THE RECEIVER AND MANAGER’S AGENCY FOR THE MORTGAGOR
AND ITS DISPLACEMENT BY THE CONDUCT OF THE APPOINTOR
Michael Galvin QC
15 April 2015
Introduction
1.
When administrators, liquidators, agents for mortgagees and receivers and
managers are appointed to insolvent companies or the property of such
companies, they are entitled by statute and contract to exercise various powers
over the company’s property, in particular powers of management and sale of
assets. At the same time, they necessarily incur contractual, fiduciary and
statutory obligations to various parties having financial interests in the way in
which the insolvency practitioner deals with the mortgaged property.
2.
In general, depending on the nature of the appointment, the insolvency
practitioner’s primary obligation is to get in and realize the assets of the
company for the benefit of his or her appointor as well as creditors and/or
contributories of the mortgagor.
The appointment by a mortgagee of a
receiver and manager to the property and business of a mortgagor has the
potential to create a labyrinth of competing duties and interests, particularly
where guarantors’ rights and liabilities are at stake.
3.
The mortgagees’ perception of its own interests in the management and sale of
a defaulting mortgagor’s assets may conflict with the mortgagor’s perception
of its interests, or a guarantor’s perception of his or her interests.
The
receiver/manager is caught in the middle. To what extent is an appointor
permitted to direct, dictate or interfere in the way in which a receiver and
manager performs his or her duties? To what extent is a receiver and manager
obliged to act in accordance with the wishes of his or her appointor? What are
the consequences of a breach of duty induced by acting at the appointor’s
2
dictate? To what extent is a mortgagee liable for the defaults of a receiver
appointed by it?
Mortgagees’ duties to mortgagors
Nature of the duty under the general law – reasonable care vs. good faith
4.
The duties binding agents for mortgages and receivers and managers
exercising powers of sale are closely aligned to the duties affecting
mortgagees in possession exercising such powers. The latter plainly informs
the former. In particular, it has been said that the content of a receiver’s key
duty to a mortgagor to act in good faith and for a proper purpose “is
determined by its assimilation with the duty imposed by the law on a
mortgagee exercising a power of sale”.1
5.
The responsibilities of a mortgagee exercising a power of sale are well known.
The duty of a mortgagee, and therefore a receiver, is to act in good faith,
without willfully or recklessly sacrificing the interests of the mortgagor.2
6.
Mere inadequacy in the price obtained by a mortgagee in the exercise of a
contractual or statutory power of sale, or sale at an undervalue, is not a
sufficient ground for complaint by the mortgagor.3
7.
A mortgagee exercising a power of sale does not owe the mortgagor a duty of
care in negligence.4 That is to say, a mortgagee’s sale cannot be challenged
1
State Bank of NSW v Chia [2000] NSWSC 552 at [871] (Einstein J).
Kennedy v De Trafford [1897] AC 180 per Lord Herschell at 185; Barns v Queensland National Bank
Ltd (1906) 3 CLR 925 at 943.
3
Commonwealth Bank of Australia v Hadfield [2004] NSWCA 350, Young CJ at [40]; Gomez v State
Bank of NSW [2001] FCA 1059.
4
This is the position in Australia. See Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912)
13 CLR 676 at 680, 694 and 700; Ultimate Property v Lord [2004] NSWSC 114 at [26];
Commonwealth Bank of Australia v Hadfield [2001] NSWCA 440 per Beazley JA at 40; GE Capital
Australia v Davis [2002] NSWSC 1146 at [66] and [71]. By contrast, in England, a mortgagee
previously owed a duty to the mortgagor and any guarantors to take reasonable care to obtain the best
price that the circumstances permit and to exercise reasonable care in choosing the time for the sale
(Cuckmere Brick Co v Mutual Finance Ltd [1971] Ch 949; Standard Chartered Bank Ltd v Walker
[1982] 1 WLR 1410). According to Lord Denning MR, the duty was the common law duty of care
derived from Donoghue v Stevenson [1930] AC 562 (Standard Chartered Bank Ltd v Walker at 1415).
In Forsyth v Blundell (1973) 129 CLR 477, Walsh J (at 493) and Mason J (at 506) observed the
difference between the Australian and English positions, but found it unnecessary on the facts of the
case to resolve the question of whether mere negligence or carelessness was a sufficient basis for
challenging a mortgagee’s exercise of its power of sale. See also ANZ v Bangadilly Pastoral Co Pty
Ltd (1978) 139 CLR 195. The English position appears to have changed since China and South Sea
Bank v Tan [1990] 1 AC 536. In Florgale Uniforms Pty Ltd v Orders (2004) 51 ACSR 699, DoddsStreeton J commented (at [339]) that the enactment of s 420A “has diminished the significance of a
perceived divergence between the approach of English and Australian courts to the general law duty of
2
3
on the basis that it was conducted in good faith but negligently. The remedies
of the mortgagor as to the manner of exercise of the power of sale by a
mortgagee are regarded as lying in equity, rather than at law.5 The test, at
least in Australia, is not whether the mortgagee acted negligently, but whether
it acted in good faith.6
8.
What does the equitable notion of “good faith” mean in this context? Under
the general law, mortgagees are not permitted to exercise a power of sale over
mortgaged property solely in their own interests and in complete disregard of
mortgagors’ interests. Mortgagees owe mortgagors a duty in exercising a
power of sale to act in good faith and not to recklessly or willfully sacrifice or
disregard the interests of the mortgagor. This means that a mortgagee is
obliged to ascertain the value of the mortgaged property and conduct a sale
process which is likely to secure a fair price for it.7 It cannot simply satisfy
itself with obtaining a price sufficient to pay out its debt without any concern
for obtaining a surplus for the mortgagor. If the mortgagee’s interests are not
at risk, it is not entitled to act in a manner which sacrifices the interests of the
mortgagor.8
9.
An actual intent to defraud the mortgagor is not necessary.9
10.
The good faith test has been described, particularly by courts in New South
Wales, in terms of unconscionability:
What matters is the underlying equitable principle, which in the
modern idiom usually finds expression in terms of unconscionability.
receivers, with the former espousing an obligation to take reasonable care in exercising the power of
sale, and the latter upholding an equitable duty of good faith.” See also [357]. Her Honour suggested
(at [353]) that the difference between the practical application of the Cuckmere and Pendlebury tests
may not have been as significant as their different articulation suggested, given that “good faith” in the
context of a mortgagee’s sale is recognised to incorporate an obligation to have due regard to obtain a
fair price for the security property.
5
Pendlbury Colonial Mutual Life Insurance Co Ltd (1910) 13 CLR 676 at 700-2 (Isaacs J); State Bank
of Victoria v Parry (WASC, Malcolm CJ, 9 Dec 1988); GE Capital Australia v Davis [2002] NSWSC
1146 at [66]; Commonwealth Bank of Australia v Hadfield (2001) 53 NSWLR 614 per Beazley JA at
621.
6
Florgale Uniforms Pty Ltd v Orders (2004) 51 ACSR 699 at 341.
