Irani v St George Bank Limited [2005] VSC 403 | Case summary

Irani v St George Bank Limited [2005] VSC 403 | Case summary | Zoe

[7]

Introduction

1 Boman Irani ("Dr Irani") and Homai Irani (also known as Homai Kermani ("Dr Kermani")) are husband and wife. They have interests in a number of companies including the corporate plaintiffs and a company named Pinnacle Investments Pty Ltd ("Pinnacle"). In February 2000, Pinnacle purchased land at Sunbury known as "Daameeli", upon which a landfill business was conducted. St George Bank Limited ("the bank") extended finance to Pinnacle. It obtained guarantees from Dr Irani, Dr Kermani and the corporate plaintiffs; and it took security over assets owned by Dr Kermani and by Pinnacle. In November 2002, the bank appointed receivers and managers. They were later appointed as agents for the bank as mortgagee. They sold the Daameeli land in May 2003. Dr Kermani held a second mortgage over the land.

2 In this proceeding, Dr Irani, Dr Kermani and the corporate plaintiffs make claims falling into two categories. In the first category are claims made concerning alleged breaches by the bank of the terms of its arrangements with Pinnacle and with the plaintiffs, together with related estoppel and other claims. These claims were heard and determined against the plaintiffs by Byrne J.[1] In the second category are claims concerning the conduct of the bank and its agents in managing and realising the Daameeli land and the business conducted on that land. The trial of these claims was heard before me, as was the trial of a counterclaim by the bank in which relief is sought relating to the enforcement of its guarantees and securities.

Issues decided and to be decided

3 As indicated, certain of the issues raised in this proceeding have been decided already by Byrne J. The plaintiffs' pleading raises a number of claims. The claims have been amended many times. Both in the trial before me and in the trial before Byrne J, the hearing was dislocated by late amendments made by the plaintiffs. The final form of the statement of claim is, with one further change, found in the sixth further amended statement of claim, which was filed and served pursuant to an order I made on 1 June 2005. The further change is a result of an order I made on 12 August 2005, to which I refer further below, striking out paragraph 28(iv)(d) of the sixth further amended statement of claim. It is necessary to identify the claims made by the plaintiffs, the claims which have already been determined by Byrne J, and the claims now to be decided by me.

The pleadings

4 The plaintiffs' sixth further amended statement of claim makes claims on behalf of eight plaintiffs, all of whom are guarantors of Pinnacle.

5 The plaintiffs allege that on or about 15 June 2000, the bank advanced $3.575m to Pinnacle. That allegation is admitted. The plaintiffs then allege that the bank agreed to provide Pinnacle with further banking facilities on terms which included the provision of a bank guarantee for $2m from the Westpac Bank ("the Westpac Bank guarantee"), and that allegation is also admitted.

6 The sixth further amended statement of claim alleges a number of terms of the arrangement concerning the further advance, the substance of which are that the bank was required to call on the Westpac Bank guarantee in order to repay the further advance and was only entitled to recover the further advance from that source (paras 17 to 24A). It is alleged that the various securities given by the plaintiffs only secured Pinnacle's debts other than the further advance (para 24B). In breach of these arrangements, the plaintiffs allege, the bank returned the Westpac Bank guarantee and did not recover the further advance by calling upon it. This is alleged to have been a breach of contract, a material variation to the security arrangements, a wrongful release of security, and a repudiation of the facility agreements, amongst other things (paras 25A to 25K).

7 The plaintiffs then plead duties allegedly owed by the bank pursuant to s 77 of the Transfer of Land Act 1958, and pursuant to both limbs of s 420A of the Corporations Act 2001 (Cth) (paras 26 and 27). They allege that the bank appointed agents in February 2003 and that the agents sold the Daameeli land in May 2003, settling the sale in July 2003 (paras 27A to 27E). These allegations are admitted. It is then alleged that the bank breached s 77 of the Transfer of Land Act 1958, s 420A of the Corporations Act 2001 (Cth), its duty to the plaintiffs, and the terms of its mortgage over the Daameeli land by failing to take reasonable care to sell the land for not less than the market value, or for the best possible price, or the best price that was reasonably obtainable having regard to the circumstances existing when the property was sold. It is also alleged that the bank's conduct was "in breach of" s 423(1)(a) of the Corporations Act 2001 (Cth) (para 28).

8 In summary, the matters alleged and particularised in this respect are the following:

[8]

• It is alleged that the sale price of the land was $6.5m "which the plaintiffs do not put in issue" but, because of the terms of the sale, the "real sale price" was $4.5m when the market value of the land was $11.3m (reference is made to a report of Mr Nigel Rockliffe) or $8m (reference is made to the evidence of Mr Paul De Lutis) or $7.5m (reference is made to a report of Mr Brian Nicholson) or $6.5m (reference is made to the contract of sale).

• It is alleged that the bank failed to negotiate with the highest tenderer and thereby recklessly sacrificed the plaintiffs' interests. The matters particularised are dealings between Mr Grant Sutherland, the real estate agent who conducted the sale, and Mr Paul De Lutis, of the company Degroup Pty Ltd.

• It is alleged that the bank gave "preference" to the eventual purchaser, on the basis that the bank could not at May 2003 give vacant possession to any other purchaser, when in fact it could have done so.

• It is alleged that, by reason of various valuations which the bank held, it had "reason to believe" that the valuation for the Daameeli land was at least between $5.4m and $6m.

• It is alleged that the bank relied upon valuations that were "non-current", that were based on an erroneous assumption as to the volume of air space available in the landfill, and that were prepared for mortgage purposes and not for purposes of sale.

• It is alleged that the bank entered into a contract of sale that required the Westpac Bank guarantee to be used as part of the purchase price or to be released.

• It is alleged that the bank "unilaterally elected to release" the Westpac Bank guarantee to assist the purchaser of the land.

• Payments made by the agents of the bank to the Environment Protection Authority ("the EPA") are the subject of complaint. It is alleged that that liability arose as a result of a decision to allow the existing operator of the site to remain on site.

• A more general allegation concerning the decision to allow the site operator to remain on site is also made.

[11]

12 The plaintiffs seek relief by way of declarations and orders for accounts, as well as other relief, including orders for the discharge of the various securities and guarantees.

