Papua New Guinea Banking Corporation v Melchior ToMoot and New Guinea Development Corporation Limited [1998] PGSC 18; SC554 (5 June 1998)

Unreported Supreme Court Decisions

SC554

PAPUA NEW GUINEA

[SUPREME COURT OF JUSTICE]
SC APPEAL NO 10 OF 1997
PAPUA NEW GUINEA BANKING CORPORATION - APPELLANT
MELCHIOR ToMOOT - FIRST RESPONDENT
NEW GUINEA DEVELOPMENT CORPORATION LIMITED - SECOND RESPONDENT

Waigani

Kapi DCJ Injia Sawong JJ
30 March 1998
5 June 1998

JUDGMENTS AND ORDERS - Garnishee Order - Garnishee - Tenants of property owing rent to judgment debtor - Property subject of existing registered mortgage to third party - Mortgagee exercised right to repossess property upon default - Repossession subsequent to Garnishee Order - Whether Garnishee Order takes priority over right of mortgagee.

REAL PROPERTY - Mortgages - Garnishee Order made in respect of property subject of existing mortgage - Mortgagee exercising right of repossession of property after Garnishee Order made - Whether Court order takes priority over mortgagee’s rights.

Cases Cited

Yap v Tan & Ors [1987] PNGLR 227

Dolphin v Aylward (1870) [1870] UKLawRpHL 2; LR 4 HL 486

Richards v Jenkins [1887] UKLawRpKQB 20; (1887) 18 QBD 451

Jennings v Mather [1901] UKLawRpKQB 176; [1902] 1 KB 1

Counsel

D Hartshorn for the Appellant

R Thompson for the Respondents

5 June 1998

KAPI DCJ INJIA SAWONG JJ: The appellant (“PNGBC”) appeals from certain interlocutory orders made by the National Court in Lae on 31 January 1997 pending the determination of garnishee proceedings against PNGBC. The First Respondent (“ToMoot”) (judgment creditor) cross appeals in respect of orders denied by the court in the same application. The orders were made on a notice of motion filed by ToMoot seeking three (3) categories of orders: (1) Orders for discovery of mortgage documents kept by PNGBC in respect of property situated on Allotment 2 Section 45 BOROKO. This property was owned by the Second Respondent (“NGDC”) (judgment debtor) and mortgaged to PNGBC. (2) Orders restraining PNGBC from demanding and collecting rent from tenants of the property. The tenants (garnishees) were required to pay the rent direct to ToMoot under an earlier Garnishee Order absolute issued on 20 May 1996. (3) Orders restraining PNGBC from excercising its rights under the mortgage and restraining NGDC from selling the said property until the said garnishee order of 20 May 1996 was satisfied in full. The trial judge refused to make the first order and granted the second and third orders. PNGBC appeals against the second and third orders and ToMoot cross appeals against the denial of the first order.

The grounds of PNGBC’s appeal are:

(1) His Honour erred in failing to give any or any sufficient consideration to the evidence of the appellant having exercised its rights as mortgagee pursuant to registered mortgage No 42556 and pursuant to the Land Registration Act Ch 191.

(2) His Honour erred in failing to give any or any sufficient consideration to the evidence of the appellant having entered into possession of the premises situated at Allotment 2 Section 45, Boroko and securing the rents and profits of the said premises pursuant to its said rights as mortgagee.

(3) His Honour erred in law in failing to give any or any sufficient consideration to the appellant as a secured creditor being entitled to exercise its rights in respect of the secured premises notwithstanding the claims of the first respondent, an unsecured creditor.

(4) His Honour erred in failing to consider that once the appellant exercised its said rights and took possession of the premises all rents for the premises became due and accruing to the appellant and not to the second respondent.

(5) His Honour erred in considering that the appellant by exercising its said rights as mortgagee and directing tenants of the premises to pay rental for the property to the appellant after the appellant had taken possession of the premises was directing the tenants to do something which contravened the Order of the Court dated 20 May 1996.