7
Pendlebury v Colonial Mutual; Lacey v Bank of New Zealand (NSWCA unreported 5 December
1997); Hallifax Property Corp Pty Ltd v GIFC Ltd (1987) 4 BPR 9708; ANZ Banking Group Ltd v
Bangadilly Pastoral Co Pty Ltd (1978) 139 CLR 195 at 201; Bourke v Beneficial Finance Corporation
Ltd [1991] ANZ ConvR 473; Commonwealth Bank of Australia [2004] NSWCA 350 per Bryson JA at
[9].
8
Forsyth v Blundell per Walsh J at 493-494.
9
Forsyth v Blundell per Walsh J at 496-497.
4
The mortgagee is not answerable for what Isaacs J in Pendlebury
describes (at 700) as “mere negligence or carelessness in carrying
out the sale”. Any departure from reasonable standards must be so
serious as to be properly characterized as unconscionable, in order to
render the mortgagee accountable. If a failure by a mortgagee to
take reasonable steps to obtain a proper price is sufficiently serious
to be characterized as unconscionable as that expression is
understood in equity, then in the taking of accounts between the
mortgagee and the mortgagor, the mortgagee will be accountable on
the basis of willful default for the price which would have been
obtained if the mortgagee had not been guilty of unconscionable
conduct.10
11.
A mortgagee is entitled to have regard primarily to its own interests. It can
decide when it wishes to exercise the power of sale. It is under no general law
obligation to exercise the power at any particular time.11 Correspondingly, a
mortgagee does not incur a liability for failing to sell, lease or license
mortgaged property at any particular time.
12.
Equally, a mortgagee is not under an obligation to delay a sale because it
would be in the mortgagor’s interests.12
13.
Further, a mortgagee is not obliged to incur expenditure in improving or
increasing the value of the mortgaged property.13
14.
However, a mortgagee may not be justified in refusing to incur expenditure
which is necessary or prudent to conserve the mortgagor’s interest and to
prevent the mortgagor’s residual property being sacrificed.14
15.
Where a mortgagee holds security over several lots of land and is aware, or
ought to be aware, that it is unnecessary to sell all of the lots because the sale
of some of those lots would be sufficient to satisfy the mortgage debt and the
costs of sale, the sale of more lots than required conflicts with the purpose of
the power of sale, which is limited to recouping the mortgagee’s loss. Such a
10
Hawkesbury Valley Developments Pty Ltd v Custom Credit Corporation Ltd (1995) NSW ConvR 55731 at 55,650 (McLelland CJ in Eq). See also Commonwealth Bank of Australia v Hadfield [2004]
NSWCA 350 per Young CJ at [38]; Gomez v State Bank of NSW [2001] FCA 1059 (Branson J); and
State Bank of NSW v Chia [2000] NSWSC 552 at [879] (Einstein J). See also MBF Investments Pty
Ltd v Nolan (2011) 37 VR 116 at [100]. At [88], the Court stated that a mortgagee’s decision to sell
more lots than was required to recoup its debt would be “an unconscionable exercise” of the power of
sale.
11
Commonwealth Bank of Australia v Hadfield [2004] NSWCA 350 per Bryson JA at [14].
12
Pendlebury v Colonial Mutual per Isaacs J at 701-702.
13
Pendlebury v Colonial Mutual per Isaacs J at 701-702.
14
Pendlebury v Colonial Mutual per Isaacs J at 701-702. See also Jenkins v National Australia Bank
Ltd (1999) ANZ ConvR 544; (1999) V ConvR 54-602; [1999] VSCA 33 at [22].
5
conflict arises regardless of whether the mortgagee became aware that this was
the case either before the sale or after one or more of the lots have been sold.15
16.
A mortgagee’s decision to sell a lot contrary to the wishes of the mortgagor,
rather than an equally saleable lot which would be sufficient to meet the
mortgagee’s claim, might also amount to a reckless disregard of the
mortgagee’s interest and a breach of the duty to sell in good faith.16 But if
there are genuine doubts, the mortgagee would not be required to take the
mortgagor’s wishes into account.17
17.
Where a bank holds security over a number of related properties, or over land
awaiting subdivision, a question may arise as to whether the bank is obliged to
consider selling the land separately and, in the case of a prospective
subdivision, to assist in effecting the subdivision before selling, rather than
proceeding to realize the security “in one line”. The question whether the
bank’s chosen course amounts to reckless indifference to the interests of the
mortgagor must be determined according to the circumstances of each case.
18.
In Commonwealth Bank of Australia v Hadfield [2004] NSWCA 350, Mr
Hadfield acquired rural land which he mortgaged (by conveyance)18 to the
bank to secure his and his wife’s indebtedness to the bank. Mr Hadfield
subdivided the land into two lots, selling one lot and retaining the other. After
some time and effort, Mr Hadfield obtained council approval for the
subdivision of the remaining lot into two lots. He did not obtain the bank’s
consent as mortgagee, which was necessary for registration of the plan of
subdivision. The bank entered into possession of the remaining land and sold
it as one lot. Mr Hadfield commenced a proceeding in the NSW District Court
for the taking of accounts, asserting that, as council approval had been
obtained for the subdivision, the bank had acted with reckless indifference to
his interests by failing to consent to the registration of the plan of subdivision
and by failing to facilitate the subdivision and sale of the lots separately. The
trial judge held that, by selling the land in one line in these circumstances, the
15
MBF Investments Pty Ltd v Nolan (2011) 37 VR 116 at [87].
MBF Investments Pty Ltd v Nolan at [89].
17
MBF Investments Pty Ltd v Nolan at [90].
18
Unlike a mortgagor of general law land, a person who grants a registered mortgage over Torrens
system land retains his or her legal interest in the land, while the mortgagee acquires a statutory
security interest (MBF Investments Pty Ltd v Nolan (2011) 37 VR 116 at 49).
16
6
bank had acted in bad faith and was in breach of its duty as mortgagee
exercising its power of sale. The NSW Court of Appeal allowed the bank’s
appeal on the basis that it was not open to the trial judge to reach such a
conclusion having regard to the bank’s prior tortured and frustrating dealings
with Mr Hadfield.
The court set aside the trial judge’s conclusions and
directed that the accounts be re-opened and the balance owing redetermined.
19.
Whether the mortgagee’s duties to the mortgagor are owed in equity or at law,
it is clear that they may be qualified by the terms of the mortgage itself.19
20.
A mortgagee is not permitted to exercise its power of sale for an extraneous
purpose, or a purpose other than recouping the mortgage debt and costs of
sale.20 Where a mortgagee holds security over a number of parcels of land,
and it is unnecessary to sell all of them to recoup its debt, the choice as to
which lots are to be sold cannot be driven by an ulterior purpose, such as the
disruption of the mortgagor’s business or the eviction of the mortgagor from
his or her home. Such behaviour would be an unconscionable exercise of the
mortgagee’s power of sale.21
21.
A mortgagee may be guilty of willful neglect and default in failing to receive
money which should have been received, but that does not mean that the
mortgagee is under an obligation to sell, lease or license the mortgaged
property at a particular time or to a particular person.22
22.
