Commonwealth Bank of Australia v Jovanovic & Ors No. DCCIV-98-168 [2003] SADC 75 (13 June 2003)

03/03/2003 to 07/03/2003, 10/03/2003 to 14/03/2003, 17/03/2003 to 19/03/2003.

MORTGAGES --- MORTGAGES AND CHARGES GENERALLY --- RIGHTS AND LIABILITIES OF MORTGAGOR AND MORTGAGEE

STATEMENT OF CLAIM CBA claimed the sum of $39,615.90 from the Jovanovics as guarantors of loan made to their company, Fortson Pty Ltd. Bank had advanced Fortson the sum of $750,000 on security of the Plaza Hotel at 83 Hndley Street, Adelaide. Fortson defaulted in repayment of loan and subsequently a demand was made under guarantee. Bank, despite requests to Jovanovics and former partners Slavko and Milorad Govedarica, unable to obtain financial details relating to hotel business. Bank caused internal review of value of hotel and then arranged independent valuation of hotel. Knight Frank Pty Ltd valued hotel in sum of $660,000. Bank considered request of tender process to purchase freehold from the Jovanovics and Govedaricas. Both submitted tenders for purchase of mortgage security. Bank eventually accepted tender of Govedaricas in sum of $800,000 and sought to recover balance of debt under guarantee. DEFENCE Defendants pleaded Bank, by accepting Govedaricas tender, had "sacrificed" property and by its actions had not acted in good faith, and, further breached the equitable duty owed to Jovanovics as alleged market value of freehold was "in excess of $2,000,000". Defendants further pleaded bank proceeded without investigating all factual matters and acted in a manner which was not in the interests of Fortson and Jovanovics and consequently counterclaimed extensive damages. FINDING A private or "internal" auction by mortgagee must always be scrutinised carefully because of inherent risks apparent by such action. However, finding that bank had acted prudently in obtaining independent valuation, and, entitled to act on same. Bank had also sought independent accountancy advice on sale options and which recommended private tender process. Finding bank through its officer, Ms Barker, had acted in good faith and by its actions endeavoured to obtain best price for property. Judgment for plaintiff against the defendants in the sum of $77,643.93 being the amount owing under the guarantee as at 3 March 2003. Counterclaim dismissed.

• Corporations Law s.420A, referred to.
• Cuckmere Brick Co Ltd v Mutual Finance [1971] Ch 949;
• Kennedy v de Trafford [1896] 1 Ch 761;
• Warner v Jacob (1882) 20 Ch D 220;
• China & South Sea Bank v Tan [1990] 2 WLR 56;
• Barnes v Queensland National Bank Ltd [1906] HCA 26; (1906) 3 CLR 925;
• Pendlebury v Colonial Mutual Life Assurance Society Ltd [1912] HCA 9; (1912) 13 CLR 676;
• Westpac Banking Corp v Kingsland (1991) 26 NSWLR 700 at 708;
• Citicorp Australia Limited v McLoughney and Anor (1983) 35 SASR 375;
• Johnson and Ors v Australian Guarantee Corporation Limited (1992) 59 SASR 382;
• Artistic Builders Pty ltd v Elliot & Tuthill (Mortgages) Pty Ltd [2002] NSWSC 16;
• Cape v Redarb Pty Ltd (No 2) ; , 272;

Counsel: MR C D MCCARTHY - Solicitors: ANDREW A BURDETT

Defendants: DOUGLAS DRAGAN JOVANOVIC AND IRINI JOVANOVIC

Judgment No. [2003] SADC 75

[2003] SADC 75

On 11 February 1998 the plaintiff, the Commonwealth Bank of Australia ("the bank"), issued these proceedings against Douglas and Irini Jovanovic ("the Jovanovics") claiming that on 8 November 1995, the defendants executed a deed of guarantee whereby they guaranteed the financial obligations of Fortson Pty Ltd ("Fortson") to the bank and alleged that Fortson had defaulted in its obligations to pay the moneys so advanced. The bank claimed the sum of $39,615.09 from the defendants under covenants of the guarantee.

On 23 March 1998, the defendants filed a defence alleging that they had no recollection of signing the guarantee, and, by counterclaim alleged that the bank had sold the property at 83 Hindley Street, Adelaide, the subject of the bank charge, without their consent, and, in circumstances which involved a breach of the fiduciary duty which was owed to the defendants. The defendants further alleged that the property had been sold to Slavko and Milorad Govedarica ("the Govedaricas") who at the time of the sale were partners of the defendants, and, the property was sold "recklessly negligently and maliciously without giving the defendants a reasonable opportunity to put in an offer to purchase the property".

There were numerous and lengthy interlocutory applications, including substantial amendments particularly to the defendants' pleadings.

On 17 March 1999 the defendants filed a notice that they were acting in person.

In 1998 the numerous interlocutory applications concerning the nature of the defence and counterclaim continued. Eventually Fortson was joined as a party to the proceedings. On 12 July 1999 a further amended defence and counterclaim was filed. It was an extensive document and included an admission by the Jovanovics that they had signed the guarantee, but, a general denial of liability for the amount claimed. The Jovanovics again pleaded that the bank owed an equitable duty to them as guarantors not to "sacrifice or impair" the property the subject of the security being the unlicensed hotel premises at 83 Hindley Street, Adelaide, known as the Plaza Hotel.

The defendants further pleaded that when the bank exercised its power of sale it did not act in good faith and breached the equitable duty referred to by sacrificing or impairing the sale of the property. The default was particularised as:

"6.2.2 The Plaintiff acted behind the Defendants' back in that, without informing the defendants, the Plaintiff sold the Property to Roclin Developments Pty Ltd (ACN 007 841 152) for the purchase price of $800,000.00 ("the Sale") without having obtained a proper valuation and without having advertised the Property for sale to the public and when the Defendants and/or the Company had, in any event, already made a written offer to the Plaintiff to purchase the Property for the purchase price of $845,500.00;

6.2.3 The Plaintiff entered into the Sale without investigating thoroughly what was in the best interests of the Company and the Defendants for the reasons set out in subparagraph 6.2.2 hereof;"

and further pleaded that at the time of the sale the market value of the property was "in excess of $2,000,000".

The final amended defence and amended counterclaim and further amended defence was a rather detailed and comprehensive pleading. The pleading admitted that no payments had been made by the Jovanovics to the bank pursuant to the guarantee but denied that any moneys were owing. The Jovanovics further pleaded that the bank owed an equitable duty to the guarantors not to sacrifice or impair the property and including the business of the hotel conducted from that hotel comprising its goodwill, plant and equipment and described both the real estate and the business as the property. Further, when the bank exercised its power it did not behave with good faith and breached the equitable duty and in its manner of power of sale it sacrificed and thus impaired the property and because of that course it entered into the eventual sale without investigating thoroughly what was in the best interests of the Jovanovics. Nor did it advertise the property for sale to the public and/or accept the written offer of the Jovanovics in the sum of $845,000, which was the best offer. Further, by accepting the offer of $800,000 when the value of the property was in excess of $2,000,000. In any event, by the manner in which the bank acted and sold the hotel including all of the goods, chattels and plant, equipment and machinery, removable items and failed to include such items in its sale and the value of the same exceeded $100,000. The plaintiff's actions amounted to a calculated indifference or recklessly disregarded the interest of the company.

Consequently, by reason of these matters the Jovanovics have an equitable set-off which defeats the bank's claim.

The pleading also stated that the bank, as a controller of property was in breach of the statutory duty it owed to the Jovanovics under section 420A of the Corporations Law in that it failed to take all reasonable care in the selling of the property. In support of the plea the Jovanovics raised the matters as previously pleaded.

Consequently, by reason of these matters, the Jovanovics by their counterclaim alleged they suffered loss particularised as: (page 18 of copy documents)

"27.1 The difference between the market value of the Property at the time of the Sale and the sum of $800,000 (referred to in paragraph 15 hereof);

27.2 The loss of profits which Fortson would have derived as owner of the Property including the business of a hotel conducted thereon;

27.3 The loss of rent which Fortson would have derived as owner of the Property;

27.4 The loss of the use and enjoyment of the Property by Fortson and the Jovanovics;

27.5 The loss of wages which the Jovanovics would have earned had Fortson remained the owner of the Property, including the business of a hotel conducted thereon;

27.6 The market value of the Hindley Street Newsagency business;

27.7 The loss of profits and wages which the Jovanovics would have derived as the owners of the Hindley Street Newsagency business;

27.8 The loss of the use of the money as referred to in subparagraphs 24.1 to 24.7."

Further, the Jovanovics claimed as part of their damage, damages, which they say, arose because of their obligations owed to the Commissioner of Taxation.

The Jovanovics also sought aggravated, exemplary and punitive damages.

The bank filed a defence to the amended counterclaim, which stated:

"18. The Bank denies paragraph 18 of the Amended Counterclaim and each and every allegation therein as if the same were set out seriatim and specifically traversed. The Bank took all reasonable care to sell the property for the market value thereof in respect of the sale. Further or in the alternative, the Bank took all reasonable care to sell the property for the best price that was reasonably obtainable, having regard to the circumstances existing when the property was sold. Further, the Bank properly and adequately investigated the value of the property at the time of sale and the best price that was reasonably obtainable, having regard to the circumstances existing when the property was sold was obtained."

The bank pleaded that prior to effecting the sale it had engaged the real estate firm of Knight Frank to provide an independent valuation of the property, and, such valuation was provided to the bank dated 22 May 1997, which reported inter alia that:

"Given the state of disrepair of the premises, the lack of trading details available from the Plaza Hotel operation and the fact that there are vacancies on the ground floor, we consider that the subject property would have very limited appeal in the current market place....",

and attributed a current market value to the property in the sum of $660,000, and, on a forced sale value, $560,000.

The bank denied all of the other allegations made by the defendants.

As apparent from my earlier comments, the discovery process was detailed and complicated. During this process there were appeals from certain orders made by the Master. I heard the appeals and endeavoured to assist the unrepresented defendants. Mr Douglas Jovanovic (referred to throughout this proceedings as "Doug") attended on all these applications, and, clearly had a significant grasp of all factual matters not only involving the bank, but his detailed litigation with his former business partners, the Govedaricas.

During the interlocutory proceedings orders were sought for non-party discovery from the Govedaricas and issues arose from the delivery of the various experts' reports. As a result of these rather complex issues I became seized of the matter.

The matter came on for hearing on Monday, 3 March 2003 and continued until the evidence was concluded on Wednesday, 19 March 2003.

When the hearing commenced, Mr Sallis appeared as counsel for the Jovanovics, but not the company, Fortson. He said that the solicitors, Costi & Co, had filed an appearance for all parties in the prior week, but informed me that on the Friday before trial the solicitors for the bank had advised him that Fortson had been deregistered on 11 September 1998. He said that on his instructions Fortson had been deregistered because of its failure to file annual returns. However, since that advice was received solicitors had been instructed to endeavour to cause the company to be reinstated. An adjournment was sought, but I indicated that notwithstanding that deregistration the matter should proceed and during the course of the trial I could be advised of the outcome of the reinstatement application. I intimated that, on the basis of authorities, if the company were not reregistered it would in time be hard to resist an application that the Fortson counterclaim be struck out.

As is apparent from the recitation of the pleadings the issues for determination were, firstly, did the bank follow appropriate and proper procedures in selling the Plaza Hotel under their security and, secondly, if they had followed such proper procedures, did they sell the same for reasonable value.

There was no dispute as to the calculation of the bank's claim under its securities, or, indeed, the formal default notices.

The principal witness for the bank was Ms Barker who at all relevant times was the person having the conduct of this matter for and on behalf of the bank. The further witnesses were Mr Burton, a valuer in the employ of the real estate firm, Knight Frank (SA) Pty Ltd ("Knight Frank"), who, at the request of the bank, valued the Plaza Hotel on 27 May 1997, and, Mr Crase, a chartered accountant, who at the request of the solicitors acting for the bank and for the purposes of these proceedings had prepared a report attempting to value the hotel and newsagency business as formerly carried on by the Jovanovics at the site.

Doug Jovanovic, gave evidence. His wife was present in court for most of this time. The remaining witnesses were Mr Stefanovic, a former employee at the hotel, Mr Williamson, a real estate agent and valuer, Mr Ellery, a chartered accountant, and Mr Taylor, a valuer.

Ms Barker commenced her career in the bank in 1979 and had worked in many areas of the bank until 1996. She was then an officer in what was referred to as the "asset management unit" of the bank, in effect the default area. It was apparent from her evidence that Ms Barker had a significant background in banking and all its procedures.

She said that in October 1996 she was assigned the file relating to the transaction between the bank, Fortson and the Jovanovics. Ms Barker produced her file, which contained all of the numerous memoranda surrounding her handling of this transaction. Ms Barker kept quite meticulous notes of her involvement and numerous attendances particularly on Doug.

Ms Barker said, immediately on reading the file, it was apparent there was a major dispute between the former partners, the Govedaricas, and the Jovanovics.

