Court of Appeal
Supreme Court
New South Wales

Medium Neutral Citation:

National Australia Bank Ltd v Clowes [2013] NSWCA 179

Hearing dates:

7 June 2013

Decision date:

17 June 2013

Before:

McColl JA at [1]
Macfarlan JA at [2]
Leeming JA at [3]

Decision:

(1) Appeal allowed.

(2) Set aside the orders made by the court below on 14 February 2012, save for the judgment entered against Mr Clowes in the amount of $969,262.41 and the order that he pay the Bank's costs, and in lieu thereof:

(a) Declare that the Shares are subject to a mortgage, in favour of the Bank, which secures the monies owing to the Bank by the first and third respondents pursuant to the Peak Performance Facility Agreement and the Home Loan Agreement.

(b) Declare that the Bank is entitled to sell the Shares.

(c) Order that the first and third, fourth and fifth respondents deliver up vacant possession of the property known as Unit 7, 43 xxxxx Avenue, Double Bay NSW to the Bank or its agent.

(d) Order that the first and third respondents, or the first and the fourth and/or fifth respondents, execute and deliver up to the Bank a transfer of the Shares within 14 days of today, in default of which a Registrar of this Court is empowered to execute a transfer on their behalf.

(e) Order that the first respondent pay the costs of this appeal.

[Note: The street address of the property has not been reproduced, in accordance with the Court's policy on identity theft prevention. Order 2(c), when entered, will refer to the full address of the property.]

[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:

MORTGAGES - equitable mortgage over shares - creation - effect of specifically enforceable agreement to create mortgage by deposit of share certificate - failure to obtain signed transfer - subsequent extension by contract to secure later borrowing

CONTRACTS - construction and interpretation - mistaken reference to mortgage of land as opposed to mortgage of shares - intended meaning self-evident

MORTGAGES - equitable mortgage over shares - not created by mere retention of share certificate by bank - rights governed by terms of parties' agreement

Legislation Cited:

Bankruptcy Act 1966 (Cth)

Cases Cited:

Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99
Ellis v Marshall [2006] NSWSC 448
Fitzgerald v Masters [1956] HCA 53; (1956) 95 CLR 420
Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603
McHugh Holdings Pty Ltd v Newtown Colonial Hotel Pty Ltd [2008] NSWSC 542; (2008) 73 NSWLR 53
Miwa Pty Ltd v Siantan Properties Pty Ltd [2011] NSWCA 297
National Australia Bank Ltd v Moore [2012] FCA 865
Noon v Bondi Beach Astra Retirement Village Pty Ltd [2010] NSWCA 202
Pico Holdings Inc v Wave Vistas Pty Ltd [2005] HCA 13; (2005) 79 ALJR 825
Roberts v Investwell Pty Ltd (In liq) [2012] NSWCA 134
Ross v Bank of Commerce (Saint Kitts Nevis) Trust and Savings Association Ltd [2012] UKPC 3
Saxby Soft Drinks Pty Ltd v George Saxby Beverages Pty Ltd [2009] NSWSC 1486; (2009) 14 BPR 27
Theodore v Mistford Pty Ltd [2005] HCA 45; (2005) 221 CLR 612
Westpac Banking Corporation v Tanzone Pty Ltd [2000] NSWCA 25; (2000) 9 BPR 17
Wilson v Wilson (1854) 5 HL Cas 40; 10 ER 811
Zhu v Treasurer (NSW) [2004] HCA 56; (2004) 218 CLR 530

Texts Cited:

The Law of Securities, 5th ed (1993)

Category:

Principal judgment

Parties:

National Australia Bank Limited (Appellant)
Michael Leo Clowes (First Respondent)
Jefferson Pty Ltd (Second Respondent)
Patricia Helen Moore (Third Respondent)
Mark William Pearce (Fourth Respondent)
Andrew John Heers (Fifth Respondent)

Representation:

Counsel:
JRJ Lockhart SC/ C Colquhoun (Appellant)
Solicitors:
Dibbs Lawyers (Appellant)

File Number(s):

2012/81032

Decision under appeal

Jurisdiction:

9111

Citation:

[2012] NSWSC 80

Date of Decision:

2012-02-14 00:00:00

Before:

Gzell J

File Number(s):

2011/281981

Judgment

1McCOLL JA: I agree with Leeming JA's reasons and the orders his Honour proposes.