The grounds of ToMoot’s cross appeal are:

(1) His Honour erred in law in refusing to order the First Cross-Respondent to provide information and documents set out in paragraph 1 (a) to (f) of the Notice of Motion filed July 11th, 1996, in that the information and documents sought thereunder were necessary not only for determining the liability of the First Cross-Respondent to the Second Cross-Respondent but were also necessary for determining whether or not there was actually a default in loan repayments by the Second Cross-Respondents which made it necessary for the First Cross-Respondent to enter into possession of the property the subject of the Registered Mortgage No 42558.

(2) His Honour erred in failing to order the first Cross-Respondent and or its servant or agents to account to the Cross-Appellant monies it collected between June 27th, 1996 and January 31st, 1997 in breach of the Garnishee Order of May 20th, 1996.

On the question of leave, pursuant to S. 14 (2) (b) (ii), of the Supreme Court Act (Ch No 37) no leave is required in respect of the grant of injunctions, the subject of this appeal. In respect of the refusal to grant the orders, the subject of this cross appeal, leave is required. Leave was in fact sought at the hearing by way of Application for leave. Mr Hartshorn opposed the application for leave, on the basis that the application for leave and the Cross Appeal failed to specify “leave to appeal against an interlocutory judgment”. He relied on the Supreme Court decision in Pokawin & Ors v The State Unreported Supreme Court judgment No SC515 dated 10 May 1995. In our view, this submission has no basis. Pokawin’s case is authority for the principle that where a Notice of Appeal states a mixture of grounds which require leave and grounds which do not require leave, then that should be specified in the Notice of Appeal. To simply lump them together in the Notice of Appeal and state that all the grounds in the Notice of Appeal “lies without leave” or “in the alternate leave to appeal is sought at the hearing” is quiet misconceived as it does not distinguish between the requirement of S. 14 (1) and (3) (b) and should be struck out.

In our view, the Notice of Cross-Appeal in the instant appeal pleads the matter of leave to appeal in terms very similar to the terms pleaded in Pokawin’s case, but that is not the basis of PNGBC’s objection. In any case, at the hearing of the appeal, Ms Thompson rectified the irregularity by seeking leave to appeal. We have no difficulty in granting leave because the grounds set out in the cross-appeal arise from the same proceedings, the subject of the appeal. And for the purpose of determining the whole of the matters, both the Notice of Appeal and the Cross Appeal ought to be heard and disposed of together.

We will first deal with the appeal.

The orders made on 31 January 1997 were made at a preliminary hearing before the substantive hearing on the question of whether a Garnishee Order nisi made previously against PNGBC ought to be made absolute. The Garnishee Order nisi was obtained by ToMoot after PNGBC, after learning of the Garnishee Order of 20th May 1996, purported to excercise its powers under the mortgage by initially directing tenants (garnishees) to pay all rentals direct to PNGBC and not to anyone else including ToMoot. PNGBC’s action prompted ToMoot’s lawyers to object to the direction. PNGBC responded by repossessing the property under the mortgage. As a result ToMoot instituted garnishee proceedings against PNGBC, in the process of which the orders appealed from were made.

It is clear to us that the hearing of the motion by ToMoot did not involve the substantive question of whether the Garnishee Order nisi against PNGBC should be made absolute. That issue we understand is still pending. Similarly, the question of whether PNGBC had correctly exercised its mortgagee powers conferred by the mortgage or under statute was not dealt with by the trial judge. That issue could come up for determination either at the hearing of the application for Garnishee Order absolute against PNGBC or on the occasion if PNGBC or NGDC apply to set aside the Garnishee Order absolute dated 20 May 1996 against the tenants of the property. For purposes of determining these appeals, we simply assume that the mortgagee correctly excercised its rights as mortgagee. We say this despite Ms Thompson’s submission that we also deal with the question of whether PNGBC correctly excercised its powers under the mortgage.