Her notes and enquiries revealed that the Govedaricas and/or their company, Roclin Developments Pty Ltd ("Roclin"), had initially sold the Plaza Hotel to the Jovanovics who had incorporated the company, Fortson, for this purpose. At that time there appeared to be a close friendship between the parties. It appeared that the Govedaricas at that time were in financial difficulties with another bank and consequently the sale to the Jovanovics evolved. Ms Barker mentioned it was not until quite late in the piece that the bank became aware of an agreement between the Govedaricas and the Jovanovics dated 15 November 1995 now referred to as the "secret agreement" which provided that if the Jovanovics and/or their company obtained sole legal title of the property pursuant to the contract of sale between Roclin and Fortson dated October 1995 the Jovanovics agreed that they would hold the property as to a one-third entitlement for themselves, and, the remaining two-thirds for the Govedaricas. It further provided:

"3.2 The Jovanovic's agree that notwithstanding any arrangement that involves their possession of sole legal title of the property, that they hold on trust for the benefit of the Govedarica's, ownership of the property based upon the proportions of ownership outlined in paragraph 3.1 above."

The bank had obtained details of the secret agreement prior to the eventual sale.

Ms Barker said that even after this document surfaced the bank had always been confused with the legal position relating to the ownership of the hotel.

Ms Barker said she was aware in the initial period that there were considerable negotiations between all the parties with the Jovanovics endeavouring to arrange finance to pay out the Govedaricas. It appeared that the Govedaricas owned a substantial car park adjoining the hotel property and that in itself had created financial difficulties for them. She was also informed that the Jovanovics had difficulty in taking over the day-to-day operations of the hotel from the Govedaricas and, consequently, this was a significant contributing factor to the ability of the Jovanovics to service the loan to the bank.

What is apparent from Ms Barker's evidence is the deferring of recovery action by the bank against Fortson whilst initial litigation was on foot between the parties.

Ms Barker confirmed that the initial advance by the bank to Fortson was the sum of $750,000, but this had increased because of accruing interest.

Ms Barker had very accurately recorded the history of this matter and the involvement of the South Australian Asset Management Corporation, which was described as the "old" State Bank, and, referred to as the "bad bank" in regard to the indebtedness of the Govedaricas to that entity and the subterfuges of the Govedaricas to avoid that liability. No doubt this was the primary reason for the sale of the Plaza Hotel to Fortson. However, by 17 October 1996 Ms Barker recommended a recovery strategy, which included the Jovanovics future proposals and provision of appropriate cash flow budgets, and, further endeavouring to clarify the legal position of the management of the hotel. Ms Barker requested that the internal property department of the bank revalue the security on a market and/or forced sale basis.

Ms Barker eventually attended Mr Jovanovic with his accountant, Mr Kalenjuk, and with hindsight commented very accurately:

"Mr Jovanovic was very excitable and did not impress [you] as having a pragmatic view of the things."

Ms Barker was relieved to find the involvement of the accounting firm as is apparent in her detailed memorandum at page 91 of the documents, including the ongoing litigation between the Jovanovics and the Govedaricas.

At that time Ms Barker was aware that the Jovanovics were conducting a newsagency from the hotel premises. Ms Barker said one of the primary concerns of the bank at this stage was to obtain a cash flow budget from the Jovanovics. This had been requested but had never been received even to the point of the forced sale. I doubt whether any records exist.

As appears in the memoranda, Ms Barker accurately recorded the nature of all the numerous attendances on Doug. In this early stage it was apparent that there was no income flowing from the Govedaricas or their company, Roclin, in and about their management of the Plaza Hotel to Doug to enable him to meet his indebtedness to the bank notwithstanding Fortsons legal title. His income appeared to be what he was receiving from his newsagency business. Offers to pay the bank were made but not kept.

In the meantime the Govedaricas were advising the bank of their criticism of the manner that Doug was conducting his own financial affairs.

Eventually on 21 November 1996 Ms Barker caused a letter to be written to Fortson when the bank accepted amended proposals by Mr Jovanovic, that:

". a lump sum payment of $20,000 to account number 5000 10179498 payable immediately

. sufficient funds are to be credited to account number 5000 10179498 to meet the Fixed Rate Term Advance instalments when due

. arrangements to be reviewed in January 1997 following the conclusion of the trial scheduled to commence 14 January 1997."

In January 1997 Ms Barker reviewed the situation no doubt prompted by her repeated attendances on Mr Jovanovic and his desperate financial plight.

Ms Barker said the bank was aware the trial between the Jovanovics and Govedaricas had commenced in this court on 14 January 1997. Mr Jovanovic subsequently advised the bank that he had withdrawn this action, as the action "was not progressing to his satisfaction". To add to the bank's concerns the Govedaricas and their solicitor attended the bank on 20 January 1997 to present what they claimed to be their position in this ongoing saga. The diary note of 20 January 1997 sets out matters that allegedly reflected on the conduct of Mr Jovanovic. In the meantime Mr Jovanovic advised the bank that on 20 January 1997 he had been offered the sum of $1.1 million by the Govedaricas but he was attempting to have this sum increased. Further, he was proposing to move to Darwin to follow his former occupation and obtain substantial income.

Consequently, Ms Barker thought it prudent to wait a further time to see if all matters could be resolved.

Ms Barker was advised on 21 January 1997, by the solicitors for the Govedaricas, that they had rejected any offer to purchase the interest of Mr Jovanovic, but may continue with their negotiations. Ms Barker confirmed her note of frustration in the diary note of 21 January 1997 when she said:

"This is a frustrating development. Recommend we now write to our client and advise that we require clearance of the excess in the A/A by 21/2/97 otherwise the account is to be placed in reduction and mortgagee action commenced. FRTA instalment 1/2/97 is to be met when due."

Ms Barker made it clear, and I accept her evidence, that at no time in all of this long drawn out saga between the Govedaricas and the Jovanovics had the bank in any way taken sides in this dispute. She was aware of the further court proceedings involving all of the combatants.

Ms Barker referred to her detailed note of 12 February 1997 after the Govedaricas and their solicitor had attended both Ms Barker and Mr Smith, a bank officer, that "the Jovanovics agree that the Govedaricas are entitled to 2/3rds of the hotel and business". It was alleged that negotiations between the parties had been terminated and that the Jovanovics were demanding a public auction of the hotel, but it was the Govedaricas view that Mr Jovanovic had insufficient resources to cause such an auction. Ms Barker noted in her memo:

"The method of sale by CBA as mortgagee was discussed at length by Mr Kavenagh. His clients are keen to avoid public auction. They state their reasons a being the cost which will be added to the CBA debt. It was again stated that the value of the hotel is $800,000. Our valuation is $1M dated 10/95. This was recently discussed with PVS who indicated the valuation is likely to be unchanged. Will now request PVS revalue on market and forced sale basis."

The abbreviation "PVS" is the bank department entitled "Property Valuation Service".

Ms Barker said she was aware that in October 1995 bank officers had made a valuation of the property in the sum of $1,000,000. However, she felt it was prudent that the bank at this point of time request PVS to re-value the property, and, also considered whether they should obtain an independent valuation. Ms Barker confirmed that at the time of the original sale the bank placed reliance on their valuation of this property in the sum of $1,000,000. She was also aware that there were now issues with the persons or entities entitled to possession of the hotel.

In her memo of 12 February 1997 Ms Barker commented:

"This information casts a new light on Mr Jovanovics capacity to service our debt and it would appear that, notwithstanding that we have no knowledge of the newsagency profitability, he is unable to meet loan instalments from current income.

In any event the loan is now in arrears $5,751.31. We have given the Jovanovics until 21/2/97 to put all accounts in order. The Jovanovics have made an appointment with us for 13/2/97 and we await developments."

Mr Jovanovic again attended the bank on 13 February 1997. The bank memorandum confirmed that it stressed to Mr Jovanovic that the bank was dissatisfied with the ongoing default and questioned him about his income and lack of payments. Mr Jovanovic admitted that he was using any available funds to meet other creditors and legal costs and cheques were being dishonoured to give him further time to make payments to creditors. Mr Smith, the bank officer, pointed out to Mr Jovanovic that in his view the bank had a final deadline of 21 February 1997 otherwise they would be required to commence legal action for recovery of the debt, but, the bank would accept his proposal to voluntarily sell the property if they were able to sight such sales agreement. Mr Smith commented:

"Furthermore, it was a clear requirement that CBA will undertake a revaluation (tried to resist this) and a valuer will be in touch with him shortly to arrange this and obtain tenancy details.

In further conversation, he raised the option of having an internal auction (?) between him and the Govedaricas and the highest bidder would be successful. He states that he has ready finance available through Eastern Equity (Paul Smith) to meet any potential purchase on his part and his opinion is that no bank would wish to touch the Govedaricas for their finance requirements in the event that they were the successful bidder.

This option is somewhat unusual and we advised that CBA would not interfere in this process on the basis that written evidence was produced to the Bank by 21/2/97 that both parties had agreed to go down this track.

In other words, both solicitors would have to liaise with each other to quickly resolve this proposal.

However, he was advised that CBA would still proceed with its issue of legal notices so that we are positioned to act in the event that a sale is not achieved.

If the first option of appointing an agent to sell the property goes ahead, we would wish to be able to be satisfied that the agent is reputable and property being marketed properly at a realistic price. Obviously, the Govedaricas could make an offer for the property and I would anticipate that Jovanovic would not sign any contract to them.

Strict deadlines would need to be enforced to ensure that this file does not drag further. Jovanovic has been advised that CBA is not prepared to assist him with any finance requirements as his recent loan performance has severely tarnished his creditability.

As the first meeting by the writer with this client, personal factors were certainly not impressive. An attempt to offer a bottle of whisky at the conclusion of the interview was rejected outright.

CBA's position in attempting to finalise matters as quickly as possible was made clear to him and that it was not the intention for the Bank to become embroiled in any dispute with these parties."

Ms Barker said she then contacted the bank's solicitor, Mr Andrew Burdett, and requested that the PVS reconsider their valuation of the property. It had been noted that despite numerous requests to Mr Jovanovic they had never ever been supplied with a copy of relevant leases for the property.

Ms Barker then arranged for the bank formally to demand from Fortson the amount of $68,078.15. That demand appears on page 110 of the book of documents.

Ms Barker produced a report from PVS dated 14 February 1997 prepared by a Mr Cashman, a staff member, being the manager of the PVS. Mr Cashman noted in that internal memorandum as follows:

"As requested we have undertaken a revaluation of the above mentioned security. An inspection was conducted on 26/2/97. Reference is made to previous valuation dated 31/10/95.

Security remains as described in the previous report. One vacancy has since developed. Nominal rental return is now estimated at $135,000. There appears to be some doubt about the Plaza Hotel rental ($96,000 pa) which has been disputed. One of the other leases (payment of $14,000 pa) is not at arm's length. Hotel rental does seem excessive although we have not been able to determine the level of trade. Allowing $75,000 pa for the hotel, total rental on a fully leased basis is put at $138,000.

Building itself may require upgrading in order for it to conform with current fire regulations. We have not been able to confirm the extent of this as thorough inspection was not made possible. At the least external appearance and hotel foyer would stand some degree of updating.

Market value will depend on the extent to which satisfactory leasing agreements are reached. Given our assessment of market rental, current valuation is $950,000. On a forced sale basis our valuation is $850,000.

As a separate matter but subject also to a commercial lease arrangement hotel business would be worth about $200,000 ($150,000 on a forced sale basis).

Forced Sale Valuation: $850,000 less $35,000, $815,000.

Forced Sale Valuation: $150,000 less $8,000, $142,000.

We have been informed about proposals for the security that might add value if they were to happen. In our view unless major upgrading costs are envisaged nothing is likely to seriously challenge the basis of our valuation.

At present entire site seems to be in need of a clean up. Hotel component has an unsavoury reputation while exterior of retail outlets and the area in front warrants attention. Additionally we have been informed that there are up to 35 permanent residents staying in the hotel who may be subject to the Residential Tenancies Act. It would seem that several items will need to be cleared up before any decision to purchase the site."

Ms Barker explained in regard to the rental of the Plaza Hotel initially Mr Jovanovic informed the bank that the rental was $8,000 per month but the Govedaricas stated that amount was a "variable" arrangement. She noted that Mr Cashman was not able to make a thorough inspection of the hotel, as the Govedaricas, who appeared to be in possession, did not give him access. However, at no stage despite enquiries by the bank had they been able to ascertain the income of the hotel property. Mr Cashman had also raised questions about the nature of the 35 permanent residents and issues under the Residential Tenancies Act. Ms Barker said she spoke to Mr Cashman about that valuation and because of the unsatisfactory matters raised by him she then resolved to seek an independent valuation of the property as she was not confident after speaking to Mr Cashman, nor probably he, that the bank's valuation reflected the true position. Ms Barker said she wanted more certainty about issues like rental and other matters raised by Mr Cashman.

Consequently, on 2 May 1997, the bank instructed the real estate firm of Knight Frank to value the property.

In the meantime, the bank had written, by letter of 5 March 1997, to the directors of Fortson mentioning particularly that it was willing to postpone its sale action for a period providing that:

• "undertake to sell the property yourself at a realistic price or

• arrange to refinance the above debts elsewhere."

The bank had also, by formal notice of 5 March 1997 to Fortson in the usual form, given notice alleging a breach pursuant to section 55a of the Law and Property Act.

