Westpac v Adelaide Bank [2005] NSWSC 517

Westpac, who held a second (unregistered) mortgage over the land, claimed priority over a first mortgage held by Adelaide Bank, to secure an advance of $233,195 and interest. Alternatively Westpac claimed to be subrogated to the first mortgagee’s rights over the land.

Westpac refinanced a loan from Adelaide Bank in the sum of $233,195 and took an unregistered mortgage. Westpac did not require that the first mortgage be discharged and did not obtain the certificate of title as conditions of making the loan, a practice that banks call “unattended refinance”.

At the time of making the advance Westpac did not notify Adelaide Bank of the existence of the second mortgage. Adelaide Bank followed its own procedure of waiting for the customer to submit a discharge form before it would consider discharging the mortgage.

The customer continued to draw on the Adelaide Bank loan account, with a credit limit of over $230,000, until it went into debit and the debit reached $132,415.    

Westpac relied on the rule in Hopkinson v Rolt as explained by Justice White

 First, it relied upon the rule in Hopkinson v Rolt (1861) 9 HL Cas 514; 11 ER 829, described in Matzner v Clyde Securities Ltd [1975] 2 NSWLR 293 as:

“… a mortgagee to whom the property is mortgaged for advances already made cannot, after receiving notice of a second mortgage, have priority over the second mortgagee for further advances upon the first mortgage, even if the first mortgage, to the knowledge of the second mortgagee, is expressed to be a security for further advances that may be made.”

Alternatively, Westpac said it had paid off Adelaide Bank’s mortgage and should be subrogated to the rights of the first mortgagee (notwithstanding that it had taken its own mortgage in replacement of the first: see Ghana Commercial Bank v Chandiram [1960] AC 732 at 745).

Justice White found that Westpac’s mortgage did not pay off the first. Although the customer later requested that its loan account with Adelaide Bank be closed, that authority to close the account remained revocable. The loan contract with Adelaide Bank did not require the loan be closed upon receipt of such a request. Instead, clause 14 stated:

“14.1 We may unilaterally or at your request:

(a) close an account;
(b)  suspend access to an account;
(d) end this contract,

(in addition to exercising our rights under 2.6 and 2.7)

14.2 A cheque form issued in respect of an account may not be used in respect of the account after the account is closed or after this contract has ended and must be immediately returned as soon as we advise you the account is closed or this contract has ended or when you request that the account be closed or you request that the contract end.

14.4 Where an account is closed under 14.1(a) or this contract is ended under 14.1(d), then you must pay the total amount owing in respect of the account or contract respectively, or if an account has a deposit balance, we will pay the deposit balance to you or as you direct.

14.5 This contract continues after a card or access to an account is suspended or cancelled or an account is closed or this contract is ended under 14.1, until:

(a) the total amount owing in respect of the account or contract as the case requires is paid; and

(b) any amount subsequently debited to an account are paid

14.6 We will give you reasonable notice that this contract has been ended by us pursuant to 14.1 if an account has a deposit balance.”

Clause 14 gave Adelaide Bank the discretion as to when to close the account. Importantly, clause 2.4 stated:

“2.4 You may require us to release the property from this mortgage when there is no amount owing.  However even if the amount owing is repaid, the property remains mortgaged to us until we actually release it from this mortgage.”

The definition of “amount owing” under the Adelaide Bank mortgage included amounts owing in the future.

Justice White found that any further drawing on the Adelaide Bank mortgage was an implied revocation of the authority to close the account.

In light of the provisions of the loan contract, his Honour held  that the further drawings were secured by the first mortgage to Adelaide Bank. Since the first mortgage was not paid off by Westpac’s advance, it was not possible for Westpac to be subrogated to the rights of the first mortgagee.

His Honour cited Chetwynd v Allen [1899] 1 Ch 353 for the proposition that a person claiming to be subrogated to the rights of the first mortgagee, but who has not fully discharged the mortgagor’s liability to the first mortgagee, takes subject to the first mortgagee’s rights, and observed

A similar issue arose in Banque Financiere de la Cite v Parc (Battersea) Ltd [1999] AC 221 where a lender intended that its advance would have priority over debts owed to other companies in the debtor’s group.  The advance was applied to reduce, but not discharge, a first mortgage.  The question was of priority between the lender and another company in the group, (not the first mortgagee), which had a secured debt.  The lender claimed it was subrogated to the rights of the first mortgagee.  The other secured creditor said that subrogation was impossible as the first mortgage was not fully discharged.  Lord Hoffmann, with whom Lord Griffiths and Lord Clyde agreed, and Lord Hutton, considered that there was no conceptual problem about the lender being subrogated to the rights of the first mortgagee, whose mortgage had been since discharged.  However, this was because the lender was not seeking priority against the first mortgagee.

Westpac was entitled to claim subrogation but would rank after Adelaide Bank’s mortgage in priority.   

To succeed in ranking ahead of Adelaide Bank’s mortgage, Westpac had to at least show that Adelaide Bank had notice of its second mortgage before it made any further advances, i.e. the rule in Hopkinson v Rolt.

Justice White accepted that the rule in Hopkinson v Rolt does not apply if the first mortgagee has no choice about making a further advance (Chase Corporation (Aust) Pty Ltd v North Sydney Brick & Tile Co. Ltd (1994) 35 NSWLR 17; Wilson v Holland (1915) 21 ALR 35; In the matter of Dehy Fodders (Australia) Pty Limited; Winter v Bank of Adelaide (1973) 4 SASR 538).

