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Supreme Court 29 June 2007

The Presbyterian Church (NSW) Property Trust v Scots Church Development Ltd

[2007] NSWSC 676

Other
CONVEYANCING [155] TORRENS TITLE EXCEPTIONS TO INDEFEASIBILITY FRAUD NO FRAUD. CORPORATIONS [1705] LIQUIDATORS

Citation: The Presbyterian Church (NSW) Property Trust v Scots Church Development Ltd [2007] NSWSC 676
Court: Supreme Court of New South Wales, Equity Division
Date: 29 June 2007
Judge(s): Young CJ in Eq

Background

The plaintiff, a church property trust, owned a prominent site in the Sydney CBD. From 1999, it negotiated with a property developer to redevelop the site on terms that would allow the church to retain a stratum lot (the "Church Lot") comprising the church auditorium and worship space. Under the arrangement, the plaintiff transferred the entire site to the developer's subsidiary (the first defendant), with a contractual right to have the Church Lot transferred back once a strata plan was registered.

Before the Church Lot was transferred back, the first defendant mortgaged the whole site to two mortgagees. The second mortgagee, another subsidiary of the same developer group, later went into liquidation. Its liquidators held a registered mortgage over the entire site, including the Church Lot, and declined to recognise the plaintiff's contractual right to that lot.

The plaintiff brought proceedings seeking the return of the Church Lot in fee simple, arguing that the second mortgagee's registered mortgage either did not extend to the Church Lot or should not be enforced against it.

  • Whether the second mortgagee's registration of its mortgage over the Church Lot constituted fraud under the Real Property Act 1900 (NSW), so as to defeat its indefeasibility as a registered mortgagee
  • Whether an estoppel by convention arose from a common assumption between the parties that the Church Lot was quarantined from the mortgage
  • Whether the liquidators of the second mortgagee should nonetheless be directed to discharge the mortgage over the Church Lot under the rule in Ex parte James

Decision

Fraud and indefeasibility: The court rejected the plaintiff's fraud argument. Under Torrens title, indefeasibility of a registered interest can be defeated only where the registered party was itself guilty of fraud. The second mortgagee never made any promise to the plaintiff that the Church Lot would be protected from its mortgage. Because the second mortgagee undertook no obligation to respect the plaintiff's interest, its registration of the mortgage could not amount to fraud, even though the developer group plainly knew the Church Lot was intended to be returned to the plaintiff.

Estoppel by convention: The court also rejected the estoppel claim. An estoppel by convention requires a common assumption shared by both parties and detrimental reliance by the party asserting it. There was no evidence of a shared assumption between the plaintiff and the second mortgagee that the Church Lot was quarantined from the mortgage security, nor was there evidence of detrimental reliance by the plaintiff on any such assumption.

The rule in Ex parte James: The court found that, while the plaintiff could not prove in the second mortgagee's winding up and had no strictly enforceable priority over the registered mortgage, the rule in Ex parte James applied. That rule requires a court-appointed officer (here, the liquidators acting under the supervision of the court) to act with the standard of honour expected of the court itself, and not to retain a benefit that is unconscionable in equity even if legally available. Given that the liquidators' company knew at all material times that the Church Lot was not intended to form part of its security, it would be unconscionable for them to enforce the mortgage over that lot. The court directed the liquidators accordingly.

Orders Made

  • The liquidators of the second mortgagee (York Street Mezzanine Pty Limited, in liquidation) are directed to discharge the registered mortgage over the plaintiff's lot (the Church Lot, being Lot 11 in DP 1086866).
  • The liquidators' costs in the associated proceedings (No 6486 of 2005) are to be paid from the assets of the company; further costs reserved.
  • Both sets of proceedings stood over for short minutes.

Key Takeaways

  • Fraud sufficient to defeat Torrens indefeasibility requires the registered party to have itself engaged in dishonest conduct or to have undertaken an obligation to respect the prior interest. Knowledge of another party's interest, without more, does not suffice.
  • Estoppel by convention demands proof of a mutual assumption actually shared between the parties, together with detrimental reliance. The involvement of related corporate entities does not automatically impute a common assumption from one to another.
  • The rule in Ex parte James operates independently of strict legal rights: where a court officer (such as a liquidator acting under judicial supervision) holds a benefit that would be unconscionable to retain, the court may direct that officer to surrender or discharge it, even where the creditor has no provable claim in the winding up.
  • In applying Ex parte James, the Supreme Court emphasised the factual background that the company's controllers were aware throughout that the Church Lot was not intended to be subject to their mortgage, lending particular weight to the unconscionability finding.
  • The plaintiff ultimately succeeded on the Ex parte James point alone: both the fraud argument and the estoppel argument failed on the facts.

Legislation and Cases Referenced

Legislation
- Real Property Act 1900 (NSW), ss 42, 43 (indefeasibility provisions)
- Corporations Act 2001 (Cth), ss 468, 479(3) (directions to liquidators)

Key Cases
- Ex parte James (1874) 9 Ch App 609 (the rule requiring court officers to act honourably)
- Assets Co Ltd v Mere Roihi [1905] AC 176 (fraud and indefeasibility)
- Bahr v Nicolay (No 2) (1988) 164 CLR 604 (fraud and Torrens title)
- Frazer v Walker [1967] 1 AC 569 (indefeasibility)
- Hillpalm Pty Ltd v Heaven's Door Pty Ltd (2004) 220 CLR 472
- Bank of South Australia Ltd v Ferguson (1998) 192 CLR 248
- Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (1948) 76 CLR 463
- Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65
- Moratic Pty Ltd v Gordon [2007] NSWSC 5
- Heggies Bulkhaul Ltd v Global Minerals Australia Pty Ltd (2003) 59 NSWLR 312
- ASIC v Karl Suleman Enterprises Pty Ltd (2003) 45 ACSR 401