It appears that by March 1997 the financial plight of Mr Jovanovic was extreme particularly with his advice to the bank on 27 March 1997 that he was some four months in arrears with insurance premiums and neither he nor the Govedaricas were able to pay the same. The insurance company had threatened to cancel the relevant policies. The bank had been requested by the insurance company to pay the sum of $6,254.70 for outstanding arrears.

Ms Barker referred to her diary note of 7 April 1997. By this time it was apparent that there was no likelihood of the numerous legal issues between the Govedaricas and Jovanovics being resolved. Ms Barker accurately summarised the position in her diary note of 7 April 1997 when she stated:

• "It is unclear whether the Hotel business is managed under contract by the Govedaricas or whether no contract exists. Consider the latter is more likely.

• We are aware that the Govedaricas maintain active and assertive legal representation in this matter.

• Both Fortson and Govedaricas consider that no other party will be interested in purchasing the Hotel, outside of these two.

• Forced sale valuation in hand for the freehold only does not allow much margin for selling costs if our debt is to be repaid in full.

In addition, the concept of an internal auction has been raised in the past by Mr Jovanovic. This would see sale by tender, open only to these two parties. The reason behind this request appears to be that each of these two parties appears to believe that CBA will sell the Hotel for the amount of its debt. Therefore if CBA pays Agent or Receiver costs, the cost to purchase will be higher. Both parties want to purchase at the cheapest price.

Have discussed this with Legal (David Leydon). Of course our usual basis for setting a sale price is the valuation. Legal advise that if we wish, we could proceed along the internal auction course on the following basis:

• request each party write and state the amount they would be prepared to pay and the terms of settlement.

• advise each party that CBA would have the option to refuse both tenders if the amounts offered were not at, or above a reserve price

• sell only if the winning tender is around the reserve mark.

Obviously we would not sell at a price that could not be supported by valuations.

Recommend we issue NOS today. In view of the complications with the management aspect, recommend that we avoid public sale and instead attempt sale by the internal auction method. We would write to both parties as guided by Legal, seeking their written expression of interest in purchase of the Hotel as a going concern, including price and terms. Response required within 7 days."

The bank also instructed Mr Burdett, solicitor, to prepare the relevant tender documents. On 22 May 1997 letters were sent to the parties. During this time Mr Jovanovic was in regular contact with Ms Barker and raised issues about the nature of the tender documents and conditions. He was advised to seek independent legal advice.

The bank received the Knight Frank valuation prepared by its valuer, Mr Burton, and dated 22 May 1997. Mr Burton considered that the market value of the property was in the sum of $660,000 and on a forced sale basis, $560,000. The valuation is a comprehensive document. The valuation properly describes the nature of the hotel premises, the relevant zoning and the difficulty because of the absence of trading details.

The valuer examined in detail similar unlicensed hotel ventures in Hindley Street and their relevant yields. He initially arrived at a capital value in the sum of $762,407 and from this deducted amounts required for necessary expenditure and then rounded off his valuation in the sum of $660,000. In his valuation he commented:

"In consideration of the abovementioned and other sales, we have adopted a capitalisation rate of 13%. We have adopted this rate primarily because of the uncertainty concerning the Plaza Hotel operation and the fact that there is virtually no secure short term income."

As the basis for this conclusion, he mentioned five properties.

The valuation was a well-structured document and properly researched. The bank could not be criticised for accepting the same as an independent opinion of the value of its security.

In the meantime the formal tender process was underway between the parties. What was made clear to Mr Jovanovic by Ms Barker in this tendering process was as follows:

"It was put to him very clearly that this process wouldn't necessarily result in a bank picking the highest tender amount or either tender. A tender had to be satisfactory to the bank and it had to be one that was of substance, that would proceed."

Ms Barker commented, after receiving the valuation from Mr Burton, that she reassessed the bank's position particularly bearing in mind the prior reports from the valuation employees of the bank. A concern to her was that on the basis of the Burton valuation there would be a shortfall of moneys to liquidate the debt.

Ms Barker said that tenders were received from the Govedaricas and Mr Jovanovic. The initial tender document proposed a deposit sum to be lodged with the tender. The Govedaricas completed this but Mr Jovanovic did not forward any deposit.

Ms Barker said that in relation to Mr Jovanovic's tender she made contact with a Mr Chris Fox from Eastern Equity. The Jovanovic tender was in the sum of $845,000. She contacted Mr Fox and he advised her that he knew of the possibility of Fortson applying for funds, but he said such an application had not been made. She was then asked:

Did he advise you if, to his knowledge, Fortson had approval for $845,000 of finance.

Mr Fox told me that he believed there would be difficulties in approving an application."

Again this is subject to Ms Barker's detailed diary note of 5 June 1997, particularly when she stated that Mr Fox said that he believed the proposal would be declined by all banks, but, may be attractive to some of his private investors. She commented in her diary entry:

"Mr Jovanovic's prospects of obtaining finance appear remote. In view of deposit deficiency and incomplete tender recommend we decline this tender."

A tender had also been received from Roclin in the sum of $800,000. She then noted as follows:

"Proposal is for CBA (preferred lender) or another financier to lend $650,000. Have discussed with Darryl Royans (Snr Manager Approvals) and Colin Richie (Mobile Sales Force Unit). Colin strongly opposes CBA dealing with the Govedaricas due to his knowledge of their loan conduct when with BankSA (Asset Management Unit). Darryl has indicated that, with this in mind, he would not be inclined to approve the application.

Recommend we decline the Roclin application for finance, under SMA signature.

Roclin are in control of the accommodation business within the Plaza Hotel. There would appear to be some prospect of Roclin being able to raise finance. Tender and deposit provided are in order. The price offered is below PVS FSV but above KF FSV and market valuation, and is considered acceptable.

Recommend we respond to Roclin along the lines that we will defer our decision on their tender until 5pm 20th June 1997. If evidence of formal finance approval is provided to this office by that time, their tender will be accepted. Exact wording of reply to be approved by Legal Department."

Ms Barker caused a letter to be written to Fortson on 5 June 1997 advising that their tender was not successful and that the bank was currently considering its options in regard to the sale. This letter was written out of courtesy and mentioned that if the Jovanovics had any matters arising from this advice they should contact Ms Barker.

Ms Barker said she reconsidered the matter further and prepared a diary note of 23 June 1997 outlining as follows:

1. seek a further offer from both parties supported by written evidence of irrevocable unconditional finance. This effectively provides the Govedaricas with the additional time they have sought, and also gives Jovanovic a further opportunity.

2. set deadline for receipt of offers at 12 noon 4/7/97

3. request a Receiver make a pre appointment inspection of the Roclin operated hotel (accommodation) business prior to 4/7/97. Recommend Tony Smith of Ernst and Young. We wish to obtain information on the trading of the business, and suspect that if the Govedaricas are not successful in their bid to purchase the Hotel, their co-operation may not be forthcoming. The information will be vital if the sale process is unsuccessful and a Receiver is appointed."

It was also noted that she was aware at this time that the Govedaricas had commenced bankruptcy proceedings against Mr Jovanovic, which related to unpaid costs of the prior court action and added, no doubt accurately, "an interesting strategy, no doubt to impair his ability to raise funds for purchase of the Hotel".

It was at this point of time the bank decided to seek independent accountancy advice from the firm, Ernst & Young, in an endeavour to obtain financial information concerning the nature and/or value of the trading of the hotel. No doubt this action was prompted out of caution and to be better informed on the trading nature of the hotel in view of the failure of Fortson and the uncooperative nature of the Govedaricas to provide the same.

Ms Barker said there was a formal request for an extension of time in which to lodge the tender from the solicitors for the Govedaricas, and, she then liaised with their solicitor. Eventually Mr Burdett wrote to the solicitor, Mr Kavanagh, advising that if the matter was not concluded by 4 July 1997 the bank would then be obliged to take alternative action including seeking possession of the premises. She also pointed out that Mr Smith of Ernst & Young had been requested to inspect the premises and for this purpose they would need full discovery of all financial records.

In this interim period Mr Jovanovic kept in regular contact with Ms Barker as appeared from her diary note of 24 June 1997, including a request that he be advised on the amount of the tender that should be submitted. Ms Barker did not respond to this request. Again there was a similar request from his solicitor, Mr Esau, which was declined. She said she thought this was somewhat of a "fishing" exercise by the solicitor.

The firm of Ernst & Young was formally instructed on 25 June 1997 and was asked particularly to comment on the following:

"1. A review of management agreements and any other documentation between the Company and Roclin Developments Pty Limited and any other relevant entities owned and operated by the Jovanovics and the Govedaricas.

2. Determine the party with the operating rights for the Plaza Hotel business and if possible establish the viability (or otherwise) of the business operations.

3. Your advice regarding realisation strategies that can be adopted by the Bank to maximise the return from this account."

The bank also at this time obtained a request from the Govedaricas solicitors that the time be extended for the parties to submit their tenders. The Jovanovics were advised, by letter of 23 June 1997, that the time had been extended until 4 July 1997. It was noted in that letter that an option for the bank would be to seek expressions of interest from outside parties to purchase the property which no doubt prompted an immediate response from Mr Jovanovic on 24 June 1997 with an inquiry as to how much was needed to be tendered to secure the property. Ms Barker refused to be a party to this request. She felt that at this stage she was being to some extent badgered by Mr Jovanovic.

When the bank instructed Ernst & Young, Ms Barker said the bank had little financial information on its file notwithstanding many attempts over this long period to obtain financial details of the hotel operation.

The accountants wrote a letter of report on 4 July 1997 and confirmed that following their instructions they had met with Mr and Mrs Jovanovic and Mr Slavko Govedarica. The accountants then reported under various heads including details of Fortson Pty Ltd (Controller Appointed), and, results of meetings with Mr and Mrs Jovanovic, and Mr S Govedarica. I believe that this report from the independent accountants had a substantive impact on the bank's future action. It is necessary to set out some details of that letter of report:

On the basis of investigations and discussions carried out, our preliminary understanding of the position of the respective parties may be summarised as follows:

It would appear that the building is owned by Fortson which in turn is effectively owned by the Jovanovic's (1/3) and the Govedarica's (2/3). (The Govedarica's would allegedly obtain their 2/3 interest in the building through exercising an option to purchase the shares for $2).

The chattels are likely to be owned by PHPL which company is in turn owned by the Govedarica's. This conclusion is subject to reviewing the contract. We are advised that PHPL has not received any rent or payment for usage of the chattels since the hotel was purchased by Fortson.

The business is said to be owned by Milan Investments and is operated by Mr Slavko Govedarica on behalf of the Trust. Mr Govedarica maintains that the management arrangement with Milan Investments is verbal and involves both Fortson (with who a management agreement is said to exist) and PHPL (with whom presumably some form of rental agreement exists).

Following our meeting with the Jovanovics, we wrote to their solicitor, Mr Mark Esau on 26 June 1997 and a copy of this correspondence is attached as Appendix A. We have contacted Mr Esau subsequent to this correspondence and again reiterated that we require the documentation urgently. To date we have not received the information sought.

We believe these documents to be crucial to establishing the rights of the various parties in relation to managing the Hotel. Until we receive these documents it is not possible for us to state with certainty who has the operating rights for the Hotel. In particular, we require the copy of the original sale contract to confirm that the chattels were excluded from the purchase by Fortson Pty Limited. As no financials have been produced since March 1996, we are not in a position to comment on the viability of the Hotel's operations. We have asked Mr Govedarica to provide to us details of the monthly income and expenditure during the period he has been responsible for the Hotel's operations.

Notwithstanding the lack of documentation, we consider the following three options the most practical alternatives:

1. As the tender process is running, if one of the parties can confirm that finance is able to be independently obtained, then a sale of the property to this party is clearly the preferred option.

2. Extend the timeframe for either party to obtain finance. (The Bank should probably go straight to the market unless there is a reasonable opportunity for one of the parties to obtain finance in the next 4 to 8 weeks).

3. Appoint an agent and put the Hotel to the market.

This is clearly the preferred option. Clarification of ownership of the chattels will however be required, particularly if the Jovanovics are the successful purchaser.

If neither party is able to confirm finance by 4 July 1997, the Bank may consider extending the timeframe for obtaining finance for (say) a further 4 to 8 weeks. Both parties can be advised that should they fail to obtain finance, the Bank will be putting the Hotel to the market. In the meantime, the Bank should require that all rental monies from commercial tenants are forwarded to the Bank, including rent due by the newsagency. The Govedaricas should be informed that the Bank requires a weekly accounting of receipts and payments in relation to accommodation and that a minimum payment of $8,000 per month is required in respect to the accommodation receipts. In addition, all monies received the Govedaricas are to be banked into the PHPL account (which we are advised is the operating account for the hotel) maintained at the Commonwealth Bank.

If it is considered that the prospects of finance being obtained by the two parties are remote, then the Bank should, after clarifying ownership of the chattels and the management arrangement, appoint an agent and put the Hotel to the market. In doing this, the Bank will require control of the receipts and payments as detailed in Option 2 above. If it is felt that the Govedaricas will not be remitting the appropriate monies to the Bank then the Bank should consider appointing an agent or a receiver to manage the Hotel providing the existing arrangement, if any, can be terminated. Consideration will also need to be given to an arrangement with PHPL, the alleged owner of the chattels on two grounds:

• an option to purchase the chattels either by the Bank prior to selling the property or a purchaser in a separate agreement.

