Salta Constructions Pty Ltd v St George Bank

September 19, 2015

N THE SUPREME COURT OF VICTORIA

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL COURT

List B

S CI 2013 2936

SALTA CONSTRUCTIONS PTY LTD (ACN 006 261 301)	Plaintiff

v

ST GEORGE BANK, A DIVISION OF WESTPAC BANKING CORPORATION LIMITED (ACN 007 457 141)	Defendant

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JUDGE:	JUDD J
WHERE HELD:	Melbourne
DATE OF HEARING:	6 and 7 November 2013
DATE OF JUDGMENT:	18 December 2013
CASE MAY BE CITED AS:	Salta Constructions Pty Ltd v St George Bank
MEDIUM NEUTRAL CITATION:	[2013] VSC 685

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MORTGAGE – Rule in Hopkinson v Rolt – Subsequent mortgage and liability not disclosed to first mortgagee – Bill acceptance and discount facility – Whether rollover of bills constituted a further advance – Whether creation of an overdraft constituted a further advance.

GUARANTEE – Obligation secured by mortgage – Whether demand made under guarantee – Whether demand required before mortgagee could apply proceeds of sale of secured property in discharge of guarantor’s liability.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr R M Garratt QC with Mr T D Best	Logie-Smith Lanyon

For the Defendant	Mr D Savage QC with Mr B Carew	Gadens Lawyers

HIS HONOUR:

This case concerns the application of the principle in Hopkinson v Rolt,[1] that prevents a first mortgagee, having received notice of a subsequent mortgage, from gaining priority for further voluntary advances over other advances secured by the subsequent mortgage. In Bradford Banking Co Ltd v Henry Briggs Son & Co Ltd,[2] Lord Blackburn explained the rule thus:

The first mortgagee is entitled to act on the supposition that the pledgor who was owner of the whole property when he executed the first mortgage continued so, and that there has been no such second mortgage or pledge until he has notice of something to shew him that there has been such a second mortgage, but as soon as he is aware that the property on which he is entitled to rely has ceased so far to belong to the debtor, he cannot make a new advance in priority to that of which he has notice. As Lord Campbell says,

‘The hardship upon the bankers from this view of the subject at once vanishes, when we consider that the security of the first mortgage is not impaired without notice of a second’.

It seems to me to depend entirely on what I cannot but think a principle of justice, that a mortgagee who is entitled, but not bound, to give credit on the security of a property belonging to the debtor, cannot give that credit after he has notice that the property has so far been parted with by the debtor.

[1] (1861) 9 HL Cas 514.

[2] (1886) 12 App Cas 29, 36.
First State Developments (WA) Pty Ltd (FSDWA) was a member of a group of companies known as the First State Group. Its directors were Timothy Paul Gordon and Bruce William Tilley. First State Perth (No 7) Pty Ltd (FSP) was another member of the Group, which carried on business as property developers in Western Australia and elsewhere. The Group was, from time to time, provided with financial accommodation by a number of banks, including the defendant, St George Bank, now a division of Westpac Banking Corporation Ltd.
On 12 December 2003, FSDWA granted a first mortgage to St George over 22 Delhi Street, West Perth as security for the liabilities of Group members. The mortgage was registered on 17 March 2004. Under the memorandum of terms, the mortgagor was prohibited from creating or allowing to exist another security interest over the mortgaged property without the consent of St George. A security interest included a mortgage. If another security interest was to be created, the mortgagor was required to enter into an acceptable agreement with the mortgagee regulating the priority between the first mortgage and the other security interest, and was prohibited from increasing the secured amount under the other security without the mortgagee’s consent.
Under the terms of the mortgage, FSDWA agreed to pay to St George on demand the amount owingspecified in a demand, although that obligation was subject to contrary agreement in writing for so long as the mortgagor was not in default. The amount owing was defined to include all amounts that at any time were ‘payable, are owing but not currently payable, are contingently owing, or remain unpaid by you to us’.[3]
In 2006 and 2007, FSDWA provided guarantees to St George for liabilities incurred by Gallway Investments Pty Ltd and Tilley Properties (Qld) Pty Ltd. The guarantees are dated on or about 25 January 2006, 19 December 2006 and 4 June 2007. Under each guarantee, FSDWA agreed to pay ‘on demand’, whether or not a demand was made on the customer.

[3]          amount owing means all amounts that:

at any time;

for any reason or circumstance in connection with any agreement (including a loan agreement, guarantee, lease or other facility document), transaction, engagement, document, instrument (whether or not negotiable), event, act, omission, matter or thing whatsoever;

whether at law or otherwise;

and whether or not of a type within the contemplation of the parties at the date of this mortgage:

·     are payable, are owing but not currently payable, are contingently owing, or remain unpaid, by you to us; or

·     we have advanced or paid on your behalf or on your express or implied request; …