2MACFARLAN JA: I agree with Leeming JA.

3LEEMING JA: The appellant (Bank) entered into three separate loan agreements with the first and third respondents, Mr Clowes and Ms Moore (Borrowers), all expressed to be on a secured basis, but of which only the first (which has been repaid in full) was squarely directed to the only security ever provided by the borrowers, namely, 9,000 shares (Shares) in the company which owns a block of flats in Double Bay. The question in this appeal is whether, notwithstanding a series of defects in the contractual documentation, the Bank is a secured creditor of the Borrowers. The primary judge found that it was not. I respectfully disagree.

4The facts are uncontroversial. The land on which the block of flats is built is owned by the second respondent, Jefferson Pty Ltd, which has played no active part in the proceedings at first instance or on appeal. The owner of the Shares was entitled by Jefferson's articles of association to occupy flat 7. The Borrowers are the legal owners of the Shares, and a share certificate dated 19 June 2002 was issued to them shortly after the first loan was advanced, and has been held by the Bank at all times. In all, the Bank made three loans to the Borrowers, and it is necessary to deal with each of them in turn.

First Loan

5The first loan was called a Reducible Mortgage Loan in the amount of $636,800 on terms stated in a letter of offer dated 1 May 2002 accepted by the Borrowers on 2 May 2002 (First Loan). One of those terms was clause 9.

"9. Security

By accepting this offer, you agree with the Bank that your obligations under this contract are secured by each mortgage and other security described below and that this contract is an agreement covered by each mortgage or other security given by you.

(a) The following mortgage and/or other securities is/are to secure this loan:-

Ұ The following mortgage(s) is/are to be or has been taken from Mr Michael Leo CLOWES over the following property (which includes any rights which may arise in connection with it):-

1st registered mortgage over 7/43 xxxxx Ave DOUBLE BAY NSW 2028

Ұ The following mortgage(s) is/are to be or has been taken from Ms Patricia Helen MOORE over the following property (which includes any rights which may arise in connection with it):-

1st registered mortgage over 7/43 xxxxx Ave DOUBLE BAY NSW 2028

[THERE IS NO ADDITIONAL SECURITY REQUIRED]"

6Of course, there could be no "1st registered mortgage" over flat 7; it was a company title property. The Bank and the Borrowers were well aware of that, because, on 9 May 2002 when the First Loan was drawn down in full, the Borrowers executed a mortgage and charge of shares (Mortgage and Charge). That document recited that Mr Clowes and Ms Moore were entitled to become the registered holder of the parcel of shares which conferred absolute and exclusive use to flat 7 of the property, and that the Bank had agreed to lend moneys to them, whose repayment with interest was secured by the mortgage and charge. It also recited that:

"As part of the security for this Mortgage and Charge the Mortgagor has signed and deposited with the Mortgagee a transfer of the shares."

That recital was not true. The failure of the Bank to obtain a signed transfer at the outset is the direct cause of the Bank ultimately needing to approach this Court for relief.

7On 19 June 2002 Jefferson issued a share certificate to the Borrowers which they deposited with the Bank. The Bank continues to hold that share certificate.

8The operative provisions of the Mortgage and Charge were as follows:

"1. In consideration of the principal sum being lent and advanced by the Mortgagee to the Mortgagor upon the execution of this Mortgage and Charge (the receipt of which principal sum the Mortgagor acknowledges) the Mortgagor covenants with the Mortgagee as follows:

(a) the Mortgagor will repay the principal sums on the date agreed between the parties and referred to in the offer documents between the parties and accepted by the Mortgagor with respect to the Reducible Mortgage Loan and the Plain & Simple Home Loan ('Offer Documents');

(b) the Mortgagor will pay to the Mortgagee interest on the principal sum or the balance owing on the principal sum at any relevant time at the interest rate referred to in the Offer Documents (and as varied from time to time) until such time as the principal sum is repaid. Payments of interest will be made in the manner set out in the Offer Documents."

....

(d) if the Mortgagor defaults in the payment of the principal sum ... the Mortgagor will on demand surrender possession of the property to the Mortgagee ...."