13 The bank, in its defence to the third further amended statement of claim (no further defence having been filed to the subsequent amended statements of claim), generally denies the breaches of duty concerning management and realisation of the Daameeli land. One positive allegation made is that the bank, by the arrangements made on the sale, "thereby recovered $2m, alternatively adequate value" for the Westpac Bank guarantee (para 31 and see also para 28(c)). In reply to that allegation, the plaintiffs allege in their further amended reply that no consideration was received for the EPA licence, the goodwill of the business, or the Westpac Bank guarantee, which, it is alleged, "had a value of $2m" (para 1N).

14 The bank's counterclaim alleges a debt owed by Pinnacle for which demand has been made, alleges liability under the various guarantees and securities, and seeks relief by way of declarations and orders concerning the enforcement of the guarantees and the various securities. The allegations made in the counterclaim are either not admitted or are denied.

Judgment of Byrne J

15 The judgment of Byrne J sets out the background to the facilities provided by the bank to Pinnacle and details the securities taken. None of those matters were controversial, either before him or before me. At paragraphs 20 and 25 to 29 of his judgment, Byrne J set out the issues he was determining and those he was deferring. In substance, the issues deferred were all of those which depended upon the value of the Daameeli land and the business conducted on that land.

16 Byrne J found against the plaintiffs on the issues they raised concerning the terms of the various facilities and the alleged breaches of those terms by the bank as a result of the manner in which it dealt with the Westpac Bank guarantee.

17 Upon one issue, the matters determined by Byrne J came very close to those which were the subject of the trial before me. One of the issues Byrne J listed as requiring his determination was the contention of the plaintiffs that the bank did not recover $2m or any value from its dealings with the Westpac Bank guarantee. That issue was also agitated at length before me. It is necessary to record what Byrne J found, and did not find, in relation to that issue.

18 Byrne J found that, on a proper construction of the contract of sale entered into by the bank through its agents, what the bank was selling was not only the Daameeli land but also the Westpac Bank guarantee.[2] Byrne J observed that, that being the position, the issue then became whether the bank complied with its obligations by obtaining $6.5m for the two securities, being the land and the guarantee, and said that these matters were deferred for the later trial.[3] Byrne J found that it was "self-evident" that the bank recovered "some value" for the Westpac Bank guarantee,[4] but he found that in the circumstances he should not attempt to value that guarantee. In that respect Byrne J said:

[17]

20 Save for these issues, there was no controversy in relation to the counterclaim.

Sequence of events

Pinnacle's acquisition of Daameeli and arrangements concerning the landfill business

21 The Daameeli land is a property of approximately 260 hectares, on the east side of the Bulla/Sunbury Road, approximately 3 kilometres from Bulla and 24 kilometres north of the Melbourne CBD. There are two holes on the property, referred to as the north hole and the south hole. A landfill business is conducted on the property. By a contract of sale dated 23 February 2000, Pinnacle purchased the property for the sum of $4.5m. The bank advanced funds to Pinnacle for the purpose of the acquisition and in that connection engaged Mr Robin Hocking of the firm C J Ham & Murray Pty Ltd ("Ham & Murray"), registered valuers, to undertake a valuation. Mr Hocking had prepared a valuation of this property once before, in June 1999. That valuation valued the property at $4.8m. By a letter of 26 May 2000, accepting the bank's instructions to value the property, Mr Hocking advised that the value as at May 2000 would be $4m.

22 The bank's advance to Pinnacle was secured by a fixed and floating charge over Pinnacle's assets. The bank also took guarantees from each of the plaintiffs and fixed and floating charges over the assets of certain of the plaintiffs. The guarantee by Dr Kermani was secured by a mortgage over a property she owns at 10 Marshall Avenue, Kew ("the Marshall Avenue mortgage") and a charge over a share portfolio ("the equitable share mortgage"). Her liability under her guarantee was limited to the sum of the net realisable value of those securities. All of these instruments are dated 16 June 2000. The advance made by the bank was $3.575m on 15 June 2000.

23 By a landfill operations agreement dated 25 October 2000, Pinnacle appointed a company named Soiltech Australia Pty Ltd ("Soiltech") as operator of the landfill facility. The agreement commenced operation on 25 October 2000, and was for an initial term of five years with options to extend. Amongst other things, the agreement provided that Pinnacle was to be responsible for works defined as "Infrastructure Works" (clause 8.1), and Soiltech was to be responsible for all operational expenses (clause 13.1). By a site management agreement dated 30 November 2000, Soiltech appointed a company named Civil Construction Services Corporation as site manager.

24 On 9 May 2001, the EPA issued to Pinnacle a waste disposal licence, EPA Waste Discharge Licence No ES46084. That licence set out terms and conditions governing the deposit of low-level contaminated soil and waste acid sulphate soil on the land. Amongst other things, Pinnacle, as licensee, was required to submit quarterly landfill levy statements and payments.

25 By a quarry sub-licence dated 25 September 2001, Soiltech granted a sub-licence to a company named Hi-Quality Quarry Products Pty Ltd ("HQQ"). The sub-licence permitted HQQ to quarry sand and gravel on the land and required it to pay a royalty to Soiltech, together with a nominal rent.

26 On approximately the same date, Pinnacle and Soiltech, together with another company associated with Dr Irani and Dr Kermani, the third plaintiff, Shalridge Pty Ltd ("Shalridge"), entered into an agreement with a company related to HQQ named Tranteret Pty Ltd ("Tranteret"). There are two versions of this agreement in evidence. The two versions are not identical. For present purposes, it suffices to say that the agreement recited an arrangement between Tranteret and Soiltech for a joint venture in relation to a soil treatment facility on the land, that Tranteret agreed to procure a bank guarantee for $2m for the benefit of Soiltech and Shalridge, and that Shalridge agreed to give to Tranteret an option to acquire 25 per cent of the shares in Pinnacle, Shalridge at that time owning 75 per cent of the shares in Pinnacle, for a sum of $2m.

27 By a banker's undertaking of 19 October 2001, Westpac Banking Corporation undertook to pay, on demand, any amount demanded in writing by Shalridge up to a maximum aggregate sum of $2m. The undertaking was expressed to have been provided at the request of Tranteret.

The further facility

28 In November 2001, the bank agreed to provide to Pinnacle further facilities in the form of a fully-drawn advance on conditions which included the provision of a bank guarantee for $2m in favour of the bank.

