Permanent Custodians v AGB Developments [2010] NSWSC 540

The lender (“PC”) sought to recover from two guarantors (“Gore” and “Atkinson”) the balance of the loan, following default by the borrower (“AGB”).

Terms of consent judgement were agreed but not entered, in these terms:

Judgment in favour of the plaintiff against the second defendant and third defendant in the amount of $705,093.97, being the amount owing under the Guarantee as at 17 August 2009.

After the sale of the mortgage property the balance owing was $222,491.98.

The consent judgement was not entered because the guarantors filed a cross-claim that alleged the agreement to settle the proceedings by consent judgement contained an implied term that PC would do all it could to achieve the best price when it sold the property, and alleged that there was a breach of that term when the best price was not obtained. The cross-claim rested on the duties PC was said to have owed to the guarantors.

There was no evidence to show that the property had been sold at an undervalue. Leave to file the cross-claim was refused by Justice Davies on the basis that there was no arguable case for sale at an undervalue in breach of the mortgagee’s duty to the guarantor.

Justice Davies also rejected a claim based on s 420 of the Corporations Act quoting Justice Bryson in GE Capital Australia v Davis [2002] NSWSC 1146; (2002) 11 BPR 20,529, as follows:

Subsection 420A(1) is markedly unlike s 85 of the Property Law Act 1975 (Queensland) in that s 85 expressly confers a right to damages. On the face of sub-s 420A(1) it was enacted for the protection of the corporation over the property of which a controller exercised power of sale, and it might also be that it was enacted for the protection of other persons who had interests in property owned by a corporation. There is nothing in the terms of s 420A, or elsewhere in the Corporations Act, which indicates that it was enacted for the protection of persons who do not have interests in the property of the corporation, such as guarantors who incur obligations by reference to the obligations of the corporation. Their obligations are not obligations to the corporation, they do not have an interest in its relevant property and they have not entered into any relevant contractual relationship with the corporation, in respect of its property or otherwise; they have guaranteed an obligation of the corporation to a third party. There is in my opinion no basis for the view that s 420A, alone or with the aid of context, operates or was intended to operate so as to confer a right to recover damages or any other right to a remedy on guarantors. The subsection speaks with Delphic simplicity and exemption from interrogation by saying what the controller must do without referring to consequences of failure to comply.

In s 420A the only allusion to remedies is contained in sub-s 420A(2) which preserves the generality of duties imposed by several other sections; this does not do anything to indicate a legislative intention that there should be any particular remedy for breach of sub-s 420A(1). Counsel did not refer to any general provision of the Corporations Act which created a right of action or entitlement to damages; to my reading there is no provision to that effect which relates to s 420A.

Section 85 of the Property Law Act 1975 (Qld) by sub-s 85(1) creates a duty of a mortgagee in a provision which, from its terms appears to have been a model on which s 420A was based, and goes on in later subsections to regulate the conduct of the mortgagee in detail and in ways not found in s 420A or in any related provisions. Sub-section 85(3) expressly confers a right to damages:
(3) The title of the purchaser is not impeachable on the ground that the mortgagee has committed a breach of any duty imposed by this section, but a person damnified by the breach of duty has a remedy in damages against the mortgagee exercising the power of sale.

A guarantor who suffers loss through breach of sub-s 85(1) has a remedy in damages: Higton Enterprises v BFC Finance [1997] 1 QdR 168. By providing for this remedy s 85 indicates the legislative intention as to the persons to whom the duty of a mortgagee created by sub-s 85(1) is owed. Section 420A contrasts strongly as it contains no express statement of remedies intended to be created, and no indication of the persons for whose benefit the controller must act as required, apart from the reference to the corporation property of which is sold. It contains no express indication whether or not a wider class of persons such as guarantors who have involved themselves contractually in the outcome without having any interest in the property of the corporation are intended to be given any protection or remedy. (emphasis added)

As to whether a statutory duty gives rise to a remedy, Justice Davies quoted the following passage from GE Capital Australia v Davis:

My view is that the requirement imposed on the controller by sub-s 420A(1) takes the place of, or it may be operates cumulatively to the obligation otherwise existing with the general law of a controller exercising power of sale in respect of property of a corporation. In so doing the section enhances the duty of the controller and the protection afforded to the corporation. This is achieved, and the apparent legislative intention is fulfilled without altering the remedies available to the corporation for breach of obligation in exercising the power of sale, and without altering the means available for obtaining remedies. Where real property subject to a mortgage has been sold and the mortgagor succeeds in establishing that there has been a sacrifice of the mortgagor’s interest in the exercise of the power of sale the mortgagor’s remedy is to be credited compensation when accounts are taken of the mortgage debt. Subsection 420A(1) alters this scheme by inserting a more stringent rule, but does not otherwise change the scheme.

Section 420A can readily be given full and effectual operation without resorting to any implication of an intention to confer a remedy in damages on corporations which mortgage their property, still less to confer such a remedy on guarantors of the debts of those corporations; section 420A can readily take a place in the existing remedies without supposing that it was intended to confer or that it does confer any rights at all upon guarantors.
In my view s 420A was plainly enacted for the protection of the corporation the property of which is referred to, and the implication that the duty created by sub-s 420A(1) should be enforced by a remedy conferred on the corporation is irresistibly clear, notwithstanding that the legislation does not specify what that remedy is to be. In the context of the exercise of a power of sale in a mortgage over property of a corporation the corporation had, before s 420A was enacted, a remedy against the mortgagee, and an efficacious and reasonable operation can be attributed to sub-s 420A if the duty in that subsection takes the place of the test of entitlement of the corporation to what would otherwise be its remedy. There is no context of an existing entitlement under Common Law to damages, and no reference in the legislation to any such entitlement, in strong contrast to the Queensland legislation. The intention of the legislature should be understood to be that the corporation as mortgagor was to have the remedies already available to it, but the availability of the remedies was to be tested by reference to the duty in sub-s 420A(1). In reasoning in this way I echo the last passage I have set out from the judgment of Dixon J in O’Connor; a specific rule for the protection of the interests of corporations is prescribed in a matter where the mortgagee is under the general law already subject to a duty in favour of the corporation, and the effect of s 420A(1) is to redefine the duty and what must be done to protect the corporation and its property when affected by exercise of a power of sale.

In my view there is nothing to indicate that it was the intention of the legislature that sub-s 420A(1) should confer any right or remedy on guarantors or other persons who involve themselves contractually in consequences of the exercise of the power of sale, but the guarantor is entitled to rely on the availability to the mortgagor of a remedy, whether the remedy was that previously established by Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676 or is now the remedy available to the mortgagor on breach of the duty declared by sub-s 420A(1); the guarantor is entitled to have an equitable remedy on the basis that the mortgage accounts are taken on whatever may be the principle truly applicable to taking mortgage accounts. In my opinion the equitable remedies which in an earlier state of the law were available to a guarantor where there was a breach of the mortgagee’s duty to a mortgagor corporation are now to be tested by reference to whether there was a breach of the duty stated in sub-s 420A(1). (emphasis added)

Justice Davies decided that s 420 of the Corporations Act did not create a remedy and pointed out that the view of Bryson J has been followed by Young CJ in Eq in Ultimate Property Group Pty Ltd v Lord [2004] NSWSC 114, (2004) 60 NSWLR 646 at [87] and [94], and Florgale Uniforms Pty Ltd v Orders [2004] VSC 65.

Justice Davies also pointed out that the type of claim relied on by the guarantors, that PC as mortgagee in possession exercising a power of sale had breached a duty to take reasonable care to obtain a the market value or best price for the property, had been “rejected again and again in New South Wales”. There is no duty from which a claim of negligence arises that a mortgagee must take reasonable care to obtain the best price. Justice Davies explained why:

The idea that a mortgagee owes a duty of care derives from the decision of the English Court of Appeal in Cuckmere Brick Co Ltd v Neutral Finance Ltd [1971] Ch 949. The Cuckmere approach was rejected by Needham J in Porter v Associated Securities Ltd (1976) 1 BPR 9279 and again in Expo International Pty Ltd v Chant [1979] 2 NSWLR 820 at 835. Young CJ in Eq in Lord discussed the authorities and concluded that there is no common law duty in negligence on a mortgagee in NSW which makes a mortgagee liable in common law damages if he fails to get a good price for the mortgaged property– see at [26].