As a matter of general practice, the court will restrain the mortgagee from
exercising the power of sale or any other powers upon payment into court of
the amount of that is verified by the mortgagee, although it is still open to the
mortgagor to have accounts taken to have the true liability established.23
23.
Mortgages commonly provide that a receiver/manager appointed by the
mortgagee is appointed as agent for the company, notwithstanding the
appointment is by the mortgagee and ultimately for the purposes and benefit
19
State Bank of Victoria v Parry (WASC, Malcolm CJ, 9 Dec 1988); O’Day v Commercial Bank of
Australia Ltd (1933) 50 CLR 200; Buckeridge v Mercantile Credits Limited (1981) 147 CLR 654)
20
Commonwealth Bank of Australia v Hadfield at [14]; MBF Investments Pty Ltd v Nolan at [87].
21
MBF Investments Pty Ltd v Nolan at [88].
22
Westpac Banking Corporation v Kingsland at 707.
23
Inglis v Commonwealth Bank (1972) 126 CLR 161; Equus Financial Services v RMBL (1996) 22
ACSR 744 at 746.
7
of the mortgagee. As a result, the mortgagee is generally not liable for the
defaults of the receiver.24
Section 420A
24.
A mortgagee in possession of mortgaged property, along with an agent for a
mortgagee, a receiver and receiver/manager, is a “controller” within the
meaning of the Corporations Act.25 Controllers’ duty of care in exercising a
power of sale are now subject to a statutory duty contained in s 420A of the
Corporations Act 2001, which provides as follows:
(1)
(2)
25.
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.
Nothing in subsection (1) limits the generality of anything in
section 180, 181, 182, 183 or 184.
According to the view expressed by Bryson J in GE Capital v Davis, the duty
imposed by s 420A operates in the place of, or otherwise cumulatively to, the
prior existing general law duty.26 His Honour characterized the provision as a
redefining of the general law duty and what must be done to protect the
corporation and its property when affected by the exercise of a power of
sale.27 According to Dodds-Streeton J in Florgale Uniforms v Orders, s 420A
is neither a codification of pre-existing law nor designed to displace it. The
general law requirements of good faith co-exist with both the general duties in
24
Expo International Pty Ltd (in liq) v Chant [1979] 2 NSWLR 820 at 828.
By s 9 of the Act, “controller” in relation to property of a corporation means:
(a)
a receiver, or receiver and manager, of that property; or
(b)
anyone else who (whether or not as agent for the corporation) is in possession, or has
control, of that property for the purposes of enforcing a security interest;
and has a meaning affected by paragraph 434F(b) (which deals with 2 or more persons
appointed as controllers).
26
GE Capital Australia v Davis [2002] NSWSC 1146 at [53]. As to how s 420A came to be inserted in
the Corporations Act, see Ultimate Property v Lord [2004] NSWSC 114 at [51]ff.
27
GE Capital Australia v Davis [2002] NSWSC 1146 at [55].
25
8
ss 180-184 of the Act and the more rigorous statutory duty imposed by s 420A
in relation to the power of sale.28
26.
More is said of the nature of the controller’s duty under s 420A in the context
of receiver’s duties to mortgagors and guarantors below.
Mortgagor’s remedy for a mortgagee’s breach of s 420A
27.
As the cause of action lies in equity, rather than law, so too does the remedy.
In a claim by a mortgagee against a mortgagor for the balance of the mortgage
debt, the mortgagor is entitled to raise a claim for equitable compensation for
sacrifice of the mortgagor’s interest in exercise of the power of sale as an
equitable set-off of compensation against the contractual debt. This is no
more than a short form of claiming that an account be taken of the amount due
under the mortgage.29
28.
This is better understood by reference to the nature of the mortgagor’s interest
in mortgaged property under the general law. That interest is an equity of
redemption. Once a mortgagee has sold the mortgaged property pursuant to a
power of sale, the mortgagee becomes a trustee of the surplus proceeds of
sale.30 It is in the context of the mortgagor’s right to redemption that the
entitlement to an accounting as between mortgagor and mortgagee arises.31 If
the mortgagor successfully contends that the mortgagee has recklessly
sacrificed the mortgagor’s interest then, after the sale has occurred, an account
is to be taken to determine the amount which should be deemed to be
28
(2004) 51 ACSR 699 at [358].
GE Capital v Davis at [82]
30
Ultimate Property v Lord at [33].
31
In Commonwealth Bank of Australia v Hadfield [2001] NSWCA 440, Beazley JA at [41] quoted,
with apparent approval, the following extract from Meagher, Gummow and Lehane, Equity Doctrines
and Remedies, 3rd ed (1992) Sydney, Butterworths at [2513]:
“…in the case where a mortgagee has exercised his power of sale, the mortgagor may
successfully demand accounts if he is suing to recover surplus proceeds of sale”;
the following extract from Sykes and Walker, The Law of Securities, 5th ed (1993) Sydney, Lay Book
Co Ltd at 142:
“The mortgagor is entitled to demand the accounts to be taken by the court only in the
cases where he or she is claiming redemption or the surplus proceeds of sale”;
and the following extract from Nevill and Ashe, Equity Proceedings With Precedents (New
South Wales) (1981 Sydney, Butterworths at 21:
“[the remedy of accounts is] a procedure to ascertain the monetary dealings of the
parties in respect of the subject property and to determine with precision the balance
between them. After the balance is ascertained orders are made as to the rights of the
parties to that balance.”
29
9
surplus.
32
A mortgagor’s claim against a mortgagee for equitable
compensation for a breach by the mortgagee of its duty with respect to the
exercise of the power of sale is properly regarded as a claim in equity for an
account for the surplus proceeds of sale.33
29.
No section of the Corporations Act expressly confers any right to damages or
any other remedy where a controller breaches the duty contained in s 420A(1).
This is to be distinguished from other provisions of the Act, for example those
dealing with directors’ duties and insolvent trading, for which statutory
remedies for breach in the nature of damages or compensation are provided.
30.
The mortgagor’s remedy for a mortgagee’s breach of s 420A(1) is not
common law damages, but the mortgagor’s equitable entitlement to a set off in
the taking of accounts between mortgagor and mortgagee:
My view is that the requirement imposed on the controller by subs
420A(1) takes the place of, or it may be operates cumulatively to the
obligation otherwise existing with the general law of a controller
exercising power of sale in respect of property of a corporations. This
is achieved, and the apparent legislative intention is fulfilled without
altering the remedies available to the corporation for breach of
obligation in exercising the power of sale, and without altering the
means available for obtaining remedies. Where real property subject
to a mortgage has been sold and the mortgagor succeeds in
establishing that there has been a sacrifice of the mortgagor’s interest
in the exercise of the power of sale the mortgagor’s remedy is to be
credited compensation when accounts are taken of the mortgage debt.
Subsection 420A(1) alters this scheme by inserting a more stringent
rule, but does not otherwise change the scheme.34
31.