29 On 21 November 2001, an agreement was entered into between Pinnacle and Shalridge, Soiltech, Tranteret and HQQ. This agreement recited that Shalridge had requested Tranteret to provide an unconditional bank guarantee in favour of a third party or bank to be notified in writing. For present purposes, a key provision of the agreement was that Pinnacle agreed to grant a mining lease to HQQ on the minimum terms set out in an annexure. Pinnacle agreed it would apply for an extractive industries licence.

30 By a banker's undertaking dated 19 October 2001, but apparently provided pursuant to the arrangements in November 2001 to which I have referred, Westpac undertook to pay, on demand, any amount demanded in writing by the bank up to a maximum aggregate sum of $2m. This is the Westpac Bank guarantee. It is, save for the description of the favouree, in the same terms as the earlier undertaking in favour of Shalridge, including the express reference to the undertaking having been provided at the request of Tranteret.

Dealings with Transwest

31 Transwest Haulage Pty Ltd ("Transwest") is a transport, materials handling and environmental services company. Transwest's marketing and development manager is Mr David John Lindgren. He gave evidence in the proceeding and produced a number of documents from Transwest's file. This material is relevant not only to the sequence of events, but also to the subsequent evidence given as to the value of the Daameeli land by the plaintiffs' principal expert witness, Mr Nigel Rockliffe. For that reason, it is necessary to review the evidence concerning Transwest in some detail.

32 Dr Irani approached Transwest in early 2002, presenting them with what Mr Lindgren described in a memo of 6 February 2002 as "an opportunity to purchase a 261 hectare property at Bulla". Transwest sought advice from a firm of environmental infrastructure consultants named PPK and on 29 May 2002 received a report from Mr Gary Hirst, a geoenvironmental engineer. The purpose of the report was to give Transwest information relevant to the decision to develop the site to accept solid wastes. It included a summary of waste streams and potential environmental issues that might affect future development of the site. The PPK report reviewed the Northern Regional Waste Management Plan, then itself under review by the EPA and the Northern Regional Waste Management Group. In this context, the report indicated that the Northern Regional Waste Management Group's view was that additional municipal waste disposal capacity would not be required in the region for the next ten years and that any use of the site for that purpose would have to take into account "the potential impacts of bid [bird] nuisances and will require consultation with Tullamarine Airport".

33 In July 2002, Mr Lindgren and others prepared a detailed analysis of the proposal, which was incorporated into a document entitled "Proposal to Form a Joint Venture Company with Pinnacle Investments Pty Ltd: Bulla Land Fill Site". This is a document upon which the plaintiffs' expert, Mr Rockliffe, relied extensively in preparing his analysis. In the document, Mr Lindgren modelled both the existing performance of the landfill site and its expected performance. His analysis of expected performance indicated an internal rate of return (pre-tax), based on 25 years' utilisation of the site, of in excess of 30 per cent.

34 In a memorandum of 25 July 2002, Transwest's managing director, Mr J C P Emmerson, recorded concerns expressed by the Transwest chairman as to whether the volumes forming the basis of the projected revenues were sustainable. The memorandum indicated a report would be provided as a separate paper for the board. Mr Lindgren engaged a Mr Martin Williams from a firm named GHD to address these issues and he recorded that engagement in a memorandum to the managing director on 26 July 2002.

35 A board minute of 31 July 2002 was tendered in evidence. The minute indicated that a proposed purchase price of "$7.5m has been adopted for an 85% interest in a new joint venture company." The memorandum continued:

[23]

Fitzroys' valuation in June 2002

41 In June 2002, Mr Michael Hosking, from the firm Fitzroys, undertook a valuation of the Daameeli land for the bank. His conclusion was that the current market value, for mortgage security purposes, as at 24 June 2002, was $5,450,000 (exclusive of GST). The report stated that the definition of market value adopted was the traditional definition of a willing buyer and willing seller at arm's length.

Demands made, proceeding issued, receivers and managers appointed

42 There is in evidence a notice of termination dated 26 August 2002 from Pinnacle to Soiltech. The notice asserts termination of the landfill operations agreement on the basis of breaches of that agreement and purports to require delivery up of possession by 30 August 2002. The evidence before me was that Soiltech remained in possession and continued operating the site notwithstanding that notice.

43 On 18 September 2002, the bank's solicitors, Herbert Geer & Rundle, served a notice of demand on Pinnacle requiring repayment of all the facilities then outstanding.

44 On 20 September 2002, HQQ issued proceeding no. 2075 of 2002 in this Court against Pinnacle ("the HQQ proceeding"), alleging an enforceable agreement to lease based on the agreement of 21 November 2001 previously referred to, and alleging, in the alternative, agreement on the terms of a formal lease in June 2002. Pinnacle's defence denied any concluded agreement for lease, asserting that the parties were still in negotiation; alleged the existence of a condition precedent to any agreement to lease; and alleged that any agreement made was void for uncertainty.

45 By notices of 8 October 2002, the bank made demand upon the guarantors of Pinnacle's debt. On the same day, the bank served on Pinnacle a notice to pay pursuant to s 76(1) of the Transfer of Land Act 1958.

46 On 18 November 2002, Tranteret issued proceeding no. 8189 of 2002 in this Court against the bank ("the Tranteret proceedings"). In that proceeding, Tranteret alleged that the Westpac Bank guarantee, which Westpac had provided to the bank in November 2001 at Tranteret's request, was given after the bank had represented to Tranteret that Pinnacle was not currently in default under its existing facilities and had represented that the bank guarantee was to be used to secure money advanced to Pinnacle and for Pinnacle's purposes only. It was alleged that these representations were misleading and deceptive. Interlocutory and permanent injunctions were sought restraining the bank from making demand under the guarantee and a declaration was sought that the Westpac Bank guarantee was void.

47 On 26 November 2002, the bank appointed Mr Ian Menzies Carson and Mr Nicholas John Martin of Carson & McLellan PPB as joint and several receivers and managers under the fixed and floating charge granted by Pinnacle over its assets and undertaking.

The position of Pinnacle on appointment of the receivers and managers and early action taken by them

48 The position confronted by the receivers and managers upon their appointment was one which could fairly be described as daunting.

