Duggan v Thomas, in the matter of William Joseph Duggan

7 At the relevant time Australian Guarantee Corporation ("AGC") had the following interests: · a second registered mortgage over the freehold property given on 20 October 1988; · a guarantee of PPMW's obligations under a bailment plan given by Raffindale and the applicant dated 20 October 1988; · a first registered mortgage over the MSB lease; and · a fixed and floating charge over the assets of Raffindale, PPM and PPMW. 8 From as early as 1991 the Bank and AGC were having discussions as to the best way to realise the securities they each held in respect of the debts of Raffindale and associated companies. It appears to have been generally agreed by the valuers on whom the Bank and AGC relied, that the freehold property, the MSB lease and the marina should be offered for sale by public auction in "one-line". This proposal raised the issue of how the net proceeds of the "one-line sale" should be split. A chain of correspondence between the Bank and AGC (or their legal representatives) indicates that in 1991 the Bank and AGC were negotiating about this issue. AGC initially indicated that the proceeds should be split equally. In a letter dated 3 January 1992 the Bank indicated that it was prepared to proceed with the suggestion "that three independent valuations of the Point Piper house/marina complex be obtained and these then be used to determine a percentage share between AGC and [the Bank] of eventual sale proceeds". At that time there was a dispute between AGC and the Bank as to whether the moorings in the water near the MSB lease should be considered in a valuation of the combined properties. In its response dated 23 January 1992, AGC commented that it was "inappropriate to proceed to arbitration on the valuation of the real property and the marina when agreement cannot be achieved on the terms of reference for such valuation." It is not necessary for present purposes to traverse the whole of the dispute. 9 The matter then lapsed for reasons that are not relevant here. The question of the one-line sale was reactivated and in 1994 the Bank and AGC entered into an agreement concerning the distribution of the proceeds. The terms of this agreement are set out in a letter dated 18 May 1994 from AGC to the Bank. They provided that the net proceeds of the sale would be shared in the ratio of 60:40 between the Bank and AGC with the amount payable to the Bank being capped at $1.3 million. The properties were eventually sold, in one-line, for $2,150,000. Settlement of the sale took place on 6 December 1995. The vendor under the contract was Mr Peter Hedge acting in the following capacities: (a) as receiver and manager of PPM; (b) as agent for the Bank as mortgagee exercising power of sale pursuant to its registered mortgage over the freehold land; (c) as agent for AGC as mortgagee exercising power of sale pursuant to mortgage X979331 dated 20 October 1998 from Raffindale over the freehold land; and (d) as receiver for AGC as mortgagee exercising the power of sale pursuant to the registered mortgage over the MSB lease. Following settlement the net proceeds of the sale in the amount of $1,980,025.75 were distributed in accordance with the agreement, ie 60% to the Bank and 40% to AGC. The Bank received a cheque for $1,188,015.45.

Applicant's claim 10 Despite the complexity of the facts in this proceeding the applicant's case is simple. It is claimed that in the sale of the freehold property the Bank owed a duty to the applicant and to Raffindale not to act recklessly or sacrifice the property, to exercise reasonable care in the sale of the property and to sell it in good faith at the best price reasonably available. It is claimed that the Bank breached these duties by entering into the agreement described in [9] above, by failing to obtain valuations of the freehold property and the MSB lease in May 1994 and by failing to sell the freehold property on its own for $2 million or thereabouts. It should be noted that at issue in this proceeding is the sale of the freehold property only. No complaint is made concerning the sale of the MSB lease. The applicant claims that because of the above the Bank failed to realise a sum sufficient to meet the obligations of the applicant under the guarantee to the Bank.