2.The Mortgagor as beneficial owner mortgages and charges in favour of the Mortgagee ALL THOSE 9000 shares numbered 52001 to 61000 inclusive classified as ordinary shares in the capital of the Company for the purpose of securing payment to the Mortgagee of the principal sum together with interest and costs in accordance with the terms of the Mortgage and Charge and Offer Documents. However if the Mortgagor pays to the Mortgagee the principal sum with interest at the rate and in manner appointed and expressed for payment respectively in the Offer Documents or as agreed between the parties, together with all other moneys secured or covered by this Mortgage and Charge, then the Mortgagee shall at the request of and at the expense of the Mortgagor execute a discharge of this Mortgage and Charge. The Mortgagee will then re-deliver to the Mortgagor, or as she shall direct, the share certificate held by it."

Second Loan

9Some seven months later, by letter dated 17 December 2002, accepted by the Borrowers the following day, the Bank entered into a separate facility, described as a Peak Performance Equity Mortgage Facility, with Mr Clowes and Ms Moore (Second Loan). The documentation made this provision for security:

"Security for the loan

The following securities, if any, have been or are to be taken by us:

Mortgage over real property:

A first ranking mortgage is to be or has been taken over the following property:

Mortgagor(s):

Michael Leo Clowes of 7/43 xxxxx Ave DOUBLE BAY NSW 2028 and Patricia Helen Moore of 7/43 xxxxx Ave DOUBLE BAY NSW 2028

Address of mortgaged property:

7/43 xxxxx Ave DOUBLE BAY NSW 2028

Title reference:

Lot 1 plan number DP435244."

10The loan document also made provision for an additional condition precedent in these terms:

"The following conditions (if any) must be met to HomeSide's satisfaction before the loan is made available to you. They are additional to the conditions set out in Clause 2 of the General Terms:

....

Prior to the settlement date (or Change Date if this is a variation of an existing loan), HomeSide Lending must receive its Continued Reliance and Extension of Security form(s) duly executed by the security provider(s) nominated on the form(s). The signatories to the form(s) are each of the mortgagors who have previously given mortgage security to HomeSide Lending to secure a loan or overdraft contract and/or a guarantee and indemnity given for a loan or overdraft contract (as the case may be). The Continued Reliance and Extension of Security form extends the effect of the security which HomeSide Lending now holds so that it also secures all the further obligations which arise under this contract for the security provider."

11A "Continued Reliance and Extension of Security" form as contemplated by that condition precedent was executed by Mr Clowes and Ms Moore on 18 December 2002. That document referred to a "Prime 1st registered mortgage over 7/43 xxxxx Avenue DOUBLE BAY NSW 2028" given by Mr Clowes and Ms Moore in favour of the Bank. The operative clause was as follows:

"I/We confirm that the security detailed above is a continuing security and I/we accept the extension of the security detailed above to my/our liability under the following credit contract:

[There followed a reference to the Peak Performance Equity Mortgage and the facility amount of $20,000 made available by offer dated 17 December 2002.]"

12The signing page of the letter contained an acknowledgement and a declaration in these terms:

"By signing this document (and returning it to us), you (the customer):

...

4. acknowledge that:

each security you have given or will give which is referred to under "Security" extends to the resulting loan agreement between you and us; and

the resulting loan agreement is an agreement covered by each of those securities (and no other security interest) unless you and we expressly agree otherwise); and

5. declare that you understand that any mortgaged or secured property will be at risk if you default."

13It will be seen that all references to the security in the documents associated with the Second Loan were drafted on the basis that the security was a mortgage over land, rather than shares in a company title building.

14The $20,000 made available by the Second Loan was drawn down on 20 December 2002. It remains unpaid; by February 2012, some $29,879.17 was owing.

Third Loan

15Some three years later, Mr Clowes and Ms Moore and the Bank entered into a "Plain & Simple Home Loan", with a facility limit of $705,000. The letter of offer which the borrowers accepted included precisely the same statements as to security, and the condition precedent, and the acknowledgement and declaration, as appeared in the Peak Performance Equity Mortgage Facility reproduced above. Once again the documentation proceeded on the basis that security was a mortgage over land, rather than shares. In the case of the Third Loan, there was no "Continued Reliance and Extension of Security Form", to which I return below.

16On 10 November 2005, that facility was drawn down in the amount of $705,000, and, on the same date, $606,945.71 was used to pay out the original Reducible Mortgage Loan. By February 2012, some $939,382.24 was outstanding.

