Can a breach of trust claim defeat an indefeasible title under the Transfer of Land Act, 1958?
The Supreme Court of Victoria recently had to determine whether a Barnes v Addy claim fell within the exceptions to indefeasibility of title under the Transfer of Land Act 1958.
In Mathieson Nominees v Aero Developments & Ors  VSC 131, Vickery J dealt with this interesting issue.
The Plaintiff (“Mathieson”) claimed that it was entitled to an equitable charge over subdivisional land at Point Cook in Victoria (“the Property”) and that, as a result, it had an interest in the land capable of supporting a caveat.
The Property was vacant land, although a town planning permit had been issued which permitted a 22 lot subdivision of the Property, including 21 townhouse allotments and a larger allotment which was proposed to include 125 apartments.
Sprint Homes Pty Ltd (“Sprint Homes”) planned to purchase the Property from the Victorian Urban Development Authority (“VicUrban”). The Property was undeveloped at that time. It needed to borrow funds to proceed with the purchase and develop the Property.
Mathieson agreed to advance the necessary funds for the deposit, as well as an additional amount to be put towards the working capital of Sprint Homes. The loan (in the sum of $250,000) was effected by a deed made on or about 18 April 2008.
Around 18 April 2008, Sprint Homes executed a fixed and floating charge in favour of Mathieson over all of its present and future property (the “Charged Property”) as security for the repayment of the Advance.
On or about 21 April 2008, Mathieson advanced to Sprint Homes $250,000.
By the contract of sale dated 16 June 2008 (the “Contract”), Sprint Homes purchased the Property from VicUrban for $4.5 million plus GST. The Contract provided for payment of a deposit of $225,000, with settlement of the balance falling due for payment within 9 months.
The deposit under the Contract of $225,000 was paid to the VicUrban on or about 22 July 2008 out of the proceeds of the loan.
Sprint Homes failed to pay the residue of the purchase price by 30 March 2009 and fell into default under the Contract.
On or about 15 June 2009, VicUrban served a notice of rescission of the Contract.
Negotiations then ensued with the result that on or about 29 June 2009 VicUrban agreed to further extend the settlement date under the Contract to 31 July 2009 and withdraw the notice of rescission dated 15 June 2009. A clause in the Contract as amended also entitled the purchaser to a discount of $500,000 on the purchase price if the Contract was settled on or before 31 July 2009.
On 3 July 2009, the First Defendant, Aero Developments Pty Ltd (“Aero Developments”), was registered as a company. Mr Joe Katz (“Mr Katz”) was appointed as solicitor for Aero Developments.
By a nomination in writing dated 3 July 2009, Sprint Homes nominated Aero Developments as substitute purchaser under the Contract. The nomination was executed by Mr Evans as the director of both Sprint Homes and Aero Developments and was effected without notice to Mathieson.
On or about 17 July 2009, a Mr Tenuta, Aero Developments and Mr Evans executed a written agreement. The principal objective of the 17 July Agreement was to secure funding for Aero Developments, to facilitate completion of the Contract.
On 21 July 2009, VicUrban agreed to amend the Contract by adding Aero Developments as nominee.
However, Aero Developments failed to pay the residue of the purchase price by the varied settlement date of 31 July 2009.
On 3 September 2009, VicUrban issued a second notice of rescission.
Settlement of the sale of the Property to Aero Developments finally took place on 17 September 2009. To facilitate the purchase, a net amount of $3,600,000 was loaned to Aero Developments by the Bank of Queensland. A further sum of $818,448 was provided at settlement by Mr Tenuta and Mr Plevritis.
Aero Developments became registered as proprietor of the Property on 16 October 2009, with a first mortgage in favour of the Bank of Queensland being registered on the same day.
On 11 January 2010, administrators were appointed to Sprint Homes.
On 22 January 2010, Mathieson lodged a caveat over the title to the Property claiming an interest as chargee.
On 22 January 2010, Mathieson appointed a receiver and manager of Sprint Homes pursuant to the Instrument of Charge.
On 10 February 2010, Sprint Homes was wound up pursuant to a resolution of creditors.
On 15 February 2010, Aero lodged an application under s 89A of the Transfer of Land Act 1958 (Vic) in respect of the Caveat, supported by a certificate signed by Mr Katz.
By letter dated 15 February 2010 the Registrar of Titles advised Mathieson that the Caveat would lapse unless proceedings were issued.