Mr Rowan's valuation 11 For the applicant, Stuart Nevin Rowan, a registered valuer, deposed that the fair market value of the freehold property as at October 1995 was $2,300,000. In a report dated 16 June 2001 and attached to his affidavit, Mr Rowan noted that the property had "no legal access from Woollahra Road but relies on crossing a proportion of land known as Lot 1 in Deposited Plan No. 3556, owned at the date of valuation by Woollahra Municipal Council." He noted that the use of the property for residential purposes was permitted within the zoning and that the use of the basement of the residence as a workshop for the adjoining marina and the use of a weatherboard structure for office and showroom space were permitted under the "continuance of usage provisions." Mr Rowan's report noted that the land is irregular in shape but did not appear to draw any adverse conclusion from this fact. 12 Mr Rowan's report compared the freehold property with a number of other more or less comparable residences in the immediate area, the sales prices of which were known to him. Three of the four properties he considered were said to be superior or substantially superior to the subject land. One was considered to have been much inferior. Mr Rowan also made some comments about the marina business: "It is our view that the value of the residence was inexorably linked to the marina business. Clause 21 of the Maritime Services Board Lease appears to give the MSB the right to determine the lease upon written objection from the proprietor of the adjoining freehold land [the subject land]. The value of the marina business would be severely compromised, if it were not rendered unsaleable should the properties fall into separate ownership. The marina has no land access except through the freehold lot, and no provision for a right of way has ever been made. We understand that the property was sold by the mortgagee together with the Maritime Services Board lease for the marina and the licence for the moorings. We have not had an opportunity to assess the value of the marina itself or the combined value of the two, but it is our view that the freehold house and land alone were worth well in excess of the amount of $2,150,000 for which the entire property was sold." 13 In cross-examination, Mr Rowan confirmed that, despite the opening sentence of the above comment, it was the value of the marina business that was "inexorably linked" to the freehold property. He defended his valuation of the property on a "stand-alone" basis (rather than taking into account the effect of the marina) on the basis that this was in accord with his instructions. Mr Rowan was also asked about the "direct comparison methodology" used in his valuation. He was vague about the source of the comparative sale prices stating that the information came from his firm's computer system, adding "I think some of it was drawn from area report that we had done in the area. I am not quite too sure which sales now were - had been analysed at that time. In 1995, we had analysed other sales in the area and some of those were taken from those - that earlier prior information in our report". 14 Mr Rowan said that he had assumed that the quoted sale prices represented a market price but was unaware with respect to each of those sales prices what marketing had been conducted. He agreed that he had not undertaken the task of determining whether each of the sale prices for the comparable sales were market prices but had just assumed it. Despite this, Mr Rowan stated that he would not be prepared to assume that the sale price of the subject property was a market price. He commented that if a mortgagee is involved properties often sell for less than they might otherwise. He then admitted that he did not know whether the sales of the comparable properties to which he referred to in his report were mortgagee sales. He stated that his assistant had made some inquiries and had reported to Mr Rowan that there was nothing "untoward" about any of the properties. It would appear that the instructions to his assistant were as vague as the assistant's report and that the assistant was not specifically asked whether any of those sales were precipitated by mortgagees. 15 In cross-examination Mr Rowan was also asked about a fuel tank on the property. He was initially vague about the fuel tank but, when its position was identified with reference to the survey plan of the property attached to his report, he said that "indirectly" he had taken the tank into account but had not discounted the price because of it. Similarly he said that though in his report he had raised the question of contamination of land as an issue, he had not discounted the price on this basis.

Mr Ten Kate's valuation 16 Mr Robert Harry Ten Kate, a registered valuer, gave evidence for the Bank. As instructed, Mr Ten Kate reviewed the report prepared by Mr Rowan. He also gave his opinion of the market value of freehold property and the MSB lease together as at 19 October 1995. Mr Ten Kate made the following comments about Mr Rowan's report:

• Mr Rowan had used a "Direct Comparison Approach" in his valuation having regard to the "style and condition of accommodation and analysis of available market transactions";
• "[T]he sales evidence relied upon, comprises waterfront and non-waterfront properties which are generally superior to the subject property";
• Despite Mr Rowan's comment that the value of the residence was inexorably linked to the marina business, Mr Rowan's view of the effect of the proximity of the marina facility on the residential component value is not apparent from his report nor is his view as to the value of the marina in the context of the whole property apparent. 17 Mr Ten Kate expressed the view that the loss of amenity to the residents caused by the adjacent commercial marina must be taken into account. He commented, "[i]t is unlikely that a purchaser would seek to acquire the residential portion to or erect a high quality residence if the commercial marina were to remain in existence in its current format." Mr Ten Kate's report takes into account a number of aspects of the subject property including that it is a hatchet shape, has a slightly narrower frontage than the property at 5A Wunulla Road, has limited pedestrian access, is affected by an easement supporting the retaining wall, is affected by an existing tree at street frontage and that there are underground fuel storage tanks. All of these factors, in his opinion, tended to diminish the value of the site. 18 Mr Ten Kate summarised the valuation approach taken in his report: "We have taken the view that the highest and best use for the subject property at the time of sale was as a residential dwelling redevelopment site with additional value relative to the marina berthing and mooring facilities. This view would assume the removal of, the ground floor workshop to the residence, slipway facilities and the weatherboard shed containing the marina offices" 19 Mr Ten Kate's report concluded that the market value as at 17 October 1995 of the combined property was $2,200,000 reduced to $2,000,000 in the case of a forced sale. The report states that the circumstances surrounding a forced sale, any one of which could have a negative effect on the price obtained, usually involve: "I. An owner under some form of duress or pressure, financial or otherwise to sell a property or; II. A third party such as a receiver or mortgagee in possession of the property. A forced sale of a property may involve: · An inadequate exposure to the market; · An unreasonably short period in which to achieve a sale; · An inappropriate selling method; · A vendor with a primary objective of recouping a loan or secured amount rather than obtaining the market price; · Potential buyers being aware of the circumstances of sale and the sellers(sic) weakened bargaining position; · Other unusual factors." 20 The value of $2 to $2.2 million referred to above was based on the combined property "as a residential dwelling redevelopment site ignoring the existence of the marina facility, but assuming that an MSB lease was available for private berthing facilities". These two elements were valued as follows: (a) market value of the residential redevelopment site ($1.6 to $1.7 million); and (b) value of the marina berthing and mooring component ($500,000).

Mr Dundas' valuation 21 The Bank also relied on a valuation of the freehold land and the MSB lease provided by Mr Terence Dundas. The valuation was prepared in October 1994 at the request of Mr Hedge. Mr Dundas looked at the combined property from several different aspects. As a marina, he commented that the property lacked many facilities normally associated with modern boating centres, including car parking, level access and retail shops for the sale of boating goods and food items. He also noted the shallow water depth and poor condition of the marina structure and that the leasehold had a limited tenure of only five years. Mr Dundas concluded, based on the examination of the sale of similar marinas, that as a marinathe property would be worth $1.1m. As a waterfront dwelling, however, Mr Dundas estimated the value of the combined property to be $1.4 million. In cross-examination Mr Dundas elaborated that the $1.4 million estimate was based on an assumption that the marina would be demolished because it detracted from the value of the combined property as a waterfront dwelling. 22 Mr Dundas also provided a third estimate that might be achieved from persons who might consider the purchase of the combined property with the marina business from a "lifestyle" viewpoint. In his opinion, "it is not unreasonable to assume they may pay a premium over the value of the freehold to secure a business in [the location of the property]." He commented in cross-examination that he had known people who had done that, "Most have lived to regret it, but people still go ahead and do it because they like being around boats and they think it is an affluent way to live."

The value of the property from this "lifestyle" point of view was given as $1.7m.. 23 As indicated above Mr Dundas prepared his valuation in 1994. On cross-examination, Mr Dundas denied that the value of the property could be determined by adding the value of the marina business ($1.1m) to the value of the freehold property ($1.4m). In his opinion because the marina could not exist without the freehold property, the marina and freehold property were inextricably linked. The freehold property itself could be valued independently. Mr Dundas confirmed the valuation of $1.7 m was reached by taking the residential site value of $1.4m and adding to it a premium that someone might be willing to pay to acquire the marina with the house. Thus, the addition to the value of the marina "lifestyle" component was said to be $300,000, or roughly one-sixth of the total value of the property. Mr Dundas agreed that, if the property was valued at a higher amount, approximately one-sixth of that value would be attributable as the value of the marina. He expressed the view that $300,000 was a reasonable premium over the land value for the marina business although this would have to be reduced if the business was running at a loss.

Valuations of Chesterton International and of Collier Jardine 24 Two other valuations were submitted attached to the affidavit of Barry Watson, who is the Manager, Credit Management, Group Credit and Market Risk for the Bank. Mr Watson noted that the Bank had engaged Chesterton International ("Chesterton") to value the properties on which PPM carried on its business. Chesterton provided a valuation report dated 10 May 1991. This report concluded that the value of the combined property was $2,600,000. The value of the freehold land was $1,250,000 and the MSB Lease was "unlikely to exceed $500,000." The report also states that if sold in one-line the proceeds should be apportioned as to $1,250,000 to the freehold property and $1,350,000 to the MSB Lease. Given that this valuation was prepared some years earlier than the earliest of those already described and also that there was no cross-examination of the person who prepared the report, I do not think that I can attach any weight to the report. 25 Mr Watson also exhibited to his affidavit a valuation prepared by Collier Jardine in April 1994. This report valued the properties as to $1,900,000 for the freehold property, $2,000,000 for the MSB lease and $4,000,000 for the combined property. As with the Chesterton valuation there was no cross-examination of the person who prepared the report and for similar reasons I do not feel that I can attach any weight to it.

