Australia: Dispute over adequacy of mortgage default notice

Last Updated: 7 December 2014
Article by Danielle Kuti
Focus: Salta Constructions Pty Ltd v St George Bank - [2014] VSCA 289
Services: Dispute resolution & litigation, Financial services
Industry Focus: Financial services

Salta Constructions Pty Ltd v St George Bank [2014] VSCA 289

St George Bank was recently successful in the Victorian Court of Appeal in defending a claim by a second mortgagee disputing St George's ability to rely on default notices to recover amounts owing under guarantees.


In 2004, First State Developments (WA) Pty Ltd (FSDWA) mortgaged its property in West Perth to St George. By 2007, the mortgage became security for various loans and guarantees in the name FSDWA.

In 2009, FSDWA granted two further mortgages over the property to Salta Constructions. In 2012, St George appointed receivers to the property which was subsequently sold for $20 million. St George retained the proceeds of sale as monies it claimed it was owed pursuant to the secured loans and the guarantees.

Salta Constructions sought to have those proceeds of sale referable to the guarantees paid to it on the basis that St George was not entitled to retain those funds.

Under the terms of the mortgage to St George, FSDWA agreed to pay to St George on demand the 'amount owing' specified in the demand. The 'amount owing' was defined in the mortgage to include all amounts that 'at any time' were 'payable, are owing but not currently payable, are contingently owing, or remain unpaid by you to us' or 'are reasonably foreseeable as likely...'.

Under each guarantee FSDWA agreed to pay 'the guaranteed money' to St George 'on demand', whether or not a demand was made on the customer.

The default notice

In August 2012, St George served a default notice on FSDWA which was headed 'Notice of Default' and referred to s 106 of the Transfer of Land Act 1893 (WA).

The notice was addressed 'TO THE BORROWERS AND MORTGAGORS NAMED BELOW'. The 'Lender' was identified as St George and the 'Borrower(s)', also called 'you', was identified as FSDWA. The property was identified as the 'Mortgaged Property', and the 'Mortgage' was identified as the mortgage granted to St George over the property by FSDWA in 2003.

The notice identified nine loan numbers, the amounts of the loans and the total of the loans ($54,215,174.50). While the first two loan numbers (totalling $16,911,069.05) represented facilities granted to FSDWA, the remaining seven (totalling $37,304,105.45) represented facilities granted to the other companies which were guaranteed by FSDWA.

In the notice of default, the 'Loan Agreement' was described as:

Loan Agreement between the Borrower and the Lender dated 19 September 2007 as varied by letters dated 5 March 2009, 23 June 2009 and 21 October 2009, and unlimited Guarantee and Indemnity with respect to the obligations of Gallway Investments Pty Ltd as Trustee for the Gordon Family Trust and Tilley Properties (Qld) Pty Ltd as Trustee for the Tilley Properties Trust (Qld).

The 'Total Amount Due' was described in the notice of default as:

$54,215,174.50 as at 1 August 2012. This is the amount which is required to be paid to repay your loan in full; as at the date specified. The amount required to pay out your loan changes each day as interest and charges accrue and payments are credited.

Decision at first instance

The central issue before the Court was whether the default notice constituted a demand under the guarantee.

Salta Constructions maintained that in the absence of a demand under a guarantee, no amount was owed, contingently or otherwise and, therefore, St George was not entitled to retain those funds which related to the guaranteed debt.

St George contended that the amount owing included amounts under the guarantees even though a demand might not have been made and further, even if liability only crystallised under a guarantee on demand, it had the right to retain the proceeds of sale pending the amount becoming due and payable. Clause 27.2 of the mortgage provided:

If, at the time we receive the money, any part of the amount owing is not then due for payment, we may retain an amount equal to that part. We must hold it in an interest bearing account. We may use it (and any net interest after tax — including income tax) to pay the amount owing when it becomes due for payment.

St George maintained that if necessary it could serve demands under each guarantee to crystallise the liability and draw down on the retained funds.

Salta Constructions argued that cl 27.2 did not prevail over s 61 of the Property Law Act 1969 (WA), which sets out the priority in which mortgagee sale proceeds are to be applied and states that following discharge of the money owing under the mortgage any residue is to be paid to the person entitled to the mortgaged property, or authorised to give receipts for the purpose of the sale thereof.

Salta Constructions argued that in the absence of a proper demand under the guarantees there was no amount actually owing or due for payment.

The Court held that there is no tension between the operation of cl 27.2 and s 61. Clause 27.2 provides machinery for the management of funds in anticipation of an amount owing that is not yet due and payable. Additionally, the Court was satisfied that the notice of default was, in any event, a demand for payment on the guarantor under the guarantees.

Court of Appeal

On appeal Salta Constructions maintained that the notice was not a demand under the guarantees for various reasons including:

  • the notice was served under s 106 of the Act in order to enliven the power of sale under s 108 of the Act
  • the notice was not addressed to FSDWA as a guarantor
  • the notice was not addressed to any of the other guarantors
  • it was erroneous to refer to the existence of a loan debt of $54,215,174.50 because FSDWA was only itself indebted for a fraction of that amount, and
  • the language in the notice was passive rather than active as you would expect in a demand ie it referred to a 'default' and how the default 'should be remedied'.

The Court held that:

  • simply because the notice was made pursuant to s 106 and 108, this did not preclude the possibility that the notice also constituted a relevant demand for payment from FSDWA under the guarantees
  • despite the notice referring to an unlimited guarantee (rather than specifying one or all three guarantees), there was no relevant difference between the guarantees in its terms
  • although the notice was not addressed to FSDWA as a guarantor, it was plain from the loan numbers, the definition of Loan Agreement and the total amount claimed that St George required FSDWA to pay the amount of $37,304,105.45 under the guarantees in addition to the $16,911,069.05 due under the bill facility (a total of $54,215,174.50)
  • St George was entitled to make a demand for payment on FSDWA as guarantor without making any demand on any other guarantor.


Although St George was successful at first instance and in the Court of Appeal, this case is a timely reminder of how delays and costs can be incurred in litigation when a dispute arises over the adequacy of default notices.

Perceived or apparent shortcomings in default notices can potentially impact all subsequent recovery action taken on the back of those notices.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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