Application by Westpac – Charara v Konneh [2015] NSWSC 1084

The bank paid surplus funds following the sale of mortgaged property into court and three competing claims were made on the fund – two alleged debtors and the owner of the property, now bankrupt. Each debtor disputed the other’s debt and priority. The first in time claim arose from the owner personally guaranteeing his company’s debt to a supplier, which created an equitable charge on his land. The second in time claim arose from a loan to the owner to enable him to pay his mortgage, which also created an equitable charge on his land. Caveats were lodged by both debtors in the order in which the debts arose.

The law as to priorities where equitable claims are made is that the earlier in time prevails provided there is no postponing conduct. The court held that this accorded priority to the supplier’s debt, as it was created first in time and the supplier’s caveat had warned of its interest. However the second debtor claimed that priority was lost not because of postponing conduct but for four reasons:

  1. The judgment debt in the supplier’s favour granted in the District Court was liable to be set aside on the grounds of fraud;
  2. The debt was proved in bankruptcy and could no longer be pursued;
  3. The supplier’s interest was limited to the amount of stamp duty paid on the caveat;
  4. The supplier’s insurance claim against the debt extinguished the debt.

The court noted that the judgment debt had not been set aside and it would not be appropriate for the court to go behind it. The court rejected the second argument because while a provable debt is converted into a right to share in the bankrupt’s estate vested in the trustee, a secured creditor retains the right to realise his security. The third was rejected as misconceived– the miminum amount of duty had initially been paid simply because it was an all monies charge and therefore the amount was not fixed at the time the caveat was lodged and so the creditor could not know the amount of duty chargeable at that time. In any case, the debt was quantified by the judgment and the caveat was stamped by the time of the hearing. The fourth was also rejected because an insurance payment does not extinguish any part of the debt. The court also dismissed the argument that the supplier should have obtained leave to enforce its debt against a company in liquidation because proceedings in the District Court commenced before the company went into administration and judgment was entered after. The embargo on enforcement during administration did not nullify proceedings commenced before administration, but simply operated to put the proceedings on hold for so long as the administration subsisted.

The court held the supplier’s charge had priority and ordered that the money paid into court be paid to the supplier pursuant to section 98 of the Trustee Act 1925.

Click here to read the full judgment.

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