The New South Wales Court of Appeal recently handed down an interesting decision which clarified the intersection of compulsory acquisition, receivership, liquidation and deregistration.
The facts in the case are reasonably complex, but necessary to understand the decision. A basic timeline of the matter is as follows:
- 12 August 2003: Golden Mile Property Investments Pty Ltd (Golden Mile) was incorporated.
- 14 August 2003: Golden Mile purchased land at Rouse Hill for $3.9 million, financed primarily by a loan secured by a mortgage of the land to Stacks Managed Investments Ltd (the Mortgagee).
- 14 September 2007: Golden Mile was placed into liquidation for unpaid land tax.
- 20 December 2007: The land was independently valued at $1.4 million.
- 13 August 2008: Cudgegong Australia Pty Ltd (Cudgegong) was incorporated. Two of the three directors of Golden Mile were also directors of Cudgegong.
- 22 September 2008: The Mortgagee exercised its power of sale and entered a contract to sell the land to Cudgegong for $2.2 million, with a deposit of just $2,000 and an almost four year settlement period.
- 14 February 2012: The liquidator initiated the deregistration of Golden Mile, mainly because it was unlikely any funds would be left over after the Mortgagee's sale and no creditor was willing to fund further action.
- 21 February 2012: Transport for NSW (TfNSW) wrote to Cudgegong, confirming that it intended to acquire the land in the near future. Based on an independent valuation, it was willing to pay an amount of $4.2 million 'in respect of the current market value' of the land. This was not communicated to Golden Mile or its liquidator, but it was communicated to the Mortgagee.
- 21 April 2012: Golden Mile was deregistered.
- 31 May 2012: TfNSW wrote to the Mortgagee indicating its intention to compulsorily acquire the land for the North West Rail Link. TfNSW sent copies of the letter to Golden Mile and Cudgegong.
- 21 June 2012: The Mortgagee and Cudgegong agreed to rescind the original contract for sale. On the same day, however, they entered a second contract for sale which allowed Cudgegong an extra 12 months to raise finance. The second contract also allowed for a marginally higher purchase price of around $2.8 million.
- 21 September 2012: The land was compulsorily acquired by TfNSW. Compensation was valued at just over $4 million under the Land Acquisition (Just Terms Compensation) Act 1991 (NSW) (the Just Terms Act). The Mortgagee was paid out in full by TfNSW, and a dispute arose between Golden Mile and Cudgegong as to who was entitled to the residue of approximately $1 million.
Golden Mile's argument was relatively straightforward:
- The Mortgagee had breached its duty in not properly exercising its power of sale in entering the second contract; evidence indicated the land had not been advertised for sale, nor was a fresh valuation sought. The sale price in the second contract was also some $1.4 million lower than what TfNSW was willing to pay in compensation.
- The breach of duty by the Mortgagee meant that the sale of Cudgegong was invalid in equity.
- The remaining compensation (after satisfaction of the Mortgagee's debt) should therefore flow to Golden Mile, as it held title to the land in equity.
Cudgegong opposed each of Golden Mile's arguments. In addition, it contended that because Golden Mile had been deregistered when the second contract was entered, no duty could be owed to Golden Mile as it did not exist at that time.
The Court of Appeal unanimously held:
- The Mortgagee was bound under s420A of the Corporations Act 2001 (Cth) (the Act) to take all reasonable care to obtain at least market value for the property or, if there was no market value, to obtain the best price reasonably obtainable having regard to the existing circumstances.
- The fact that a mortgagor corporation has been deregistered, and cannot itself bring proceedings to restrain (for example) a mortgagee's exercise of its power of sale, does not of itself mean that there is no duty owed by the Mortgagee.
- A mortgagor retains the right to any surplus from a mortgagee's sale; this may constitute an 'interest' for the purposes of the Land Acquisition (Just Terms Compensation) Act 1991 (NSW).
- It follows that, if the Mortgagee validly exercised its power of sale in entering the second contract, the balance of the compensation would go to Cudgegong. If the power of sale was invalid and ineffective, the excess compensation should flow to Golden Mile.
Whilst the Court of Appeal referred the matter back to the Land and Environment Court for a final determination, it did note the following:
[Mr Stack's failure to obtain a fresh valuation] may be of some significance, in that Mr Stack’s attitude appears to have been that his only concern was to obtain a price that would ensure repayment, to the two mortgagee companies of which he was a director, of the amounts secured. That attitude appears to ignore the interest of Golden Mile as the mortgagor (as well as its unpaid creditors)…
…The evidence indicates that Stacks simply did not turn its mind to the possibility of obtaining a higher price in the light of the significant changes that would affect the market value of the Resumed Land. That may well be a breach of duty by Stacks in the exercise of its power of sale.
The full decision is available at Golden Mile Property Investments Pty Ltd (in liq) v Cudgegong Australia Pty Ltd  NSWCA 100.