We have asked Mr Govedarica to advise the details and value of the chattels located in the Hotel. He has advised that he believes the chattels to be worth $60,000 which is based on 35% to 40% of current cost. In our discussions with Mr Govedarica, he advised that he did not particularly wish to remove the chattels as he has no real use for them and therefore it is probably that a deal could be done with him for the purchase of the chattels.

It is evident that the Bank is receiving little or no rental income from the tenants of the Plaza Hotel or from the business being conducted therefrom. Under Options 2 and 3 outlined above, we believe it imperative that rental proceeds are received by CBA. All tenants including the Hindley Street Newsagency should be advised that rent is to be forwarded as it falls due and payments are to be kept current.

Our preliminary assessment is based on our discussions with the Jovanovics and Govedaricas and a review of the Bank's file. Without sighting the relevant documentation it is difficult to advise on whether the Govedaricas (or entities associated with the Govedaricas) have the right to manage the Hotel. This issue should be clarified on receipt of the documents requested from Mr Esau and Mr Kavanagh.

If one of the parties is able to obtain finance and the valuations support the price offered, we recommend selling to that party as soon as possible. Further consideration of Options 2 or 3 outlined above should wait until receipt of documents evidencing arrangements between the parties. We will continue to pursue Messrs Esau and Kavanagh for the relevant documents and upon receipt, we will clarify the outstanding issues and provide you with our further advice."

Ms Barker said that, although she accepted the recommendations contained in this report, in her opinion as this matter had developed over some 8 to 9 months of her management and in view of all of the uncertainty and legal issues surrounding the hotel and its business, that option 1 was the preferable course for the bank to follow.

Ms Barker commented that notwithstanding that letter of report she still requested Ernst & Young to continue in an endeavour to see if they could obtain any further documentation to assist their report.

The tendering process had been extended to 4 July 1997. Ms Barker's diary note of 8 July 1997 summarised the situation when she said:

Deadline for lodgement of offers to purchase was 12 noon 4/7/97.

No offer was received from Doug Jovanovic as he was reluctant to pay up front broking fee of $10,000 to obtain finance approval required by CBA. On 7/7/97 Mark Esau, Solicitor for Doug telephoned and again requested we allow Doug a further two weeks to obtain finance? This request was declined by the writer. An identical request had been declined 2/7/97.

Terry Kavanagh, Solicitor for the Govedaricas called at this office 4/7/97 and spoke to Neil Smith SMCM and the writer. He stated that his clients' offer of $800,000 still stood, however they were unable to raise finance anywhere. CBA had declined to provide finance of $650,000 5/6/97.

Mr Kavanagh advised finance requirement had reduced to $620,000 and requested CBA reconsider its' decision. Settlement is offered in 7 days. The application has been completed and is awaiting decision.

It is certain that we will have a shortfall on this account following sale of the Hotel premises. Position is as follows:

Suspect financial statements for 6/97 have not and will not be completed.

Have recently stated that they have sold all their jewellery and other assets to fund the ongoing battle for possession of the Plaza Hotel. Also that they have creditors to answer to. Suspect their net worth is nil and they will soon be the subject of numerous creditors petitions. We now need to seek a sworn balance sheet from clients.

Have made enquiries with NASA David Thomas who advises that this newsagency is not an 'authorised' agency (i.e. not associated with particular territory) and they do not record Banks charges for these. There is no formula for calculation of goodwill value, simply a commercial judgement/transaction.

In the event that we wished to realise on this security, one option would be to appoint a Receiver to manage and sell the business. On the financial information to hand, this would not appear to be an economical option.

Alternatively, we could close the business and sell the stock. Consider it is likely that there would be little value in this method after allowing for ROT and dated stock.

If the Jovanovics co-operate it is possible that they may be able to sell the business, however as it is likely that all proceeds will come to CBA, this is also not considered to be a probable outcome, however recommend this be explored with the Jovanovics to ascertain their reaction to the idea.

Will also seek details of stock, ROT claims, fittings etc.

Recommend a specific provision for loss of $60,000 be established. CRR to be amended to HE8.

We received a report from Ernst & Young pm 4/7/97. In spite of their best endeavours, to date they have been unable to provide any firm evidence of the actual legal arrangements between any of the parties involved in this file. Their conclusions and recommendations are identical to our existing strategy."

In regard to the newsagency business Ms Barker commented in that diary note that she had visited the premises on at least on 10 occasions. She said:

"The business was looking very tired. The fittings in the shop were run-down. The value and amount of stock on the shelves was very low. The number of customers going through the door - I never saw a customer in there to my recollection."

At this stage Ms Barker sought frequent advice from Mr Burdett, the bank's solicitor, concerning the bank's position and its obligations to the Jovanovics. Her diary note of 11 July 1997 (page 248) recalls her rationalisation of the financial position assuming an offer from Roclin was accepted for the sum of $800,000, and thus a shortfall of approximately $60,000 would be owing by Fortson and the Jovanovics under their guarantee. In that diary note Ms Barker commented on the possibility that Mr Jovanovic may claim the property was sold for less than "market value", but "as we hold an independent valuation report which provides adequate support for sale of $800,000 this should not represent a problem". She had discussed this matter with Mr Burdett, the bank's solicitor, who was also of the same view.

By 14 July 1997 the bank had accepted the Govedaricas offer. This, as one would assume, caused much concern to Mr Jovanovic as Ms Barker's diary note of 14 July 1997 reports:

"Doug Jovanovic called at this office 14/7/97 and was interviewed by Neil Smith SMAM and the writer. Mr Jovanovic was informed that CBA had agreed to sell the Plaza Hotel to Roclin Developments Pty Ltd for $800,000.

Mr Jovanovic questioned why he had not been given more opportunity to raise finance. Mr Smith advised Mr Jovanovic that we considered that he had been provided with sufficient opportunity to raise finance to repay the debt.

Mr Jovanovic then questioned whether we could stop the sale process, to which the response was negative. He was advised that the only action which could alter the proposed course of events was for full repayment of the debt within the next 24 hours. In spite of this information, Mr Jovanovic stated he may try and obtain an approval for finance and present to us in an effort to save his situation. Mr Smith advised that we had committed to sale of the Plaza Hotel, however the Bank would respond to any proposal put by Mr Jovanovic but that this would most likely be too late.

Mr Jovanovic was distressed at the sale price of the Plaza Hotel. He was hoping for a better result. Mr Jovanovic had raised finance against his mother's residence to meet initial costs associated with purchase of the Plaza Hotel in 11/95, and stated that the house must now be sold as the finance commitment cannot be repaid. In addition Mrs Jovanovic's parents house was also used to raise finance to fund legal and other costs relating to the Hotel. Mr Jovanovic mentioned that this house may also be sold.

Mr Jovanovic was advised that the residual debt following sale of the Hotel may be as high as $60,000. This news was not taken well. Sale of the Hindley Street Newsagency was briefly discussed and Mr Jovanovic stated that the business had value and he believes a buyer can be found.

It was suggested to Mr Jovanovic that he seek independent advice regarding his present situation.

On execution of the contract for sale, will confirm that event in writing to the Jovanovics. Will then formally request sworn declarations of their financial position (suspect they are insolvent), and their intentions regarding sale of the newsagency business and repayment of the residual debt."

Ernst & Young reported again on 24 July 1997 by which time they had obtained documents from the solicitors for the Jovanovics. That discovery included a number of contract documents particularly an agreement between the Jovanovics and the Govedaricas dated 15 November 1995. The bank had never seen that document prior to receiving the same from the accountants by their letter of 24 July 1997. She said at this stage it confirmed the bank's confusion as to the legal owner of the property, hotel, and goods and chattels and this had not been resolved by the accountants.

Also at this time Ms Barker was aware that Mr Burdett had prepared the formal contract documents for the sale.

Ms Barker commented that she was aware, and with the consent of the bank, that the Jovanovics were endeavouring to sell the newsagency business and figures of up to $50,000 or $60,000 had been mentioned, but, from her observations of the business she thought that this was "ridiculously high" and considered the business was unsaleable. She was aware that there was some ongoing difficulty between the Govedaricas and the Jovanovics concerning a lease of the newsagency business.

Ms Barker confirmed that the hotel business was subsequently sold to Roclin for the sum of $800,000. Her diary note sets out in detail her attendances thereafter on Mr Jovanovic. Particularly, attention was drawn to the fact that she was conscious of the relationship between the bank and Mr Jovanovic. She commented in her diary note of 11 July 1997 after conferring with Mr Burdett as follows:

The only possible claim that Doug may be able to make is that the property sold for less than market value. As we hold an independent valuation report which provides adequate support for sale at $800,000 this should not represent a problem."

Her examination in chief was completed as follows:

You have had the benefit now, along with the lawyers, of preparing for this trial at least twice. So you have had the opportunity to go through the file twice. Is it clear to you as at today who owned the assets of the hotel at the time they were sold.

Is it clear to you who was the operator of the hotel - that is, who was actually operating or not operating it.

Ms Barker was cross-examined by counsel for the defendant about every issue of this mortgage loan. The cross-examination of her lasted over some four days. The cross-examination was painstakingly thorough, and no issue in any way was overlooked. At times it was most repetitive.

It commenced with a summary and examination of the initial security documents the bank had obtained for Fortson for the initial loan of $750,000. Although Ms Barker was not in charge at that transaction she assumed that the bank was satisfied at that point of time with the nature of the security. She commented that it was her opinion if perhaps the bank had known of what was referred to as the "secret agreement" between the parties, dated 15 November 1995, it may not have made the loan in the terms it did to Fortson. I assume from that that the bank may have involved at that initial point of time with discussions with the Govedaricas. In any event that document did not surface until 1997.

Ms Barker agreed that when the bank sold the hotel to Roclin it relied on the valuation of Mr Burton and answered all pertinent questions in relation to the actions of what was referred to as the "forced sale" and the two parties involved in the tendering process. She summarised these numerous questions as to the bank's duty to its clients when she said:

"The bank in selling a property, is mindful of its client and the owner of that property and its aim is to achieve the best sale price so that those interests can take comfort in the fact that we have done the best we could given the circumstances and the time frame of the other issues surrounding the sale."

Again, when dealing with the two person tender process she commented:

"The concept of this tender process had been suggested to us by Doug Jovanovic and the Govedaricas, I believe, and they put to us that they were the only two parties; that knew the full circumstances surrounding this property. We, the bank, looked at other options including selling through an agent, doing a traditional sale, if you like, and it was our assessment that this would achieve the best result."

She was particularly asked numerous questions that the bank was only endeavouring to obtain a figure to pay out its debt as follows:

I put it to you that what your bank was concerned about was obtaining a sale price sufficient to pay its outstanding debt.

I disagree. That would be a good result for the bank, yes, but that's not the primary aim. We don't sell for just the amount of a debt and leave it at that. We aim to get the highest possible sale price given the circumstances surrounding the sale. If that means a surplus or a shortfall or exact equalling of the debt, then so be it.

Why did you think that the best way of obtaining the highest price was by offering it to Roclin or Fortson as opposed to putting the property to market.

It seemed a path where both parties would cooperate in terms of, for example, if it was a market, a public offering, if parties wanted access to documents or - which we'd been able to have access to, whether physical inspection of the building, which at times had been problematic for each of the other parties. There seemed to be a lot of conflict between them. This was a path both sets of parties agreed on. They were the only two sets of parties that had the full amount of information available. The bank certainly didn't. There seemed a lot of negatives that would impede new parties - prospective purchasers - being interested in the property. There were a lot of costs involved in the other options we considered. You mentioned receivers being appointed and a public sale offering. Both those two courses of action have costs which, of course, would then come off of the sale price. All those things were considered and the bank made the decision to go down this path; the path of offering the property by tender.

I suppose the question in a nutshell is why didn't the bank exercise this power to a wider group, to the market in toto rather than just the two parties.

There was a lot of uncertainty about the circumstances surrounding the property. What the exact ownership was, including the business, the chattels, the tenancy arrangements for the three shops that were part of the building. The decision was made that, because of those issues, and the costs, and the fact that interest was continuing to accrue on this debt, that course of action gave the best chance of achieving the highest price for the property and it was the one the bank chose and it had been suggested by the parties concerned.

You're saying that this was the best way in the bank's view to get the best price.

And this couldn't be looked upon as the normal type of bank mortgagee sale because of all that confusing background.

There were many questions directed to Ms Barker concerning the ownership of the premises as from the moment of the bank's involvement with Fortson and thereafter during its default. She was asked:

When you came on to the scene, in your initial documents, you assumed Fortson was the owner.

And, as this unravels, there is some concern as to whether they are or, if they are, what is the extent of their ownership.

Yes; we were in discussions with solicitors, with the Govedaricas and the Jovanovics, and with their respective solicitors and their respective accountants, and we were being given conflicting information, and the documentation, when it finally surfaced, after many requests, didn't give us much comfort as to bringing clarity to the situation.

Was it ever explained that they were related in some way, or was there some friendship there; does anyone explain that.

I can't recall the exact nature, but I recall one of the Govedaricas being a best man at the Jovanovics wedding. I believe the Govedaricas are cousins but the relationship between the parties I'm not sure of.

