This case involved a priority dispute over surplus proceeds after the first mortgagee had been paid out and the balance deposited with the court.
Both Circuit Finance and the Wills obtained a charge over the land in question by virtue of charging clauses. These are clauses which “charge as security for the debt all land held now or in the future by the guarantor”.
The Wills lodged a caveat, Circuit sought to lapse and lost, Circuit then obtained the Wills consent to register its mortgage after agreeing that the registration would not prejudice the rights of the parties.
His Honour stated:
..Circuit is registered upon the title whilst the charge in favour of the Wills is not registered. In normal circumstances, that fact would give to Circuit priority. However, the parties expressly agreed that “that registration of your client’s mortgages shall not in any way alter the rights (including priority) of our respective clients”.
…The parties were are able to vary the manner in which that balance of the proceeds of the mortgagee sale are to be applied amongst themselves…Accordingly, in determining the priority… the fact of that registration of the Plaintiff’s mortgage should be disregarded.
…The Court must determine the priority between the two securities, each executed on the same day, as adverse equitable interests.
…There is no evidence before the Court as to which of the two loan agreements was executed earlier in time on 23 December 2002. In any event, priority of time is the last resort in a contest between persons having only equitable interests.
In the classic statement of general principle regarding priority between adverse equitable interests Kindersley V-C said in Rice v Rice (1853) 2 Drew 73 at 78; 61 ER 646 at 648,
In a contest between persons having only equitable interests, priority of time is the ground of preference last resorted to; i.e., that a Court of Equity will not prefer the one to the other, on the mere ground of priority of time, until it finds upon an examination of their relative merits that there is no other sufficient ground of preference between them, or in other words, that their equities are in all other respects equal; and that, if one has on other grounds a better equity than the other, priority of time is immaterial.
The Court must direct its attention are obviously these: the nature and condition of their respective equitable interests, the circumstances and manner of their acquisition, and the whole conduct of each party with respect thereto. And in examining into these points it must apply the test, not of any technical rule or any rule of partial application, but the same broad principles of right and justice which a Court of Equity applies universally in deciding upon contested rights.
The judge then determined the case in favour of the Wills on the following grounds:
- Both Mr and Mrs Wills have sworn affidavits to the effect that, at the time the charge was granted in their favour, they were unaware that the borrowers had agreed to charge all their property for the benefit of Circuit Finance.
- Circuit Finance has not adduced any evidence about its knowledge about the charging clause granted by the borrower to the Wills.
- The interest rate payable on the Circuit Finance loan is either 26% per annum (if payments are made on time or within seven days) or 40% per annum (if payments are made late). Such an extraordinarily high interest rate is consistent with Circuit Finance being aware that it was lending with very little or no security. In the absence of any evidence adduced by Circuit Finance, it may be inferred that it had reason to believe that the charge granted in its favour might be of little or no value.
- The Wills loan agreement provides for an interest rate of 10% per annum (if payments are made on time) or 15% per annum (if payments are made late). The interest rate on the Wills loan was commensurate with a loan provided with adequate and appropriate security.
- The charge granted in favour of Mr and Mrs Wills specifically provided that they might place a caveat over the Goulburn property. No such provision was made in the charge granted in favour of Circuit Finance.
- Mr and Mrs Wills were the first parties to lodge a caveat on the Goulburn property, that being lodged on about 30 December 2002. Circuit Finance did not lodge a caveat until 17 March 2003. Whilst recognising that the lodgement of a caveat does not improve the equitable interest of a caveator, nevertheless in determining priority between the competing charges of the Plaintiff and the Defendants, the sequence in the lodgement of the caveats to protect those respective interests is of relevance.