Procedural history

17Mr Clowes and Ms Moore defaulted under the Second and Third Loans in 2007. Proceedings were commenced in 2011 against them. The hearing before the primary judge took place on 31 January 2012. Neither Mr Clowes nor Ms Moore appeared at that hearing. However, Ms Moore filed a debtor's petition and was made bankrupt on 2 February 2012. Her trustees in bankruptcy have been joined as the fourth and fifth respondents to this appeal, and leave to proceed against them has been obtained from the Federal Court: see National Australia Bank Ltd v Moore [2012] FCA 865.

18By reasons delivered on 14 February 2012, the primary judge entered judgment against Mr Clowes and ordered him to pay the Bank's costs, but otherwise dismissed the Bank's summons, rejecting the Bank's claim that it was a secured creditor. The Bank appeals, although (properly) it seeks no monetary relief against Ms Moore. None of the respondents appeared at the hearing of the appeal.

The Bank's submissions

19The first and primary way in which the Bank put its case was that the Borrowers' obligations under the First Loan were secured by an equitable mortgage created by the Mortgage and Charge, and that thereafter, that mortgage also secured the obligations to repay the Second and Third Loans.

20The Bank advanced a second submission by way of fall-back. It submitted that an equitable mortgage was effected by the Bank's retention of the share certificate following the Second and Third Loans, independently of whether the First Loan and the Mortgage and Charge created an equitable mortgage.

Creation of an equitable mortgage

21An equitable mortgage arises when the mortgagee does not receive legal title to the mortgaged property. In the case of a mortgage of shares, and particularly in the case of shares in a private company such as Jefferson whose directors were empowered to impose levies upon members to meet outgoings (see Article 22), a legal mortgage is obviously undesirable. Hence the Mortgage and Charge was drafted on the basis that the Bank would not become registered owner of the shares until and unless there was a default.

22An equitable mortgage may be created in a number of ways. In Theodore v Mistford Pty Ltd [2005] HCA 45; (2005) 221 CLR 612 at 621 [22] the High Court referred with apparent approval to Frederic Maitland's statement:

"An equitable mortgage (enforceable by an order for foreclosure or for sale) can be made by a deposit of title deeds if they were deposited with intent that the land which they concern shall be security for the payment of a debt."

23The deposit may occur with or without a signed transfer in blank. It is said in Sykes and Walker, The Law of Securities, 5th ed (1993) at 790 that:

"It was, for a long time, usual, though the practice seems less frequent in modern times, for the deposit to be accompanied by a blank transfer signed by the mortgagor so that the mortgagee could, if the mortgagee wished, procure the passing of the legal title by filling in her or his name and registering the transfer."

24No writing is required in this country to create an equitable mortgage by deposit of a certificate of title. The position is different in the United Kingdom, as was noted by Lord Walker in Ross v Bank of Commerce (Saint Kitts Nevis) Trust and Savings Association Ltd [2012] UKPC 3 at [20].

25An equitable mortgage will also arise where there is a specifically enforceable agreement between mortgagor and mortgagee to create a mortgage. In light of the foregoing, it is sufficient for there to be a specifically enforceable agreement to deposit a certificate of title, with or without a signed transfer, with the lender by way of security. "A binding promise for the delivery of a certificate of title by way of security is a contract to create an equitable mortgage and, if specifically enforceable, creates an interest in the relevant land": Pico Holdings Inc v Wave Vistas Pty Ltd [2005] HCA 13; (2005) 79 ALJR 825 at 837 [68]. That was plainly the effect of the Mortgage and Charge. The document recited that the Borrowers would lodge a signed transfer with the Bank, and authorised the Bank when exercising its rights of sale to complete the transfer and deliver it to a purchaser (cl 7). No signed transfer was provided by the Borrowers. The circumstances in which that situation came about are not disclosed by the evidence. But it is plain that the Reducible Mortgage Loan was drawn down in full on 9 May 2002, being the date of the Mortgage and Charge, that the share certificate was issued on 19 June 2002 and was provided to the Bank thereafter, and the Bank chose not to insist upon its right to a signed transfer.

26In those circumstances, an equitable mortgage arose on execution of the Mortgage and Charge. Although it incorrectly recited that the share certificate and signed transfer had already been provided, it remained a specifically enforceable agreement which required the delivery to the Bank of those documents when it became possible for the Borrowers to do so, and which mortgaged the parcel of shares to secure the repayment of the principal, interest and costs specified in the Offer Documents. The subsequent delivery of the share certificate did not alter the position. Nor did the failure of the Bank to insist upon the creation of a signed transfer.

