Blog 102. A Federal Court case concerning a caveat, equitable priorities and much else besides.

Credit Suisse AG v Gu (No 3) [2026] FCA 439, Cheeseman J.

This is the first Blog covering a Federal Court case, gratefully brought to my attention by a follower of this Blog. I use the word “gratefully” advisedly – as I traversed its 476 paragraphs I did not always experience this feeling! I occasionally reflected that, having done sundry misdeeds and contemplating whether to stop entirely, Macbeth said –

“I am in blood Stepp’d in so far, that, should I wade no more, Returning were as tedious as go o’er.” (Act 3, Scene 4)

This case is a long priority contest between three parties covering multiple grounds with a minor caveat element. No Victorian cases are cited, but the principles enunciated apply equally in Victoria. This Blog has been very difficult to format within the limits of WordPress, particularly in the case of the subsections of s. 121 of the Bankruptcy Act, and my friend Frank, who is responsible for putting the Blog into cyberspace, says it has taken 5 years off his life.

The facts were –

In 2017 Mr Gu entered a contract to purchase a residential property in Sydney (the Property) for $10 m. with a $1 m. deposit.
In March 2017 Credit Suisse agreed to advance $6 m. to Gu for this purchase.
At that time Gu was a director of i-Prosperity Pty Ltd (IPPL). On 3 and 15 March and 13 April monies were transferred from IPPL’s accounts into Gu’s HSBC account (the First, Second and Third IPPL Sums). On 18 April $3.2 m. was paid from that account to a solicitor’s trust account. That day $500,000 was also transferred from IPPL into that trust account (the Fourth IPPL Sum). On 21 April trust monies in the sum of $3,654,987.14 were applied by those solicitors towards the purchase price and acquisition costs.
The sale settled. On or about 3 May 2017 Gu became registered proprietor of the Property subject to Credit Suisse’s mortgage. The mortgage provided that the mortgagee’s consent was required before any further interest in the property was granted (cl. 5.7(c)).
Subsequently, $280,000 of IPPL’s funds were paid to Credit Suisse as follows: $200,000 on 12 May 2017, $30,000 on 5 July 2019 and $50,000 on 22 January 2020 (the Fifth, Sixth and Seventh IPPL Sums). Credit Suisse treated those sums as credits to the current account associated with the mortgage facility, applying them to meet interest due.
In June 2019 a series of related agreements involving Gu and Great Lands Investment Pty Ltd (Great Lands) were made. One was a loan agreement dated 28 June by which it lent him $3 m. repayable after two months secured inter alia by an unregistered mortgage over the Property, as to which a caveat was lodged that day. The loan agreement provided for a lower interest rate of 2% per month in the ordinary course, but in cll. 5.4, 5.5 and 5.7(a)(ii) stipulated a higher interest rate of 4% per month upon default, with compounding and capitalisation in the default regime.
Within Great Lands Mingjie (Jason) Zhang had authority to act in relation to this loan including in relevant discussions with Gu. IPPL on behalf of Gu paid Jason Zhang $700,000 on 20 September 2019 and $500,000 on 6 February 2020 (the Jason Zhang payments).
On 10 March 2020 four persons (the Hu Parties) sued IPPL and another company seeking repayment of monies invested pursuant to a convertible debenture arrangement. The Hu Parties obtained a freezing order for $5,750,000 against the defendants.
On 15 April 2020 this proceeding was settled on terms including payment by the defendants of an agreed sum. Following non-payment the Hu Parties obtained judgment on 14 May 2020 for $5,761,972.60. (the First Judgment Debt).
The parties to this litigation then negotiated during which Gu proposed that i‑Prosperity Capital Management Pty Ltd (IPCM) grant security over its assets in the Hu Parties’ favour. Their solicitor responded by seeking particulars of those assets and their value. The Hu Parties generally interrogated the financial information provided by IPPL and Gu, including proposed security, and conducted a title search disclosing the registered mortgage and the Great Lands caveat.
A draft Deed of Guarantee and Indemnity (the Hu Deed) between the Hu Parties (described as the Beneficiaries), Gu and IPCM (described as the Guarantors) and IPPL was circulated. On 1 June Gu’s solicitor sought to delete cl. 7.2 of the draft while otherwise preserving the broader package of the proposed deal. The Hu Parties’ solicitor refused this deletion, but that solicitor’s contemporaneous communications revealed that the caveat’s purpose was to provide the most uninvasive form of security pending payment on 30 June 2020, when the caveat would be removed immediately.
On or about 2 June 2020 the Hu Deed was executed. It recited or provided –
- the Hu Parties’ concern that the First Judgment Debt would be unpaid and their desire to pursue further relief (Recital D);
- for a standstill agreement lasting until 30 June 2020 (Recital E);
- that Gu and IPCM guaranteed payment of the First Judgment Debt by 30 June, indemnified the Hu Parties against loss from non-payment, and undertook not to dissipate assets pending payment (cls. 1.1, 5, 8);
- Clause 7, headed “Security” provided:

“7.1 Security for Beneficiaries
The Beneficiaries agreeing to the Guarantee Proposal … is subject to and conditional upon I[P]CM entering into a general security deed under which I[P]CM agrees to grant a security interest in and over all of the I[P]CM’s … property to the Beneficiaries …

7.2 Caveat
Gu hereby grants to the Beneficiaries a caveatable interest in the [Property] … and consents to the Beneficiaries lodging and maintaining a caveat on the title to the Property until … the Judgement Debt has … been paid and discharged in full.

7.3 No security for the Guarantors
The Guarantors have not taken, and will not take, security from the Debtors for or in consideration of the Guarantors assuming their obligations …”

The Hu Parties agreed to forbear from enforcement of the First Judgment Debt, or commencing certain proceedings until after 30 June 2020.

On or about 3 June the Hu Parties caveated, consistently with cl. 7.2.
In mid 2020 IPPL went into liquidation.
The First Judgment Debt was not paid by 30 June 2020. The Hu Parties sued Gu and IPCM as guarantors and on 21 August 2020 obtained judgment against Gu for $5,929,897.86 (the Second Judgment Debt).
In early 2021 the Property was sold by receivers appointed by Credit Suisse. Over $5.5m remained after they and it were paid out (the Surplus Funds). This proceeding concerned entitlements to those funds.
On 10 August 2021 Gu became bankrupt.
On 17 January 2022 a Deed of Assignment and Sale was executed by which Gu’s trustee in bankruptcy assigned to the Hu Parties the trustee’s right to pursue claims under ss. 120 and 121 of the Bankruptcy Act against Great Lands and others.
On 28 January 2022, the Hu Parties’ solicitor gave notice of this assignment.

Section 121 of the Bankruptcy Act provided (omitting headings) –

“(1) A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor’s bankruptcy if:“(1) A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor’s bankruptcy if:

(a) the property would probably have become part of the transferor’s estate or would probably have been available to creditors if the property had not been transferred; and

(b) the transferor’s main purpose in making the transfer was:

(i) to prevent the transferred property from becoming divisible among the transferor’s creditors; or

(ii) to hinder or delay the process of making property available for division among the transferor’s creditors.

…

(2) The transferor’s main purpose in making the transfer is taken to be the purpose described in paragraph (1)(b) if it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent.

…

(3) Subsection (2) does not limit the ways of establishing the transferor’s main purpose in making a transfer.

…

(4) Despite subsection (1), a transfer of property is not void against the trustee if:

(a) the consideration that the transferee gave for the transfer was at least as valuable as the market value of the property; and

(b) the transferee did not know, and could not reasonably have inferred, that the transferor’s main purpose in making the transfer was the purpose described in paragraph (1)(b); and

(c) the transferee could not reasonably have inferred that, at the time of the transfer, the transferor was, or was about to become, insolvent.

…

(4A) For the purposes of this section, a rebuttable presumption arises that the transferor was, or was about to become, insolvent at the time of the transfer if it is established that the transferor:

(a) had not, in respect of that time, kept such books, accounts and records as are usual and proper in relation to the business carried on by the transferor and as sufficiently disclose the transferor’s business transactions and financial position; or

(b) having kept such books, accounts and records, has not preserved them.

…

(5) The trustee must pay to the transferee an amount equal to the value of any consideration that the transferee gave for a transfer that is void against the trustee.

…

(8) This section does not affect the rights of a person who acquired property from the transferee in good faith and for at least the market value of the property.

…

(9) For the purposes of this section:

(a) transfer of property includes a payment of money; and

(b) a person who does something that results in another person becoming the owner of property that did not previously exist is taken to have transferred the property to the other person; and

Section 100-5 of Schedule 2 to the Bankruptcy Act (Insolvency Practice Schedule (Bankruptcy)) permitted the trustee in bankruptcy to assign a right to sue conferred by the Act and s. 100-5(4) provided that if such a right is assigned, a reference in this Act to the trustee in relation to the action was taken to be a reference to assignee.