Similarly, in Ultimate Property Group Pty Ltd v Lord, Young CJ (at [94])
considered that by the insertion of s 420A, the legislature intended to confer
on mortgagors a right of action for equitable damages against a controller in
the same way as there would have been an action to recover surplus proceeds
of sale in equity where a mortgagee had sold the property in reckless disregard
of the mortgagor’s obligations.
32
Pendlebury v Colonial Mutual.
Coroneo v Australian Provincial Assurance Association, Ltd (1935) 35 SR (NSW) 391; 52 WN
(NSW) 131; Colin D Young Pty Ltd v Commercial & General Acceptance (1982) NSW ConvR 55-097;
Commonwealth Bank of Australia v Hadfield [2001] NSWCA 440 per Beazley JA at [36], [41] and
[48].
34
GE Capital Australia v Davis at [53].
33
10
Effect of breach of s 420A on rights of purchaser
32.
A purchaser from a mortgagee who has become registered as proprietor of the
mortgaged property has an indefeasible title under the Transfer of Land Act
1958 (Vic), subject to the usual in personam exceptions. Where a sale has
occurred, but settlement has not taken place, and the purchaser has knowledge
of the facts which amount to a breach of the mortgagee’s duty to the
mortgagor, the purchaser cannot obtain a right superior to the right of the
mortgagor.35
Section 77 Transfer of Land Act
33.
The statutory duty in section 77 of the Transfer of Land Act 1958 (Vic)
requires a mortgagee exercising a power of sale after mortgagor’s default to
act “in good faith and having regard to the interests of the mortgagor grantor
or other persons”.
34.
The section appears to blend the duty to act in good faith with the duty to take
reasonable precautions to obtain a proper price, but it falls short of a duty to
take reasonable care to obtain the market value of the property.36
35.
Section 77 requires that the mortgagee, on selling, must take reasonable steps
to ensure that, at the time of sale, it is getting the best price available for the
mortgaged property, and reasonable steps to obtain the best price must be
taken, irrespective of the amount of the mortgage debt. The “interests of the
mortgagor” must include at least the mortgagor’s interest to see that the
mortgagee takes reasonable steps to get the best possible price available for
the property. The mortgagee must have regard to this interest.37
36.
A duty to have regard to the interests of the mortgagor or other persons is not
necessarily a duty to act in their interests. The mortgagee is still allowed to
act in its own interests as long as it takes the interests of the mortgagor into
account. In other words, it is not necessary for the mortgagee to subordinate
its interests to those of other parties.38
35
Forsyth v Blundell per Walsh J at 497.
James O’Donovan, Lender Liability, 1st ed, [13.255]; Goldcel Nominees Pty Ltd v Network Finance
Ltd [1983] 2 VR 257 at 261-2 (Murphy J).
37
Goldcel Nominees Pty Ltd v Network Finance Ltd at 261-2.
38
O’Donovan, Lender Liability [13.255]; Walker v Wimborne (1976) 137 CLR 1 at 10-12 (Mason J)).
36
37.
11
In MBF Investments Pty Ltd v Nolan,39 Mr Nolan owned land in Kew, which
he subdivided into three lots. Mr Nolan and his family lived on Lot 1, and had
done so for about ten years. Lots 2 and 3 were vacant. The land was
mortgaged to MBF Investments Pty Ltd, which took possession of all of the
land upon a default under the mortgage. It sold Lot 2 first and then proceeded
to sell Lot 1.
Mr Nolan commenced an action claiming that MBF had
breached its duty under s 77 to sell “in good faith and having regard to the
interests of the mortgagor”. More particularly, he claimed that MBF had
failed to have regard to his “home occupation interest” with respect to Lot 1.
He claimed that the sale of lots 2 and 3 would have been sufficient to pay out
MBF’s debt.
38.
Vickery J at first instance held that neither the language of s 77(1) nor the
authorities on the extent of a mortgagee’s duty in exercising a power of sale
confined the mortgagor’s interest to an interest in obtaining the best price for
the property. He held that MBF’s decision to sell Mr Nolan’s home, rather
than the vacant land, was manifestly unreasonable and in reckless disregard of
Mr Nolan’s interests, specifically his home occupation interest. Consequently,
he upheld the claim and ordered MBF to pay Mr Nolan $129,046 in damages,
plus interest and costs.40
39.
MBF appealed and Mr Nolan cross-appealed (seeking a larger quantum of
damages). The Victorian Court of Appeal (Neave, Redlich and Wienberg
JJA) upheld MBF’s appeal and refused the cross-appeal.
It found that,
although he was the registered proprietor of the land, under the terms of the
mortgage Mr Nolan occupied the premises under a licence from MBF, rather
than as a mortgagor entitled to possession.
Being in default under the
mortgage, he was not entitled to quiet enjoyment of the property. The Court
of Appeal rejected the contention that he had a “home occupation right”.
40.
The Court of Appeal further held that, historically, the only duty imposed on a
mortgage exercising a power of sale was to act in good faith.41 It summarised
the relevant principles as follows:
39
(2011) 37 VR 116.
Nolan v MBF Investments Pty Ltd [2009] VSC 244.
41
At [65].
40
12
(a)
a mortgagee is not a trustee of the power of sale, which is given to the
mortgagee to enable the realization of the security interest;
(b)
a mortgagee must act in good faith, that is conscionably, and cannot
sell for a purpose other than that for which the power of sale is
conferred;
(c)
a mortgagee is not required to place the interests of the mortgagor
above the mortagee’s interests in recovering the debt. For example, the
mortgagee can sell the property at a time of the mortgagee’s choice,
even though the property might realize a higher price if the sale were
postponed;
(d)
the mortgagee cannot disregard the interests of the mortgagor by
simply selling for a price which will cover the amount of the loan. The
mortgagee must take reasonable steps to obtain the best price
consistently with its right to enforce its security interest. This requires
the mortgagee to consider how the property should be advertised and to
allow an appropriate time between the advertisement and the sale;
(e)
the mortgagee must also have regard to the interests of subsequent
security holders; and
(f)
if there is no doubt that the sale of the lots preferred by the mortgagor
would be sufficient to discharge the debt owed to the relevant
mortgagee and of any other security holders whose interest the
mortgagee is required to consider, a failure to sell the preferred lots
may breach the mortgagee’s duty to sell in good faith.42
Receivers’ duties to mortgagors
41.
Whilst he or she is appointed primarily for the purpose of enforcing the
security and paying over the secured amount to the mortgagee, a receiver
appointed to mortgaged property also owes a duty to the mortgagor to pay
over or surrender the surplus assets to it.43 The receiver is liable to account to
the mortgagor as an agent is ordinarily liable to account to a principal. By
liable to account, we mean liable to provide proper accounts and to hand over
42
43
MBF Investments Pty Ltd v Nolan at [100].
Chant at 828-829; Jefferys v Dickson (1866) 1 Ch. App. 183 at 190.
13
surplus assets. The mortgagor has a right to ensure that the receiver abides by
his duty under the mortgage instrument and does not act outside it.44
42.
The receiver, however, is not under a fiduciary duty to the mortgagor, until he
or she holds money in his or her hands.45 Until that time, the receiver is under
no duty to account to the mortgagor.