Assessment of valuation evidence 26 The valuations of Mr Rowan, Mr Ten Kate and Mr Dundas are difficult to compare because they were responding to different instructions and adopt somewhat differently methodologies. Both the Ten Kate and Dundas valuations concentrate on the "highest and best use" of the combined property whereas Mr Rowan, as instructed, valued only the freehold property on a stand-alone basis. Nevertheless Mr Rowan's valuation does not impress in either the thoroughness of his report or the reliability of its conclusions. In giving evidence he was defensive and reluctant to consider any proposition that might not be in accord with the views and conclusions he expressed in his valuation report. I do not have much confidence in his analysis and I attach little weight to his conclusions. In comparison Mr Ten Kate's report contains more careful and methodical analysis with detailed explanation of the methodology adopted. The approach in the report of Mr Dundas, of giving a value for the sale of the combined property as a marina, as a waterfront dwelling and as a lifestyle property is initially confusing. The difficulty lessens, however if the first two valuations are seen as elements in the process of determining the value of the combined property in its highest and best use. In that light the ultimate valuation of $1.7 million can be seen as resulting from a careful analysis of the relevant information. It should be noted that both Mr Ten Kate and Mr Rowan have calculated a premium over land value attributable to the marina as $500,000 and $300,000 respectively. Given the difference between their total valuations, the value attributable to the marina appears to be approximately between 17.5% and 25% of the total value of the combined property. As indicated earlier Mr Ten Kate and Mr Dundas adopted a similar approach in their reports. In giving evidence they were both straight forward and not defensive. Given that Mr Dundas's valuation was prepared closer to the actual time of the sale I would be inclined to give more weight to his estimate. In giving evidence he struck me as a thoughtful and careful person. I accept 17.5% as the appropriate proportion. If this is correct then AGC, in receiving 40% of the net proceeds of sale, received an amount substantially in excess of the amount attributable to their security, that is the MSB lease.