Legal issues raised were –

Whether clause 7.2 of Hu Deed created an equitable charge and if so what amounts it secured.
Whether the Great Lands mortgage was void against Gu’s trustee in bankruptcy, and by assignment the Hu Parties, by reason of s. 121(1) of the Bankruptcy Act, including whether Great Lands established the good faith defence under s. 121(4).
The Great Lands mortgage being void against the Hu Parties, what consideration must be repaid to it by them under the Bankruptcy Act s. 121(5) and s. 100-5 of Schedule 2 to the Bankruptcy Act (Insolvency Practice Schedule (Bankruptcy))?
Whether the Higher Interest Rate clauses in the Great Lands loan were void and unenforceable as a penalty.
If the Great Lands mortgage had remained operative, would the Jason Zhang payments have reduced Gu’s debt to Great Lands under its loan?
If the Great Lands mortgage had remained operative, would it have covered costs?
Whether, on the assumption that Great Lands had a surviving secured claim under the its loan and mortgage, these should be denied enforcement by reason of People’s Republic of China (PRC) law.
The legal principles for determining questions related to movement of monies.
Was IPPL the beneficiary of a purchase monies resulting trust?
Was IPPL the beneficiary of a constructive trust based on Black v S. Freedman?
Was IPPL the beneficiary of a constructive trust arising from Gu’s breaches of fiduciary or directors’ duties?
Was IPPL subrogated to the rights formerly held by Credit Suisse by reason of the Fifth, Sixth and Seventh IPPL Sums?
Was IPPL subrogated to Great Lands’s position by the Jason Zhang payments?
Who between the Hu Parties and Great Lands had priority to the Surplus Funds?
Who between the Hu Parties and IPPL had priority to the Surplus Funds?
Who between IPPL and Great Lands had priority to the Surplus Funds?

Cheeseman J. held –

Whether clause 7.2 of Hu Deed created an equitable charge and if so what amounts it secured.

Whether cl. 7.2 of the Hu Deed created an equitable charge or other proprietary security interest, or merely the right to caveat, was a question of construction to be determined objectively by reference to its text, context and purpose, requiring a reading of the instrument as a whole. Relevant considerations included the presence or absence of the familiar language of charge or mortgage, the place of the clause within the instrument, the evident commercial purpose of the transaction, and whether the clause was directed only to the practical support of a caveat or to conferring a present security interest.
1. In favour of an equitable charge or other proprietary security interest was:
  1. the words of present grant in cl. 7.2;
  2. the heading “Security”;
  3. the linkage between the caveat and payment in full of the First Judgment Debt;
  4. the commercial purpose of the Deed as a forbearance and security arrangement. However, those considerations were not determinative: construing a commercial instrument did not require that every phrase be forced to perform independent proprietary work – the starting point remained the legal effect actually produced by the text read as a whole, not the avoidance of semantic redundancy. [58], [59]
2. In favour of a mere right to lodge and maintain a caveat was:

1. 1. Clause 7.2 did not employ the familiar language of charge or mortgage; nor expressly confer any right of realisation. In the setting of a solicitor-drafted commercial deed concerned at least partly with the provision of security, those omissions were significant and enhanced by the immediate adversarial setting of the Deed as a negotiated standstill. Clause 7.2 was capable of operating merely as employing a caveat as a practical restraint on dealings with the Property;
  2. The text and structure of cl. 7. Clause 7.1 expressly required IPCM to enter into a general security deed. By contrast, cl. 7.2 did not require Gu to grant security in those terms. Clause 7.3 reinforced that contrast in the way in which the subclauses of cl. 7 were framed;
  3. The commercial setting and course of negotiations. The Hu Parties were insisting on a package of protections rather than merely personal promises of payment. They were being asked to forbear until 30 June but continuing to seek information about the proposed security and unprepared simply to rely on Gu’s assurances of payment or of no undisclosed dealings. A caveat would impede dealings with the Property thereby reducing their informational disadvantage;
  4. The broader structure of the Deed. Read as a whole it was apt to establish a regime of guarantees, forbearance and preservation of assets pending payment. In that setting, cl. 7.2 was more naturally understood as part of that preservation regime rather than as conferring a proprietary security interest;
  5. The existence of the Credit Suisse mortgage and in particular the requirement in its cl. 5.7(c). [42], [60]-[72], [75]

In conclusion, the correct interpretation of cl. 7.2 was (b). [36], [38], [39], [74], [76], [470]

If, however, the Hu Deed did create an equitable charge, it would, on its proper construction, secure all amounts for which Gu became liable to the Hu Parties under it including the First Judgment Debt, interest and liabilities arising under the indemnity in cl. 5. Although the contractual liabilities under the Deed merged in the Second Judgment, such that the Hu Parties could not again sue on the underlying causes of action, the security was not lost by that merger while the judgment remained unsatisfied. The charge would continue to secure Gu’s liabilities as crystallised in the Second Judgment. [32], [81]-[87]

Whether the Great Lands mortgage was void against Gu’s trustee in bankruptcy, and by assignment the Hu Parties, by reason of s. 121(1) of the Bankruptcy Act, including whether Great Lands established the good faith defence under s. 121(4).

As to the challenge by the Hu Parties to the Great Lands mortgage based on s. 121(1) of the Bankruptcy Act:
1. For the purposes of s. 121, the grant of a mortgage or charge may constitute a transfer of property. The Hu Parties carried the onus of establishing that it was void under s. 121(1); [97], [98], [103]
2. The Hu Parties could not, by force that section alone, succeed to the position of a mortgagee or other proprietary claimant to the Surplus Funds. Rather, the statutory question was whether that mortgage was void against the trustee and, if so, whether the trustee’s statutory right to recover property or obtain restitution had been validly assigned to the Hu Parties and may now be enforced by them; [99]
3. The requisite purpose of the transferor may be established directly from the facts and circumstances of the transaction, or indirectly by operation of statutory presumptions; [104]
4. Establishment of insolvency, or impending insolvency, bore directly upon the purpose inquiry under s. 121(1); [105]
5. Great Lands having conceded that Gu was insolvent or about to become so when its mortgage was granted, the presumption in s. 121(2) applied and Gu’s main purpose in granting the mortgage was taken to be that described in s. 121(1)(b). The Great Lands mortgage was accordingly, subject to it establishing a good faith defence, void against the Hu Parties pursuant to s. 121(1); [107]-[108], [198], [471]

As to whether Great Lands established its good faith defence under s. 121(4) –
1. The transferee bore the onus of establishing each element in ss. 121(4)(a), (b) and (c); [109], [114]
2. The requirements in ss. 121(4)(b) and (c) were expressed in objective terms. The statutory question was not exhausted by the transferee’s assertion of its subjective belief. The inquiry was whether, on the facts known to the transferee at the time, the transferee proved that the relevant inference was not one that it could reasonably draw. This prevented the defence from succeeding by reason of the transferee’s wilful blindness, but it may be possible, in certain circumstances, for the defence to succeed even in the case of the transferee’s honest ineptitude; [119]
3. In applying ss 121(4)(b) and (c), the ordinary principles for drawing of inferences from proved facts applied. Where direct proof was unavailable, a reasonable and definite inference on the balance of probabilities may be drawn from proved facts, not being a matter of conjecture, guesswork or surmise. In the case of a corporate transferee, the inquiry proceeded by reference to the knowledge of the natural persons who had acted on its behalf in negotiating, arranging or implementing the transaction, applying ordinary principles of attribution; [120]-[121].
4. As to whether Great Lands as the transferee, had established the element of value for the purposes of s.121(4)(a) –
  1. The property transferred was the mortgage itself, ie, the proprietary interest granted over the Property to secure the $3 m. advanced not merely a chose in action to recover a fixed principal sum. It was a proprietary security interest securing a bundle of monetary rights defined by the Great Lands transaction documents, including contingent and accruing interest liabilities; [125]
  2. The term “consideration” imported its ordinary legal and commercial meaning; [129]
  3. Where, as here, the mortgage secured an expanded and potentially escalating set of liabilities, including interest liabilities, the market value of the proprietary interest transferred could not simply be equated with principal alone. It secured liabilities beyond the $3 m. advanced. The same conclusion followed from the Great Lands Loan. Great Lands had failed to discharge its onus under s. 121(4)(a). [133], [135], [136], [162]
5. Great Lands failed to discharge its onus under s. 121(4)(b). The proscribed purpose was reasonably inferable from facts known to it; [153], [156], [157], [162]
6. Great Lands failed to discharge its onus under s. 121(4)(c). Gu’s insolvency or impending insolvency was reasonably inferable at the time of the transfer. [158]-[161], [162].
7. The defence under s. 121(4) accordingly failed. [162], [198], [471]

The Great Lands mortgage being void against the Hu Parties, what consideration must be repaid to it by them under the Bankruptcy Act s. 121(5) and s. 100-5 of Schedule 2 to the Bankruptcy Act (Insolvency Practice Schedule (Bankruptcy))?