43.
The Court has supervisory jurisdiction over controllers. Under s 423 of the
Corporations Act, if it appears to the Court or to ASIC that a controller of
property of a corporation has not faithfully performed, or is not faithfully
performing, his or her functions, the court may direct an investigation.
44.
In Re S & D International Pty Ltd (in liq) (recs and mgrs apptd) [2009] VSC
225, a controller was appointed to realize mortgaged property. The property
was sold with ample funds to pay out the mortgagee. There were a number of
competing claims to the surplus by subsequent chargees. Rather than pay the
money into Court, as the claimants had requested, the controller held on to the
surplus money and purported to conduct investigations into who was entitled
to the surplus. Robson J found that the conduct of both the mortgagee and the
controller could not be characterized as reasonable or proper. They were
obliged to pay the mortgagee’s debt and costs out of the proceeds of sale as
soon as possible and to pay the balance into Court under s 77(3) of the
Transfer of Land Act 1958. Robson J was satisfied that the controller had not
faithfully performed his duties and ordered an inquiry into his conduct (both
as receiver and agent for the mortgagee), as well as an order under s 434 for
the rendering of accounts by the controller. He made similar orders against
the mortgagee.
45.
A receiver/manager is not under an obligation to the mortgagor and
contributories to preserve the mortgagor’s goodwill and business.46 He or she
is not the manager of the company, but rather the manager of the property of
the mortgagor for the mortgagee.47
44
Chant at 829-830; Visbord v Federal Commissioner of Taxation (1943) 68 C.L.R. 354 at 383.
Chant at 830.
46
Re B. Johnson & Co. (Builders) Ltd [1955] Ch. 634 per Evershed MR at 646; Chant at 831.
47
Re B. Johnson & Co. (Builders) Ltd [1955] Ch. 634 per Jenkins LJ at 654; Chant at 831.
45
46.
14
A receiver appointed by a debenture holder is not liable to the mortgagor for
negligence in the conduct of the receivership.48
47.
The role of a court-appointed receiver is different. Generally, he or she is
under a fiduciary duty to preserve the goodwill and property of the company
in the interests of both debenture holders and the company.49
48.
Upon the appointment of a liquidator to the mortgagor, the receiver ceases to
be the agent of the company and becomes the agent for the mortgagee.50
Power of sale – s 420A
49.
The general law duties of a receiver in exercising a power of sale are
analogous to those of a mortgagee.51
50.
Section 420A now takes the place of, or operates cumulatively to, the
obligation previously existing under the general law.52
51.
A breach of s 420A is not established merely because market value or the best
price reasonably obtainable is not achieved. Rather, a breach of s 420A
requires a failure by the controller to take all reasonable care to sell the
property for not less than market value of the best price that is reasonably
obtainable having regard to the circumstances existing when the property is
sold.53
52.
In Clyde Industries Ltd v Dittes (NSWSC, Cole J, 5 June 1992), the deed of
charge provided that no receiver appointed by the mortgagee was to be liable
for any involuntary losses caused in the exercise of the receiver’s powers.
Cole J held that this, and the fact that the receiver was the agent of the
mortgagor, precluded the mortgagor, and the guarantors, from making a
successful claim against the mortgagee in respect of the acts of the receiver.
Cole J found it difficult to see how a guarantor could have an action against a
mortgagee for breaches of duty by a receiver who was the mortgagor’s agent.
48
Chant at 834.
R v Board of Trade; Ex parte St. Martins Preserving Co. Ltd. [1965] 1 Q.B. 603 per Phillimore J at
614; Chant at 832; State Bank of NSW v Chia [2000] NSWSC 552 at [867] (Einstein J).
50
Gosling v Gaskell [1897] AC 575 at 591; Chant at 834.
51
Florgale Uniforms v Orders at 351.
52
GE Capital v Davis at [53]. His Honour’s view was endorsed by Young CJ in Ultimate Property v
Lord at [73]-[74] and Dodds-Streeton J in Florgale Uniforms v Orders (at [358]).
53
Florgale Uniforms v Orders at [410].
49
15
Mortgagees’ duties to guarantors
53.
A mortgagee exercising a power of sale does not owe guarantors a duty of
care in negligence.54
54.
If a surety believes he is suffering damage by failure of the mortgagee to
exercise the power of sale in that the surety believes that the value of the
mortgaged property may decline, his entitlement is to pay out the mortgagee,
obtain the security and sell it.55
55.
Section 420A does not confer any rights on guarantors with respect to a sale of
mortgaged property by a controller.
The provision was enacted for the
protection of mortgagor companies, not others, such as guarantors of the
obligations of the company to the mortgagee.56
56.
Whilst the obligation of the guarantor to the principal creditor arises under the
contract between them, equity permits the guarantor to raise an equitable
defence or set-off in part or in whole against a claim for its contractual
liability. The protection is related to the guarantor’s right to be subrogated to
the rights of the principal creditor against the security if the guarantor pays out
all the secured debt. 57 In short, if the mortgagee sues the guarantor, then the
guarantor is able to say that the quantum of the claim must be reduced by the
amount at which the creditors sold the security at an under-value.58
57.
A guarantor is entitled to rely on the availability to the mortgagor of a remedy
(though this may require the joinder of the principal debtor to the proceedings
against the guarantor).59 If the mortgagor is entitled to have a further credit
54
See paragraph 6 and note 4 above.
WBC v Kingsland (1991) 26 NSWLR 700; China and South Sea Bank Ltd v Tan Soon Gin [1990] 1
AC 536 (per Lord Templeman at 545); Countrywide Banking Corporation v Robinson [1991] NZLR
75 at 77.
56
“There is nothing in the terms of s 420A, or elsewhere in the Corporations Act, which indicates that
it was enacted for the protection of persons who do not have interests in the property of the
corporation, such as guarantors who incur obligations by reference to the obligations of the
corporation. Their obligations are not obligations to the corporation, they do not have an interest in its
relevant property and they have not entered into any relevant contractual relationship with the
corporation, in respect of its property or otherwise; they have guaranteed an obligation of the
corporation to a third party. There is in my opinion no basis for the view that s 420A, alone or with the
aid of context, operates or was intended to operate so as to confer a right to recover damages or any
other right to a remedy on guarantors.” (GE Capital Australia v Davis at [45]). See, more recently,
National Australia Bank Ltd v C & O Voukidis Pty Ltd [2015] NSWSC 185 at [79] (Davies J).
57
GE Capital Australia v Davis at [85].
58
Ultimate Property v Lord at [80].
59
GE Capital Australia v Davis at [84].
55
16
brought into account on the taking of the mortgage accounts by virtue of a
breach by the mortgagee of s 420A, the guarantor can get the benefit of the
credit by relying on an equitable set-off against the creditor’s demand under
the guarantee. The substance of what the guarantor does by relying on a setoff is establishing the true amount of his or her own liability by showing that
the debtor is entitled to a set-off.60
58.
Unless the mortgagee does something to limit or discharge the guarantee, the
guarantor is in a derivative position such that the quantum of his or her
liability is, unless the guarantee is restricted, the liability of the mortgagor. If
that liability is disputed, it is determined only on the taking of accounts
between mortgagor and mortgagee.