49 Proceedings were already on foot by HQQ seeking to enforce the alleged agreement to grant a mining lease.

50 Pinnacle's records indicated significant default by Soiltech under the landfill operations agreement. A notice of termination had been given but Soiltech had continued on site. Most significantly, Soiltech had not paid landfill levies to the EPA. The receivers and managers met with Soiltech's solicitor, who asserted that Soiltech had incurred considerable expenditure in carrying out infrastructure works. Under the agreement with Pinnacle, "Infrastructure Works" were Pinnacle's responsibility.

51 The receivers and managers met with representatives of the EPA on 5 December 2002. The EPA representatives advised them that levies in excess of $1m were outstanding and that the EPA would need to carefully consider the currency of the EPA licence.

52 Pinnacle had agreed with HQQ that it would obtain an extractive industries licence. Enquiries by the receivers and managers with the Department of Natural Resources and Environment indicated that, whilst the licence had been applied for, it had not been issued, as a result of a dispute between Dr Irani and Pinnacle's B class shareholders.

53 The receivers and managers instructed Mr Hosking of Fitzroys, who had prepared the most recent valuation for the bank, to prepare a valuation. The valuation obtained was a valuation as at 16 December 2002 and reached the following conclusions as to value:

"1. As an operating land fill site with extractive industries licence $4,000,000 (FOUR MILLION DOLLARS)

[35]

61 I find that the receivers and managers' concerns that the EPA licence was in jeopardy, and that the EPA might impose obstacles to a sale of the property, were well-founded.

Commencement of the sale process

62 In early December 2002, Soiltech offered to procure a purchaser of the site for $5.6m. Thereafter a variety of proposals were put on behalf of Soiltech, each of which was different and none of which were acceptable to the receivers and managers. Whilst Soiltech was not the eventual purchaser of the site, there is no evidence to suggest that the receivers and managers' view that Soiltech's interest was valuable in creating a competitive environment for the sale was misconceived.

63 The receivers and managers obtained written marketing recommendations for the property from two real estate firms, Knight Frank and Sutherland Farrelly. Each of them recommended sale by public tender. The receivers and managers accepted that recommendation and appointed Sutherland Farrelly as the selling agents.

64 The receivers and managers obtained a quote for an aerial survey of the Bulla landfill. The quote was $7,460 (excluding GST). They determined that that was too expensive. The purpose of an aerial survey is to more accurately estimate the available air space for use as landfill. A number of other estimates of available air space were held by the receivers and managers.

65 The receivers and managers had obtained a further valuation from Fitzroys in December 2002. In January 2003, they sought a further valuation from Mr Hocking at Ham & Murray. Mr Hocking's further valuation was dated 7 February 2003. The valuation was expressed to be completed on the assumption that vacant possession was available. It was a valuation of current market value, being the estimated amount for which an asset would exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction. The valuation of the property as it stood, including the EPA licence, was $4.2m. The valuation expressed the view that the value of the EPA licence was $250,000, but in relation to the question of what was the value of the property without any licences, i.e. for an alternate purpose to the purpose of landfill, the valuation gave a value in the range of $1m to $1.3m.

66 One aspect of one of the plaintiffs' complaints is that the valuations relied upon were unreliable because no aerial survey had been carried out. In his oral evidence, Mr Martin asserted that Ham & Murray had stated that any additional air space revealed by an aerial survey would make no difference to the valuation. The plaintiffs' final submissions were critical of Mr Martin in relation to this assertion, submitting that it was an assertion eventually revealed to be one which had not been recorded and made not to Mr Martin but to a staff member. Whilst those criticisms might not have been inaccurate in themselves, the Ham & Murray valuation itself does make it clear that the existence of additional air space volume (in excess of 5,000,000 cubic metres) would have made no difference to their valuation because the valuation methodology was capitalisation of earnings (page 14), because the period used in the capitalisation calculation was 15 years (page 16), and because there was no doubt on any view that the site had sufficient air space to receive a large annual stream of waste for a minimum of 15 years (page 11). The plaintiffs' principal expert on valuation, Mr Rockliffe, adopted a similar approach in this respect and similarly concluded that additional air space volume would not alter the valuation.

The tender process

67 Mr Martin and Mr Carson were appointed as joint and several agents for the bank as mortgagee in possession under a first mortgage it held over the Daameeli land on 19 February 2003. No doubt that step was prompted by concern at a number of proprietary claims which were being made in relation to the Daameeli land, including claims by both Soiltech and HQQ that were the subject of caveats. I hereafter refer to Mr Martin and Mr Carson together as the agents, or the agents for the mortgagee.

68 Tender documents were prepared by Herbert Geer & Rundle and circulated by Sutherland Farrelly. The tender conditions provided for a closing date of Thursday, 3 April 2003, and an acceptance date of Thursday, 24 April 2003. The acceptance date was subsequently extended twice.

69 The tender documents required tenderers to execute a tender form and sign a contract of sale. Corporate tenderers were required to provide guarantees by directors and shareholders. Tenderers were required to deliver a bank cheque for 2.5 per cent of the price offered. The tender conditions alerted tenderers to the various caveats, advising that the encumbrances, other than an easement in favour of the SEC, were not to be assumed by the purchaser. Purchasers were required to purchase the property subject to the terms and conditions contained in an environmental release and indemnity. The tender documents included a copy of an environmental management plan prepared by Egis Consulting in August 2000, which indicated, amongst other things, that the site had total air space of at least 6,000,000 cubic metres. The tender documents included a copy of the EPA licence as well as correspondence from the EPA addressing concerns which the EPA had as to the storage of acid sulphate soil in the low-level contaminated cell.

The Tranteret injunction application

70 Tranteret had issued proceedings concerning the Westpac Bank guarantee in November 2002. It made an application for an interlocutory injunction restraining the bank from calling on that guarantee, and undertakings were given pending the hearing of that application. The application was heard by Ashley J on 28 February 2003 and he delivered reasons for his decision on 3 March 2003. Ashley J found that Tranteret had demonstrated that there were serious issues for trial and that the balance of convenience favoured Tranteret. He concluded that Tranteret should have the interlocutory relief that it sought. Consequent upon that conclusion, the bank, as defendant, gave an undertaking in the following terms:

[51]

92 It seems to me that it is more likely that Mr De Lutis decided not to submit a further offer on 8 May 2003 and left with it after being told of the second extension to the time for acceptance. That is why he had it in front of him when he had the conversation with Mr Sutherland that Mr Sutherland recorded in the email of 15 May 2003, and that is why no reference is made to it in Mr Sutherland's email. Whilst on this matter my conclusion is contrary to Mr De Lutis' evidence, I do not wish to be taken as suggesting that in giving that evidence he was not honestly giving his best recollection of what occurred. In my view he was doing so, but on the balance of probabilities I find he is mistaken.

