The consequences of a 2nd ranking mortgagee paying the debt owing to the 1st ranking mortgagee…
In this edition of our newsletter we are going to briefly examine what rights a 2nd ranking mortgagee has in respect of collateral securities and guarantees given to a 1st mortgagee after it pays out the debt owing by mortgagor (borrower) to the 1st ranking mortgagee.
In 2011, Geltonia Pty Ltd borrowed money from Westpac in order to develop a property at Annandale (“Westpac Mortgage”). Magasi Pty Ltd and John Lyons Rigelsford gave guarantees and collateral mortgage securities in respect of the Westpac Mortgage. During the development of the Annandale property, Huizhong Investment Group Pty Ltd (“Huizhong”) lent money to Geltonia Pty Ltd and were granted a second mortgage by Geltonia Pty Ltd over the property.
In early 2015, Huizhong took the decision to pay in full the Westpac Mortgage and in return took assignment of this 1st ranking mortgage. Subsequently, Huizhong proceeded to exercise its power of sale and ultimately sold the property in Annandale for $7.9 million. Huizhong applied this money in reduction of the money owing to it under the 2nd ranking mortgage.
Huizhong believed that it was also entitled to then seek to recover the balance of the money owing by Geltonia Pty Ltd from Magasi Pty Ltd and Mr Rigelsford who were identified as guarantors. The guarantors resisted this claim and were successful.
The Court held that when Huizhong took an assignment of the Westpac Mortgage, Huizhong held all of the rights under that mortgage but no more. Huizhong did not have the right to seek recourse against the collateral securities. In addition, the Court held that Huizhong should have paid the money it received on the sale of the Annandale property first in payment of the Wesptac Mortgagee, which would have been paid in full, and the balance in reduction of their debt owing under the 2nd ranking mortgage.
Ultimately, Huizhong found themselves in the position of having their debt of more than $14 million paid only in part and were unable to recover the money they had paid to Westpac – a very unsatisfactory commercial result.
COVID-19 Update
In order to protect the safety of our professional staff and and the widen community during this unprecedented period created by the novel virus Covid-19, we at Jackson & Associates, Solicitors have taken all steps to continue to work and assist our clients electronically. As such, our office is and will continue to remain fully operational as we all deal with the Covid-19 crisis.
Should any of our readers have any legal problems that they wish to discuss, please do not hesitate to contact Peter Jackson at pjackson@jacksonassoc.com.au or Costin Stan at cstan@jacksonassoc.com.au.