Mr Hartshorn makes two main submissions. His first submission is that because PNGBC was not named in the Garnishee Order dated 20 May 1996, PNGBC was not in breach of that order to warrant the restraining orders issued on 31 January 1997. Alternatively, even if the Garnishee Order of 20 May 1996 applied to PNGBC, ToMoot as a judgment creditor of NGDC was an unsecured creditor which ranked second in priority to PNGBC’s interest. PNGBC was a secured creditor and PNGBC was entitled to excercise its powers under the mortgage notwithstanding the claims by unsecured creditors like ToMoot. Mr Hartshorn’s other submission is that under the garnishee proceedings against PNGBC, ToMoot was entitled to attach a debt due or accruing by PNGBC to NGDC but there was no debt due or accruing from PNGBC to NGDC. PNGBC upon taking actual or constructive possession of the property, upon excercising its powers under the mortgage, became entitled to receive the rents, as a secured creditor, and therefore, there was no debt due or accruing by the tenants to NGDC for the Garnishee Order of 20 May 1996 to become applicable to NGDC. ToMoot, as an unsecured creditor ranked second in priority to NGDC’s list of creditors. In support, Mr Hartshorn cited relevant passages from various text books including Duncan and Wilmott, Real and Personal Securities at page 69 and Fisher and Lightwood’s Law of Mortgage, Australian Edition at para 19 - 35. He also refers to S. 74 of the Land Registration Act (Ch. No 91). He also refers to various common law cases including the Privy Council decision in Dolphin v Aylward [1870] UKLawRpHL 2; (1870) LR 4 HL 486. Ms Thompson urges us to accept the trial judge’s orders for the reasons given by the trial judge.

The first issue before us is whether the Garnishee Order of 20 May 1996 applied to PNGBC. Counsel for PNGBC raised this point before the trial judge during argument on ToMoot’s motion but it seems to us that the trial judge did not consider this issue. The trial judge simply assumed that the said Garnishee Order applied to any person having an interest in the property the subject of the Garnishee Order which included PNGBC. All that the trial judge said was:

“In relation to the said order of the 20th May, 1996 regarding the Order Absolute it would seem to me that that Order is still a valid Order and it should be obeyed. It is established law that an Order of the Court should stand until it is changed or altered by another Order of a Court. The Order cannot be disobeyed just because someone is of the view that it is wrong! Yap v Tan & Ors [1987] PNGLR at page 227 makes that very clear. So to that extent I am satisfied that the orders sought in Number 3, 4 and 5 should be granted. If the garnishee is of the view that the said Order of 20th May, 1996 is wrong in law or whatever then it is up to it to seek a further Order from the Court to ensure that it can exercise its rights as a mortgagee, if necessary.”

In our view, the Garnishee Order of 20 May 1996 no doubt affected the interest of third parties such as PNGBC, and in that way, the onus was on PNGBC to challenge the Garnishee Order in a proper manner. For as long as the Garnishee Order remained on foot, the tenants of the property were obliged to obey the order. It is clear to us that PNGBC deliberately interfered with the implementation of the Garnishee Order of 20 May, 1996 in first instructing tenants not to pay rent to any other person other than to PNGBC only and then later withdrawing its instruction upon opposition from ToMoot’s lawyers and when that avenue was of no avail to it, then taking possession of the property under the mortgage. The question is whether PNGBC had any legal justification for interfering with the garnishee order.

This leads us to the next question which is the important one. That is the question of whether Garnishee Order (absolute) takes priority over a mortgagee’s right under an existing registered mortgage.

It is true that the validity of the garnishee order of 20th May, 1996 was never in doubt. The restraining orders of 31 January 1997 was founded upon that garnishee order. But at the hearing of ToMoot’s motion, PNGBC which had an interest in the rents paid by the tenants, quiet legitimately challenged the validity of that order. This raised an issue of law to be decided by the trial judge. It then became incumbent upon the court to decide this issue of law for the restraining orders could not exist in a vacuum. Although this issue could have been properly raised at the garnishee proceedings against the tenants, the same issue fell to be decided here as well because the two proceedings were inter-related. But the court failed to consider and decide this issue.

