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Bofinger v Kingsway Group Limited [2009] HCA 44 (13 October 2009)

Last Updated: 13 October 2009

Guarantee and indemnity – Surety – Right to subrogation to securities – Three separate loans made to company, each secured by mortgage over company’s property – Appellants guarantors of each loan – Appellants sold personal properties and used proceeds to reduce first loan – First mortgagee exercised power of sale over company’s property to satisfy outstanding amounts owing under first loan and transferred surplus to second mortgagee – Whether appellants have right to subrogation to securities in priority to puisne mortgagees – Whether appellants’ right to subrogation excluded by terms of guarantees to puisne mortgagees – Whether rule in Otter v Lord Vaux (1856) 2 K & J 650 [1856] EngR 694; [69 ER 943] applied to prevent appellants from exercising right to subrogation or should be extended to so apply – Whether transfer of surplus required to be unconscionable for doctrine of subrogation to apply.

 Equity – Remedies – Constructive trust – Nature of constructive trust – Surplus transferred by first mortgagee to second mortgagee – Whether first mortgagee constructive trustee of surplus – Whether obligation to account.

HIGH COURT OF AUSTRALIA

GUMMOW, HAYNE, HEYDON, KIEFEL AND BELL JJ

 

RONALD JOHN BOFINGER & ANOR APPELLANTS

AND

KINGSWAY GROUP LIMITED FORMERLY
WILLIS & BOWRING MORTGAGE INVESTMENTS
LIMITED & ORS RESPONDENTS

Bofinger v Kingsway Group Limited [2009] HCA 44
13 October 2009
S161/2009

ORDER

 

1. Appeal allowed.
2. Set aside order 1 of the orders of the Court of Appeal of the Supreme Court of New South Wales entered 29 December 2008 and the orders of the Court of Appeal entered 8 July 2009 and in place thereof order that:

(a) appeal allowed;

(b) orders 1 and 2 of the orders made by Young CJ in Eq, entered 18 February 2008 be set aside; and

(c) the separate question stated on 16 November 2006 be answered as follows:

Question: In the circumstances of the case, were the sums of $268,307.33 and $432,712.53 and the securities over Lots 1 and 14 SP75069 held by the second defendant in trust for the plaintiffs as at 8 February 2006?

Answer: In the absence of prior consent or release by Mr and Mrs Bofinger, on 8 February 2006 Kingsway Group Limited was obliged to account to Mr and Mrs Bofinger as a constructive trustee for any dealing by it with the moneys and securities identified in the question for decision in favour of any other party, and to pay equitable compensation to Mr and Mrs Bofinger in respect of the

denial or limitation by such dealing of recoupment from those moneys and securities of moneys paid by Mr and Mrs Bofinger to Kingsway Group Limited, in total $1,519,234.40, from the proceeds of sale of their properties at 407 Willarong Road, Caringbah and 2/41 Bulwarra Street, Caringbah.

1. The first, second, fifth, sixth, seventh and eighth respondents pay the appellants’ costs in this Court, in the Court of Appeal and of the proceedings to date in the Equity Division of the Supreme Court of New South Wales.

On appeal from the Supreme Court of New South Wales

Representation

G J McVay with A Tsekouras for the appellants (instructed by Warren McKeon Dickson Solicitors)

D R Sibtain with C K Amato for the first and eighth respondents (instructed by Watson Mangioni)

C M Harris SC with H P T Bevan for the second respondent (instructed by Bransgroves Lawyers)

R J H Darke SC with G K J Rich for the fifth to seventh respondents (instructed by Middletons Lawyers)

Submitting appearance for the third and fourth respondents

Notice: This copy of the Court’s Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.

Statute of Frauds 1677, s 4.
Conveyancing Act 1919 (NSW), s 10.
Law Reform (Miscellaneous Provisions) Act 1965 (NSW), s 3.
Real Property Act 1900 (NSW), ss 57(1), 58.
Uniform Civil Procedure Rules 2005 (NSW), r 28.2.

1. GUMMOW, HAYNE, HEYDON, KIEFEL AND BELL JJ. The resolution of this appeal calls for application of “the cardinal principle of equity that the remedy must be fashioned to fit the nature of the case and the particular facts”[1]. The nature of the present case and the particular facts engage the law respecting sureties, their obligation to indemnify the creditor and right to indemnity by the principal debtor, and the operation of the doctrine of equity associated with the term “subrogation”.
2. The appellants (Mr and Mrs Bofinger) are husband and wife. Mr Bofinger was a director of B & B Holdings Pty Ltd (“B & B Holdings”), which is now in liquidation. B & B Holdings borrowed consecutively from the first, second and third respondents (“first mortgagee”, “second mortgagee” and “third mortgagee” respectively) on the security of mortgages over the same real property of B & B Holdings. The appellants gave guarantees to the first, second and third mortgagees. The guarantees were supported in each case by a mortgage over real property of the appellants. The appellants sold these properties and applied the proceeds in reduction of the indebtedness of B & B Holdings to the first mortgagee.
3. Thereafter, the first mortgagee exercised its power of sale over certain of the properties mortgaged by B & B Holdings. After satisfying the balance of the indebtedness of B & B Holdings, the first mortgagee accounted to the second mortgagee by payment of the surplus sale proceeds and delivery of the certificates of title and discharges of the first mortgages over two unsold properties. The first mortgagee did not, as the appellants contend it should have done, account to them so that they might recoup what they had paid off the indebtedness of B & B Holdings.
4. The right of subrogation in favour of a surety recently was described by Sir Andrew Morritt V-C as follows[2]:

“The right operates so as to confer on the surety who has paid the debt in full the rights against the debtor formerly enjoyed by the creditor or by imposing on the creditor the obligation to account to the surety for any recovery in excess of the full amount of his debt.” (emphasis added)

That statement is important for this case because the indebtedness to the first mortgagee had been paid in full and the securities held by the first mortgagee discharged. The remedies equity provides must, as will appear, found upon the obligation of the first mortgagee to account.

1. Before proceeding it is convenient to consider further the relevant principles respecting subrogation and guarantees.

Subrogation and guarantees

1. In Orakpo v Manson Investments Ltd[3] Buckley LJ remarked that the relevant equitable considerations respecting a claim to subrogation may differ, for example, where the basis of subrogation is a contract of indemnity, or concerns ultra vires borrowings by a corporation, or the lending of funds to complete a purchase or pay off an existing mortgage. To that list may be added the subrogation of creditors of a trustee to the trustee’s lien over the trust property[4]. Therefore, if for no other reason, it is unhelpful to speak of subrogation as if it were a “cause of action” in the sense recognised at common law[5].
2. In its widest sense, that apparently used by Buckley LJ in Orakpo, an indemnity includes a contract obliging one person to make good the loss suffered by another, and contracts of guarantee and those of insurance fall within that description. The authorities dealing with the writing requirements of s 4 of the Statute of Frauds 1677 with respect to guarantees (but not indemnities) sought to distinguish between guarantees and indemnities by emphasising the secondary liability of the guarantor and the primary liability of the indemnifier. But as Mason CJ pointed out in Sunbird Plaza Pty Ltd v Maloney[6], there is in this distinction “an element of ambiguity … unless the reference to primary liability is understood to mean ultimate liability”. His Honour added[7]:

“Once default has occurred, the party having the benefit of the guarantee can call on the guarantor to honour his promise before calling on the principal contracting party to perform his obligation, but the guarantor, having honoured his promise, can hold the principal contracting party to account by virtue of the doctrine of subrogation.”

1. This notion of the ultimate liability of the principal provides a foundation for the application of subrogation in aid of the surety. Thus, where a claim to the benefit of securities held by the creditor is made by a surety, it was said by Turner V-C[8] that the equity for subrogation is derived from the obligation of the principal debtor to indemnify the surety[9]. There is “nothing hard” in the act of a court of equity in placing the surety in exactly the situation of the creditor with respect to those securities[10], because it would be unconscientious for the debtor to recover back the securities from the creditor while the debtor was obliged to indemnify the surety[11].
2. What then are the equities where the creditor holds a first mortgage and there are puisne mortgagees? The authorities hold that a second mortgagee cannot complain where the surety utilises by subrogation the security held by the first mortgagee. In Drew v Lockett[12] this was put on the basis that the second mortgagee took its interest with notice and by grant from the equity of redemption enjoyed by the principal debtor in its state remaining after giving full effect to the first mortgage. Thus, in de Colyar’s work on guarantees it was said that the surety was entitled to all the equities the creditor could have enforced, adding[13]:

“And this right prevails, not merely against the original creditor of the principal debtor, but also against all persons claiming under the latter[14]. A mortgaged his estate to C, and B became A’s surety for the debt. Afterwards A mortgaged the estate to D, who had notice of the first mortgage. The first mortgage was subsequently paid off, partly by B, the surety, but D got a transfer of the legal estate. It was held that the surety had still priority over D for the amount paid by him under the first mortgage, as surety for A[15]. Again, on a purchase of goods by a broker for an undisclosed principal, in a market according to the usage of which such a broker is personally liable in default of his principal, and is, therefore, a surety for the latter, the unpaid vendor’s lien will pass to the broker, on default made by his principal, even though the latter may have pledged his interest in the goods to the third persons, and indorsed the delivery order to them[16].”

1. The appellants in the present appeal relied, in particular, upon the statement of principle by Sir John Romilly MR in Drew v Lockett[17]:

“I am of opinion that a surety who pays off the debt for which he became surety must be entitled to all the equities which the creditor, whose debts he paid off, could have enforced, not merely against the principal debtor, but also as against all persons claiming under him. It is to be observed that the second and any subsequent mortgagee is in no respect prejudiced by the enforcement of this equity; when he advances his money he knows perfectly well that there is a prior charge on the property, and if he thinks fit to advance his money on such security, it is his own affair, and he cannot afterwards with justice complain. The amount being limited, it is a matter of indifference to him whether the first mortgagee or the surety is the prior claimant for that amount, and it would be, in my opinion, a violation of all principle if, when the surety pays off the debt, he were not to be entitled, as against the principal debtor and those who claim under him, to be paid the full amount due to him.” (emphasis added)

1. This statement is to be read with the earlier decision of the same judge in Gedye v Matson[18]. The immediate issue in that case was whether a foreclosure suit by a first mortgagee was defective for want of joinder of a surety who had paid off part of the mortgage. Sir John Romilly MR ruled that the surety “is entitled to stand in the place of the mortgagee, and is, therefore, interested in the equity of redemption … [and] might afterwards come and redeem”[19]. He also held that the surety was “in the situation of a subsequent incumbrancer, and as if the mortgagor had executed a second mortgage to him. As against the principal debtor, the surety is entitled to a charge on the estate.”[20]
2. More recently, in Aquilina Holdings Pty Ltd v Lynndell Pty Ltd[21] Daubney J remarked that an opposite result to that in authorities such as Gedye v Matson would tend to undermine the operation of the equitable doctrine of subrogation. His Honour also said that the equitable doctrine did not do violence to the principles of the Torrens system[22]. Rather, the doctrine accepts the state of the register but enforces against registered proprietors conscientious obligations imposed upon them[23]. Under the Torrens system, the charge or equitable lien of the surety would support a caveat on the subject property[24].

The present dispute

1. The respondents do not challenge these statements of principle. But by their Notices of Contention they submit that the statements do not speak to the circumstances of the present litigation. First, the debt secured by the first mortgage had been paid in full at the date when the entitlement of the appellant sureties was to be assessed and the first mortgage had been displaced on the register upon exercise of the power of sale of some of the lots and upon registration of discharges with respect to other lots. Secondly, surplus proceeds and assets had been distributed to the second mortgagee and thus had left the control of the first mortgagee. Thirdly, and unlike the situation in Drew v Lockett, the sureties also had guaranteed puisne mortgages and for that reason any entitlement they had in equity to the surplus would prejudice impermissibly the second and third mortgagees.
2. The appellants complain that in upholding the decision of the primary judge (Young CJ in Eq)[25] the New South Wales Court of Appeal (Giles JA, Handley AJA and Sackville AJA)[26] did not give any effect to their equity as guarantors to subrogation to the rights of the first mortgagee against B & B Holdings. This result was reached by an answer in the negative to a question posed for separate decision in a suit in the Equity Division of the Supreme Court.
3. The primary case of the appellants is that the first mortgagee had distributed the surplus in breach of the constructive trust in which the surplus was held for them as sureties. The reasons which follow lead to a conclusion which, without going to the length of accepting all of the appellants’ submissions, favours allowing the appeal.