By Writ dated 24 March 2010 Mathieson commenced these proceedings against Aero Developments, Cash Flow King and Mr Evans.Mathieson sought (among other things):A declaration that the registration of Aero Developments as proprietor of the Property was affected by fraud within the meaning of ss 42 and 44 of the Transfer of Land Act 1958 (Vic); andA declaration that it was entitled to an equitable charge over the Property.
By Counterclaim dated 13 July 2010, Aero Developments sought:A declaration or order to the effect that the caveat lodged by Mathieson is taken to have lapsed and is no longer of any force or effect pursuant to s 89A(5)(b) of the Transfer of Land Act 1958 (Vic); andAn order or direction requiring the Registrar of Titles to remove the caveat from and against the Property.
Neither the Original Loan, nor any part of it, was repaid to Mathieson.
A preliminary question arose as to whether the Deed gave rise to an equitable charge or an equitable mortgage.
After analysing various textbook definitions and cases, the Honourable Justice Vickery concluded (at paragraph 80):…
a charge does not assign or convey to the chargee any of the charged property. Rather, it secures the debt against the charged property. It provides this security by empowering the chargee, in the event of default or other defined event under the instrument of charge, to seek orders from a court for a judicial sale and the appointment of a receiver, or whatever other remedies are permitted by the charge.
Vickery J also noted (at paragraphs 81 to 82) that (emphasis added):
Whether the instrument in question is an equitable charge or an equitable mortgage, both have a characteristic in common, namely that a proprietary right is created in the charged property, as distinguished from a bundle of contractual rights.Further, if the charged property the subject of the security is real property, the transaction will give rise to an interest in land sufficient to support a caveat under the Transfer of Land Act 1958 (Vic).
After that analysis, and looking at the terms of the Deed, Vickery J concluded that the Instrument of Charge which gave rise to the security claimed by Mathieson, when read as a whole, gave rise to an equitable mortgage and not to an equitable charge.
Mathieson submitted that Sprint Homes became, upon execution of the Contract, the equitable owner of the Property, by reason that the Contract was specifically enforceable by Sprint Homes. At that point, Mathieson had a security over Sprint Homes’ equitable interest in the Property pursuant to the Instrument of Charge. The interest obtained by Sprint Homes pursuant to the Contract, it was submitted, passed to Aero Developments when it became the substituted purchaser under the nomination.
At paragraph 106, Vickery J concluded that Aero Developments gained no enforceable right to enforce the Contract against the vendor, VicUrban. Nor did it gain a purchaser’s lien, or any right to compel specific performance of the Contract in its favour.
Next Mathieson argued that the nomination transaction gave rise to an interest in the Property under the Instrument of Charge in favour of Mathieson. It was submitted that this interest survived the nomination clause and the subsequent registration of Aero Developments as the registered proprietor. As a consequence, it claimed that the Instrument of Charge is presently enforceable by Mathieson and gives it a caveatable interest in the Property.
Vickery J rejected that argument. He concluded that (emphasis added):Even if Aero Developments became a substituted purchaser of the Property through the nomination transaction pursuant to a novated contract, upon registration it took a transfer of the Property free from any other interests by operation of the indefeasibility provisions of the Transfer of Land Act 1958 (Vic).
In the circumstances of this case, Aero Developments acquired an indefeasible title upon becoming the registered proprietor of the Property.
At paragraph 123, the Honourable Justice Vickery noted:As is plain from these authorities, except in cases of fraud or other instances provided for in s 42, ‘there is immediate indefeasibility of title by the registration of the proprietor named in the register’ with the result that a registered interest prevails over an encumbrance not recorded on the Register and prevails unaffected by notice of the unregistered interest (Breskvar v Wall (1971) 126 CLR 376, 385 (Barwick CJ)).
This left Mathieson with only one argument: The in personam exception to indefeasibility. It was said by the Privy Council in Frazer v Walker that indefeasibility ‘in no way denies the right of a plaintiff to bring ... a claim in personam, founded in law or equity, for such relief as a court acting in personam may grant’  1 AC 569, 585. However, such claims must be brought under established causes of action, whether legal or equitable (Grgic v Australian & New Zealand Banking Group Ltd (1994) 33 NSWLR 202, 222–3).