27The primary judge considered that an equitable mortgage was created by the Mortgage and Charge (see [15], [21] and [31]), and he was right to do so.

The obligations secured by the equitable mortgage

28What were the obligations whose performance was secured by the equitable mortgage? As the primary judge observed, and as Mr Lockhart SC who with Mr Colquhoun appeared for the Bank very properly conceded, this was not an "all monies" mortgage. It secured the repayment of the particular amounts on the date agreed between the parties by reference to the "Offer Documents". That is to be read as a reference to the separate letters, each described as "Our Offer Document", to each of Mr Clowes and Ms Moore, each dated 1 May 2002, and each of which referred to a "Reducible Mortgage Loan". True it is that there was also a reference to a "Plain & Simple Home Loan", but there was no such loan in 2002, and no reliance was placed upon the happenstance that some three years later a separate loan agreement answering that description was entered into between the same parties.

29There was an infelicity in the form of the Offer Documents, which referred to a "1st registered mortgage" over the Double Bay flat, wording which proceeded on the false premise that a registered mortgage could be granted over that flat. But on no view could the incorrect language in the First Loan deny effect to the clear and correctly drafted language of the mortgaging clause in the Mortgage and Charge entered into one week later.

30The next question, chronologically, is whether the new obligation to repay a further advance of $20,000 with interest which arose in December 2002 was secured by the equitable mortgage. The Bank advanced no claim based on equitable rectification, or estoppel by convention. On the primary way it put its case, its claim was and is confined to contract.

31The contractual document accepted by the Borrowers referred to "Security for the loan", as reproduced above. Once again, there was a defect in the documents. There was not, nor could there ever be, any mortgage over real property at 7/43 xxxxx Avenue Double Bay, let alone a "first ranking" mortgage as stated in the letter of offer, or a "Prime 1st registered mortgage" as stated in the "Continued Reliance and Extension of Security" form.

32The question is whether the objective intention of the parties manifested in the documents they executed was such as to extend the scope of the existing equitable mortgage so that it secured the obligation to repay the additional $20,000 advanced pursuant to the Second Loan.

33In support of that proposition, the Bank makes essentially three points. First, it says that the references to a first registered mortgage over the apartment are a legal nonsense, such that they can readily be construed as references to the mortgage of the parcel of shares which gave the right to use and occupy that apartment. Secondly, it says that at the very least the words are ambiguous, and should be construed to bear that meaning. The Bank prays in aid established principles of construction: that words should be construed so as to avoid making commercial nonsense: Zhu v Treasurer (NSW) [2004] HCA 56; (2004) 218 CLR 530 at [82]; that words should not be construed pedantically or in a manner prone to defeat the evident commercial purpose: Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603 at [19], and that where there is ambiguity, a construction should be preferred which avoids consequences which are capricious, unreasonable, inconvenient or unjust: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109. Thirdly, it adds that the same language in the documentation for the First Loan supported an equitable mortgage; the same result should be given to the similarly inaccurate language in the Second and Third Loans.

34In my view, the Bank's submission should be accepted because of the Bank's first point. In my opinion this is a clear case where the literal meaning of the contractual words is an absurdity, and it is self-evident what the objective intention is to be taken to have been. Where both those elements are present, as here, ordinary processes of contractual construction displace an absurd literal meaning by a meaningful legal meaning. As this Court observed in Westpac Banking Corporation v Tanzone Pty Ltd [2000] NSWCA 25; (2000) 9 BPR 17,521 at [21], the principle is premised upon absurdity, not ambiguity, and is available even where, as here, the language is unambiguous.

35The applicable principles are conveniently found in Noon v Bondi Beach Astra Retirement Village Pty Ltd [2010] NSWCA 202 at [46], where Giles JA said, with the agreement of Macfarlan JA:

"The process of construction may bring a marked divergence from the text. In Wilson v Wilson [1854] EngR 513; (1854) 5 HL Cas 40 'John' was read as 'Mary' in a will. In Fitzgerald v Masters [1956] HCA 53; (1956) 95 CLR 420 'inconsistent' was read as 'consistent' in a contract for sale. As a recent illustration in McHugh Holdings Pty Ltd v Newtown Colonial Hotels Pty Ltd [2008] NSWSC 542; (2008) 73 NSWLR 53 'lessor' was read as 'lessee' in a lease. This is often because a mistake is obvious on the face of the instrument and in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 1 AC 1101 Lord Hoffmann, with whom Lords Hope, Rodger and Walker and Baroness Hale relevantly agreed, accepted that there must be a clear mistake on the face of the instrument and it must be clear what correction ought to be made in order to cure the mistake. But in Fitzgerald v Masters at 437 it was explained 'the rejection of repugnant words, the transposition of words and the supplying of omitted words' is a consequence of 'the rule that the intention of the parties is to be ascertained from the instrument as a whole and that this intention when ascertained will govern its construction'. Ascertaining the intention of the parties, of course, is in accordance with the principles of contract construction abovementioned."