Applicant's submissions 27 It is important to distinguish two elements in the applicant's claim that were occasionally confused in the submissions made to the Court. The main complaint relates to the agreement between the Bank and AGC and its provision for disposition of the proceeds of sale, that is 60% to the Bank and 40% to AGC, disproportionate to the relative value of the their interests in the combined property. This claim does not in my view relate to the manner in which the sale was carried out. It is a complaint that the mortgagee Bank has not applied the proceeds of sale in accordance with the law. If the applicant is correct in saying that the whole of the proceeds attributable to the freehold land should have been applied to the debts secured by that property it would be theoretically possible for there to be a ground for complaint under this heading even if the sale of the combined property had realised an amount in excess of all expectations and valuations for the properties whether sold separately or together. 28 The applicant submitted that whatever agreement the Bank may have made with AGC concerning the distribution of the proceeds of sale, that agreement could have no effect on the applicant. It was entitled to have the whole of the amount realised by sale of the freehold property set off against its indebtedness to the Bank. That amount could only be determined by a proper valuation of all the assets sold in the one-line sale. The Bank and AGC could not by agreement between themselves, to which neither Raffindale nor the applicant was a party, alter this entitlement as to funds. An agreement made between the Bank and AGC may have been effective to create binding contractual obligations between them but could not affect the rights of Raffindale and the applicant to have the debt to the Bank reduced by the amount realised in respect of the freehold property. It was therefore submitted that effectively, the Bank had been paid the full amount owed to it in accordance with the settlement deed and thus the liability of Mr Duggan as guarantor had been extinguished. It was submitted that it was not to the point that the Bank chose to divert some of the proceeds to which it was entitled to AGC. Senior counsel for the applicant, Mr Aldridge conceded that there might be a small shortfall but even if that were to be the case, the proof of debt should be expunged because it is for an incorrect amount. On this view the effect of the agreement is that the overpayment to AGC was paid by the Bank and had nothing to do with the applicant. The Bank, it was submitted, cannot call on the applicant to cover payments that it had chosen to make. 29 Another important issue is whether the approach adopted by the Bank in entering into the agreement with AGC resulted in the obligation of the applicant under the guarantee being greater than it otherwise would have been. As stated earlier, the amount received by the Bank as its 60% of the net proceeds of sale was $1,188,015.45. Only Mr Rowan valued the freehold property on a stand-alone basis. For reasons set out in [26] above I do not accept his valuation. Mr Dundas gave a value of $1.4 million for a "waterfront dwelling" although that value was for the combined property with the marina being demolished. Mr Ten Kate also considered that the marina detracted from the desirability of the property as a waterfront residence. On a similar basis to Mr Dundas, he assessed the market value of the residential development site as between $1.44 million and $1.53 million. This figure allows for a 10% discount for a forced sale. Even if the mortgagee acts entirely appropriately, knowledge that the sale is a mortgagee sale may affect the sale price. It is not necessary to decide which of these estimates is to be preferred in order to conclude that if the agreement with AGC were legally to affect the applicant's obligations under the guarantee to the Bank, then it had the effect of increasing the amount payable. It is difficult to imagine that the net proceeds of sale for the freehold property alone would not have significantly exceeded the amount of $1,188,015.45 given that the Bank would have been entitled to retain the whole of the net proceeds. 30 Another important issue relates to the fact that the sale was "in one-line", in other words a sale of the combined property. The applicant submits that the freehold property should have been sold separately from the MSB lease. Although this claim is made in the written submissions, at the hearing it was put in a slightly different way. It was common ground that the price achieved for the combined property was greater than the total that could be achieved by selling the freehold land and the MSB lease separately. It was admitted by the applicant in cross-examination that the MSB lease would have been worthless had the freehold property been acquired by a person with no interest in conducting a marina business and that person had denied access to the marina over the freehold land. Any such sale would presumably have caused a loss to the applicant by reason of his guarantee of the debts that Raffindale owed to AGC. Nevertheless the applicant's position was that if the Bank could not negotiate an agreement with AGC for the sale price to be divided in proportion to the relative value of the two properties, then it should not have entered into any agreement to sell the combined property. If this had been the case, and on the basis that the true proportion of the sale price attributable to the marina was approximately 17.5%, then the Bank should have received approximately $1.64 million instead of $1.18 million.

The Bank's submissions 31 In brief, the Bank's submissions were: (a) In its exercise of its power of sale the Bank (as mortgagee) did not owe any duty to the applicant as guarantor of the debts of Raffindale and that even if it had breached its duties to Raffindale, the applicant cannot rely on those breaches to diminish his liability under the guarantee. The only remedy against the Bank in that circumstances would for the mortgagor to bring proceedings for an account; (b) Even if the above is not accepted, the Bank did not breach any duty to Raffindale or to the applicant by entering into the agreement with AGC because the amount realised by the "one-line" sale was greater than the amount that would have been realised by selling the freehold property alone; (c) Even if, contrary to the above, the Bank did breach its duties by entering into the AGC agreement: (i) on the taking of accounts Raffindale would have been liable to credit the Bank with an amount equal to the amount that was applied from the proceeds of sale to discharge the debts that Raffindale owed to AGC; (ii) the applicant suffered no loss because the money the Bank paid to AGC reduced Raffindale's indebtedness to AGC and consequently the applicant's obligations under his guarantee to AGC. 32 In rejecting the applicant's claim that the Bank was in breach of its duties as mortgagee, the Bank denied that the properties were sold at a gross undervalue. The Bank relied on: 1. the valuation of Mr Dundas prepared in 1994 which put a value of $1,700,000 on the properties; 2. the fact that the price obtained for the properties was consistent with Mr Ten Kate's valuation; and 3. that the properties were sold in one-line at auction after extensive marketing.

