Falk v Haugh
53 CLR 1631935 - 0604A - HCA
(Decision by: Rich J, Dixon J, Evatt J, McTiernan J)
Between: Falk
And: Haugh
Judges:
Rich JStarke J
Dixon J
Evatt J
McTiernan J
Subject References:
Mortgages and securities
Financial emergency
Foreclosure
Restriction of mortgagee's right
Interest paid
Mortgagee in possession
Receipt of rents
Right of mortgagor to an account
Legislative References:
Financial Emergency Act 1931 (Vic) No 3961 - s 28
Judgment date: 4 June 1935
Sydney
Decision by:
Rich J
Dixon J
Evatt J
McTiernan J
This is an appeal from an order of Mann J. dismissing an application under s. 28 of the Victorian Financial Emergency Act 1931 as amended: Act No. 3961, s. 28, as amended by No. 3970, s. 5; No. 4047, s. 2; No. 4064, s. 2; No. 4106, ss. 5 and 6; and No. 4249, s. 3 (1). That provision enables a mortgagor, if certain conditions are fulfilled, to apply upon summons for an order that the mortgagee shall not before 1st October 1935 exercise any power of sale or foreclosure or repossession in respect of the property comprised in the mortgage, or any other remedy for enforcing payment of the principal moneys thereby secured, or interest (if any) in arrear at the time of the application.
The prescribed conditions are two. The first is that under the mortgage,
- (a)
- any interest accrued due and payable is not in arrear, or
- (b)
- interest has been paid to a date within a specified period immediately preceding the date of the application.
The specified period is twelve months if interest is payable quarterly or more frequently, fifteen months, if half-yearly, and eighteen months, if yearly or less frequently. Interest for this purpose accrues from day to day, and a tender of interest if refused is equivalent to payment.
The second condition is that, apart from the non-payment of principal and interest, the mortgagor has performed his covenants or, if there has been a breach of covenant, it is in the opinion of the Court of a minor or technical character. The mortgagor is entitled to such an order if he establishes that he is unable to redeem, either from his own moneys or by borrowing at a rate of interest not exceeding the mortgage rate as reduced by the statute, and that there is no serious diminution in the value of the property and that the mortgagee's security is not otherwise in jeopardy. The power of sale of a mortgagee in possession is not affected if he took possession before the provision came into force.
The mortgagor applied in the present case for an order that the mortgagee should not exercise his power of foreclosure or any other remedy except his power of sale for enforcing payment of principal and interest. The mortgage was given on 15th May 1929 to secure repayment of PD5,500 and interest payable quarterly at ten per cent per annum reducible to eight per cent per annum on payment within fourteen days of the quarterly dates. It is a mortgage under the Transfer of Land Act. The land is situated at East St. Kilda, and is the site of a building divided into a number of flats. The mortgagee went into possession on 29th October 1930, interest being then in arrear. Ever since he has remained in receipt of rents and profits. In September 1933 the mortgagor applied under s. 28 to the County Court at Melbourne. To establish fulfilment of the condition that interest had been paid to a date within twelve months, he relied upon the mortgagee's receipt of the rents and profits which, he said, were more than sufficient to keep down the interest after defraying all lawful outgoings. The County Court directed an inquiry before the Registrar. When his certificate came before the Judge some questions arose which were reserved pursuant to s. 76 of the County Court Act 1928. The stated case was heard by the Full Court, consisting of Irvine C.J., Mann and Macfarlan JJ., who refused to answer the questions upon the ground that no occasion had arisen for an account or inquiry between the mortgagor and the mortgagee, as the mortgagor did not seek to redeem, and there had been no sale by the mortgagee. The reasons of the Court, which were given by Mann J., are to the effect that the mortgagor cannot rely upon the receipt of the rents and profits by the mortgagee in possession to establish fulfilment of the condition that interest has been paid to a date within the specified period immediately preceding the mortgagor's application (Falk v Haugh). [F1]
The County Court then dismissed the application upon the ground that interest had not been paid to a date within twelve months preceding September 1933, when the application then under consideration was made.
