Padovan v MGG Group [2011] NSWSC 1080

Two purchasers provided scaffolding in consideration of the purchase price of units but completion did not occur and a refund was claimed from the developer but not made. An arrangement was then agreed whereby the amount owing by the developer would be offset by other property being conveyed to the purchasers provided the existing mortgage was discharged by them and the difference between the value of the property less the amount paid to discharge the mortgage would wipe the debt clean and the contract would be rescinded. The purchasers now assert a right of subrogation to the personal guarantee given by debtor, which was secured by a bank mortgage over the units.

Subrogation

The court found that prior to recission of the contract of sale, the purchasers had an equitable interest in the units under the contract, since the court would have granted specific performance of it requiring the developer to complete the subdivision. When the units were not conveyed and the contract rescinded, the purchasers had a purchaser’s lien to secure repayment of the consideration paid under the contract. Hence the purchasers had an equitable interest in the units from the date of the contract up to and after the recission of the contract.

The court held that the purchasers’ equitable interest was taken and sold when the bank exercised its power of sale and declared that the purchasers are entitled to be subrogated to the rights of the bank against the seller as guarantor of the debt due to the bank by the seller’s company. The court found it irrelevant that the amount due to the bank was not repaid in full by the sale of the units as subrogation of a proportionate part of the security has no impact on the bank’s interests under the guarantee. Even though the right to exercise the subrogation cannot be enforced until the whole of the bank debt has been paid, the right exists and the bank does not need to be joined as a party.

The court also found that account should be made by the seller as part of the purchaser’s entitlement to claim contribution from the seller to prevent injustice that would otherwise exist by virtue of the sale proceeds of property in which the purchasers had an equitable interest being used to discharge the seller’s debt.

Click here to read the full judgment

Scroll to Top