Consideration 33 The Bank's first submission, that the Bank did not owe any duty to the applicant, as guarantor of the debts of Raffindale, cannot be accepted. There is ample authority for the proposition that a mortgagee exercising a power of sale owes the same equitable duty to a surety as to a mortgagor; Tooth & Co Ltd v Lapin (1936) 53 WN (NSW) 224 at 225; Yorkshire Bank Plc v Hall [1999] 1 WLR 1713 at 1728; Medforth v Blake [2000] ChD 86 at 98. Similarly there is no reason to doubt that where a mortgagee breaches such a duty that the surety cannot rely on that breach as a defence to a claim by the mortgagee with the result that the guarantor's liability is reduced to the extent that the value of the security has been diminished; Taylor v Bank of New South Wales (1886) 11 App Cas 596 at 601, and see generally Phillips and O'Donovan The Modern Contract of Guarantee 3rd ed. 1996 at p. 405 to 410. 34 Section 420A of the Corporations Law (the Corporations legislation in force in 1995)also imposes obligations on a controller of a corporation to take "all reasonable care" to sell the property for: "(a) if, when it is sold, it has a market value - not less than the market value; or (b) otherwise - the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold." 35 Under s 423(1)(b) of the Corporations Law if a person complains to the Court that the controller is not observing the obligation imposed by s 420A, the Court can inquire into the matter and "take such action as it thinks fit". It is clear from Artistic Builders Pty Ltd v Elliot & Tuthill (Mortgages) Pty Ltd [2002] NSWSC 16 that s 423 allows the Court, after due inquiry, to impose a remedy including that the mortgagee pay to the complainant the amount of the loss sustained by reason of the mortgagee's breach of its statutory duty under s 420A; see also Jeogla Pty Ltd v Australia & New Zealand Banking Group (1999) 150 FLR 359. 36 I accept that the Bank did not breach any duty to Raffindale or to the applicant by entering into the agreement with AGC. The Bank supports this proposition with reference to the fact that the amount realised by the one-line sale was greater than the amount that would have been realised by selling the freehold property alone. This is not the reason why I accept the initial proposition. It seems to me that the fact that the property was sold in one-line is irrelevant to the propriety of the agreement. Entry into the agreement was not a breach of any duty owed to the applicant because the agreement had no power to affect the interests of the applicant. It is a principle of contract law so fundamental as to need no authority, that parties to a contract can create rights and duties as between themselves but they cannot, as a matter of contract law, bind or benefit persons who are not party to the contract. 37 It is possible, however, to vary property rights by way of contract or otherwise and such a transaction might well affect third parties. For instance when an owner grants a lease of land, the lessee thereby acquires the right to exclude third parties from the leased land even though they are not privy to the contract creating the lease. A person borrowing a car may have a right to possession of that car to the exclusions of persons other than the owner. On the other hand it is important to realise that one can have a contract where the subject matter of the contract is property without creating or varying any property interests; for instance a contract to paint a house. The fact that the contract between the Bank and AGC was concerned with property does not mean that it had the ability to alter the rights of the applicant whether or not they were proprietary. 38 My view as to the appropriate analysis of this issue means that much of the material that was put in evidence was irrelevant. It has not been necessary for me to comment on the detailed evidence and submissions in relation to negotiations leading up to the making of the agreement. Mr Manousaridis spoke at some length on the difficult position that the Bank felt that it was in. It was being hard pressed by AGC, which initially demanded 50% of the proceeds of sale. The Bank was also concerned at the prospect of the MSB lease becoming worthless if the Bank abandoned any notion of a one-line sale and sold only the freehold property. I have no reason to doubt that the Bank entered into the agreement honestly and thinking that the deal it made was in the best interests of all parties and that the concessions it made to AGC were just the price of the deal. Unfortunately for the Bank however, if it were allowed to pursue the applicant for the shortfall occasioned by the arrangement with AGC, then the deal would have been done at the expense of the applicant. This cannot be permitted. Such an arrangement would have been entirely proper if it had been done with the consent of the applicant. 39 The submission in [32] above concerning sale at an undervalue was not seriously pressed. Nor, in my view, would there be any purpose in doing so as all the evidence supported the view that the sale of the property was properly carried out and that the one-line sale meant that a better price was realised than if the freehold property and the MSB lease had been sold separately. Ultimately the problem here is one of the disposition of proceeds of sale. The Real Property Act 1900 (NSW) s 58(3) is quite clear as to the manner in which the proceeds of a mortgagee sale are to be applied. It is possible for this to be varied but only with the consent of all interested parties. Directly or indirectly the Bank has applied the proceeds of sale in a manner inconsistent with these provisions. It cannot now seek to recover the loss it brought on itself by recourse to the applicant. 