Gazzana v Nadalan Enterprises [2012] NSWSC 676

The lender sold the property and paid the surplus proceeds into court. Two brothers applied for half each of the proceeds, being tenants in common in equal shares of the property. However a creditor of their deregistered company claimed an equitable charge over part of the proceeds of sale. The charge secured a guarantee the brothers allegedly gave for their company’s debts. The creditor had lodged a caveat over the property prior to its sale in respect of its equitable interest in the property and had commenced District Court proceedings against the brothers for debts owed. The creditor argued that these proceedings should await the District Court proceedings or that his equitable charge prevented payment out. Alternatively the creditor sought a freezing order or preservation order in relation to such funds.

At the hearing, one brother gave evidence that he never signed the guarantee, nor gave the other brother power to bind him to a guarantee. A guarantee was signed by only one of the brothers.

The issue was whether there was a guarantee of the company’s debts that extended to the giving of a charge over the brothers’ interests in the property. The judge considered s 58(3) of the Real Property Act, which provides:

The purchase money to arise from the sale of land shall be applied, first, in payment of the expenses occasioned by such sale; secondly, in payment of the moneys which may then be due or owing to the mortgagee, chargee or covenant chargee; thirdly, in payment of subsequent mortgages, charges or covenant charges (if any) in the order of their priority; and the surplus (if any) shall be paid to the mortgagor, charger or covenant charger, as the case may be.

The brothers argued that the creditor did not have a charge within the meaning of the Real Property Act s 3(1), which provides that a charge is:

Any charge on land created for the purpose of securing the payment of an annuity, rent-charge or sum of money other than a debt.

However, the judge agreed with the creditor, saying:

s 58(3) does not operate to defeat a claim for an equitable charge over property. The definition of mortgage in the Act would encompass an equitable charge of the kind presently claimed.

To permit payment of money out of Court under Rule 55.11, the brothers had to prove that the creditor has no valid claim to the funds. The creditor argued he had a valid claim on two grounds:

On the basis of the signed guarantee
The court found that the brother in charge of finance signed the guarantee as director and personally but had no authority to sign for the other brother on his personal behalf. Hence the court found no equitable charge over the non-signing brother’s interest in the property or his share of the surplus. The court was not satisfied that the creditor had no valid claim to an equitable charge over the signing brother’s share of the proceeds however refused to comment on the strength or otherwise of the claim, noting that it was a matter for determination in the District Court.

On the basis of an oral guarantee
The court found difficulties with there being an oral guarantee let alone a promise to secure any such guarantee simply based on statements to the effect that “we will honour our debts” and “we have plenty of equity in the property”. However the court ultimately was unable to say there was no valid claim, however slim that claim might seem to be.

The above claims were fatal in relation to the signing  brother, and the latter in the case of the non-signing brother, accordingly their application to for payment out of the court was denied.

Furthermore the court noted it would have granted a preservation order on the basis that there was a serious question to be tried that the creditor had a proprietary interest in the fund in Court and further, the balance of convenience lay in favour of the funds remaining in Court until the determination of the District Court proceeding.

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