As to the consideration to be repaid to Great Lands under s. 121(5) and s. 100-5 of the Insolvency Practice Schedule:
1. Great Lands bore the onus of proving the value of the consideration to be refunded; [167]
2. The Jason Zhang payments were accepted and treated by those concerned as being on account of Gu’s indebtedness under the Great Lands loan, and not as partial redemptions of an investment by Zhang. There was a binding arrangement to this effect – any contemplated written instrument was no more than a fuller record of an arrangement already concluded and implemented (ie this was not in the “third class” described in Masters v Cameron). Accordingly they must be brought to account in determining the refund; [186], [187]
3. As to the content of that arrangement in allocating those loan repayments between principal and interest, Zhang and Gu were proceeding on the footing that the relevant interest provisions were those in the Great Lands loan, including the higher interest rate, whereby the payment of $700,000 would comprise $200,000 of interest and $500,000 of principal and the payment of $500,000 would comprise $450,000 of interest and $50,000 of principal. However (see below) the higher-rate default provisions were void as penalties, entailing adjustment of the parties’ agreed allocation. Thus the excess amounts would be brought to account instead as reductions of principal, and so the payment of $700,000 would reduce principal by $532,328.77 and the payment of $500,000 would reduce principal by $274,461.61; [188]-[192]
4. With this gross reduction of principal by $806,790.38 the amount to which Great Lands was entitled was $2,193,209.62 being the amount equal to the value of the consideration of $3,000,000 given by Great Lands for the transfer avoided, less $806,791 repaid. [193], [199], [471]
In giving effect to this statutory entitlement the relief to which Great Lands was entitled would be moulded to avoid double recovery and ensure that it did not both retain the benefit of those payments and obtain a refund of the same value. This remedial outcome followed from the absence of any surviving proprietary security interest held by either Great Lands or the Hu Parties in the Surplus Funds. [194]
The amount to which Great Lands was entitled under s. 121(5) did not include any interest possibly recoverable by Great Lands if it had enforced its personal rights under the loan, rather than receiving the statutory repayment under s. 121(5). Interest was not payable on the amount due under s. 121(5), nor under s. 51A of the Federal Court of Australia Act 1976 (Cth). [196]-[197], [199]

Whether the Higher Interest Rate clauses in the Great Lands loan were void and unenforceable as a penalty.

A provision requiring payment upon default was not penal merely because engaged by breach. The question was whether the stipulated consequence was out of all proportion to, or exorbitant or unconscionable having regard to, the legitimate interest which the provision was designed to protect. A clause increasing the rate of interest on default, or one providing for compound interest, was not necessarily penal. The inquiry was fact specific. [204]
The higher interest rate clauses were void and unenforceable as a penalty. The combined effect of the increase from 2% per month to 4% per month, plus compounding and capitalisation upon default, imposed a substantially more onerous liability than before default, and Great Lands did not establish a legitimate interest justifing it. The consequences were out of all proportion to, or exorbitant or unconscionable having regard to, Great Lands’ legitimate interest in repayment which the provisions were designed to protect. [205], [209]

If the Great Lands mortgage had remained operative, would the Jason Zhang payments have reduced Gu’s debt to Great Lands under its loan?

These payments were to be brought to account in reduction of Gu’s debt to Great Lands under its loan. [212]

If the Great Lands mortgage had remained operative, would it have covered costs?

Costs properly proved to be secured by the Great Lands mortgage would be recoverable. [213]

Whether, on the assumption that Great Lands had a surviving secured claim under its loan and mortgage, these should be denied enforcement by reason of People’s Republic of China (PRC) law.

The arrangements whereby Great Lands drew the funds lent to Gu did not involve the movement and use of RMB (the official currency of the PRC) funds in China in a manner engaging PRC foreign exchange controls and related provisions of PRC law: ie the proper characterization of the transaction did not involve the movement and use for the purpose of effecting what was, in substance, the provision of value to Gu in Australia outside the ordinary channels contemplated by such controls. The relevant documents recorded two distinct loan agreements, only one being the Great Lands loan. There was no applicable PRC civil law illegality, nor any basis in public policy or clean hands, for refusing enforcement of the Great Lands loan or mortgage. The transactions were also not tainted by PRC criminal law. [252], [253], [257], [260]-[262]

The legal principles to be applied in determining questions related to movement of monies.

The Court was required to determine questions related to the movement of monies. The following principles applied:
1. Factual issues were to be determined by reference to the whole of the evidence bearing upon the movement, application and character of the relevant monies, including the agreed facts, the contemporaneous banking records and solicitors’ trust account records, the witness evidence concerning those records, and the later accounting and ledger materials.
2. The inquiry was one of inference from the proved facts and the documentary record considered as a whole. Where direct proof was unavailable, factual findings were possible by inference from proved facts, including contemporaneous documents, but the inference must be a reasonable and definite inference on the balance of probabilities and not a matter of conjecture, guesswork or surmise; it was insufficient that the evidence permitted competing inferences of equal probability.
3. Primary recourse should ordinarily be had to any available contemporaneous documents, and findings should if possible be reasoned from contemporary materials, objectively established facts and the apparent logic of events rather than from demeanour alone.
4. To the extent that the competing characterisations include an allegation of misappropriation or other serious wrongdoing, the evidence must be scrutinised with appropriate care before such an inference was drawn, consistently with Briginshaw v Briginshaw [1938] HCA 34; 60 CLR 336, as reflected in s 140 of the Evidence Act 1995 (Cth). This approach did not alter the standard of proof, but directed a court not lightly to make a finding that, on the balance of probabilities, a party to civil litigation has been guilty of serious wrongdoing.
5. Later bookkeeping descriptions and ledger labels were relevant, but not conclusive of the underlying legal character of a transaction; their weight depended upon their provenance, consistency and objective reliability.
6. In particular, to characterise a payment as a loan it was necessary to identify objective facts supporting the conclusion that the payment was made on terms for repayment. The essence of a loan was an advance of money coupled with an obligation of repayment. Neither a formal written loan agreement nor an agreement for interest were essential. But nor did the mere use of expressions such as “director loan”, without more, establish a concluded loan arrangement.
7. Where, as here, monies passed through an intermediate mixed account before transfer to the solicitors’ trust account, the tracing inquiry was to be undertaken by reference to orthodox equitable principle and not by treating later ledger classifications as dispositive. [275]-[278]

Was IPPL the beneficiary of a purchase monies resulting trust?

1. Funds sourced from IPPL were applied in the acquisition of the Property;
2. Those funds were not advanced to Gu under a concluded loan agreement;
3. The passage of funds through the Gu’s account did not alter their character as IPPL funds applied toward the acquisition. This conclusion accorded with orthodox tracing principles for trust money passing through a mixed account. If allocation of any deficiency within a mixed trust fund as between competing trust claimants was in question, there would be proportionate distribution rather than a first-in, first-out application of the rule in Clayton’s Case. [169], [176], [193].
4. Later accounting records and a ledger reclassification exercise did not reliably reflect the legal character of the underlying transactions at the time of payment.
5. Accordingly, with the qualification that $20,000 was withdrawn from Gu’s account after deposit of the First IPPL Sum and not applied toward the acquisition, the First to Third IPPL Sums formed part of the $3.2 m. transferred from Gu’s account to the solicitors’ trust account on 18 April 2017, and the Fourth IPPL Sum was also paid directly into that trust account that day. The total of IPPL Funds traced into the acquisition of the Property was $1,045,246.14. [337]-[341], [349]

1. Where property was acquired in the name of one person with money provided by another, equity may presume a resulting trust; rebuttable by evidence that the provider intended that the recipient take a beneficial interest, or that the money was provided on some different basis (eg gift or loan). The critical inquiry was the actual intention of the provider at the time of the purchase, objectively ascertained. The relevant evidence included the acts and declarations of the parties before or at the time of the purchase, or so immediately thereafter as to form part of the transaction, and the provider’s intention at the time may be proved by admissible evidence directed to that question.
2. The presumption was not displaced by material that was merely neutral, equivocal, or otherwise incapable of demonstrating an intention inconsistent with beneficial acquisition.
3. If the monies were provided on a footing inconsistent with beneficial acquisition, no resulting trust arose merely because they were later applied in the purchase.
4. Costs incidental to the acquisition may be treated as part of the relevant contribution.

[346]-[348], [352]-[354]

Subject to the deduction of $20,000, the First to Fourth IPPL Sums were contributions to the price in the requisite sense. There was insufficient evidence to displace any presumption of a trust. Accordingly Gu held the Property pursuant to a purchase money resulting trust for IPPL to the extent of $1,045,246.14 and any traceable accretions to that amount, reflected in the Surplus Funds. [349]-[351], [353], [354], [472]

Was IPPL the beneficiary of a constructive trust based on Black v S. Freedman?

A constructive trust based on Black v S. Freedman [1910] HCA 58; 12 CLR 105 arose where money had been stolen. It attached immediately to the money and adhered to it and its traceable product. The equitable obligations arose at the time of theft or, in the case of a volunteer recipient (regardless of notice), upon acquisition of knowledge. The trust was institutional rather than remedial. [272], [364]-[366]
The said funds of $1,045,246.14 were misappropriated by Gu from IPPL, not lent, given or having a consensual basis entitling him beneficially to retain or use them. Accordingly to this extent a constructive trust of the Black v S. Freedman kind existed. [368], [369], [372], [373], [374], [472]

Was IPPL the beneficiary of a constructive trust arising from Gu’s breaches of fiduciary or directors’ duties?

As a director of IPPL Gu owed fiduciary duties to it under ss. 180, 181 and 182 of the Corporations Act. However a mere breach of fiduciary or statutory duty did not establish that the impugned property or its traceable proceeds were held on constructive trust for the company. Such a breach may only give rise to a right in equity to impeach the transactions and obtain personal or ancillary equitable relief – a mere equity or other personal equitable claim, such as an account of profits or equitable compensation, not a proprietary interest.