93 In any event, it is clear that Mr Sutherland knew that Mr De Lutis' company was an interested purchaser at a figure above $4.5m. Mr Sutherland did not pursue the matter because he had been told that the HQQ tender was $6.5m and was to be assessed on that basis.

94 Mr De Lutis gave evidence that he was prepared to offer up to $8m for this property. There is no contemporaneous record of any such intention. No such intention was ever communicated to the bank or any of its agents.

95 Notwithstanding the difference between Mr De Lutis and Mr Sutherland as to whether the 8 May 2003 offer of $5m was ever submitted or not, Mr Martin, in his evidence, said that he was not happy with Mr De Lutis' proposals. He considered that none of his proposals conformed satisfactorily to the tender conditions and in that respect he referred in particular to the absence of a signed environmental indemnity and guarantee and to the absence of a director's guarantee.

Sale to HQQ

96 By a contract of sale dated 23 May 2003, the bank sold the Daameeli land to HQQ. The price expressed in the contract was $6.5m. The contract contained the terms required by the tender documents, including the environmental indemnity and release. The contract contained a special condition, clause 26, which read as follows:

[56]

97 Documents in evidence reveal that Mr Martin maintained to Mr Sutherland that Sutherland Farrelly's commission on this sale should be based on $4.5m. Eventually, it was agreed that commission would be payable on $6.5m. Whilst I found Mr Martin's evidence to be generally credible and comprehensive, it seemed to me that on this issue his evidence was unsatisfactory. As was submitted by the plaintiffs, in relation to this matter he was evasive.

98 As was anticipated, the sale to HQQ had the consequence that both the HQQ proceeding and the Tranteret proceeding were resolved. The sale settled on 29 July 2003. The bank elected to take the course provided for by clause 26.1(a), returning the Westpac Bank guarantee to Tranteret, and receiving at settlement the full sum of $6.5m.

Consequences of Soiltech's retention

99 A reconciliation of the position under the licence agreement which Mr Carson, as agent for Pinnacle, entered into with Soiltech was produced by Mr Martin and tendered in evidence. The reconciliation reveals that the total EPA levies incurred from 26 November 2002 until Soiltech's eviction were $888,758, of which Soiltech paid $335,859, leaving a shortfall which had to be met by the bank, and which it has added to the secured debt, of $552,899. When assessing the total cost to the bank, and consequently to the borrower and the guarantors, of the decision to retain Soiltech, there must be deducted from this shortfall the licence fees that Soiltech paid. The fees total $165,500. Thus, the net additional liability is $387,399. Recovery action is continuing. It remains to be seen whether any further sum will be recovered.

100 It is not clear against what alternative this outcome should be judged. Mr Martin's evidence was that it was impractical to obtain any other short-term operator. In my view, there was no evidence which contradicted this assessment. Mr Martin and Mr Carson were concerned that considerable losses would result from a cessation of operations as a result of the potential effect which that might have had upon the EPA licence and the possibility that the EPA would require remediation work. The valuations they obtained confirmed that the value of the property without any licences was considerably reduced. The correspondence from the EPA confirmed that the EPA was considering suspension or revocation of the licence. Finally, it cannot be assumed that the eviction of Soiltech in late 2002 could have been accomplished. Such an attempt in late 2002 might well have resulted in further litigation. Soiltech's solicitors claimed Pinnacle was indebted to it.

Evidence of Mr Paul Anthony Pattison

101 Mr Paul Anthony Pattison is a chartered accountant with extensive experience in insolvency and reconstruction matters. Mr Pattison was called as an expert witness by the plaintiffs.

102 An edited version of a report he had prepared dated 8 April 2005 was tendered. Many of the conclusions he had expressed in that report were inadmissible but evidence was led from him orally as to the steps which, in his experience, would be taken by competent insolvency practitioners in the circumstances revealed by the material which he had set out in some detail in his report.

103 Mr Pattison said that the first step that ought to be taken is assessment of the property and the nature of the business conducted on the property. He said the property appeared to be unique and that it would be necessary to engage recognised specialist valuers. In this respect he said he would seek a valuer accredited in the area through the Institute of Valuers. Given the uncertainty as to the air space available on the site for landfill, he said he would have considered an aerial survey. In seeking a valuation, he observed that a valuation for mortgage purposes tended to be more conservative than a valuation for sale, the difference being 5 per cent to 15 per cent. He said the purpose of the valuation was to give a minimum market value which ought to be obtained for the property. He said that if the only offers received were below that valuation then it would be necessary to reconsider the sale strategy or to consider holding the property until market forces changed.

104 In relation to arrangements with an operator of the site, Mr Pattison said he would consider it necessary to assess the viability of Soiltech and to consider their past performance in meeting debts as and when they fell due. He said that if that assessment revealed them to be an operator in default, then it would be necessary to consider whether others might be interested in being an operator and, if so, to go to the market and find another tenant. Mr Pattison said that if it were known that Soiltech would not pay the amounts due as operator, then they ought not be kept on. He added that this was particularly so here given the fact that EPA levies would be incurred by the operator, but the liability for the levies would fall personally upon the receivers and managers. Mr Pattison also made the observation that if Soiltech were to remain as operator, he would expect the insolvency practitioner to seek security to ensure levies were recoverable from Soiltech.

105 In relation to the material which Mr Pattison had seen concerning the tender process, he expressed the opinion that the process adopted did not reflect normal practice. When asked why this was so, he referred to the fact that the dates for acceptance of tenders had been extended. He said that the danger with this practice was that tenderers would believe the process was a sham and would withdraw. He said the appropriate course if no acceptable tender was received by the due date was to conduct a "Dutch auction". He said that if the offers still did not reach the valuation then the appropriate course was to withdraw the property and offer it for sale by private treaty or by auction.

106 In relation to the tender accepted here, Mr Pattison expressed the view that the price obtained for the property was $4.5m, as $2m was already available to the company through the Westpac Bank guarantee.

