Phillip Ashley Dickson v Geoffrey Philip Reidy [2004] NSWSC 1200

The Plaintiff claimed a declaration that the Defendant held on trust for him the share of the net proceeds of the property at Eastgardens (“the property”) received by him as property of the bankrupt estate of Terri Dickson (his wife), and an order that the Defendant pay to him the proceeds of the sale.

The plaintiff and his wife were joint tenants of the property. On 24 April 2003 a sequestration order was made against the wife’s estate, and on 28 April 2003 the Defendant was appointed trustee of her estate.
On 8 August 2003 the property was sold for the sum of $747,000.00 by the Plaintiff and the Defendant as the wife’s trustee in bankruptcy. At the time of the sale the property was under a mortgage to secure the principal amount of a loan of $470,000.00 from Lawteal Pty Ltd. After discharge of the mortgage and other liabilities the net proceeds of sale amounted to $230,616.60. These proceeds were paid as to half, $115,313.30, to the Plaintiff, and as to the other half, $115,313.30, to the Defendant as the wife’s trustee in bankruptcy. It was this amount which the Plaintiff claimed from the Defendant.

The Plaintiff contended that the jointly owned property was mortgaged to secure the loan which was wholly for the benefit of the wife and, in the circumstances, the doctrine of exoneration applied so that her interest in the property was subject to a charge to secure his right of exoneration from liability for the loan. He claimed that her interest in the property which passed to the Defendant was subject to that charge, and thus he was entitled to the whole of the net proceeds of sale rather than to one half thereof.

The equity of exoneration is conveniently explained in Parsons v McBain (2002) 192 ALR 772:

“The equity of exoneration is an incident of the relationship between surety and principal debtor. It usually arises where a person has mortgaged his property to secure the debt of another, whether or not that other has covenanted to pay the debt. However, it will also arise in a case where, although not an actual suretyship, the relationship is treated as one of suretyship. This is Lord Selbourne’s third class of suretyship mentioned in Duncan, Fox & Co v North and South Wales Bank (1880) 6 App Cas 1 at 10. For the doctrine to apply in this class, the following facts will usually exist. First, a person must charge his property. Where the person is the beneficial owner of the property it will be sufficient if the charge is by his trustee. Second, the charge must be for the purpose of raising money to pay the debts of another person or to otherwise benefit that other person. Third, the money so borrowed must be applied for that purpose: see generally Re Berry (a bankrupt) [1978] 2 NZLR 373.

An equity of exoneration operates in the nature of “a charge upon the estate of the principal debtor by way of indemnity for the purpose of enforcing against that estate the right which [the beneficiary] has, as between [the beneficiary] and the principal debtor, to have that estate resorted to first for the payment of the debt”: Gee v Liddell [1913] 2 Ch D 62. Thus, where co-owners mortgage their property so that money can be borrowed for the benefit of one mortgagor, the other has an interest in the property of the co-mortgagor whose property is to be regarded as primarily liable to pay the debt”.

(See also Farrugia v Official Receiver in Bankruptcy (1982) 43 ALR 700, and, relevantly, where Deane, J held that the charge which Mrs Farrugia had upon her husband’s interest in the property by way of indemnity to secure her right of exoneration was not obliterated by his bankruptcy, and that his interest which passed to the official receiver was subject to it).

In Official Trustee in Bankruptcy v Citibank Savings Ltd (1995) 38 NSWLR 116 Bryson, J at pp 129-130 observed that the doctrine of exoneration depends on the presumed intention of the parties and continues to exist to supply a presumption of the intention of parties as to who should be principal and who should be surety. He said:

 “ … The doctrine serves to illustrate that the intention of a party may establish which is to stand as surety and which as principal even though both appear to incur substantially the same legal obligation.
Although contemporaneous agreements, arrangements and expression of intention are the usual sources of evidence about the intentions of parties on such a subject, there is no reason why their intentions may not be inferred from the circumstance in which they acted. Intentions, like other facts, may be proved from circumstances. Circumstances could conceivably furnish very clear proof of intention as to who was to be principal and who was to be surety, and the intended and actual application of funds raised when two persons incur a common liability would often have an important, even predominant part in the proof of the relevant intention”.

It is to be remembered that the doctrine of exoneration is based on an inference in each case from all the facts of that particular case. (Hall v Hall (1911) 1.
The Defendant submitted that the equity of exoneration does not apply to any of the loans in this case because it had not been shown that they were for the substantial benefit of the wife and it was not enough to show merely that she received some incidental benefit.

It was also put that for the Plaintiff to succeed it was necessary to show that it was his intention to act as if a surety for his wife in respect of each loan, and that the evidence does not prove such intention.
The Plaintiff submitted that the facts demonstrated that each of the transactions was entered into wholly for the benefit of the wife, that the monies obtained were wholly subject to her direction and control, and nothing was received by, or subject to the control or direction of, the Plaintiff. It was put that each transaction was entered into in the expectation that the loan for which the property was provided as security would be repaid by the wife, or from sources over which she had control, or by others with whom she was associated.

Justice Nicholas held that the fact that the funds were raised and applied for the use of the wife without benefit to the Plaintiff was sufficient to attract the doctrine.

Insofar as the evidence does not establish the destination of some part of a particular loan, nevertheless when the whole of the evidence is taken into account there is ample basis for the inference that it was probably spent in furtherance of the wife’s interests. Having regard to the uncontradicted evidence that the Plaintiff received no benefit, it was held the only rational conclusion was that the whole of each loan was in fact availed of by the wife for her purposes. Reinforcement for this conclusion was evidence of the length to which she was prepared to go to secure the monies by way of threatening divorce proceedings, and forging the Plaintiff’s signature, and not causing payment to be made to Mr Lam (a second unregistered lender to the plaintiff and his wife for the purchase of the property)

Accordingly, the Court held that the Plaintiff had established a right of exoneration in respect of each of the loans and, finally, in respect of that from Lawteal Pty Ltd on 14 February 2003 of $470,000.00. As a consequence the Plaintiff has established a charge on his wife’s interest in the property to secure that right, which property has passed to the Defendant subject to the charge.
The Plaintiff succeeded and orders were made that the Defendant pay to him the sum of $115,313.30 together with interest calculated from 8 August 2003. Costs were to be argued at a later date.

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