36In the same case, Young JA referred at [179] to Brereton J's decision in Saxby Soft Drinks Pty Ltd v George Saxby Beverages Pty Ltd [2009] NSWSC 1486; (2009) 14 BPR 27,213 in which the word "shorter" was read as "longer".

37This principle is distinct from rectification in equity. As Lord St Leonards said in Wilson v Wilson (1854) 5 HL Cas 40 at 66-67; 10 ER 811 at 822:

"Now it is a great mistake if it is supposed that even a Court of Law cannot correct a mistake, or error, on the face of an instrument: there is no magic in words. If you find a clear mistake, and it admits of no other construction, a Court of Law, as well as a Court of Equity, without impugning any doctrine about correcting those things which can only be shown by parol evidence to be mistakes - without, I say, going into those cases at all, both Courts of Law and of Equity may correct an obvious mistake on the face of an instrument without the slightest difficulty."

38True it is that that principle requires a very strong level of conviction that a mistake has been made. To use the language of Dixon CJ and Fullagar J in Fitzgerald v Masters [1956] HCA 53; (1956) 95 CLR 420 at 426-427, it must be "clearly necessary in order to avoid absurdity or inconsistency", and, as this Court said in Miwa Pty Ltd v Siantan Properties Pty Ltd [2011] NSWCA 297 at [18], the test of absurdity is not easily satisfied. But that demanding test is in my view satisfied in this case. The principle is not confined to linguistic errors such as "inconsistent" being read as "consistent" or "shorter" being read as "longer". The principle extends to obvious conceptual errors, such as "lessor" being read as "lessee" as in McHugh Holdings Pty Ltd v Newtown Colonial Hotel Pty Ltd [2008] NSWSC 542; (2008) 73 NSWLR 53, or words denoting a mortgage of company title flat being read as a mortgage of the shares in the company which entitle their owner to that flat. In all those cases, it is perfectly clear what legal meaning is to be given to the literally absurd words.

39It follows in my view that the words "first ranking mortgage ... over 7/43 xxxxx Avenue Double Bay" where they appear in the letter of offer, and the words "Prime 1st registered mortgage over 7/43 xxxxx Avenue Double Bay NSW 2028" where they appear in the "Continued Reliance and Extension of Security" form executed by the Borrowers on 18 December 2002 are in each case to be construed as referring to the mortgage which the Borrowers had previously given over the Shares which entitled them to use and occupy that flat, being the only mortgage that was capable of being given in respect of that flat. The execution of that form by the Borrowers satisfied the condition precedent in the Second Loan, and validly extended the existing equitable mortgage to secure the new obligations incurred by them pursuant to that Loan. To that extent, it follows that the appeal must be allowed.

40The letter of offer in respect of the Third Loan contained identical language as to the "Security for the loan" and the condition precedent that "Continued Reliance and Extension Form to be Executed" as had appeared in the Second Loan. However, this time the Continued Reliance and Extension Form is not in evidence. The Bank adduced no secondary evidence of the form, or any searches for it, nor did it adduce any evidence beyond the contractual documents and drawing down of funds of the circumstances in which the Third Loan was entered into. As noted above, the Borrowers did not appear at trial or on appeal.

41The appropriate inference to be drawn in those circumstances, as Mr Lockhart candidly conceded, is that notwithstanding the condition precedent, the Bank proceeded to advance the Third Loan without obtaining an extension of the existing mortgage. That is something the Bank was entitled to do; the condition precedent was after all for its benefit.

42That presents a difficulty for the Bank. At the time of the Third Loan, the Bank had the benefit of an equitable mortgage to secure the repayment of the First Loan, which had been extended to secure the repayment of the Second Loan. The Bank's letter of offer stated that it was the execution of the Continued Reliance and Extension form which "extends the effect of the security which HomeSide Lending now holds so that it also secures all further obligations which arise under this contract for the security provider." The construction propounded by the Bank requires a conclusion that that statement was incorrect, and that the existing mortgage would extend to the Third Loan merely upon acceptance of its terms, even if the form were not executed by the Borrowers.