[264], [271], [273], [274], [357], [380], [382]-[384]

If the facts found did not support a purchase money resulting trust or a Black v S. Freedman constructive trust, Gu’s breaches of fiduciary and statutory duty would not have given rise to an immediate institutional constructive trust. On that conditional footing, and treating the impugned payments as dealings effected by Gu acting within the scope of his authority to cause IPPL to make payments, albeit in breach of duty, those dealings were at most voidable, with IPPL having a mere equity to impeach the transactions or obtain other equitable relief. [386]

Was IPPL subrogated to the rights formerly held by Credit Suisse by reason of the Fifth, Sixth and Seventh IPPL Sums?

As to subrogation –
1. Subrogation was an equitable remedy by which a person who had discharged, in whole or in part, a secured debt owed by another may be treated in equity as standing in the position of the creditor, to the extent of discharge. In a general sense, it was the process by which one party was substituted for another so that the former may enforce the latter’s rights against a third party for that party’s own benefit. The remedy was not confined to a single fixed category but was fashioned by reference to the particular circumstances and the nature of the unconscionability arising from retention of the payment without recognition of the payer’s position; [388]
2. Where an existing security was discharged, the equitable foundation of subrogation was unconscionability not unjust enrichment. It was unconscionable for a mortgagor, or those claiming through the mortgagor, to treat the payment as simply discharging the encumbrance, rather than preserving the benefit of the security for the person whose funds discharged the debt. A presumption existed that a third party discharging a mortgage intended to keep it for its own benefit, rebuttable by objective circumstances that the payment was made on some other basis, including as an unsecured advance; [389]-[390], [401]
3. Subrogation may also be available if funds were applied under a defective transaction, or in circumstances defeating the position of the person whose money was used. Relief in these circumstances did not depend upon proof of payer subjectively intending to take an assignment of the security but upon whether, absent subrogation, it would be unconscionable for the defendant to deny the proprietary interest claimed; [391]
4. The subrogated party being treated in equity as standing in the position of the original secured creditor, the original charge was not necessarily assigned or kept alive for all purposes, but equity regulated the parties’ legal relations as if the benefit of the security had been preserved and assigned to the payer to the extent necessary to prevent unconscionability. Equity did not treat the subrogated party as having acquired a wholly new interest at the time of payment, but treated the existing security as continuing for such party’s benefit, so enjoying to the extent of discharge the benefit of the pre-existing security and its priority. [392]

The payments from its funds were applied in reduction of Gu’s indebtedness under the mortgage and it was presumed that IPPL intended to keep the Credit Suisse mortgage alive for its own benefit. The other parties failed to discharge the onus of rebutting that presumption by proving objective circumstances showing the payments were made on another basis, such as any arrangement obliging Gu to repay them as loans or unsecured advances. IPPL was in equity subrogated to the rights formerly held by Credit Suisse to the extent of $280,000 and so acquired an proprietary interest in the Surplus Funds. [401], [409], [410], ]420], [421], [422], [472]

Was IPPL subrogated to Great Lands’s position by the Jason Zhang payments?

Where the original secured creditor remained unpaid and continued to have use for the security, any entitlement of a third-party payer to stand in that creditor’s position could not operate in a presently enforceable way in competition with the creditor’s subsisting rights. This conclusion was reinforced here by the further finding that the Great Lands Mortgage was void against the trustee. In light of both this finding, and that the Jason Zhang payments were to be brought to account in reduction of Gu’s indebtedness to Great Lands, IPPL had no present entitlement to compete with Great Lands while Gu’s debt to Great Lands remained unpaid. Accordingly IPPL’s Great Lands subrogation claim only mattered if Great Lands’ own entitlement did not exhaust the Surplus Funds. Accordingly IPPL had not established any presently enforceable right of subrogation to the position formerly held by Great Lands under its mortgage. [424], [425], [428], [431], [473]

Who between the Hu Parties and Great Lands had priority to the Surplus Funds?

As to priority between equitable interests:

1. The earlier in time would usually prevail if the merits were equal;
2. Nonetheless the Court must search for the better equity, and the holder of the later equity bore the onus of showing some circumstance sufficient to displace the earlier equitable interest. What was required is not mere lateness or absence of notice, but some act, default or other circumstance of tangible and distinct significance affecting the justice of the competing claims, assessed in light of the whole of the conduct and surrounding circumstances. The entire conduct of each party with an equitable interest must be taken into account;
3. The position of the second equitable claimant was not preferred simply because that claimant took their securities without notice of the first encumbrance, or because of both that fact and that the second claimant acquired a later interest for value;
4. Mere failure by the holder of a prior equitable interest to caveat did not, without more, constitute postponing conduct. [91], [444]-[447], [462], [463]
As to priority between the Hu Parties and Great Lands to the Surplus Funds:

1. Neither held any secured proprietary interest therein and as unsecured creditors of Gu their entitlement of either to participate in the Surplus Funds was subject to the statutory order of payment in bankruptcy. [194]-[195]
2. But Great Lands’ entitlement to refund under s. 121(5) of $2,193,209.62 took priority over the claims of unsecured creditors including the Hu Parties. The purpose of the statutory scheme would be undermined if a party’s entitlement to recovery of consideration for a transfer voided under s. 121 could be eroded by rateable participation with unsecured creditors. This priority reflected how the statutory scheme had balanced competing policy imperatives: the cost of voiding transfers pursuant to s. 121(1) and thereby enlarging the pool of unsecured creditors against the transferor was offset by the transferee’s closely confined entitlement to recover lost consideration pursuant to s. 121(5) above and beyond the claims of unsecured creditors. [433], [434], [474]

Who between the Hu Parties and IPPL had priority to the Surplus Funds?

As to priority between IPPL’s interests and those of the Hu Parties:
1. Each of IPPL’s equitable interests arose, for priority purposes, when each came into existence, because each arose by operation of law upon the application of IPPL’s funds, independent of discretionary curial intervention. This was in the case of –
  1. the purchase money resulting trust, by 3 May 2017 at the latest;
  2. the Black v S. Freedman constructive trust, immediately upon the wrongful taking and misapplication of the funds;
  3. subrogation to Credit Suisse, when IPPL’s funds were applied to reduce the mortgage debt. [438], [439], [440], [441], [458]
2. IPPL did not represent to the Hu Parties either positively, or by omission in circumstances calling for disclosure or otherwise, that it had no beneficial interest in the Property. Mere non-disclosure of IPPL’s now-established proprietary claims did not constitute such a representation, still less one displacing its earlier equitable position. This was reinforced by the fact that the Hu Parties had entered the Hu Deed because they desired within a narrow period of forbearance to use the leverage available to obtain the best security and practical protection for satisfaction of the First Judgment Debt, not because of confidence in Gu or in the accuracy of what they had been told. And, even if it was reasonably foreseeable that a person in the Hu Parties’ position might rely on an assumption of the kind alleged, they did not in fact so rely. [452], [453], [454], [455], [460]
3. Also material was that the claim of the Hu Parties to postponement was on a different basis from that existing if they had succeeded in establishing an equitable charge or other security. They did not by force of s. 121 alone succeed to the position of a mortgagee or other proprietary claimant; rather, the statutory question was whether the Great Lands Mortgage was void against the trustee and its consequences. That difference told against any broad conclusion that IPPL should be postponed simply because the Hu Parties later obtained contractual protections and, as assignees, statutory rights arising from the trustee’s position. [456]
4. Accordingly interests of IPPL were not postponed to any interest claimed by the Hu Parties. [457], [460], [475]

Who between IPPL and Great Lands had priority to the Surplus Funds?

IPPL’s interests were not postponed to that (on the assumption that it retained a competing equitable interest) of Great Lands. IPPL did not by acquiescence or silence convey that it had no interest or assented to the creation or priority of the Great Lands Mortgage. The knowledge of Gu was not attributable to it. Its failure to caveat was not postponing conduct. [464]-[467]

Philip H. Barton

Owen Dixon Chambers West

Wednesday, July 29, 2026

Blog 89. Removal of caveat following mortgagee’s sale.

Archer Wealth v Casey [2024] VSC 300, Moore J.

The facts were as follows.