40 In its defence the Bank also relied on the terms of the guarantee signed by the applicant and in particular clauses 9 and 10: "9. As a separate and independent stipulation the Guarantor agrees that all or any sums of money which may not be recoverable from the Guarantor on the footing of a guarantee whether by reason of any legal limitation disability or incapacity on or of the Debtor or any other Guarantor if there is more than one or any other fact or circumstance and whether known to the Bank or not shall nevertheless be recoverable from the Guarantor as sole or principal debtor in respect thereof and shall be paid by the Guarantor on demand together with interest at the rate or rates charged or chargeable by the Bank in respect of the moneys hereby secured immediately prior to the making of such demand from the date of demand until payment. 10. The Bank is under no obligation to hold or take any other or further guarantee or security for the payment of moneys hereby secured and this Guarantee shall be in addition to and independent of and shall not affect or be affected by any other or further guarantee or security now or hereafter held or taken by the Bank or by any arrangement or transaction between the Bank and the Debtor or any other person or by any loss release discharge abandonment or transfer either in whole or in part and either with or without consideration of any other guarantee or security now or hereafter held by the Bank from the Debtor or from any other person or by any act forbearance or omission by the Bank or by any other act matter or thing." (emphasis added) 41 The Bank contends that the effect of clause 10 is that none of the claims made by the applicant, even if accepted by the Court, can have the effect of reducing or otherwise extinguishing the applicant's liability under the guarantee. It was however contended, again without elaboration, that even if the argument in relation to clause 10 is not accepted, the Bank could rely on clause 9. 42 Counsel for the applicant, Mr Aldridge SC not surprisingly took a different view and put his objection to the Bank's interpretation of the clauses in two ways. His first submission was based on his view of the effect of the agreement between the Bank and AGC which was that the Bank had been paid in full; see [28] above. It was submitted that nothing in clauses 9 or 10 entitles the Bank to have recourse to the applicant for money that it chose to give to AGC. On the alternate view, namely that the Bank had not been paid because of its own breach of its duties as mortgagee, Mr Aldridge submitted that the extension of the guarantor's obligations in those clauses does not extend to situations where the Bank is in breach of its duty. 43 In my view there is substance in these submissions. Certainly if the effect of the agreement is that the Bank was paid in full there could be no room for application of clauses that are predicated on the Bank not having received such payment. If, however, the Bank, as a result of its own breach, has not been paid in full the analysis is different. The portions of clause 10 emphasised above are the only parts of the clause that could possibly have any application here. In my view, however, they are directed to the situation where there has been dealing with the security or the release of a debtor or other guarantor or some such variation that has the potential to release all the guarantors. Similarly clause 9 is, in my opinion, directed to a situation where there is some technical problem with the guarantee or the money is not recoverable for some reason relating to the capacity of the debtor or other circumstance independent of the Bank. It would take very clear words to convince me that either clause is intended to protect the Bank from the consequences of its own or its agent's breach. 44 In any event there must be a question, one that I do not need to resolve here, as to whether the Bank could contract out of the consequences of its own breach. While this appears to be possible in respect of the equitable duty, the issue may well be different in relation to the obligations imposed by s 420A of the Corporations Law; State Bank of Victoria v Parry (1989) 7 ACLC 226 at 229, O'Day v Commercial Bank of Australia (1933) 50 CLR 200 at 213 per Rich J. There may well be good reasons of public policy why a specific standard set out in legislation such as the Corporations Law should not be able to be avoided by agreement between the parties; see Tyler et al Fisher & Lightwood's Law of Mortgage Australian Edition 1995 at p. 460. 45 For reasons set out above I am satisfied that the applicant should have the orders he seeks. The orders will be a declaration that the proof of debt lodged by the Commonwealth Bank of Australia in the Estate of William Joseph Duggan has been wrongly admitted by the Trustee; that the proof of debt be expunged. I will hear the parties on the issue of costs. I certify that the preceding forty-five numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone.

Counsel for the Applicant: Mr M R Aldridge SC with Ms J L Gallagher

Solicitor for the Applicant: Horowitz & Bilinsky

Counsel for the First Respondent: Mr S Mullette

Counsel for the Second Respondent: Mr N Manousaridis

Date of Hearing: 24, 25 September 2001