Unless such accounts are taken and
circumstances for which the mortgagee is responsible result in reduction of the
liability, the guarantor’s liability is equivalent to that of the mortgagor without
deduction.61
59.
The effect of the statements made in Williams v Frayne62 and Buckeridge v
Mercantile Credits Limited63 is that, under the general law, guarantors may
complain of anything of which the principal debtor may complain, and have
further rights where the value or realisation of the security has been
diminished by the creditor’s neglect or default.
The guarantor has even
greater protection than was available to the debtor under Pendlebury v
Colonial Mutual Life Assurance Society Ltd, and may be completely
discharged if the creditor fails to obtain effective security which is available,
or varies the terms of the loan or security without the guarantor’s concurrence:
These authoritative statements appear to me to have the effect that the
surety may complain of anything of which the debtor may complain,
and has further rights where the value or realization of the security has
been diminished by the creditor’s neglect or default. What is meant
by neglect or default is not further defined by the authorities, but it
gives more protection that was available to the debtor under
Pendlebury. The guarantor has even greater protection and may be
completely discharged if the creditor fails to obtain effective security
which is available as in Wuff v Jay, or varies the terms of the loan or
60
GE Capital Australia v Davis at [83]; Re Kleiss; Ex parte Kleiss v Capt’N Snooze Pty Ltd (1996) 61
FCR 436.
61
Westpac v Kingsland (1991) 26 NSWLR 700 at 706.
62
(1937) 58 CLR 710.
63
(1981) 147 CLR 654.
17
security without the guarantor’s concurrence. Where subs. 420A(1)
applies I am of the view that it should be applied as a fair
representation of the standard of neglect of default referred to by
Dixon [in Williams v Frayne (1937) 58 CLR 710 at 738] and Brennan
JJ [in Buckeridge v Mercantile Credits Limited (1981) 147 CLR 654
at 675]. If the guarantors show that the mortgagors would, if they
made a claim, be entitled to a remedy under subs 420A(1), the
guarantors are, in my opinion, entitled to a similar remedy by way of
an equitable defence to the claim against them, subject to the
provisions of the guarantee.64
60.
Guarantors also have remedies in their own right for conduct of secured
creditors that sacrifices or diminishes the value of the security. A guarantor of
a secured debt is entitled to show that his or her liability to the secured creditor
has been reduced or may be extinguished as a result of some shortcoming in
the realization or management of the security by the mortgagee.
If the guarantee is given upon a condition, whether express or implied
from the circumstances, that a specific security shall be obtained,
completed, protected, maintained or preserved, any failure in the
performance of the condition operates to discharge the security and
the discharge is complete. But otherwise the surety can complain only
if the creditor sacrifices or impairs a security, or by his neglect or
default allows it to be lost or diminished, and in that case the surety is
entitled in equity to be credited with the deficiency in reduction of his
liability.65
61.
As to what might amount to neglect of default for the purposes of this
doctrine, Bryson J in GE Capital Australia v Davis was of the view that the
standard imposed by s 420A(1) was a fair representation:
These authoritative statements appear to me to have the effect that the
surety may complain of anything of which the debtor may complain,
and has further rights where the value or realisation of the security has
been diminished by the creditor’s neglect or default … If the
guarantors show that the mortgagors would, if they made a claim, be
entitled to a remedy under s 420A(1), the guarantors are, in my
opinion, entitled to a similar remedy by way of an equitable defence to
the claim against them, subject to the provisions of the guarantee.66
… the guarantor is entitled to have an equitable remedy on the basis
that the mortgage accounts are taken on whatever may be the principle
truly applicable to taking mortgage account. In my opinion, the
equitable remedies which in an earlier state of the law were available
64
GE Capital Australia v Davis at [92].
Williams v Frayne (1937) 58 CLR 710 per Dixon J at 738.
66
GE Capital v Davis at [92].
65
18
to a guarantor where there was a breach of the mortgagee’s duty to a
mortgagor corporation are now to be tested by reference to whether
there was a breach of the duty stated in subs 420A(1).67
…[the guarantor is entitled to have]…the correct amount of any credit
ascertained and brought into account in calculating the amount of the
liability of the principal debtor which in turn determines the amount of
the liability of the guarantor. If the mortgagor is entitled to have a
further credit brought into account on taking the mortgage accounts,
the guarantor can get the benefit of the credit by relying on an
equitable set-off against the creditor’s demand. To do so is to rely on
an entitlement of the mortgagor to set-off that credit on taking
mortgage accounts. The substance of what the guarantor does by
relying on a set-off is establishing the true amount of his own liability
by showing that the debtor is entitled to set-off. Allowing this course
tends to avoid a multiplicity of proceedings…68
62.
Guarantor’s rights, including rights to equitable set-off, are subject to the
terms of the guarantee. Guarantors may bargain away their rights by agreeing
to an express provision in the guarantee that precludes his or her reliance on
them.69 Contractual provisions that limit the rights of guarantors and ensure
the primacy of recovery by the creditor are a well-established part of
commercial life. For example, clauses permitting the creditor to issue and rely
on a certificate as conclusive evidence of indebtedness are commonplace.70
Modern guarantees and indemnities frequently include express terms which
preclude guarantor’s reliance on rights of equitable set off, at least until the
full amount of the guaranteed sum is paid. The terms of the guarantee may
foreclose any claim by the guarantor for a breach of duty by the mortgagee
(whether the duty be owed in equity or at law). In other words, a guarantor
will be bound by a contractual term to the effect that a failure by the
mortgagee with respect to the realisation of the security will not diminish the
guarantor’s liability.71
67
GE Capital v Davis at [56].
GE Capital v Davis at [83].
69
Buckeridge v. Mercantile Credits Limited (1981) 147 CLR 654 per Brennan J at 675.
70
Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643.
71
State Bank of Victoria v Parry (WASC, Malcolm CJ, 9 Dec 1988); O’Day v Commercial Bank of
Australia Ltd (1933) 50 CLR 200; Buckeridge v Mercantile Credits Limited (1981) 147 CLR 654 at
675 (Brennan J); GE Capital v Davis at [85]; Permanent Custodians Ltd v AGB Developments Pty Ltd
[2010] NSWSC 540; Graeme Webb Investments Pty Ltd v St George Partnership Banking Ltd [2001]
NSWCA 93.
68
63.
19
Typically, a guarantee to a bank will incorporate terms which suspend the
guarantor’s right to complain about the mortgagee’s conduct until the
guarantor first pays the full amount claimed under the guarantee. This is not
an ouster of the jurisdiction of the Court, because the guarantor’s rights are
suspended but not otherwise impaired. There is no infringement of the rule
against ouster where parties agree to ensure that the guaranteed sum will be
paid, and make this the more certain by postponing litigation raising any
cross-claim or set-off.72
64.
Provisions limiting a guarantor’s rights are to be construed strictly against the
interests of the creditor, but only to the extent that they are ambiguous.73
65.