His Honour did not accept that Adelaide Bank was obliged to make further advances. It retained a discretion to close the loan account at any time. Further

as explained in West v Williams [1899]  a first mortgagee who has covenanted to make further advances on first mortgage security is released from that covenant where the mortgagor obtains a further advance on second mortgage, as the mortgagor is no longer able to proffer the security promised for the further advance.

The rule in Hopkinson v Rolt applies to moneys advanced by a bank under a current or overdraft account

Where a bank receives notice of an advance on second mortgage, it will lose priority in respect of subsequent advances even though moneys are paid to the credit of the account and are appropriated against the current indebtedness.  (Deeley v Lloyds Bank Limited [1912] AC 756.  As Lord Shaw said

“After notice to the bank of a second mortgage by the customer, the debit is struck at the date of notice, and in the ordinary case, that is to say, where an account is merely continued without alteration, or where no specific appropriation of fresh payments is made, such payments are credited to the earliest items on the debit side of the account, and continue so to be credited until the balance secured under the first mortgage is extinguished.”

As was said in Mercantile Credits Limited v ANZ Banking Group (1988) 48 SASR 407

“The rule in Hopkinson v Rolt does not operate to defeat that security or any part of it.  It merely fixes the amount for which the security has priority over subsequent securities at the date upon which the mortgagee has notice of those subsequent securities.”

It was at least arguable that Adelaide Bank received notice of the Westpac mortgage when the account was put in credit.

His Honour considered the underlying basis of the rule in Hopkinson v Rolt as stated by Justice Kearney in Central Mortgage Registry of Australia Ltd v Donemore Pty Ltd [1984] 2 NSWLR 128

it would constitute equitable fraud on the part of a first mortgagee, for it to claim priority in respect of further advances made with notice of an intervening equity.  After referring to the Irish case of Re O’Byrne’s Estate (1885) 15 LR(IR) 373, and the Canadian decision of Pierce v Canada Permanent Loan & Savings Co (1894) 25 OR 671, his Honour concluded that as the rule was based on the doctrine of equitable fraud, actual notice of the second mortgage was required. 

Justice White considered the authorities as to whether actual or constructive notice was required and concluded that actual notice was required

Although the authorities do not all speak with one voice, their effect is that before equity will regard it as fraudulent for a first mortgagee to insist on its priority for subsequent advances, it is necessary that it have had actual notice of an intervening equitable interest.  It is apparent from Deeley v Lloyds Bank Limited [1912] AC, that it is not necessary to show that at the time of the subsequent advance, the first mortgagee has knowledge, in the sense of an actual awareness, of the second mortgagee’s interest.  Although it is sufficient for the second mortgagee to show notice, and not knowledge, it must show that actual notice of its having made an advance on second mortgage was given to the person or persons who represent the mind of the first mortgagee.  Thus, in R & I Bank of Western Australia Ltd v Cash Resources Australia Pty Ltd, the first mortgagee received a certificate of currency from the insurer of the mortgaged property which noted the existence of a second mortgage.  The document was dealt with at a clerical level and not by employees who were concerned with the making of loans, or the taking of securities.  Anderson J held  that:

“I do not consider it would be a proper application of the doctrine of constructive notice to impute knowledge to the defendant of the fact that the plaintiff was mortgagee of the subject property by reason of the receipt in the defendant’s insurance records of the insurance certificate.” 

His Honour found that the receipt of the document did not give the defendant actual notice of the second mortgage and that it “did not actually produce any awareness on the part of the defendant of the existence of the plaintiff’s mortgage.” 

The knowledge of the loan manager who acted as the agent of Adelaide Bank was fully imputed to Adelaide Bank. However, the knowledge of the employee of the loan manager whose only responsibility was to process mortgage discharges, and not to approve loan advances, could not be imputed to the loan manager of Adelaide Bank

She did not have the responsibility for managing or controlling Domain’s actions in relation to the act or omission in question (El Ajou v Dollar Land Holdings plc [1994] 2 All ER).  The act or omission in question in this case is the failure to take steps to prevent the Bryants from further drawing on their account.  That was not a matter within Ms Veness’s responsibility.  Even if she should have inferred from the terms of Westpac’s letter that Westpac had already taken a mortgage from the Bryants to secure their advance, it was no part of her job to consider the implications of that fact. 

Therefore Adelaide Bank did not have actual notice of the advance made by Westpac simply because of the deposit of the advance in the Adelaide Bank loan account.

Justice White stated that the lending procedures of banks could not be relied on to alter the principles applied by the Courts in determining priority.

Justice White stated that if the second mortgagee had notice of customer’s covenant not to create any further security without the first mortgagee’s consent, the first mortgagee would be entitled to assert its priority as first registered mortgagee against the second mortgagee’s equitable mortgage in relation to further advances that increased the first mortgagee’s security. That point was not argued and his Honour did not decide the issue.   

The result was that a letter sent by Westpac at a later date (after the advance was deposited) did have the effect of putting Adelaide Bank on actual notice of the second mortgage. After that date, any advances made by Adelaide Bank could not be tacked onto its security under the first mortgage, as it would not be just and fair to do so. Westpac was therefore partially successful in claiming priority, but only ahead of advances made by Adelaide Bank after it had received actual notice.

Westpac substantially failed and was ordered to pay costs. 
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