In the recent decision of Commonwealth Bank of Australia v Geoffrey Anthony Shannon [2013] NSWSC 1076 the New South Wales Supreme Court considered whether the Bank took all reasonable care to sell the mortgaged property, through receivers it appointed, for not less than market value in accordance with section 420A of the Corporations Act.

The Defendant, Mr Shannon, raised two issues in respect of which it alleged the receivers had breached their duty under section 420A:

  1. the sale was advertised as a “mortgagee sale” in heavy black type prominently across an advertisement; and
  2. insufficient efforts were made to respond to an initial offer.

In considering those issues, the Court provided a useful summary of the requirements under section 420A of the Corporations Act in circumstances where property has a market value.

Section 420A of the Corporations Act

Section 420A provides that in exercising a power of sale in respect of property of a corporation that has a market value, a controller must take all reasonable care to sell the property for not less than that market value.

The requirement imposed operates cumulatively to the obligation to act in good faith which otherwise exists under the common law.

What is market value?

Market value is the price that a willing purchaser would have to pay at arm’s length to obtain the land from a vendor willing but not anxious to sell. In the ordinary course, the sale price achieved on the open market is the market value.

What conduct will constitute a breach of section 420A?

A breach of the section will not be established merely because the sale in question did not achieve the market value. What must be shown is a failure to take reasonable care to sell the property for not less than the market value.

In deciding whether there has been a breach of section 420A, a court looks at the process gone through in selling the property. Typically the duty requires the controller 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; and
  • take reasonable steps to ascertain the value of the property before selling it, but does not require the mortgagee to determine the best price achievable or to sell for more than market value.

Applying the principles

In this case, the Court found that there was nothing improper about advertising a mortgagee sale, stating that it is not a logical proposition to suggest that such an advertisement would depress the price achieved. The Court found that advertising the property as a mortgagee sale was a considered position and by no means an inappropriate or unacceptable strategy to maximise the price achieved.

In respect of the receivers’ sale process, the Court found that the receivers obtained an independent valuation and retained professionals to engage in the marketing campaign and tender process. This process ran over two months and included aerial photography for use in promotional literature, newspaper and internet advertisements, a widely disseminated colour brochure, signboards and mail-outs from the sales agents’ databases. The purchase price accepted was the highest offer made to the receivers. Having regard to this process, the Court rejected the allegations that section 420A had been breached.

Conclusion

This case should provide some comfort to receivers and other controllers that the courts recognise the commercial realities of mortgagee sales. In this case, the court appreciated that it is a common misconception that a mortgagee sale is akin to a bargain sale.

So long as controllers conduct a reasonable marketing campaign and investigate legitimate expressions of interest, the question of whether the ultimate purchaser obtains a bargain is really in the eye of the beholder and objectively an unlikely result having regard to the duties imposed under section 420A and the general law.