The agreed facts

1. Something further now should be said respecting the agreed facts. These include attached documents and correspondence. There emerges what may be an incomplete account of events but it is upon this basis that the parties choose to present the question for separate determination.
2. Part 28 r 28.2 of the Uniform Civil Procedure Rules 2005 empowered the Supreme Court to make orders for the decision of any question before trial. In such a proceeding care is to be taken that agreed facts are stated with precision[27]. This is important, not the least because the parties to such a proceeding will be bound by the determination of the question and will not be at liberty subsequently in the same proceedings to advance argument or adduce further evidence directed to showing that the separate question was wrongly determined[28].
3. B & B Holdings carried on business as a real estate developer and on land (“the Enmore land”) in an inner suburb of Sydney constructed 17 town houses and one house. It was placed in liquidation by February 2006 and the joint liquidators are the fourth respondent in this Court. They have entered a submitting appearance.
4. To finance the purchase of the Enmore land and the construction of the buildings thereon, in 2003 B & B Holdings borrowed $7,062,000 from the first mortgagee, Kingsway Group Limited. The interest rate initially was nine percent per annum. Then, as the project proceeded, B & B Holdings borrowed $1,400,000 from Rekley Pty Limited, the second mortgagee, and finally $350,000 from Mr John Edward Skehan, the third mortgagee. The indebtedness under these arrangements was secured in each case by registered mortgages against the title to the Enmore land and a property of B & B Holdings at Nullaburra Road, Caringbah. (There also appears to have been a fixed and floating charge in favour of the first mortgagee over the assets of B & B Holdings, but nothing turns upon this.)
5. The fifth, sixth and seventh respondents (“the Solicitors”) carried on their practice at 575 Kingsway, Miranda under the name “Willis and Bowring Solicitors”. They acted for the first mortgagee and for the second mortgagee and, at least in February 2006, for the third mortgagee as well. The first mortgagee is Kingsway Group Limited but throughout this period was named “Willis and Bowring Mortgage Investments Limited” and carried on business also at 575 Kingsway. The fifth respondent, one of the Solicitors, was a director of the first mortgagee. The eighth respondent was an officer of the first mortgagee. The third mortgagee, the third respondent, entered a submitting appearance in this Court.
6. In this Court, counsel for the Solicitors, for the first mortgagee and eighth respondent, and for the second mortgagee presented essentially a united front and divided the oral argument between them.
7. The first, second and third mortgages were dated respectively 31 January 2003, 14 March 2003 and 28 April 2005. In addition, by an instrument of guarantee dated 31 January 2003 (the date of the first mortgage) the appellants guaranteed to the first mortgagee repayment of the amount owing from time to time under the first mortgage by B & B Holdings. The guarantee was supported by mortgages by the guarantors to the first mortgagee over residential premises at Caringbah (“the Willarong Road property”) and over a home unit in the same suburb (“the Bulwarra Street property”). Both properties were owned by the appellants. Thereafter, by instruments of guarantee dated respectively 14 March 2003 (the date of the second mortgage) and 28 April 2005 (the date of the third mortgage) the appellants guaranteed to the second and third mortgagees respectively repayment of the amounts from time to time owing to those parties by B & B Holdings. The guarantees given by the appellants to the second and third mortgagees also were secured by second and third mortgages over the Willarong Road property and the Bulwarra Street property. All three guarantees were relevantly in the same form.
8. The loan agreement between B & B Holdings and the first mortgagee had an expiry date of 1 February 2004. On 20 February 2004 the first mortgagee agreed to an increase in the loan amount to $8,288,000 with an increased interest rate and an extension to 1 October 2004. On 15 October 2004 it granted a further extension to 1 March 2005 and the loan amount was reduced to $8,278,000. On 23 March 2005, the first mortgagee agreed to a third extension to 1 October 2005, with a higher interest rate of 14.5 percent per annum; failure to pay the required interest amount by the 14th of each month would deprive the borrower of a lower interest rate of 9.5 percent and constitute an event of default.
9. Thereafter, on 28 April 2005, B & B Holdings entered into the loan agreement with the third mortgagee; this was secured by the third mortgage.
10. It is not clear when in this period B & B Holdings defaulted on the second mortgage. However, it defaulted on the first mortgage on 1 October 2005, and on the third mortgage on 28 October 2005.
11. In China and South Sea Bank Ltd v Tan Soon Gin (alias George Tan)[29] Lord Templeman observed that a surety, worried, for example, by the decline in value of securities held by the creditor from the principal debtor, may “bustle about”, pay off the debt and take over the benefit of the securities.
12. In July 2005, that is to say during the currency of the third extension by the first mortgagee and after the apparent defaults which had occasioned the grant of the third extension, the appellants sold the Willarong Road property. From the proceeds they paid a total of $894,044.14 to the first mortgagee in reduction of the amount which was then owing to the first mortgagee by B & B Holdings and secured by the first mortgage. Thereafter, the appellants sold the Bulwarra Street property and on 5 October 2005 paid to the first mortgagee $625,190.26. This gave a total in payments to the first mortgagee by the appellants of $1,519,234.40.
13. It is important to note that following the sales of the Willarong Road property and the Bulwarra Street property there were discharges of the mortgages over those properties which the appellants had given not only to the first but also to the second and third mortgagees. Thereafter the guarantees given by the appellants remained in force but were unsecured. This may be important for the final working out of liabilities between the appellants and the second and third mortgagees, and may emphasise the importance to the appellants of their claim against the Solicitors. But, given the limited framework of the case to date, these matters were not pursued in argument.
14. There had been no call by the first mortgagee upon the guarantees, and in that sense the payments by the appellants were initiated by them. However, this was in the circumstances of default by B & B Holdings described above. The first mortgagee, necessarily involved so as to clear the titles, knew of the sales of the two properties by the appellants and also knew of the payment of the proceeds in reduction of the indebtedness of B & B Holdings.
15. In November 2005 the first mortgagee went into possession of the Enmore land. On or about 2 February 2006, the first mortgagee completed the exercise of its power of sale of Lot 13 of the Enmore land. By 8 February 2006 the indebtedness of B & B Holdings to the first mortgagee had been satisfied. However, its indebtedness to the second and third mortgagees was $1,935,671.23 and $464,267.12 respectively.
16. On 7 February 2006, the Solicitors wrote a letter directed to the attention of the eighth respondent, Mr Hatheier, an officer of the first mortgagee. The letter said, with reference to security over the Enmore land:

“We advise that we act for the Second Mortgagee Rekley Pty Limited. This letter is to formally request possession of the 2 remaining unsold lots being lots 1 and 14 in the above development.
Please pay the balance proceeds of sale in relation to lot 13 and the total proceeds of sale in relation to lot 5 to Willis & Bowring Trust Account.”

On the next day, 8 February 2006, Mr Hatheier, describing himself as “Business Development Manager” of the first mortgagee, wrote to Willis and Bowring Solicitors, for the attention of Mr Tosolini, the fifth respondent:

“We acknowledge receipt of your letter dated 7th February.
We consent to your client Rekley Pty Limited taking possession.
We now enclose the following:-
1. Keys
2. Deeds and Discharges of Mortgage in relation to lots 1 and 14
We confirm that the balance proceeds of sale of lot 13 (after discharge of mortgage) and the proceeds of sale of lot 5 are to be paid to your trust account for the purpose of being disbursed to your client.” (emphasis added)

The discharges of these first mortgages were subsequently registered on or about 8 February 2006.

1. On 20 February 2006, Mr Hatheier, on behalf of the first mortgagee, wrote to one of the liquidators of B & B Holdings. He enclosed copies of the letters of 7 and 8 February and wrote that the Solicitors were acting on behalf of the second and third mortgagees. This presumably was in addition to their acting for his company as first mortgagee. The letter indicated that $268,307.30 had been provided to the second mortgagee at settlement. It attached a summary of receipts and payments of the first mortgagee as mortgagee in possession. This showed payments to the first mortgagee of $3,848,000 and to the second mortgagee of $268,307 and, significantly, made an allowance for the earlier receipt from the appellants of the proceeds of sale of their properties. On 21 February 2006, the whole of the proceeds of sale of Lot 5, $432,712.53, was paid to the Solicitors on behalf of the second mortgagee.
2. The upshot was that by about 21 February or shortly thereafter the titles to Lots 1, 5, 13 and 14 of the Enmore land no longer showed the first mortgages by B & B Holdings and the second mortgagee had received surplus proceeds of sale of Lot 13 and the whole of the proceeds of Lot 5. Hence, as indicated in the opening passages of these reasons, the importance of the obligation to account to the appellants and of its nature and scope.

Statutory provisions

1. All the lands the subject of the various mortgages were lands under the provisions of the Real Property Act 1900 (NSW) (“the RP Act“), and the mortgages were registered mortgages. Section 57(1) of the RP Act provides that a mortgage has effect as a security but does not operate as a transfer of land. Section 58(1) provides for the exercise of a statutory power of sale. Section 58(2) protects the purchaser by denying any obligation to see to the application of the purchase money. Section 58(3) states that the purchase money from the sale of land by a mortgagee in exercise of power of sale “shall be applied”, first in payment of the expenses of the sale, secondly in payment of the first mortgagee, thirdly in payment of subsequent mortgagees in order of priority and that any surplus is to be paid to the mortgagor. However, upon that first mortgagee equity may place requirements as to the disposition of the surplus purchase moneys.
2. Adams v Bank of New South Wales[30] is authority that s 58 is to be read in a manner consistent with the equitable duty of the first mortgagee to account to puisne mortgagees as a trustee for any surplus. The position in equity was described as follows by Kay J in Charles v Jones[31] as follows:

“I have never heard it doubted that where a mortgagee sells, and has a balance in his hands, he is a trustee of that balance for the persons beneficially interested. He takes his mortgage as a security for his debt, but, so soon as he has paid himself what is due, he has no right to be in possession of the estate, or of the balance of the purchase-money. He then holds them, to say the least, for the benefit of somebody else, of a second mortgagee, if there be one, or, if not, of the mortgagor. What, then, is he to do? Surely he has a duty cast upon him. His duty is to say, ‘I have paid my debt: this property which is pledged to me, and in respect of which I now hold this surplus in my hands, is not my property. I desire to get rid of this surplus, and hand it back to the person to whom it belongs.‘ … The duty of this mortgagee was at least to set this money apart in such a way as to be fruitful for the benefit of the persons beneficially entitled to it. To that extent and in that manner he was, according to my understanding of the law, in a fiduciary relation to the persons entitled to the money. It was so held in the case of Quarrell v Beckford[32], and so far as I know has always been so held, and although I quite agree that the Court is very reluctant to treat a mortgagee as being a trustee in any sense while any money is due to him, still when he has paid himself, and has money remaining in his hands which is no longer his property, how can he be treated as other than a trustee of such money?” (emphasis added)

1. The appellants sought to bring themselves, by reliance upon their subrogation rights, within the obligation of the first mortgagee to account to the person to whom the surplus belonged, and to place their rights in priority to any entitlement of the puisne mortgagees.
2. The appellants sought to support their case by reliance upon the provisions now made by s 3 of the Law Reform (Miscellaneous Provisions) Act 1965 (NSW) respecting the entitlement of sureties to assignment of securities. Section 3 is the descendant in New South Wales of s 5 of the Mercantile Law Amendment Act 1856 (UK)[33]. The provisions confer upon sureties statutory rights and remedies which furnish a summary mode of carrying into effect those otherwise available in courts of equity[34]. The second mortgagee correctly submitted that if, as it contended, the appellants lacked an equity supporting subrogation, s 3 would not supply that deficiency.

The Supreme Court proceedings

1. By proceedings instituted in the Equity Division of the Supreme Court of New South Wales the appellants complained that in the circumstances they had an entitlement to recoupment of what they had paid as sureties and that this was in the nature of a trust binding the first mortgagee. They contended that in accounting to the second mortgagee in the manner described above, the first mortgagee had committed breaches of trust and that the second mortgagee had received trust property of the appellants. They sued the Solicitors as accountable under the principles associated with Barnes v Addy[35].
2. The separate question was:

“In the circumstances of the case, were the sums of $268,307.33 and $432,712.53 and the securities over Lots 1 and 14 SP75069 held by the second defendant in trust for the plaintiffs as at 8 February 2006?”

1. The sense of the separate question was to ask whether, given that by 8 February 2006 the first mortgagee had been paid in full, it followed that in respect of surplus moneys attributable to the sale of Lots 5 and 13 of the Enmore land and the first mortgages over Lots 1 and 14, the first mortgagee was trustee for the appellants up to so much thereof as would give effect to their subrogation rights.
2. There was an immediate difficulty respecting any trust by the first mortgagee over the mortgages to it of Lots 1 and 14. The discharges were registered on or about 8 February and thus the subject matter of such a trust no longer existed.
3. In the event, the primary judge answered the separate question wholly in the negative. The primary judge thereafter entered judgment for the defendants in the suit. The Court of Appeal dismissed an appeal and made a special costs order in favour of the Solicitors. In this Court, the appellants seek to have those orders set aside and to have an affirmative answer to the question.
4. The appellants refer to the acceptance by Hodgson J that if a first mortgagee exercises its power of sale, the surety is entitled at least to a charge over the balance of the proceeds[36]. The respondents counter that even if there were such a charge it bound the subject matter only while it was in the hands of the first mortgagee. Further, the charge would confer no more than a security interest, would not entail fiduciary obligations owed by the chargor to the appellants, and would not support a proprietary interest which persisted against a third party such as the second mortgagee. Once the discharges of the first mortgages over Lots 1 and 14 reached the hands of the second mortgagee for registration, and the cash surplus reached its hands without the need for retention in an identifiable separate fund, any such charge would be spent[37]. (There may have been grounds in these circumstances for an action at law by the appellants against the second mortgagee for money had and received, but this was not considered in submissions to this Court[38].)
5. The preferred position of the appellants remained the trust in their favour. The respondents pointed to what were said to be the burdensome administration and investment duties this would entail[39].

The appropriate equitable remedy

1. It is unnecessary to resolve all of these questions. The essential task is to identify the scope of equitable relief which, in the circumstances of this case, now adequately protects the position of the appellants that obtained on 8 February 2006, when the indebtedness of the first mortgagee had been satisfied.
2. Equitable intervention is sought by the appellants and this would have an impact upon the position of not just the first mortgagee but of the other respondents. Further, while there were proceeds of sale of Lots 5 and 13 it is not apparent from the agreed facts that they remain capable of separate identification and, in any event, the first mortgages over Lots 1 and 14 could not provide subject matter for any trust after registration of the discharges on or about 8 February 2006.
3. In this situation assistance is afforded by a point emphasised by four members of the Court in the joint reasons in Giumelli v Giumelli[40] when considering the constructive trust as a remedial response to a claim to equitable intervention. The point is that the term “constructive trust” may be used not with respect to the creation or recognition of a proprietary interest but to identify the imposition of a personal liability to account upon a defaulting fiduciary.
4. In Jones v Southall & Bourke Pty Ltd[41], after reviewing the authorities, Crennan J said that they:

“make plain [that] the term ‘constructive trust’ covers both trusts arising by operation of law and remedial trusts. Furthermore, a constructive trust may give rise to either an equitable proprietary remedy based on tracing or, whether based on or independently of tracing, an equitable personal remedy to redress unconscionable conduct. The equitable personal remedies include equitable lien or charge or a liability to account.”

Earlier in her reasons her Honour had noted that the term “constructive trust” had been applied to include the enforcement of the obligation of a defaulting fiduciary to make restitution by a personal rather than a proprietary remedy[42].

1. The obligation to account, here by a first mortgagee, is consistent with what was said by Kay J in Charles v Jones[43] in the passage set out earlier in these reasons. On 8 February 2006 the first mortgagee was obliged in good conscience both to account to the appellants for surplus moneys and securities it held and not to undertake or perform any competing engagement in that respect without prior release by the appellants[44]. These obligations were fiduciary in character. As indicated by the correspondence of 7, 8 and 20 February 2006, to which reference has been made, the first mortgagee entered into and performed a conflicting engagement with the second mortgagee. The result was to cause loss to the appellants by denial of enjoyment of their entitlement to recoupment from the surplus moneys with respect to the sale of Lots 5 and 13 and first mortgages over Lots 1 and 14.
2. In respect of its misapplication of the surplus moneys and securities and the consequent loss to the appellants the first mortgagee is to be treated as a constructive trustee to the extent that it must account to the appellants as a defaulting fiduciary. It is unnecessary to seek to determine upon the agreed facts whether the first mortgagee was a trustee in a fuller sense which afforded the appellants a beneficial interest in the assets in question.
3. Breach by the first mortgagee of its above described fiduciary obligation to the appellants would suffice to engage the principles associated with the “second limb” in Barnes v Addy[45], if at any further hearing the necessary further facts are established against other respondents. In Barnes v Addy itself, the two solicitors, Messrs Preston and Duffield, had not received any trust property; the question was whether their knowledge made them accountable as parties to the breach of trust by the trustee and bound to make good as constructive trustees the loss of the trust assets.