And it's, if you can look at p.363 of P2, and that's form of contract that Mr Burdett prepared; I assume that was the document that was eventually signed and settled upon.

When the eventual contract was prepared for the sale of the hotel to Roclin, the bank specifically excluded "all goods, chattels, plant and equipment et cetera machinery and removable items not in the nature of permanent improvements in or about the land". That was done no doubt because of the uncertainty as to which entity owned or had the right to use those goods and chattels.

Ms Barker kept reiterating the reasons the bank had acted in the manner it did in selling the asset over which it had security, namely, the freehold premises. When asked numerous times about the actual business being carried on in that premises she said they elected to sell the hotel because "we were so uncertain of the position with the ownership relating to the business". She was then asked:

So, is it fair to say that no attempt whatsoever was ever made by your bank to sell the business, the hotel business; is that fair comment.

We attempted to go down that path by asking Ernst & Young to confirm the ownership for us and I believe they were unable to do so.

That's a fair answer, but, subject to that, the bank didn't make any attempt to actually sell the hotel business.

You felt that, as at that report, your hands were tied.

Ms Barker confirmed that later in the piece she had received a copy of a lease from Roclin to Mr Jovanovic, which commenced on 15 January 1995 and expired on 15 January 1998 purportedly a lease over the whole of the Plaza Hotel property for an annual rental of $96,000. During the early period of this trial I was informed that this document was not known to the bank and surfaced during the subsequent inquiry by the accountants. Counsel for the defendants readily admitted that the document, in his words, was "a sham" and placed on foot for the purpose of possibly defeating the creditors of Roclin.

Certainly what was referred to as the "secret agreement" between the Govedaricas and the Jovanovics concerning the actual legal beneficial owner of the property naturally caused the bank concern. Ms Barker commented that initially when Fortson had obtained the loan from the bank it was her memory that the bank's valuer had mentioned an annual rental of $96,000 and that may well have been related to the material in what I call the "sham lease", and, although it had mentioned this consideration Ms Barker said that she did not believe on her investigations it had ever been paid and said:

"To me it raised not confusion; it sort of further confirmed that nothing could be relied on; that the bank had used this in it's initial application, this information, if not the document, the valuer had used that. Those pieces of information had been considered as part of the whole, and the application had been approved, and then this course of action didn't actually happen. To my knowledge I don't know that there was any intent to pay that; it was never clarified that this was a commercial agreement that was intended to occur."

Much was made in cross-examination of the evolving nature of the legal agreements between the parties, which came into the bank's possession during this time. Eventually, Ms Barker endeavoured to summarise the position when she said:

"The bank looked at the history of the file, the constantly changing position - we were constantly being assured that at that point in time we were in full possession of the facts and all the available documents and yet the matter continued to evolve. It was a very uncertain aspect of it, trying to pin down facts as to what was the truth and what was not, and the bank elected to go down the path that it did because that was the path that was certain."

Mr P Burton, the valuer in the real estate firm of Knight Frank, gave evidence to support his valuation. Mr Burton said that prior to receiving the bank's instructions he had valued properties in the Hindley Street area. On receipt of his instructions he attended at the Plaza Hotel and went to the reception area. He met a person who gave him verbal evidence about the nature of the shops and their rental. As part of his background investigation he had searched the title and obtained copies of the relevant registered instruments.

He valued the property, as at 22 May 1997, in the sum of $660,000 and in the event of what he called a "forced sale" a value of $560,000. It was a complex valuation document containing some eight chapters entitled introduction, property search details, site details, improvement details, property income, property overview, valuation methodology and valuation certification.

Under the heading "property overview" Mr Burton commented on the then poor state of the hotel and the inability to obtain trading details. When he interviewed the apparent operator of the hotel he suggested that the occupancy rate was between 50%-55% of which "90% represents permanent occupants".

He then went on to consider the market potential for the property and commented as follows:

Given the state of disrepair of the premises, the lack of trading details available from the Plaza Hotel operation and the fact that there are vacancies on the ground floor, we consider that the subject property would have very limited appeal in the current market place. The lack of trading details for the Plaza Hotel raises questions concerning the profitability of the business, especially given the disrepair of the premises. At present an investor would be faced with a substantial cost to upgrade the premises, with only minimal rental income provided. The Game Quest tenancy, which is the only formally leased portion of the premises, is due to expire on the 4th September 1997. While we do not know whether the tenant will vacate, it does raise the question and therefore lower the marketability of the premises.

Any property investor would be very wary of the income producing potential of the hotel and the fact that Hindley Street as an entertainment venue has deteriorated in recent years. Consequently the purchaser would be faced with an initial capital expenditure with the prospect of vacancies in the short term and what may be an enviable hotel operation. We do not consider that this scenario would appeal to many investors in the market place and consequently an extended selling period of in excess of six months may well be required in order to dispose of the property."

Mr Burton then explained his valuation methodology based on a capitalisation of net income approach. In this approach he commented:

"Based on the tariffs for the hotel as stated earlier in this report, we have adopted an average room rate of $30 per night. We have assumed that all rooms are available for rent by making a capital allowance, as detailed later in the report, to fix the roof leaks and other problems. This equates to a maximum possible turnover for the hotel operation of $733,925 per annum. Assuming 50% occupancy, as stated by the hotel operator, this equates to a realistic turnover figure of $366,825. Based on industry parameters, a hotel operation should be capable of sustaining a rental of 20% of its turnover.

This equates to a market rental for the hotel operation of $73,365 per annum which we have rounded to $73,000."

Mr Burton considered comparable rental properties and referred to three properties in the vicinity. He said in his opinion the most comparable property was that at 108-112 Hindley Street, Adelaide. He stated that he adopted a market rental for the hotel at $70,000.

He considered the fair market rental applicable to the retail tenancies and viewed some five properties and their rental to assist him in his conclusion.

Mr Burton explained that to determine the appropriate capitalisation rate for this property the base is to look at sales of similar investment properties. He commented that in his investigations few hotel operations have sold in recent times. However, he noted that in November 1995 the present property's sale price was $750,000. He considered five additional properties, their sale prices showing yields, which ranged from 12.61% to 14.65% and commented:

"In consideration of the abovementioned and other sales, we have adopted a capitalisation rate of 13%. We have adopted this rate primarily because of the uncertainty concerning the Plaza Hotel operation and the fact that there is virtually no secure short term income.

This results in a capital value for the property of $762,407.

From this we have deducted a capital allowance of $50,000 which we have estimated is required to fix problems within the building, especially the hotel. In addition we have allowed a letting up allowance of one year on the three retail areas given that even the leased premises is due to expire in the near future. Allowing for leasing fees of 10%, this equates to a letting up allowance of $55,000.

To this we have added back the present value of the rental surplus for the leased tenancy of $866.

This shows a current market value for the subject property of $658,273 which we have rounded to $660,000.

As a check method of valuation, we have analysed the subject property on a development site basis. The value of $660,000 equates to a development rate of $142/m², which is considered appropriate based upon comparable sales and in particular, 88 - 90 Hindley Street.

As per our instructions we have also given consideration to the forced sale value of the subject property. We have deducted a figure of 15% which we consider appropriate and which results in a value of $560,000 (rounded)."

Mr Burton said that shortly before trial he had seen an appraisal of this premises prepared by Mr Williamson. However, he did not classify that document as a valuation and commented:

"A valuation or for a valuation to be acceptable it has to adhere to the Australian Property Institute guidelines and you have to go through the entire process such as we did, where you look at all the evidence, you present the evidence, you present your argument and this does neither of those, doesn't present any evidence whatsoever to support yields, rentals, other than general market knowledge, which isn't sufficient in terms of valuation, a bank would not accept that as sufficient for security purposes."

Consequently, in the Williamson appraisal, this type of material was not present.

He was questioned concerning Mr Williamson's comments about capitalisation rates and agreed that much of the content of his valuation and the Williamson report were similar but the capitalisation rate varied. He noted that Mr Williamson had said investments in these properties ranged from 10-12% in broad terms. Mr Burton commented:

"Again, that is an incredibly general comment. I would never rely on it. It is the impossible to comment on that."

Mr Williamson used a capitalisation rate of 11%. Mr Burton did not agree with this rate. He pointed out that when he inspected the premises details of trading figures were not available and consequently would not thus command a capitalisation rate of between 9-11%.

Counsel for the defendants endeavoured to gain some advantage from Mr Burton of the sale price of the hotel of $800,000 to Roclin, particularly in reference to a "forced sale" basis of sale. Mr Burton responded:

"I'm saying that that is retrospect and anyone can pay what they like for a property. I've got to determine what the market will pay and that's the whole basis of my valuation. I said to you before that there may be special or some sort of special value to this person because they are effectively, as I understand it, operating the business. I've got to see what the market will say, on the basis of the market evidence, on the basis of what I was given. I wasn't given any detail with regard to the trading performance of the hotel, so I had to make assumptions."

He maintained that his valuation was a fair valuation of the market value of the property in 1997 bearing in mind the material that was then in his hands and from his own investigations at the site. At one stage defence counsel endeavoured to obtain his agreement that his valuation was nothing more than "an educated guess". He replied:

"No, it is not an educated guess, because we are going through a process. It is not an educated guess."

The plaintiff also called Mr David Crase, a chartered accountant, who confirmed that he had been instructed by the solicitors for the plaintiff to prepare a report valuing the hotel business, the newsagency business and other related matters. He prepared such report dated 20 February 2002. This report was no doubt requested because of the content of the counterclaim.

Mr Crase is a very experienced accountant in this type of valuation. His valuation is indeed very comprehensive and the annexure material is in great detail and contains all of the materials that were relied upon by Mr Crase in his report. Mr Crase mentioned the absence of reliable financial material, which clearly was a cause of concern and made the report and the quality of it and its substance difficult.

During the course of this action one was able, not without some difficulty, to prepare a piecemeal corporate structure that related to the defendants and as well the Govedaricas. Those structures are summarised in the diagram, Appendix D, to Mr Crase's report. Such diagram has been of considerable assistance.

Mr Crase commented that he was alarmed and concerned at some of the documentation particularly the sham lease document and, as well, the secret partnership agreement. Mr Crase commented that much of the financial material that he requested had not been produced and because of the absence of this material he commented:

"To the extent to which we are unable to access relevant financial accounts, quite often that would make it impossible to undertake a valuation of substance and we would either decline offering any submission as to value or, if we did put forward any submissions as to value, we would severely discount with gross disclaimers concerning the valuation that we put. Our concern would be that the buyer may be buying something for which there is no factual ability for them to pursue in the event that the business was unsuccessful."

As Mr Crase commented, he looked at actual daily sheets for the relevant period, but believed the Jovanovics accountant, Mr Ellery, had relied on information outside the relevant period. Mr Crase pointed out in his report the major difficulty was the lack of information or the poor quality of available information, which will always undermine any report of this nature.

Mr Crase confirmed that in his report he used a capitalisation rate of 30% before tax whereas Mr Ellery used 20%.

As I mentioned, the primary purpose of the bank instructing Mr Crase was to prepare a report in relation to claims made by the defendants against the bank. The report was comprehensive and set out all the background and source information, the corporate structure of all entities, not only the Jovanovics but the Govedaricas, and then in detail the comments on the alleged loss of profits from the hotel operation, loss of wages as a hotel operator and the market value of the Hindley Street newsagency, loss of profit of rental income and circumstances of mitigation. Indeed, his report is thoroughly comprehensive.

The defendant, Doug Jovanovic, gave evidence and outlined in detail his former friendship with the Govedaricas and his involvement in the Plaza Hotel. He initially met the Govedaricas while he was opal mining at Coober Pedy and believed that when he first met them that they had an interest in the Plaza Hotel.

He returned to Adelaide in about 1989 and worked on and off as the night reception person at the hotel and in other employment in Hindley Street. He continued in that type of employment until he became involved in the incorporation of the company, Fortson, and purchased the Plaza Hotel. He said during the time that he worked at the hotel he was under the direction of Mr Slavko Govedarica and regarded him as his immediate boss.

He said he entered into discussions with Slavko in late 1994 or early 1995 concerning acquiring an interest in the hotel. He said this was brought about by the fact that Slavko explained they were in trouble with their finances from the former State Bank in regard to the car park building at the rear of the Plaza Hotel and, consequently, Slavko viewed their interest in the hotel as being at risk. Slavko proposed a lease arrangement be entered into between Mr Jovanovic as lessee as a precaution that, if the bank sold the freehold, this lease would encumber the property. Mr Jovanovic said that they all regarded the Plaza Hotel as a "cash cow" to support their borrowing. Eventually the lease dated 12 January 1995 was executed between Roclin and the Jovanovics. Mr Jovanovic said he viewed that as being a lease of the Plaza Hotel excluding the shops. Mr Jovanovic said he went along with these arrangements, as initiated, and carried into effect by Mr Govedarica. He said Slavko Govedarica arranged for the preparation of the lease, its execution and the payment of the stamp duty.

Mr Jovanovic said the sale to Fortson came about because in April 1995, Slavko came to him and said that the bank was applying pressure and suggested that he get a loan against his mother's property. Mr Jovanovic said he subsequently obtained some $94,000 by way of this security and there was an attempt to buy out the existing Westpac mortgage of $485,000.