The second defendant (Kookee) was the registered proprietor of 100 acres in rural Victoria (the Property). Its sole director and shareholder was the fourth defendant Ms Lagoutatzis.
Following a formal letter of offer by the first plaintiff (Archer) to Kookee and Ms Lagoutatzis, signed on 10 August 2023, Archer on 16 August agreed to lend Kookee $4,325,000 secured by first mortgage over: the Property; two properties in Doncaster owned by Kookee (Victoria Street and Daphne Street); and a property in Warrandyte owned by Ms Lagoutatzis where she lived with her husband the first defendant (collectively ‘the security properties’). Clause 11.1(a)(i) of the Loan Deed required Kookee, within 30 days of the loan advance, to engage or procure a real estate agent acceptable to Archer, to list and market the security properties for sale. The mortgages also required the mortgagor to pay the land tax and municipal rates.
On 23 August Archer agreed to lend Kookee an additional $700,000 on the security of second mortgages over the security properties. The loans were advanced on 23 August, refinancing existing secured debts.
On 24 August Archer assigned part of its interest in the mortgages to the other plaintiffs.
Between 25 September and 10 November 2023: a Lender’s Demand by Archer alleged breach of cl. 11.1(a) of the Loan Deed and non-payment of land tax on the Doncaster properties, requiring rectification within seven days; Archer tried to obtain the cooperation of the tenant of Victoria Street to list it for sale; Archer took possession of Daphne St as mortgagee, it subsequently being sold for $1,057,000; a default notice under the Transfer of Land Act s. 76 was served in respect of the mortgages over the Property and the Doncaster properties, giving Kookee one month to remedy its breach of cl. 11.1(a) and to pay certain land tax and rates.
Following non repayment of the loans on the due date of 23 January 2024 the plaintiffs took possession of the Property, gave another s. 76 notice for over $4 m., obtained an independent valuation of market value at $800,000, and conducted a mortgagees’ sale for $850,000 plus GST due for settlement on 13 May. The parties were ready, willing and able to complete this sale.
On 18 April Ms Lagoutatzis sought an injunction restraining sale of the Property for under $1.4 m., resulting not in restraint but in an order that she be provided with a copy of the contract of sale, which was complied with.
On 15 May a caveat was lodged on behalf of Kookee claiming a freehold estate with an absolute prohibition on dealings based on ‘Registered proprietor(s) being entitled to possession of the certificate of title for the land and to prevent improper dealings’. Other caveats were lodged which counsel for the defendants acknowledged to be without foundation.

The plaintiffs commenced this proceeding ultimately seeking removal of all three caveats under the Transfer of Land Act s. 90(3). Ms Lagoutatzis’ deposed that: the Loan Deed was entered into so that Archer could provide the finance necessary to sell the four properties; despite cl. 11(a) of the Loan Deed the plan, of which she had told Archer’s director, had always been only to sell the three Melbourne properties and for her family to move to the Property where they would build a home to live in retirement – the director denied being told this; the couple had spent about $100,000 in preparation for building this dwelling.

A draft counterclaim was provided to the court which among other things pleaded that: Kookee had engaged an agent to list and market the Melbourne properties, which Archer approved, whereby Kookee did not engage another agent; it was exonerated as regards land tax and rates because of a particular representation by Archer; accordingly the Lender’s Demand was void, whereby Archer’s enforcement of the Doncaster mortgages exceeded its power as mortgagee and breached the Loan Deed; on substantially the same grounds as those relied on to invalidate the Lender’s Demand, Archer had no right to serve the November Default Notice, on the basis of which it sold the Property; Archer had engaged in conduct which unreasonably prevented Kookee from refinancing; Archer did not sell Daphne Street and the Property in good faith; the sale of the Property should be restrained and the contract of sale set aside.

Moore J. ordered that the caveats be removed, holding –

The improper dealings referred to in the caveat may be taken to be those articulated in the draft counterclaim. On the authority of Swanston Mortgage v Trepan Investments [1994] 1 VR 672 this did not give rise to an estate or interest in land and a mortgagor’s right to have an improper sale of mortgaged property set aside was a ‘mere equity’. Accordingly there was no caveatable interest. [42]-[45], [47]
The fact that the interest in land claimed in the Swanston Mortgage caveat was an equitable interest as mortgagor, whereas Kookee had asserted a ‘freehold estate’, was immaterial. [46]
The balance of convenience would also have favoured removal of the caveat because
Archer’s exercise of its rights as mortgagee did not infringe Kookee’s proprietary rights. This informed the general rule that the court would not restrain the exercise of a mortgagee’s power of sale unless the mortgage debt, if undisputed, be paid, or, if it was disputed the amount claimed by the mortgagee be paid into court. The defendants had not offered any payment. [48]-[50], [58]
However, being an application of the equitable maxim that ‘he who seeks equity should do equity’, this general rule was subject to exceptions. Depending on the facts and circumstances and overall justice of the case, payment into court may not be required if it was alleged that:
1. the mortgagee’s power of sale was not properly exercisable or was being exercised for an improper motive;
2. the mortgage was invalid, or had not been breached so as to engage the power of sale, or a notice required to engage that power was ineffective;
3. the mortgage or the power of sale was impugned pursuant to the Australian Consumer Law or the Australian Securities and Investments Act 2001 or equitable principle. [51]
On the basis of the allegations in the draft counterclaim, whatever might be the position of the other security properties, it appeared most unlikely that this sale enlivened any of these exceptions. Kookee had not complied with cl. 11.1(a)(i) of the Loan Deed (and the alleged representation in the draft counterclaim in relation to the engagement of a real estate agent was limited to the other security properties). Accordingly it had defaulted under the Loan Deed whereby the total amount owed by it was immediately due and payable. Further, any allegation that the ‘express purpose’ of the loans was for the couple to build a house on the Property for their retirement was fundamentally weak: whatever their subjective purpose, the plan deposed to by Ms Lagoutatzis was contradicted both by her also deposing that the Loan Deed was entered into to enable Archer to provide the finance necessary to sell all four properties and by the terms of the formal letter of loan offer. There was also no evidence that the Property was included in the Loan Deed by common mistake. [52]-[57]
Accordingly, Kookee was not relieved from the obligation to bring in an amount either sufficient to meet the mortgaged debt, or such other amount as may be appropriate – which was in this case an amount equal to the mortgagee’s maximum possible loss from the sale being lost, this not being the amount of the mortgage debt but the value of the security itself. [58]

Philip H. Barton

Owen Dixon Chambers West

Tuesday, November 26, 2024

Blog 76. A collection of claims, none amounting to a caveatable interest.

SJM v PMD & Anor [2023] VSC 349, Daly AsJ.

This case concerns a persistent user of the court system with sundry claims, none caveatable. Interestingly Daly AsJ essays a definition of what is an estate or interest in land (this being the basis of a caveatable interest under the Transfer of Land Act s. 89). Lawyers find it easier to say whether, in the particular circumstances of a case, an interest in land exists, than to define one. Relying on Victorian authority her Honour stated –

“An estate or interest in land required to support a caveat must be an interest in respect of which equity would give specific relief against the land itself, either by way of requiring the provision of a registrable instrument or in some other way, for example, ordering a sale to enable a charge to be satisfied out of the proceeds.”

This is a comprehensive definition though not complete, because, for example it does not cover the interest of an adverse possessor, held caveatable in Nicholas Olandezos v Bhatha & Ors [2017] VSC 234 at [35], [37], nor rights of a legal not equitable nature. In that case Derham AsJ stated at [18] –

“First, the Caveators must establish that there is a prima facie case – there is a probability on the evidence before the Court that the Caveators will be found to have the asserted legal or equitable rights or interest in the disputed land by adverse possession.”

Any general statement of what is an estate or interest in land also depends on context. So in Stow v Mineral Holdings (Australia) Pty Ltd (1979) 180 CLR 295, which concerned the requirement that permitted objectors to the grant of a mining licence claim an estate or interest in land, Aickin J. stated at [21] –

“In my opinion the ordinary meaning of the compound expression “estate or interest in land” is an estate or interest of a proprietary nature in the land. This would include legal and equitable estates and interests, e.g., a freehold or a leasehold estate, or incorporeal interests such as easements, profits a prendre, all such interests being held by persons in their individual capacity. It does not embrace interests in which the person concerned has no greater claim than any other member of the public.”

The facts were as follows –

The plaintiff and the first defendant (defendant) were in a de facto relationship for about a decade until 2010. In 2003 the plaintiff purchased a property at Hoddles Creek of which she was sole registered proprietor and where they cohabited until she moved interstate in 2010, returning, she alleged, in 2012 to retake exclusive possession. In 2012 the defendant caveated claiming an implied, resulting or constructive trust, the grounds of the claim being an alleged constructive trust.
On 15 August 2012 the Federal Magistrates’ Court made final consent orders in a proceeding commenced by the defendant including providing three alternatives for disposal of the property. The first alternative (in paragraph 2 of the orders) was that the defendant pay the plaintiff $110,000 by 15 November 2012 in exchange for a transfer of her interest in the land with him discharging the mortgage and performing certain other obligations. Failing this alternative being taken, the second alternative gave her an election to retain the property and to pay him $50,000 in exchange for withdrawal of the caveat. Failing both the foregoing alternatives the property was to be sold and proceeds distributed in a particular manner. Other orders included (in paragraph 5.2) that the parties would hold their respective interests in the land on trust pursuant to these orders. The orders concluded that pursuant to s. 81 of the Family Law Act the parties intended them to, as far as practicable, finally determine their financial relationship and avoid further proceedings.
Due, the defendant alleged, to the plaintiff’s non-co-operation with his pursuit of the first alternative, he filed an application returnable on 31 October 2012 to enforce the final orders (the enforcement application) chiefly to require the plaintiff to give effect to the first alternative. The case was not reached, but on that day the plaintiff’s solicitor deposed to holding the required completed Transfer document and that his client was ready, willing and able to settle the sale in accordance with the first alternative on 15 November.
Although the orders of 15 August required payment by 15 November the parties agreed to extend the time for settlement to 11.30am on 16 November. The enforcement application was relisted at 10am on 16 November and stood down pending settlement of the transfer. However, the transaction did not settle at 11.30am due to a discrepancy between the Transfer and a mortgage, the defendant’s lender Westpac requiring the parties to execute a new Transfer to conform with the terms upon which it had agreed to advance finance. The defendant and his solicitors then took steps to remedy this and planned to be able to settle at 3:30pm. However, at about 1.40pm the plaintiff elected to take the second alternative. When the hearing resumed at around 2.30pm counsel for the defendant sought orders compelling the parties to attend settlement at 3:30pm. The Federal Magistrate dismissed both this application and the enforcement application on the basis that both parties had complied with their obligations but the bank had prevented settlement, and that to order the parties to attend settlement at 3.30pm would conflict with the orders of 15 August.
In December 2012 and February 2014 the defendant refused the plaintiff’s tender of $50,000.
In January 2014 an application for leave to appeal against the dismissal of the enforcement application was itself dismissed but the judge commented in substance that instead of appealing the defendant should have commenced proceedings under s. 90SN(1)(c) of the Family Law Act which provided that if, on application by a person affected by an order in property settlement proceedings, the court was satisfied that a person had defaulted in carrying out an obligation imposed by the order and it was just and equitable, the court had a discretion to vary or set aside the order and if appropriate substitute another order. An application to the High Court for special leave to appeal against the judge’s decision failed.
In February 2014 the defendant filed a contravention application in the Federal Circuit Court directed at the plaintiff and her solicitors. This was dismissed in September 2014, and an application to the Family Court for leave to appeal against this dismissal was itself dismissed except as to a question of possession of chattels which was remitted to the Federal Circuit Court, and an application to the High Court for special leave to appeal against the Family Court decision was itself dismissed. On the remitted question the defendant failed as did an appeal against this dismissal.
The plaintiff applied for removal of the caveat under the Transfer of Land Act s. 90(3), for an injunction restraining the defendant from further caveating, and for compensation under s. 118. The defendant argued that he had an equitable interest in the land by reason of being the beneficiary of a trust created by the final orders dated 15 August 2012 and having the potential to bring an application to have the orders dismissing the enforcement application and/or the contravention application varied or set aside for fraud. He also contended that failure of the transaction to settle at 11.30am on 16 November 2012 was not attributable to the action of his bank but to the plaintiff’s actions.

