Commonwealth Bank of Australia v. Nick Frisina Pty. Limited & Ors. [1999] NSWSC 907

New South Wales Supreme Court CITATION : Commonwealth Bank of Australia v. Nick Frisina Pty. Limited & Ors. [1999] NSWSC 907 CURRENT JURISDICTION : Equity Division Commercial List FILE NUMBER(S) : No. 50142 of 1998 HEARING DATE(S) : 26 August 1999 JUDGMENT DATE : 2 September 1999

PARTIES : Commonwealth Bank of Australia - P Nick Frisina Pty. Limited 1D, Nicola Frisina 2D, Julianna Frisina 3D, Anna-Maria Frisina 4D, Sandra Frisina 5D JUDGMENT OF : Hodgson CJinEq at 1

COUNSEL : R.G. Forster SC for plaintiff D. Raphael for 1, 2 & 3 defendants SOLICITORS : Corrs Chambers Westgarth, Sydney, for plaintiff Smith Monti Costa, Fairfield, for defendants CATCHWORDS : CONVEYANCING - LAND TITLES UNDER THE TORRENS SYSTEM. MORTAGES. TRUSTS AND TRUSTEES. Trustees purport to appoint company, of which they are sole directors, trustee of a family trust. The appointment is ineffectual, because not registered. The purported trustee mortgages trust property to Bank (which has notice of the trust), the mortgages are registered, and the Bank advances money to the purported trustee. On default, the Bank seeks possession of the mortgaged property. On behalf of the trust, it is contended that the Bank's title is subject to the trust. HELD that (assuming the participation of the true trustees in the grant of the mortgages did not bind the trust) the Bank's title to the mortgages was indefeasible; that the advances of money to the purported trustee effected pro tanto purchases of charges over the property, which were not indefeasible; that (assuming the participation of the true trustees in the reciept of the advances by the purported trustee did not bind the trust) the Bank could rely on the legal title unless and until it was shown that the advances were applied otherwise than in accorance with determinations of the true trustees and that there was loss of the beneficiaries; that Section 66B of the Conveyancing Act (assuming it applied otherwise than to sales properly so called) did not give a cause of action without proof of loss and causation of loss ACTS CITED : Conveyancing Act 1919 (NSW) ss.7, 66B. DECISION : See page 11 of judgment

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

CORAM: HODGSON, CJ in Eq.

Thursday 2nd September 1999

NO. 50142 OF 1998 COMMONWEALTH BANK OF AUSTRALIA V. NICK FRISINA PTY. LIMITED & ORS.

JUDGMENT

1 In these proceedings, the plaintiff Bank claims relief against the first defendant (which I will call "the Company") pursuant to mortgages executed by it in favour of the Bank, and against the second to sixth defendants pursuant to guarantees which they executed. The relief sought against the Company is judgment for a sum of money, and judgment for possession of the land the subject of the mortgages. 2 On 13th August 1999, Rolfe, J. ordered that the proceedings as between the plaintiff and the Company be separately determined, pursuant to Pt.31 of the Rules. I embarked on that separate hearing on 26th August 1999. Mr. Raphael, appearing for the Company, and also for the second and third defendants, Mr. and Mrs. Frisina, applied to have Mr. and Mrs. Frisina joined, in this separate determination, as trustees of the Frisina Family Trust. I indicated that, if I was to accede to that application, I may require that Mr. Raphael also represent some beneficiaries of the Trust and have them also joined. 3 Mr. Forster SC for the Bank did not oppose the application, so long as no additional evidence was to be led. The matter proceeded on the basis that I would consider evidence and submissions on behalf of the Trust, to the effect that the Trust or beneficiaries had a claim which they could assert against the Bank, arising out of the circumstances of the giving of the mortgages and the making of advances under them, and that I would make appropriate orders in due course.

