Mortgagees and receivers and managers often face a difficult
task when exercising rights to sell secured property or assets. A
recent Court of Appeal decision has again highlighted some of the
difficulties that can arise and the financial consequences that can
result if a judge thinks it was done incorrectly.
The Court of Appeal's decision has rejected a
mortgagee's appeal against a finding that it breached its
duties when exercising its power of sale.
The duties on mortgagees and receivers are set out in various
conveyancing legislation as well as in the Corporations Act
2001 (the Act) and are largely the same. For example, section
420A(1) of the Act provides:
"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:
if, when it is sold, it has a market value – not
less than that market value; or
otherwise – the best price that is reasonably
obtainable, having regard to the circumstances existing when the
property is sold."
In Glodale Pty Limited & Ors v Investec Bank (Australia)
Limited (2007) the Judge found that the mortgagee had failed
to properly fulfil its power of sale duties and awarded damages of
A$2,714,250 against the mortgagee. The mortgagee appealed the
Two important aspects of the mortgagee's duty, when
exercising its power of sale were considered by the Court
1. Selling The Mortgaged Property In One Line
The mortgaged property consisted of two apartment complexes in
Port Douglas, Queensland. Rather than taking steps to sell the
apartments individually, the mortgagee decided to sell each complex
in its entirety (or "in one line"). The mortgagee was
able to point to a number of reasons why it took this course and
the trial judge ultimately agreed that in this case a sale in one
line was an acceptable method of sale.
The Court of Appeal agreed, noting in particular, that the sale
in one line was appropriate given the loan had been in default for
sometime, substantial interest continued to accrue (and would keep
accruing during the longer period necessary for individual sales)
and the owners had previously been unsuccessful at selling the
2. Breach Of Duty
On the basis that a sale in one line was allowed, the second
issue considered was whether the mortgagee breached its duty in
exercising its power of sale.
The trial judge had identified two deficiencies in the sale
process. First, the mortgagee failed to retain a local Port Douglas
agent for the sale. The mortgagee had retained a Melbourne based
agent (with no experience in the Port Douglas market) who in turn
retained a Cairns based agent to conduct the sale. The evidence
established that Cairns and Port Douglas were separate markets with
different agents servicing the two areas. Although the mortgagee
argued that a local agent was not required for a sale in one line,
the Court of Appeal disagreed and affirmed the views of the trial
The second breach by the mortgagee related to the information
provided in the tender documents and the way the properties were
presented for sale. Among other things, the tender documents
described the properties as having a "troubled history"
and that the fire safety at the properties was "high
risk" without adequate further explanation. The trial judge
considered such comments painted an unnecessarily dim view of the
properties. The judge was also critical of the mortgagees closing
certain rooms in the apartments because the planning requirements
did not allow those rooms to be used as bedrooms and presumably the
mortgagee did not want to confuse potential purchasers. The Court
appeared to be of the view that the more appropriate course was to
leave the rooms open but explain the planning issue.
Given the Court of Appeal had already found a breach of duty
based on the failure to retain a Port Douglas agent, it did not
make any findings on this further breach but the Court appeared to
support a number of the trial judge's comments.
It is often difficult to draw general principles from cases
relating to the exercise of a power of sale given they almost
always turn on their own specific facts. If nothing else, this case
confirms the importance of engaging appropriately qualified agents
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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