107 Mr Pattison was also asked whether competent insolvency practitioners would consider non-complying tenders and he expressed the view that they would.

108 In relation to claims and litigation concerning the property, Mr Pattison said competent insolvency practitioners would act on the advice of their lawyers.

109 In cross-examination, it became apparent that there was a good deal of relevant material which Mr Pattison had not been shown. Mr Pattison had observed in his evidence-in-chief that he saw no evidence of advertising or the methods of advertising. In cross-examination he said that he had not assumed that it had not been done at all, but he had seen nothing about it in the material he was given. No complaint is made by the plaintiffs about lack of advertising. Mr Martin's evidence was that the property was widely advertised. Mr Pattison's observations in this respect were misconceived, due to the limited material he was given.

110 Mr Pattison also agreed that he had not seen the valuation by Ham & Murray prepared on the instructions of the receivers and managers. Ham & Murray are valuers accredited in the applicable area of expertise by the Institute of Valuers.

111 In cross-examination, Mr Pattison agreed that the terms of tender which were shown to him in the witness box were common and appropriate conditions.

112 Mr Pattison also agreed that maintenance of the EPA licence was a matter that would need to be considered, observing that the value of that licence would need to be weighed against the risks of continued operation and any liability that may fall back upon the receiver.

113 In relation to Soiltech, Mr Pattison had not been told what payments Soiltech had made.

114 In relation to Soiltech's caveats, he said the appropriate course was to rely on legal advice. He made similar observations in relation to the claim by HQQ for a mining lease.

115 Mr Pattison had not seen the correspondence from the EPA threatening the licence. Of even greater significance, he was unaware of the order and reasons of Ashley J of 3 March 2003 concerning the Westpac Bank guarantee. He agreed in cross-examination that he had assumed there was no impediment to calling up the Westpac Bank guarantee.

Evidence of Mr Nigel Rockliffe

116 An important part of the plaintiffs' case concerning its complaints in relation to the sale of the property was founded upon expert evidence given by Mr Nigel Rockliffe in relation to the value of the business conducted on the Daameeli land.

117 Mr Rockliffe is a financial analyst. He has extensive experience in project evaluation and litigation support. He was asked to conduct a valuation of the property for the purpose of this proceeding and was given a volume of material. He was asked to make a number of assumptions, one of which was that a licence for putrescible waste disposal, although not yet held, "will issue". He proceeded on the basis that this licence would be available by the point at which a business conducted on the property would need the licence, which in his analysis was in approximately ten years' time.

118 The valuation methodology adopted by Mr Rockliffe was the discounted cash flow ("DCF") method.

119 In cross-examination, Mr Rockliffe agreed he was not addressing the value of this property for the first time. In 2002, he had been engaged by Dr Irani to assist him in his dealings with Transwest. Mr Rockliffe had, in that context, conducted a presentation for Transwest, the powerpoint slides of which were tendered in evidence. Mr Rockliffe said there was no link between the work he did on that occasion and his present task. He said that he did not recall any involvement with the property after that presentation, which was held on 9 April 2002. He indicated on a number of occasions that, whilst on that occasion he was working to assist Dr Irani, in preparing his report for this proceeding and in giving his evidence he knew that his duty was to the Court. Whilst I do not doubt Mr Rockliffe's competence or integrity, the fact that he had previously worked for Dr Irani and had engaged in valuation work in relation to this very property for the purpose of, in effect, acting as an advocate for him with Transwest, means that, in my view, he is less independent than would be the case had he been approaching the matter for the first time. There is, accordingly, a need for additional caution in relation to his conclusions.

120 Perhaps the most important document relied upon by Mr Rockliffe in preparing his analysis is the analysis which Transwest undertook of the project consequent upon the approaches made to them, including the presentation by Mr Rockliffe himself. The analysis which Transwest prepared plays an important role in relation to Mr Rockliffe's revenue projections and a critical role in relation to his expenditure projections.

121 In relation to the revenue projections, Mr Rockliffe's report identifies five streams of income. There was considerable interchange between Mr Rockliffe and counsel for the bank in cross-examination in relation to these revenue streams. The most significant revenue stream is revenue related to low-level contaminated soil. The net present value of projected revenue from this source is assessed by Mr Rockliffe at a little over half the net present value of revenue from all sources. There was an historical basis, in actual figures from the period 2001-2002, for Mr Rockliffe's projection.

122 In relation to each revenue stream, Mr Rockliffe projected a "low", a "most likely", and a "high" revenue level, and for his eventual valuation he took a mean of those levels. For low-level contaminated soil, his "high" estimate is a little above the annualised actual levels for 2001-2002, his "most likely" estimate assumes a decline by one third, and his "low" estimate assumes a further slight decline. The next most significant revenue stream is from acid sulphate soils. Again, Mr Rockliffe did have an actual level of disposals in the 2001-2002 period. This became his "low" level. His "most likely" and "high" estimates came from Transwest's analysis. In relation to revenue from putrescible waste, Mr Rockliffe developed his own estimate, based upon regional waste management plans, one of which was from November 2004, and one of which was from June 2002. Mr Rockliffe assumed that a licence would be available and that disposals would begin in year 11. This assumption was controversial, but Mr Rockliffe made it clear that he had no expertise in matters of licensing and that he had assumed, as instructed, that a licence would be available. The fourth revenue stream was from solid waste, and Mr Rockliffe's estimates were based upon the actual disposal of "clean fill" in the 2001-2002 period. The annualised actual level became both his "most likely" and his "high" estimates and a "low" estimate assumed no disposal. His final revenue stream came from quarrying and in this regard he relied on Transwest's estimate.

123 In relation to expenditures, Transwest's estimates of cost structure were critical. Mr Rockliffe substantially adopted them.

124 Mr Rockliffe projected cash flow over a 25-year period, producing a total net cash flow of $48,228,228. To that figure he then applied a discount rate. He chose a discount rate of 15 per cent per annum real. In his report, he said this was "appropriate for a relatively low-risk project such as landfill operation." His valuation of the Daameeli landfill was $11.3m.

