Latec Finance v Knight [1969] NSWLR 79

Latec Finance v Knight, a 1969 New South Wales Law Reports case, concerns the doctrine of notice in the context of equitable interests in property, specifically a mortgage. It significantly clarifies the circumstances under which a prior equitable interest (in this case, a defrauded mortgagor’s equity to set aside a fraudulent sale) loses priority to a later equitable interest (a subsequent equitable charge created by the purchaser).

The factual background involves Latec Finance providing finance to Hotel Terrigal Pty Ltd secured by a mortgage over the hotel. Hotel Terrigal defaulted, and Latec exercised its power of sale as mortgagee. Critically, Latec sold the hotel to its wholly-owned subsidiary, Southern Hotels, at what appeared to be a significant undervalue. This transaction raised suspicion of a fraudulent or improper exercise of the power of sale.

Years later, Southern Hotels granted an equitable charge over the hotel to Knight as security for a debt. Knight was unaware of the potential fraud surrounding the original sale from Latec to Southern Hotels. Hotel Terrigal, realizing the potential impropriety, brought an action seeking to set aside the original sale to Southern Hotels, arguing it retained an equity to set aside the transaction due to Latec’s fraudulent conduct.

The central legal issue was which equitable interest took priority: Hotel Terrigal’s earlier equity to set aside the fraudulent sale or Knight’s later equitable charge. The court had to determine whether Knight took its equitable charge without notice of Hotel Terrigal’s earlier equity.

The court held that Knight’s equitable charge took priority. While Hotel Terrigal’s equity to set aside the sale was indeed prior in time, Knight was deemed to be a bona fide purchaser for value without notice. The crucial point was that Knight had no actual, constructive, or imputed notice of the potential fraud. Constructive notice requires that a purchaser has made reasonable inquiries and would have discovered the earlier equitable interest if those inquiries had been properly pursued. The court found that Knight was not put on inquiry regarding Latec’s original sale to Southern Hotels. The mere fact that Southern Hotels was related to Latec was, on its own, insufficient to impute notice of potential fraud. Years had passed, and there was no outwardly suspicious element to the transaction as it appeared to Knight.

This case reinforces the principle that a later equitable interest will prevail over an earlier one if the holder of the later interest is a bona fide purchaser for value without notice of the earlier interest. It emphasizes the importance of conducting thorough due diligence and making reasonable inquiries when acquiring an interest in property. Furthermore, it clarifies that mere suspicion or a tenuous connection to a potentially fraudulent transaction is not enough to constitute constructive notice; a purchaser must be put on inquiry and have failed to reasonably investigate suspicious circumstances.

Latec Finance v Knight remains a landmark case in Australian property law, providing important guidance on the doctrine of notice and its application to equitable interests.