The in personam exception, as it is called, operates so that the registered proprietor is not protected from the consequences of his own actions where those actions give rise to a personal equity in another. In Bahr v Nicolay (No 2) Wilson and Toohey JJ observed  HCA 16; (1988) 164 CLR 604, 638 (emphasis added):
The point being made by the Privy Council [in Frazer v Walker  1 AC 569, 585] is that the indefeasibility provisions of the Act may not be circumvented. But, equally, they do not protect a registered proprietor from the consequences of his own actions where those actions give rise to a personal equity in another. Such an equity may arise from conduct of the registered proprietor after registration: Barry v Heider  HCA 79; (1914) 19 CLR 197. And we agree with Mahoney JA in Logue v Shoalhaven Shire Council (1979) 1 NSWLR 537, 563 that it may arise from conduct of the registered proprietor before registration.
Vickery J concluded (at paragraph 131) that there was no conduct on the part of Aero Developments, either before registration of its interest or after that time, which gave rise to any personal equity in Mathieson such that the interest of Aero Developments as the registered proprietor ought to be rendered subject to the Instrument of Charge.
Aero Developments only acquired its rights on settlement of the Contract when it took the transfer from VicUrban in its favour on 17 September 2009. Vickery J concluded (at paragraph 133) that when it did so, it took title without any knowledge of any intention on the part of Mr Evans or Sprint Homes to defeat the claims of Mathieson, if ever that was their intention, which in any event was not accepted on the evidence.
At the time of settlement of Property in favour of Aero Developments on 17 September 2009, the Honourable Justice Vickery accepted that the company and its directors had no knowledge of any prior dealings between Sprint Homes and Mathieson (including the Loan Agreement and the Instrument of Charge). There was no dishonesty on their part, or through them, on the part of Aero Developments. Accordingly, he found that Aero Developments took the transfer of the Property without notice, whether actual or constructive notice, of the equitable mortgage comprised in the Instrument of Charge.
Vickery J observed that when Aero Developments took its transfer of the Property, it did so without any caveat having been lodged against the title to the Property by Mathieson. Such a caveat, had it been lodged, would have served to give notice to Aero Developments of the interest in land under the equitable mortgage comprised in the Instrument of Charge, and it would have taken the Property subject to that interest.
It was further submitted on behalf of the Plaintiff that Mathieson had a claim under one or other of the equitable causes of action in Barnes v Addy. This was said to be an enforceable personal equity of the type contemplated in Bahr v Nicolay (No 2).
In Barnes v Addy Lord Selborne said: (1874) LR 9 Ch App 244, at 251–2 (words in brackets added):
Strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, [knowing receipt] or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees [knowing assistance].
A claim for knowing receipt arises where a person knowingly receives property in breach of trust. A claim for knowing assistance arises where a person has knowingly assisted a trustee to carry out a ‘dishonest and fraudulent design’. Barnes v Addy liability has been applied beyond breaches of express trusts to breaches of fiduciary duty on the part of directors and other persons standing in a fiduciary relationship Farah Constructions v Say-Dee  HCA 22; (2007) 230 CLR 89, 140 at ; Consul Development v DPC Estates Pty Ltd  HCA 8; (1975) 132 CLR 373.
Knowledge is an essential requirement to be assessed by courts in governing the boundaries of liability under both limbs.
Vickery J conducted an analysis of the High Court’s unanimous joint judgment (of Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ) in Farah Constructions Pty Ltd v Say-Dee Pty Ltd(‘Farah Constructions’),  HCA 22; (2007) 230 CLR 89, and concluded (at paragraph 165) that the tests as to knowledge under limbs of Barnes v Addy appear to be the same.
The claim under Barnes v Addy in this case was put on the basis of an alleged breach of s 180 of the Corporations Act 2001 (Cth), being an alleged breach of fiduciary duty owed by Mr Evans to his company Sprint Homes arising from his position as a director of the company.
The conduct said to amount to a breach of Mr Evans’ fiduciary duty was essentially that the conduct relied upon amounted to a contention that Mr Evans orchestrated a transaction pursuant to which Sprint Homes parted with the Property in favour of Aero Developments for no valuable consideration, effectively providing them with a windfall.
Vickery J was not satisfied that any such claim as alleged under Barnes v Addy could possibly be established on the facts of this case. He concluded that there was no breach of any relevant fiduciary duty on the part of Mr Evans to his company Sprint Homes.
The transaction in question was designed to rescue Sprint Homes from a serious commercial predicament.
