J Creswick v F Creswick[2011] QSC 62

SUPREME COURT OF QUEENSLAND

[1] John Francis Creswick (“John”), William Gerard Creswick (“Bill”) and their father Felix Antonio Creswick (“Felix”) are the registered proprietors as tenants-in-common in equal shares of the property described as Lots 1 and 2 on RP 12943 County of Stanley Parish of Bulimba, which is situated at 503 Logan Road, Greenslopes (“the Property”). 

[2] John and Bill have applied pursuant to s 38 of the Property Law Act 1974 (“PLA”) for the appointment of statutory trustees for the sale of the Property. 

[3] John, Bill and Felix are not strangers to litigation.  On 13 September 2010, I gave judgment in a proceeding in which they, and other family members and companies associated with them, were parties.[1]  Certain aspects of that judgment are now the subject of appeal to the Court of Appeal (or, on Felix’s side at least, a proposed cross-appeal, subject to leave being granted in that regard).  The history of dealings between John, Bill and Felix was set out as some length in that other judgment.  It is unnecessary to repeat that for present purposes.  The conclusions I reach in this present judgment are based on the material and circumstances now before me on this application, and certainly not on speculation as to what results might obtain in the pending appeal and cross-appeal in the other proceeding.

[4] The Property is encumbered by a registered mortgage to GE Commercial Corporation (Australia) Pty Ltd (“GE”).  The GE mortgage was registered on 19 December 2000.  In the other proceeding, Felix had alleged that his signature to the GE mortgage (and the loan facility under which that mortgage was granted) had been forged by John.  I found that Felix had not proved this allegation.  It is clear however, that there is presently no issue in respect of the following facts:

(a)John, Bill and Felix are the co-owners[2] of the Property;

(b)The GE mortgage secures advances made by GE to Tabtill Pty Ltd;

(c)None of John, Bill or Felix impugn any of GE’s rights and entitlements under the GE mortgage.

[5] Section 38(1) of the PLA provides:

“Where any property (other than chattels personal) is held in co-ownership the court may, on the application of any 1 or more of the co-owners, and despite any other Act, appoint trustees of the property and vest the same in trustees, subject to encumbrances affecting the entirety, but free from encumbrances affecting any undivided shares, to be held by them on the statutory trust for sale or on the statutory trust for partition.”

[6] A co-owner who seeks an order for the appointment of statutory trustees for sale under s 38 is undoubtedly in a strong position.  As Connelly J said in Re Permanent Trustee Nominees (Canberra) Ltd:[3]

“It may be seen therefore that in modern times there are few defences to partition proceedings based merely on the circumstances of the parties.  To say therefore that the exercise of the jurisdiction is virtually mandatory is an adequate statement for most cases but it is, in my opinion not strictly the law and should be avoided.”

[7] That being said, however, it is also clear that there is a discretion to refuse relief, in appropriate circumstances, under s 38.[4]  In the present case, Felix sought to persuade me that there are three factors or circumstances which are sufficient to warrant the exercise of the discretion to refuse relief under s 38. 

[8] The first circumstance relied on was the contention that Felix did not receive any of the funds advanced by GE.  These funds were lent to Tabtill Pty Ltd, which is controlled by John and is the trustee of John’s family trust.  It was argued that “in those circumstances, as between Felix and John, John is entirely responsible for discharging the debts of Tabtill”.

[9] Counsel for Felix contended:

“In circumstances where John is the ultimate recipient (through Tabtill) of the benefit of the loans under the GE Loan Facility, he has the principal liability as surety to repay those amounts.  Felix has a secondary liability.  In those circumstances, Felix is entitled to be indemnified by John in respect of the repayment of the loan under the GE loan facility.  Moreover, Felix has a charge over the property of John secured by the GE mortgage, namely John’s interest in 503 Logan Road.”

[10] In advancing these propositions, counsel for Felix relied on commentary in Professors Phillips and O'Donovan’s work The Modern Contract of Guarantee.  In the current online version of that work, the relevant passage is found in the section of the commentary dealing with the rights of co-sureties to contribution from one another after payment of the guaranteed debt.  Under the heading “Who is obliged to contribute”, the commentary states (omitting footnotes and citations):[5]

“Contribution is available only against co-sureties on the basis that persons who bear co-ordinate liabilities to make good one loss or to meet a common demand can be held liable to contribute.  The parties can be under co-ordinate liabilities in the relevant sense even if they can choose different methods of discharging their obligations, for example by a contribution of equity capital to the principal debtor rather than an advance of loan capital or a payment to the creditor on behalf of the principal debtor.  By the same token, a guarantor will not be entitled to contribution from the co-sureties unless he directly or indirectly pays more than his just share of the principal debt. 