In Clyde Industries Ltd v Dittes,74 Cole J found it difficult to see how a
guarantor could have an action against a mortgagee for breaches of duty by a
receiver who was the mortgagor’s agent. However, Cole J’s statements are
difficult to reconcile with authorities for the proposition that the receiver’s
general law duty to act in good faith extends to guarantors.75
Receivers’ duties to guarantors
66.
It has been noted above that the duty contained in s 420A co-exists with the
pre-existing general law duty of mortgagees and receivers.
67.
Receivers’ general law duty to act in good faith in the exercise of their powers
extends to guarantors of the mortgage debt.76 Receivers owe an equitable duty
to guarantors of mortgage debts to act in good faith in the general conduct of
the receivership. According to Professor O’Donovan, receivers might be held
liable directly to guarantors for breach of the general law duty to act in good
faith where their actions impair securities which the guarantors are entitled to
claim by way of subrogation. They may be liable to anybody with an interest
in the equity of redemption.77 According to Professor O’Donovan, this is an
independent liability of receivers which cannot be deflected by the “agency”
72
GE Capital v Davis at [93] - [97]; Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643,
651-653 (Dixon, Evatt & McTiernan JJ).
73
Credit Lyonnais Australia Ltd v Darling (1991) 5 ACSR 703 per Kirby P at 708.
74
NSWSC, Cole J, 5 June 1992.
75
See O’Donovan, [11.90] and paragraph 67 below.
76
ANZ v Carnegie (VSC, Crockett J, 16 Jun 1987).
77
O'Donovan, [11.90].
20
provision in the mortgage. It is not founded on the law of negligence. Rather,
it operates as an adjunct to the mortgagee’s duty to act in good faith.78
68.
However, Professor O’Donovan has postulated that the more onerous statutory
duty in s 420A of the Corporations Act relating to the sale of charged assets
may not be owed by receivers to guarantors.79
69.
A receiver appointed under a mortgage, may exercise the power of sale as and
when it suits the interests of the mortgagee.80
70.
If a guarantor believes he or she is suffering damage by the failure of the
mortgagee or the receiver to exercise a power of sale, for example because the
value of the mortgaged property may decline, the guarantor may pay out the
mortgage and take over the security.81
Interference by appointors in the performance of a receiver’s functions
The receiver’s duty to his or her appointor
71.
It is a trite proposition that the primary duty of a receiver appointed under a
mortgage debenture is to satisfy his or her appointor’s debt. That role is
distinctly different to the role of a court-appointed receiver or provisional
liquidator.82 The privately appointed receiver manager is under no obligation
to carry on the business of the mortgagor at the mortgagee’s expense.
The primary duty of the receiver is to the debenture holders and not to
the company. He is receiver and manager of the property of the
company for the debenture holders, not manager of the company. The
company is entitled to any surplus of assets remaining after the
debenture debt has been discharged, and is entitled to proper accounts.
But the whole purpose of the receiver and manager’s appointment
would obviously be stultified if the company could claim that a
receiver and manager owes it any duty comparable to the duty owed to
a company by its own directors or managers…”83
78
O’Donovan, [11.90]; State Bank of Victoria v Parry (1989) 7 ACLC 226 at 229 (Malcolm CJ).
O’Donovan, [11.90].
80
In ANZ v Carnegie (VSC, unreported, 16 June 1987), Crockett J commented that a receiver may be
able to choose the time of sale within a considerable margin, but should exercise a reasonable degree of
care about it.
81
China and South Sea Bank Ltd v Tan Soon Gin (alias George Tan) [1990] 1 AC 536 at 545; Westpac
Banking Corporation v Kingsland (1991) 26 NSWLR 700 at 705.
82
NSW v Chia at [867].
83
Re Johnson & Co (Builders) Ltd [1955] Ch 634 per Jenkins LJ at 661; cf Evershed MR at 644. See
also Chant at 831-832.
79
21
The receiver as agent for the mortgagor
72.
Notwithstanding that the purpose of his or her appointment is to get in his or
her appointor’s debt, a receiver and manager is typically appointed as the
agent of the mortgagor under the terms of the mortgage and deed of
appointment.84 The agency is contrived to protect the mortgagee from liability
for the defaults of the receiver.85
73.
Whilst he or she is appointed as an agent of the mortgagor, the receiver and
manager is not generally a fiduciary of the mortgagor. 86 The agency is
limited. However, that is not to say that the receiver does not owe the
mortgagor a duty to exercise his or her powers in good faith:
In the first place, the receiver has a duty to the mortgagee to collect
and realise the assets of the company for the purpose of discharging
the security…In the second place, the receiver holds in trust for the
mortgagor any proceeds from the sale of the company’s assets after
the satisfaction of the claims of the mortgagee and subsequent
creditors…In the third place,…the receiver, as the done of a power
must exercise the powers and duties granted to him or her in good
faith and for a proper purpose.87
Does the appointor owe a duty not to interfere in the receivership?
74.
To what extent must a receiver act independently of his or her appointor? To
what extent may he or she act on the instructions of his or her appointor?
75.
A mortgagee has no power to compel a receiver to act in accordance with its
directions.88 However, a receiver is in a fiduciary relationship with his or her
appointor and is obliged to keep the appointor apprised of the progress of the
receivership.89
76.
In Westpac Banking Corporation v Kingsland, 90 the plaintiff bank sought
judgment against a number of guarantors of moneys advanced to a company,
which had subsequently been wound up. Prior to the winding up, the bank
had appointed receivers and managers to the company under an equitable
84
State Bank of NSW v Chia at [868].
Gosling v Gaskell [1897] AC 575 at 589, 590, 595; Visbord v Commissioner of Taxation (Cth)
(1943) 68 CLR 354 per Latham CJ at 368; State Bank of NSW v Chia at [868].
86
State Bank of NSW v Chia at [869].
87
State Bank of NSW v Chia at [870].
88
State Bank of NSW v Chia at [881].
89
Ibid.
90
(1991) 26 NSWLR 700.
85
22
charge. The company’s principal asset was a hotel. Neither the bank nor the
receivers had taken steps to sell the hotel. The guarantors complained, in a
defence and counterclaim, that the bank and the receivers ought to have sold
the hotel and thereby extinguished the guarantees. They alleged that by failing
to do so, the bank and the receivers had breached duties to them and crossclaimed for damages.
77.
The guarantors did not dispute that the receivers had been appointed as agents
for the mortgagor. However, the guarantors claimed that the bank owed them
a duty not to interfere in the conduct of the receivership, which duty the bank
had breached by directing the receivers not to accept a number of offers which
had been made to purchase the hotel. They also alleged that the bank had
breached its duty to them by failing, by itself or “by its agents”, to accept any
of the offers. This was said to amount to willful default and neglect in the
management of the company’s assets.
78.
In the result, Cole J determined the case without hearing argument on the
question of whether or not a mortgagee owes a duty not to interfere in the
conduct of a receivership. As a mortgagee is entitled to decide when to realize
its security, directing a receiver as to when to sell mortgaged property cannot
be a breach of duty. The appointment of a receiver does not deprive the
mortgagee of the right to determine the timing of the realization of its
security.91
What amounts to interference in a receivership and what are its consequences?