As a matter of procedural rule, the Court must first decide whether a garnishee order nisi ought to issue and made absolute. In considering whether a garnishee order should issue in the first place, the interest of third parties over the property or debt to be attached is a relevant consideration. Order 13 r 63 of the National Court Rules makes this clear when it provides:

63. Claim by other person (46/10)

Where it appears to the Court that any person other than the judgement debtor is, or claims to be, entitled to money paid into Court under Rule 59 or to the debt attached or to any charge or lien on, or other interests in that money or debt, the Court may make orders for giving to that person notice of the proceedings and may hear and determine his claim, and may direct the entry of such judgement, or make such order in respect of the claim, as the nature of the case requires. (Underlining is ours).

The National Court Rules Order 13 however is silent on the issue of whether a third party’s existing interest takes priority over a judgment creditor’s interest on the debt to be attached. The court is simply given wide discretion by Order 13 Rule 63 to “direct the entry of such judgment or make such order...as the nature of the case requires.” This discretion is to be excercised in accordance with established principles.

It is well settled at common law that the execution of a judgment debt, either by seizure and sale of the property of the judgment debtor or by attachment of debt owing or occruing to the judgment debtor, takes second in priority to the rights and interests of a third party under existing charge, lien or mortgage over the property. The fundamental principle is that a “judgment creditor can take no interest whatever, either legal or equitable, beyond what he acquires from the debtor; such as interest, in fact as the debtor himself could give, and no other. Therefore, finding what is due on his judgment debt, he proceeds elegit to enforce its recovery, and he takes the interest of his debtor in exactly the same plight in which he finds it”. (per Lord Chancellor Hatherly in Dolphin v Aylward [1870] UKLawRpHL 2; (1870) LR 4 HL 486 at 500. Also see Richards v Jenkins [1887] UKLawRpKQB 20; (1887) 18 QBD 451; Re Standard Manufacturing Co [1891] UKLawRpCh 26; [1891] 1 Ch 627; Re Opera Ltd [1891] UKLawRpCh 144; [1891] 3 Ch 260; Jennings v Mather [1902] 1 KB 2. Also see Halsbury’s Laws of England Vol. 17 (4th Edition) at para 483. We would adopt these principles as being appropriate and applicable to the circumstances of this country under Constitution, Sch. 2 because our property law is similar to that of England.

In the matter before us, the property was subject of an existing mortgage to PNGBC. In addition, there was an existing Deed of Guarantee in which NGDC further guaranteed to pay to PNGBC its income from all sources including rentals from the property, to secure a further advance made to NGDC. Therefore, the execution of the Garnishee order of 20 May 1996 against the tenants of the property was subject to NGDC’s reversionary or residual interest, that is, in any rental money remaining after first discharging the mortgage and guarantee commitments. If the property had been seized under a Writ, the same principles would apply. ToMoot’s execution of the judgment debt would only have been limited to the residual balance remaining, if any, after satisfying the mortgagee’s interest. PNGBC in the circumstances was entitled to protect its interest in the manner provided for in the mortgage and the guarantee, even if it meant interfering with the garnishee order of 20th May 1996.

For these reasons, we find that the trial judge erred in law in failing to determine the validity of the garnishee order of 20 May 1996. We find that the garnishee order of 20 May 1996 could not stand in law and hence, the restraining orders of 31 January 1997 could also stand.

Therefore we allow the appeal and set aside both orders.

In relation to the cross-appeal, we agree with Mr Hartshorn that the matters sought to be discovered by Mr ToMoot were matters known to Mr ToMoot by virtue of his being a director of NGDC. Alternatively, he could have discovered them from other sources such as from the Registrar of Titles’ files.

For these reasons, we dismiss the cross appeal.

Costs follow the event in each matter.

Lawyer for the Appellant / Cross Respondent: Shepherds Lawyers

Lawyer for the Respondent / Cross Appellant: Silan Tedor & Associates