Westpac Bank of Tonga v Fonua [2014] TOCA 6; AC 16 of 2013 (9 April 2014)

IN THE COURT OF APPEAL OF TONGA
LAND JURISDICTION
AC 16 of 2013
NUKU'ALOFA REGISTRY [LA14 of 2013]

BETWEEN :

WESTPAC BANK OF TONGA
Appellant

AND:

1. SIOSAIA H. FONUA
2. MARY PREM FONUA
Respondents

Coram : Salmon J
Blanchard J
Ward J

Counsel : Mr H. Waalkens QC & Mrs D. Stephenson for the Appellants
Mr L. Niu SC for the Respondents

Date of Hearing : 3 April 2014
Date of Judgment : 9 April 2014

JUDGMENT OF THE COURT

[1] This appeal from a judgment of the Land Court raises issues about enforcement of a mortgage over registered leasehold land on which there is situated a dwellinghouse.

[2] The respondents, Mr and Mrs Fonua, mortgaged their leasehold interest and their dwellinghouse to Westpac Bank of Tonga in 2007. The mortgage was registered under the Land Act. It is not in dispute that the respondents have failed to make repayments as required by the mortgage despite service on them of notices of demand. That default continues.

[3] Westpac lodged a notice with the Ministry of Lands under s.109 of the Land Act in which it notified its intention to take possession of the land. The 14 day period mentioned in the section has expired.

[4] In the meantime, on 1 November 2010, the Personal Property Securities Act 2010 (PPSA) had come into force. Westpac took advantage of s.65(4) of that Act by registering a notice of its interest under the 2007 mortgage. That notice was a transition notice which was registered on 13 August 2013. The mortgage was a prior transaction as defined in s.65 (1) (a).

[5] On 15 August 2013 Westpac filed in the Land Court an application for orders for possession and control of the land and dwellinghouse seeking vacant possession. It relied on s.57(2)(a) of PPSA. Section 57 reads:

Secured party's right to possession or control

(1) Upon default, the secured party may take possession or control of collateral without legal proceedings if the secured party does not breach the peace.

(2) (a) Upon default, the secured party shall be entitledto a special, expedited order from the court granting the secured party possession or control over the collateral.

(b) Issues at the hearing are limited to the existence of a security agreement covering the collateral and at least one event of default.

(c) An order to dispossess the debtor under this section may be appealed by the debtor, but no court shall stay the dispossession order or prevent the disposal of the collateral during the appeal process.

(3) If the security agreement so provides, the secured party may require the debtor to assemble the collateral and make it available to the secured party at a place to be designated by the secured party which is reasonably convenient to both parties.

(4) A secured party may render equipment unusable without removing it from its location, and may dispose of collateral on the debtor's place of business, residence, or any other location where the collateral is found.

[6] In a judgment delivered on 18 October 2013 the Lord President dismissed the application. He said that the provisions of PPSA to what he referred, primarily s.57:

"...appear to grant not only the Land Court but also the Supreme Court an unregulated mandate to make immediately effective orders for the possession of land and improvements thereto, including dwelling houses, which are incapable of being stayed pending appeal, merely upon satisfying the Court that there was in existence a security agreement (whether valid or not) and that default has occurred (whether excusable or not). To my mind, such a procedure is unfair and sits uneasily with Clauses 14, 90 and 91(1) of the Constitution. Section 58(1) appears to be in conflict with Clause 114."

[7] Although he said the two criteria in s.57(2)(b) had clearly been met, he was not satisfied that it would be just to grant the application, which would result in the present respondents immediately being evicted from their home without any effective right of appeal. He referred to the principle that "when a party is appealing, exercising his undoubted right of appeal, [the] Court ought to see that the appeal if successful is not nugatory":Wilson v Church(No 2) [1879] UKLawRpCh 233; (1879) 12 Ch D 454, 458 per Cotton LJ.

[8] The Lord President granted leave to appeal to this Court.

[9] For two reasons, Westpac's appeal must fail. The first is that Westpac was not entitled to rely on s.57 which does not apply to the enforcement of a prior transaction.Section 65(2),which was not drawn to the Lord President's attention by counsel,makes this clear:

"The validity, effect and enforcement of a prior transaction or prior lien shall be determined by reference to the law in effect when the prior transaction was concluded or the prior lien arose, except as provided otherwise in this section".

[10] Understandably, the Legislature must have considered that it would not be just to impose retrospectively ona debtor enforcement provisionswhich were not available to the creditor when the security created by the prior transaction was given by the debtor. The validity, effect and enforcement of such a security are governed by the law as it stood prior to PPSA. On the other hand, there was nothing unreasonable about enabling a holder of such a security to register it under the Act and have its priority determined by s.65 (6) and (7).

[11] The second reason why the appeal fails is that, on the basis on which it is now put before this Court, the application should have been made in the Supreme Court, rather than in the Land Court. That is because Mr Waalkens, who did not appear below, said that his client was seeking only possession of the building, which under Tongan law is not part of the land. In other words, Westpac is not now invoking any right against an interest in the land. We hasten to add that it seems that the matter was not so treated in Westpac's application and was not put before the Lord President on this restricted basis.