Where one guarantor enjoys the whole benefit of the guarantee through a shareholding in a company from which her or his co-surety has withdrawn, the co-surety is not liable to contribute.  Since the first guarantor enjoys all the benefits of the guarantee he or she alone must bear its burden, and the co-surety has a sound defence to an action for contribution.  There is, however, no direct English or Australian authority for this proposition.  On the other hand, it is consistent with the equitable genesis of the right of contribution.  It is at least clear that a co-surety can resist a claim for contribution by relying on an indemnity granted by the plaintiff in a contribution suit.  This indemnity can take the form of a verbal promise since the Statute of Frauds 1677 ... does not apply to such an undertaking.”

[11] The authority relied on for the first two sentences in the second paragraph of that quotation is the judgment of the Supreme Court of Canada in Bater v Kare.[6]

[12] A previous edition of this commentary (with slightly different wording but similar substance) was quoted with approval by Bryson J in Official Trustee in Bankruptcy v Citibank,[7] who then said:[8]

“Clearly enough, there are cases where a person falls under a common liability but is not obliged to contribute equally to the liability.  To take a grossly simple illustration, if two join in borrowing money but the money borrowed is applied for the purposes of only one of them, obviously enough the borrower who obtained the money is categorised as the principal borrower and the other is categorised as a surety for the purpose of adjustment of rights between them, whether or not they were expressly so categorised by the terms of their contract with the creditor, and whether or not there was any express arrangement excluding contribution or any actual advertence to the question of contribution at all.  The court would have no difficulty in categorising one as principal and one as surety, and in recognising that they do not stand in a position of equality so that there could be no claim for contribution by the principal, while the other would be entitled to an indemnity.  Further, if both gave security over property the surety would be entitled to a charge over the charged property of the principal.  That these observations are not an exercise in the excessively obvious is shown by the arguments put to the Chancery Division (Foster J and Fox J) in Re A Debtor; Ex parte Marley v Trustee of the Property of the Debtor [1976] 1 WLR 952;  [1976] 2 All ER 1010.  In that case the standing of one co-owner as surety was established by a concession, but, I would think, could not fairly have been disputed.”

[13] Counsel for Felix also sought to draw analogies between the position of Felix and circumstances in which a mortgagor, who mortgages his or her property to secure the debt of another is entitled in equity to be exonerated.  In Parsons v McBain[9] the Full Federal Court said:

“[20]The equity of exoneration is an incident of the relationship between surety and principal debtor.  It usually arises where a person has mortgaged his property to secure the debt of another, whether or not that other has covenanted to pay the debt.  However, it will also arise in a case where, although not an actual suretyship, the relationship is treated as one of suretyship.  This is Lord Selbourne’s third class of suretyship mentioned in Duncan, Fox & Co v North and South Wales Bank (1880) 6 App Cas 1 at 10.  For the doctrine to apply in this class, the following facts will usually exist.  First, a person must charge his property.  Where the person is the beneficial owner of the property it will be sufficient if the charge is by his trustee.  Second, the charge must be for the purpose of raising money to pay the debts of another person or to otherwise benefit that other person.  Third, the money so borrowed must be applied for that purpose: see generally Re Berry (a bankrupt) [1978] 2 NZLR 373.

[21]An equity of exoneration operates in the nature of “a charge upon the estate of the principal debtor by way of indemnity for the purpose of enforcing against that estate the right which [the beneficiary] has, as between [the beneficiary] and the principal debtor, to have that estate resorted to first for the payment of the debt”:  Gee v Liddle [1913] 2 Ch D 62 at 72.  Thus, where co-owners mortgage their property so that money can be borrowed for the benefit of one mortgagor, the other has an interest in the property of the co-mortgagor whose property is to be regarded as primarily liable to pay the debt.”