·
On about 19 September 2007, St George offered to provide FSDWA with a Commercial Bill Acceptance and Discount Facility (the bill facility) with a limit of $14,062,000. This limit represented an increase over a previous limit under a facility granted in February 2006. The bill facility was to be granted pursuant to General Standard Terms, a copy of which was enclosed with the offer. Security for the bill facility included the mortgage over the Delhi Street property. The offer was accepted by FSDWA on 28 September 2007. The bill facility was to expire on 1 June 2009.
On 29 September 2008 the plaintiff, Salta Constructions Pty Ltd entered into a building contract with FSP for the construction of an office building at 226 Adelaide Terrace, Perth, for a lump sum price of $59,600,000. A few days later, on 2 October 2008, the plaintiff, FSP and a number of other entities within the Group, entered into a deed, described as the Perth Deed, under which FSP agreed to pay to the plaintiff the amount by which the actual costs for each line item of expenditure in the schedule, exceeded the allocated cost. It would appear that the plaintiff may not have fixed its cost for some components of the proposed construction work. In any event, under the Perth Deed, the parties agreed to work cooperatively to agree the cost of the works. The obligations of FSP under the Perth Deed were to be secured by mortgages and other securities, although there was no mention of a mortgage over the Delhi Street property. The Perth Deed was superseded by a new agreement, dated 10 July 2009, known as the July Deed.
By early 2009, FSP was experiencing financial difficulty in funding the construction works. The plaintiff proposed various measures to secure its position, including a second mortgage over the Delhi Street property to be provided immediately. The grant of the mortgage and other security appears to have been a condition imposed by the plaintiff if discussions with FSP to resolve its funding difficulty were to continue. The plaintiff was aware of the existence of the first mortgage granted to St George, and of its role as a financier in relation to the construction project.
A mortgage over the Delhi Street property was prepared by the plaintiff’s solicitors and sent to Hickey Lawyers, solicitors for the Group, on 12 February 2009. The mortgage was to secure repayment of a principal sum of $3 million arising under a loan facility between Atlas Facilities Pty Ltd and FSP, and under the Perth Deed. It was not made a condition of the requirement for the second mortgage that consent be obtained from St George. A reasonable lender, seeking to protect its interests, would surely have understood that the terms of the mortgage to St George would prohibit the grant of a subsequent mortgage without the consent of St George. A requirement, that FSDWA obtain the consent of St George to the subsequent mortgage was, however, out of the question. As it turned out, the extent of the financial accommodation to be provided by the plaintiff, and the existence of security for that accommodation was to be withheld from St George. It was plain to Tilley and Gordon that the proposed mortgage to the plaintiff would, if granted without consent, constitute a breach of the first mortgage, and that St George was most unlikely to give its consent without a satisfactory deed of priority.
On 13 February 2009, Hickey Lawyers wrote to the plaintiff’s solicitors, responding to an email from them dated 11 February 2009, requesting that the second mortgage over the Delhi Street property should remain unregistered until the expiry of the Atlas loan facility, which was linked to the completion of the project. The Atlas loan facility appeared to have been provided by or on behalf of the plaintiff, although the connection, if any, between Atlas and the plaintiff was unclear. There was a proposal to sell properties, including the Delhi Street property.
After some modifications to a draft, the mortgage was executed at a meeting between representatives of the plaintiff and Messrs Gordon and Tilley on 11 May 2009. It included an amendment under which the principal sum secured was confined to the amount due under the Perth Deed, which was defined as the ‘Principal Agreement’. The mortgage dated 11 May 2009 became known at trial as the ‘first Salta mortgage’.
At the meeting on 11 May 2009, there was some discussion about the use of the Delhi Street property as security for payment to the plaintiff of a deferred margin. Those discussions resulted in the preparation of the July Deed, made between the plaintiff, FSP, Messrs Tilley and Gordon, and companies in the Group as guarantors. Atlas was also a party. The deed purported to record agreement between FSP and the plaintiff to resolve outstanding issues with respect to the building works and to amend the Perth Deed.
On 19 May 2009, Ross Blunden, a relationship manager employed by St George, and Neil McAllister, then head of premium corporate and property finance at St George, met with Gordon, Tilley and the financial controller of the Group, David Hibbins. The meeting took place in the boardroom of the Group headquarters on the Gold Coast. The plaintiff alleged that during the meeting, Blunden and McAllister were told of a loan from the plaintiff which was to be repaid out of funds to be released from a retention fund held by St George. The significance to the plaintiff’s case of the alleged knowledge of the loan was to provide a stepping stone for a contention that St George ought to have realised the likelihood of security attaching to such a loan.
Another meeting took place between representatives of St George and the Group on 17 June 2009. Gordon said that he met with Hibbins and Blunden. He said that the meeting took place at the Gold Coast offices of the Group. The plaintiff alleged that during this meeting Gordon told Blunden that funding from the plaintiff was repayable; that mortgages had been given to the plaintiff to secure the funding; and that FSDWA had granted a mortgage over the Delhi Street property.
While the July Deed purported to vary the Perth Deed, it did so only upon the parties performing all of their obligations under the July Deed. Notwithstanding the conditional variation of the Perth Deed, which depended upon performance of the July Deed, cl 4.1 of the July Deed purported to relieved the parties of their obligations under the Perth Deed, substituting the obligations under the July Deed. The plaintiff even agreed to recall the invoices it had raised under the Perth Deed.
The July Deed amended the price in the building contract and various other related matters, including an extension of the date for practical completion. The ‘price’ did not, however, include an amount described as the Margin, which was the plaintiff’s construction margin under the building contract, in the sum of $6,200,000. The amount expressed as the price in the July Deed was an understatement.
Under the July Deed, the plaintiff and FSP agreed that payment of the Margin would be deferred until two months after the works had achieved practical completion, or the date upon which St George released moneys that it was holding in retention. The retention sum was said to be in the order of $10 million. FSP warranted that it would apply for, and use all reasonable commercial endeavours to obtain the consent of St George to the new price, but the price did not include the Margin. In the event that St George would only approve a price of less than $63,560,000, the difference between the approved amount and the agreed price would be an amount due to the plaintiff when payment of the approved price fell due, but no later than 1 December 2009.
It is difficult to ignore what appears to be have been a plan, embodied in the July Deed, to conceal from St George the fact that FSP would be indebted to the plaintiff for at least $6,200,000 more than the disclosed price, for which approval would be sought from St George; and that if St George only approved a lesser sum, to further conceal the indebtedness of FSP to the plaintiff for the difference between what had been approved by St George and what was payable under the July Deed.
St George did not contend at trial that the plaintiff and the Group had embarked on a deliberate strategy to conceal the true liability of FSP, or that the Group had sought the plaintiff’s cooperation to conceal the existence of the Salta mortgages, although that was the effect of the July Deed. Accordingly, I make no such findings of a deliberate strategy involving the plaintiff. But the evidence disclosed a disturbing aspect to the transaction, reflected in the July Deed, to which the plaintiff was party, that went unexplained.
As security for its obligations under the July Deed, FSP agreed to provide a number of mortgages, including a further mortgage by FSDWA over the Delhi Street property. That mortgage was to be held in escrow on the following terms:[4]

(a)          The mortgages over Delhi and Rockingham shall be held in escrow, as security for performance under this Deed, and shall not be released from escrow unless First State fails to pay the Margin at a time that such a sum is due and payable under this Deed, provided that First State has first received 14 days prior written notice of that sum.

(b)          Documents held in escrow shall be held by Logie‑Smith Lanyon, and shall not be registered with the relevant Land Titles Office unless and until they are released from escrow in accordance with the terms of this Deed.

The circumstances in which the further mortgage came to be released from escrow were not explored at trial, save for production of a letter dated 15 September 2010, under which the plaintiff gave notice to FSP that it was in default under the July Deed for having failed to pay the Margin of $6,200,000.

[4]          Court book 608; emphasis added.
The bill facility was to expire on 1 June 2009. On 5 March 2009, the facility was extended to 30 June 2009. On 23 June 2009, the facility was extended to 31 July 2009. On 21 October 2009, it was again extended to 31 October 2009. There is an unexplained gap in the extension process from 31 July to 21 October 2009, when St George offered the extension to 31 October 2009.
The plaintiff alleged that on about 8 September 2009, FSDWA granted the further mortgage pursuant to the July Deed (the second Salta mortgage) over the Delhi Street property. The date of the mortgage is not evident on the face of the document, although it would appear that original copies had been sent by the plaintiff to its solicitors on 8 September 2009, ‘to be held in escrow’. The second Salta mortgage purported to be granted pursuant to:

The Deed being the Deed so entitled between First State Perth (No 7) Pty Ltd, Salta Constructions Pty Ltd, Bruce William Tilley, Timothy Paul Gordon, First State Properties (Qld) (No 5) Pty Ltd, Midon Investments Pty Ltd, First State Developments Pty Ltd, Galway Investments Pty Ltd, Tilley Properties (Qld) Pty Ltd, and First State Developments (WA) Pty Ltd dated on or about the date of this Mortgage.
On and between 31 October 2009 and 11 February 2010, St George accepted and discounted bills with a total face value of $14,062,000. James McDonald, a credit analyst employed by St George, gave evidence of various rollovers that occurred in October, November and December 2009, in January 2010 and finally on 11 February 2010, at which point St George declined to accept any further bills. On 12 March 2010, St George debited the outstanding amount of $14,062,000 to an overdraft account in the name of FSDWA.
The plaintiff capitalised on this unexplained period between 31 July 2009 (when the extension granted on 23 June 2009 expired) and the offer made on 21 October 2009, to contend that the new offer constituted the offer of a new facility, not merely an extension of an existing facility. In so doing, the plaintiff hoped to establish that St George had made a ‘further advance’ after having received notice of the Salta mortgages.
On 9 April 2010, the plaintiff wrote to Blunden:[5]

[5] Court book 53; emphasis added.

Dear Ross,

Re: First state Group – security over properties at Delhi and Rockingham

As you are aware, we are the builders at Adelaide Terrace Perth.

We have been approached by First State Group, seeking our consent to St George Bank’s security (being the mortgages at Delhi and Rockingham) being cross collateralised to secure other liabilities to the Bank. This consent has been sought as Salta Constructions has been granted unregistered mortgages over each of those properties behind the existing first mortgages to the Bank.

As part of our arrangement with First State Group, First State Group has also agreed to pay to Salta Constructions Pty Ltd one half of any of the cash security held by the bank in respect of the Adelaide Terrace Property, which would be released upon leasing of the property.

In order that we can consider the request, could you please confirm the terms of the cross collateralisation, and further confirm that there would be no impediment to the release of cash deposits held by the Bank, in the event that binding Agreements for Lease with acceptable tenants are procured by First State Group.

