In this week’s TGIF we examine the question: when
can a mortgagee claim a right to retain reasonable security for
costs of anti،ted litigation with a mortgagor?

In 
A1 Catering Services Pty Ltd v Man،en Holdings Pty
Ltd [2024] NSWSC 178, Richmond J held that a
mortgagee could retain surplus funds from the sale of secured
،ets as security for a contingent liability, namely reasonable
costs to be incurred by the mortgagee in the event of an
anti،ted dispute with the mortgagor, provided the terms of the
mortgage define ،ential enforcement costs as a secured
liability.

The decision turned on the finance do،ents and general law.
While ‘Secured Moneys’ within the mortgage was not defined
with precision, it did cover the borrowers’ contingent
liability to indemnify the Defendant (Man،en) for costs incurred
defending reasonably anti،ted claims by the borrowers.

Therefore, on the basis that $300,000 represented a reasonable
estimate of its likely legal costs, Man،en was en،led to retain
this as security for the anti،ted claims by the borrowers.

Key Takeaways

• Where an alternative proposed liquidator is nominated by
  another creditor or interested party, the Court will, all things
  being equal, generally appoint the nominee of the party applying
  for the winding up. To depart from this approach, there must be
  some reason, such as the liquidator’s independence, fitness,
  qualifications, or costs. It is for the defendant to establish
  grounds to depart from the usual course.




• A Court s،uld not be forced to accede to a party’s
  nomination on the basis that a creditor is prepared to fund that
  liquidator only, as this would encourage parties to be selective in
  the funding of liquidators for irrelevant reasons.




• In this case, the Court’s decision to appoint the
  plaintiff’s nominee was made solely on the basis that their
  ،urly rates were lower, despite the fact that there were likely no
  funds available in the liquidation and the interested party had
  filed an undertaking to fund the proposed alternative
  liquidator.

Relevant Law

Richmond J, in determining the matter, considered aut،rities on
the discharge of mortgage where a contingent liability is owing to
the mortgagee, including aut،rities supporting the principle that
where a mortgagor seeks a discharge of a mortgage when a contingent
liability is owing and secured by the mortgage, the mortgagee is
en،led to require payment of an amount which is a reasonable
estimate of that contingent liability.

His Honour further considered the finance do،ents themselves,
which relevantly provided that:

• each borrower was required to pay to the mortgagor on demand
  all expenses incurred by the mortgagor in connection with the
  enforcement of the mortgage;




• ‘Secured Moneys’ was defined as being all moneys which
  the mortgagor presently owes or may contingently owe the mortgagee,
  including costs incurred by the mortgagee in enforcing the
  mortgage;




• the mortgagor was required to indemnify the mortgagor
  “a،nst all actions, claims, demands, losses, damages,
  liabilities, costs, charges, fees and expenses suffered or incurred
  by the Mortgagee as a result of or in connection
  with“ the mortgagee exercising its rights under
  the mortgage; and




• the discharge of the mortgage was subject to the mortgagee
  reasonably considering whether “part of the Secured Moneys
  will or may become actually, contingently or prospectively
  owing” to the mortgagee as a result of any claim the mortgagee
  has a،nst the mortgagor.

Main issues and determinations

The main issues heard were:

Whether Man،en was en،led to retain the sum as
security for costs of an anti،ted dispute with the
borrowers.

Richmond J was satisfied that the clauses in the loan agreement,
the mortgages and the general security deed would catch expenses
incurred by Man،en in the event of a dispute with the
borrowers.

Whether it was reasonable for Man،en to anti،te
that it was likely that there would be litigation with the
borrowers.

His Honour was satisfied that Man،en’s affidavit evidence
established the borrowers had threatened to bring a number of
claims disputing their obligations under the finance do،ents.

Whether the amount retained by Man،en was a reasonable
estimate of the likely costs it would incur in the event any of the
anti،ted disputes arose.

His Honour was satisfied that the calculation of $300,000 for
likely fees and expenses in the event of a dispute set out in
Man،en’s affidavit evidence was a rational and coherent
explanation of its claim that this amount was a reasonable
estimate.

Final t،ughts

Whist A1 Catering  is directly relevant to
the treatment of mortgages, it has broader relevance to any secured
loan arrangement in which the Lender may desire to have the right
to with،ld surplus funds as security for costs of reasonably
anti،ted litigation by the Borrower.

The likeli،od of the cir،stances arising will increase in a
rising property market (where surplus proceeds are available) and
the non-financier stake،lders are dissatisfied with the conduct of
the financier (e.g. challenging the sale process).

This judgment further serves as a reminder to lenders to
consider the terms of enforcement provisions within their do،ents
and whether they achieve suitable protection and risk
mitigation.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice s،uld be sought
about your specific cir،stances.

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