[14] The application of the principles of contribution between co-sureties and even of the equity of exoneration would not, however, in any way impinge on GE’s entitlements under the GE mortgage.  Counsel for Felix submitted that the amount owed by Tabtill Pty Ltd to GE is so much in excess of the value of the Property that if the Property is sold then it is likely that all of the net proceeds of sale will be taken by GE, that “it is likely there will be little or no residual proceeds to be distributed to Felix” and that the “proceeds from the sale of his interest will be used to pay GE”.  Even assuming that to be the outcome, however, that is a function of the fact that GE holds a registered mortgage over all of the co-owners’ interests in the property and has nothing to do with any equitable rights which Felix might have against John. 

[15] In a similar vein, it was submitted that it “would be grossly inequitable to grant John an order appointing statutory trustees for sale when the result of that order would be to:

(a)deprive Felix of his registered interest in 503 Logan Road and his charge over the interest of John;  and

(b)permit John to have the proceeds of sale applied to repay a loan from which John benefits and Felix does not.”

[16] Again, however, these submissions ignore the fact that GE is a registered mortgagee, and is entitled to be paid the moneys properly due to it in return for a discharge of the mortgage.  It cannot be said that any equitable claim which Felix might have against John, or any charge in equity which Felix might have over John’s interest in the Property, have priority over the rights of the registered mortgagee.

[17] This case is quite different from Official Trustee in Bankruptcy v Cameron.[10]  In that case, a husband and wife were joint tenants of their home property.  They granted a mortgage over their home to secure borrowings.  Much of the money borrowed was to finance the husband’s optometry business.  The husband went bankrupt, and his interest in their home was transmitted to the Official Trustee.  Despite the husband’s bankruptcy, the wife continued to maintain the property and make the mortgage payments.  The Official Trustee filed an application for the appointment of a statutory trustee to sell the property, but the wife, in separate proceedings, sought declaratory relief claiming that after payment of the registered mortgage she was entitled, inter alia, to be exonerated in respect of any claim which the Official Trustee may otherwise have in respect of the husband’s interest in the property.  The amount owing to the bank in that case was just over $200,000, while the evidence indicated that the value of the property was between $480,000 and $550,000.  In other words, if the property had been sold, there would have been a significant surplus after paying out the mortgagee, and the real contest was whether the Official Trustee was entitled to all of the husband’s nominal share of that surplus or whether the wife had the benefit of an equity of exoneration over her husband’s nominal share of the surplus.  It was in that context that I said:

“[28] The circumstances described in the affidavit material filed before me give rise, in my view, to real and substantial triable issues as to whether the interest in the property now held by the Official Trustee is subject to such a charge. Moreover, the evidence strongly suggests that such a charge extends over the entirety, or at least a very substantial part of, the bankrupt estate’s interest in the property. The establishment by Mrs Cameron of such a charge over the whole, or a significant part of, the interest in the property held by the Official Trustee may very well, in my view, be a sufficient circumstance to enliven an exercise of the discretion to refuse the making of an order under s 38.”

[18] It is quite clear, however, that the wife’s equitable claims in that case were not relied on to defeat or postpone the interests of the registered mortgagee.  Rather, the case dealt expressly with considerations concerning the surplus, after payment of the registered mortgagee.

[19] Similarly, the present case is quite different from the factual matrix considered by Bryson J in Official Trustee in Bankruptcy v Citibank.  The facts of that case, in summary, were as follows.  Ralph and Rosa Panebianco, husband and wife, were the directors and shareholders of Wytoe Pty Ltd.  They carried on business through that company, and it had no organisational structure separate from them.  Citibank advanced money to Wytoe Pty Ltd.  Those advances were secured by, inter alia, a third party mortgage over Ralph and Rosa’s home and a third party mortgage over the home owned by Ralph’s parents, Innocenzo and Saveria Panebianco.  These individuals were all parties to various loan agreements with Citibank under which, amongst other things, the parents acknowledged having provided collateral security to Citibank over their home to secure increases in the advances to Wytoe Pty Ltd.  Ralph and Rosa went bankrupt, and their interest in their home was transmitted to the Official Trustee in Bankruptcy.  The Official Trustee sold the home and, from the proceeds of sale, paid out all moneys which were owed to Citibank by Wytoe Pty Ltd.  By this time, Wytoe Pty Ltd had fallen into default with Citibank, and indeed had been removed from the register of companies.  Citibank, which was not owed any money, still held the mortgage over the parents’ home.  Even though Citibank had no further claim, the Official Trustee claimed that the parents were co-sureties with Ralph and Rosa and that the Official Trustee was entitled to recover as contribution from the parents one half of the amount paid to Citibank, and to rely on Citibank’s mortgage over the parents’ home to enforce that right.  In the end, Bryson J, on the facts and having regard to the particular circumstances of that case, held that there was no equitable claim to contribution by Ralph and Rosa or by their bankrupt estate in respect of the moneys paid out of the proceeds of the sale of their house to Citibank.  It is relevant for present purposes to note that nothing in that case concerned Citibank’s entitlements as mortgagee, but rather turned on the rights of co-sureties inter se after the secured creditor had been paid.