If you have any queries in relation to the above, please do not hesitate to call me to discuss.

Yours faithfully,

Salta Constructions Pty Ltd
While the letter of 9 April 2010 did not identify the mortgages with precision, it was unambiguous in the notice it gave St George, that the Group had granted mortgages over the Delhi Street property to the plaintiff. In its statement of claim, the plaintiff alleged that ‘by a date presently unknown to Salta, but at the latest by 9 April 2010, St George knew of the [mortgages]’. In its particulars of knowledge, the plaintiff identified an earlier occasion on which St George had been informed of the existence of a mortgage to the plaintiff over the Delhi Street property and of a loan from the plaintiff to the Group. That occasion was the meeting of 17 June. The earlier meeting, held on 19 May 2009, was said to provide context. The second Salta mortgage had not, of course, been granted at the time of these meetings.
Thus, the plaintiff alleged that St George received notice of the first Salta mortgage prior to the expiry of the bill facility on 31 July 2009 and that the reinstatement of the facility, on about 23 October 2009, constituted a grant of further accommodation by St George, with knowledge of a Salta mortgage granted to the plaintiff. The plaintiff contended that each rollover thereafter, and the establishment of the overdraft account on 12 March 2010, also constituted further advances for the purpose of the rule inHopkinson v Rolt.
On 8 December 2010, the plaintiff lodged a caveat over the title of the Delhi Street property claiming an interest in the land under the second Salta mortgage.
The plaintiff alleged at trial that the amount secured by the mortgages remained unpaid. While St George did not admit that allegation, it did not challenge the evidence of Andrew Justin Regan, that the amounts outstanding under the Salta mortgages had not been paid.
On 6 March 2012, St George appointed receivers and managers of the assets of FSDWA. By contract of sale dated 18 July 2012, novated in favour of St George by a deed dated 5 September 2012, the receivers sold the Delhi Street property to a third party for $20 million. On 15 November 2012, the Supreme Court of Western Australia ordered the removal of the plaintiff’s caveat from the title of the Delhi Street property, and the sale was completed on the following day. The whole of the proceeds of sale have been applied by St George in reduction of the amounts due under its mortgage, which St George contended included the amount required to repay the overdraft, and the amount due under the guarantees given by FSDWA.
The plaintiff, by its reply, challenged the right of St George to take any priority over the proceeds of sale of the Delhi Street property on the basis of an indebtedness under any of the guarantees. The plaintiff alleged that liability under the guarantees arose only upon demand, and that as no demand had been made on FSDWA for payment, there was no liability under the guarantees secured by the mortgage at the time of sale.
The plaintiff alleged that it was entitled to the payment of $11,230,592.37 from the proceeds of sale of the Delhi Street property.
Rule in Hopkinson v Rolt
A useful and sufficient recitation and explanation of the rule in Hopkinson v Rolt[6] is found in the judgment of Redlich J (as he then was) in OCBC v MKIC and Aljade:[7]

[6] (1861) 9 HL Cas 514; (1861) 11 ER 829.

[7] [2003] VSC 495, footnotes omitted.

The House of Lords in Hopkinson v Rolt held that a first mortgagee whose mortgage is taken to cover what is then due and also future advances cannot claim the benefit of such future advances in priority over a second mortgagee of whose mortgage it had notice at the time of its execution and before it made these new advances. The case overruled Gordon v Graham, Lord Cowper having there reasoned that it was the folly of the second mortgagee with notice of the first mortgage, to take such a security.

The rule in Hopkinson v Rolt was explained by Lord Blackburn in Bradford Banking Co Ltd v Henry Briggs Son & Co Ltd:

“The first mortgagee is entitled to act on the supposition that the pledgor who was owner of the whole property when he executed the first mortgage continued so, and that there has been no such second mortgage or pledge until he has notice of something to shew him that there has been such a second mortgage, but as soon as he is aware that the property on which he is entitled to rely has ceased so far to belong to the debtor, he cannot make a new advance in priority to that of which he has notice. As Lord Campbell says,

‘The hardship upon the bankers from this view of the subject at once vanishes, when we consider that the security of the first mortgage is not impaired without notice of a second’.

It seems to me to depend entirely on what I cannot but think a principle of justice, that a mortgagee who is entitled, but not bound, to give credit on the security of a property belonging to the debtor, cannot give that credit after he has notice that the property has so far been parted with by the debtor.”

The rule ensures that a first mortgagee cannot encroach upon the mortgagor’s remnant estate so as to enlarge the scope of its first mortgage to cover fresh advances when the first mortgagee knows the property to no longer be the mortgagors to charge. The principle underlying the rule was explained by Lord Lindley M.R. in West v Williams:

“That an owner of property dealing honestly with it, cannot confer on another a greater interest in that property than he himself has. The rule rests on no technicality of English law; it is based on the plainest good sense.”

The rule is not confined to competing mortgages. When the holder of the subsequent interest is a purchaser of land the rule also applies as it does to an assignee of the mortgagor’s interest.

The source of the rule is to be found in equitable principles based on notice affecting the conscience, so that the person with notice takes subject to it. The rule does not depend upon the doctrine of estates. It is the equities derived from the contractual relationship which make it unconscionable for the mortgagor to further charge the property to secure a subsequent advance made by the mortgagee. Notice that the prior interest exists makes it inequitable for the mortgagee to rely upon its subsequently acquired interest which the mortgagor was not entitled to create. The rule was described by Holland J in Matzner v Clyde Securities Ltd as based upon “justice and fair dealing as between the mortgagor and mortgagees.”

Considerations of fairness and justice applicable to priorities between successive mortgagees were again identified as the foundation for the rule in Mercantile Credits Ltd v Australia and New Zealand Banking Group Ltd. The rule does not affect the mortgagee’s title to the charge upon the land which extends at any given time only to the amount owing at that time. As King CJ stated:

“The rule in Hopkinson v Rolt does not operate to defeat that security or any part of it. It merely fixes the amount for which the security has priority over subsequent securities at the date upon which the mortgagee has notice of those subsequent securities.”

So far as Torrens title land is concerned principles as to notice, constructive notice and inquiry which may affect the title to general law land have little or no scope for operation because one who becomes the registered proprietor under Torrens title “takes free from all unregistered interests whether he has notice of them or not.”

The rule with which I am concerned does not affect indefeasibility of title. Such equitable doctrines as the rule in Hopkinson v Rolt remain enforceable against those who have acquired a registered interest under the Torrens system. In Mercantile Credits Ltd v ANZ Banking Group Limited King CJ observed that:

“….the principal of indefeasibility of title cannot operate to exclude a rule of law, derived from equity, which limits priority over a subsequent registered mortgage to the amount for which the security exists at the time of notice of the subsequent mortgage.”

The rule in Hopkinson v Rolt has been applied on numerous occasions to the Torrens system of title by registration. The New South Wales Court of Appeal in Sussman & Anor v AGC Advances Ltd was concerned with the principle in Otter v Lord Vaux which, like the rule in Hopkinson v Rolt, is based on equitable notions of fair dealing and justice as between a mortgagor and second mortgagee. President Kirby, with whom Powell JA agreed, said:

“…the system of title under which the property is held should not be regarded as a point of differentiation if the system of title by registration can accommodate the rule. Long standing authority in this State and in Victoria have held that it can.”

The rule operates only when the first mortgagee has made a further advance. It has no application where the first mortgagee is bound to make and the mortgagor bound to accept advances made after the date of the second mortgage. When the further advances are made under a building mortgage so that each advance facilitates the construction of the building and increases rather than diminishes the value of the security, the rules do not operate. Matzner v Clyde Securities Ltd was such a case where advances made were necessary to enable the buildings to be completed. The mortgagee’s obligation to make advances under the terms of the mortgage were not discharged by notice of the subsequent mortgages.