OUTLINE OF FACTS 4 On 18th December 1987, Mr. and Mrs. Frisina became trustees of the Frisina Family Trust, a trust of which they and various members of their family were beneficiaries. It was not a true discretionary trust; although, because the class of beneficiaries was not closed, there were no persons who could join to put an end to the Trust. 5 On 5th April 1988, Mr. and Mrs. Frisina executed an instrument whereby they were purportedly removed as trustees, and they appointed the Company as trustee. This instrument was not registered pursuant to the Conveyancing Act 1919. 6 On 25th June 1988, Mr. and Mrs. Frisina transferred what has been called the Fenwick Street property to the Company, subject to an existing mortgage to the Commercial Bank of Australia. On 7th February 1989, Mr and Mrs. Frisina transferred what has been called the Wilkins Street property to the Company. It is common ground that both these properties became subject to and part of the Frisina Family Trust. 7 On 23rd March 1989, the Company mortgaged the Wilkins Street property to the ANZ Bank; and on 21st September 1990, the Company mortgaged the Fenwick Street property to the ANZ Bank, subject to the existing Commercial Bank of Australia mortgage. 8 On 5th December 1992, the Company executed mortgages over both properties in favour of the Bank. There is evidence that a copy of the trust deed of the Frisina Family Trust was provided to the Bank before this time. Discharges of the ANZ mortgages, dated 9th July 1992, were also provided to the Bank, along with the mortgages themselves, and these discharges were registered on 17th February 1993 and 14th March 1993. 9 A letter from the Bank dated 30th March 1994, approving an increase of the Company's overdraft from $100,000.00 to $200,000.00, required production of the trust instrument of the Frisina Family Trust. On 6th July 1994, a deed between the Bank and the Company referred to the instrument of 5th April 1988. 10 The Bank made advances to the Company on the security of the mortgages; and those advances including interest now total about $1 million. There has been default by the Company in relation to such advances. Notices under s.57 of the Real Property Act have been given to the Company.

ISSUES 11 No substantial opposition has been raised to the giving of a judgment against the Company for the amount of the advances plus interest. The following contentions have been made by Mr. Raphael, especially on behalf of the Frisina Family Trust. 12 First, it was contended that the purported appointment of the new trustee was ineffectual, because it was not registered, registration being required by s.6(1) of the Trustee Act. This point is in fact conceded by the Bank. 13 Second, it was contended that accordingly the Company never validly became the trustee of the Frisina Family Trust, but rather held the properties as a trustee de son tort, having obligations as a trustee but none of the powers of a trustee. Mr. and Mrs. Frisina remained the true trustees of the Trust. This point was also conceded by the Bank. 14 Third, it was contended that the Bank was on notice that the properties were subject to the Trust, and that the Company did not have power to sell or mortgage or transfer them on behalf of the Trust. The Bank's mortgage was therefore subject to the rights of the Trust and the beneficiaries of the Trust. This point was the subject of contest. 15 Fourth, it was contended that advances under the mortgages were not made to two trustees as required by s.66B(2) of the Conveyancing Act. Section 66B provides as follows: 66B.(1) A purchaser of property from trustees for sale or having power of sale shall not be concerned with the trusts affecting the proceeds of sale of the property (whether made to attach to such proceeds by virtue of this Act or otherwise), or affecting the income of the property until sale, whether or not those trusts are declared by the same instrument by which the trust for sale or power of sale is created.

(2) Notwithstanding anything to the contrary in the instrument (if any) creating a trust for sale or power of sale of property or in the settlement of the net proceeds, the proceeds of sale or other capital money shall not be paid to or applied by the direction of fewer than two persons as trustees, except where the trustee is a trust corporation, or the trustee was appointed as a sole trustee by the instrument creating the trust or power, but this subsection does not affect the right of a sole personal representative as such to give valid receipts for, or direct the application of, the proceeds of sale or other capital money; nor, except where capital money arises on the transaction, render it necessary to have more than one trustee. set out

That issue was also a matter of contest. 16 Prior to Mr. Raphael's application to join Mr. and Mrs. Frisina on behalf of the Frisina Family Trust, the Bank had raised an issue of standing: the contention was that the Company was in effect relying on a jus tertii to resist the Bank's claim for possession. Having regard to the application which has been made, it is not possible now to decide the matter in favour of the Bank on that basis alone.