79.
What are the consequences of a receiver acting in accordance with instructions
which are inconsistent with his or her duties under the general law or the
Corporations Act? At what point will the appointor become liable for defaults
of the receiver brought about by the receiver acting on the appointor’s
instructions?
80.
In State Bank of NSW v Chia,92 the plaintiff bank sued Dr Chia, and his wife
as guarantor, for amounts owing under certain banking facilities. The debts to
the bank were secured. The mortgaged property included a cinema complex.
91
92
At 707.
[2000] NSWSC 552.
23
The receivers embarked on negotiations to sell the cinema and related assets.
The bank’s senior relationship manager, who managed the bank’s relationship
with its client, Hoyts Cinemas, sought to influence the receiver to keep the
price down and sell the cinema to Hoyts, so as to foster thereby the bank’s
relationship with an important customer.
81.
The receiver ultimately sold the property to Hoyts.
Dr and Mrs Chia
complained that he had done so in breach of his duties to them as mortgagor
and guarantor. Relevantly, they alleged that the receiver, by reason of the
bank’s interference, had failed to keep them informed of his negotiations with
Hoyts and to give Dr Chia an opportunity to bid for the cinema. These were
part of wider allegations that the receiver had breached his duty of good faith
to the defendants and had sold the land at an undervalue in willful neglect of
his duties.
82.
Einstein J found that the receiver had indeed sold the cinema to Hoyts in close
association with the bank and that it was the bank that ultimately decided to
effect the sale. As the bank was “heavily involved” in the sale, even to the
point of deciding when and to whom the sale was to take place, his Honour
held that it was proper that the bank be held to account in the same manner
and to the same standards as the receiver was required to account.93 His
Honour accepted as correct the following statement of Scott V-C in Medforth
v Blake:94
If a mortgagee establishes a relationship with the receiver he has
appointed under which the receiver exercises his powers in
accordance with instructions given by the mortgagee, I can see the
force of an argument that if the receiver is liable to the mortgagor
then so will the mortgagee be liable. If the mortgagee chooses to
instruct the receivers to carry on the business in a manner that is a
breach of the receiver’s duty to the mortgagor, it seems to be quite
right that the mortgagee, as well as the receivers, should incur
liability. This conclusion does not in the least undermine the
receivership system. What it might do is to promote caution on the
part of mortgagees in seeking to direct receivers as to the manner in
which they (the receivers) should exercise their powers. I would
regard that as salutary.”95
93
At [886].
[2000] Ch 86.
95
At 95.
94
83.
24
On the facts before him, his Honour found that no duty owed by the receiver
or by the bank to the mortgagor or guarantor had been breached.96
84.
Similar issues arose in Bank of Western Australia Ltd v Abdul.97 The plaintiff
bank sought to recover from principal debtors and guarantors in respect of
various banking facilities relating to aged care facilities. Upon default, the
bank appointed receivers and managers under its securities.
One of the
questions which Croft J was called upon to decide was whether the bank had
interfered in the conduct of the receivership such as to displace the agency
between the receivers and the mortgagors and to render the plaintiff directly
liable for defaults of the receivers.
85.
Croft J liberally quoted from and referred to Einstein J’s judgment in State
Bank of New South Wales v Chia. As to whether the degree of interference of
the bank in the conduct of the receivership was sufficient to displace the
agency between the receivers and the mortgagor and to make the bank liable
for the receiver’s conduct, his Honour said:
The answer to this question depends upon the particular facts and
circumstances against which a receivership is conducted and,
unsurprisingly, there is not necessarily any “bright line” which will
indicate that, when crossed, the receiver becomes the agent of the
mortgagee, the secured creditor. In this context, it must also be
kept in mind that communications between the receiver and the
mortgagee, the secured creditor, are not only quite proper in
themselves, but likely to be desirable in the interests of both the
mortgagor, the secured debtor, and mortgagee, the second creditor,
in seeking to maximise the proceeds of realisation of secured
assets.
Reporting and communication will be particularly important in
circumstances where the realisation of assets is not a simple matter
and, clearly, in circumstances where the mortgagee, the secured
creditor, is also assisting in maximising the proceeds of realisation
by funding the continuation of the business or businesses the
subject of the security; thereby protecting the value of goodwill.98
86.
His Honour observed99 that the authorities made it clear that a receiver has a
duty to keep the mortgagee informed as to the progress of the receivership and
96
At [911].
[2012] VSC 222.
98
At [37]-[38].
99
At [41].
97
25
that communications engaged in for that purpose are not to be confused with
interference. Interference in this context contemplates something more than
mere consultation and communication of preferences by the mortgagee. To
constitute interference, there must be “heavy involvement” (to use the words
of Einstein J in Chia) in the performance of the receiver’s duties.
The
involvement must be so intimate as to transform the character of the
relationship between the mortgagee and receiver into one of principal and
agent.
87.
His Honour said that the nature and degree of communication and interaction
between the mortgagee and receiver will naturally vary according to the nature
of the security and surrounding circumstances. 100
In a more complex
receivership, there is bound to be more frequent communication.
88.
In the result, particularly having regard to the size and complexity of the
receivership, Croft J was not satisfied that the bank’s involvement in the
receivership had overstepped the mark beyond which the receiver would
become its, rather than the mortgagor’s, agent.
The making of
recommendations by the bank did not mean that final decisions had been left
to the bank to make.101
Conclusion
89.
It seems, following these decisions, that a receiver’s agency for a mortgagor
will not be displaced and that a mortgagee will not be held liable for the
defaults of the receiver unless the defaults are the consequence of some
“heavy involvement” by the mortgagee in the conduct of the relationship.
That involvement is made out when the receiver’s decision making power
with respect to key issues is usurped by, or appropriated to, the mortgagee.
90.
There must, of course, be some accompanying breach of the receiver’s duty
before there will be any consequence for a mortgagee. A decision as to the
timing of a sale of mortgaged property, for example, is not sufficient to render
the mortgagee principal for the receiver.
On the other hand, a decision
effectively made by a mortgagee that a receiver should engage in a sale, or a
100
101
At [42].
See [47].
26
process of sale, of mortgaged property which willfully neglects the interests of
the mortgagor and/or guarantors is a decision which, if acted upon by the
receiver, may displace the receiver’s agency for the mortgagor and render the
mortgagee directly liable for the losses caused to the mortgagor and/or
guarantor.
91.
The object of appointing a receiver and manager as agent for the mortgagor is
to protect the mortgagee from liability for the receiver and manager’s defaults.
Care should be taken by mortgagees and receivers alike to ensure not only that
an adequate degree of independence is maintained between them in the course
of a receivership, but also that communication between them is not capable of
being construed as evidencing an effective abdication by the receiver in favour
of his or her appointor. Otherwise, the mortgagee and the receiver run the risk
of displacing the receiver’s agency for the mortgagor and rendering the
mortgagee liable as principal for any breaches of the receiver’s duties to the
mortgagor or guarantors.