The answer by the respondents’ Notices of Contention

1. The respondents seek to outflank any conclusion such as that just expressed in several ways. A starting point is provided by The Equity Trustees Executors & Agency Co Ltd v New Zealand Loan & Mercantile Agency Co Ltd[46] where Lowe J said:

“When a guaranteed debt is paid by the surety he is entitled, unless the right is excluded by agreement or his conduct makes it inequitable to enforce it, in respect of the amount he has paid under his guarantee to the securities which the creditor holds for the debt guaranteed. This right arises not from any agreement between the surety and the creditor, though it may be excluded by agreement between them. It rests on equitable principles.” (emphasis added)

That statement of principle is plainly correct. The respondents, however, draw from the emphasised words two propositions of exception and rely upon them as an answer to any success the appellants’ submissions otherwise might enjoy. First, the respondents say any right of the appellants was excluded by agreement, in particular by the terms of their guarantee of the second mortgage. Secondly, the respondents contend that this and other circumstances rendered it inequitable as between the appellants and the first mortgagee to rely upon Drew v Lockett[47]. Thirdly, it is said to follow that there is no footing to attach liability upon the first mortgagee to account to the appellants in respect of the surplus and so no basis for any remedy against other respondents.

The terms of the guarantee of 14 March 2003 to the second mortgagee

1. It is convenient to turn first to the terms of the appellants’ guarantee given by deed on 14 March 2003 to the second mortgagee. The instrument is described on the cover sheet as a “Deed of Guarantee and Indemnity”. The settled principle in Australia governing the interpretation of contracts of guarantee and indemnity has been stated by this Court in authorities the most recent of which is found in the joint reasons in Andar Transport Pty Ltd v Brambles Ltd[48]. The principle is that a doubt as to the construction of a provision in such a contract should be resolved in favour of the surety or indemnifier. It is implicit in this that the doubt may arise not only from the uncertain meaning of a particular expression but from its apparent width of possible application.
2. Mr and Mrs Bofinger were each identified as “Guarantor”, the second mortgagee as “Lender” and B & B Holdings as “Borrower”. The “Mortgage” was the second mortgage by the Borrower, also dated 14 March 2003, and “Obligated Person” meant any of the Borrower, Guarantor, and any other person who was liable to the Lender for payment of the “Guaranteed Money”, being the subject of the guarantee and indemnity in cl 3 and cl 5 respectively.
3. Clause 3 stated:

“3.1 The Guarantors guarantee to the Lender:
(1) the performance of all the obligations of the Borrower under the Mortgage; and
(2) the payment of all damages suffered by the Lender (including interest costs and expenses) arising from any breach or termination of the Mortgage.
3.2 If the Borrower does not, on the date provided in the Mortgage, pay any amount payable to the Lender, the Guarantors must immediately pay that amount to the Lender.”

1. Taken by itself cl 3 does not contain a covenant by the Guarantor to ensure that B & B Holdings meets its obligations to the second mortgagee in priority to those owed to the first mortgagee. Such a priority structure would have been at odds with the sequence of the registered mortgages and the circumstances of the borrowings to finance the development of the Enmore land. It would have required clear terms in a multi-party priority agreement.
2. Clause 5 stated:

“5.1 If the Borrower is not bound by some or all of the Borrower’s obligations under the Mortgage, if for any other reason the guarantee is not effective, the Guarantors agree, by way of indemnity and principal obligation, to pay to the Lender the amount which would have been payable by the Guarantors to the Lender under the guarantee in clause 3 had the guarantee been effective and the Borrower been bound.”

1. The lengthy provisions of cl 6 are headed “Matters Not Affecting Guarantor’s Liability”. Clause 6.4 is headed “Waiver by Guarantor” and its provisions were relied on in particular in submissions by the second mortgagee. The sub-clause reads:

“Each Guarantor waives the Guarantor’s rights as surety whether legal, equitable, statutory or otherwise which may be inconsistent with the provisions of this deed or in any way restrict the Lender’s rights, remedies or recourse.”

1. Counsel for the second mortgagee submitted that cl 6.4 extended to the waiver by the appellants of any surety rights they might have in respect of another instrument, namely the first mortgage. This was said to be the effect of the general words “the Guarantor’s rights as surety”. But the critical words which follow are “inconsistent with the provisions of this deed”. They govern also the earlier words “Guarantor’s rights as surety”. The waiver effected by cl 6.4 is a waiver of such of the Guarantor’s rights as surety under the guarantee to the second mortgagee as may be inconsistent with the provisions of the guarantee to the second mortgagee. It is not a waiver of any of the Guarantor’s rights under the guarantee to the first mortgagee. This submission fails.
2. Counsel for the Solicitors sought to achieve a similar application to the first mortgage by reference to cl 3.1 and par (2) of cl 7.1. Clause 7.1 is headed “Guarantors Not To Claim Benefits Or Enforce Rights” and reads:

“Until the Guaranteed Money is paid in full and all obligations of the Borrower under the Mortgage are fully and finally discharged or released, a Guarantor must not in any way:
(1) claim the benefit or seek the transfer (in whole or in part) of any other guarantee, indemnity or security held or taken by the Lender;
(2) make a claim or enforce a right against any other Obligated Person or against the estate or any of the property of any of them (except for the benefit of the Lender); or
(3) raise or claim any set-off, counterclaim or defence available to any other Obligated Person in reduction of the Guarantor’s liability under this deed.”

1. Clause 7.1, as the opening words indicate, bars the Guarantor from taking any of the steps described in pars (1), (2) and (3) until two events have taken place. The first is the full payment of the moneys secured by the terms of the guarantee in cl 3; these are identified by reference only to the second mortgage by B & B Holdings. The second event is the discharge or release of all obligations of B & B Holdings under that mortgage. These events had not occurred at 8 February 2006, with the result that the restraints in pars (1), (2) and (3) were operative.
2. Paragraph (1) limits recourse to rights of the second mortgagee. Paragraph (3) is concerned with reduction of liability “under this deed”. As the Solicitors accepted, neither paragraph constrains the exercise of rights under a guarantee of the first mortgage.
3. However, the Solicitors contended that par (2), read with cl 3.1 and the definition of “Obligated Person”, manifested a particular intention by B & B Holdings, the appellants, and the second mortgagee. This was that the second mortgagee would “go first” in relation to the property of B & B Holdings and that the second mortgagee be protected from what otherwise might be prior claims by the appellants in reliance upon subrogation to the rights of the first mortgagee.
4. That submission also should be rejected. The Guarantor falls within the defined term “Obligated Person”, as also does B & B Holdings. In asserting subrogation to the rights of the first mortgagee against B & B Holdings as Borrower, is the Guarantor making a claim against “any other Obligated Person” within the meaning of par (2)? The answer is suggested by the opening words of cl 7.1. These suspend engagement in this activity until full payment of the moneys guaranteed by cl 3, namely those secured by the second mortgage. Paragraph (1) then is directed to claims by the Guarantor to rights of the Lender (the second mortgagee), par (3) deals with claims to set-off and the like in reduction of the liability of the Guarantor to the Lender under the second mortgage, and par (2) with such matters relating to the guarantee of the second mortgage as claims by the Guarantor for indemnity for obligations under that guarantee by the Borrower or for contribution by any co-sureties.
5. If there be any doubt respecting the construction of cl 7.1 in this way, then, as indicated earlier in these reasons, the doubt is to be resolved in favour of the Guarantor.
6. It follows that in asserting rights of subrogation with respect to the first mortgage, the appellants were not acting in breach of any restrictions binding them by reason of the terms of the guarantee of the second mortgage. It follows further that there was nothing inequitable as between the appellants and the first mortgagee and the Solicitors (not parties to that guarantee) in the appellants seeking the support of equity in the manner described earlier in these reasons.
7. In particular, contrary to the submission by the Solicitors, the appellants were not bound to do equity by offering to perform an obligation to “protect” the second mortgagee as the price of any equitable relief founded on their subrogation rights in respect of the first mortgage. In Langman v Handover[49] Rich and Dixon JJ said that the maxim that he who seeks equity must do equity “does not substitute moral for legal standards in the determination of the conditions of relief”. Rather, those who ask for the assistance of a court of equity must be willing to do justice by accepting terms which flow from the legal or equitable rights of the defendant to the suit.
8. The result is that the grounds in the Notices of Contention based upon the terms of the guarantee of the second mortgage fail.
9. The question for this Court then becomes whether the grounds of decision by the Court of Appeal should be sustained.

The reasoning of the Court of Appeal

1. The members of the Court of Appeal gave differing reasons for upholding the decision of the primary judge. Giles JA observed that it was important that the appellants had given guarantees not only to the first mortgagee but also to the second and third mortgagees. This distinguished the present case from Drew v Lockett[50]. As between the appellants and the second mortgagee the “plain intention” was that the second mortgagee was to have resort to its security after the first mortgagee but “prior to any entitlement [the appellants] might have with respect to that property”. The appellants had undertaken obligations to the second mortgagee “inconsistent” with the assertion of prior entitlement to subrogation and “the priority which would otherwise arise” was displaced.
2. However, for the reasons already explained when dealing with the Notices of Contention, the terms of the guarantee given to the second mortgagee do not manifest any such intention. There was no displacement of priority between the mortgagees and the giving of the consecutive guarantees produced no inconsistency. Each guarantee operated in accordance with its terms. There was nothing in the circumstances rendering it inequitable for the appellants to enjoy the rights of subrogation.
3. Handley AJA relied upon an application or extension of the rule in Otter v Lord Vaux[51]. Of that rule, his Honour said that it:

“prevents the mortgagor derogating from his grant and obtaining an advantage from his breach of contract. The mortgagee is estopped by his grant and contract from claiming priority over the second mortgage.”

Handley AJA said that the estoppel was an estoppel by convention and added:

“The position in the present case is substantially the same. The guarantors guaranteed each of the mortgages on the basis that one would be the first, another the second, and the other the third. The Principal Debtor could not have paid off the first and kept it alive for its own benefit. The guarantors, having guaranteed the second mortgage as a second mortgage, agreed in substance with the second mortgage[e] that once the first mortgagee was paid in full the second mortgagee would be paid next from one source or another before the guarantors got anything.”

1. There are several obscurities in this passage. The reference in the second sentence to “each of the mortgages”, when read with “[t]he Principal Debtor” in the next sentence, appears to be to the securities given by B & B Holdings not those given by the appellants in support of their guarantees. As things stood at 8 February 2006 there was no indebtedness remaining of B & B Holdings on its first mortgage and no occasion for B & B Holdings to pay it off and keep it alive for its benefit. Nor, as already indicated, was there any agreement, in substance or otherwise, between the appellants as guarantors and the second mortgagee that once the first mortgage had been paid in full (with the contribution made by the guarantors from the proceeds of sale of their two properties) the second mortgagee would be paid next and before the guarantors could recoup that contribution.
2. In Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd[52] the Court said:

“Estoppel by convention is a form of estoppel founded not on a representation of fact made by a representor and acted on by a representee to his detriment, but on the conduct of relations between the parties on the basis of an agreed or assumed state of facts, which both will be estopped from denying.”

1. The reference to an agreed or assumed state of facts (not of law) is significant. In any event, in the present case the agreed facts fall far short of what would be necessary to establish that the priority of the second mortgagee which is now asserted was the conventional basis of the transaction between it and the appellants as guarantors, so that the appellants had been estopped from asserting their right of subrogation.
2. Nor does the rule in Otter v Lord Vaux depend upon reasoning which supplies any analogy for resolution of the present appeal. The rule is concerned with the merger of charges (including mortgages) in estates; the mortgages by B & B Holdings were of land under the provisions of the RP Act and thus were “creatures of statute” to which the general law principles of destruction by merger did not apply[53].
3. The rule of the common law is that whenever a greater and a lesser estate meet in the same person, without any intermediate estate, the lesser is sunk or drowned in the greater. Accordingly, at common law, where a person entitled to land acquires a security over it, a merger is conclusively presumed; the security merges and disappears in the greater estate. However, equity gives effect to an intention of the parties that there be no merger[54]. But to that acceptance of intention as controlling the outcome there is an exception. This is identified as the rule in Otter v Lord Vaux. A mortgagor who has paid off an encumbrance thereafter cannot set it up in priority to a puisne mortgage which the mortgagor has granted. Why is this so? The answer, which has the support of Viscount Haldane LC[55] and Megarry J[56], is as follows[57]:

“a second mortgage, as between the parties, is a grant of the mortgagor’s entire interest in the property, saving only the rights of the prior incumbrancer, and the mortgagor cannot derogate from his grant by holding the first mortgage against the second mortgagee”.

The rule in Otter v Lord Vaux has been applied to securities over personal property[58]. But as indicated above, there was no question in the present case of any merger by operation of law, with a contrary intention to which equity would not give effect.

1. The preferred basis upon which Sackville AJA decided the appeal was that the conduct of the first mortgagee in accounting to the second mortgagee for the surplus proceeds was not “unconscionable”. His Honour answered in the negative the question he posed as follows:

“But in what way is the doctrine of subrogation needed to avoid an unconscionable result? Or, to put the question another way, what would be unjust or inequitable about the net surplus from the sale of the Principal Debtor’s assets going to the second mortgagee, as envisaged by s 58(3) of the [RP Act] …?”

1. The answer is that for the reasons already given the first mortgagee was required by equity to account for the net surplus to the appellants. That obligation was imposed upon the enjoyment by the second mortgagee of its entitlement under s 58(3) of the RP Act.
2. His Honour also said:

“The arrangements were plainly not intended to allow the appellants, by paying out the first mortgagee, to transform the second mortgagee from a secured creditor of [B & B Holdings] to an unsecured creditor presumably ranking equally with the other unsecured creditors of the appellants.”

There are difficulties with this passage. On the agreed facts the appellants had been able to sell their two properties and so raise the moneys paid by them in reduction of the indebtedness of B & B Holdings to the first mortgagee only because the three mortgagees had consented to the clearing of the title to those two properties. The second and third mortgagees had not, for example, protected their position by obtaining an agreement with the appellants and the first mortgagee expressly to deny to the appellants what otherwise would be their subrogation rights to the first mortgage over the assets of B & B Holdings.

1. Sackville AJA referred to the passage in Tanwar Enterprises Pty Ltd v Cauchi[59] where, after noting that the terms “unconscientious” and “unconscionable” are used across a broad range of equity jurisdiction, Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ continued:

“They describe in their various applications the formation and instruction of conscience by reference to well developed principles. Thus, it may be said that breaches of trust and abuses of fiduciary position manifest unconscientious conduct; but whether a particular case amounts to a breach of trust or abuse of fiduciary duty is determined by reference to well developed principles, both specific and flexible in character. It is to those principles that the court has first regard rather than entering into the case at that higher level of abstraction involved in notions of unconscientious conduct in some loose sense where all principles are at large.”

