In the decision of Pearl Beach Property Administration Pty Ltd v Wisewoulds Nominees Limited [2014] VSC 113, the Victorian Supreme Court refused a mortgagor’s last-minute application to restrain a sale of mortgaged property on the grounds that the mortgagee had exercised their duties of sale negligently and in want of good faith. 

The decision in Pearl Beach is important for two reasons:

  • It applies the rule in Inglis v Commonwealth Trading Bank of Australia (1972) 126 CLR 161 and confirms that (despite recent cases questioning the rigid application of Inglis) that, subject to an exception, in order to restrain a mortgagee sale, a mortgagor must pay into Court the amount owed under the mortgagee’s security.
  • It also provides guidance on whether a mortgagee will be complying with their duties under their power of sale when advertising a property for auction below its valuation.

BACKGROUND

Wisewoulds (Mortgagee) had obtained possession of a property in Dromana, Victoria (Property), from Pearl Beach (Mortgagor) and planned a sale by auction.  The value of the Property was estimated to be approximately $5 million, but the Mortgagee had advertised the Property for auction in the price range of $3.9 - $4.2 million.  While the Mortgagee was in possession, the Mortgagor arranged a sale with a third party company, Eliad Pty Ltd, purportedly for $5 million.

On the day of the auction the Mortgagor sought an injunction to restrain the auction on the grounds that the Mortgagee had exercised their duties of sale negligently and in want of good faith by, amongst other things:  

  • marketing the Property in a price range that was less than the valuation; and
  • refusing to agree to the contract of sale with Eliad.

DECISION

Dixon J refused the injunction, holding that the Mortgagor had provided insufficient proof that the Mortgagee had failed in any of its duties.  Interestingly, his Honour observed that underquoting, while attracting some criticism, is not necessarily an indicator that a property will sell at an undervalue at an auction, as it is often used to attract buyers to the auction.  At its highest, underquoting is a matter that may require some consideration when evaluating all of the circumstances of the conduct of the sale.  For these reasons, the mortgagee was unable to establish a prima facie case that it would be entitled to relief, or that damages would be an insufficient remedy.

His Honour also held that the principle in Inglis should be applied and that an injunction should be refused unless the Mortgagor payed the amount owing into court as security for the injunction.  In this case, there was no suggestion that the mortgagor had, could, or would do so. 

CONCLUSION

This decision provides lenders with some comfort that, unless an exception applies, the rule in Inglis will be applied and injunctions to restrain a mortgagee sale will not be granted lightly.  Furthermore, the decision contains some useful observations suggesting that underquoting to attract buyers to an auction, of itself, will not necessarily be considered a breach of a mortgagee’s duties.