Even if the holder of the subsequent interest acquires that interest with notice of the first mortgage, the rule operates.
There is a continuing debate as to whether constructive notice will suffice for the purpose of the rule. During the course of its final submissions, the plaintiff disavowed any reliance upon constructive notice, contending instead that the discussions at the meeting in May made it more likely that Blunden was told on 17 June 2009 of the debt and the mortgage. But the plaintiff also suggested, in the course of cross‑examination of Messrs McAllister and Blunden, that their knowledge of mezzanine finance would lead a reasonable banker to conclude that it must be accompanied by security.
In Sibbles v Highfern Pty Ltd,[8] Mason CJ and Brennan, Dawson, Toohey and Gaudron JJ said:

… the prior mortgagee could not tack if at the time of the further advances he had notice, actual or constructive, of the subsequent mortgage.

[8] (1987) 164 CLR 214, 221.

The observation in Sibbles was obiter, and the authorities do not speak with one voice.[9] There are cases in which something less than actual knowledge will suffice to bind the conscience of the earlier mortgagee. Notice of something may not necessarily translate into knowledge, but will nonetheless bind the recipient.[10]
In R & I Bank of Western Australia Ltd v Cash Resources Australia Pty Ltd,[11] Anderson J said:

Perhaps it is not truly a matter of categorising the notice as being actual or constructive. The basis of the rule in Hopkinson v Rolt is “justice and fair dealing as between the mortgagor and the mortgagees, and as between the competing mortgagees” (Matzner v Clyde securities Ltd [1975] 2 NSWLR 293 at300, per Holland J). The starting proposition is that the security of the first mortgage is not impaired or affected without notice of a second mortgage. The first mortgagee is entitled to an act on the basis that his security continues in full effect until he has notice of something to the contrary. Knowing that a second mortgagee has acquired an interest in the property, it would be, in the language of equity, against conscience to allow the first mortgagee to make a further advance calculated to affect the rights of the second mortgagee. In the technical sense in which the word is used in equity, it would be a fraud on the second mortgagee. Therefore, any notice, to be operative, would have to sustain a charge of equitable fraud. The notice would have to be such as to affect the conscience. The general rule is that only actual notice will be sufficient to do that. Actual knowledge must generally be proved. However, there may be exceptions. There may be circumstances under which, although actual knowledge is not proved, the circumstances are so strongly against the first mortgagee that knowledge of a subsequent encumbrance should be imputed to him. One such circumstance may perhaps be where there has been deliberate conduct on the part of the first mortgagee designed to prevent receipt of actual notice of the later encumbrance.

[9]          Westpac Banking Corporation v Adelaide Bank Limited [2005] NSWSC 517 at [75].

[10]         Deeley v Lloyds Bank Ltd [1912] AC 756, 782.

[11]         (1993) 11 WAR 536, 547; emphasis added.
Another such case was OCBC, in which a failure by the mortgagee to make enquiries into the voracity of information provided by its customer resulted in the mortgagee being bound by knowledge previously acquired.[12] In OCBC, the bank knew of the existence of contracts of sale. The status of those contracts, as continuing obligations, was put in doubt by its customer. In the circumstances, the bank was required to make further enquiry. Redlich J held that the obligation to enquire can arise when the mortgagee is aware of material facts that would cause a reasonable and honest person in its position to enquire further.

[12] [2003] VSC 495 [169]–[182]; footnotes omitted, emphasis added.
St George submitted that the letter of 9 April 2010 did not provide sufficient notice of the mortgages. But when advised by the plaintiff, on 9 April 2010, that it had taken mortgages over the Delhi Street property, St George must be taken to have knowledge of the terms of those mortgages, including the amounts, if any, advanced. Detailed information about the mortgages would have been readily available from the Group and the plaintiff. Any prudent banker would have sought and obtained such information with relative ease.
Having regard to the way in which the case was conducted, I am not required to decide whether St George ought to have appreciated that the plaintiff would probably have required a mortgage to secure mezzanine funding, and therefore a mortgage had probably been granted. That contention was not developed in submissions. The plaintiff contended for actual knowledge of the existence of the Salta mortgages, because Gordon had told Blunden of their existence on 17 June 2009.
Meetings in May and June 2009
The critical meeting, according to the plaintiff, was held on 17 June 2009. The meeting held on 19 May 2009 was said to provide context and background, and make it more likely that Gordon told Blunden of the mortgage on 17 June 2009. Gordon deposed that on 17 June 2009 he attended a meeting at the Group’s office on the Gold Coast with Hibbins and Blunden. He said that he took notes. Gordon said that he recalled discussing with Blunden that funding was repayable to the plaintiff, and that a mortgage had been granted over the Delhi Street property to secure moneys owing to the plaintiff. Gordon deposed that a ‘Salta debt’ had also been discussed during a meeting he attended on 19 May 2009, at the same office, with Hibbins, Tilley, Blunden and McAllister. He said that he took notes at that meeting, and produced his notes.
McAllister deposed that on 19 May 2009 he and Blunden met with Messrs Gordon, Tilley and Hibbins in the boardroom of the Group’s office on the Gold Coast. McAllister said it was a significant and very long meeting. He said that Tilley informed those present that security had been given by the Group in relation to mezzanine funding for the construction project, but not over assets over which St George held security. McAllister deposed that he was not informed that the mezzanine funding had been provided by the plaintiff. He said that had he been informed that security had been or was to be given to the plaintiff over assets held by St George, he would have immediately become concerned as it would have been a very significant issue for St George and its relationship with the Group. He produced a lengthy file note prepared by Blunden recording the matters discussed at the meeting on 19 May 2009.
Blunden deposed that he attended the meeting on 19 May 2009, and made notes that were subsequently reproduced in typed form. He recalled Tilley saying that the Group had obtained additional finance, secured over assets other than those over which St George held security. He said that he was not informed that the plaintiff had been given a mortgage over any property.
Blunden said nothing in his first affidavit, sworn 15 October 2013, of the meeting that took place on 17 June 2009. In a later affidavit, in response to an affidavit filed by Gordon concerning a meeting on 17 June 2009, Blunden said he had no recollection of attending such a meeting, and had no file note of it. He said that at no time prior to 9 April 2010 had Gordon discussed with him the fact that moneys were owing by the Group to the plaintiff, or that it had given a mortgage over the Delhi Street property.
Tilley and Hibbins did not give evidence. No relevant member of the Group was a party to this proceeding. I am not persuaded that any inference, adverse to the plaintiff, arises by reason of their absence as witnesses. Thus, in relation to the communications that occurred on 19 May 2009, the Court has only the evidence of Gordon, Blunden and McAllister, supplemented by file notes of Blunden and Gordon. In relation to the meeting on 17 June 2009, the Court has only the evidence of Gordon and Blunden, supplemented by a file note of Gordon.
Under cross‑examination, Gordon conceded that he had no independent recollection of any of the meetings. He was entirely dependent upon his notes. His memory was not refreshed, but reconstructed. Gordon agreed that the purpose of meetings with St George in May and June 2009 was to review the financial position of the Group against the background of the global financial crisis. The loan‑to‑value ratio had been exceeded and the Group was anxious to avoid the appointment of receivers. Gordon said that from about April 2009 the Group was seeking access to cash retained by St George as security. Those funds were required to discharge obligations to the plaintiff and others. It was apparent that the financial accommodation made available by St George was insufficient to enable FSP to pay for the construction work being undertaken by the plaintiff.
Gordon produced five pages of handwritten notes of the meeting on 19 May 2009. The first page, he said, comprised notes made in anticipation of the meeting, as an agenda. Gordon said that during the meeting there was discussion about the various projects then being undertaken by the Group. While the first Salta mortgage had been granted a few days earlier, his notes made no mention of it.
I found the evidence of Gordon unhelpful. He said that he had no recollection of revealing to St George the existence of the mortgage. It was put to Gordon in cross‑examination that information about the mortgage had been deliberately withheld. Gordon responded by asserting ‘[it was] our right to offer security on a property that we owned’. When pressed, Gordon said, ‘if it is not on my notes here, it wouldn’t have been spoken about. I don’t have any recollection. But if it’s not here, I can’t recall’. When pressed again, Gordon said:

I don’t have any recollection of regards to why I wouldn’t have told the bank about the security, but my recollection of it is in the following meeting that we had, which is a reflection of my notes, there was a discussion in regards to that, and that was still an ongoing discussion from this meeting here, which was a continuation of the reassessment of the loan facilities that we were requiring to be adjusted to reflect the additional funds and security needed for the property to continue on for it to be completed.[13]

[13] T 70–71.
The notes taken by Blunden of the meeting on 19 May 2009 were lengthy, detailed and comprehensive. According to Blunden’s note, the meeting lasted over three hours. There was a review of the group entities and projects, debt limits and property values, revealing Group security gearing for the main business group at 83.49 per cent. Blunden’s typed file note contained the following paragraph:

Discussion then turned to the Adelaide & Hill Project, its current status, and the cash deposit SGB currently hold. Bruce advised that First State had taken $3.00m of Mezz Funding to support the project, secured by external means and not against anything held by SGB. This had been reduced by $0.5m but the balance will be due for repayment shortly. FSG consider that the Bank is holding surplus cash as security and are keen to have a portion of this deposit released to allow for repayment of the Mezz Funding.[14]
It was put to Blunden that mezzanine funding was usually accompanied by some form of security. He accepted that would often be the case, but was adamant that he had never been told that any such funding was secured by assets of the bank. His file note recorded Tilley’s advice that the mezzanine funding was secured by external means, and not against anything held by St George. There was no mention of funding from the plaintiff.

[14] Emphasis added.
It was also put to Blunden that his notes were not of the meeting, but had been prepared as a ‘detailed review paper based on what had been discussed’ at the meeting. Blunden rejected the suggestion and was emphatic that the notes were a record of the meeting. I accept Blunden’s evidence that his notes constituted a contemporary and accurate record of what was discussed. I also accept, as the notes disclose, that Tilley told Blunden and McAllister that security for mezzanine finance was ‘not against anything held by’ St George.
The notes taken by Gordon at the meeting on 17 June 2009 were brief. There is a reference on the second page to a ‘Salta debt’ of $6.2 million and to a ‘2nd mortgage’. It is surprising that Blunden would have a meeting with representatives of the Group without taking any notes. While Blunden could not recall such a meeting at the Group’s offices, he did recall another meeting at the bank’s office. I accept that there may have been a meeting attended by Blunden, Gordon and Hibbins on 17 June. It may have been short. But I also accept that had anything been said at such a meeting, wherever held, to the effect alleged by the plaintiff, it would have been of great concern to the bank and resulted, not just in a file note, but in immediate action by St George. Disclosure by Gordon of an unauthorised mortgage over the Delhi Street property, would have disclosed a breach of a term of the mortgage granted to St George, and seriously eroded the relationship of trust and confidence between banker and customer.
I am satisfied that in their meetings with St George on 19 May and 17 June 2009, Tilley and Gordon deliberately withheld information that might have alerted St George to the possibility that a mortgage had been granted to the plaintiff over the Delhi Street property. After all, the July Deed was designed to ensure that St George would not learn of the extent of the liability to the plaintiff, or of the existence of the mortgage to be granted thereunder, in the absence of default under the deed.
Quite apart from my dissatisfaction with the evidence of Gordon, in which he asserted that Blunden had been told of the Salta mortgages at the meeting in June, the correspondence generated from within the Group and by its legal representative, following the letter from the plaintiff dated 9 April 2010, compelled the conclusion that the Group had concealed the mortgages from St George.
The Group’s conduct had been exposed by the letter. In their correspondence, Tilley, Gordon and their solicitors sought to justify the failure to inform St George of the true nature and extent of the relationship with the plaintiff, and of the mortgages. Nowhere in that material did the Group assert that St George had previously been advised of the mortgages. On the contrary, Gordon and Tilley set out to explain and justify their failure to disclose the mortgages.
Blunden deposed that following receipt of the 9 April 2010 letter, he sought information from Hibbins and Gordon about their arrangements with the plaintiff, and attended a meeting with them on 13 April 2010. He requested a written response from Tilley concerning the plaintiff’s funding and the unregistered mortgages. Tilley wrote to McAllister and Blunden on 13 May 2010. Earlier the same day, Hibbins provided Tilley and Gordon with some background:[15]

[15]         Emphasis added.

Bruce/Tim

I have reviewed my files and notes (I have not had an opportunity to review all of my emails and there may be something further in there) in respect of the Salta securities and while I cannot provide a document which directly addresses the security to St George I would like to outline the following key points:

1.           On 27^th January 2008 Salta lodged a caveat on the Cato Street property. I was required to explain the reasoning of this to St George.

2.           The formal April review report that was prepared for St George included a cashflow report (attached) which outlined the repayment of $3 million to Salta by way of a mezzanine facility. In addition the same report included reference to Salta facility both in the property summary area and the Executive summary (I have also attached copies of these). Bruce you will recall that we both had a meeting with St George to discuss the requirement of the return of the term deposit to fund this repayment.

3.           The April review report was the last comprehensive overview report provided, obviously if I were to provide one as at today’s date there would be further reference to the amounts owed to Salta. Although again they would be heavily qualified as the final amount that is payable is still to be validated and I believe will be much less than the amount they request.

4.           In mid 2009 when we were required to renegotiate the terms with Salta pursuant to finalising a quarantined building price we also had further meetings with St George where we discussed the chart that detailed and outlined the new pricing of the overall deal with Salta.

5.           In respect of the contingent liability not being recorded in the financials we do not have a requirement to report nor would I have been able to fully determine the quantum to be reported of the liability until building works were completed. It was always the intention that due to the pressure applied by Salta that we would have to wait until the building was completed and then attend to a finalisation of all matters.

6.           I had not seen a requirement to complete a formal notification process with St George in respect of the 2^nd Mortgage as I believed that the security was already in place for the renegotiation and that the mortgages were only a backstop (hence being unregistered) for the eventuation that the security deposit was depleted by interest rates. I never considered the possibility that the deposit would be held in full by St George.

7.           We had a group meeting with St George on 19 May 2009 and 17 June 2009. In those meetings we had discussed the release of the deposit referred to above. St George had confirmed that due to the reduction in interest rates we would likely receive a refund of $6.2 mlo, with a worst case of $5.4 mlo – it was never zero.

In reflection with all the things that were happening at the time I never paid a great deal of attention to the unregistered security as I did not think that it would be a real risk to St George position (also mindful that I was anticipating the term deposit being refunded) and there was no deed of priority requested. Perhaps if I had the time again I would have completed things a little differently.
Hibbins did not assert that St George had been informed of the Salta mortgages. On the contrary, he sought to explain why St George had not been informed.
McAllister said that he had a telephone conversation with Tilley on or about 12 May 2010 in which he explained that St George had been unaware of the mortgages granted to the plaintiff, and expressed his disappointment. McAllister deposed that Tilley did not suggest during that conversation that the mortgages had been disclosed. Tilley and Gordon followed up that conversation with a lengthy email:[16]

[16]         Emphasis added.

Dear Neil

Further to our conversation yesterday we are forwarding some material to validate that we have disclosed several times in the past, that monies have been owing to Salta outside of the building contract.

Find attached

1)           Memo of understanding from David Hibbins of the Salta matter dated today.

2)           Tim Gordon’s notes of meetings with You, Ross, Tim, Dave and myself dated 19/5/09.

3)           Tim Gordon’s notes of meeting with Ross, Dave and Tim dated 17/6/2009.

