Titles Strata Management v Nirta [2015] VSC 366

The case has been the subject of an earlier case note, where it was held that the wife’s signature was forged and while the fraud could not be sheeted home to the lender, the covenant to pay in the loan was not incorporated into the mortgage and so the mortgage secured nothing. The matter before the court in this case was the precise form of orders to give effect to the court’s earlier findings and the question of costs. The court found that the lender was entitled to be subrogated to the security interests of the previous lender on the basis that the loan was a refinance but only allowed the lender the amount paid out on the first loan, not interest under the first loan or the second loan even if it had been enforceable (owing to it being an unenforceable penalty), but at the statutory rate and ordered the sale of the pizza shop.

The court justified this award of interest by applying the principles of equitable compensation for breach of fiduciary duty even though the case was one of subrogation and despite there being English CA authority, which though not binding on Australian courts, takes the view that if the benefit of the whole security is preserved, that means the rights relating to capital and interest are preserved unless there are special circumstances which make that inequitable. And indeed the practice of awarding interest in Australia arguably appears to reflect this in that interest is either awarded at the commercial rate or at a lower rate. However the judge viewed these awards of interest at differing rates as providing no real authority. The court then proceeded to apply different principles from the principle of subrogation, namely the principles of equitable compensation, but conceptually the principles are entirely different.

In our view, applying principles of equitable compensation converts the lender’s right to subrogation , to stand in the shoes of the first lender and take the benefit of the whole security and its rights capital and interest (unless inequitable for it to do so) to a right to compensation for loss of the use of funds. So the starting point of what rate of interest should apply is entirely different. Under the doctrine of subrogation, the starting point is the interest under the first loan unless inequitable to do so whereas under the principles of equitable compensation, the interest awarded depends on the alternative ways the moneys may have been put if repaid on time by the borrower.

While the court disallowed interest at the rates in the first loan, it did allow the lender the benefit of the entire security in the first loan. The court found that the lender’s right to be subrogated to the rights of the first lender included its rights to all of the securities held by the first lender, so not only the mortgage of the pizza shop but also a charge over all of the borrowers’ property, which included their home. The court said:

The doctrine of subrogation is to put the party that pays out a debt in as advantageous a position (at least with respect to the capacity to realise a security) as the original lender.

Accordingly, the court ordered the owners to execute a mortgage over their home to secure any debt due to the second lender but only to the extent that the sale of the pizza shop failed to satisfy the amount owing to the lender.

The court found that the lender should have been on notice that the advice of its own handwriting expert as to the issue of forgery was equivocal at best and that its mortgage secured nothing. The lender’s decision to contest the alleged forgery and ‘rely on the doctrine of indefeasibility’, rather than simply limiting its claim to subrogation meant the lender only partially succeeded on the issues litigated but also meant the owner would seek indemnity from the Registrar and fail against the Registrar for the same reason the lender’s action on its mortgage would fail. Accordingly the court held that the lender’s partial success (it failed in relation to the issue of the forgery and the fact its mortgage secured nothing but succeeded on the issue of subrogation) should be reflected in some apportionment of the lender’s costs. The court found that the lender should have expected that the owner would seek indemnity from the Registrar and fail and accordingly the lender should pay the Registrar’s costs (the form of the order provided that the lender should satisfy the costs that the wife was ordered to pay to the Registrar).

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