The surrounding circumstances all pointed in one direction — Sprint Homes was unable to secure loan funds to enable it to settle the Contract with VicUrban. It was facing not one, but a second successive rescission notice, and was likely to not only lose the purchase, but also face the loss of its deposit and be exposed to a claim for damages and additional costs of a re-sale in the event that the Property was put up for a further sale by VicUrban and a lower purchase price achieved.
In the circumstances, Sprint Homes was compelled to extricate itself from the Contract in order to avoid loss of its deposit and exposure to a damages claim if the notices of rescission had been acted upon by the vendor, VicUrban.
The outcomes of the transaction comprised in the Share Sale Agreement dated 15 September 2009, pursuant to which the purchasers of the shares in Aero Developments, Mr Tenuta and Mr Plevritis purchased Mr Evans shares in the company for $1.00, included an obligation on the part of the purchasers to refund to Sprint Homes the deposit of $225,000 which it had paid to VicUrban under the Contract, together with interest.
Sprint Homes secured significant commercial advantages for itself by the Share Sale Agreement.
Vickery J was satisfied that by the means described, Mr Evans acted responsibly as a director of Sprint Homes by extricating it from a disastrous Contract which it could not settle, securing the return of its deposit together with interest, and putting in place a structure which facilitated settlement of the Contract with VicUrban on 17 September 2009, thereby avoiding any exposure of Sprint Homes to damages. In these circumstances a finding cannot be made that Mr Evans breached any fiduciary duty he owed to Sprint Homes as its director.
It follows that, at the time of receiving the Property, Aero Developments, its directors and relevant agents, including its solicitor Mr Katz, could not have known of any relevant trust arising from any breach of fiduciary duty owed by Mr Evans to Sprint Homes — simply because there was no such breach. Similarly it could not have known of any misapplication of the trust property as this never occurred.
Vickery J concluded on the facts of the case that Aero Developments did not knowingly receive the Property in breach of any trust. The Plaintiff’s claim under the first limb of Barnes v Addy must fail on this basis.
Further, even if the case of the Plaintiff was advanced on the basis of the second limb of Barnes v Addy, being knowing assistance, the same considerations apply, with the result that it has not been established that Aero Developments knowingly assisted in any breach of trust.
Of most interest to readers is the conclusion by the Honourable Justice Vickery (at paragraph 198) that (emphasis added):… it has been authoritatively determined that a claim under Barnes v Addy is not a personal equity which defeats the indefeasibility provisions of the Transfer of Land Act 1958 (Vic) (Macquarie Bank v Sixty-Fourth Throne  3 VR 133, 156-157; Farah Constructions  HCA 22; (2007) 230 CLR 89, 169–71).
The argument that a claim based on Barnes v Addy would be inconsistent with the principle of indefeasibility and would undermine the certainty of the Torrens register and hence the system of title by registration was accepted by the majority of the Court of Appeal of Victoria in Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd  3 VR 133 where Tadgell JA held (and Winneke P agreed at 156–7):
[T]o recognise a claim in personam against the holder of a mortgage registered under the Transfer of Land Act, dubbing the holder a constructive trustee by application of a doctrine akin to “knowing receipt” when registration of the mortgage was honestly achieved, would introduce by the back door a means of undermining the doctrine of indefeasibility which the Torrens system establishes. ... In truth, I think it is not possible, consistently with the received principle of indefeasibility as it has been understood sinceFrazer v Walker and Breskvar v Wall, to treat the holder of a registered mortgage over property that is subject to a trust, registration having been honestly obtained, as having received trust property. The argument that the appellant is liable as a constructive trustee because it had “knowingly received” trust property should in my opinion fail.
At paragraph 206, Vickery J notes:Although this outcome has been the subject of academic criticism, Farah Constructionson the issue of indefeasibility has settled the law in Australia.
As a result, Mathieson’s alleged in personam claim against the registered proprietor of the Property (Aero Developments) failed.
The issues to take away from this decision are:
- Lodge a caveat early – as soon as your entitlement to make a claim arises. In this case, if Mathieson had done so, Aero would have been on notice of its interest and Aero would not have been able to settle the purchase of the Property without Mathieson’s agreement (or a payment being made to Mathieson); and
- Any claim under Barnes v Addy based on alleged knowledge of a breach of trust will not override the principles of indefeasibility established under the Torrens system of title by registration.
Hayden Starke Chambers