4)           Ross Blunden email 12/3/10, Bruce Tilley’s email 5/3/10.

You have clearly explained the banks disappointment regarding FGS’s non disclosure of security given to Salta last year and not going through the aspect of unregistered securities when meeting with Martin and yourself a few weeks ago.

In relation to the matter of overall disclosure there is no doubt at these meetings (which is within a couple of weeks of completing the re documentation of the new Salta Building Contract) and before that in the attached cash flows and extract from our last full submission to St George in April 09, thatSt George was made aware of

a)        Outstanding monies to Salta, outside the Building Contract of which $3 million was shown in the April 09 submission to St George.

b)        That $6.3 million was needed for Salta, being on P2 of Tim’s file notes of the meeting of 17/6/2009.

c)        And that due to a massive drop in interest rates, between $5.4 million and $6.2 million was be refunded to us from our cash security deposit held for Adelaide and Hill Street and was to be applied to FSG group debt reduction.

There is a series of emails provided to you previously, from St George, saying we would receive this substantial refund from the security deposit.

Subsequently St George told us they wouldn’t release any monies to us, so we obviously had to fill this cash flow hole by going to Salta, renegotiating, an delaying this payment to 60 days after completion. Obviously we had to give some unregistered securities including Rockingham and Delhi Street in the event of its non payment. This was appropriate as we were free to deal with our equity in our assets, at that time, as we saw fit.

With respect to not going into absolute detail of Salta’s security at the recent meeting with Martin we would note:

a)        The meeting was held for Tim to meet Martin and brief him direct on leasing and sales for Adelaide and Hill as we all at that time, were waiting for 333 to complete their report.

b)        It was held to discuss, the recent letters of offer issued to us by the bank, including fees, cross collateralisation, capital reductions requested by the bank and facility deadline dates.

Focusing on cross collateralisation, being the key non disclosure issue you mentioned, we all discussed at length that our legal advice, in fact from Madgwicks (which we can show was sought when the renewal letters were first issued, well before this meeting) was to avoid for normal commercial reasons, agreeing to any cross collateralisation. Madgwicks key point that we would never have access to any of our equity on the future sales of our assets. This was reinforced in the item (4) email to St George referring to a proposal meeting with Martin and Neil regarding keeping excess funds from Rockingham and Delhi Street and discussing the other points Bruce raised in this email. In fact the email notes actually become the agenda for topics to be discussed at Martin’s meeting, not securities.

Accordingly our refusal to the banks request for x collateralisation was nothing to do with Salta’s position, it was our companies overall requirement, for some equity return from asset sales, hence we didn’t even think to specifically cover it as an item in the meeting, as evidenced by all the attachments.

It should be noted Salta’s letter to St George actually only asks for a copy of any deed between us and St George, not that it is disagreeing to the banks x collateralisation request.

Also we just assumed Martin would have been pre‑briefed on any relevant matters, so we only discussed what was “on the table” scheduled for the meeting as listed in email item (4).

With the benefit of hindsight, we can now see with regret, how Martin, and the bank would be disappointed in us not covering off again, on this part of Salta’s agreements, but we hope you can perhaps see our view which was influenced by so many meetings with the bank over the previous months regarding the refund by our cash deposit and replacing same with securities for Salta to hold unregistered.

In any case we sincerely offer our apologies for the upset this matter has caused and welcome any offer extended to us to meet again for a thorough re‑briefing of any matter the bank requires.

We want to finally reiterate that in the whole Salta matter, it was always FSG’s first priority to have the building completed to PC to protect us and St George with a finished building for occupation and sales, with FSG dealing with other payments after this occurring. This is still the current status.

We again can only thank you for the banks ongoing support and trust after this explanation of the matter, we can all move on, enjoying the relationship we have had together with the bank over the past 15 years.

Bruce and Tim
What was immediately apparent from the email was the description of the subject matter of the alleged prior disclosure. It was that ‘monies have been owing to Salta outside of the building contract’. There was a concession that during a meeting ‘a few weeks ago’, they had not even then gone ‘through the aspect of unregistered securities’. They did not challenge the bank’s assertion of the Group’s ‘non disclosure of security given to Salta last year’. A fair reading of the emails revealed that the authors were attempting to explain why St George ought to have known that moneys were owing to the plaintiff and thus why the mortgages had not been disclosed.
The plaintiff relied on the email from Tilley and Gordon, as containing an assertion to the effect that the mortgages had in fact been disclosed. It contended that the failure of St George to challenge the assertions constituted an admission. But the email contained no such assertion for St George to challenge. In my view, the email from Tilley and Gordon was an admission of non‑disclosure.
On 15 May 2010, Blunden received a more formal response, in the form of a letter from Hickey Lawyers on behalf of the Group. They wrote:[17]

[17]         Court book 87–89; emphasis added.

We act for the First State Group. We have been instructed to write to you in response to your recent request for details surrounding Salta’s claim to a portion of any security deposit released by the bank when the building has been “leased up” and the granting of unregistered mortgages to Salta in respect of the Delhi and Rockingham properties. We are instructed as follows:-

1.           During the first year of the construction process and as a consequence of lengthy negotiations with a prospective tenant for the whole of the building (Sinclair Knight Merz) it became apparent to the parties that certain elements of the building would require redesign and upgrade. Negotiations in relation to certain aspects of the redesign were protracted and concluded towards the end of the second quarter of 2009. In the course of those negotiations the parties resolved:-

a.   Changes to original specifications and building design;

b.   A revised date for practical completion for the redesigned building;

c.   Adjustment to the builder’s margin reflecting the deferred date for payment of same (i.e. 2 months after practical completion);

d.   Delivery of the redesigned building to practical completion within the banks existing funding facility;

e.   Discontinuance of the existing disputes regarding extensions of time, First States entitlement to liquidated damages and other variations.

All of these issues were resolved by First State agreeing to pay a final sum of $6.2 million dollars above the banks approved funding facility (the margin sum).

2.           Salta and First State agreed that the margin sum would not be paid until two months after the Building achieved practical completion. As a consequence St George would receive a completed building to a design and standard superior to that originally contemplated but within the approved funding facility. Understandably Salta requested some security for the deferred payment. As a consequence First State granted Salta unregistered mortgages over the Delhi and Rockingham properties. The mortgages would only be registered if First State failed to pay Salta its margin within 2 months after practical completion. First State also agreed to pay to Salta 50% of any part of the security bond released by St George as the building was “leased up”. These monies be applied toward the margin sum. A release of the security bond had been discussed between First State and St George at the relevant time.

3.           First State offered this commitment to Salta on the basis that:-

a.   Salta would deliver a completed building to a higher specification then originally contemplated under the building contract (which would ultimately improve the banks security position by delivering a more “Saleable” and/or “Leasable” building). First State formed the view (reasonably in our opinion) that the revised payment proposal and security offered to Salta would not adversely affect the banks security position in circumstances where:-

i.           The mortgages over Delhi and Rockingham would not be registered unless and until First State defaulted on its deferred margin payment obligation (some two months after practical completion);

ii.          St George were not requested to enter any priority agreement with Salta in relation to either of the unregistered mortgage facilities;

iii.         Cross guarantees of the relevant St George facilities had already effectively been granted by the relevant members of the First State group which own the Delhi, Rockingham and Adelaide Terrace properties;

iv.          It is ultimately within St George’s discretion as to whether any part of the security bond retained by it was released to First State (and therefore available for distribution to Salta).

4.           Our client notes with interest that Salta makes no demand of the bank through its letter dated 9 April, 2010 and it is not in a position to do so. In our client’s view Salta’s correspondence does not warrant a response from the bank.