1. However, Sackville AJA appears to have proceeded, not in accordance with that passage, particularly its last sentence, but by asking whether and in what way the doctrine of subrogation was “needed to avoid an unconscionable result” and answering that there was nothing unconscionable or unjust in the first mortgagee applying the surplus proceeds of sale to the second mortgage. But this reasoning does not allow for the circumstance that the surplus was computed only after allowance for the payments which had been made by the appellants to reduce the secured indebtedness of B & B Holdings. These payments had enlivened the doctrine of subrogation, subject to the operation of which, and subject to contrary agreement or inequitable conduct, the parties were to be taken to have conducted their affairs.
2. Sackville AJA referred to the judgment of Kearney J in Cochrane v Cochrane[60]. This is often, and correctly, cited as containing an orthodox statement and application of principles respecting the interrelation between the doctrines of subrogation and contribution. The remedy of one co-mortgagor who pays off the mortgage in full is not of subrogation to the rights of the mortgagee against the other mortgagor, but to contribution from that mortgagor.
3. Kearney J also referred to the implied indemnity by the principal debtor which reflected the ultimate liability of that party in cases of suretyship[61]. It was that ultimate liability of B & B Holdings which in the present case founded the application of the doctrine of subrogation in favour of the appellants. Kearney J contrasted the right of subrogation with the right of contribution between those, such as the present appellants, who are subject to co-ordinate liabilities or common obligations. There equity is moved by concern that the common exposure of the contributors to the creditor and the equality of burden not be defeated by the accident or chance that the creditor select for recovery one or some rather than all of the contributors[62].

Unjust enrichment and the English decisions

1. The appeal to this Court in Friend v Brooker[63], which concerned the equitable doctrine of contribution, was correctly conducted on the footing that the concept of unjust enrichment was not a principle supplying a sufficient premise for direct application in a particular case. The same is true of the equitable doctrine of subrogation. The oral submissions for the Solicitors correctly recognised this.
2. In a passage in their reasons in David Securities Pty Ltd v Commonwealth Bank of Australia[64], Mason CJ, Deane, Toohey, Gaudron and McHugh JJ rejected the submissions that in Australian law unjust enrichment was more than “just a concept” and that it was “a definitive legal principle according to its own terms”. The use of the phrase “unifying legal concept” earlier in the joint reasons[65] must be understood with what was said in that later passage[66]. In the years which have followed the Court has reaffirmed this position[67] and all other Australian courts are bound accordingly.
3. A not dissimilar fate met the attempt to adopt “proximity” as the “unifying theme” of the categories of case recognising a duty to take reasonable care to avoid a reasonably foreseeable risk of injury to another[68].
4. The concept of unjust enrichment may provide a means for comparing and contrasting various categories of liability. Reference has been made to Cochrane v Cochrane[69] and this provides an example. Subrogation may be seen as preventing the unjust enrichment of the principal debtor who otherwise might escape carriage of ultimate liability and contribution prevents one of equal obligors bearing more than its share of the burden. The two doctrines do not let matters lie where they would fall if the carriage of risk between the various actors involved were to be left entirely to be worked out within the limits of their contractual obligations. But as Cochrane shows, and as explained above, the two doctrines have different foundations in equity and operate with different results.
5. The concept of unjust enrichment also may assist in the determination by the ordinary processes of legal reasoning of the recognition of obligations in a new or developing category of case[70]. An example is the conclusion reached in David Securities itself, that the vitiating factors which enliven the action for money had and received include mistakes of fact or law. But this appeal is not in that category. The principles of equity which govern the outcome are well developed and have the vitality to permit further development in an orthodox fashion.
6. Subrogation, like other equitable doctrines, is applicable to a variety of circumstances, as explained earlier in these reasons. One circumstance concerns sureties, another the paying off of an existing mortgage. But that is not to say that subrogation is a “tangled web”[71] in need of the imposition of the “top-down” reasoning which is a characteristic of some all-embracing theories of unjust enrichment[72].
7. Such all-embracing theories may conflict in a fundamental way with well-settled equitable doctrines and remedies. Reference was made in the opening paragraph of these reasons to the importance attached by equity to the fashioning of the particular remedy to meet the nature of the case. The administration of the remedies of injunction and specific performance provides perhaps the most obvious examples. So also the remedial constructive trust, as these reasons have sought to demonstrate.
8. Equity has been said to lack the necessary “exacting taxonomic mentality” when providing an appropriate remedy for unconscientious activity[73]. The better view is said to be that liability in “unjust enrichment” is strict, subject to particular defences[74], while “[t]he unreliability of conscience” offends the precept that like cases must be decided alike and not by “a private and intuitive evaluation”[75].
9. But the experience of the law does not suggest debilitation by absence of a sufficiently rigid taxonomy in the application of equitable doctrines and remedies. And legislatures have taken the same view in Australia, notably by calling upon equitable analogues in framing the remedial provisions laid out in Pt VI of the Trade Practices Act 1974 (Cth).
10. As these reasons have sought to show, the relevant principles of equity do not operate at large and in an idiosyncratic fashion. So it was that in Boscawen v Bajwa[76], Millett LJ, after denying that subrogation is a remedy which the court has a general discretion to impose whenever it thinks fit to do so, went on:

“The equity arises from the conduct of the parties on well settled principles and in defined circumstances which make it unconscionable for the defendant to deny the proprietary interest claimed by the plaintiff.”

1. That was said in 1995. In England matters appear now to stand differently[77].
2. Banque Financière de la Cité v Parc (Battersea) Ltd[78] concerned the application or extension of the reasoning in the authorities[79] allowing subrogation of a third party to securities paid off by that party. Counsel for the successful appellants had submitted no more than that, while there is “an inevitable link” between unjust enrichment and subrogation, “the two are not co-extensive”[80]. It may well be that the result in that case could have been arrived at by development of orthodox equitable principles of subrogation[81]. However, Lord Hoffmann, who gave the most detailed opinion, referred[82] to the use of the term “subrogation”:

“to describe an equitable remedy to reverse or prevent unjust enrichment which is not based upon any agreement or common intention of the party enriched and the party deprived”.

His Lordship then considered various cases in which securities were “kept alive” on the footing that a third party who paid off the security was presumed in equity to intend that it be so retained for the benefit of that party[83]. Lord Hoffmann concluded[84]:

“I think it should be recognised that one is here concerned with a restitutionary remedy and that the appropriate questions are therefore, first, whether the defendant would be enriched at the plaintiff’s expense; secondly, whether such enrichment would be unjust; and thirdly, whether there are nevertheless reasons of policy for denying a remedy.”

1. However, there is difficulty in identifying the “unjust” enrichment in subrogation cases, which necessarily involve multilateral, rather than bilateral, relationships[85]. Further, as Bryson J later explained, the reasoning of Lord Hoffmann in Banque Financière does not[86]:

“provide an explanation for the mortgagor’s being treated as bound, in equity, to treat the person who paid off the previous mortgage as entitled to security under it. Restitution would provide a basis for treating the mortgagor as obliged to restore to the person who paid it the amount which had been paid to the mortgagee: the concept is inadequate for also treating the mortgagor as obliged to hold the payer secured. This is particularly clear where, as in this case, and in other cases where subrogation has been held to exist, the mortgagor in fact had no dealings with the payer, or where the payer believed that he was getting security under arrangements in which the mortgagor was not in fact involved.”

1. In the present case, Giles JA described the understanding in Australia of the doctrinal basis of subrogation as “open to debate” by reason of the recent English authorities. However, for the above reasons, and contrary to the earlier suggestion in Highland v Exception Holdings Pty Ltd (In liq)[87], the doctrinal basis of equitable subrogation in Australian law is not unsettled. The respondents, led by counsel for the Solicitors, in this Court correctly eschewed any attempt to support the outcome in the Court of Appeal by application of reasoning in the recent English cases.

Orders

1. The appeal should be allowed. Order 1 of the orders of the Court of Appeal entered 29 December 2008 and the further orders entered 8 July 2009 should be set aside. In their place, it should be ordered that: (a) the appeal to the Court of Appeal be allowed; (b) orders 1 and 2 of the orders made by the primary judge and entered on 18 February 2008 should be set aside; (c) the separate question stated on 16 November 2006 should be answered as follows:

“In the absence of prior consent or release by Mr and Mrs Bofinger, on 8 February 2006 Kingsway Group Limited was obliged to account to Mr and Mrs Bofinger as a constructive trustee for any dealing by it with the moneys and securities identified in the question for decision in favour of any other party, and to pay equitable compensation to Mr and Mrs Bofinger in respect of the denial or limitation by such dealing of recoupment from those moneys and securities of moneys paid by Mr and Mrs Bofinger to Kingsway Group Limited, in total $1,519,234.40, from the proceeds of sale of their properties at 407 Willarong Road, Caringbah and 2/41 Bulwarra Street, Caringbah.”

The third and fourth respondents entered submitting appearances in this Court. The costs of the appellants in this Court, in the Court of Appeal and of the proceedings to date in the Equity Division of the Supreme Court, should be paid by the first, second, fifth, sixth, seventh and eighth respondents.

1. It will be for the appellants to take such steps as may be appropriate to restore the proceedings in the Equity Division for consideration of remaining issues. These will include the rate and nature of an interest component of the sum for which there is to be equitable compensation to the appellants[88].

 

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[1] Warman International Ltd v Dwyer (1995) 182 CLR 544 at 559; [1995] HCA 18.

[2] Liberty Mutual Insurance Co (UK) Ltd v HSBC Bank plc [2001] Lloyd’s Rep Bank 224 at 225; affd [2002] EWCA Civ 691. See Andrews and Millett, Law of Guarantees, 5th ed (2008), §11-028 and, with respect to insurance, the statement by Kitto, Taylor and Owen JJ in British Traders’ Insurance Co Ltd v Monson (1964) 111 CLR 86 at 94; [1964] HCA 24, that where there was no longer an outstanding right of action of the insured against a third party, “one might almost wish that some other word had been used as the label of a right which exists when it is too late for subrogation in the ordinary sense”.

[3] [1977] 1 WLR 347 at 357; [1977] 1 All ER 666 at 676; affd [1978] AC 95.

[4] Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367; [1979] HCA 61.

[5] Cf Boscawen v Bajwa [1996] 1 WLR 328 at 335; [1995] 4 All ER 769 at 777; Kation Pty Ltd v Lamru Pty Ltd (2009) 257 ALR 336 at 340-341.

[6] (1988) 166 CLR 245 at 254; [1988] HCA 11.

[7] (1988) 166 CLR 245 at 254.

[8] Yonge v Reynell [1852] EngR 655; (1852) 9 Hare 809 at 818-819 [68 ER 744 at 748-749].

[9] See also O’Day v Commercial Bank of Australia Ltd (1933) 50 CLR 200 at 223; [1933] HCA 37; Friend v Brooker [2009] HCA 21; (2009) 83 ALJR 724 at 735 [55]; 255 ALR 601 at 614; [2009] HCA 21.

[10] Duncan Fox & Co v North and South Wales Bank (1880) 6 App Cas 1 at 12.

[11] Andrews and Millett, Law of Guarantees, 5th ed (2008), §11-017.

[12] [1863] EngR 589; (1863) 32 Beav 499 [55 ER 196].

[13] De Colyar, A Treatise on the Law of Guarantees and of Principal and Surety, 3rd ed (1897) at 330-331. See also Rowlatt on Principal and Surety, 5th ed (1999) at 160; Andrews and Millett, Law of Guarantees, 5th ed (2008), §11-015.

[14] Drew v Lockett [1863] EngR 589; (1863) 32 Beav 499 [55 ER 196]; and see In re Kirkwood’s Estate (1878) 1 LR Ir 108.

[15] Drew v Lockett [1863] EngR 589; (1863) 32 Beav 499 [55 ER 196]; and see In re Kirkwood’s Estate (1878) 1 LR Ir 108. [See also Aylwin v Witty (1861) 30 LJ Ch 860.]

[16] Imperial Bank v London and St Katharine Docks Co (1877) 5 Ch D 195.

[17] [1863] EngR 589; (1863) 32 Beav 499 at 505-506 [55 ER 196 at 198]. See also In re Davison’s Estate (1893) 31 LR Ir 249 at 255.

[18] (1858) 25 Beav 310 [53 ER 655].

[19] [1858] EngR 477; (1858) 25 Beav 310 at 311 [53 ER 655 at 655].

[20] [1858] EngR 477; (1858) 25 Beav 310 at 312 [53 ER 655 at 656].

[21] [2008] QSC 57 at [74]; noted Young, “Recent cases”, (2008) 82 Australian Law Journal 760 at 762-763.

[22] [2008] QSC 57 at [53]. Cf Westfield Management Ltd v Perpetual Trustee Co Ltd (2007) 233 CLR 528 at 538-541 [35]-[45]; [2007] HCA 45.

[23] See, generally, Barry v Heider (1914) 19 CLR 197 at 213-214; [1914] HCA 79; Bahr v Nicolay [No 2] (1988) 164 CLR 604 at 613, 637-639, 653-655; [1988] HCA 16.

[24] Cochrane v Cochrane (1985) 3 NSWLR 403 at 404.

[25] Bofinger v Rekley Pty Ltd [2007] NSWSC 1138.

[26] Bofinger v Kingsway Group Pty Ltd (2008) 14 BPR 26,167.

[27] Bass v Permanent Trustee Co Ltd (1999) 198 CLR 334 at 357 [50]; [1999] HCA 9.

[28] O’Toole v Charles David Pty Ltd (1991) 171 CLR 232 at 244-247, 260, 298; [1991] HCA 14.

[29] [1990] 1 AC 536 at 545.

[30] [1984] 1 NSWLR 285 at 299, 302.

[31] (1887) 35 Ch D 544 at 549-550. See also Banner v Berridge (1881) 18 Ch D 254 at 269-270; Sheahan v Carrier Air Conditioning Pty Ltd (1997) 189 CLR 407 at 429-430; [1997] HCA 37; Lloyds Bank NZA Ltd v National Safety Council [1993] 2 VR 506 at 511, 514.

[32] (1816) 1 Madd 269 [56 ER 100].

[33] 19 & 20 Vict c 97.

[34] Embling v McEwan (1872) 3 VR (L) 52 at 53-54; Hardy v Johnston (1880) 6 VLR (L) 190 at 193.

[35] (1874) LR  9 Ch App 244.

[36] Russet Pty Ltd (In liq) v Bach unreported, Supreme Court of New South Wales, Equity Division, 23 June 1988 at 12.

[37] Cf Lord Napier and Ettrick v Hunter [1993] AC 713 at 738-739.