SUBMISSIONS 17 I have been provided with substantial written submissions, which I will leave with the papers. 18 Mr. Forster submitted that no breach of trust had been committed, because the mortgage to the Bank had been effected through the agency of Mr. and Mrs. Frisina, who were the true trustees of the Trust: they were the only directors of the Company, and they executed the relevant documents on behalf of the Company. It did not matter that they were not expressly acting as trustees: see Re J.W. Broomhead Pty. Limited (1985) 9 ACLR 593 at 632; Re Express Engineering Works Limited (1920) 1 Ch. 466. 19 Mr. Forster next submitted that, even if the grant of the mortgage was a breach of trust, nevertheless, upon registration, the Bank acquired an indefeasible title; and that title supported the personal covenant to pay: see P.T. Limited v. Maradona Pty. Limited (1992) 25 NSWLR 643 at 676-682. Such notice as the Bank had of the breach of trust fell far short of what was necessary to give rise to a personal equity binding the Bank, or to amount to fraud within s.43 of the Real Property Act: see Equiticorp Finance Limited v. Bank of New Zealand (1993) 32 NSWLR 50 at 103; Consul Development Pty. Limited v. DPC Estates Pty. Limited (1975) 132 CLR 373. 20 Next, Mr. Forster submitted that s.66B of the Conveyancing Act had no application, because the Company was appointed a sole trustee by the transfers of the properties by Mr. and Mrs. Frisina. In any event, there was no evidence that money advanced had actually been misapplied, and no evidence of loss by the beneficiaries. The money having been advanced to the Company was in any event under the control of Mr. and Mrs. Frisina who were the true trustees of the Trust. 21 Mr. Raphael for the Company and Mr. and Mrs. Frisina submitted that the participation of Mr. and Mrs. Frisina in the grant of the mortgages was only as directors of the Company: they did not either intend or purport to act as trustees of the Trust. The mortgages were the acts of the Company, not of Mr. and Mrs. Frisina, and were therefore breaches of trust. 22 Next, Mr. Raphael submitted that the indefeasibility of the estate of the mortgagee did not extend to the covenant to pay money; and he referred me to Travinto Nominees Pty. Limited v. Vlattas (1973) 129 CLR 1. He also referred to Quarrell v. Beckford (1816) 56 ER 100 at 103, where a sharp distinction is drawn between the personal covenant under a mortgage and the estate which is security for the performance of that covenant. Registration would protect the estate but not the personal covenant. Mr. Raphael also submitted that a similar sharp distinction was drawn by s.102 of the Conveyancing Act. 23 Mr. Raphael next submitted that an enquiry or search as to registration of the appointment of the new trustees was one which ought reasonably have been made, within s.164 of the Conveyancing Act. He referred to Bailey v. Barnes (1894) 1 Ch. 25. He submitted also that it was notorious that there should be two trustees where new trustees were appointed. The Bank therefore had ample notice that there had been a breach of trust. This was confirmed by the provisions of s.66B of the Conveyancing Act. 24 Finally, Mr. Raphael submitted that there was no onus on the beneficiaries to prove loss, in circumstances where s.66B had not been complied with: Lee v. Sankey (1875) LR 15 Eq. 204 at 211; Re Flower (1884) 27 Ch.D. 592 at 596.