[12] The PPSA applies to all transactions where the effect is to secure an obligation with collateral: s.5(1)(a). Mr Waalkens elected not to pursue the questions of whether a security over a lessee's interest in land (an interest which the common law called a chattel real) is to be classified in Tonga as real or personal property, and whether such a security is within the PPSA. We note that s.5(2)(a) excludes from the PPSA a transfer of an interest in land,and that exclusion may encompass a legal mortgage of a lease pursuant to Part VI of the Land Act under which it is transferred to the mortgagee by way of security. An equitable security in the form of a charge on a lease does not involve any such transfer. As the matter was not argued, we express no view on whether it could fall within the PPSA as a species of personalty.

[13] Fortunately, the position in relation to securities on buildings is much clearer. In Tonga they are not part of the real estate and may be dealt with separately from the land on which they stand. The PPSA recognises this, for s.5(1)(e) applies the Act expressly to a security interest in a building or other improvements as well as the rental of such a building or improvements for a period greater than one year. Furthermore, s.8(1)(a)(i) provides that collateral, defined in s.2 as "personal property subject to a security interest", may be personal property of any nature and s.8(1)(h) specifically includes as collateral and thus personal property under the Act "a building or other improvement to real property to which a security interest is attached or that is rented for a period exceeding one year".

[14] Accordingly, for the purposes of PPSA buildings and other improvements, treated separately from the land on which they stand, as Westpac now wishes to do,are personalty. The jurisdiction of the Land Court therefore does not extend to them. A dispute regarding them is not one "affecting any land or any interest in land" and so is beyond the jurisdiction conferred on that Court by s.149 of the Land Act: see Niu&Ors v Tapealava AC 15 of 2012, 17 April 2013.

[15] That is sufficient to dispose of this appeal but we should not leave it without saying something about the significance of the PPSA regime and expressing some provisional views about the important question of the constitutionality of ss.58 and 57, upon which we heard argument.

[16] The PPSA regime is a major reform of unsatisfactory statutesconcerningsecurities over personal property which in common law countries had become outdated and anomalous in their operation. It classifies any arrangement which is in substance intended to provide security to a creditor over personal property as a security interest, without regard to its particular form (eg. charge, hire purchase agreement or financing lease) and regardless of where title to the collateral lies. It enables public notice to be given of the existence of the security interest and contains rules governing the priority of both notified and unnotified interests. The priority rules replace the common law rules for determining priority, again without regard to where title to the collateral happens to be. The PPSA has its origins in Article 9 of the Uniform Commercial Code of the United States of America, first developed over 60 years ago and inforce in every State. The English speaking provinces of Canada, then New Zealand (in 1999) and more recently Australia, have all adopted the Article 9 model with some local variations. The Tongan Act, we understand, was derived from the Australian legislation. As the Long Title to the Tongan PPSA says, it is an Act to facilitate business and consumer credit by providing rules on attachment, priority, publicity and enforcement of security interests in personal property. Its importance and overriding effect is apparent from s.4 which provides that in a conflict between a provision of the PPSA and any other enactment, the PPSA is to prevail unless the other enactment specifically cites or expressly amends the conflicting provision of the PPSA.

[17] Section 58 gives a secured party a right, after default by the debtor, to sell or otherwise dispose of the collateral. The Lord President was concerned that it might be in conflict with cl.114 of the Constitution, which forbids any transfer of a lease without the prior consent of Cabinet or, in the case of leases for a term of over 99 years, the prior consent of the Privy Council. But, if the PPSA does extend to securities over leases of land (a question we are leaving open), cl 82 of the Constitution (as amended) would require s.58 to be read subject to cl 114. So read, it would not be invalid.

[18] It seems likely that s.57 (set out at [5] above) is directed primarily towards chattels which a debtor can move from place to place to hinder or delay enforcement of the creditor's security. In such a case a creditor may require a peremptoryremedy in order to gain physical control of the collateral. Hence the need for the special expedited court order. However, the section is also available in relation to securities over buildings and improvements, which may also be harmed or neglected by the debtor to the prejudice of the creditor, in circumstances where speedy court intervention may be needed.

[19] One aspect of s.57 is problematical. Our provisional view is that the Lord President was right to be concerned that it would prevent a court from making an order preventing the disposal of the collateral during the currency of an appeal from an order granting the secured party possession and control of the collateral.

[20] The argument put by Mr Niu was that the court's inability to grant any form of stay is in conflict with the right to an appeal to this Court conferred by cl.91 of the Constitution. He supported the view of the Lord President that collateral might be seized and then disposed of to a purchaser for value before an appeal was heard, thus rendering the appeal nugatory.

[21] Putting the question of disposal of the collateral to one side for a moment and looking only at a situation where the creditor has obtained an order enabling it to seize control ofthe collateral (or enter into possession of a building), we think there is muchto be said for the view that, as control and possession can be restored to the debtor if the appeal succeeds, the appeal could notthereby be rendered nugatory by the absence of a stay. But if the matter proceeded further and a sale or other disposal were to occur before an appeal judgment could be delivered, then there might well be an impediment to restoring the collateral in kind to the successful debtor. There is therefore the appearance of a conflict between cl.91 of the Constitution and those portions of s.57 which would prevent the court from making any order preventing the disposal of the collateral during the appeal process: subs (2)(c) and (4). From a practical point of view, the removal of a building from the land could also result in loss to the debtor which might render a successful appeal nugatory, and it would therefore seem that the court should be able to make an order preventing removal pending the appeal decision.Apart from that aspect of s.57, however, we would not be minded to agree with the Lord President's strictures which we have quoted at [6] above.

[22] The appeal is dismissed with costs to the respondents, to be taxed if not agreed upon.

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Salmon J

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Blanchard J

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Ward J