[38] Cf Lord Napier and Ettrick v Hunter [1993] AC 713 at 752.

[39] Cf Lord Napier and Ettrick v Hunter [1993] AC 713 at 738.

[40] (1999) 196 CLR 101 at 111-112 [2]-[4] per Gleeson CJ, McHugh, Gummow and Callinan JJ; [1999] HCA 10.

[41] (2004) 3 ABC (NS) 1 at 17. See also Giumelli v Giumelli (1999) 196 CLR 101 at 119-120 [31]-[32] and the form of the orders made at first instance by McLelland J in United States Surgical Corporation v Hospital Products International Pty Ltd [1982] 2 NSWLR 766 at 820-822.

[42] (2004) 3 ABC (NS) 1 at 16.

[43] (1887) 35 Ch D 544 at 549-550.

[44] See Pilmer v Duke Group Ltd (In liq) (2001) 207 CLR 165 at 199 [78]; [2001] HCA 31; Commonwealth Bank of Australia v Smith (1991) 42 FCR 390 at 393; Bristol and West Building Society v Mothew [1998] Ch 1 at 19; Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1 at 47; Finn, Fiduciary Obligations, (1977) at 253-254; Conaglen, “Fiduciary Regulation of Conflicts Between Duties”, (2009) 125 Law Quarterly Review 111 at 119-122.

[45] (1874) LR  9 Ch App 244. See Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at 159-161 [159]-[165]; [2007] HCA 22.

[46] [1940] VLR 201 at 205.

[47] (1863) 32 Beav 499 [55 ER 196].

[48] (2004) 217 CLR 424 at 433-437 [17]-[23]; [2004] HCA 28.

[49] (1929) 43 CLR 334 at 351; [1929] HCA 42.

[50] [1863] EngR 589; (1863) 32 Beav 499 [55 ER 196].

[51] [1856] EngR 694; (1856) 2 K & J 650 [69 ER 943].

[52] (1986) 160 CLR 226 at 244; [1986] HCA 14.

[53] English Scottish and Australian Bank Ltd v Phillips (1937) 57 CLR 302 at 322-323; [1937] HCA 6.

[54] Commissioner of Stamp Duties (NSW) v Perpetual Trustee Co Ltd (1915) 21 CLR 69 at 87; [1915] HCA 91; Lewis v Keene (1936) 36 SR (NSW) 493 at 499. In New South Wales, s 10 of the Conveyancing Act 1919 (NSW) enacts that there shall be no “merger by operation of law only of any estate, the beneficial interest in which would not be deemed to be merged or extinguished in equity”.

[55] Whiteley v Delaney [1914] AC 132 at 144-145.

[56] Brunner v Greenslade [1971] Ch 993 at 1002.

[57] Waldock, The Law of Mortgages, 2nd ed (1950) at 437, quoted in Sussman v AGC Advances Ltd (1995) 37 NSWLR 37 at 51.

[58] In re W Tasker & Sons Ltd [1905] 2 Ch 587 at 599-600, 603, where the property was corporate debentures. The law was altered retrospectively by s 15 of the Companies Act 1907 (UK): In re New London and Suburban Omnibus Company [1908] 1 Ch 621 at 625-626; White and Tudor’s Leading Cases In Equity, 9th ed (1928), vol 2 at 34-35.

[59] (2003) 217 CLR 315 at 324 [20]; [2003] HCA 57.

[60] (1985) 3 NSWLR 403.

[61] (1985) 3 NSWLR 403 at 405.

[62] Friend v Brooker (2009) 83 ALJR 724 at 732 [38]; 255 ALR 601 at 609-610.

[63] (2009) 83 ALJR 724 at 728 [7]-[8]; [2009] HCA 21; 255 ALR 601 at 604.

[64] (1992) 175 CLR 353 at 378-379; [1992] HCA 48.

[65] (1992) 175 CLR 353 at 375.

[66] Cf Ford (by his tutor Watkinson) v Perpetual Trustees Victoria Ltd (2009) 257 ALR 658 at 684.

[67] Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at 156 [151] per Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ; Lumbers v W Cook Builders Pty Ltd (In liq) (2008) 232 CLR 635 at 664-665 [83]-[85] per Gummow, Hayne, Crennan and Kiefel JJ; [2008] HCA 27.

[68] See Bryan v Maloney (1995) 182 CLR 609 at 619; [1995] HCA 17, and the later decisions collected in Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515 at 528-529 [18]; [2004] HCA 16.

[69] (1985) 3 NSWLR 403.

[70] Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 at 257; [1987] HCA 5; Lumbers v W Cook Builders Pty Ltd (In liq) (2008) 232 CLR 635 at 665 [85].

[71] See Goff and Jones, The Law of Restitution, 4th ed (1993) at 592. This statement was removed from subsequent editions.

[72] See Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at 156 [151].

[73] Birks, “Equity in the Modern Law: An Exercise in Taxonomy”, (1996) 26 University of Western Australia Law Review 1 at 16-17.

[74] Birks, “Equity in the Modern Law: An Exercise in Taxonomy”, (1996) 26 University of Western Australia Law Review 1 at 67-68.

[75] Birks, “Equity in the Modern Law: An Exercise in Taxonomy”, (1996) 26 University of Western Australia Law Review 1 at 17.

[76] [1996] 1 WLR 328 at 335; [1995] 4 All ER 769 at 777.

[77] The English authorities, of which the most recent was Cheltenham & Gloucester plc v Appleyard [2004] EWCA Civ 291, were analysed by Mr Tilley in his article “Restitution and the law of subrogation in England and Australia”, (2005) 79 Australian Law Journal 518.

[78] [1999] 1 AC 221.

[79] Notably, Ghana Commercial Bank v Chandiram [1960] AC 732.

[80] [1999] 1 AC 221 at 223.

[81] See the note by Jackman, “Restitution and subrogation”, (1999) 73 Australian Law Journal 110 at 112.

[82] [1999] 1 AC 221 at 231.

[83] [1998] UKHL 7; [1999] 1 AC 221 at 232-233.

[84] [1999] 1 AC 221 at 234.

[85] See Goff and Jones, The Law of Restitution, 7th ed (2007) at 132, where the learned authors write that by reason of the tripartite relationship of the parties “it is not always easy to determine whether it is B or C who has been enriched and why a court should conclude that the enrichment is an unjust enrichment”.

[86] Challenger Managed Investments Ltd v Direct Money Corporation Pty Ltd (2003) 12 BPR 22,257 at 22,269.

[87] (2006) 60 ACSR 223 at 239.

[88] See Hermann v Charny [1976] 1 NSWLR 261 at 270; and the authorities collected in Victorian Workcover Authority v Esso Australia Ltd (2001) 207 CLR 520 at 531-532 [24]; [2001] HCA 53.

Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue [2009] HCA 41 (30 September 2009)

Last Updated: 30 September 2009

Taxes and duties – Stamp duty – Transactions resulted in acquisition of all shares in corporation which held Crown leases containing options to renew – Section 56N(2)(b) of Taxation (Administration) Act (NT) (“Act”) requires valuation for assessment of duty of “all land” to which corporation is entitled at time of acquisition – Section 4(1) of Act provides “land” includes “a lease of land” but that “‘lease’ … does not include … an option to renew a lease” – Whether “land” in s 56N(2)(b) includes option to renew lease.

HIGH COURT OF AUSTRALIA

FRENCH CJ,
HAYNE, HEYDON, CRENNAN AND KIEFEL JJ

ALCAN (NT) ALUMINA PTY LTD APPELLANT

AND

COMMISSIONER OF TERRITORY REVENUE RESPONDENT

Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue
[2009] HCA 41
30 September 2009
D7/2009

ORDER

1. Appeal allowed with costs.

1. Set aside orders 1, 3 and 4 of the orders of the Court of Appeal of the Supreme Court of the Northern Territory made on 20 January 2009, and in lieu thereof order that the appeal to that Court be dismissed with costs.
2. Respondent to pay the costs of the appellant in the proceedings before Mildren J.

On appeal from the Supreme Court of the Northern Territory

Representation

D J S Jackson QC with P G Bickford for the appellant (instructed by Clayton Utz Lawyers)

A H Slater QC with T W Anderson for the respondent (instructed by Solicitor for the Northern Territory)

Notice: This copy of the Court’s Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.

Interpretation Act (NT), ss 62A, 62B.
Taxation (Administration) Act (NT), Pt III Div 8A, ss 4(1), 56N, 56R.

FRENCH CJ.

Introduction

1. In November 2005, the Commissioner of Territory Revenue (“the Commissioner”) assessed for stamp duty two transactions by which Alcan (NT) Alumina Pty Ltd (“Alcan”) acquired all of the shares in Gove Aluminium Ltd (“GAL”). The assessment was based in part upon the value of a Special Mineral Lease and Special Purpose Leases (“the Leases”) held by GAL and the value of its goodwill. In making the assessment the Commissioner relied upon s 56N of the Taxation (Administration) Act (NT) (“the Act”)[1], which renders the acquisition of shares in a corporation dutiable by reference to the value of its landholdings where that value exceeds 60% of the value of all of its property. Section 56R provides for the dutiable value of the shares acquired to be assessed by reference to the same proportion of the unencumbered value of the corporation’s land as the proportion of the corporation’s shares acquired. The Court of Appeal of the Northern Territory held, contrary to the conclusion of the primary judge[2], that the value of the Leases should be assessed by taking into account options to renew them[3]. The definition of “lease” in s 4(1) of the Act expressly excludes “an option to renew a lease”. The factual and procedural history and the provisions of the relevant legislation are set out in the joint judgment[4]. I agree, for the reasons expressed in that judgment and the reasons that follow, that the options to renew the Leases should not have been taken into account by the Commissioner. I agree with the proposed orders allowing the appeal.

The constructional questions

1. The issue which is determinative of the appeal is whether the assessment of the dutiable value of the Leases requires that the Commissioner take into account options to renew contained in them.
2. The two constructional questions raised are:
   1. Whether, properly construed, ss 56N and 56R in their application to leases as a species of land pick up the definition of “lease” in s 4(1).
   2. Whether, properly construed, the exclusion of “an option to renew a lease” in the definition of “lease” in s 4(1) precludes consideration of such an option in assessing the value of a lease as land for the purposes of s 56N(2) and s 56R(2).

The resolution of the first question involves determination of the question whether the definitions of either or both “land” and “lease” in s 4(1) are displaced in ss 56N and 56R by a contrary intention. The resolution of the second question involves the application, in those sections, of the exclusion of renewal options from the definition of “lease”.

Whether the statutory definitions of “land” and “lease” are displaced

1. The starting point in consideration of the first question is the ordinary and grammatical sense of the statutory words to be interpreted having regard to their context and the legislative purpose. That proposition accords with the approach to construction characterised by Gaudron J in Corporate Affairs Commission (NSW) v Yuill[5] as:

“dictated by elementary considerations of fairness, for, after all, those who are subject to the law’s commands are entitled to conduct themselves on the basis that those commands have meaning and effect according to ordinary grammar and usage.”

In so saying, it must be accepted that context and legislative purpose will cast light upon the sense in which the words of the statute are to be read. Context is here used in a wide sense referable, inter alia, to the existing state of the law and the mischief which the statute was intended to remedy[6].

1. The provisions of the Interpretation Act (NT) (“the NT Interpretation Act“) as they stood at the time of the relevant transactions have to be taken into account. Section 62A of the NT Interpretation Act requires a construction promoting the purpose or object underlying the statute to be preferred to a construction that does not do so[7]. Section 62B authorises recourse to extrinsic materials in the interpretation of statutes[8]. The NT Interpretation Act has no equivalent of s 15AB(3) of the Acts Interpretation Act 1901 (Cth) (“the Commonwealth Interpretation Act“), which requires regard to be had to “the desirability of persons being able to rely on the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act”. Despite the lack of such a provision in the NT Interpretation Act, the established common law approach, which begins with the ordinary grammatical meaning of the text having regard to context and purpose, applies to like effect. The Court of Appeal in this case construed the Act by reference to an imputed legislative intention reflecting a revenue-maximising approach to taxing statutes[9] which paid insufficient regard to the clear words of the Act.
2. In the present case the displacement of the definitions in s 4(1) of the Act is expressly conditioned upon the appearance of a “contrary intention”. This kind of provision, like that in the present s 18 of the NT Interpretation Act[10], has been described as “a standard device to spare the drafter the embarrassment of having overlooked a differential usage somewhere in his [or her] text”[11]. The ninth edition of Craies on Legislation calls it[12]:

“a general gloss of a kind that would have to be inferred in any event, where a provision elsewhere in the legislation to which the definition purported to apply showed by express provision or necessary implication that the definition was not intended to apply there.”

The exclusion of a particular definition where a “contrary intention” appears would be implied in any event[13]. A contrary intention may appear from context or legislative purpose. But, as Pearce and Geddes observe[14]:

“A good drafter will indicate ‘the contrary intention’ clearly.”

1. If the definition of “land” in s 4(1) was displaced in ss 56N and 56R, then the definition in s 19 of the NT Interpretation Act as it stood at the relevant time would apply, namely:

“‘land’ includes all messuages, tenements and hereditaments, corporeal and incorporeal, of any tenure or description and whatever may be the estate or interest therein”.

That definition dates back to Lord Brougham’s Act[15] and was included in the Interpretation Act 1889 (Imp)[16]. It found its way into colonial interpretation statutes in Australia[17], and into s 22(c) (now s 22(1)(c)) of the Commonwealth Interpretation Act. It includes “freehold and leasehold, corporeal and incorporeal interests of every description.”[18] It is to be read with the definition of “estate” in s 19 which “includes any estate or interest, charge, right, title, claim, demand, lien or encumbrance at law or in equity”. It would no doubt pick up, within the meaning of “leasehold interests”, options to renew incorporated in the grant of such interests.

1. At common law an option to renew a lease is “an incident of the lease”[19]. It is a present interest running with the land and is “intertwined with the lease itself”, which, it has been suggested, is probably why it did not attract the rule against perpetuities at common law[20]. A lease obtained by the exercise of an option to renew is a new lease and the option is “merely an irrevocable offer, but beyond that there is no contract for a further term, unless and until the offer is duly accepted, by exercising the option.”[21] That characterisation was relied upon by Hill in commentary on the definition of “lease” in s 76 of the Stamp Duties Act 1920 (NSW)[22]:

“Where a lease for a term grants to the lessee the option for a further term, the term of the lease does not include the term of the renewal and hence duty is charged without reference to the rent payable during the renewal. See Hand v Hall (1877) 2 Ex D 355. The option for renewal is not itself stampable as a lease within the definition since until exercise it does not amount to an agreement for lease, nor does it confer upon the tenant the right to use property. It is considered that an option for renewal of a lease is subsidiary to the main object of the instrument and thus covered by the stamp on the lease itself … In practice such options are not separately stampable.”