The present application to the Supreme Court was made on 21st December 1934. Mann J. dismissed it, following the reasons he had given in the Full Court. Counsel for the mortgagee expressly refrained from taking the point that the question whether the interest had been paid to a date within twelve months preceding 21st December 1934 is concluded. The contention is open that this question is decided already, and the applicant is precluded by issue estoppel. The respondent's refusal to raise it makes it unnecessary to discuss the matter. But it may be remarked that the present application raises a different issue from that determined by the County Court. The reasons of the Full Court for refusing to determine the questions reserved may be taken to be the basis of the decision by the County Court that interest had not been paid. The decision in the County Court was that interest had not at that time been paid up to a given date. The question at issue here is whether it has now been paid up to another and later date. An affirmative answer to that question involves no necessary contradiction of the County Court decision. The issues are not the same; but the decision of each issue involves a common question, namely, what, in the case of a mortgagee in possession, amounts to payment.
It is this question with which the reasons of the Full Court deal. It may, therefore, be right to regard those reasons as forming only a subsidiary ground leading to the decision of the issue between the parties, and not as constituting the decision of an issue. An estoppel of this kind arises from the decision inter partes of an ultimate issue identical with one of the ultimate issues that are again raised. But it does not arise from the adoption of a process of reasoning in the decision of the issue, although the same process may be applicable in the decision of a second and different issue. It is upon this ground, if at all, that the decision of the Privy Council in Broken Hill Pty Co v Broken Hill Municipal Council [F2] is to be reconciled with its decision in Hoystead v Commissioner of Taxation. [F3]
The materials before us on the present appeal do not include, unfortunately, the actual accounts brought in by the mortgagee as a result of the direction of the County Court Judge. The mortgagor has appealed to the Supreme Court against the order of the County Court dismissing his application to the latter Court. That appeal, which appears to have been instituted with a view of an appeal to this Court, was pending at the time the present application came before Mann J., and is still pending. The mortgagor applied on this occasion to the Supreme Court in order to preserve his rights under the Act, and sought an adjournment which, however, was refused upon the ground that, in view of the decision of the Full Court, on no materials could the application succeed, and an adjournment would be useless. Perhaps the matter might have been disposed of on grounds depending upon the character and amount of the actual receipts and expenditure, and the manner or order in which the mortgagee has appropriated receipts against expenditure and interest, if an appropriation has been made by him. As it is, the appeal must be decided upon the assumption that, if an account were taken, it might appear that, after the deduction of all allowable outgoings, the receipts of the mortgagee from the mortgaged premises have been sufficient to answer arrears of interest, and to keep down accruing interest. But, in making this assumption, the possibility of the mortgagee's having made an appropriation of receipts against outgoings in priority to interest cannot be neglected. For, according to the respondent's counsel, the net residue does not suffice to keep down the interest. Whether, when the receipts of a mortgagee in possession are sufficient, after the deduction of all prior charges, fully to answer the interest payable under the mortgage, the interest is to be considered paid, is a question which, as appears from the decided cases, depends more on the meaning with which the word "payment" is used than upon any obscurity in the relations of the mortgagor and mortgagee.
Under the operation of ss. 156 and 157 of the Transfer of Land Act 1928, the mortgagee in possession of land under the Act occupies a situation analogous to that of the mortgagee in possession of land under the general law. He enjoys possession in his own right, and not as an agent. But he enjoys it as mortgagee, that is, for the purpose of securing payment of the mortgage moneys. He is, therefore, accountable for what he receives and for what he ought to receive. If a mortgagee's receipts are thrown against principal, they reduce pro tanto the amount upon which interest is chargeable. It is not to the mortgagee's advantage, therefore, to attempt to appropriate to principal his receipts from the mortgaged premises. When interest is owing, it is scarcely to be supposed that, instead of utilizing the receipts to keep it down, he would throw them against principal. Indeed, the contest which has most often arisen, is whether the surplus receipts after interest has been answered ought in the hands of the mortgagee to be treated as partly paying off principal: whether, in other words, an account between mortgagee in possession and mortgagor must be taken with yearly or periodical rests. It has long been a rule that when payments are received generally on account of a debt, which is in part interest and in part principal, they are treated as applicable to interest in priority to principal. In Crisp v Bluck [F4] a bond creditor received some payments, and afterwards recovered judgment. It was decreed that the payments ought to go in discharge of the interest first. The rule was again enunciated by Lord Keeper Wright in Chase v Box. [F5] It has, however, been little discussed. The most recent statement of the rule is contained in Venkatadri Appa Row v Parthasarthi Appa Row. [F6] There Lord Buckmaster said: [F7]
"There is a debt due that carries interest. There are moneys that are received without a definite appropriation on the one side or the other, and the rule which is well established in ordinary cases is that in those circumstances the money is first applied in payment of interest and then when that is satisfied in payment of capital. That rule is referred to by Rigby L.J. in the case of Parr's Banking Co v Yates, [F8] at p. 466 in these words:'The defendant's counsel relied on the old rule that does, no doubt, apply to many cases, namely, that, where both principal and interest are due, the sums paid on account must be applied first to interest. That rule, where it is applicable, is only common justice. To apply the sums paid to principal where interest has accrued upon the debt, and is not paid, would be depriving the creditor of the benefit to which he is entitled under his contract."' (See too Bamundoss Mookerjea v Omeish Chunder Raee, [F9] at p. 115.)