Daly AsJ ordered removal of the caveat on condition that on any sale or refinancing $50,000 be set aside to meet the defendant’s entitlements under the final orders, holding –

An estate or interest in land required to support a caveat must be an interest in respect of which equity would give specific relief against the land itself, either by way of requiring the provision of a registrable instrument or in some other way, for example, ordering a sale to enable a charge to be satisfied out of the proceeds. [67]
The allegation that there was fraud arising from the solicitor for the plaintiff’s affidavit sworn on 31 October 2012, or by counsel’s statements during the hearing on 16 November, was untenable. However, any claim to set aside an order for fraud, which in the case of the orders in the enforcement and contravention applications was accordingly very weak (the strength of the caveator’s claim being relevant to whether the caveat should be maintained), was a mere equity, not a proprietary interest, and so did not found a caveatable interest. [72]-[74], [86]-[90]
Section 91(1) of the Evidence Act 2008 provided that evidence of a decision, or a finding of fact in another proceeding was inadmissible to prove the existence of a fact that was in issue in that proceeding. However, it was doubtful that s. 91(1) excluded evidence contained in reasons for judgment of admissions or concessions made by a party in the course of the other proceeding. The defendant had made such admissions or concessions to the effect that the plaintiff’s bank could discharge its mortgage by the scheduled date. And the defendant or his counsel had in previous proceedings repeatedly acknowledged that the defendant’s bank was responsible for the failure to settle on 16 November 2012. [82]-[84]
Any claim under the Family Law Act s. 90SN(1) was a statutory claim incapable of giving rise to an equitable interest. [90]
The interpretation of the final orders and of the plaintiff’s entitlement to elect to take the second alternative had been litigated extensively. The defendant was estopped from further litigating either his entitlements under the final orders or the validity of this election. Even if the question of the alleged fraud had not yet been expressly raised in previous court proceedings, then they should have been so raised having regard to the principles of Port of Melbourne Authority v Anshun (1981) 147 CLR 589. It was unreasonable for the defendant not to have raised allegations of fraud in the actual enforcement and contravention applications. [90], [93]
The court had considered whether the defendant had any caveatable interest, not just that claimed in the caveat (a claim to the constructive trust having been subsumed in the final orders). And, although in the final orders of 15 August 2012 paragraph 2 gave the defendant an equitable interest in the property akin to that of a purchaser (which alternative had not however been taken) and paragraph 5.2 created a trust, that trust did not survive one of the alternatives in the orders being taken. [71], [94]-[96], [99]
The balance of convenience overwhelmingly favoured removal of the caveat because of the plaintiff’s financial circumstances. [100]
Given the history of litigation and circumstances of the case the defendant was restrained from lodging any further caveats over the land. [103]

Philip H. Barton

Owen Dixon Chambers West

Wednesday, August 30, 2023

Blog 62. Caveators lost in blizzard, but obtain injunction.

Reindel & Ors v Confreight Pty Ltd & Ors (No 2) [2022] VSC 442, Daly AsJ (8 August 2022).

This case arises from the same development as that the subject of Blog 61. It concerns imposition of caveats based on Barnes v Addy claims, no caveatable interest being found to exist. In the 1874 English case of Barnes v Addy (1874) LR 9 Ch. App. 244 at 251 – 252 Lord Selborne LC stated –

“Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if … But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers … unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees”.

Subsequent cases have worked out the scope of these principles, known as the “first and second limbs of Barnes v Addy”, ie knowing receipt of trust property or dishonest assistance in a breach of trust (being an accessorial liability).

The facts were –

In around 2015 Messrs Reindel, Murone and Monson decided to carry out a multi – unit residential development in Windsor. A company (WDC) was incorporated to perform the development. It was trustee of a unit trust in which Confreight Pty Ltd (Confreight) and Supply Chain Logistics (SCL) controlled respectively by Murone and Monson together held 35%, and an entity associated with Reindel held 65%, of the units. In 2020 the development was completed and WDC was wound up with negligible return to Confreight and SCL.
Five residential units in the development valued at approximately $2 m. in total had been transferred by WDC, one to Reindel and four to a company controlled by him (Blizzard Winds). On 3 February 2021 the liquidator wrote to the unit holders in the trust seeking information including on this transfer. On 15 February 2021 the liquidator made his statutory report including stating that there were claims totalling over $2 m. by unsecured creditors.
In the first half of 2021 Confreight and SCL caveated over the five Windsor units and over a Toorak property of which Reindel’s wife Ms Runhardt had been registered proprietor since 2015. Relevantly the interest in land claimed was as beneficiary of an “implied, resulting or constructive trust”.
In July 2021 Reindel and associated parties commenced a proceeding under the Transfer of Land Act s. 90(3) to remove the caveats. The caveators opposed this and, if their opposition failed, applied to restrain the registered proprietors from dealing with the land pending the determination of their proceeding referred to below.
In August 2021 Confreight and SCL commenced a proceeding (the investors’ proceeding) alleging inter alia that: Reindel had caused WDC to transfer much cash and the Windsor units to himself and his associated entities for little or no consideration; by reason of his alleged breaches of fiduciary duty and of trust they were inter alia entitled to orders that property of the unit trust be transferred to WDC (in its capacity as trustee), and/or equitable compensation for the value of property transferred from WDC in breach of trust or for less than market value, and certain other relief.
The defendants to the investors’ proceeding in substance denied the allegations against them, alleging that transfers were in reduction of debts duly owing.
The plaintiffs in the investors’ proceeding also alleged that Reindel had used WDC’s funds for mortgage payments on and renovations to the Toorak property. Reindel admitted these payments into his and Runhardt’s joint account, and that payments were applied to paying the mortgage, but denied misappropriation. The plaintiffs also alleged that Runhardt participated in Reindel’s breach of fiduciary duty and breach of trust by receiving trust property with knowledge of his breaches. Runhardt basically denied all allegations concerning her.
On 14 September 2021 WDC’s liquidator applied to intervene in the caveat proceeding, supported by an affidavit exhibiting his letter of 3 February and his report. He subsequently did not pursue this application.
The caveat and injunction proceedings were heard in October 2021 with judgment reserved. Although no orders were made in the caveat or the investors’ proceeding that the evidence in one proceeding would stand as evidence in the other Daly AsJ would (footnote [92]) if necessary have ordered this now as for then (traditionally “nunc pro tunc”). Her Honour stated ([25]) that the findings and issues raised by the liquidator’s report and letter and WDC’s accounting records were a generally reliable guide to the affairs of WDC and the unit trust, although it was unnecessary for present purposes to determine whether the concerns raised therein had been established. Her Honour noted ([64]) that the liquidator’s affidavit, his letter, his report and the accounting records revealed evidence of the transfers of Windsor units being for no consideration or at an undervalue, although it was premature to conclusively determine whether in breach of trust or otherwise invalid (also [34]).
In January 2022 the liquidator sought, inter alia, court approval to enter an agreement to assign certain unspecified causes of action to a Mr Baker – it was unclear but her Honour inferred that there was a substantial overlap between these causes of action and those in the investors’ proceeding ([31]). The liquidator also applied to be appointed as a receiver of the unit trust, deposing that he believed that this was necessitated by cl. 12.5 of the trust deed which provided that on its liquidation WDC ceased to be trustee of the trust.
Clause 37 of the trust deed provided:

“the rights of the trustee to indemnity for losses … and to recoupment for expenditure incurred shall … be limited to the monies and property comprising the Trust Fund … but this clause shall not be construed as in any way limiting the liability of any trustee (or of any director of a company which is a trustee hereof) to the unit holders for any breach of trust involving the dishonesty or wilful act or omission of that trustee or director.”

