The Supreme Court of New South Wales recently considered section 420A of the Corporations Act 2001 (Cth) (the Act) in the context of a Receiver selling secured property without first advertising and offering the property for sale by auction.

Despite no final determination being made as to whether the statutory duty under section 420A had been breached, the decision of In the matter of Australasian Barrister Chambers Pty Ltd (in liquidation) [2017] NSWSC 597 provides Receivers with a timely reminder that they may breach their duty of care if they sell property over which they are appointed without first conducting a marketing campaign or running a public auction.

Background

In October 2016, a Receiver was appointed over a commercial strata title unit in Sydney’s CBD (Property) by the Court after a successful winding up application in respect of unpaid strata levies exceeding $70,000. The terms of such appointment expressly permitted the sale of the Property by public auction or by private treaty, at the Receiver’s discretion.

Shortly after appointment, a member of the building’s body corporate who owned an adjacent lot of property within the building contacted the Receiver to express an interest in purchasing the Property. A valuation was subsequently obtained, placing its open market value at $550,000. Having received this valuation, the Receiver notified the interested party that it would only consider offers over $600,000, at which point an offer for $618,000 was submitted by the interested party (and ultimately accepted).

Despite achieving a sale price that exceeded the market valuation by 12%, provided for prompt exchange and completion of the contract and avoided agent’s commission, auction fees and additional agent’s costs, the registered owner of the Property applied for injunctive relief seeking to restrain the Receiver from completing the sale of the Property. The registered owner contended that in selling the Property, the Receiver had breached his duty of care in exercising a power of sale as required by section 420A. The basis of that contention centered on the Receiver’s conduct in failing to engage an advertising campaign, place advertising signs on the street front of the building, engage a local agent to market the Property and not publically auctioning the Property.

Legal Principles

Section 420A of the Corporations Act provides as follows:

Controller's duty of care in exercising power of sale

  1. 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.

The legislation, which applies to both court appointed and privately appointed Receivers as well as mortgagees-in-possession, does not identify specific parties that may bring an action against a Receiver for breaching this duty. However, the courts have recognised that an action for breach of section 420A may be commenced by a number of parties including a secured creditor, the company (as mortgagor) and guarantors.

In handing down the decision, the court reaffirmed that any determination as to whether section 420A has been breached requires an examination into the process undertaken by the controller. The relevant question is whether the controller failed to do what a reasonable and prudent person would do, or has done what a reasonable and prudent person would refrain from doing in the circumstances.1

In delivering his judgement, Justice Black referred to several authorities which lend weight to the proposition there is no mandatory requirement to advertise and publically auction a property in order to achieve market value and expressed serious reservations about the proposition that a sale, made at or above a reliable market valuation albeit without advertising and by private treaty, would necessarily contravene section 420A of the Act.

Despite the weight of those authorities, his Honour noted a contrary decision of the Full Court of the South Australian Supreme Court, in which it was held that:

The duty expressed in section 420A(1)(a) is a duty to take all reasonable care to sell the property for not less than market value … It requires the mortgagee to put the property on the open market and bring it to the attention of potential purchasers by advertising and responding to all enquiries and expressions of interest.2

Accordingly, and strictly on the basis of the South Australian appellate authority, Justice Black recognised that it was possible to:

… establish a seriously arguable case that a failure to put a property on the open market would, without more, establish a contravention of section 420A of the Corporations Act.3

However, ultimately the registered owner’s application for an interlocutory injunction was unsuccessful based on the plaintiff’s inability to establish any loss arising from the Receiver’s alleged contravention and that the balance of convenience favoured ameliorating any financial detriment suffered by creditors.

Key Takeaway

The standard of care required of controllers when exercising their power of sale is to be determined by reference to the prevailing circumstances at the time of sale. However, this case provides a reminder that it is prudent for a Receiver or mortgagee-in-possession to undertake a marketing campaign and auction process as part of the sale process irrespective of surrounding circumstances (such as a robust market valuation) to satisfy the obligations under section 420A of the Act.