Permanent Trustee Australia v Andreas Kolozos [2005] NSWSC 420

Permanent Trustee (“PT”) as lender sought orders for possession of the defendants’ land which was secured by mortgage, upon default in making repayments. The appropriate notices were issued under the Real Property Act (1900). The defendants alleged that PT had misapplied funds from the sale of a different property pursuant to another mortgage. Instead of discharging the second mortgage the defendants alleged the funds should have been used to discharge PT’s first mortgage over the land in respect of which it now sought orders for possession.  

PT relied upon their obligation under s 58(3) of the Real Property Act (1900), which reads as follows:

The purchase money to arise from the sale of any such land, estate, or interest, shall be applied, first, in payment of the expenses occasioned by such sale; secondly, in payment of the moneys which may then be due or owing to the mortgagee, chargee or covenant chargee; thirdly, in payment of subsequent mortgages, charges or covenant charges (if any) in the order of their priority; and the surplus (if any) shall be paid to the mortgagor, charger or covenant charger, as the case may be.

The defendants as third party mortgagors of the other land relied on the obligation of good faith that the first mortgagee owed to them in the exercise of its powers: see Lloyds TSB Bank PLC v Shorney (2002) 81 1 FLR; Hancock v Williams 42 SR 253.    

The defendants also relied upon the unconscionable conduct provisions of the ASIC Act: see ss 12CA, 12CC.

Associate Justice Newman set out the relevant law:

the defendant’s relied upon what fell from Austin J in the Supreme Court in Boral Formwork v Action Makers [2003] NSWSC 713. In that case Austin J considered the reach of ss5lAA and 51AC of the Trade Practices Act (1974) – sections which are in identical terms to sections 12CA and 12CC of the “ASIC Act”. There, Austin J held that unconscionable conduct within the reach of those sections overcame the principle of autonomy. The principle of autonomy provides that a financier’s unconditional payment obligation in commercial instruments is independent of the underlying contract between the applicant for the instrument (the account party) and the beneficiary of the instrument; therefore, with limited exceptions, courts do not interfere with the performance of the payment obligation. In holding that the sections did overcome the effect of that principle, Austin J accepted the analysis of s 51AC (the equivalent of s12CC(1)) proposed by the Full Federal Court in Hurley v McDonald’s Australia Ltd [2000] ATPR 41-741. There their Honour’s said :-

“For conduct to be regarded as unconscionable, serious misconduct or something clearly unfair or unreasonable, must be demonstrated …. . Whatever `unconscionable’ means in sections 51AB and 51AC, the term carries the meaning given by the Shorter Oxford English Dictionary, namely, actions showing no regard for conscience, or that are irreconcilable with what is right or reasonable … . The various synonyms used in relation to the term `unconscionable’ imports a pejorative moral judgment …”

His Honour concluded that in fulfilling its duties under s 58 of the Real Property Act, PT’s conduct could not be categorised as unconscionable.

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