5.           In summary, the commercial position finally negotiated and which now exists with Salta:-

a.   Imposes obligations on Salta to deliver a completed building to a higher standard of specification then originally contemplated under the building Contract within the already approved St George loan facility;

b.   Resolves the disputes with Salta (known to the bank at the relevant time) in respect of a revised date for practical completion and First States entitlement to liquidated damages for delay.

c.   Resolves the dispute in relation to building quantities; and

d.   For the reasons expressed in paragraph 3 above has not eroded the bank’s existing security position.

This position was negotiated with Salta in the ordinary cause of First State’s business and additional liability was assumed by First State outside of the Hill and Adelaide Street funding facility.

Messrs Tilley and Gordan have indicated that they would be happy to meet with you in conference to discuss these issues further. In the meantime we trust this is sufficient for present purposes.
Hickey’s lawyers did not assert any notice of the mortgages, but sought to justify the financial arrangements made with the plaintiff in the July Deed. The contention that ‘Salta makes no demand on the bank … and is in no position to do so’, seems inconsistent with the contention now advanced by the plaintiff, that the priority of the St George mortgage had been displaced.
I find that the first occasion on which St George had any notice of a mortgage granted to the plaintiff over the Delhi Street property was upon receipt of the plaintiff’s letter dated 9 April 2010. Notwithstanding the contention by St George that the letter was ambiguous, I am satisfied that the notice that was given was sufficient to enable St George to ascertain the full terms of the mortgage and the borrowing secured thereby.
If, contrary to its case at trial, the plaintiff were to contend that St George knew enough about a third party debt to give rise to a duty of enquiry as to the existence of a mortgage over the Delhi Street land, I would reject such a contention. I am not satisfied on the evidence that St George was told that additional funding had been provided by the plaintiff. It was a purpose of the July Deed that St George should not know of that debt. Notwithstanding Gordon’s note of the meeting on 17 June 2009, I am not satisfied that Gordon told Blunden on that occasion of the ‘Salta debt’.
Negotiations between the Group and the plaintiff, that resulted in the July Deed, had commenced in early May 2009. The course of those negotiations was not revealed by Tilley and Gordon at the meeting on 19 May 2009. The suggestion by Tilley and Gordon in their email of 13 May 2010, that they had ‘disclosed several times in the past that moneys were owing to Salta outside the building contract’ is not supported by the attachments to the email. It is true that St George knew there was mezzanine finance of around $3 million. Tilley and Gordon had sought the release of funds by St George to discharge that debt. There was reference in one document to a debt owing to Atlas, but Tilley had also advised on 19 May that it was ‘secured by external means and not against anything held by SGB’. Had Gordon mentioned a ‘Salta debt’ and mortgage at the meeting on 17 June 2009, it would have undermined the Group’s strategy to keep the true nature and extent of the relationship between the Group and the plaintiff from St George. To disclose the extent of the debt and the security would also have put at risk the rescue plan that was ultimately embodied in the July Deed.
Insofar as it may be relevant, I find that such information as St George had, concerning mezzanine finance and third party financial accommodation to the Group, was not sufficient to put St George on enquiry about the possibility that FSDWA might have acted in breach of the terms of its mortgage to St George, by granting an undisclosed second mortgage over the Delhi Street property. The plaintiff did not, of course, contend for any such finding.
Further advances
The plaintiff contended that the bill facility expired on 31 July 2009 or on 31 October 2009, and thereafter St George made further advances, when each series of bills was rolled over. The next event, relied upon by the plaintiff as a further advance, was the establishment of the overdraft account on 12 March 2010. Each of those events, of course, predated the letter from the plaintiff to St George of 9 April 2010.
The plaintiff did not contend that the rollover of commercial bills prior to expiry of the bill facility constituted an advance that would attract the operation of the rule in Hopkinson v Rolt. In my opinion, the further accommodation provided by St George on and after 31 July 2009 did not constitute further advances for the purpose of the rule.
The essence of a ‘further advance’ is informed by the object of the rule. In Commonwealth Bank of Australia v Grubic,[18] the Full Court of the Supreme Court of South Australia expressed the objects of the rule thus:

The rule in Hopkinson v Rolt was grounded on principles of justice and fair dealing as between the mortgagor and mortgagees and as between the competing mortgagees: Matzner v Clyde Securities Ltd(supra) at 300; Mercantile Credits Ltd v Australia and New Zealand Banking Group Ltd (1988) 48 SASR 407, 409. The rule was designed to achieve two objects. The first was to leave the mortgagor in a position to raise further monies on his property, which he could be prevented from doing if the first mortgagee was free to diminish the security of the second mortgagee by making further advances. The second, which is of particular relevance here, was to prevent the first mortgagee with notice of the second from diminishing the value of the security for the second mortgage by making advances of money in addition to that initially secured by the first mortgage. As between competing mortgagees, the purpose was to ensure that the first mortgagee did not by additional advances adversely affect the value of the second mortgagee’s security.

[18] Commonwealth Bank of Australia v Grubic Full Court of the Supreme Court of South Australia 27 August 1993, unreported; BC9300359 at 65, citations omitted, emphasis added.
These objects share a common expectation, that the further advance will have the effect of increasing the liability of the mortgagor and, but for the operation of the rule diminish the value of the mortgagor’s unencumbered equity in the charged property. The further advance must also be voluntary, in the sense that the mortgagee is not bound under the secured facility to make the advance.[19] The passage from Grubic was adopted by White J in Westpac Banking Corporation v Adelaide Bank Limited.[20] Definitions of ‘advance’ found in facility agreements, mortgages and other contexts, are of little assistance.[21]
There may be circumstances in which a secured indebtedness is reduced or eliminated and then restored by an advance of further funds. The Westpac Banking case is one such example. The creation or extension of an overdraft, or bill facility, may constitute a further advance, although a mortgagee would not, in my view, lose its priority as a secured creditor for a further advance merely because an overdraft had returned to credit, if the bank had agreed to provide an ongoing fluctuating overdraft facility. Unless terminated, the bank would be obliged to honour cheques drawn, and thus make further advances. In that sense, the advances would be involuntary.

[19]         OCBC v AKIC [2003] VSC 495 at [77].

[20]         [2005] NSWSC 517, [57]–[59].

[21]         Quainoo v NZ Breweries Ltd [1991] 1 NZLR 161; Williams v Glyn’s Bank Limited [1981] Com LR 205.
In the present case, when St George continued to roll over bills after the bill facility came to an end, and eventually converted the liability into an overdraft, it did so because the borrower had not repaid the facility. The liability of FSDWA had never been discharged. The secured debt was never reduced. Equity is concerned with the substance of a transaction, its effect on the mortgagor and the conscience of the mortgagee. The drawing, accepting and rolling of bills on and after 31 July 2009, and the creation of the overdraft on 12 March 2010, recorded a continuation of a liability, that remained unsatisfied. It is not to the point that St George decided to manage the indebtedness of FSP by agreeing to accept further bills or, as occurred on 12 March 2010, convert the debt into an overdraft. Put another way, the indebtedness of FSDWA to St George, secured by the mortgage, was never reduced so as to legitimately place FSDWA in a position where it might take advantage of the reduced liability and increased equity to seek other financial accommodation secured under a subsequent mortgage.
There was no further advance, for the purpose of the rule in Hopkinson v Rolt, by the rollovers that took place after 31 July 2009 and the establishment of the overdraft account on 12 March 2010.
Guarantees
Under each guarantee, FSDWA agreed:

2.1 You unconditionally and irrevocably guarantee payment to us of the guaranteed money. If thecustomer does not pay the guaranteed money on time and in accordance with any arrangement under which it is expressed to be owing, then you agree to pay the guaranteed money to us on demand from us (whether or not we have made demand on the customer).

