Between: Falk
And: Haugh

Judges: Rich J

Starke JDixon 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

Sydney

Decision by:
Starke J

The Financial Emergency Act 1931-1934 (Vict.), s. 28 (1), provides:

"Where under a mortgage-

(a)

any interest accrued due and payable is not in arrear; or

(b)

interest has been paid

(i)

in the case where interest under the mortgage is to be paid quarterly ... to a date within the period of twelve months immediately preceding the date of application ... but otherwise the mortgagor's covenants other than for payment of the principal moneys have been performed, such mortgagor may apply to the Court upon summons for an order that the mortgagee shall not ... 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 such application."

The application may be made to the Supreme Court, the County Court, or, in cases where the principal money secured by the mortgage does not exceed PD1,000, to a Court of Petty Sessions consisting of a Police Magistrate (s. 14).  If possession has been taken by a mortgagee before the coming into operation of the Act, the provisions of the section do not affect any power of sale of any mortgagee in possession (s. 28 (7)).

Falk had given a first mortgage to Haugh over certain lands under the Transfer of Land Act, to secure PD5,500 with interest payable quarterly at the rate of ten per cent per annum reducible to eight per cent per annum on punctual payment.  The mortgagor made default in payment of the interest due under the mortgage, and the mortgagee took possession of the mortgaged property about the end of October 1930, and received the rents and profits therefrom.  In 1933 the mortgagor applied on summons to the County Court at Melbourne for an order that the mortgagee should not exercise any power of foreclosure in respect of the property.  But the Act, as already stated, requires that interest should have been paid to a date within twelve months of the summons.  The mortgagor suggested that if accounts were taken, it would be found that the rents and profits received by the mortgagee were sufficient to sink the interest payable under the mortgage.  A case was stated for the opinion of the Supreme Court upon a number of questions concerning the manner in which the rents and profits received by the mortgagee should be applied, but the Supreme Court thought the questions did not call for solution.  The Court observed that an account as between mortgagor and mortgagee in possession was familiar enough, but that such accounts were

"ordered when, and only when, the occasion for them arises-that is to say, when the mortgagor desires to redeem or the mortgagee desires to terminate the option of redemption by foreclosure, or after a sale by a mortgagee". ^[F27]

And such an occasion had not arisen (Falk v  Haugh). ^[F28]   The summons, coming again before the County Court, was dismissed upon the ground that interest had not been paid to a date within twelve months of the summons.  An appeal, it was stated, is pending in the Supreme Court against this order.  In December 1934, the mortgagor issued another summons, but this time in the Supreme Court for an order that the mortgagee should not exercise any power of foreclosure in respect of the property comprised in the mortgage.  It came before Mann J., and an adjournment was applied for, but refused, because it was inevitable that the summons should be dismissed, having regard to the decision already given by the Supreme Court.  We need not consider whether the decision on the former summons operated as an estoppel, for the learned counsel for the mortgagee waived the contention, so that the construction of the Act and the position of the parties might be here determined.

The first question is the meaning of the words "interest has been paid," which condition the mortgagor's right to make application under the Act.  It is contended that the mortgagor must himself have paid the interest (cf. Walters v  White), ^[F29] or discharged it in some manner equivalent in law to payment.  But there seems no reason for so restricting the Act if rents and profits are in hand sufficient and applicable for sinking or keeping down the interest.  Technically the mortgagor would not pay the interest, for the mortgagee receives the rents and profits in his own right, though accountable to the mortgagor, but the result would be the same.  Under clause (a), where interest is not in arrear a mortgagee would not be allowed to say that interest was in arrear if he had in his hands rents applicable for its payment (Wrigley v  Gill). ^[F30]   The change of words in clause (b) is relied upon in support of the argument, but little reason can be found for any distinction.  The purpose of the Act is to relieve impecunious mortgagors, and the payment of interest required by the Act is the receipt of moneys satisfying and applicable to payment of interest, and not the precise legal effect of that receipt.  No doubt the ordinary rule of equity was that a mortgagor, or anyone claiming under him, could not make the mortgagee party to any suit without offering to redeem.  Indemnity of the mortgagee was the condition of redemption, and accounts were taken for the purpose of ascertaining the amount owing to him.  But unless otherwise directed the practice in England is that the accounts are taken as a whole, and the mortgagee is not treated as repaid until the account is taken Nelson v  Booth; ^[F31] Union Bank of London v  Ingram; ^[F32] see Fisher and Lightwood's Law of Mortgage, 7th ed. (1931), p. 734).  Such a practice cannot determine the proper construction of the Financial Emergency Act, nor, indeed, that of any other instrument.  So much is recognized in cases such as Wrigley v  Gill, ^[F33] by Cotton L.J. in Cockburn v  Edwards, ^[F34] and in Chinnery v  Evans. ^[F35]   If the statute only requires the receipt of moneys satisfying and applicable for payment of interest, then the statute prevails, whatever the practice be in redemption and other actions.  It must be remembered, however, that a mortgagee who enters into possession of the mortgaged estate enters for the purpose of recovering his principal, interest, and any other moneys secured by the mortgage (Lord Kensington v  Bouverie, ^[F36] at p. 62).  The mere collection, therefore, of the rents and profits does not establish that they have been applied in reduction or satisfaction of interest; something more must appear.

It is said that where the mortgagor claims to be discharged by the receipt of rents and profits, the general rule is that they are deemed to have been applied in sinking the interest before any part of the principal or other moneys due under the mortgage is discharged (Chase v  Box; ^[F37] Wrigley v  Gill; ^[F38] Venkatadri Appa Row v  Parthasarathi Appa Row). ^[F39]   That may be so if the mortgagee does not show that he applied the moneys in payment of anything else under the mortgage (cf. Wrigley v  Gill). ^[F40]   But if he receives the money in his own right, and for payment of what may be due to him under the mortgage, then he may appropriate and apply it in satisfaction of such part of the mortgage debt as is most advantageous to himself-Principal, interest, and costs.  The right to appropriate may be exercised, I should say, in accordance with the general principles relating to appropriation, at any time after receipt of the rents and profits, and certainly before the settlement of any account between the mortgagor and mortgagee or proceedings taken under the Financial Emergency Act.  We have been informed that the rents and profits in the present case have actually been applied in and towards recouping the mortgagee various expenses incurred by him in relation to the mortgage security, and that the balance is insufficient to sink the interest.  Unfortunately the facts have not been ascertained, by reason of the decision of the Supreme Court in Falk v  Haugh, ^[F41] and the case should therefore go back to the Supreme Court so that they may be determined.  The provision of the 6th clause enables the mortgagee to capitalise costs, charges and expenses under the mortgage, but it does not compel him so to capitalise them, and in any case does not preclude him from appropriating the rents and profits in and towards satisfaction of any moneys due under the mortgage.

The difficulties suggested during argument in the case of proceedings under the Act before the Police Court are more apparent than real.  The Police Court must mould its procedure so as to carry out the jurisdiction conferred upon it by the Act.

The result, in my opinion, is that the appeal should be allowed, and the summons remitted to the Supreme Court.

PER CURIAM.  In the circumstances of this case, which is an appeal in forma pauperis, the Court thinks no order as to the costs of the appeal should be made.