And in the seventh edition of Sergeant and Sims on Stamp Duties and Capital Duty, published in 1977, the following observation was made[23]:

“A lease for a definite term of x years, with an option to the tenant to renew for a further y years, is chargeable as a lease for x years not as a lease for x + y years; see Hand v Hall (1877) 2 Ex D 355″.

These commentaries are indicative of legal opinion at the time of the making of the Taxation (Administration) Ordinance 1978 (NT), enacted in identical terms in the Act, which contained the exclusions in the definition of “lease” relevant to this case[24]. Those exclusions were themselves derived from the Australian Capital Territory Taxation (Administration) Act 1969 (Cth)[25]. The Explanatory Memorandum for the Bill that became that Act contained no explanation of why options to renew had been excluded[26]. By way of contrast, when a leasehold interest is valued for the purpose of determining compensation for its compulsory acquisition, valuation practice and authority (sparse as it is) indicate that the value of such an option would be taken into account[27].

1. On the face of it, there is nothing in the text of ss 56N and 56R which indicates an intention to displace the definition of “land” in s 4(1) so as not to apply to the word as used in those provisions. There is no textual indicator of such an intention in the other provisions of the Act. Neither the context in the wide sense nor legislative purpose suggests such an intention. There is nothing to indicate any basis upon which the term “lease” as used in the definition of “land” in s 4(1) should not take its meaning from the definition of “lease” in that section.
2. It was common ground that the purpose of Div 8A of Pt III of the Act was to tax transactions involving the sale of shares in corporations which had the effect of indirectly transferring ownership, or a share in the ownership, of land in the Territory. The “mischief” to which that purpose was directed arose out of[28]:

. the much lower rate of marketable security duty payable on transfer of shares than on transfer of land;

. the calculation of the duty payable on transfer of shares by reference to the consideration for the transfer or by reference to the value of the shares;

. the relief from payment of duty enjoyed in respect of the indirect transfer of the shares in the company holding the subject land to the new shareholder.

So it was submitted by the Commissioner and not contested by Alcan that “by the device of transferring shares in a landholding company and winding it up all but minimal duty could be avoided”. But, as Alcan submitted, to identify the purpose of Div 8A as providing a remedy for the mischief so described does not answer the constructional question.

1. That submission should be accepted. The ultimate purpose of Div 8A was to impose stamp duty on the transactions to which it applied. Its purpose says nothing about the extent of that imposition, which must be determined by reference to its terms. The terms are not to be read by reference to some general principle that requires taxing statutes to be construed so as to maximise the recovery of revenue. In my opinion, no contrary intention was disclosed which would warrant displacing the definitions of “land” and “lease” in s 4(1) so as to render them inapplicable in ss 56N and 56R.

Whether exclusion of options to renew affects dutiable value

1. The negative answer to the first constructional question leaves open the possibility that, even though the definition of “lease” for the purposes of ss 56N and 56R excludes an option to renew, the existence of an option to renew can be taken into account in valuing the lease and therefore arriving at the dutiable value attaching to the relevant share acquisition. That possibility fell within the broad sweep of the Commissioner’s submission. The Commissioner argued that the words “does not include … an option to renew” in the definition of “lease” in s 4(1) did not require that the value added to a leasehold estate by inclusion in the grant of an option to renew should be excised. The submission appeared to focus upon the proposition that the words “does not include” simply meant “not adding” and did not mean “deducting”. Division 8A was said to manifest an intention contrary to any exclusion of the value added by an option.
2. The possible construction for which it seemed the Commissioner was contending can be judged by transposition of the relevant definitions into ss 56N and 56R of the Act. A necessary condition for the application of Div 8A is that the corporation whose shares are the subject of acquisition be a landholder. Making the transposition into s 56N(2)(b), that condition relevantly reads:

“the value of all leases (not including options to renew) to which the corporation is entitled, whether in the Territory or elsewhere, … is 60% or more of the value of all property to which it is entitled …”

Under a like transposition, s 56R(2) would provide that the dutiable value is the same proportion of the unencumbered value of the leases (not including options to renew) in the Territory to which the corporation is entitled as the proportion of the corporation’s shares acquired.

1. This reading demonstrates that the exclusion of renewal options is directly related to the determination of whether a corporation is a corporate landholder and the dutiable value of the acquired interest by reference to the unencumbered value of the corporation’s leaseholdings. The exclusion of the options cannot be detached from the determination of the value of the land held by the corporation and the relevant dutiable value.
2. The second constructional question is therefore also answered adversely to the Commissioner.

Conclusion

1. The appeal should be allowed and orders made as proposed in the joint judgment.
2. HAYNE, HEYDON, CRENNAN AND KIEFEL JJ. This appeal from the Court of Appeal of the Northern Territory concerns a disputed assessment of stamp duty by the Commissioner of Territory Revenue (“the Commissioner”) for Alcan (NT) Alumina Pty Ltd (“Alcan”) under the Taxation (Administration) Act (NT) (“the Act”)[29]. The assessment relates to two transactions by which Alcan acquired 100% of the shares in Gove Aluminium Ltd (“GAL”).
3. The parties brought two issues before this Court in two separate appeals. The first appeal, brought by the Commissioner, raises the question of whether the property of GAL to be assessed for stamp duty included “goodwill” as that term is understood in Federal Commissioner of Taxation v Murry[30]. The second appeal, brought by Alcan, raises the question of whether, as a matter of statutory interpretation, the “land” held by GAL, within the meaning of s 56N(2)(b) of the Act[31], included options to renew particular Crown leases held by GAL. In these reasons for judgment, it will be explained that the “land” held by GAL for the purposes of s 56N(2)(b) did not include the options to renew the leases. It is common ground that this decision renders it unnecessary to address the issue of goodwill, the subject of the first appeal. Hereafter these reasons relate to the second appeal.

The transactions

1. GAL is a joint venturer in the business enterprise of operating a bauxite mine and alumina refinery near Nhulunbuy on the Gove Peninsula, Arnhem Land, in the Northern Territory. On 30 January 2001, CSR Investments Pty Ltd executed a share sale agreement pursuant to which 70% of the share capital in GAL was transferred to Alcan. At the same time, GAL entered into a share buy-back agreement with AMP Life Ltd (“AMP”) for the remaining 30% of its shares. By these two transactions, Alcan became the sole shareholder in GAL.
2. The prices agreed to be paid for the two acquisitions were US$275 million for the 70% share interest and US$117.9 million for the share buy-back, totalling US$392.9 million. After adjustments, the total Australian dollar equivalent of the acquisition prices was A$740.1 million.

Joint venture assets

1. The “land” to which GAL was entitled at the relevant date comprised leases granted under statute[32] for the purposes of establishing and operating the bauxite mine and alumina refinery, a township and associated facilities.
2. One of these leases, Special Mineral Lease 11, included land on which the joint venture has a number of key assets, namely:

(a) the mine site comprising 49,466 acres;

(b) a corridor of land comprising an area of 698 acres for the purpose of establishing, operating and maintaining a bauxite conveyor installation for the transportation of bauxite from the mine site to the bauxite treatment plant area; and

(c) a third area of land containing approximately 600 acres located by the wharf area which is used for the purpose of operating and maintaining the bauxite treatment plant and stockpile area, as well as office buildings and other buildings used or associated with the treatment plant.

In addition, the joint venture has a number of special purpose leases which relate to associated facilities, including the township. All but two of the leases were granted for a term of 42 years commencing in 1969 and contain an option to renew for a further 42 years.

The assessment

1. On 16 November 2005, the Commissioner determined that the transactions involved relevant acquisitions for the purposes of Div 8A of Pt III of the Act. Division 8A operates to charge the acquirer of shares in a corporation with stamp duty as if the acquirer had acquired the same proportionate interest in the land of the corporation that the shares represent[33]. The Commissioner assessed stamp duty on the transactions in the amount of $31,050,000, together with a penalty of $16,467,997, making Alcan’s total liability $47,517,997.

Relevant legislation

1. In 1988, the Taxation (Administration) Amendment Act (No 2) 1988 (NT) inserted into Pt III of the Act a new Div 8A (ss 56C-56U) entitled “Change of Control of Certain Land-owning Corporations and Unit Trusts”. Part III is headed “Liability to Duty or Tax”. Following the insertion of Div 8A and prior to the transactions under consideration here, the Act had been relevantly amended on four occasions, in 1992[34], 1994[35], 1999[36] and 2000[37].
2. On the occasion of the Second Reading Speech the Treasurer, Mr Perron, explained that the amendments which became Div 8A were directed to a specific mischief. He said[38]:

“[T]he amendments will introduce measures to counter the avoidance of conveyance duty where a company or unit trust is set up temporarily to hold land which is, in effect, then sold by transferring the relevant shares or units. At present, such a transfer can attract a significantly lower level of marketable security duty based on the number of units transferred, rather than the conveyance duty assessed on the value of the land. In many cases, such purchases are commercially artificial and are carried out to avoid stamp duty.”

Relevantly, the statutory scheme in Div 8A for levying duty on the acquisition of “land rich” companies is contained in the following provisions of the Act, which, at the date of the relevant transactions, provided as follows:

“4. Interpretation
(1) In this Act, unless the contrary intention appears –
…
‘dutiable property’ means –
(a) land;
…
and includes an estate or interest in dutiable property;
…
‘instrument’ includes any document;
…
‘land’ means land in the Territory[[39]] and includes –
(a) a lease of land;
(b) a mining tenement under the Mining Act, including information relating to the tenement; and
(c) a fixture to land, including a fixture to land comprised in a lease or mining tenement;
‘lease’ includes a lease granted under an Act, a sub-lease and an agreement for a lease or sub-lease, but does not include –
(a) an attornment under a mortgage or contract of sale;
(b) a right granted by a company to a shareholder of the company, by virtue of his being such a shareholder, to occupy or use land owned or held under lease by the company; or
(c) an option to renew a lease;
…
56K. When statement to be lodged
(1) Where by a relevant acquisition a person acquires a majority interest or a further interest in a corporation to which this subdivision applies, that person shall prepare and lodge with the Commissioner a statement in respect of that acquisition.
…
56M. Statement chargeable with duty
(1) A statement lodged under section 56K is chargeable, in accordance with section 56R, with duty at the rate provided for in item 5 in Schedule 1 to the Stamp Duty Act …
56N. Corporations to which this Division applies
(1) This Division applies to a relevant acquisition of shares in a corporation that is –
(a) a corporation, other than a corporation shares in the capital of which are listed on a recognized stock exchange within the meaning of the Securities Industry (Northern Territory) Code; and
(b) a land-holder within the meaning of subsection (2).
(2) A corporation is a land-holder for the purposes of this Division if, at the time of a relevant acquisition –
…
(b) the value of all land to which the corporation is entitled, whether in the Territory or elsewhere, … is 60% or more of the value of all property to which it is entitled, other than property directed to be excluded by subsection (4) …
(4) There shall not be included, for the purpose of calculating the value of property under subsection (2)(b), any property of a corporation or a subsidiary within the meaning of subsection (5) that is –
(a) cash or money in an account at call;
(b) a negotiable instrument or money on deposit with any person;
(c) money lent by the corporation or a subsidiary to a person …
56P. Meaning of relevant acquisition
(1) An acquisition by a person is a relevant acquisition for the purposes of this Division –
(a) where it –
(i) is an acquisition of an interest that alone constitutes a majority interest in the corporation …
other than an interest acquired –
(c) before 17 August 1988; or
(d) as a result of an agreement entered into before 17 August 1988.
…
56Q. Meaning of ‘interest’, ‘majority interest’ and ‘further interest’
(1) For the purpose of section 56K, a person acquires an interest in a corporation if the person, or the person and a related person, acquires on or after 17 August 1988, otherwise than as a result of an agreement entered into before 17 August 1988, a shareholding in the corporation that would entitle the person, or the person and a related person, if the corporation were to be wound up after the shareholding was acquired, to participate (otherwise than as a creditor or other person to whom the corporation is liable) in a distribution of the property of the corporation.
…
56R. How dutiable value determined
…
(2) Where by a relevant acquisition a person acquires a majority interest in a corporation, the dutiable value is the same proportion of the unencumbered value of the land in the Territory to which the corporation is entitled, as provided by subsection (4), at the time of the acquisition, as the proportion of the property of the corporation which the person, or the person and a related person, would be entitled, as provided in subsection (5), after the acquisition.”

1. The Stamp Duty Act (NT) (“the Stamp Act“) is incorporated into, and to be read as one with, the Act[40]. A statement lodged under s 56K(1) is deemed to be an instrument[41] and is chargeable with stamp duty payable at the rate set out in item 5 in Sched 1 to the Stamp Act[42], which is the rate applicable to an instrument of conveyance of dutiable property.
2. It is relevant to note that the definition of “lease”, by reference to exclusions (a), (b) and (c) set out above, has been in that form in the legislation since 1978. The definition of “dutiable property” was inserted by the Taxation (Administration) Amendment Act (No 2) 1991 (NT). It is also necessary to note that the definition of “land” was inserted into the Act in 2000 by the Taxation (Administration) Amendment Act 2000 (NT) (“the 2000 amendments”).

The issue

1. The ultimate issue was identified correctly by the primary judge as whether Alcan is liable to stamp duty in respect of either or both of the transactions involving the issued capital of GAL and, if so, in what amount[43]. As is evident from the terms of s 56N(2)(b), set out above, if there is to be liability for stamp duty the value of the “land” to which GAL was entitled, whether in the Northern Territory or elsewhere, must comprise 60% or more of the value of all property to which it was entitled (other than property directed to be excluded). It is common ground that without the inclusion of the value of the options to renew in the leases this 60% threshold would not be met. It is therefore agreed by the parties that Alcan’s liability for stamp duty turns on whether “land” referred to in s 56N(2)(b) includes an option to renew a lease.
2. The resolution of that issue requires consideration of the definitions in s 4(1) of the Act. The definition of “land” includes a “lease of land” but the definition of “lease” expressly states that “‘lease’ … does not include … an option to renew a lease”. Those definitions apply “unless the contrary intention appears”. The Court of Appeal of the Northern Territory found a contrary intention with the effect that “land” was interpreted by the Court of Appeal to include “an option to renew a lease”, notwithstanding the abovementioned definitions[44].

The proceedings below

1. Alcan lodged an objection against the Commissioner’s assessment pursuant to s 100 of the Act. The Commissioner dismissed Alcan’s objection and determined that the assessment was payable according to its terms. Alcan successfully appealed from the Commissioner’s dismissal of the objection to the Supreme Court of the Northern Territory and the assessment was set aside[45]. The Court of Appeal allowed the Commissioner’s appeal against the order of the Supreme Court setting aside the assessment[46].