The rule affords only a presumption in the absence of any actual or express appropriation by the debtor or the creditor. But it is treated by text writers as a rule governing the application of payments in respect of mortgage moneys (Fisher on Mortgages, 6th ed. (1910), par. 1514, p. 770; Coote on Mortgages, 9th ed. (1927), vol. II., ch. 54, s. 6, p. 1237). There is also some old authority that a mortgagee in possession must after keeping down interest do necessary repairs out of the surplus rents and profits (Richards v Morgan). [F10] But, from the fact that net receipts are thrown primarily against interest, it does not necessarily follow that the interest is paid as and when the moneys in hand suffice for the purpose. In Brocklehurst v Jessop, [F11] indeed, Shadwell V.C. held that, at any rate in the case of an equitable mortgagee who had no legal estate, the receipts amounted to payment even to defeat the Statute of Limitations. He said that the receipt of the receipt of the rents and profits by an equitable mortgagee in possession ought prima facie to be taken as payment either of the principal or interest of his debt as the case might be. But in Cockburn v Edwards [F12] this view was disapproved as going too far. Jessel M.R., as he had done in Union Bank of London v Ingram, [F13] in that case emphasized the nature of the account taken between mortgagor and mortgagee in possession; an account where the total receipts, less expenses, are compared with the total mortgage moneys. He cited Chinnery v Evans [F14] as showing that within 3 & 4 Wm. IV. c. 27 it was no payment, because not made by the mortgagor or his agent. These views were, however, by no means shared by Brett and Cotton L.JJ. In Union Bank of London v Ingram, [F15] Jessel M.R. had already decided that, under a proviso for reduction of interest on punctual payment, a mortgagee in possession, whose net receipts exceeded the interest, might nevertheless charge the higher rate. The case was followed with some reluctance by Kay J. in Bright v Campbell. [F16] These decisions, however, were examined thoroughly in Wrigley v Gill, [F17] first by Warrington J., as he then was, and then in the Court of Appeal by Vaughan Williams, Stirling and Cozens-Hardy L.JJ. The question there was whether under a proviso for the capitalisation of interest due which should be in arrear for fourteen days, interest could be treated as capital by a mortgagee in possession who received rents and profits sufficient to keep down the interest. This question was answered that it could not be so treated. All the judges disapproved of the dicta of Jessel M.R. The conclusion reached was expressed as follows by Vaughan Williams L.J.:
"But it seems to me that we cannot support the judgment of Warrington J. in the present case unless we are prepared to hold that under such a proviso as we have here the mortgagee will not be entitled to say that the interest is in arrear, if while he was in possession he had in his hands on the day appointed for payment of interest, or within twenty-one days afterwards, rents received by him available for the payment of the interest. In my opinion that is the right view". [F18]
The views expressed by Mann J. proceed very largely upon the reasoning which Jessel M.R. enunciated. The true view appears to be that a mortgagee in possession is treated as having satisfied the interest accruing under the mortgage when he has in his hands moneys received from the mortgaged premises which, after the deduction of expenditure allowable to him, are sufficient to keep the interest down. But, when under a provision of a statute or of the mortgage deed itself, payment by or on behalf of the mortgagor is required, the discharge of the obligation out of the receipts of the mortgagee in possession is not enough, at any rate without some active appropriation of the moneys on his part. The question then arises under which head the condition laid down by s. 28 (1) falls. The answer depends on what the true purpose of that requirement is.
