Porter v Computer Based Technology [2004] NSWSC 476

This was a case concerning whether a valid equitable mortgage had been created; and an analysis of whether the conduct of the secured creditor’s conduct was such that he could be found to have surrendered his security.
Mr Porter, the liquidator of Imperial Plantations Pty Ltd (“Plantations”) sought a declaration that an unregistered mortgage over an interest in land given by Plantations to the First Defendant (“CBT”) dated 1 February 1996 was of no effect. Mr Porter said that the mortgage was not executed at the time and in the circumstances alleged by CBT and that the loans which it purportedly secured were never made to Plantations by CBT. Alternatively, he said that even if the mortgage was otherwise valid, CBT irrevocably elected to surrender it by proving as an unsecured creditor in the liquidation of Plantations.

Accordingly, Porter sought orders under s.530B or s.530C Corporations Act 2001 (Cth) (“CA”) that CBT or its sole director, Mr B.P. Hocking, the Second Defendant, should give him the certificate of title in respect of Plantations’ interest in the land. CBT cross claimed seeking a declaration that the mortgage was valid, and sought consequential relief.

The issues were:

– whether the mortgage was executed on behalf of Plantations on the date it bore and in the circumstances alleged by Mr Hocking;

– whether CBT ever advanced money to or for the benefit of Plantations, as asserted in a deed of loan between those parties;

– whether CBT was precluded from enforcing the mortgage by reason of an irrevocable election to prove as an unsecured creditor in the winding up of Plantations.

Conclusions as to execution of mortgage

The Court found the following:

1. Mr Hocking’s general credit: Mr Hocking was frank in admitting that he had been guilty of serious misconduct in placing a signature on a mortgage document in about 1967. He did not attempt to justify his conduct and he said that he still felt ashamed of it. He was re-admitted as a solicitor in 1996 and there was no evidence to suggest that he was not of good character or of good standing as a solicitor. I have found no reason to regard Mr Hocking’s evidence as uncreditworthy.

2. There was no doubt that by 1996 CBT had made considerable payments from its own funds for the benefit to a company (Daintree), the shares of which were beneficially held for Plantations.

3. Having regard to Mr Hocking’s experience as a conveyancing solicitor, it was probable that when further money was sought by a co-director on or about 1 February 1996 in order to pay further debts of a company which Mr Hocking regarded as the subsidiary of Plantations, Mr Hocking should have made it a condition of agreeing to make that further payment that he obtain some real estate security not only for the advance about to be made but also for the advances already made. As Mr Hocking explained, Plantations was the only company which had real estate available to give as security.

Therefore it was probable that Mr Hocking would have sought an equitable mortgage from Plantations securing past advances for the benefit of Daintree as a condition of the further advances sought and that, as the advances were ultimately for the benefit of Plantations as the beneficial holding company of Daintree, Mr Williams as the other director of Plantations, agreed to give the security. That an equitable mortgage by Plantations in favour of CBT was agreed is supported by the fact that Mr Hocking, in fact, had possession of the Certificate of Title to Plantations’ interest in the Corndale land by the time that Plantations was placed in liquidation.

The Court found that as at 1 February 1996, CBT had the benefit of a valid and enforceable equitable mortgage over Plantation’s interest in the Corndale land. The debt secured was as acknowledged in the deed of loan between Plantations and CBT dated 1 February 1996.

Election to surrender the security

The Plaintiff also claimed that even if CBT had a valid equitable mortgage, by lodging a proof of debt dated 8 January 2002 it had irrevocably elected to surrender its security and to prove as an unsecured creditor in the liquidation of Plantations.

The Court held that the law as to election to surrender a security in an insolvency administration may be summarised in the following propositions:

a) whether or not an election to surrender a security has been made is not subject to rules peculiar to insolvency law; the question is determined according to the principles applicable to election generally;

b) an election to surrender may be shown by proving a conscious decision by the creditor, communicated to the liquidator or bankruptcy trustee, to give up the security and take instead a dividend from the insolvent estate;

c) where a conscious decision by the creditor to surrender has not been shown, a decision to surrender will be imputed to the creditor, regardless of actual intention, if the creditor has acted in a manner which is clearly and unequivocally consistent only with surrender of the security;

d) an election to surrender is not lightly to be imputed from conduct – it is not to be supposed that secured creditors give up their securities without good reason;

e) where an intention to surrender is to be imputed from conduct, lodgement by the creditor of a proof of debt may not, on its own, be sufficient – other surrounding circumstances, both before and after lodgement of the proof of debt, may indicate a contrary intention;

f) on the other hand, lodgement of a proof of debt together with acceptance and retention of a dividend from the insolvent administration will usually give rise to an imputed intention to surrender;

g) if conduct said to imply an election to surrender is equivocal or indicates confusion or that a final course of action has not yet been decided upon by the creditor, no election to surrender will be held to have been made:

Here no such election was found to have occurred.

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