Construction of “land” by the primary judge

1. There were two hearings and two sets of reasons for judgment given by the primary judge. In the first set of reasons[47], his Honour held that both “land” in s 56N(2)(b) and “lease” took their defined meanings in s 4. The result was that “land” did not include an option to renew a lease.
2. The starting point for the primary judge was that even though leases are in law personalty, they have long been regarded as land. So much was uncontroversial. His Honour also accepted a submission on behalf of the Commissioner that a covenant to renew runs with the land and with the reversion and is an incident of a lease.
3. His Honour found that there was therefore no need for the definition of land in s 4 to include a lease “as plainly a lease of land is already ‘land’”[48]. This observation influenced and informed his Honour’s consideration of the text and structure of the legislation when he said[49]:

“The purpose, it seems to me, of these definitions [ie of 'land' and 'lease'], is to exclude from what is ‘land’ those things which are excluded from the definition of ‘lease’ which, relevantly to this case, means that the options to renew are not part of the lease and must be ignored. Otherwise there is no work to do for the words ‘includes a lease … but does not include …’ etc in the definition of ‘lease’ and no work for the words ‘includes a lease of land’ in the definition of ‘land’. … The result is that the option to renew is not ‘land’ as defined.”

1. In the second set of reasons[50], the primary judge held that the value of GAL’s leases, excluding the options to renew the leases, was less than 60% of the value of all the property to which it was entitled, and therefore that GAL was not a “land-holder” within the meaning of s 56N(2)(b).

Reasoning in the Court of Appeal

1. The Court of Appeal found error in the reasoning and conclusions of the primary judge and set aside his judgment. The Court of Appeal decided that the word “land” in Div 8A did not take its defined meaning in s 4, at least to the extent that an option to renew a lease was thereby excluded. That conclusion depended mainly on an analysis of the history of the legislation from 1978 to 2000.
2. The Court of Appeal accepted submissions from the Commissioner to the effect that a contrary intention is manifest and the common law definition of a lease (which includes, as an incident, an option to renew a lease) should be preferred to the definition of lease in the text of the Act. The contrary intention was said to be evinced by the context and legislative history, particularly as the latter suggested that the purpose of the relevant amendments was to increase the capacity of the Northern Territory to raise revenue through the imposition of stamp duty. The primacy given to these considerations is exemplified in the following extracts from the judgment of Martin (BR) CJ[51] (with whom Angel and Southwood JJ agreed[52]):

“It is readily understandable that on an instrument for a lease in respect of which duty is assessed by reference to the rent payable for the term of the lease, the legislature would intend to exclude an option to renew for the purposes of assessing duty because it might never be exercised. However, it is also readily understandable that the legislature would intend that duty be assessed on the transfer of a lease on the basis of the total value of the lease, determined by reference to all the incidents of the lease. Indeed, it would be surprising if the legislature intended to sever from the lease an incident of the lease which contributes to the value of the lease.
…
The application of the definition [of 'lease' in s 4(1)] would result in dissecting from a lease, for the purposes of assessing the value of the lease, an incident of the lease that travels with the lease upon conveyance. Such a dissection would create an air of unreality in relation to the assessment of the value of the lease being conveyed. The legislature intended to apply duty according to the market value of the lease being conveyed and exclusion of an option to renew contained in a lease would distort the value. Exclusion of the option to renew would also reduce the revenue of the Territory. I am unable to discern any sound reason for applying the definition of lease to a conveyance of a lease. For these reasons, in my view a ‘contrary intention appears’ and the definition does not apply to a conveyance of a lease.
…
Over the years since 1978, the legislature has consistently increased its capacity to raise revenue by closing off avoidance practices and increasing the range of transactions attracting duty. …
Read literally in isolation from the legislative history, and applying the definitions in s 4 without qualification, the ordinary meaning of the provisions excludes an option to renew from ‘land’ for the purposes of Div 8A and from ‘dutiable property’. However, apart from such a literal application of the 2000 amendments, there is nothing in the amendments or the extrinsic material to suggest that, contrary to the consistent history of increasing its capacity to raise revenue through the application of stamp duty, the legislature intended in 2000 to reduce that capacity by excluding options to renew leases from the value of ‘land’ held by a corporation for the purposes of Div 8A.”

1. This reasoning led the Court of Appeal to overturn the primary judge’s decision and to hold that, for the purposes of valuing the land to which GAL was entitled at the time of the relevant acquisitions, the value of the options to renew the leases should be included.

Submissions on the appeal

1. Alcan sought to restore the decision of the primary judge, relied on the natural and ordinary meaning of the definitions of “land” and “lease” in s 4(1) of the Act and contended that no contrary intention appears in s 56N(2)(b).
2. Alcan accepted that a contrary intention might be discerned, not only in the text of legislation, but also by reference to the purpose and operation of relevant parts of the legislation[53] or the general character of the legislation[54]. However, Alcan contended that generally a contrary intention to the effect that a definition in an Act is not to apply might be expected to be manifested in the Act itself[55].
3. Adopting the approach to statutory definitions explained by McHugh J in Allianz Australia Insurance Ltd v GSF Australia Pty Ltd[56], Alcan sought to insert the definition into the substantive text of s 56N(2)(b) to show that no real question of construction of the meaning of the provision arose. It was contended that the natural and ordinary meaning of the provision was clear and unambiguous.
4. Next, it was contended that the Court of Appeal erred in not closely considering the text, preferring instead to focus on the context of the Act. It was submitted that in focussing on the context, particularly the legislative history, the Court of Appeal concentrated erroneously on a general legislative intention to amend the legislation to increase revenue and on extrinsic materials dealing with the mischief of avoidance of stamp duty, to the exclusion of the text. Alcan also pointed out that a person who did not appreciate the meaning of s 56N(2)(b), as discerned by the Court of Appeal, would be liable to penalties[57] and be guilty of an offence[58]. To the extent that it retains force, Alcan relied on the principle of construction expressed in Anderson v Commissioner of Taxes (Vict)[59] that clear and unambiguous language is required in taxing legislation. Alcan also relied on the principle (perhaps of last resort) that ambiguity in a penal statute may be resolved in favour of an accused[60]. Finally, it was submitted that no contrary intention was discernible either in s 56N(2)(b) or elsewhere to the effect that “land” was not to be construed in accordance with the definition provisions of the Act and that the contrary intention discerned by the Court of Appeal arose from a non-textual and contestable historical analysis of the Act and amendments made to it prior to the 2000 amendments.
5. The Commissioner sought to affirm the interpretation of Div 8A given by the Court of Appeal with two main arguments. The first was a semantic argument. The second propounded a contrary intention in respect of the definition of “land” as it occurred in s 56N(2)(b) which in turn depended on the definition of “lease” in the Act.
6. First, the Commissioner contended that, as a matter of ordinary meaning, the words “‘lease’ … does not include … an option to renew a lease” do not mean excluding from a lease the value attributable to an option to renew the lease. It was suggested that the words mean “do not add the value of an option to renew to a lease” or, more simply, that they mean “an option to renew is not a lease”.
7. Secondly, in propounding a contrary intention in respect of the definition of “land”, the Commissioner relied on the context of Div 8A in the “widest sense”[61] and on the history of the legislation as evincing a legislative intention that despite the definitions of “land” and “lease” in the Act, “land” for stamp duty purposes included an option to renew a lease. In broad terms, the Commissioner contended that if the interpretation of words in a definition section is inconsistent with an ascertained legislative purpose, the definition should be disregarded or read down. It was contended that the Court of Appeal construed s 56N(2)(b) consistently with the purpose and language of the whole Act[62], especially as that was elucidated by the history of the legislation. The critical submission of the Commissioner on this branch of the argument involved the following steps:

. the definition of “lease”[63] in the Act, as enacted[64], contained the same exclusions (a), (b) and (c) as the definition set out above, which applied to this case; in particular, “lease” was defined to exclude “an option to renew a lease”;

. in 1979[65], the statutory scheme for the imposition of stamp duty imposed duty on instruments for conveyance of a lease of an estate or interest in land which was assessed by reference to the consideration paid on the value of the interest transferred. Duty was also payable on an instrument for a lease, agreement for a lease or grant of a lease of an estate in fee simple and duty was assessed by reference to the total rent payable during the term;

. in respect of the latter, the legislature did not intend to assess duty payable on an option to renew a lease because that term might never come into operation. If a lease were renewed, the renewal would be treated for stamp duty purposes as a grant of a lease. The exclusion of an option to renew a lease from the definition of “lease” was intended to apply to the grant of a lease, not the conveyance of a lease;

. in Div 8A, as enacted in 1988, the criterion for liability was entitlement to “real property”, which was defined in s 56C to include an estate or interest in real property, so that the definition of “lease” was wholly irrelevant to Div 8A;

. the purpose of the 2000 amendments, which inserted a new definition of “land” and which substituted that term for “real property” in Div 8A, was to remove doubt as to what was in the tax base[66]; and

. the successive amendments to the Act after 1988 up to and including the 2000 amendments precluded any inference that the new definition of “land” inserted by the 2000 amendments had, as its purpose, the reduction of revenue.

Conclusions on the construction of “land”

1. It was common ground that giving s 56N(2)(b) its natural and ordinary or literal meaning, once the relevant definitions from s 4(1) were inserted into the substantive text, did not lead to an absurd result of the kind referred to in Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation[67]. At issue were competing constructions of the definition of “lease” and whether there was a contrary intention which displaced the natural and ordinary or literal meaning of the definition and consequentially affected the definition of “land”.
2. It was also common ground that the Act fastened on particular aspects of the bundle of rights created in connection with land[68].
3. This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the text itself[69]. Historical considerations and extrinsic materials cannot be relied on to displace the clear meaning of the text[70]. The language which has actually been employed in the text of legislation is the surest guide to legislative intention[71]. The meaning of the text may require consideration of the context, which includes the general purpose and policy of a provision[72], in particular the mischief[73] it is seeking to remedy.
4. The Commissioner’s first argument must be rejected. The construction given by the Commissioner to the words “‘lease’ … does not include … an option to renew a lease” was strained and contrary both to the natural and ordinary meaning of the words and to considerations of grammar and syntax. The construction was tantamount to excising the ordinary adverb of negation “not”, as it occurs in the phrase “does not include”, so as to give the words a meaning quite different from their ordinary and natural meaning such that “lease” would include an option to renew.
5. As to the Commissioner’s second argument, propounding a contrary intention, the steps in that argument set out above reveal that the critical issue of statutory construction is whether the definition of “lease” to be found in s 4(1) of the Act was irrelevant to Div 8A as enacted in 1988 and whether it continued to be irrelevant when the 2000 amendments inserted the new definition of “land” into s 4(1).
6. In the Court of Appeal, Martin (BR) CJ (with whom Angel and Southwood JJ agreed) observed that over the years the Northern Territory legislature had consistently increased its capacity to raise revenue. Such considerations underpinned his Honour’s conclusion that Div 8A operates independently of the definitions in s 4(1) because there is no reason to suppose that the legislature intended to reduce its capacity to raise revenue by excluding an option to renew a lease from the definition of “land”.
7. Fixing upon the general legislative purpose of raising revenue carried with it the danger that the text did not receive the attention it deserves. This danger was adverted to by Gleeson CJ in Carr v Western Australia[74] when he said:

“[I]t may be said that the underlying purpose of an Income Tax Assessment Act is to raise revenue for government. No one would seriously suggest that s 15AA of the Acts Interpretation Act has the result that all federal income tax legislation is to be construed so as to advance that purpose. Interpretation of income tax legislation commonly raises questions as to how far the legislation goes in pursuit of the purpose of raising revenue. In some cases, there may be found in the text, or in relevant extrinsic materials, an indication of a more specific purpose which helps to answer the question. In other cases, there may be no available indication of a more specific purpose. Ultimately, it is the text, construed according to such principles of interpretation as provide rational assistance in the circumstances of the particular case, that is controlling.”

1. There is nothing express in the text of relevant parts of the Act, as enacted, or in amendments made to the Act in 1979[75] or in 1987[76] which supports the Commissioner’s contention, upheld in the Court of Appeal, that the definition of “lease” in the legislation did not apply when dealing with a “conveyance” of a lease. As can be seen from the extracts set out above, essentially the Court of Appeal’s reasoning was not based on the text, but on an inference that the text would not apply because it would be surprising if the legislature intended to sever from a lease something which contributed to its value on a conveyance[77]. However, in terms, the definition of “lease” in the Act, as amended over time, was always capable of applying both to the grant of a lease and to the conveyance of a lease. Relevant amendments to the Act up to and including the 2000 amendments were all assessed by the Court of Appeal by reference to a generally ascertained intention to amend the legislation to increase the revenue rather than by reference to the express terms of the Act. The effect of that approach is to impute erroneously a statutory intention which destroys the effect of a clearly expressed definition.
2. In conclusion, “land” in s 56N(2)(b) takes its defined meaning so that it includes “lease of land” and the words “‘lease’ … does not include … an option to renew a lease” bear their natural and ordinary meaning, which is not displaced or reversed by contextual or historical considerations. The general purpose of the Act to raise revenue is insufficient to support an intention to exclude a clearly expressed definition and to substitute a quite different meaning. Accordingly, the value attributable to an option to renew a lease should be excluded in making relevant calculations for stamp duty purposes under s 56N(2)(b) of the Act.

Other arguments

1. There are consequences for a corporation which fails to lodge a statement as required by the Act. First there is a direct offence under s 56K(6) of the Act and secondly under ss 94 and 96 of the Act the Commissioner may apply a penalty when making a default assessment. A power to remit penalties is to be found in s 96(6).
2. Alcan submitted that if, contrary to its main argument, the definitions of “land” and “lease” in the Act were found to be ambiguous, after applying the current principles of statutory interpretation referred to above, then it could rely on Anderson[78] for the proposition that the imposition of a tax must be in plain terms. Alcan also relied on the principle that penal statutes should be construed strictly, as exemplified in Waugh v Kippen[79]. An attempt was made to draw an analogy with the American “rule of lenity” in resolving ambiguity in relation to the coverage of penal statutes[80].
3. The Commissioner contended that Anderson cannot stand with the purposive approach to statutory interpretation which has emerged and is now well settled.
4. Given the basis on which this appeal is to be allowed, it is not necessary to deal with these arguments beyond the making of two points. First, tax statutes do not form a class of their own to which different rules of construction apply; they are to be construed by application of the settled principles referred to above. Secondly, the fact that a statute is a taxing Act, or contains penal provisions, is part of the context and is therefore relevant to the task of construing the Act in accordance with those settled principles. Whether or when “rules” of the kind considered in Anderson[81] and Waugh v Kippen[82] may be relied upon need not be decided.