In the provisions contained in s. 28 it is not difficult to see an attempt to balance the interests of the two parties to the mortgage transaction. The section seeks to protect the mortgagor against the remedies which the law gives to a mortgagee; but at the same time to stop short of giving protection when to do so would inflict substantial loss upon the mortgagee. If the mortgagor can redeem out of his own moneys, or by borrowing at a proper rate of interest, he is regarded as needing no protection. If he can repay part of the principal in this manner, the question whether he needs protection, except as to the balance, is regarded as one for decision on the facts of the particular case. But, if he cannot so repay any part of the mortgage moneys, he is to get protection provided that certain conditions are fulfilled. These conditions are introduced for the purpose of safeguarding the mortgagee. They do not appear to be concerned so much with the deserts of the mortgagor as with the measure of security which must be preserved to the mortgagee. If the value of the property is diminishing seriously, or the mortgagee's security is otherwise in jeopardy, protection is to be withheld or withdrawn. The covenants of the mortgagor must have been fulfilled except for breaches of a minor or technical nature. The interest must not be in arrear for too great a time. The original provision was that not more than six months' interest due and payable should be in arrear. This has been replaced with the provision which governs the present appeal. It requires that interest shall have been paid to a date within the specified period, in this case twelve months, preceding the date of the application.
It is possible to construe the language in which this provision is expressed as requiring that the mortgagor or some one on his behalf shall have paid the interest to the mortgagee. It is possible, on the other hand, to construe it as requiring no more than that the mortgagee shall have obtained payment of his interest, shall have received or derived the amount of interest in question. In favour of the former view is the fact that Sargant J. so construed the phrase "so long as interest at the standard rate is paid and is not more than twenty-one days in arrear" in s. 1 (4) of the English Increase of Rent and Mortgage Interest (War Restrictions) Act 1915, which is said to be the source of all such legislation (Walters v White). [F19] But the decision is explained by the context and restricted purpose of that statute (cf. Wallace v Fogarty). [F20] It imposed upon the mortgagor the necessity of doing other acts and paying other moneys as a condition of the protection it gave. Among other things, the provision required that the covenants by the mortgagor should be performed and observed, and Russell J., as he then was, has held that this means punctually performed according to their tenor (Evans v Horner). [F21]
In favour of the second construction of s. 28 of the Victorian Act is the fact that sub-s. 7 expressly provides that the section shall not affect any power of sale of a mortgagee in possession where possession was taken before the provision began to operate. In the case of pastoral companies that time was to be fixed by proclamation, and accordingly sub-s. 7 refers specifically to them. Clearly this provision contemplates a mortgagor's obtaining protection notwithstanding that the mortgagee has been in possession. The possession of a mortgagee, particularly a pastoral company, would in practice mean a complete suspension of actual payments by the mortgagor. Interest would be kept down by the rents and profits and not otherwise. It is to be noticed that the first of the alternative conditions is that interest should not be in arrear; the second, as amended, is that it should be paid up to a date within the specified period preceding the application. The language in which the first condition is expressed suggests that it is satisfied if the interest is kept down from whatever source the mortgagee may receive it. It is scarcely credible that the second alternative was intended in this respect to have a different meaning from that of the first.
All these considerations support the conclusion that the conditions precedent laid down by s. 28 (1) do not require actual payment of interest by or on behalf of the mortgagor himself, but are satisfied if the interest is obtained by the mortgagee so that, either at law or in equity, the mortgagor's obligation to pay it would be discharged. In the same way the condition expressed by the requirement that the mortgagor's covenants shall have been performed should be understood as requiring not punctual, exact and faithful performance by the mortgagor himself according to the tenor of the covenants. It refers to such a discharge of the obligation of the covenant as would be an answer to an action for breach, at any rate except as to nominal damages. Thus a condition precedent to a right to renew a lease, requiring that the covenants on the part of the tenant shall have been duly observed and performed, does not mean that the tenant must have strictly observed and performed the covenants all through the term; it is satisfied if the covenants have been so observed and performed that there is no existing right of action under them at the time when the lease is applied for (per Mellish L.J., Finch v Underwood, [F22] at p. 316). In Storkey v Barton [F23] a condition of a tenant's option of purchase was that the tenant should in the meantime have duly paid the rent. It was interpreted by Parker J., as he then was, as requiring not strict and punctual payment, but that the rent should be paid up before the expiry of the option. Parker J. referred to the decision of Farwell J. in Benabo v James [F24] and said:
"In that case there was a covenant not to call in a mortgage on leasehold hereditaments if the ground rent was duly paid. There were special circumstances in the case, but it was held that if the ground rent was paid in time to prevent the exercise of the right of the lessor to re-enter, that was due payment within the exercise of the right of the lessor to re-enter, that was due payment within the meaning of the covenant". [F25]
The purpose and effect of the conditions precedent to a mortgagor's application for relief, which sub-s. 1 imposes, may be summed up as requiring that at the date of the application the mortgagee shall have received interest up to a time within the specified period, in this case twelve months, and that no breach of covenant shall be unremedied except it be of a minor or technical nature. It is consistent with this view of the provision that by reason of the amount and application of the rents and profits received by the mortgagee, the mortgagor may not be disqualified from relief by his failure personally to pay interest to the mortgagee and his failure to pay rates and taxes to the rating and taxing authorities.