43However, for the following reasons I have reached the view that the Bank's construction is correct. The first is that the signing page makes it plain that the borrowers acknowledged that "each security you have given ... which is referred to under "Security" extends to the resulting loan agreement between you and us". Those words are unambiguous. The second is that those words are not buried in small print in the general conditions; they are on the signing page, a page the Borrowers must be taken to have seen, and they are identified as three of the five important consequences of the signing and return of the document. The third is that there is no necessary contradiction between the condition precedent waived by the Bank and the acknowledgement; the execution of the form was no doubt desirable in order to strengthen the Bank's position, but there is no sound basis to conclude that its absence was fatal to the extension of the security to the Third Loan. As Mr Lockhart put it, the provision for the execution of the "Continued Reliance and Extension Form" may be said to have reflected a "belt and braces" approach on the part of the Bank. The fourth is that this was a refinancing of an existing indebtedness, secured by a mortgage over the shares; there is nothing in the context to suggest that the Bank was refinancing the existing secured indebtedness, and indeed providing an additional $100,000 to the Borrowers, but this time without the benefit of any security whatsoever.

44Notwithstanding the series of errors all of which, so far as the evidence discloses, are attributable to the Bank, in the course of the borrowings in this case, this is not a case where there is anything to be discerned other than an objective intention for the Third Loan to be secured by the existing equitable mortgage over the parcel of shares.

The Bank's fall-back submission

45For the reasons above, it is unnecessary to resolve this submission. However, were it necessary to do so, I would reject it. The premise of the submission is that the equitable mortgage created by the Mortgage and Charge did not extend to secure the Second and Third Loans. On that premise, it was wrong for the Bank to retain the share certificate after the First Loan had been repaid in full. The creation of a mortgage, whether legal or equitable, requires an act by the owner of property. True it is that the deposit of title deeds without more gives rise to an inference that the deposit was intended by the parties to operate as creating an equitable charge or mortgage over the property whose title document is deposited: see the authorities collected by Campbell J in Ellis v Marshall [2006] NSWSC 448 at [47]. However, there is no room for the application of that principle here for two reasons. The first is that there was no deposit of the share certificate. It would be the voluntary act of the owner of property in depositing the share certificate in relation to the Second and Third Loans that might be taken to create an equitable mortgage; the retention of that document by the Bank after the First Loan was discharged cannot do so. As Bathurst CJ said in Roberts v Investwell Pty Ltd (In liq) [2012] NSWCA 134 at [29]:

"What is clear from the authorities is that for either an equitable mortgage or equitable charge to come into existence there must be an intention to create an immediate proprietary interest or immediate right of recourse to identifiable, present, or in the case of a charge, future property."

46The second reflects Campbell J's statement in Ellis at [48]:

"If the Court is satisfied that there has been an actual agreement about the basis on which those title documents are deposited, the inference ceases to operate: Westpac Banking Corporation v Cronin (1990) 6 BPR [13,105] at 13,110. In that situation, the rights which arise from the deposit will be whatever the parties are demonstrated to have actually agreed."

47Hence, on the premise that the Second and Third Loans were not as a matter of contract secured by the equitable mortgage, it should not be concluded that the retention by the Bank of the share certificate secured their performance by the Borrowers. The position might well be different were there evidence of the circumstances pursuant to which the Bank came to retain the share certificate, or alternatively if the Bank had advanced a claim based on an estoppel by convention. But that was not how the litigation proceeded.

Orders

48However, for the reasons given in relation to the Bank's primary submission, the Bank was a secured creditor in respect of both the Second and Third Loans. The appeal must therefore be allowed from the orders made to the extent they dismissed the Bank's claim for relief based on it being a secured creditor, which was the extent of its appeal. Ms Moore's interest in the shares now vests in her trustees in bankruptcy, although that does not detract from the Bank's rights as a secured creditor: Bankruptcy Act 1966 (Cth), s58(5). The position as to Jefferson's register today is not clear on the face of the materials before us, but the registered owners of the shares must either be the Borrowers, or Mr Clowes and one or both of Ms Moore's trustees. Accordingly I propose the following orders: