here, whatever loss and damage it suffered as a consequence of pursuing Kimberley in separate proceedings is to be referred?

COUNSEL: Yes."

190 The orders that the judge made included an order referring to a referee, who was expert in costs determinations, a question:

"What is the amount representing the costs properly and reasonably incurred by Marcel Esber and Casanda Pty Ltd in their unsuccessful pursuit of Kimberley Securities Ltd; including

(a) in these proceedings; 50110 of 2006; and

(b) in the NSW Court of Appeal; 40150 of 2008."

191 That order was in accordance with the way the case had been conducted. It cannot now be the basis for altering the judgment on appeal.

Orders

192 I propose that:

(1) Leave to appeal be granted, if necessary;

(2) The appeal be dismissed with costs.

193 If the effect of those orders is that some of the costs of the first-instance proceedings have not been provided for, the parties are free to approach whichever of McDougall J or Hammerschlag J determined the questions concerning which costs have not been provided for.

194 MACFARLAN JA : I agree with Campbell JA.

195 SACKVILLE AJA : I have had the privilege of reading the detailed judgment prepared by Campbell JA. I agree with the orders proposed by his Honour.

196 The present case, unlike Adams v Bank of New South Wales [1984] 1 NSWLR 285 and Bofinger v Kingsway Group Ltd [2009] HCA 44; 239 CLR 269, does not concern the obligation of a first mortgagee to account for the proceeds of sale derived from the exercise of the mortgagee's power of sale. This case concerns the obligation of a registered second mortgagee to account for surplus funds that have come into its hands following the sale of the mortgaged property by the first mortgagee.

197 As Campbell JA has explained, the first mortgagee ("Permanent Trustee") paid to the second mortgagee ("Resi") the surplus funds remaining after Perpetual Trustee had exercised its power of sale. Resi, after appropriating the amount due to it under the second mortgage, held what Campbell JA has described as " the Surplus Proceeds ". Resi paid the Surplus Proceeds to an unregistered third mortgagee ("Kimberley"), which, in fact, was owed no moneys. The mortgagors ("the Esbers") succeeded in their claim that Resi was obliged to compensate for its failure to pay the Surplus Proceeds to them, the moneys paid to Kimberley being irrecoverable.

198 Campbell JA concludes that s 58(3) of the Real Property Act 1900 (NSW) ("RP Act") applies to a non-selling mortgagee (in this case, Resi). However, his Honour also concludes that s 58(3) does not oblige a non-selling mortgagee to account to a subsequent unregistered mortgagee. This is so because the direction in s 58(3) that the purchase money arising from the sale of the property be applied to the " payment of subsequent mortgages ", applies only to subsequent registered mortgages and does not include subsequent unregistered mortgages.

199 Campbell JA further concludes that, independently of s 58(3), Resi was obliged in accordance with equitable principles to account for any moneys in fact due to Kimberley as the unregistered third mortgagee. Since Kimberley was not owed any moneys under its unregistered third mortgage, s 58(3) required Resi to account to the Esbers, as the mortgagors, for the balance of the Surplus Proceeds.

200 In Bofinger (at 287 [35]), the High Court approved the holding in Adams v Bank of New South Wales that s 58(3) is to be:

"read in a manner consistent with the equitable duty of the first mortgagee to account to puisne mortgagees as trustee for any surplus."

201 The equitable principles applied in Bofinger were not confined to the specific case of a first mortgagee being held liable to account to puisne mortgagees. In Bofinger itself, the first mortgagee paid surplus moneys resulting from the exercise of a power of sale to a registered second mortgagee. The first mortgagee was held liable to account to guarantors who had partially paid out the first mortgage and had thereby acquired priority over subsequent mortgagees under the doctrine of subrogation. The High Court held (at 290 [49]) that the first mortgagee:

"was obliged in good conscience both to account to [the guarantors] the surplus moneys and securities it held and not to undertake or perform any competing engagement in that respect without prior release by the [guarantors]. These obligations were fiduciary in character."

202 On applying the principles in Bofinger , it makes no difference to the present case whether s 58(3) of the RP Act applies to a non-selling mortgagee. If it does, Bofinger holds that the sub-section is to be construed in conformity with equitable principles which oblige Resi, the non-selling mortgagee, to account to the Esbers, the mortgagors beneficially entitled to the Surplus Proceeds. If s 58(3) does not apply to a non-selling mortgage, equitable principles nonetheless require Resi to account to the Esbers, as the persons beneficially entitled to the Surplus Proceeds.

203 I agree with Campbell JA that Resi was subject to a fiduciary duty to account to the Esbers for the Surplus Proceeds (see at [167]).

204 In these circumstances, it is not necessary to decide whether s 58(3) of the RP Act applies to a non-selling mortgagee. Nor is it necessary to decide whether the order of priority set out in the sub-section is intended to cover the position of a subsequent unregistered mortgagee. I prefer to express no opinion on these questions.

205 I otherwise agree with Campbell JA.

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Amendments

24 May 2011 - Correction of the name of the first respondent
Amended paragraphs: Coversheet

19 July 2012 - corrected paragraph reference
Amended paragraphs: 31

Decision last updated: 19 July 2012