DECISION 25 On the view that I take in respect of later issues, particularly the lack of evidence of loss, it is not necessary for me to come to a firm decision as to whether the participation of Mr. and Mrs. Frisina in the grant of the mortgages by the Company is sufficient to prevent there being a breach of trust. On the material before me, it appears that they did not purport or intend to participate in those transactions as trustees on behalf of the Trust; but on the other hand, they did intend that the Trust, through the agency of the Company, do so. It seems to me possible that the approach taken in Broomhead and Express Engineering Works would support the view that, in those circumstances, no breach of trust was involved. However, particularly where it is just possible that the question may have to be considered further on the basis of more satisfactory evidence, I would prefer not to make that finding, but rather to proceed on the assumption that there was a breach of trust. 26 On that assumption, the Bank in my opinion nevertheless obtained an indefeasible title. Each mortgage contained a covenant by the mortgagor to pay the "Secured Moneys", and "Secured Moneys" was defined to include, among other things, all moneys, including moneys advanced by way of fixed term or provided by way of overdraft, to become owing by the mortgagor. In my opinion, the Bank's indefeasible title extended to its rights under that covenant, as secured by the mortgage, as indeed was held by Giles, J. in PT. In my opinion, such notice as the Bank had of any breach of trust fell well short of what would have been required to give rise to a personal equity or to amount to fraud. I do not think the provisions of s.66B of the Conveyancing Act have any relevance to this position. However, the Bank has to go outside its indefeasible title to quantify the amount in respect of which it has a charge. 27 If the Bank's registered mortgage had itself specified the amount of the debt secured by it, then in my opinion indefeasibility would go to the extent of the Bank having security for a debt in that amount. But in fact, no amount was specified in the mortgage. The Bank has by evidence proved advances to the Company, so at least as against the Company it has a debt, in the amount of the advances plus interest, secured by the mortgage. That right is indefeasible, except in so far as the quantum of the debt depends upon the advances having been made to the Company. 28 These advances can be regarded as effecting pro tanto purchases of property, the property in question being a commensurate charge over the land. In relation to those purchases, it is not suggested that the Bank did not act bona fide. However, it is submitted that the Bank had notice of the interests of the beneficiaries of the Trust, so that the Bank's legal title does not prevail over the beneficiaries' equitable title to the land unaffected by the Bank's charge. 29 However, the advances were made to an entity which had purportedly been appointed trustee of the Trust by previous trustees; and those previous trustees remained the true trustees of the Trust and were also the sole directors of the purported trustee. The advances were thus made to a purported trustee which was in turn under the absolute control of the true trustees. There is in fact no evidence that the Company's receipt of money and the correlative expansion of the Bank's charge was other than the act of both the Company and of the true trustees. In relation to informal transactions of this kind, the Court would, in my opinion, be less ready to look minutely at the capacity in which Mr. and Mrs. Frisina acted than in the case of the formal grant of a mortgage, considered earlier; so that the approach in Broomhead and Express Engineering Works would more readily be adopted. And there is no evidence that these advances were applied otherwise than in accordance with determinations of the true trustees, or, even if they were, that there was any loss to the beneficiaries. 30 In those circumstances, in my opinion, the mere notice that the Bank may be considered as having, that the appointment of the new trustee was ineffectual, is insufficient to defeat the Bank's legal title. There would, in my opinion, need to be positive evidence supporting an equitable interest of which the Bank had notice; that is, evidence of an actual breach of trust in the receipt of advances and the correlative expansion of the charge, of application of the advances otherwise than in accordance with the determination of the true trustees, and of consequential loss to beneficiaries. 31 Furthermore, in the circumstances of this case, it seems probable that some of the money was applied to discharge prior mortgages, and it is extremely unlikely that the rights of beneficiaries could impinge upon the Bank's charge to that extent. 32 As regards s.66B of the Conveyancing Act, the first question is whether it applies at all. Mr. Forster submitted that the Company was appointed as a sole trustee by the instrument creating the trust or power, within the meaning of s.66B(2). I reject that submission. The Company was not appointed trustee at all, but rather became a trustee de son tort by assuming control of the trust property following a purported appointment which was ineffectual. The actual transfers of the subject properties to the Company cannot be regarded either as appointments of the Company as a trustee, or as instruments creating a trust for sale or power of sale. 33 However, there are other indications in s.66B which raise a question as to whether it applies in circumstances such as these. Section 66B appears in Part 4 Division 5 of the Conveyancing Act, which is headed "Dispositions On Trust For Sale, Or With Power Of Sale". The opening words of s.66B(2), referring to "the instrument (if any) creating a trust for sale or power of sale of property" and to "the settlement of the net proceeds" also suggest that the section is directed to cases of sale; and "sale" is defined in s.7 of the Act to mean "only a sale properly so called". On the other hand, the reference in s.66B(2) to "other capital money" seems wide enough to include advances under a mortgage. 34 In those circumstances, without fuller argument and evidence as to exactly what happened, I would be reluctant to decide on the application of s.66B to this case, unless it were necessary to do so. I am prepared to proceed on the assumption that it does apply. 35 In this case, the payment was made to a single trustee, not being a validly appointed trustee but rather being a trustee de son tort. It seems to me that the effect of s.66B is that the Bank did not get a good discharge in respect of those advances; but that in the circumstances of this case, that would only mean that the Bank did not have a defence based on such a discharge, if the beneficiaries had some identifiable cause of action. 36 A further effect of s.66B may be that, if loss to the beneficiaries is caused by the payment of money to one trustee, then, without any further requirement, the beneficiary has a cause of action for the loss of that money. Again, I would be reluctant to decide this definitively without further submissions and consideration; but again I am prepared to proceed on the assumption that this is so. However, a cause of action of that kind would require not only proof of loss, which is absent here; but it would also require proof of causation. In the present case, where the one trustee to which the money was paid was a purported trustee controlled by the two true trustees, proof of causation of loss may be problematic. 37 In my opinion, the consequence of all these reasons is that, on the material before me, there is no basis for cutting down the Bank's statutory charge over the land securing the amount of advances to the Company, and therefore nothing to defeat the Bank's right to possession. 38 The remaining question is whether I should make an order joining Mr. and Mrs. Frisina, in their capacity as trustees of the Trust, in this determination. This order was sought on their behalf, and not opposed. There has in fact been no appearance by any of the beneficiaries. The effect of making the order joining Mr. and Mrs. Frisina in their capacity as trustees could be that the Trust, and the beneficiaries of the Trust, are bound by my determination. However, any such order would be an order made in the absence of the beneficiaries, so that the beneficiaries could apply to set it aside. 39 On the whole, I think it is appropriate to make the order sought, and not opposed. 40 For those reasons, I propose to give judgment against the Company for the amount owing, just over $1 million; to order that Mr. and Mrs. Frisina, on behalf of the Frisina Family Trust, be joined in the determination of issues as between the Bank and the Company; to give judgment for possession against the Company; and to order that the Company and Mr. and Mrs. Frisina pay the Bank's costs of this determination. 41 There may be a question as to the precise amount owing; and also as to whether I should authorise the issue of a warrant for possession, and if so, at what time. I will issue this judgment to the parties and have them arrange with my Associate an early appointment for the determination of the precise orders. I direct the Bank to provide Short Minutes on that occasion.

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