125 Mr Rockliffe made it clear that he is an economist and not a person with relevant expertise in either landfill operations or quarrying operations. His report states:

[58]

126 I queried Mr Rockliffe as to what part of his decision to adopt the discount rate of 15 per cent was the exercise of expertise as an economist, and as to how that decision was made, given his lack of expertise in relation to the technical aspects of quarrying and landfill operations. Mr Rockliffe said, in substance, that his decision to apply a discount rate of 15 per cent was based upon an assumption that there were no risks relevantly to be taken into account in the areas in which he had no expertise. He agreed that 15 per cent was low for valuing a business.

127 In cross-examination, Mr Rockliffe said that issues as to air space were of no relevance to him as his projection was based on cash flow over 25 years and there was sufficient air space for that period on any view. He reiterated a number of times that he had assumed that appropriate licences, including a putrescible licence, would be in place, and he agreed that he was unaware of potential problems in relation to obtaining such a licence, including resistance from the nearby Tullamarine airport. He also agreed that he had no expertise in the concurrent operation of quarrying and landfill and that his report assumes that concurrent operation is practical. He agreed that he was unaware of pre-existing claims to possessory rights in relation to quarrying on the site.

128 Mr Rockliffe also agreed that he did not refer to comparable sales and that he did not take into account the purchase price which had been paid by Pinnacle in February 2000 of $4,500,000. He said he also did not take into account the tender responses received in the first half of 2003 and that he did not know what they were. His opinion was that they ought to be treated with caution. He said that, in any event, they were not relevant to his methodology. When asked to explain why there was such a disparity between his valuation and the tender responses, he observed that he imagined that those responding felt they could acquire the property for a price in that range. He agreed that another explanation was that tenderers did not share his assumptions or conclusions, including his conclusion about the appropriate discount rate.

129 I have earlier referred to the evidence of Mr Lindgren from Transwest and to the material which he produced concerning Transwest's assessment of the Daameeli site and the business conducted on it. In so far as that Transwest material bears upon Mr Rockliffe's analysis, it seems to me that the conclusions to be drawn are as follows:

[80]

1. At general law, in dealing with charged property in the course of enforcing a security, a mortgagee must use its powers of enforcement in good faith and for the purpose for which they were conferred.[7] A receiver is subject to the same requirement.[8]

2. The mortgagor, later-ranking chargees, and guarantors all have standing to complain about a breach by the mortgagee of this duty.[9]

3. The onus of establishing a breach of this duty lies on the complainant.[10]

4. The enactment of s 420A of the Corporations Act 2001 (Cth) has diminished the significance of the general law duty where what is in issue is the exercise of a power of sale.[11]

5. Section 420A extends the general law duty owed by the mortgagee. The existing entitlements of guarantors and later chargees to equitable remedies in respect of any faulty or deficient exercise of the power of sale are enhanced and strengthened by the higher duty it establishes.[12]

6. When considering a claim of breach of the duty concerning sale, as now provided for in s 420A, it is necessary for the court to determine whether the property in question has a "market value". If it does, sub-s (1)(a) applies. If it does not, sub-s (1)(b) applies.

7. The question of whether a property has a "market value" depends upon the degree of certainty with which value is ascertainable by reference to events in a market. For the purposes of s 420A, a property does not have a "market value" where market experience does not yield a value with sufficient certainty to be used as an integer. In that circumstance, sub-s (1)(b) will apply.[13]

8. Both limbs of s 420A are concerned with the process of exercise of the power of sale. On the one hand, breach of the duty provided for is not established merely because market value or the best price reasonably obtainable is not achieved.[14] On the other hand, breach may be found to have occurred even where it is established that market value or the best price reasonably obtainable was achieved.[15]

[81]

Ross v Victorian Permanent Property Investment & Building Society

143 The focus of attention at the trial was on s 420A and the issues raised by the duty provided for in that section.

144 After conclusion of the evidence and submissions, I sought further submissions on the decision of the Full Court of this Court in Ross v Victorian Permanent Property Investment & Building Society.[16] In further submissions made both orally and in writing, the plaintiffs relied upon Ross for the proposition that it is impermissible for a mortgagee to sell Torrens title land together with other security "in one lot". The bank submitted that this issue was not properly raised on the pleadings, that the sale was permissible under the relevant security documents, that Ross does not stand for the proposition contended for by the plaintiffs, and finally, that even if Ross had stood for that principle, the issue had, in effect, been overtaken by s 420A.

145 The issue is raised by the pleadings. The sixth further amended statement of claim alleges that the bank, "by entering into a Contract of Sale which required the Bank Guarantee to be used as part of the purchase price or alternatively, to be released to Tranteret, sold the land otherwise than in accordance with the terms of s 77 of the Transfer of Land Act" (para 28(ii)).

146 Before turning to the decision in Ross, it is necessary to consider an earlier decision of Jessell MR in In re Cooper & Allen's Contract for sale to Harlech.[17] This case concerned a sale by a mortgagee of both a life estate and of the remainder. There were independent mortgages over the two proprietary interests, although the mortgagee was the same. The conveyance in question recited the apportionment of the purchase price between the life estate and the remainder. The issues raised in the case concerned liability for succession duty and the position of the purchaser. There was no issue raised as to the appropriateness of the recited apportionment.[18]

147 Jessell MR approached the matter first by outlining what he considered to be the applicable principle. He then turned to the authorities. As to the principle, he said the following:

[96]

161 There do not appear to have been many subsequent cases dealing with the issue of combined sales.

162 Midland Credit Ltd v Hallad Pty Ltd[32] dealt with the issue of the sale "in one line" of a number of apartments which were all mortgaged under the one mortgage. The property in question there was a multi-level residential development. The relevant issue raised there was the commercial prudence of the mode of sale.