The mortgage contains a covenant by the mortgagor that he will bear, pay, satisfy and discharge all taxes, rates, charges, impositions and assessments on the mortgaged premises. The mortgagor has left it to the mortgagee in possession to pay rates and taxes. But apparently the mortgagee has been able to pay them out of the receipts. If the rates and taxes have been paid out of the rents and profits, the breach of covenant may be so far remedied as to be considered performed within the meaning of the section. The failure in the mode of performance, if any longer of importance, might be regarded as a breach of a minor or technical nature. The requirement that interest shall be paid up to a date within twelve months may be satisfied if the rents and profits have been sufficient, and have not been required for some other purpose.
Counsel for the mortgagee stated that it would be found that in fact his client had appropriated the receipts primarily to expenditure and outgoings in connection with the maintenance and management of the mortgaged premises, and that the residue was insufficient to keep down the interest to the extent necessary to enable the mortgagor to succeed in his application.
Counsel for the mortgagor said that he did not concede that all the mortgagee's expenditure was proper and could be debited against the receipts, but that, in any event, under a covenant given by the mortgagor all such expenditure by the mortgagee was to be deemed capital. He contended that as the outgoings, if allowable, were capitalised, rents and profits could be applied in discharging them only after the interest was satisfied.
This last contention is erroneous. The rule that rents and profits are applicable to interest before principal operates in the absence of express appropriation. It is unnecessary to consider whether a mortgagee in possession is at liberty to apply the receipts from the mortgaged premises primarily in discharge of the principal of the loan. Apart from such legislation as that now under consideration, it is difficult to suppose that it would ever be to his advantage to do so. But the fact that the mortgagee's expenses are capitalised cannot prevent him applying current revenue to discharge the expenditure and thus intercept capitalisation. These are questions which can arise only on the taking of accounts, but, in the circumstances of the case, it seems undesirable to allow this contention of the mortgagor to pass unnoticed. Once a construction is adopted of s. 28 (1) which makes it possible that the net revenue coming to the hands of the mortgagee may constitute or provide a payment up of interest to the date that provision requires, the question whether the interest has in fact been kept down in this matter must be determined by the Court to which the application is made. Then is there any reason why an account should not be taken to ascertain whether the receipts do or do not suffice for the purpose?
"When a question is stated to be referred to an established Court without more, it, in my opinion, imports that the ordinary incidents of the procedure of that Court are to attach" (per Viscount Haldane L.C., National Telephone Co v Postmaster-General, [F26] at p. 552).
The application may be made in the County Court and in the Supreme Court, which have ample powers of taking accounts. Why should they not be invoked? It is true that, when the principal secured is not more than PD1,000, a Court of Petty Sessions may be applied to. But the provision implies nothing more than that the Legislature contemplated cases of little complication arising out of comparatively small loans. To say that the mortgagor is not entitled to an account unless he offer to redeem is to apply a general rule of equity to this special enactment. The purpose of the statute is to afford a protection against the mortgagee's legal and equitable remedies. The account sought is required only to decide whether the case is within or outside the provision. If it is an appropriate means of deciding that question, it is a proceeding to which the applicant is entitled to resort.
The appeal should be allowed. The matter should be remitted to the Supreme Court for hearing or rehearing.