Daly AsJ removed the caveats but granted an interlocutory injunction restraining Reindel and Blizzard Winds from dealing with their residential units –

The possibility of the caveators having a prima facie case of an interest in the land was undermined if they lacked standing to bring their claims in the investors’ proceeding, or this was in doubt. Generally the proper party to bring a claim to recover trust property was the trustee but this was subject to “special circumstances”, eg collusion between the third party wrongdoer and the trustee, insolvency of the trustee, or where the trustee was unwilling or unable to take action to recover trust property. There were real doubts whether the caveators had standing to, in effect, recover WDC’s property. Alternatively, any claim for damages and/or equitable compensation would have to be calculated by reference to their shares in the unit trust. [40]-[41], [46], [47]
Confreight and SCL could also in their capacity as shareholders of WDC apply under s. 237 of the Corporations Act 2001 (Cth) to bring a derivative action to bring the claims in the investors’ proceeding on behalf of WDC. This application had not been made, although they had made an informal application for leave to continue the investors’ proceeding standing in the shoes of WDC in its capacity as trustee. [48]
On the issue of standing, the position was somewhat fluid and far from clear cut. There was some doubt whether on its liquidation WDC remained as trustee of the unit trust or whether the liquidator was ready, willing, and able to pursue any claim by WDC against third parties for the benefit of the beneficiaries (and creditors) of the trust, but it appeared that liquidator had not reached a final position. Clause 37 of the trust deed preserved the beneficiaries’ entitlement to pursue claims against the trustee and the directors, at least on their own behalf. And although the plaintiffs arguably needed curial leave to proceed with their claims in the investors’ proceeding to recover trust property, it was in the context of the current case neither necessary nor appropriate to determine the possible fate of this application for leave. It was accordingly difficult for present purposes finally to resolve the question of standing and this undermined the caveats, given that the entitlement to lodge a caveat must exist at the time of lodgement. [55], [56], [57], [62], [63]
The caveators must demonstrate a prima facie case, ie a probability of being found to have the asserted legal or equitable rights or interest in the land. The ‘prima facie case’ test was preferable to the ‘serious question to be tried’ test of such rights or interest. [69]-[70]
The caveats over the Toorak property were unsustainable. Runhardt was alleged at most to have accessorial liability for Reindel’s (and WDC’s) alleged breach of trust. In Barnes v Addy cases a constructive trust was only imposed over the property concerned on a curial determination to this effect. Until then there was no proprietary interest, even where it was claimed that trust property could be “traced” to a particular (other) property. Further, any “notice” Runhardt had of Reindel’s alleged breach of trust postdated her becoming registered proprietor of the Toorak property. [80]-[82], [91(c)], [138]
Even if breach of trust or of fiduciary duty was established against Reindel or WDC, the liability of Blizzard Winds was (notwithstanding that Reindel was its sole director) only accessorial. Further, even if the transfers to Blizzard Winds were arguably tainted by fraud which could be sheeted home to it so it lost the protection of indefeasibility of title, and a court ultimately determined to impose a constructive trust over the units, the entitlement of a former registered proprietor to set aside a transfer for fraud was an in personam claim giving rise to a mere equity, not an equitable and so caveatable interest. Accordingly the caveats over its property would also be removed. [83]-[87], [91], [94], [96], [138]
The claim concerning the transfer to Reindel was also only an in personam claim incapable of supporting a caveat. [87], [91(a)], [94], [96], [138]
However, Reindel and Blizzard Winds would be restrained from dealing with the units transferred to them. Runhardt would not be restrained from dealing with the Toorak property. [117]-[121], [133], [137], [138]

Philip H. Barton

Owen Dixon Chambers West

Monday, November 7, 2022

40. B acquires monies from A by mistake or in breach of trust, which B passes on to a third party, who uses them to purchase land of which third party becomes registered proprietor – Monies held on constructive trust for A – Not mere equity – Caveat by A based on constructive trust upheld – AE Brighton Holdings Pty Ltd v UDP Holdings Pty Ltd [2020] VSCA 235. No purchaser’s lien and so no caveatable interest because purchaser in breach of contract of sale – Ironbridge Holdings Pty Ltd v O’Grady [2020] VSC 344.

AE Brighton Holdings Pty Ltd v UDP Holdings Pty Ltd [2020] VSCA 235 (11 September 2020) was an unsuccessful application for leave to appeal from the case of that name covered in Blog 32, in which Ginnane J dismissed an application under the Transfer of Land Act s. 90(3) for caveats to be removed. The facts are now restated from that Blog and supplemented –

Esposito Holdings Pty Ltd (Esposito Holdings) agreed to sell and the first defendant (UDP) agreed to purchase the issued shares in a company. An arbitration occurred related to disputes arising under that agreement. The arbitral Award stated that Esposito Holdings had engaged in misleading and deceptive conduct contrary to s. 18 of Schedule 2 of the Competition and Consumer Act 2010 (Cth) and that its sole shareholder and director Mr Antonio Esposito was involved in the contravention within the meaning of s. 2(1) and for the purposes of s. 236 of Schedule 2. The Award also declared that on and from 31 January 2014 Esposito Holdings held the purchase price on constructive trust for UDP which had suffered loss of $54,144,847.
The plaintiff (AE Brighton) purchased and became registered proprietor of four properties.
There was prima facie evidence that, when Mr Esposito was also sole shareholder and director of AE Brighton, part of the purchase price received from UDP under the share sale agreement was paid by Esposito Holdings, possibly through another company controlled by Mr Esposito, to AE Brighton to purchase the properties, possibly in the case of one purchase through repayment of an earlier loan used for that purchase.
In 2017 UDP caveated over the properties on the grounds of an implied, resulting or constructive trust.
In 2018 the Supreme Court gave UDP leave to enforce the Award and ordered that it be given effect as a judgment of the Court (‘Award recognition judgment’).
In 2019 AE Brighton entered contracts to sell two of the properties.

After the decision of Ginnane J in October 2019 UDP took an assignment of a mortgage registered on the properties, took possession, as mortgagee in possession rescinded the contracts of sale, and sold the properties with settlement due on 4 September 2020. Its solicitor swore that the net proceeds of sale would be paid into court pending resolution of a proceeding.

The Court of Appeal (Kyrou, Kaye and Sifris JJA) held or stated –

The law related to applications under s. 90(3) in conventional terms (eg see Blog 1). [25]-[26]
A successful challenge to the exercise of judicial discretion by Ginnane J required establishment of an error of the kind identified in House v The King (1936) 55 CLR 499 at 505. [27]
Only a legal or equitable interest in land could sustain a caveat and accordingly, as stated by the High Court in Boensch v Pascoe [2019] HCA 49 (Blog 29), a mere statutory right to take steps to avoid a transaction did not suffice – the interest asserted must be in existence when the caveat was lodged. A mere equity, defined in various ways including ‘a right, usually of a procedural character, which is ancillary to some right of property, and which limits it or qualifies it in some way’, was not a proprietary interest. [28]-[29]
The constructive trust of the type upon which UDP relied was an institutional trust arising from the retention of funds known to have been paid by mistake. More particularly –

(a) This trust arose at the time when the person who received the funds acquired knowledge of the mistake, if the moneys paid could still be identified at that time. The recipient’s conscience was then bound and it would be against conscience for the recipient to use the funds as his or her own. [30]

(b) “Knowledge” meant the payee having actual knowledge, or wilfully shutting his or her eyes to the obvious, or wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make, or having knowledge of circumstances which would indicate the facts to an honest or reasonable person. [31]

A third party may be liable to account as a constructive trustee where it received trust property with notice that it was being dealt with in a manner involving a breach of trust. In accordance with the equitable principle of tracing, the beneficial owner of misappropriated property could recover it or its traceable proceeds from someone holding the asset, subject only to the defence of bona fide purchaser for value without notice. Where a trustee wrongfully used trust money to provide part of the cost of acquiring an asset, the beneficiary was entitled at his or her option either to claim a proportionate share of the asset or to enforce a lien upon it to secure his or her personal claim against the trustee for the amount of the misapplied money. [32]-[33]
This case had two features usually absent from cases where a caveator claimed an interest under a constructive trust –

(a) There was a declaration, recognised by the Award recognition judgment which itself had the effect of declaring as a matter of law, that Esposito Holdings held the purchase price paid by UDP on constructive trust for UDP from 31 January 2014;

(b) Secondly, the sole director of the corporate registered proprietor of the properties (Mr Esposito) had given sworn evidence at a public examination that funds subject to the constructive trust were used to purchase the properties. He was aware of all the facts giving rise to the constructive trust. As he was its sole director his knowledge was attributable to Esposito Holdings. It was its knowledge of those facts, which operated on its conscience, that could give rise to an institutional constructive trust without the need for a court order and which enabled the arbitrator to declare the existence of a constructive trust from 31 January 2014. Importantly, as Mr Esposito was also the sole director of the plaintiff, his knowledge was attributable to the plaintiff.

