Official Receiver v Schultz
Note:    Bankruptcy means you cannot repay your debts. An official receiver takes charge of your affairs (to repay creditors etc). However, after a certain period, the law says it is unreasonable to keep you enslaved forever, and you are discharged. After that, creditors cannot come back at you for more money (even if they have only received 40 cents in the dollar).

Facts:    Mrs Schultz became bankrupt but was discharged after a few years. During the term of her bankruptcy, her friend died and left her an interest in her estate (i.e. Mrs Schultz became a residuary beneficiary of her friend’s estate). She is discharged from bankruptcy and then the estate’s administration is complete and she receives property. The official receiver in bankruptcy claims the property to pay back her former creditors.

Held:    The HCA said that as soon as she became a beneficiary under the will, she had a chose in action (a property right) against the trustee. As a piece of property, the chose in action could be transferred to someone else. Here, it was transferred by the operation of the law. Bankruptcy laws say that when a bankrupt acquires property during the term of the bankruptcy, the property is transferred to the receiver. The chose in action arose during this time, so the chose in action belonged to the official receiver. When the chose in action finally bears fruit (when administration is complete), it belongs automatically to the official receiver.

“When a beneficiary transmits a chose in action (or part thereof) or that chose in action passes by operation of law, such as under the Bankruptcy Act, that transmission naturally encompasses not only the chose in action but also the expected fruits of that chose in action”

“Mere equities” and “personal equities”

•    A “personal equity” is a right to seek the assistance of a court of equity that is personal to a plaintiff
•    It is not a chose in action which may be assigned to another, nor does it attach to any specific assets of the defendant

•    Consider the concept of a “personal equity” in National Provincial Bank v Ainsworth

National Provincial Bank v Ainsworth
Facts:    A deserted wife, living in a house owned by her husband, was threatened with eviction by a bank, when the husband defaulted on a loan secured by mortgage over the home. She claimed she had an equitable interest in the home (a personal equity against the husband who is obliged to provide her with a home).

Held:    The House of Lords held that she had a personal equity against her husband. He had an obligation to continue to support her and provide her with a home. However, that personal equity did not attach to any particular piece of the husband’s real estate. This personal equity did not touch and concern the land.

This was a personal equity (a conscience obligation of the husband), but it did not attach to the house. Hence, someone else (the bank) could come and claim an interest in the house without being affected by the personal equity against the property owner.

The House of Lords said possession (enjoyment of property) does not give you an ownership (proprietary) interest in the property.

Hence, the Bank is not affected by that personal equity. The equity did not touch and concern the land that the Bank was interested in. The wife can sue the husband, but the Bank’s property rights ought not to be affected by a personal equity between the wife and the husband.

•    It is necessary to distinguish between an equity that touches an concerns land (confers a proprietary interest) and a personal equity

•    Consider the distinction between an equitable interest and a “mere equity” described in Latec Investments v Hotel Terrigal

•    A “mere equity” is a right in equity that is ancillary to an interest in land and is binding on a third party who has notice of its existence or is a volunteer
•    A mere equity usually takes the form of the right to have a transaction set aside for fraud or mistake (Latec Investments v Hotel Terrigal)

Latec Investments v Hotel Terrigal
Facts:    Latec takes a registered mortgage over a hotel owned by X. X defaults on the loan, and Latec exercises the power of sale. It should be noted that a mortgagee must exercise their power of sale properly (they cannot exercise that power fraudulently). Here, Latec sold the property at a very significant undervalue
to A (a wholly owned subsidiary of Latec). A then charges the land to T (trustees for debenture holders) so that T holds an equitable interest. Five years later, X asserts an equity to have the sale set aside as fraudulent.

X was claiming that they had an equitable interest. X argued that they used to have the legal title, and that legal title was taken by a fraud on the power of sale. Since Latec had acquired the legal title, X had an equity of redemption (which entitled X to redeem that property by paying the loan). X argued that they had an earlier equitable interest that prevailed over T’s later equitable interest. Under the general priority principles, where the equities are equal, the first in time prevails.

Held:    The court decided not to grant what X was asking for in this case.

Kitto J:        Argued that the rule about competing interests applies only to full equitable property interests. The right to set aside title for fraud (or improper purpose) is a “mere equity”. X only has a “mere equity” (not a full equitable property interest). A mere equity is less than a full equitable interest, so if there is a competition between a mere equity and a later full equitable interest, the full equitable interest prevails.

Meagher, Gummow & Lehane argue that this is not a satisfactory explanation. They prefer adopting the reasoning of Menzies J. He argues that X potentially has a full equitable interest, and that interest is proprietary in nature because it can be bequeathed to someone else (e.g. if X had been a natural person and had died, X’s estate would have acquired the same interest that X had against Latec). Hence, X’s interest is proprietary because it can be transferred.

However, in these circumstances, it is a proprietary interest that has to be acknowledged by a court of equity. X must go to a court of equity to recognise their interest. A court of equity must take into account all relevant factors, and here, that factor is the innocent intervention of a third party who, without any notice, has acquired their interest in good faith and for value. The result is that the later interest prevails. Since equitable remedies are discretionary, the court will take into consideration any other important factor which makes the remedy inequitable.

Hence, X’s right against Latec remains, but will be subject to T’s equitable interest. X has an entitlement to redeem the property but subject to T’s equitable charge (i.e. X has an entitlement to redeem the property, but they have to pay out both Latec and T). X could also abandon any claim over the property and sue Latec for breach of their power of sale.

Competing equitable claims

•    Where the equities are equal, “the first in time prevails”, but consider: Breskvar v Wall, Heid v Reliance Finance

•    First in time prevails only where the equities are equal after balancing the competing equitable interests
•    These cases introduce the idea of postponing conduct - in deciding whether the equities are equal, we examine the conduct of the person who has the prior equitable interest
•    We must consider whether the conduct or inaction of the earlier interest holder ought to be regarded as postponing, so as to deprive the earlier interest holder the advantage that he would otherwise have

What is the basis for postponing a prior equitable interest?

•    Estoppel?
o    The idea that if one person makes a representation that induces someone else to act to their detriment, that person can be estopped from asserting their own claim
o    Where a prior equitable interest holder has engaged in some conduct that has allowed the creation of other equitable interests, that earlier interest holder can be estopped from asserting their title against them

•    Agency?
o    By handing over the signed transfer, the rogue was put in a position of being the agent of the owner
o    Under principles of agency, if you give an agent authority and power, you can be responsible for the exercise of that power, so long as what the agent did was within the scope of that power
o    The principal can be bound by any transaction that the agent enters into

•    In Heid v Reliance Finance, Mason and Deane JJ argue that it is artificial to use estoppel or agency to resolve these scenarios. What we have to do is weigh the options and decide which equity is better
•    “A more general and flexible principle that preference should be given to what is the better equity in an examination of the relevant circumstances” (Mason & Deane JJ in Heid v Reliance Finance)
•    The agency argument is particularly strange, since the owner never appointed the rogue as agent

•    Equitable property interests are always vulnerable to someone coming in and taking the legal estate (bona fide purchaser of the legal estate for value without notice)