Mr Jovanovic said in May 1995 he purchased what he described as "the little green box" which was a booth selling newspapers immediately outside the Plaza Hotel and continued operating that form of newsagency business.

Mr Jovanovic said he observed a "for sale" sign that had been placed on the building through agents. He said Slavko approached him because he was aware that he had obtained funds and eventually after discussions with the Govedaricas tendered the sum of $750,000 for the property. When this offer was accepted he acquired a shelf company, Fortson Pty Ltd, which was the vehicle used for the purchase of the hotel business. This contract for sale was executed on 16 November 1995.

At the same time as these negotiations he said the "secret" agreement, dated 15 November 1995, was prepared. Mr Jovanovic said he was uncertain as to who made this proposal, but felt it was at Slavko's suggestion and he was what he called the "front man" for the transaction. The agreement was eventually prepared whereby the ownership of the Plaza Hotel was acknowledged as to each Govedarica a one-third interest and Mr Jovanovic the remaining third.

Mr Jovanovic said his understanding of this agreement was:

"It divvied up the hotel and business three ways and because my mother's house was put up, and basically a lot of the moneys that were paid like stamp duty and all that were taken from that money, in the event of the death of either Slavco or Milorad we would have an equal chance with the other surviving member of purchasing that member's share. Like Milorad's share would not automatically fall to Slavco. He would make an offer so I would make an offer and - I don't know how to put it, but just so no-one would gain control by default and that was reflected in the first page when it speaks about the death of either Slavco or Milorad. It was protecting the fact that my mother had taken a huge equity loan on her house."

During this period Mr Jovanovic said he worked in the newsagency. He was aware of Fortson's liability to the bank and the monthly payments, principal and interest. He said he believed that income from the hotel business and the shops would be applied to Fortson's debt. He said after the purchase, Slavko continued to have the management of the hotel and attended to all banking.

Mr Jovanovic said he did not work in that business from November 1995 through to November 1997. The difficulties developed between the partners because of the failure of the Govedaricas to make moneys available to him and he was then obliged to resort to court proceedings.

He said early in 1996 he was first contacted by the bank because of the failure to make monthly payments.

He said his initial court action against the Govedaricas resulted in his decision not to proceed. The Govedaricas obtained costs orders and immediately following taxation endeavoured to bankrupt Mr Jovanovic. He outlined how he contested that action in the Federal Court and eventually Justice Mansfield refused to make the order as sought.

Mr Jovanovic said in late 1995, he was able to move his newsagency business into premises in the Plaza Hotel and at considerable expense outfitted the premises. However, thereafter it appears that this venture was far from successful, and, eventually he was obliged to close it in 1998 with a considerable amount of debts owing to various suppliers.

Mr Jovanovic spent some time outlining his numerous negotiations and attendances upon Ms Barker. Clearly, in this time he was in a hopeless financial position. He was completely unable to pay the arrears of the debt or monthly payments, despite his well-founded intentions to make payments.

Mr Jovanovic agreed that he had not initially disclosed what has been referred to as the "secret" partnership agreement. He believed he told the bank in September 1996 of this arrangement. Mr Jovanovic said he believed he had suggested to the bank a public auction of the premises.

Mr Jovanovic said he was always the "eternal optimist" in regard to refinancing his loan and added in 1997 he was "just as naïve as I was in 1995".

Mr Jovanovic confirmed receiving the formal notice of default, which was served on him by the bank. He said in this time he organised for a Mr Taylor from Richardson & Wrench to prepare a valuation to enable him to get finance from a group called Eastern Equity and as well spoke to a finance broker a Mr Fox of Fox Finance. The difficulty in obtaining funding was his inability to pay a loan application fee.

He confirmed that Ms Barker advised him that the bank had decided to sell the property by way of a private tender between himself and the Govedaricas and he had received the tender documents. Mr Jovanovic confirmed that Fortson put in a tender to the bank for the sum of $845,000. He based this on the valuation obtained from Richardson & Wrench. He also believed, as distinct from the freehold, that the business had a valuation of between $200,000 and $300,000 and the freehold he thought was worth about $1.2 million. It was after this date that the bank advised him that they had accepted the Govedaricas tender of $800,000, and this caused him much anguish. He believed the property and business therein were considerably more valuable.

Mr Jovanovic, in cross-examination, again confirmed his understanding of the initial purchase by Fortson in that all moneys flowing from the business would be applied to repay the Fortson loan and, if there was any excess, would be divided in accord with the "secret agreement". He said he did not regard Fortson at any time as being at any financial risk, as there was ample income from the hotel operations to meet the relevant payments due by Fortson. He agreed that in that initial period the secret agreement was not disclosed to the bank.

Mr Jovanovic conceded that in regard to the Fortson purchase this occurred after discussions with Slavko and Milorad Govedarica. The initial tender he recalled was $700,000 and increased to $750,000. He said he was aware of another "friendly" tender from his uncle, a Mr John Jefferson, in the sum of $665,000.

Mr Jovanovic admitted that the secret agreement was used for the purpose of creating a deception to the South Australian Asset Management Corporation and was not going to be disclosed to the bank.

Ms Jovanovic admitted that the lease entered into between Roclin and himself trading as Milan Investments was a sham as well as the subsequent agreement dated 8 July 1996 between Fortson and MRM International Pty Ltd. He said the last document was drawn up for the purpose of representing to a financier that the tenancy was occupied. He again conceded that in the formal memorandum of lease from Roclin to Mr Jovanovic trading as Milan Investments where the annual rental was alleged to be $96,000 was prepared to secure the loan from the Commonwealth Bank. However, he believed that by early 1997 the bank was fully acquainted with all relevant "sham" documents.

Although Mr Jovanovic commenced his newsagency business in the street booth from about May 1995 and then the business was transferred into the main property there have never been any financial details available relating to this business, nor it would appear that taxation returns were filed.

Mr Jovanovic maintained that the falling out between the Govedaricas and himself was because they were not banking the money that was being received by the Plaza Hotel business nor was there any accounting to him for such moneys and, consequently, he was unable to meet the loan repayments.

Mr Jovanovic did agree with the content of Ms Barker's various memos, particularly those concerning the method of sale of the hotel, and did not disagree with the recommended procedures for sale and indeed participated in that internal tender process.

Mr Jovanovic maintained in cross-examination that between the months January, February, April or May 1997 he made a request or requests to the bank through Ms Barker that the property be sold by public auction, despite the lack of any specific mention of this request in Ms Barker's memoranda. He agreed that in January 1997 and before he was in a desperate financial position, balancing his various accounts and writing cheques when there were insufficient funds to make payments, and endeavouring to gain time for making payments of the various debts, particularly those in relation to the newsagency business.

Mr Jovanovic agreed that annual returns had never been filed for Fortson as the relevant documentation had been forwarded to his former accountant's offices and they did not know of his whereabouts. He did not concern himself with ascertaining the position of its registration.

The defendant called Dragan Stefanovic who worked at the Plaza Hotel from early 1992 until late 1998. Mr Stefanovic worked various shifts but mainly worked what I call the "midnight shift" from midnight until 8.00am in the morning and worked on average about five nights per week.

He confirmed that there were between 65 and 70 hotel rooms available for letting and described them as:

".... various types of rooms, some with just one single bed in them and some with a double and a single, some with two single beds. The majority of the rooms were the same, what we called standard rooms, which meant there were no ensuites; they just used community bathrooms. We had about a dozen rooms with ensuites."

Mr Stefanovic outlined the tariffs that were paid for each room. He felt that permanent residents, in the vicinity of 40 to 45, occupied most of the rooms. These were people who paid a weekly tariff for the occupation of their rooms. He thought the weekly tariff for a single room was about $91 and for a room with an ensuite in the vicinity of $130 to $140. He outlined how he would record payments that were made by the occupants. He confirmed in court the record sheets, which had been produced to him.

The Jovanovics called Mr Williamson who has been a licensed land valuer for approximately 20 years and has considerable experience in the valuation and sale of licensed hotels. Mr Williamson pointed out that in recent years he has not acted as a valuer, but, as a consultant giving advice in this rather specialised area of sale and, consequently, is very much involved in the marketing and selling of hotel properties. Clearly, Mr Williamson is a very experienced selling agent of large hotel properties in this state and believes that he has made approximately 65% to 70% of all licensed hotel or motel transactions in Adelaide.

Mr Williamson, at the request of the defendants' solicitors, prepared a report in May 2002. Mr Williamson has a very comprehensive knowledge of all hotel and motel premises similar to that of the Plaza Hotel in and around the Hindley Street area.

Mr Williamson had read the report of Mr Burton, the valuer of Knight Frank, dated May 1997. He understood the methodology that Mr Burton approached to his valuation. He accepted that in that valuation Mr Burton used a capitalisation rate of 13.5%. He was asked as follows:

Do you agree with that valuation and that capitalisation rate.

I agree with the methodology used. It is an appropriate methodology. I would not agree - I don't disagree with the calculation of capitalisation rate, I think he has made an error in that regard."

He pointed out in regard to what he regarded as a traditional investment in Hindley Street where rentals are of a certain sense of security and/or reasonable quality office accommodation that in broad terms for that type of investment he believed a capitalisation rate of 10% to 12% was appropriate. However, he did not regard the Plaza Hotel as a traditional investment property. A number of direct questions were put to Mr Williamson by the defendants' counsel particularly about relevant material for adjoining properties. Some of these matters were not put to Mr Burton. Mr Williamson believed that an appropriate capitalisation rate for this property was 11%. In his written valuation report there was little ground to support this capitalisation rate figure.

There was an attempt to introduce into evidence a recent document prepared by Mr Williamson, which supports such rates. The document had not been subject to discovery or indeed, importantly had not been put to Mr Burton. Mr Sallis submitted that the document did not exist at the time of Mr Burton's cross-examination. I eventually ruled that this expert material was not admissible at this stage. I viewed it as highly prejudicial to the plaintiff and refused to allow it to be placed in evidence.

Mr Williamson did make a concession when he was asked:

Is it fair to say that you were not asked to put comparable sales in your report.

And then you assumed that your knowledge and experience as you have set out in your report was sufficient to justify your opinion.

Mr Williamson conceded that he had approached his report on a different basis to that of Mr Burton and his report was not prepared as one would expect a traditional valuation. What he was asked to do was to examine Mr Burton's valuation and analyse whether or not he agreed with the same. He agreed that his report was not a valuation of the hotel property.

It was apparent during the evidence of Mr Williamson that he has a great deal of selling expertise of hotels and unlicensed premises. He asserted:

On the other hand, some people may look at it for its potential for leasing. Even though the shops are vacant and there are 67 rooms there with no records, no people are in there, some people may look at it -

I will put to your Honour that from my knowledge in the market in selling such properties, it would not attract any interest from the conventional investment market at that time.

Bu someone, for instance, that has a knowledge of these areas may be interested in it.

They would be somebody who had a development, owner/occupier or interest in acquiring such a property.

Their interest would be not only it potential but -

If we quarantine that additional part you call on, which I call the development premium, the fact that Burton fixed it at 13.5% on a traditional investment approach is not something you would quibble with.

On re-examination Mr Sallis ran the gauntlet of numerous objections and eventually I asked Mr Williamson:

I think you will agree that the 10% to 12 % for the capitalisation rate is around the market, as you have said, in broad terms.

I know you have said how the Plaza - you don't look at the hotel-related aspect of it, you look at it as a development potential. There is always the possibility - coming back to my earlier question - that someone might look at it from a possible income earning basis.

Yes. There's one distinction we should make, and that is that one of the reasons why it needs to be analysed a little differently here is that you have a leasehold component to that hotel. There was no lease in place. That is one of the reasons why it would appear to somebody who would get in there - they could not only make money out of rental but out of other aspects. In sort of setting a rental phase, it's fair if you are evaluating it as a traditional property. By way of description, many years ago when involved in the sale of the Ramada Grand, the valuation community put a valuation of 27 million and we sold it for 45. There is this disparity that often occurs.

Bearing in mind what this man has done in his valuation, and bearing in mind that comment, would you say that for a valuer as Burton has done, to put a capitalisation rate of 13.5% was a totally unreasonable thing.

I think - I don't think it was the correct choice, no.

But you would have to agree on the figures, it's certainly in the range.

I think it's consistent with his approach as a traditional investment property, absolutely."

The defendants also called Mr Taylor an experienced licensed valuer. He said that in 1997 he was approached to prepare a written valuation of the freehold of the Plaza Hotel. Mr Taylor explained that at this time he was employed by Richardson & Wrench. He recalled having discussions with Mr Jovanovic but believed he was asked to prepare this valuation for a firm called Eastern Equity. However, he said whoever instructed him Mr Jovanovic was the prime mover for such instructions and he subsequently prepared a written valuation.

Plaintiff's counsel sought a ruling that Mr Taylor's evidence was inadmissible on the substantive ground that the valuation was not produced to the bank in 1997. Consequently, the bank never considered it, so it could not be relevant as to the conduct of the bank at the time of sale. Counsel said the reason for Mr Taylor being called was to endeavour to establish what was the alleged market value of the property. There was thus a failure to comply with rule 38 and consequently the document was irrelevant.