[20] As I have said, these claims by Felix in equity against John cannot defeat or take priority over the interests of the registered mortgagee.  Felix’s registered interest in the Property, and any claim in equity he may have over John’s interest in the Property, are subject to the interests of the registered mortgagee.  To accede to Felix’s submissions would be tantamount to subverting the rights of the registered mortgagee.  That is not a sound basis, in my opinion, for the exercise of the discretion to refuse an order under s 38 of the PLA. 

[21] It does, however, seem appropriate in the circumstances that if the property is sold by statutory trustees, then any net proceeds of sale (i.e. after payment of the proper expenses of sale and in discharge of the registered mortgage) should be held by the trustees pending further order of the Court.  If there be any such surplus, then that is the amount to be disputed between John and Felix.  If necessary, further directions can be made under s 42 of the PLA to facilitate the resolution of that dispute. 

[22] The second argument advanced by Felix was that under the terms of an agreement made between, inter alia, Felix, John and Bill in May 2007 (this is the “May Agreement”, specific performance of which I ordered in the other proceeding), John and Bill agreed to indemnify Felix against any liability to pay money advanced on the security of the Property.  It seems to me, however, that this claim, of itself, is not a good and sufficient basis for the exercise of the discretion to refuse an order under s 38.  Felix does not contend that this contractual indemnity gives him a charge over the Property.  If Felix has the benefit of a contractual indemnity from John and Bill then the appropriate course is for Felix to sue John and Bill to seek enforcement of that indemnity.

[23] The third basis for Felix’s opposition turns on the fact that Felix has appealed against my finding in the other proceeding that he had not proved (to the requisite standard) that John had forged Felix’s signature on the GE mortgage and the GE loan facility.  Felix’s argument was that if the Court of Appeal overturns that finding and makes findings that John did forge Felix’s signature, then “John would have no continuing right to have Felix’s interest in [the Property] mortgaged to secure a loan to Tabtill” and that “Felix would be entitled to have John take steps to remove the GE mortgage.” 

[24] That submission, by its terms, invites speculation as to what might or might not be the outcome of Felix’s proposed cross-appeal, and the consequences of such outcome.  There are extant findings on these issues in proceedings to which each of John, Bill and Felix were parties.  The sort of speculation which Felix urges is not, I think, a proper basis for the exercise of the discretion to refuse an order under s 38.

[25] John and Bill have nominated Mr Jon Broadley and Mr Stuart Rees, both solicitors of this Court, to be the trustees appointed for the sale of the Property.  Felix took no issue with the appropriateness of either of these proposed appointees.

[26] Felix has not persuaded me to exercise the discretion against the making of an order under s 38 of the PLA.  For the reasons given earlier, however, I consider it appropriate to direct that the statutory trustees hold any net proceeds of sale (after payment of the proper expenses of sale and in discharge of the registered mortgage) pending further order of the Court.

Conclusion

[27] There will be an order pursuant to s 38 of the Property Law Act 1974 appointing Jon Broadley and Stuart Rees as trustees for the sale of the property described as Lots 1 and 2 on RP 12943 County of Stanley Parish of Bulimba, being the land situated at 503 Logan Road, Greenslopes.

[28] It will further be directed that the trustees hold any net proceeds of sale (after payment of the proper expenses of sale and in discharge of registered mortgage no. 704493416 in favour of GE Commercial Corporation (Australia) Pty Ltd) pending further order of the Court.

[29] I will hear the parties as to the appropriate form of order and as to costs.