Collateral securities: Limits on rights of subrogation

Articles, Loan + Securities

The Supreme Court of New South Wales recently considered a subrogation claim by a second mortgagee seeking to enforce securities collateral to a first mortgage in circumstances where it:

  • paid out the first mortgage debt and took an assignment of the first mortgage pursuant to sections 94 and 95 of the Conveyancing Act 1919 (NSW);
  • exercised its power of sale under the second mortgage pursuant to sections 57 and 58 of the Real Property Act  1900 (NSW); and
  • applied all proceeds of sale towards payment of the second mortgage debt (without applying any proceeds towards payment of the first mortgage debt).

The Court’s decision in Huizhong Investment Group Pty Ltd v Westpac Banking Corporation Ltd and Ors [2019] NSWSC 524 (Huizhong) explores the interplay between subrogation and statutory provisions governing mortgages and mortgagee rights, as well as the limits of subrogation as an equitable remedy available to financiers taking an assignment of securities granted earlier in time.

Facts

Westpac Banking Corporation (Westpac) was the first mortgagee of real property pursuant to a registered mortgage.  Huizhong Investment Group Pty Ltd (Huizhong ) were the second mortgagee pursuant to a second mortgage.

Magasi Pty Ltd (Magasi) provided a guarantee and indemnity in respect to the debt owed by the principal debtor to Westpac, which was secured by a mortgage over real property owned by Magasi.

Huizhong paid out the mortgage debt to Westpac and took an assignment of Westpac’s debt and a Transfer of the mortgage was lodged.  Relevantly, the Transfer recorded that Westpac acknowledged receipt of an amount for consideration and transferred all of its estate and interest in the first mortgage. Huizhong did not take a formal assignment of the securities collateral to the first mortgage i.e. the guarantee and indemnity provided by Magasi.

Some time later there was a default and Huizhong exercised a power of sale under the second mortgage and sold the property (thereby discharging the first and second mortgage). The sale proceeds were insufficient to pay out the debts secured by the first and second mortgages and Huizhong applied the proceeds to pay out the debt owed to it. Had the sale proceeds been applied to the mortgage debts in order of their priority, the debt pursuant to the first mortgage would have been paid in full (thereby discharging the collateral security granted by Magasi).

Huizhong applied to the Court to recover the first mortgage debt and enforce the security granted by Magasi, relying on the principle of subrogation enunciated in Ghana Commercial Bank v Chadriam [1960] AC 732 that “…where a third party pays off a mortgage he is presumed, unless the contrary intention appears, to intend that the mortgage be kept alive for his own benefit…”.

Decision and key principles

Upon Westpac’s mortgage being transferred to Huizhong sections 51 and 52 of the Real Property Act 1900 (NSW) were engaged.

Section 51 provides, in part, that:

“Upon the registration of any transfer, the estate or interest of the transferor as set forth in such instrument, with all rights, powers and privileges thereto belonging or appertaining, shall pass to the transferee”..”.

Section 52 goes on to provide, in part, that:

“By virtue of every such transfer, the right to sue upon any mortgage or other instrument and to recover any debt…thereunder…and all interest in any such debt, sum of money, annuity, or damages shall be transferred so as to vest the same at law as well as in equity in the transferee thereof.” 

The Court found that Huizhong’s subrogation claim could only be equitable in nature (as opposed to contractual) in the absence of a formal assignment of the collateral securities granted in favour of Westpac. The circumstances of this case did not call for equitable intervention – in fact, there was no occasion for equity to intervene at all. The Court held that:

  • Huizhong’s rights, duties and remedies were both governed and limited by sections 9495 of the Conveyancing Act  1919 (NSW) and sections 5152, 58(3) of the Real Property Act 1900 (NSW).
  • Huizhong had a remedy at law – the right to enforce the first mortgage as the registered transferee, which was sufficient for the purposes of avoiding an unjust or unconscionable result.
  • The purpose of sections 5152  of the Real Property Act 1900  (NSW) and sections 9495 of the  of the Conveyancing Act 1919 (NSW) (when read in conjunction) is to enable a mortgagor to maintain the priority of a mortgage for a new lender and avoid the costs of a new mortgage being prepared (including the costs of negotiating with the subsequent mortgagee) (see Ley v Scarff (1981) 146 CLR 56).
  • Although Huizhong was entitled  to compel a transfer of the Westpac mortgage and enforce the interests and rights in the mortgage, the statutory provisions did not entitle Huizhong to compel or require the transfer of any other securities (such as those collateral to the first mortgage).
  • By taking a transfer of the first mortgage pursuant to its statutory rights, Huizhong “acquired all the security it bargained for” (being the right to enforce the debt secured by the first mortgage). Hence, there was no unconscionable conduct which required equitable intervention.
  • Huizhong was “bound in equity” to repay the mortgages in the order of priority, being the order of registration, given there was no agreement revising the priorities. Section 58(3) of the Real Property Act  1900 (NSW) governs the payment of monies arising from a mortgagee’s power to sell, and “interacts with equitable principles” to give effect to the order of mortgage priorities (see Residential Housing Corporation v Esber [2011] NSWCA 25).

Key Takeaways

The case of Huizhong is a useful summary of the parameters of subrogation as an equitable remedy for lenders taking an assignment of earlier securities. An assignment of a mortgage does not necessarily involve an assignment of rights under the loan agreement secured by that mortgage, pursuant to which the obligation to pay arises. In circumstances where there is only an assignment of the mortgage, the assignee will have the remedy of sale of the encumbered property alone, and no standing to sue the debtor (or any third party surety) personally to recover any shortfall.

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