Defendants' counsel conceded the bank was never privy to the valuation and the first time the bank was aware of it was when it was discovered in these proceedings in the list of documents of January 2000. An issue in this case was a consideration of section 420A and, indeed, a person's view of the market value in 1997 was admissible.

162. The content of Mr Taylor's valuation had not been placed before Mr Burton.

163. Mr Taylor outlined that he believed he had prepared his report for mortgage security purposes. He was at that time endeavouring to provide the market value of the Plaza Hotel freehold property. Mr Taylor outlined in detail the content of his valuation using a capitalisation rate of 11.5% and arrived at a market value of $1,000,000. Mr Taylor was at pains to point out that he thought the property leant itself to a whole variety of options that would appeal to an investor. It could appeal to a developer with the nature of its income and ongoing business, or, indeed could be capable of being leased. He would not like to "pinhole" it in any particular area. Mr Taylor explained his basis for arriving at a capitalisation rate of 11.5%.

164. Mr Taylor said that he had been asked to peruse Mr Burton's report on the Monday of the week that he gave evidence. Mr Taylor was asked in cross-examination the following:

Assuming Mr Burton has considered it properly as a valuer should, do you accept that is a reasonable check against error comparing those properties and their capitalisation rates.

Although you may not agree, precisely with the capitalisation rate that he came to, he fixed on 13.5% and gave reasons for that, and I suggest to you that it comes down to this, he's provided a capitalisation rate based on his evidence and research at the time which is simply different to yours at about the same time.

You could not say one or the other was more correct.

Well, I suppose I would say that with the way I felt about the market at the time, again I'm saying this with hindsight, that having chosen a rate of 11.5% on imputed market rents, which I think both valuers agree is reasonable, and achievable let me add that. I think it's the level of rent that's achievable otherwise you don't worry about doing that, you used passing rents. I think having said these are the rents we have to put on these shops, for example, on the ground floor to achieve a tenant, which is why I showed the asking rents in there to show what we put on the subject shops should be achievable, because they're sort of showing that sort of rate per square metre, so that's your competition even though they're not proven yet, but they're competition in the market place. You should be able to say at this level of rent we're not pitched right up here, or down there. We're sort of saying this is about what we expect to achieve. The same on the hotel. So on that basis, you say I've got more of a level of comfort which is why I left it at 11.5% and I think to then go to 13.5% is saying, well, those rates are probably still too high because 13.5% I reckon even in '97 would have been deemed a fairly high risk type of cap rate.

What, if you like, is not perhaps quantified with your capitalisation rate, my friend didn't ask you, the comment you've made on the fourth to last page, the page where you've set out the imputed rent in your capitalisation, first word on the top of the page is 'based on'.

On his basis of valuation would you say his figure of 13.5 is unreasonable, on his logic.

You wouldn't call it on that basis totally unreasonable, would you.

On the edge of the ballpark, perhaps, but in there.

165. The defendants called Mr Ellery, a very experienced chartered accountant, who prepared a report for the defendants and in so doing had perused much material including a report from the plaintiff's accounting firm, Crase Consulting Group. That report contained his opinion of the valuation of the Plaza Hotel business. Acting on this information he said that as of July 1997 he valued that business in the sum of $175,000 and after he had received further material he arrived at a market value of the business as at July 1997 in the sum of $425,000.

166. Mr Ellery commented that he had financial statements of Roclin for the year ended 30 June 1998, which indicated that the business income was $340,546. He said he did not place much weight on this but it gave comfort that the $285,000 that he adopted was likely to be conservative and an estimate of future maintainable earnings.

167. Mr Ellery disagreed with the capitalisation rate of 20% and in his view this business justified a lower capitalisation rate. He viewed this business as having a relatively low risk factor.

168. Mr Ellery conceded in cross-examination that it was not mentioned to him in the course of his instructions that the lease representing an annual figure of $96,000 was a sham, but considered that would not have affected his valuation. He commented that he had concerns about the provided financial information and, as well, the financial reliability not only of his client Mr Jovanovic but also the Govedaricas. He agreed that he was a little frustrated with the lack of financial material to assist in his valuation.

169. Clearly there was a difference in the capitalisation rate of Mr Crase and that of Mr Ellery. Mr Ellery did concede:

"As I said the other day, the issue of the capitalisation factor is an objective issue. I don't believe that the figure that he uses is outside of the realms of what would be acceptable. But certainly it is not an outrageous rate. He and I, I think, would seem to be in agreement."

170. As appears from my earlier comments, Ms Barker gave evidence over a very long period and explained each step undertaken by the bank in endeavouring to obtain repayment of the moneys owed by Fortson. Ms Barker, very properly, diligently and fairly applied herself to this task and, in my opinion, was extremely patient in all of her dealings with Mr Jovanovic. I do not believe she overlooked any matter in any of her memoranda of her dealings with Mr Jovanovic.

Mr Jovanovic was most forthright in the manner of his evidence. I believe he was honest in his now full disclosure of all matters relating to his dealings with the Govedaricas. He is a person with much personality, but, clearly is a very naïve man with very little or no business acumen. I have no doubt the reason he now finds himself in this dire financial predicament, as indeed was probably the case from the initial time of the purchase by Fortson of the Plaza Hotel, was because of the trust that he placed in his then friends. I doubt that Mr Jovanovic would have the legal acumen to conceive the numerous documents that flowed from the Fortson purchase, including the "sham" lease and the "secret partnership" agreement. He personally had little to gain from such fraudulent subterfuges. The only persons who could possibly gain from the same were the Govedaricas. However, it does show the lengths to which these persons would go in an endeavour to defeat their rightful creditors and, he, in effect, was part of the conspiracy, and, because of his naivety and/or crass stupidity, never applied his mind to his own personal financial position.

It is impossible to rationalise a one-third interest in the Plaza Hotel worth $750,000 unless as Mr Jovanovic suggested all income from the hotel was applied to pay out this loan and then the ownership would be in the stated proportions. However, who would know the machinations of the minds of these devious people? Fortunately for me that may be resolved in other proceedings.

However, I do not believe that Mr Jovanovic was endeavouring to in any way mislead me and was now being honest and forthright about all of his dealings not only with his prior friends but the bank.

However, I have to say when there is any divergence between the evidence of Mr Jovanovic and that of Ms Barker, I have no difficulty in preferring the evidence of Ms Barker.

The principle question to be determined is whether the plaintiff acted reasonably and in good faith as the mortgagee and controller in possession when selling its security, being the freehold of the Plaza Hotel, for the sum of $800,000.

As I mentioned, the bank's security documents nor the quantum of the debt owed by Fortson or further the default documentation have been questioned, thus the only question to be determined is whether the actions of the bank can be criticised in the manner as outlined in the defence and counterclaim.

Duties in Law for a Mortgagee in Possession to Sell

The law concerning the duty placed upon mortgagees and the duty of care they are expected to take in exercising the power of sale is not decisive in Australia. There is authority for the concepts of "good faith", "reasonable care" and the duty not to sacrifice the mortgagee's interests when a mortgagor is enforcing a sale of the encumbered asset.

This appears to stand in contrast to the English law, which in addition to these requirements necessitates a duty to be also upheld in negligence.

England has placed faith in the mortgagees and appears to suggest there was no duty to obtain the best possible price for the property being sold. This went further to establish a duty in tort in Cuckmere Brick Co Ltd v Mutual Finance [1971] Ch 949 in a failure to advertise the virtues of a property. The "good faith" test was originally articulated in Kennedy v de Trafford [1896] 1 Ch 761; being fully explored in Warner v Jacob (1882) 20 Ch D 220. This test existed in competition with a "reasonable care" test illuminated by Cuckmere Brick.

Later in time English law attempted to balance these two tests, and further expanded to include negligence. It has been said that after China & South Sea Bank v Tan [1990] 2 WLR 56 there existed three duties which have all received judicial approval; two in equity, good faith and reasonable care, and one in negligence, to take reasonable care.

In Australia, similarly the "good faith" test was adopted in Barnes v Queensland National Bank Ltd [1906] HCA 26; (1906) 3 CLR 925 and followed in Pendlebury v Colonial Mutual Life Assurance Society Ltd [1912] HCA 9; (1912) 13 CLR 676. This appears to have been faithfully followed throughout Australian authority, but some judicial support has also been found for the "reasonable care" test. When these duties were considered as conflicting in Nixon v Commercial & General Acceptance Ltd [1980] Qd R 153, the Chief Justice found the authorities were irreconcilable. In South Australia, the State Supreme Court has overwhelmingly followed the "good faith" test. As Cole J stated in Westpac Banking Corp v Kingsland (1991) 26 NSWLR 700 at 708:

"The law as stated by Lord Denning in Standard Chartered Bank Ltd v Walker [1982] 3 All ER 938 in relation to the duties of a mortgagee in relation to the exercise of a power of sale is not, until the High Court indicates to the contrary, the law in Australia. In Pendlebury v Colonial Mutual Life Assurance Society Ltd [1912] HCA 9; (1912) 13 CLR 676, it was held that the obligation of a mortgagee exercising a power of sale is to act in good faith (Griffith CJ at 679; Barton at 694; Issacs at 700; see also Forsyth v Blundell [1973] HCA 20; (1973) 129 CLR 477 at 481, 493. All Judges at first instance who have considered the obligations of mortgagees in relation to the exercise of power of sale have felt obliged to follow the expressions of principle in Pendlebury: See Expo International Pty Ltd (recs and mgrs appts) (in liq) v Chant [1979] 2 NSWLR 820 at 835-6 per Needham J; Brutan Investments Pty Ltd v Underwriting & Insurance Ltd (1980) 58 FLR 289 at 298; 39 ACTR 47 at 55 per Sheppard J; Chacalot Nominees Pty Ltd v Prime Nominees Pty Ltd [1984] WAR 380 at 393 per Smith J; Citicorp Australia Ltd v McLoughney (1984) 35 SASR 375 at 381 per Zelling J; Westpac Banking Corp v Mousellis at 8 per Nader J; Australia & New Zealand Banking Group v Carnegie (Crockett J, 16 June 1987, unreported) at 42; Wenham v General Credits Ltd (McLelland J, 16 December 1988, unreported); Burke v Beneficial Finance Corp Ltd (Hill J, 30 January 1991, unreported) at 36. And so do I. The duty referred to in Pendlebury is a lesser duty than that expressed in Standard Charter Bank Ltd v Walker."

This preference for "good faith" appears to arise from a view that negligence has no place in this area of law. This was articulated by Issacs J in the seminal judgment of Pendlebury, in which has said at 700 "regarding the matter from the standpoint of principle it seems to me clear that the word 'recklessly' cannot include mere negligence or carelessness in carrying out the sale". This approach was followed by Zelling J in Citicorp Australia Limited v McLoughney and Anor (1983) 35 SASR 375. He examined the English decision of Cuckmere Brick, where the mortgagor was required to take reasonable care in obtaining a proper price for the property. He expressed that this approach had not been followed either in Australia or his judgement. Zelling J went on to say at 381:

"The view of the High Court of Australia in Pendlebury's case on mortgagee's duties under powers of sale is supported by the leading textbook on powers: Farwell on Powers (3rd ed., 1916), p. 620. The decision in the Cuckmere Brick case has been criticized, and in my opinion rightly, in Meagher, Gummow and Lehane: Equity, Doctrines and Remedies (1975) pages 46-47, pars. 229-230. I would go further. The basic flaw in my respectful opinion in the reasoning in Cuckmere Brick is to formulate the test equating common law negligence with the equitable duty on a mortgagee to take reasonable steps in exercising his power of sale to obtain the best possible price. The latter is merely one aspect of the doctrine of equity relating to fraud on a power, i.e. the misuse of a power given for a particular purpose. Negligence is the breach of a duty of care owed by A to B causing damage and here (if applicable) by a mortgagee to a mortgagor. But a mortgagee has two duties: one not to sacrifice the mortgagor's rights in the mortgaged property otherwise than so far as is necessary to realize his security; and the other to realise his security so as to protect adequately his own interests. It is because these two duties interact and there is no hard and fast sole duty of care to the mortgagor, that equity has provided the solution adopted in Pendlebury's case and referred to in Farwell on Powers. In my opinion, that solution is still the law in South Australia today."

This concept was built upon by King CJ in Johnson and Ors v Australian Guarantee Corporation Limited (1992) 59 SASR 382. King CJ expressed at page 387 that a want of good faith has been:

".... held that a 'calculated indifference to the interests of the mortgagor' (Forsyth v Blundell; Associated Securities Ltd v Blundell [1973] HCA 20; (1973) 129 CLR 477) or a 'reckless disregard for the interests of the mortgagor' (Pendlebury v Colonial Mutual Life Assurance Securities Ltd), amounts to want of bona fides. Whatever one may feel about the realisation of the security in disregard of the respondents' interests with all its consequences for the respondents, the legal position is that the respondents had no interest in or claim to benefit from the security as a result of the contract, which they had signed. I do not think that the sacrifice of a security can involve the want of good faith in the legal sense towards a person who has no legal interest in or claim to the benefit of the security."

