We previously reported on the trial at first instance. This note is about the appeal.
St George (as first ranking mortgagee) sold the property for $20 million and retained all the money against a debt it claimed was $54 million.
Salta Constructions (as second ranking mortgagee) argued that the bulk of the money claimed by St George was pursuant to guarantees which had not yet been called in. As such, no amount was owing contingently or otherwise under the guarantees.
St George counter-argued that, even if liability only crystallised under a guarantee upon demand, it had the right to retain the proceeds of sale pending the amount becoming due and payable. In this regard the mortgage provided:
‘If, at the time we receive the money, any part of the amount owing is not then due for payment, we may retain an amount equal to that part. We must hold it in an interest bearing account. We may use it (and any net interest after tax — including income tax) to pay the amount owing when it becomes due for payment.’
Salta Constructions argued that the mortgage did not prevail over s 61 of the Property Law Act 1969 (WA) that required the funds to be disbursed in the prescribed manner. Section 61 provides:
‘The money that is in fact received by the mortgagee, arising from the sale, after discharge of prior encumbrances to which the sale is not made subject (if any) shall be held by him in trust to be applied by him —
(a)firstly, in payment of all costs, charges and expenses properly incurred by him as incident to the sale or any attempted sale, or otherwise; and
(b)secondly, in discharge of the mortgage money, interest and costs, and other money (if any) due under the mortgage,
and the residue of the money so received shall be paid to the person entitled to the mortgaged property, or authorised to give receipts for the proceeds of the sale thereof.’
The trial judge was of the opinion that the guaranteed monies formed part of the secured debt, whether or not the guarantees had been called up by the issue of a formal notice.
The Court of Appeal began by considering whether or not a formal notice had been issued (because if it had the balance of the argument would be irrelevant).
The Court of Appeal held that while the notice of default was not addressed to the guarantor, it was clear that St George required thew full amount under the guarantees to be paid. The fact that the notice of default served the additional purpose of enlivening a power of sale did not change the fact that St George required the amount owing under the guarantees to be paid in order to avoid the commencement of enforcement proceedings against the guarantor.