Peters v Lithgow Forge [2011] NSWSC 1185

A solicitor obtained judgment for legal fees against a former client. The former client moved back to the USA and the only property of value in Australia is real property in the name of his company. The solicitor lodged a caveat and seeks a court declaration that he holds an equitable charge over the property and the appointment of a receiver to realise its value and pay his costs. Alternatively the solicitor claims that the property is held on resulting trust for his former client and he has access to the property. The former client claims no equitable charge because it had previously been transferred to his wife (three days after the solicitor served a creditor’s petition) and a mortgage granted over it in favour of his sister (on the day judgment for costs was awarded).

Equitable charge
An equitable mortgage is created when the legal owner of property enters into some instrument or does some act, short of conferring legal title, which demonstrates a binding intention to create security in the favour of the mortgagee.

An equitable charge is created when property is expressly or constructively made liable or specially appropriated to pay a debt and confers on the charge a right to realise the property by the appointment of a receiver or an order for sale.

The court found an agreement to make the property liable to pay the costs judgment debt in the caveat agreed to be lodged (despite the fact that only the scanned copy of the signed caveat not the original was ever receipted by the solicitor). The court held that the caveat created an equitable charge as security for the payment of the costs judgment debt although the caveat did not use the word charge. The grant of authority to the solicitor to lodge the caveat over the property also created an equitable charge because it is implied in the authority given.

Voidable transactions
Section 37A of the Conveyancing Act 1919 provides that transactions with intent to defraud creditors are voidable at the instance of any person thereby prejudiced.

The court found that the property was previously transferred to the former client’s wife when the husband transferred his shares in the company to his wife (on the testimony of his wife and an individual who witnessed the transfer) and not voidable. This was done to remedy the former client’s failure to set the company up initially with his wife as sole shareholder.

However the court did not believe the testimony of the former client’s sister at all or of the wife in relation to the mortgage and held that the alleged mortgage granted to the sister did not record a genuine advance from the trust and was entered into with an actual and dishonest intent to defraud creditors and specifically, the solicitor.  The court found that the solicitor was entitled to avoid the mortgage but not the share transfer. The mortgage was a sham but not the share transfer.

Resulting trust
Where a purchaser pays the vendor and directs him to transfer property into someone else’s name without consideration passing from that person, there is a presumption that the transferee holds the property upon trust for the transferor or the purchaser as the case may be, except in the case of transfers to a wife or child, where there is a presumption of advancement so that legal and beneficial interest pass. Each of these presumptions may be rebutted by evidence.

The court found that the funds for the purchase of the property came from the former client from his own funds and not the trust, even though the funds passed through an account in the name of a trust. The court found that mere use of a trust bank account as a conduit for the payment of funds does not establish those funds as trust funds. The court held that the company held the property on resulting trust for the former client and the presumption of advancement did not operate because it only applies where a husband makes a purchase in his wife’s or child’s name, not in the name of a company controlled by a wife or child.

The former solicitor succeeded on both grounds.

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