Ultimate Property Group v Lord [2004] NSWSC 114

A company mortgaged property to a Bank (“the lender”). The mortgage was also guaranteed by a number of other parties. When the loan subsequently fell into arrears, the lender appointed a controller to manage the mortgaged property. Shortly thereafter, the property was sold by the controller at an auction for an amount, which was less than the amount owing under the mortgage. The result was that the guarantors were liable for the short-fall.

The lender sought to recover the shortfall from the guarantors in the proceedings, but the guarantors counter-claimed on the basis that:

(1) the controller had relied on a valuation of the property that contained a critical error;

(2) the controller should have sold the mortgaged property in another manner which would have avoided a liability for GST; and

(3) as a result of the above errors, the controller had breached his duty under the general law and his statutory duty under section 420A of the Corporations Act 2001 in respect of the sale of the mortgaged property.

The duty under general law

After examining the authorities, Young CJ found that a lender does not owe a common law duty in negligence to the borrower. The lender is not liable for damages if he or she fails to get a good price when selling the mortgaged property.

However, the lender is under an equitable duty to exercise his powers in good faith and must not wilfully or recklessly sacrifice the interests of the borrower in the mortgaged property; a view taken by the Australian courts diverging from the English position in Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] CH 949.

To this end, Young CJ held at paragraph 38 that:

[The lender] has an equitable duty to act conscionably towards the mortgagor (the borrower) and persons under the mortgagor. The duty must be considered based on the whole of the mortgagee’s conduct with respect to the sale. The mortgagee may, up to a point, act solely in its interests, but it must also act conscionably toward the mortgagor and those claiming under the mortgagor.

Further at paragraph 47, His Honour cited the case of Gomez v State Bank of NSW [2001] FCA 1059 saying that:

The borrower was “required to satisfy the Court that … the Bank had so failed to take reasonable steps to obtain a proper price for the Properties that it was guilty of unconscionable conduct. It will be insufficient for [the borrower] to satisfy the Court merely that the properties, or one of them, was sold at an undervalue.”

The duty imposed by section 420A

Section 420A of the Corporation Act requires that, in exercising a power of sale in respect of property of a corporation, a controller must take all reasonable care to sell the property for:

(a) if, when it is sold, it has a market value – not less than that market value; or

(b) otherwise – the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold.

Under the section, the inquiry is whether, in the course of selling company property, the controller has taken all reasonable care to sell the property for not less than its market value. Accordingly, the section imposes on the controller, a more stringent duty in respect of the sale of company property than the duty to act conscionably imposed on the lender who is selling a mortgaged property.

As noted by Young CJ, the purpose of the section is to give an added protection to companies, which the legislature considers as necessary as the protection offered by the general law duty is considered inadequate.

Damages recoverable under the duties

Young CJ held that a contravention of section 420A of the Corporations Act gives rise to a private action for equitable damages equivalent to that available for breach of the equitable duty of a lender to act conscionably.

Did the actions of the controller amount to a breach of the duties?

In applying the above principles, Young CJ held that the controller did not breach either of his duties. In respect of the error which existed in the valuation, the controller presented evidence, which His Honour accepted, that he did not rely on the flawed valuation when considering the sale but rather his own valuation and the marketing advice of a real estate agent. Thus he had not acted unreasonably contrary to section 420A nor had he acted unconscionably.

In respect of the manner in which the property was sold, the controller explained that he had considered other methods of sale but decided on eventual manner because of the additional costs associated with the alternative schemes. Young CJ therefore held that the controller had not acted unreasonably or unconscionably.

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