Bofinger v Kingsway Group Ltd

• Jurisdiction: Australia Federal only
• Court: High Court (Australia)
• Judge: Gummow,Hayne,Heydon,Kiefel,Bell JJ.
• Judgment Date: 13 October 2009
• Neutral Citation: 2009-1013 HCA C,[2009] HCA 44
• Docket Number: S161/2009
• Date: 13 October 2009

[2009] HCA 44

HIGH COURT OF AUSTRALIA

Gummow, Hayne, Heydon, Kiefel and Bell JJ

S161/2009

Ronald John Bofinger & Anor

Appellants

and

Kingsway Group Limited Formerl Willis & Bowring Mortgage Investments Limited & Ors

Respondents

Representation

G J McVay with A Tsekouras for the appellants (instructed by Warren McKeon Dickson Solicitors)

D R Sibtain with C K Amato for the first and eighth respondents (instructed by Watson Mangioni)

C M Harris SC with H P T Bevan for the second respondent (instructed by Bransgroves Lawyers)

R J H Darke SC with G K J Rich for the fifth to seventh respondents (instructed by Middletons Lawyers)

Submitting appearance for the third and fourth respondents

Statute of Frauds 1677, s 4.

Conveyancing Act 1919 (NSW), s 10.

Law Reform (Miscellaneous Provisions) Act 1965 (NSW), s 3.

Real Property Act 1900 (NSW), ss 57(1), 58.

Uniform Civil Procedure Rules 2005 (NSW), r 28.2.

Bofinger v Kingsway Group Limited

Guarantee and indemnity — Surety — Right to subrogation to securities — Three separate loans made to company, each secured by mortgage over company's property — Appellants guarantors of each loan — Appellants sold personal properties and used proceeds to reduce first loan — First mortgagee exercised power of sale over company's property to satisfy outstanding amounts owing under first loan and transferred surplus to second mortgagee — Whether appellants have right to subrogation to securities in priority to puisne mortgagees — Whether appellants' right to subrogation excluded by terms of guarantees to puisne mortgagees — Whether rule in Otter v Lord Vaux (1856) 2 K & J 650 [ 69 ER 943] applied to prevent appellants from exercising right to subrogation or should be extended to so apply — Whether transfer of surplus required to be unconscionable for doctrine of subrogation to apply.

Equity — Remedies — Constructive trust — Nature of constructive trust — Surplus transferred by first mortgagee to second mortgagee — Whether first mortgagee constructive trustee of surplus — Whether obligation to account.

Words and phrases — ‘subrogation’, ‘unconscientious’, ‘unconscionable’, ‘unjust enrichment’.

ORDER

1. Appeal allowed.

2. Set aside order 1 of the orders of the Court of Appeal of the Supreme Court of New South Wales entered 29 December 2008 and the orders of the Court of Appeal entered 8 July 2009 and in place thereof order that:

• (a) appeal allowed;

• (b) orders 1 and 2 of the orders made by Young CJ in Eq, entered 18 February 2008 be set aside; and

• (c) the separate question stated on 16 November 2006 be answered as follows:

  Question: In the circumstances of the case, were the sums of $268,307.33 and $432,712.53 and the securities over Lots 1 and 14 SP75069 held by the second defendant in trust for the plaintiffs as at 8 February 2006?

  Answer: In the absence of prior consent or release by Mr and Mrs Bofinger, on 8 February 2006 Kingsway Group Limited was obliged to account to Mr and Mrs Bofinger as a constructive trustee for any dealing by it with the moneys and securities identified in the question for decision in favour of any other party, and to pay equitable compensation to Mr and Mrs Bofinger in respect of the denial or limitation by such dealing of recoupment from those moneys and securities of moneys paid by Mr and Mrs Bofinger to Kingsway Group Limited, in total $1,519,234.40, from the proceeds of sale of their properties at 407 Willarong Road, Caringbah and 2/41 Bulwarra Street, Caringbah.

3. The first, second, fifth, sixth, seventh and eighth respondents pay the appellants' costs in this Court, in the Court of Appeal and of the proceedings to date in the Equity Division of the Supreme Court of New South Wales.

1 Gummow, Hayne, Heydon, Kiefel AND Bell JJ. The resolution of this appeal calls for application of ‘the cardinal principle of equity that the remedy must be fashioned to fit the nature of the case and the particular facts’ 1. The nature of the present case and the particular facts engage the law respecting sureties, their obligation to indemnify the creditor and right to indemnity by the principal debtor, and the operation of the doctrine of equity associated with the term ‘subrogation’.