In 1988 The Harmer Report was released in an attempt to elucidate the Australian position. This report specifically refrained from using the term "market value" as this could be a "costly and difficult for partly manufactured goods or products with a limited market" (Symes 51). This has further been suggested that to couch this duty in "market value" or "best price possibly obtainable" is to place the duty in an objective standard. This report led to the introduction of section 420A Corporations Law 2001 which introduced a duty to take "reasonable care" when exercising the power of sale. From this legislation, it is stipulated that there is no correct method of sale, with an absence of statutory requirement for such. In this legislation, in deciding if there has been a breach, the court will examine the process the receiver goes through in selling the property (Artistic Builders Pty ltd v Elliot & Tuthill (Mortgages) Pty Ltd [2002] NSWSC 16). In this case it was held that "any departure from reasonable standards must be so serious as to be properly characterised as unconscionable, in order to render the mortgagee accountable". In fact, in Cape v Redarb Pty Ltd (No 2) [1992] HCA 28; (1992) 10 ACLC 1, 272, it was held that under section 420A, "as a consequence of the attitude of hostility and distrust.... so clearly displayed" it put the receiver in a "'no-win' position and is (sic) entitled to act upon his or her own advice a little more than is normal".

Ms Barker is an extremely experienced and competent bank officer. Effectively she assumed control of the Jovanovics default in October 1996 and had control of the account until the Govedaricas tender was accepted some 10 months later. During this period she was continually discussing all issues of the default and the proposed bank actions with Mr Jovanovic.

The immediate question to consider is in carrying out her duties did Ms Barker and thus the bank act in and about the manner of the execution of her duties and in the eventual exercise of the power of sale in good faith? Did the bank by its actions show a calculated indifference or reckless disregard to the rights of Fortson and the Jovanovics?

Ms Barker's memoranda showed the extensive nature of her attendances on Mr Jovanovic, his accountant and solicitor. By late October 1996 she had been informed of all personal details of Mr Jovanovic and the nature of his litigation with his former partners, the Govedaricas, and a recommendation the bank defer action as the trial was anticipated to commence in January 1997. The trial was aborted by Mr Jovanovic and thereafter she had numerous attendances with the Govedaricas and their solicitors as well as Mr Jovanovic including receiving advice at this time of the secret partnership agreement. There were suggestions of mutual buyouts as well as a voluntary sale and thus her recommendation to defer recovery action.

I accept that in late February 1997 Mr Jovanovic raised the option with the bank of an internal auction.

By February 1997 Ms Barker had some information of the alleged value of the hotel, but no doubt because of the unsatisfactory nature of the parties prudently sought a revaluation by bank officers of the security and the Cashman report evolved stating a market value of $910,000 and a forced sale value of $815,000, and, leasehold of $190,000 or forced sale of $142,000, and, expressing concerns about the "sham" document and absence of trading details.

One may well have considered by March 1997 the bank was justified in then exercising the default powers. However, on 5 March 1997, Mr Jovanovic was given an extension to enable him to sell the hotel.

By April 1997 Ms Barker raised the issue of the sale of the freehold as distinct from the hotel business. Obviously as one would expect Ms Barker was confused as to the persons operating and/or legally entitled to operate the business and there was never likely to have been an immediate resolution of these issues and as well a complete absence of any trading details despite requests. Added to the confusion was the mire created by false and misleading legal documentation. Bearing in mind these matters, Ms Barker in her memorandum of 7 April 1997 raised the issue of Mr Jovanovic's suggested "internal" auction with built-in safeguards of not being bound by either tender. Ms Barker sought legal advice on this proposal. However, to assist the process in May 1997 she prudently sought an independent valuation from Knight Frank. That valuation arrived in late May 1997 certifying that the current market value of the hotel was $660,000 and on a forced sale of $560,000.

Ms Barker continued with her discussions with Mr Jovanovic including requests that he obtain legal advice.

In late May 1997 the tenders arrived; $845,000 from the Jovanovics and $800,000 from the Govedaricas. Ms Barker enquired of Mr Jovanovic's financial broker to be told there was no commitment to him for finance and in his view the proposal would be declined by all banks.

The tendering process continued into July 1997 including the bank's solicitor attending the solicitor then acting for Mr Jovanovic.

No doubt because of the uncertainty about the hotel business the bank requested a financial report from Ernst & Young.

The bank accepted the Govedaricas offer of $800,000 on the basis it significantly exceeded the Knight Frank valuation and was in line with other reports on a forced sale value.

I do not believe it is possible to make any criticism of Ms Barker in any way of her handling of the default file.

(1) She initially undertook a detailed review of the file and involved herself with long attendances upon Mr Jovanovic and his solicitor.

(2) She caused the internal bank valuers to revalue the security.

(3) She was concerned because of the legal issues that had arisen between the warring factions and lack of financial records and then sought -

(a) An independent valuation of the property, and

(b) Professional accounting advice on the hotel operations.

(4) Armed with the internal bank valuation and the Knight Frank valuation and receiving supportive legal advice, she recommended the internal tender process as suggested by Mr Jovanovic and willingly participated in by both parties. The independent accountants who were requested by the back to endeavour to clarify this mire of deceitful transactions also suggested this course.

(5) In the tendering process she was sympathetic to the Jovanovics making no issue with the lack of payment of a deposit, but rejecting the same because of the fact it could not be supported by appropriate funding.

A private or internal auction by a mortgagee must always be closely scrutinised. Because of the inherent risks it should never be a recommended course of action. However, there will always be exceptions because of a factual matrix of circumstances. In this case, Ms Barker's opinion was the informal tender process between the parties was in the best interests of the bank, whilst not overlooking the interest of the Jovanovics. This opinion was also the preferred option of the independent investigative accountants. Her motives can be summarised as reasoned and careful to ensure that the bank obtained the best possible price for the property.

The Burton valuation was a well-reasoned document and its conclusion cannot be criticised, notwithstanding the evidence and opinions of Mr Williamson and Mr Taylor. There is no basis for their criticism of the valuation of Mr Burton. The bank was entitled to act on the basis of this independent valuation particularly in subsequently accepting the final offer of the Govedaricas.

The actions of Ms Barker could in no way be classified peremptory, or, disregarding the rights of Mr Jovanovic. Quite the opposite. Ms Barker in the 10 month period showed sympathetic understanding of the financial predicament suffered by Mr Jovanovic at the hands of his former partners, deferring any action to await the outcome of the initial litigation and then further deferral of the recovery action whilst at all times making herself available to confer with Mr Jovanovic and his advisors. An example of her good faith is seen by long periods she acted whilst in charge of the default file seeking advice not only from the bank's solicitors but independent views on the value of the hotel and the business and in all of this time continually making herself available to attend the Jovanovics and their representatives. From my reading of her memoranda from the commencement of her role to the sale she conferred with Mr Jovanovic on at least some 25 occasions.

Indeed, I accept counsel for the plaintiff's submission that when one reads Ms Barker's evidence (pp 231-243 and 477-487) her understanding of her duties is consistent with the stated legal principles.

PRESENT KNOWN FACTUAL POSITION CONCERNING THE JOVANOVICS INVOLVEMENT WITH THE BANK

When one now examines the Jovanovics involvement with the bank and the dealings with the former partners, the Govedaricas, in my view it supports the action taken by the bank. Clearly many of the matters, which have emerged in this trial, came into the hands of the bank in a piecemeal fashion or from a third party. Even at this stage there is still great uncertainty as to the legal position of the persons who are either entitled to own or manage the business of the hotel. All these issues will not be determined until litigation between the former partners is completed. The bank's security was over the freehold of the Plaza Hotel. Much has been made of the value of the "business" of the hotel. However, the bank, no doubt on legal advice, excluded from the sale any property associated with this business.

However, what is apparent from the information before me, the Govedaricas and the Jovanovics from the year 1995 engaged in a devious web that perhaps could also be viewed as fraudulent conduct to defeat their creditors and for the purpose of retaining the ownership of the Plaza Hotel. Perhaps the most explicit summary of the 1994 actions of Mr Jovanovic, no doubt at the request of the Govedaricas, to protect their investment not only in the car park adjoining the hotel but also the hotel itself is set out in the judgment of Justice Mansfield delivered on 4 May 1998 (Exhibit P15). This was the action instituted by the Govedaricas seeking the sequestration of the estate of Mr Jovanovic. This action followed Mr Jovanovic not proceeding with his first action against the Govedaricas in this court and a cost order was subsequently made and on the basis of that judgment the Govedaricas sought to have his estate sequestrated.

These documents commenced with the initial lease in January 1995 from Roclin to Mr Jovanovic for him to "run the hotel business". Although it was nominally in his name it was proposed that he would operate the hotel business in trust for the Govedaricas through a jointly held account in the name of Milan Investments. In fact Mr Jovanovic freely admitted in his cross-examination this document was a sham. There is no doubt the Govedaricas continued to run the business. That form of lease was an attempt by the Govedaricas to protect their interests in view of their substantial indebtedness to the State Bank of South Australia and Westpac Banking Corporation. The lease referred to a consideration of $96,000. Also there is no doubt that these parties would rely upon the terms of that sham lease endeavouring to show the income potential of the property other than when presented to financiers would indicate a significant anticipated cash flow. I have little doubt this form of documentation in hand may well have eased to some extent the pressures, which were being applied to the Govedaricas by their creditors.

Again I accept Mr Jovanovic's evidence that it was the Govedaricas who in a further attempt to defeat and defraud their creditors the proposal evolved as to Mr Jovanovic purchasing the freehold of the hotel property. The initial proposal was for the sum of $700,000 and this was increased to $750,000 and that offer was accepted. Mr Jovanovic admitted that the only other tender was from a family member who was involved in these arrangements.

Then followed the secret partnership agreement, which in effect restored the Govedaricas to a two-thirds interest in the hotel and hotel business. In all of this time the Govedaricas still continued to have the management of the hotel business and applied the funds for their own benefit and refused thereafter to apply funds to the bank to meet Fortson's liability.

It is apparent from this summary that I believe very much the instigators of this devious web of misleading documentation were the Govedaricas because they had much to lose and very much Mr Jovanovic was a pawn in these transactions, but no doubt a willing partner in the conspiracies. His naivety is abundantly clear. This was apparent from very much his own forthright admissions in his evidence. His actions were not only naïve, but crassly stupid. He, at the request of the Govedaricas raised money on the home of his mother and borrowed through Fortson the total purchase price and then signed an agreement acknowledging that he only had a one-third interest. There was never any confirmation in writing that the Govedaricas in apparent possession of the hotel would meet the borrowings.

Justice Mansfield pointed out at page 18 of his judgment and on the material before him that:

".... the Govedaricas have effectively altered their position by now holding the hotel and the hotel business free of the then charges supporting borrowings of some $4.85 million, and with only the borrowing supporting the last purchase price of $800,000. In the period November 1995 to August 1996 they retained a two-thirds interest in the hotel and hotel business, and they continued to operate it, with the benefit of monies advanced by Mr Jovanovic and with his participation in the secret partnership. They have not accounted to him at all for their operation of the hotel business during the secret partnership."

The learned judge had no difficulty in dismissing the Govedaricas petition for sequestration of Mr Jovanovics estate.

Even at the end of this long trial I was concerned at that stage whether all of the documents vis-a-vis the Govedaricas and the Jovanovics had been produced in evidence.

When one examines this trail of misleading and fraudulent information there is no doubt that the plaintiff from the inception of its dealings with both the Jovanovics and Govedaricas was a victim of these conniving fraudulent actions. Ms Barker undertook detailed investigations to throw some light on the ownership issues, but added even at this stage she still does not understand the true position, nor, will this be known until the final resolution of the outcome of the litigation between the parties.

I have considered these further matters to ensure if they in any way reflect on the bank's default actions. Unfortunately, they reflect badly on the Jovanovics and Govedaricas.

These matters support the action taken by the bank in its negotiations and sale of this business.

The plaintiff conducted its case on the basis that it did not sell the business of the Plaza Hotel. I believe counsel for the Jovanovics acknowledged this during the course of the trial.

There has been some confusion on the pleadings because there was a general reference to "property" that includes the freehold real estate property as encumbered by the security documents as distinct from the unlicensed business of the hotel carried on therein. This probably commenced in the defence documents when both assets are described as "the property".

However, from the outset of the default dealings by the bank it was apparent that as to who was entitled to own and/or run and/or manage and/or entitled to income from this business was surrounded with great confusion. This is evident on a perusal of the various memoranda of Ms Barker and even from her evidence when she concluded her state of belief that she still was not aware of the answer to these questions.

I have to add, after consideration of all of the evidence in this matter although perhaps in the main one-sided from Doug the same is still unclear. Not in any way aided by any of the documentation, most of which is of the "sham" material, I reject any suggestion the bank could do other than the course that if followed and indeed it was legally prudent to exclude the chattels in the tender document. One can only speculate that if the bank proceeded with a public auction of the impossibility of describing the assets of the business or the persons legally entitled to the same or for what periods.

Even so, the bank did endeavour, by instructing its accountants to see if they could throw some light on these issues and as one can see their reply was of little assistance.

Consequently there can be no criticism of the bank not taking any active steps to in any way concern itself with any possible sale of this business, no doubt realising that the price that it eventually received was considerably above that of the independent valuation.

In view of my above findings I accordingly enter judgment for the plaintiff against the defendants in the sum of $77,643.93, a figure calculated as owing as at 3 March 2003.

Because of my findings, I dismiss the counterclaim.

I will hear parties on the question of costs.