Orders

1. The appeal should be allowed with costs. Orders 1, 3 and 4 of the Court of Appeal should be set aside. In place of those orders the appeal to the Court of Appeal should be dismissed with costs. This has the effect of restoring the judgment of the primary judge. The Commissioner should pay Alcan’s costs of the proceedings before Mildren J.

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[1] Which has been subsequently renamed the Stamp Duty Act (NT). See fn 29 below.

[2] Alcan (NT) Alumina Pty Ltd v Commissioner of Taxes [2007] NTSC 9; (2007) 19 NTLR 153.

[3] Commissioner of Territory Revenue v Alcan (NT) Alumina Pty Ltd (2008) 156 NTR 1 at 25 [78] per Martin (BR) CJ, 30 [104] per Angel J, 34 [121] per Southwood J.

[4] See [18]-[27] and [30] below.

[5] [1991] HCA 28; (1991) 172 CLR 319 at 340; [1991] HCA 28.

[6] CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408 per Brennan CJ, Dawson, Toohey and Gummow JJ, particularly authorities referred to in fns 46 and 47; [1997] HCA 2.

[7] See also Acts Interpretation Act 1901 (Cth), s 15AA.

[8] See also Acts Interpretation Act 1901 (Cth), s 15AB.

[9] (2008) 156 NTR 1 at 17 [45], 22 [66], 24 [76]-[77] per Martin (BR) CJ, Angel J agreeing at 30 [104], Southwood J agreeing at 34 [121].

[10] Which provides: “Definitions in or applicable to an Act apply except so far as the context or subject matter otherwise indicates or requires.”

[11] M v Secretary of State for Work and Pensions [2006] QB 380 at 407 [84] per Sedley LJ.

[12] Greenberg (ed), Craies on Legislation, 9th ed (2008) at 732 [24.1.5.1].

[13] In the Matter of The Fourth South Melbourne Building Society (1883) 9 VLR(E) 54 at 58 per Holroyd J; Buresti v Beveridge (1998) 88 FCR 399 at 401 per Hill J.

[14] Pearce and Geddes, Statutory Interpretation in Australia, 6th ed (2006) at 196 [6.1].

[15] 13 & 14 Vict c 21, s 4.

[16] 52 & 53 Vict c 63.

[17] See, for example, Interpretation Act 1897 (NSW), s 21(e).

[18] Re Lehrer and the Real Property Act 1900-1956 [1961] SR (NSW) 365 at 370 per Jacobs J. It was described as being in “wide and general terms” in Goldsworthy Mining Ltd v Federal Commissioner of Taxation [1973] HCA 7; (1973) 128 CLR 199 at 215 per Mason J; [1973] HCA 7. See also Jennings Construction Ltd v Burgundy Royale Investments Pty Ltd [No 2] [1987] HCA 10; (1987) 162 CLR 153 at 163 per Brennan, Deane, Dawson and Toohey JJ; [1987] HCA 10.

[19] Mercantile Credits Ltd v Shell Co of Australia Ltd [1976] HCA 9; (1976) 136 CLR 326 at 344 per Gibbs J; see also at 337-338 per Barwick CJ, 351-352 per Stephen J; [1976] HCA 9. That case dealt with the priority accorded under the Torrens system to an unregistered, executed extension in registrable form granted pursuant to an option to renew in a registered lease.

[20] Butt, Land Law, 5th ed (2006) at 192 [1276].

[21] Gerraty v McGavin [1914] HCA 23; (1914) 18 CLR 152 at 163-164 per Isaacs J; [1914] HCA 23, citing Hand v Hall (1877) 2 Ex D 355 at 357-358 per Lord Cairns LC and Woodall v Clifton [1905] 2 Ch 257 at 271 per Stirling LJ (in argument) and 274 per Romer LJ (in argument). See also Mercantile Credits Ltd v Shell Co of Australia Ltd [1976] HCA 9; (1976) 136 CLR 326 at 345-346 per Gibbs J.

[22] Hill, Stamp, Death, Estate and Gift Duties, (1970) at 136 [76/7(a)].

[23] Sims and Tavaré (eds), Sergeant and Sims on Stamp Duties and Capital Duty, 7th ed (1977) at 155. This passage remains in the current edition: Quinlan (ed), Sergeant and Sims on Stamp Duties and Stamp Duty Reserve Tax, 12th ed (1998) at 317.

[24] See the legislative history reproduced from the Commissioner’s submissions in the joint reasons at [44] below.

[25] Australian Capital Territory Taxation (Administration) Act 1969 (Cth), s 4.

[26] Australia, House of Representatives, Australian Capital Territory Taxation (Administration) Bill 1969 et al, Explanatory Memorandum at 10.

[27] Jacobs, The Law of Resumption and Compensation in Australia, (1998) at 178 [12.5.5.3]-[12.5.5.4]; Bogg v Midland Railway Co (1867) LR 4 Eq 310; In re A Proposed Sale, Public Trustee to Mitchell [1947] NZLR 697 at 702 per Archer J. See also Fricke, Compulsory Acquisition of Land in Australia, 2nd ed (1982) at 340.

[28] See Northern Territory, Legislative Assembly, Parliamentary Record, 24 August 1988 at 3883.

[29] The Act has subsequently been renamed the Stamp Duty Act (NT) by s 7 of the Revenue Law Reform (Stamp Duty) Act 2007 (NT). The Act referred to later in this judgment (at [26]) as the Stamp Duty Act (NT) is a different Act, which was repealed by s 3 of the Revenue Law Reform (Stamp Duty) Act 2007 (NT).

[30] (1998) 193 CLR 605; [1998] HCA 42.

[31] The section is set out below at [25].

[32] Mining (Gove Peninsula Nabalco Agreement) Ordinance 1968 (NT).

[33] See ss 56M and 56R(2) of the Act.

[34] Taxation (Administration) Amendment Act (No 2) 1991 (NT), which came into operation on 1 January 1992.

[35] Taxation (Administration) Amendment Act 1994 (NT).

[36] Taxation (Administration) Amendment Act 1999 (NT).

[37] Taxation (Administration) Amendment Act 2000 (NT).

[38] Northern Territory, Legislative Assembly, Parliamentary Record, 24 August 1988 at 3883.

[39] “The Territory” was defined at the relevant date in s 18 of the Interpretation Act (NT) relevantly as “the geographical area constituting the Northern Territory of Australia”.

[40] Section 3 of the Stamp Act.

[41] Section 56K(5) of the Act.

[42] Section 56M(1) of the Act.

[43] Alcan (NT) Alumina Pty Ltd v Commissioner of Taxes [2007] NTSC 9; (2007) 19 NTLR 153 at 160 [29].

[44] Commissioner of Territory Revenue v Alcan (NT) Alumina Pty Ltd (2008) 156 NTR 1 at 25 [78] per Martin (BR) CJ, 30 [104] per Angel J, 34 [121] per Southwood J.

[45] Alcan (NT) Alumina Pty Ltd v Commissioner of Taxes [2007] NTSC 9; (2007) 19 NTLR 153 and Alcan (NT) Alumina Pty Ltd v Commissioner of Taxes (No 3) (2007) 67 ATR 664.

[46] Commissioner of Territory Revenue v Alcan (NT) Alumina Pty Ltd (2008) 156 NTR 1.

[47] Alcan (NT) Alumina Pty Ltd v Commissioner of Taxes [2007] NTSC 9; (2007) 19 NTLR 153.

[48] Alcan (NT) Alumina Pty Ltd v Commissioner of Taxes [2007] NTSC 9; (2007) 19 NTLR 153 at 171 [62].

[49] Alcan (NT) Alumina Pty Ltd v Commissioner of Taxes [2007] NTSC 9; (2007) 19 NTLR 153 at 171-172 [62].

[50] Alcan (NT) Alumina Pty Ltd v Commissioner of Taxes (No 3) (2007) 67 ATR 664.

[51] Commissioner of Territory Revenue v Alcan (NT) Alumina Pty Ltd (2008) 156 NTR 1 at 15 [41], 17 [45], 24 [76]-[77].

[52] Commissioner of Territory Revenue v Alcan (NT) Alumina Pty Ltd (2008) 156 NTR 1 at 30 [104] per Angel J, 34 [121] per Southwood J.

[53] Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Pty Ltd [2008] HCA 9; (2008) 232 CLR 314 at 322-327 [11]- [26] per Gleeson CJ, Hayne, Crennan and Kiefel JJ; [2008] HCA 9.

[54] Pfeiffer v Stevens (2001) 209 CLR 57 at 73-74 [56] per McHugh J; [2001] HCA 71.

[55] Pfeiffer v Stevens (2001) 209 CLR 57 at 65 [25] per Gleeson CJ and Hayne J.

[56] [2005] HCA 26; (2005) 221 CLR 568 at 574-575 [12]; [2005] HCA 26.

[57] See s 96(1) and (2) of the Act.

[58] See s 56K(6) of the Act.

[59] [1937] HCA 24; (1937) 57 CLR 233 at 243 per Rich and Dixon JJ; [1937] HCA 24. See also Hepples v Federal Commissioner of Taxation [1992] HCA 3; (1992) 173 CLR 492 at 510-511 per Deane J; [1992] HCA 3.

[60] Waugh v Kippen [1986] HCA 12; (1986) 160 CLR 156 at 164; [1986] HCA 12 adopting the reasons for judgment of Gibbs J in Beckwith v The Queen [1976] HCA 55; (1976) 135 CLR 569 at 576; [1976] HCA 55.

[61] CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408 per Brennan CJ, Dawson, Toohey and Gummow JJ; [1997] HCA 2. See also Minister for Immigration and Multicultural and Indigenous Affairs v Nystrom [2006] HCA 50; (2006) 228 CLR 566 at 599 [98] per Heydon and Crennan JJ; [2006] HCA 50.

[62] Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 381-382 [69]-[70]; [1998] HCA 28.

[63] The definition was derived from the Australian Capital Territory Taxation (Administration) Act 1969 (Cth): see Northern Territory, Legislative Assembly, Parliamentary Record, 15 June 1978 at 1482.

[64] The Act was enacted as the Taxation (Administration) Ordinance 1978 (NT) immediately prior to self-government. The Ordinance was assented to on 30 June 1978 and commenced operation on 1 July 1978. Self-government commenced on 1 July 1978.

[65] The Act was amended in 1979 by the Taxation (Administration) Act 1979 (NT).

[66] The definition is set out at [25] above. It can also be noted that the Interpretation Act (NT) at the relevant date defined land in s 19: “‘land’ includes all messuages, tenements and hereditaments, corporeal and incorporeal, of any tenure or description and whatever may be the estate or interest therein”.

[67] (1981) 147 CLR 297; [1981] HCA 26.

[68] As to which see Yanner v Eaton [1999] HCA 53; (1999) 201 CLR 351 at 366 [17] per Gleeson CJ, Gaudron, Kirby and Hayne JJ; [1999] HCA 53. See also The Commonwealth v Yarmirr [2001] HCA 56; (2001) 208 CLR 1 at 38-39 [13]- [14] per Gleeson CJ, Gaudron, Gummow and Hayne JJ; [2001] HCA 56.

[69] Roy Morgan Research Centre Pty Ltd v Commissioner of State Revenue (Vict) [2001] HCA 49; (2001) 207 CLR 72 at 77 [9] per Gaudron, Gummow, Hayne and Callinan JJ, 89 [46] per Kirby J; [2001] HCA 49; Stevens v Kabushiki Kaisha Sony Computer Entertainment [2005] HCA 58; (2005) 224 CLR 193 at 206 [30] per Gleeson CJ, Gummow, Hayne and Heydon JJ, 240-241 [167]-[168] per Kirby J; [2005] HCA 58; Carr v Western Australia [2007] HCA 47; [2007] HCA 47; (2007) 232 CLR 138 at 143 [6] per Gleeson CJ; [2007] HCA 47; Director of Public Prosecutions (Vic) v Le [2007] HCA 52; (2007) 232 CLR 562 at 586 [85] per Kirby and Crennan JJ; [2007] HCA 52; Northern Territory v Collins [2008] HCA 49; (2008) 235 CLR 619 at 642 [99] per Crennan J; [2008] HCA 49.

[70] Nominal Defendant v GLG Australia Pty Ltd [2006] HCA 11; (2006) 228 CLR 529 at 538 [22] per Gleeson CJ, Gummow, Hayne and Heydon JJ, 555-556 [82]-[84] per Kirby J; [2006] HCA 11. See also Combet v The Commonwealth [2005] HCA 61; (2005) 224 CLR 494 at 567 [135] per Gummow, Hayne, Callinan and Heydon JJ; [2005] HCA 61; Northern Territory v Collins [2008] HCA 49; (2008) 235 CLR 619 at 642 [99] per Crennan J.

[71] Hilder v Dexter [1902] AC 474 at 477-478 per Earl of Halsbury LC.

[72] Commissioner for Railways (NSW) v Agalianos [1955] HCA 27; (1955) 92 CLR 390 at 397 per Dixon CJ; [1955] HCA 27, quoted with approval in Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 381 [69] per McHugh, Gummow, Kirby and Hayne JJ.

[73] Heydon’s Case [1584] EngR 9; (1584) 3 Co Rep 7a at 7b [76 ER 637 at 638].

[74] [2007] HCA 47; (2007) 232 CLR 138 at 143 [6].

[75] Taxation (Administration) Act 1979 (NT).

[76] Taxation (Administration) Amendment Act 1987 (NT).

[77] Commissioner of Territory Revenue v Alcan (NT) Alumina Pty Ltd (2008) 156 NTR 1 at 15 [41] per Martin (BR) CJ.

[78] [1937] HCA 24; (1937) 57 CLR 233 at 243 per Rich and Dixon JJ.

[79] [1986] HCA 12; (1986) 160 CLR 156 at 164; see also R v Lavender [2005] HCA 37; (2005) 222 CLR 67 at 95-97 [87]- [93]; [2005] HCA 37.

[80] United States v Thompson/Center Arms Co [1992] USSC 75; 504 US 505 (1992). See also Crandon v United States [1990] USSC 25; 494 US 152 (1990) and Muscarello v United States [1998] USSC 62; 524 US 125 (1998).

[81] [1937] HCA 24; (1937) 57 CLR 233 at 243.

[82] [1986] HCA 12; (1986) 160 CLR 156 at 164-165.

Vale v Sutherland [2009] HCA 26

CATCHWORDS

Bankruptcy – Notice – Official Receiver issued notice under s 139ZQ of the Bankruptcy Act 1966 (Cth) (“the Act”) asserting certain property transactions void under s 120 of the Act – Notice asserted market value of properties at time of transfer – Failure to comply with notice may result in criminal sanctions under s 139ZT of the Act – Whether notice should be set aside under s 30 or s 139ZS if value stated incorrect.

Bankruptcy – Notice – Whether value in s 139ZQ of the Act value at time of transfer or when notice given.

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