2 The appellants (Mr and Mrs Bofinger) are husband and wife. Mr Bofinger was a director of B & B Holdings Pty Ltd (‘B & B Holdings’), which is now in liquidation. B & B Holdings borrowed consecutively from the first, second and third respondents (‘first mortgagee’, ‘second mortgagee’ and ‘third mortgagee’ respectively) on the security of mortgages over the same real property of B & B Holdings. The appellants gave guarantees to the first, second and third mortgagees. The guarantees were supported in each case by a mortgage over real property of the appellants. The appellants sold these properties and applied the proceeds in reduction of the indebtedness of B & B Holdings to the first mortgagee.

3 Thereafter, the first mortgagee exercised its power of sale over certain of the properties mortgaged by B & B Holdings. After satisfying the balance of the indebtedness of B & B Holdings, the first mortgagee accounted to the second mortgagee by payment of the surplus sale proceeds and delivery of the certificates of title and discharges of the first mortgages over two unsold properties. The first mortgagee did not, as the appellants contend it should have done, account to them so that they might recoup what they had paid off the indebtedness of B & B Holdings.

4 The right of subrogation in favour of a surety recently was described by Sir Andrew Morritt V-C as follows 2:

‘The right operates so as to confer on the surety who has paid the debt in full the rights against the debtor formerly enjoyed by the creditor or by imposing on the creditor the obligation to account to the surety for any recovery in excess of the full amount of his debt.’ (emphasis added)

That statement is important for this case because the indebtedness to the first mortgagee had been paid in full and the securities held by the first mortgagee discharged. The remedies equity provides must, as will appear, found upon the obligation of the first mortgagee to account.

5 Before proceeding it is convenient to consider further the relevant principles respecting subrogation and guarantees.

Subrogation and guarantees

6 In Orakpo v Manson Investments Ltd3 Buckley LJ remarked that the relevant equitable considerations respecting a claim to subrogation may differ, for example, where the basis of subrogation is a contract of indemnity, or concerns ultra vires borrowings by a corporation, or the lending of funds to complete a purchase or pay off an existing mortgage. To that list may be added the subrogation of creditors of a trustee to the trustee's lien over the trust property 4 . Therefore, if for no other reason, it is unhelpful to speak of subrogation as if it were a ‘cause of action’ in the sense recognised at common law 5.

7 In its widest sense, that apparently used by Buckley LJ in Orakpo, an indemnity includes a contract obliging one person to make good the loss suffered by another, and contracts of guarantee and those of insurance fall within that description. The authorities dealing with the writing requirements of s 4 of the Statute of Frauds 1677 with respect to guarantees (but not indemnities) sought to distinguish between guarantees and indemnities by emphasising the secondary liability of the guarantor and the primary liability of the indemnifier. But as

Mason CJ pointed out in Sunbird Plaza Pty Ltd v Maloney6, there is in this distinction ‘an element of ambiguity … unless the reference to primary liability is understood to mean ultimate liability’. His Honour added 7:

‘Once default has occurred, the party having the benefit of the guarantee can call on the guarantor to honour his promise before calling on the principal contracting party to perform his obligation, but the guarantor, having honoured his promise, can hold the principal contracting party to account by virtue of the doctrine of subrogation.’

8 This notion of the ultimate liability of the principal provides a foundation for the application of subrogation in aid of the surety. Thus, where a claim to the benefit of securities held by the creditor is made by a surety, it was said by Turner V-C 8 that the equity for subrogation is derived from the obligation of the principal debtor to indemnify the surety 9 . There is ‘nothing hard’ in the act of a court of equity in placing the surety in exactly the situation of the creditor with respect to those securities 10, because it would be unconscientious for the debtor to recover back the securities from the creditor while the debtor was obliged to indemnify the surety 11.

9 What then are the equities where the creditor holds a first mortgage and there are puisne mortgagees? The authorities hold that a second mortgagee cannot complain where the surety utilises by subrogation the security held by the first mortgagee. In Drew v Lockett12 this was put on the basis that the second mortgagee took its interest with notice and by grant from the equity of

redemption enjoyed by the principal debtor in its state remaining after giving full effect to the first mortgage. Thus, in de Colyar's work on guarantees it was said that the surety was entitled to all the equities the creditor could have enforced, adding 13:

‘And this right prevails, not merely against the original creditor of the principal debtor, but also against all persons claiming under the latter 14 . A mortgaged his estate to C, and B became A's surety for the debt. Afterwards A mortgaged the estate to D, who had notice of the first mortgage. The first mortgage was subsequently paid off, partly by B, the surety, but D got a transfer of the legal estate. It was held that the surety had still priority over D for the...