If, of course, s 420A is engaged then that impacts on the nature of the duty owed by the mortgagee but, for the reasons already discussed, does not in itself provide a remedy. Nor does the existence of the duty in s 420A result in there being a general duty independent of that section.

Justice Davies found the cause of action for negligence and pursuant to s 420 of the Corporations Act were misconceived.

As a result leave to file the cross-claim was rejected and consent judgement entered in the terms originally agreed.

Justice Davies considered whether the allegation of implied terms in the agreement for consent judgement would justify a stay of execution of the orders. His Honour noted the existence of an implied term of good faith but pointed out that was not the implied term on which the guarantors relied. The implied term alleged by the guarantors was:

At all material times Permanent owed to Gore and Atkinson.

  • an implied duty, as part of the Agreement, to:
    a) ensure that it did all things reasonably necessary to sell the Security Property for the best price obtainable, and to enable Gore and Atkinson to have every reasonable chance, under the Agreement, to mitigate or avoid altogether any shortfall in the net sale proceeds; and
    b) sell the Security Property having regard to the interests of Gore and Atkinson under the Agreement;
    (“the Implied Duty”)

Justice Davies found that the alleged implied term “scarcely satisfies a number of the criteria that need to be satisfied to imply a term in accordance with what has been said in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 and the cases which have followed it. The contract is effective without the implication of such term and (despite what was submitted) it is not so obvious that it goes without saying that there should be such a term in the contract”. The alleged term was also not capable of clear expression that would enable it to be enforced. His Honour added:  

as the Court of Appeal made clear in Graeme Webb Investments Pty Ltd v St George Partnership Banking Ltd [2001] NSWCA 93 at [91] a creditor does not have a general obligation to act in the best interests of a surety. That is further reason that that term, at the least, would not be implied.

As a result Justice Davies rejected the existence of an implied term as alleged by the guarantors, so that there was no basis for a stay of execution of the Consent Judgement on that basis.

Justice Davies considered the relationship between the rights of guarantors in equity and the contract of guarantee, again quoting Justice Bryson on the subject in GE Capital, as follows:

The jurisdiction of courts and the rights of parties to make claims before courts are not conferred by contract and cannot be ousted by contract. However there is in my opinion no infringement of this principle where parties agree that in stated circumstances a particular sum of money will change hands without the opportunity at the same time to obtain judicial disposition of any other claim between them. In the contract of guarantee there is no infringement of the principle where parties agree to ensure that the guaranteed sum will be paid, and make this the more certain by postponing litigation raising any cross-claim or set-off.

The effect in substance of the provisions of the guarantee including cl 8.1(a) is that there is no limit on the right to resort to the courts if the guarantor first meets the obligation the protection of which is the primary purpose of the guarantee and indemnity, and pays the amount of the debt. It is well established in this area of the law that the guarantor can have recourse to securities given by a principal debtor to indemnify himself, but that he cannot do so until he has paid the whole debt. The validity of modifications of what would under the general law be the rights of guarantors is well established. These contractual provisions extend the ways in which the guarantors’ remedies are postponed, and extend the creditor’s freedom from competition in enforcement of its rights. The condition which must be fulfilled is directly related to the purposes of the agreement.

In my opinion the operation of cl 8.1 and cll 9.1 and 9.2 of the Guarantee according to their terms is not contrary to any principle of law.

Justice Davies found that the clauses of the guarantee in question were similar to those considered in GE Capital and that the same result pertained. That is, there was no conflict between the terms of the guarantee and the guarantor’s rights in equity, namely the right of subrogation. As a result, it was the terms of the guarantee that governed the relationship between lender and guarantor. The effect of those terms was that the guarantors were obliged to pay the whole of the shortfall to PC and were not entitled to set-off any claim against PC, including a claim for sale at an undervalue. Until that amount was paid, the guarantors could not bring any claim against PC in relation to the sale of the property.

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