The combination of those two features established a prima facie case that the beneficiary of the constructive trust had an equitable interest in the properties, in accordance with the principles of tracing. [55], [56], [58].

The Evidence Act 2008 s. 91 provided that evidence of the decision, or of a finding of fact, in an Australian or overseas proceeding was inadmissible to prove the existence of a fact that was in issue in that proceeding. However, s. 91 did not preclude Ginnane J from relying on the Final Award and the evidence adduced in the arbitration, as they were not being used to prove the existence of any fact but were being considered in assessing whether there was sufficient evidence to enable UDP to establish a prima facie case of the existence of a caveatable interest. [45], [59]-[60]

In Ironbridge Holdings Pty Ltd v O’Grady [2020] VSC 344 (11 June 2020), Ginnane J, the facts and relevant holdings were –

In 2006 the plaintiff entered a contract of sale to purchase land from vendors of which the defendant was the survivor. The settlement date was no later than 7 years but was extended.
A deposit and certain instalments of purchase money were paid, but the final instalment was not. Part of the land was transferred. The vendor rescinded the contract.
The purchaser caveated on the basis of an alleged equitable (purchaser’s) lien over the untransferred land to secure repayment of instalments of purchase money and interest.
The purchaser succeeded in a claim for restitution. However the purchaser was held not to have a caveatable interest. His Honour observed that where title was not conveyed the purchaser’s lien secured the repayment of monies paid by the purchaser, to whom it gave a right to sell the property and take a share of the proceeds of sale in an amount equal to the debt. But there must be a debt which the lien could secure. Here there was no lien because the purchaser was in default of its obligations under the contract: the purchaser was only entitled to the lien where the contract went off through no fault of its own. [307], [309], [310], [312]-[314]

Philip H. Barton

Owen Dixon Chambers West

21 September 2020

32. Where B wrongfully acquires monies from A, which B passes on to a third party, who uses such monies to purchase land of which it becomes registered proprietor – Or where B fraudulently transfers land owned by A to a third party who becomes registered proprietor – Caveat by A upheld if there is a constructive trust in A’s favour, but not if there is a mere equity to set aside the transfer – Contrast between AE Brighton Holdings Pty Ltd v UDP Holdings Pty Ltd and Super Jacobs & Anor v Esera Faalogo & Ors.

In AE Brighton Holdings Pty Ltd v UDP Holdings Pty Ltd [2019] VSC 688 (15 October 2019) Ginnane J. the facts were –

Esposito Holdings Pty Ltd (Esposito Holdings) agreed to sell and the first defendant (UDP) agreed to purchase the issued shares in a company. An arbitration occurred related to disputes arising under that agreement. The arbitral award stated that Esposito Holdings had engaged in misleading and deceptive conduct contrary to s. 18 of Schedule 2 of the Competition and Consumer Act 2010 (Cth) and director Mr Antonio Esposito was involved in the contravention within the meaning of s. 2(1) and for the purposes of s. 236 of Schedule 2. The award also declared that on and from 31 January 2014 Esposito Holdings held the purchase price on constructive trust for UDP which had suffered loss of $54,144,847.
The plaintiff (AE Brighton) purchased and became registered proprietor of four properties.
There was prima facie evidence that, when Mr Esposito was also sole shareholder and director of AE Brighton, part of the purchase price received from UDP under the share sale agreement was paid by Esposito Holdings, possibly through another company controlled by Mr Esposito, to AE Brighton to purchase the properties, possibly in the case of one purchase through repayment of an earlier loan used for that purchase.
In 2018 the Supreme Court gave UDP leave to enforce the award and ordered that the award was given effect as a judgment of the Court.
UDP caveated over the properties on the grounds of an implied, resulting or constructive trust.
Subsequently AE Brighton entered a contract to sell two of the properties.

Ginnane J dismissed an application by AE Brighton for the caveats to be removed, but required the caveator to commence proceedings promptly to support its claim, on the following grounds –

Where a trustee wrongfully used trust money to provide part of the cost of acquiring an asset, the beneficiary was entitled at his option either to claim a proportionate share of the asset or to enforce a lien upon it to secure his personal claim against the trustee for the amount of the misapplied money. It was irrelevant whether the trustee mixed the trust money with his own in a single fund before using it to acquire the asset, or made separate payments (whether simultaneously or sequentially) out of the differently owned funds to acquire a single asset. This principle was not reliant on proof of fraud, merely on breach of trust. [32]-[33]
Based on this principle there was a prima facie case that the caveator had an estate or interest in the properties as a beneficiary under a constructive trust. This arose from money (ie the purchase money under the share sale agreement) obtained by Esposito Holdings as a result of misleading or deceptive conduct, from which the caveator suffered loss, held on trust by Esposito Holdings for the caveator, being paid in breach of trust by Esposito Holdings to AE Brighton which used it to purchase the properties. While the evidence in the arbitration did not bind AE Brighton, because it was not a party to the arbitration, it was relevant in determining this prima facie case. [28], [36], [37], [38], [40], [41]
AE Brighton had more than a mere equity, which was not an equitable estate and so not caveatable. [30]-[31]
Although the court took into account that AE Brighton had entered into two contracts of sale, the caveats predated the contracts and AE Brighton had made no submission about how, taking into account the interests of the mortgagees and other caveators, the caveator’s security interest in the properties could be protected if the caveats were removed. Accordingly the balance of convenience favoured maintenance of the caveats on terms requiring the caveator to commence its proposed proceeding promptly. [42]-[43]

An application for leave to appeal against this decision has been lodged, the respondent’s application for security for costs being dismissed: AE Brighton Holdings Pty Ltd v UDP Holdings Pty Ltd [2020] VSCA 43.

In Super Jacobs & Anor v Esera Faalogo & Ors [2019] VSC 778 (3 December 2019) Daly AsJ the facts were –

The defendants were registered proprietors of a residential property. They were migrants, of limited means, not highly educated or familiar with legal or financial matters. In 2016 they gave a general power of attorney to a mortgage broker who they believed was arranging finance for them to be secured against their property.
In 2017 the mortgage broker, the defendants’ claimed fraudulently, used the power to execute a contract of sale of the land to the plaintiffs who became registered proprietors in June 2018. The sale was not by auction or private treaty or advertised and had other unusual features.
The defendants received no funds from sale, subsequently discovered this transfer, and later in 2018 caveated on the ground of: “Registered proprietor(s) being entitled to possession of the certificate of title for the land and to prevent improper dealings”. This was one of the grounds of claim in the drop-down menu in the Registrar of Titles’ electronic lodgment service.
The plaintiffs applied for removal of the caveat and for an order for possession.

Daly AsJ removed the caveat, holding –

Even if (which they denied) the plaintiffs obtained the property by fraud or improper dealing the caveators’ claim to have the transfer set aside on the grounds of a fraud by, or which could be sheeted home to, the registered proprietors was not an interest or estate in land. They did not hold an equitable interest in the property until the claim was made good in a court. Until then their equitable right to assail the transfer for fraud was a ‘mere equity’, being a personal right of action. On the same principle, if a mortgagee sold land in breach of its duties to the mortgagor the mortgagor had only an equity to set aside the pending transfer of land and could not caveat. [18]-[20], [28]-[32]
Accepting for present purposes that the mortgage broker owed the defendants a fiduciary duty, and that as such, if (as they denied) the plaintiffs were knowingly concerned in the broker’s breach of trust, or were a knowing recipient of trust property (being the land), then the plaintiffs may be liable to the defendants pursuant to the principles in Barnes v Addy (1874) LR 9 Ch. App. 244 with the remedy of a remedial constructive trust. However, this did not convert the defendants’ potential claim into an equitable interest as opposed to a personal claim against the plaintiffs. This was to be contrasted with an equitable interest arising from proprietary estoppel or a common intention constructive trust: in such a case the equitable interest arose from when the promise was relied upon or the common intention was given effect. [34]-[36]
It was accordingly unnecessary to consider whether the caveat ought to be removed because the grounds of claim did not refer to an interest in land known to the law, or whether the caveat should be amended. [37]
If the defendants had had an interest in the land the balance of convenience would have been in their favour. [17]

Comment. Both cases considered the decision of the Full Court in Swanston Mortgage Pty Ltd v Trepan Investments Pty Ltd [1994] 1 VR 672 that where, under the Torrens system, a mortgagee sells in breach of its duties to the mortgagor, the mortgagor has an equity to set aside the pending transfer of land, but until the equity is made good by bringing a successful claim the mortgagor has no equitable interest in the land and therefore no right to caveat. The first case distinguished it. The second applied it.

The principle that the interest claimed in the caveat must be in existence at the time of its lodgment – it was not enough that the caveator had commenced proceedings which may result in such an interest being vested in him or her – was also asserted in Boensch v Pascoe [2019] HCA 49 which was the subject of Blog 29.

Philip H. Barton

Owen Dixon Chambers West

20 April 2020

Category: Mere Equity not Caveatable

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Blog 89. Removal of caveat following mortgagee’s sale.

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Blog 76. A collection of claims, none amounting to a caveatable interest.

SJM v PMD & Anor [2023] VSC 349, Daly AsJ.

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Blog 62. Caveators lost in blizzard, but obtain injunction.

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SJM v PMD & Anor [2023] VSC 349, Daly AsJ.

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