2.2 The guarantee in clause 2.1 is a continuing obligation and extends to all of the guaranteed money.
On 3 August 2012, St George prepared and served on FSDWA a ‘Notice of Default’ under s 106 of theTransfer of Land Act 1893 (WA). The notice was addressed, ‘TO THE BORROWERS AND MORTGAGORS NAMED BELOW’. The borrower was FSDWA. It was also the mortgagor of the Delhi Street property. The notice provided:

1.           This notice is given by the Lender as credit provider under the Loan Agreement and as mortgagee under the Mortgage.

2.           You are in default of the terms of your Loan Agreement and Mortgage in that you did not repay all moneys owing to the Lender pursuant to the Loan Agreement on the expiry date of the loan being 31 October, 2009. You have also failed to pay interest due since that date.

3.           To remedy this default, the Total Amount Due must be paid to the Lender no later than 10 August, 2012 (Rectification Date). Interest, fees, and charges continue to accrue on this amount until paid. Additional enforcement expenses may also be incurred.[22]
The ‘Loan Agreement’ mentioned in the notice was the bill facility and the guarantees given by FSDWA with respect to the obligations of Gallway Investments and Tilley Properties. The ‘Total Amount Due’ in the notice was $54,215,174.50 as of 1 August 2012. The notice continued:

This amount which is required to be paid to repay your loan in full, as at the date specified. The amount required to pay out your loan changes each day as interest and charges accrue and payments are credited.

[22] Emphasis added.
Section 106 of the Transfer of Land Act 1893 (WA) provides:

(1) Subject to Division 2 of Part 6 of the Land Administration Act 1997 in the case of conditional tenure land, a mortgage and a charge under this Act shall when registered as hereinbefore provided have effect as a security but shall not operate as a transfer of the land thereby mortgaged or charged;and in case default be made in payment of the principal sum interest or annuity secured or any part thereof respectively or in the performance or observance of any covenant expressed in any mortgage or charge or hereby declared to be implied in any mortgage and such default be continued for one monthor for such other period of time as may therein for that purpose be expressly fixed the mortgagee or annuitant or his transferees may serve on the mortgagor or grantor or his transferees notice in writing to pay the money owing on such mortgage or charge or to perform and observe the aforesaid covenants(as the case may be).[23]
The plaintiff submitted that the section required personal service on the mortgagor of a notice to payafter default had occurred, as a step to enliven the operation of a power of sale in circumstances of continuing default. The plaintiff contended that, in the absence of a demand, there was no default for non‑payment under a guarantee. Accordingly, the plaintiff contended, St George could not retain more than the amount due under the bill facility or overdraft, out of the sale proceeds of the Delhi Street property.

[23] Emphasis added.
The plaintiff did not contend that there had not been a default, or that St George was not permitted to serve the notice. Its contention was that there had not been any default under a guarantee.
St George relied upon the terms of the notice to the borrower and mortgagor, FSDWA, calling upon it to repay the whole of the indebtedness calculated as at 1 August 2012 in the sum of $54,205,174.50. St George contended that the whole sum became payable under the mortgage. Clause 1.3 of the mortgage provided:

You agree to pay us on demand that part of the amount owing specified in the demand. However, as long as you are not in default this is subject to any contrary agreement in writing between you and us.
St George contended that the amount owing included the amounts under the guarantees, even though a demand might not have been made for payment. The plaintiff contended that in the absence of a demand under a guarantee, no amount was owing, contingently or otherwise.
St George further contended that, even if liability only crystallised under a guarantee on demand, it had the right to retain the proceeds of sale pending the amount becoming due and payable. Clause 27.2 of the mortgage provided:

If, at the time we receive the money, any part of the amount owing is not then due for payment, we may retain an amount equal to that part. We must hold it in an interest bearing account. We may use it (and any net interest after tax — including income tax) to pay the amount owing when it becomes due for payment.

Thus, St George contended, it could, were it necessary to do so, serve demands under each guarantee to crystallise the liability and draw down on the retained funds.
The plaintiff argued that cl 27.2 did not prevail over s 61 of the Property Law Act 1969 (WA) that required the funds to be disbursed in the prescribed manner. Section 61 provides:

The money that is in fact received by the mortgagee, arising from the sale, after discharge of prior encumbrances to which the sale is not made subject (if any) shall be held by him in trust to be applied by him —

(a) firstly, in payment of all costs, charges and expenses properly incurred by him as incident to the sale or any attempted sale, or otherwise; and

(b) secondly, in discharge of the mortgage money, interest and costs, and other money (if any) due under the mortgage,

and the residue of the money so received shall be paid to the person entitled to the mortgaged property, or authorised to give receipts for the proceeds of the sale thereof.
The plaintiff argued that the purpose of cl 27.2 was to regularise the interim retention of money properly received under the mortgage on account of money actually owing but not yet due for payment. It argued that in the absence of a proper demand under the guarantees there was no amount actually owing or due for payment. Thus, St George was not authorised under cl 27.2 to retain the excess amount on account of a liability under the guarantees.
St George did not suggest that it had retained the excess amount under cl 27.2. But insofar as St George might seek to avail itself of the retention power, there would be no difficulty in calculating the amount of interest that ought to have been earned and applied in reduction of the liability.
In my view, there is no tension between the operation of cl 27.2 and s 61. Clause 27.2 provides machinery for the management of funds in anticipation of an amount owing that is not yet due and payable. The amount to be set aside must be an amount owing under the mortgage. An event may be required, such as a demand, to make the amount due for payment. There may be other circumstances in which the clause might operate: where, for example, there is a number of commercial bills with different maturity dates. But the present case is not troubled by any need to rely on cl 27.2.
Whatever may be the scope of cl 27.2, I am of the opinion that the amount owing under the mortgage included the guaranteed money under each guarantee, whether or not a demand for payment had been made. Even in the absence of a demand, the guaranteed money is owing but not currently payable by FSDWA. Alternatively, the guaranteed money might fall within the category of money advanced or paid on behalf of FSDWA or at its express or implied request. I am not persuaded that until a demand has been made on FSDWA, St George was unable to apply the proceeds from the sale of the Delhi Street property in satisfaction of the guaranteed money.
In any event, I am satisfied that the notice of default, dated 3 August 2012, made a demand for payment on the guarantor under the guarantees. Even though the default mentioned in the notice was a failure to repay the bill facility on 31 October 2009, and not a failure to pay under the guarantees, the mortgagor was authorised to serve a notice in anticipation of exercising its power of sale. To remedy that default, the mortgagor was required to pay the total amount, including the contingent liability under the guarantees no later than 10 August 2012. On service of the notice, and expiry of the time for payment, the guaranteed money became due and owing.
The plaintiff advanced a further argument. It contended that even if the notice of default were to be construed as a demand under the guarantees, or should St George serve a further demand in order to perfect the obligation to pay, any indebtedness would constitute a ‘further advance’ made after notice of the Salta mortgages. Accordingly, St George would lose its priority in respect of that further demand. As I understood its contention, the plaintiff would argue that by making demand under the guarantees, St George was, by that act, purporting to extend its security over the obligation well after notice of the Salta mortgages.
The plaintiff’s final contention is without merit. The liability, undertaken by the mortgagor under the guarantees, predated the Salta mortgages. No evidence has been advanced that the liability of FSDWA under any guarantee involved a further advance after 9 April 2010. By giving the notice of default, incorporating a demand to pay, St George did not tack a new liability onto the mortgage, thus diminishing the value of the security, or increasing the liability of FSDWA.
The plaintiff called for an accounting in relation to the proceeds from the sale of the Delhi Street property, should it be found that the St George mortgage secured only the amount outstanding under the commercial overdraft debt as at the date of settlement, with the balance plus interest being paid to the plaintiff to discharge its secured debt. Having regard to the reasons given above, there is no occasion for any such accounting to be undertaken. St George is entitled to the whole of the proceeds from the sale of the Delhi Street property, which have been appropriated and applied against the debt due under the mortgage, which includes the mortgagor’s liability under the overdraft and under the guarantees.