Once appointed, mortgagees in possession (and receivers) owe a duty of care when selling mortgaged property. This duty is imposed by common law and statute. At common law, mortgagees are not bound by a duty to sell a mortgaged property for a good price.1 However, an equitable duty exists in order to ensure that the mortgagee acts conscionably towards the mortgagor. Therefore if a mortgagee fails to take reasonable steps to obtain a proper selling price, he or she may be held liable on the basis of willful default for the price that could have been obtained.
The common law co-exists and compliments the statutory position outlined in s 420A of the Act which imposes a stringent duty on receivers (and other controllers) when exercising a power of sale. Section 420A specifies that when exercising a power of sale in respect of property of a corporation, a controller must take all reasonable care to sell the property:
- At market value; or
- The best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold.
The duty in s 420A of the Act is similar to that imposed upon mortgagees to exercise reasonable care in the sale of property in Queensland by section 85(1) Property Law Act 1974 (Qld) which provides that a mortgagee must take reasonable care to ensure that the property is sold at market value.
Is failure to sell at market value sufficient to establish a breach?
In the matter of C2C Investments Pty Ltd,2 C2C commenced proceedings against the Commonwealth Bank of Australia (CBA) alleging they had sold property previously owned by the company for below market value. C2C further alleged that if CBA had taken reasonable care when exercising the power of sale, they could have achieved market value or the best price reasonably available.
When determining whether s 420A of the Act had been breached, Black J examined the process adopted by the controller in selling the property and found all reasonable care had been taken to sell the property for “not less than market value”.
The court noted that there was insufficient evidence to show “clear and persuasive or substantial grounds” for an allegation of breach of the duty imposed on a controller under s420A of the Act. The court noted that a breach of this section is only established where a controller has failed to take reasonable care to sell a property and not when a controller simply does not obtain market value on the property.
The court found that C2C had not established to the requisite standard deficiencies in the sale process by the controller.
How can I avoid breaching my obligations during the sales process?
In Sablebrook P/L v Credit Union Australia Ltd3 the court found the mortgagee had breached its obligation to sell at market value. In this case, the plaintiff (Sablebrook) sued its creditor, the Credit Union Australia Ltd (CUA), for failure to sell the company’s property at a reasonable price. At the time of entering into possession, the property was subject to a dispute with the body corporate of an adjoining lot. CUA then entered into an agreement to sell the property to persons associated with the body corporate for $240,000. When selling, CUA relied on a five month old valuation and the belief that the threatened tigation could seriously affect the sale price despite ot receiving legal advice in respect of this threat.
The Court found CUA had breached its duty by failing to receive an updated valuation and by failing to take the property to market. As such, the Court identified CUA’s course of conduct as inadequate in the circumstances. In order to fulfill their obligations, CUA should have contacted a local real estate agent at minimum to gain an indication of the relevant market.
The Court awarded Sablebrook the difference between the market value at the time and the sale price, adjusted to account for commissions and marketing costs.
To reduce the risk of challenge a receiver or mortgagee should:
- Engage a real estate agent who is familiar with the type of property and the location as well as one with significant sales experience;
- Seek advice from the agent as to how, where and for how long the property should be advertised;
- Seek an expert opinion if the property has any unique characteristics;
- Obtain an independent valuation or update of old valuations;
- Oversee the agent’s sale of the property including all negotiations with potential purchasers
- Determine an appropriate method of sale to ensure maximum returns
Does this duty apply to liquidators?
In the case of Wentworth Metals Group Pty Ltd and Owen (as liquidators of Bonython Metals Group Pty Ltd)4, the appointed liquidators of the Bonython Metals Group (BMG) listed the company’s interest in a mining tenement for sale. The interest was sold to Pure Metals (the fourth defendant) after extensive negotiations. The applicants and unsuccessful bidders (Wentworth Metals) sought an interlocutory injunction to prevent the sale, submitting that s 420A applied to both liquidators and receivers.
The court held that s 420A had no application to liquidators as liquidators are not “controllers” as defined under the Act. The court also noted that liquidators have a wide discretion when exercising their powers under s 477 of the Act. Endorsing the approach of French J in ASIC v Forestview Nominees Pty Ltd (Receivers and Managers Appointed), it was held that courts should only intervene in and/or control a sale process where an erroneous approach in law exists or where damage has occurred as the result of a lack of good faith. As such, the duty to sell assets at market value is not imposed on liquidators.