163 The decision in Ross was relied upon by Coldrey J when considering an interlocutory injunction application in Gesualdi v Serenar Nominees Pty Ltd.[33] In that case, an interlocutory injunction was sought to prevent a combined sale. Coldrey J granted the injunction, substantially relying upon the decision in Ross. He held it was arguable that the memorandum of common provisions in that case and s 77 of the Transfer of Land Act 1958 "do not contemplate a consolidated sale of different portions of land subject to different mortgages, and involving differing mortgagors".[34] He expressed the opinion that it was "highly unlikely" that any Victorian court would follow the "English approach", and referred to the "grave difficulties and objections" in relation to the issue of apportionment that a combined sale would entail.[35]

164 In Commonwealth Bank of Australia v Duggan,[36] the Full Court of the Federal Court considered a combined sale of a freehold property and an adjacent leasehold interest. The Commonwealth Bank held a first mortgage over the freehold and a second mortgage over the leasehold. The finance company, AGC, held a first mortgage over the leasehold and a second mortgage over the freehold. Valuation advice was taken and that advice was that the freehold and the leasehold should be sold together. The Commonwealth Bank and AGC agreed on a 60:40 apportionment. At first instance, evidence was led as to apportionment and Stone J held that the "appropriate proportion" was 82.5:17.5. Stone J held that the agreement between the Commonwealth Bank and AGC concerning apportionment was irrelevant and that the mortgagor's interest could not be affected by it. She held that the Commonwealth Bank was obliged to account to the mortgagor in accordance with the appropriate apportionment as she found it to be. She found that this was the mortgagee's duty under s 58(3) of the Real Property Act 1900 (NSW) (equivalent to s 77(3) of the Transfer of Land Act 1958). The Full Court of the Federal Court upheld this approach. Section 420A was referred to in the Full Court's decision but did not play any role in the outcome.

165 Commentators have struggled with the application of Ross and its consistency with the English authorities.

166 Croft and Johannsson seek to reconcile the position on the basis that Ross is a case about combined sales of Torrens land and general law land, suggesting in their conclusion:

[101]

1. Ross does reflect a different approach to the approach in Cooper & Allen's Contract. The Master of the Rolls in Cooper & Allen's Contract emphasised the need to obtain the best available price. Ross emphasised the uncertainties and the potential for abuse in combined sales. In the modern context, the reasoning in Cooper & Allen's Contract is more consistent with s 420A than is the reasoning in Ross. Where s 420A applies, the duty it provides for must prevail. The duty it provides for is very similar to the principle enunciated by the Master of the Rolls. In particular circumstances, s 420A might require a mortgagee to realise a secured property in a combined sale, provided, of course, it had the requisite power to do so.

2. It is necessary to distinguish between the question whether there is power to enter into a combined sale and the question whether it is prudent to do so. Ross is authority for the proposition that a mere power to sell a property under a mortgage does not authorise a combined sale with another property. But it is also authority for the proposition that such a power can be properly conferred by the mortgage instrument.

3. As to the prudence of a combined sale, the concerns raised in Ross and in Gesualdi are valid, but, if the power exists, the commercial prudence of each combined sale will have to be assessed on its own merits. Such an issue can also arise where there is only one security, as was the case in Midland Credit Ltd v Hallad Pty Ltd.

4. The Master of the Rolls' suggestion that where there is a combined sale, apportionment is the responsibility of the mortgagee, provided it is reasonable, is inconsistent with Commonwealth Bank of Australia v Duggan. The principle applied in Commonwealth Bank of Australia v Duggan is that, if challenged, the mortgagee must account under s 58(3) of the Real Property Act 1900 (NSW) (equally, under s 77(3) of the Transfer of Land Act 1958) in accordance with the apportionment as found by the court, regardless of any private arrangements or apportionments not involving the mortgagor or other affected parties. This approach does create the possibility of litigation, one of the concerns raised in Ross and Gesualdi, but it seems to me that the statutory obligation to account must require an accounting in accordance with the facts as found by the court, not on some other basis.[40]

[102]

Complaints concerning Soiltech and the EPA levies

171 I do not consider that the complaint based upon the decision to enter into a new licence arrangement with Soiltech and the consequences of that decision, being the incurring of as yet unrecovered EPA levies, has been made out. Even with the considerable advantages of hindsight, it does not seem to me that the decision to continue with Soiltech imposed additional financial burden on the borrower and the guarantors compared to any alternative course. Indeed, it seems to me that a decision to attempt to evict Soiltech in November 2002 might well have had serious consequences for the value of the land and, consequently, for both the borrower and the guarantors, and may have had other consequences such as a requirement to perform remediation work, as referred to in the evidence of both Mr Martin and Mr Katopodis.

172 Mr Pattison's expert evidence on this issue did not relevantly impugn the conduct of Mr Martin and Mr Carson, either as receivers and managers or as agents for the mortgagee. He said that a competent insolvency practitioner would have assessed Soiltech's prior performance, considered alternatives if Soiltech was seen to be unreliable, and, if Soiltech was to be engaged, sought security for future performance. Mr Martin and Mr Carson did all of those things. Mr Pattison said a competent insolvency practitioner would weigh the risks to the EPA licence against the costs of continued engagement of Soiltech. Mr Martin and Mr Carson did weigh those risks. They made a business judgment that the best course was to re-engage Soiltech. Mr Martin and Mr Carson acted on this issue in the manner in which Mr Pattison suggested competent insolvency practitioners would be expected to act.

173 One further matter is significant in this context. The decision to retain Soiltech was made by Mr Martin and Mr Carson when they were receivers and managers. They were then agents of Pinnacle. They were not agents of the bank. To the extent the plaintiffs submitted to the contrary, I reject that contention. Mr Martin and Mr Carson are not parties to this proceeding. The bank is not responsible for the decision that they took in November 2002 to retain Soiltech. In February 2003, Mr Martin and Mr Carson became agents for the mortgagee. The bank is responsible for their conduct from that point on. The evidence does not establish any relevant failure by Mr Martin and Mr Carson when they were receivers and managers in deciding to retain Soiltech, but even less does the evidence establish any relevant failure by them in not taking steps to terminate the licence arrangement until after the contract of sale with HQQ had been signed. Once the contract of sale was signed, the agents moved quickly to evict Soiltech and entered into a new interim arrangement with the purchaser, HQQ, pending settlement. They have since taken proceedings to recover the amounts outstanding.

The recurring issue of the $525,000 payment to the EPA

174 An issue was raised from time to time concerning a payment to the EPA of a sum of $525,000 which was characterised by the plaintiffs as a payment of "pre-appointment debts".

175 When the trial began, the plaintiffs' current pleading was the further amended statement of claim dated 2 August 2004. This was the third further amended statement of claim. This statement of claim made allegations as to specified payments to the EPA (para 28(iv)) which did not involve the $525,000 payment. The allegation in paragraph 29A, particularised as concerning amounts "charged by the Bank's Agents and the Bank's solicitors", was also present.

176 On the first day of the trial before me, 20 April 2005, counsel for the plaintiffs applied to amend the statement of claim and in the course of that application gave an outline of the claims made. Amongst other things, he said there were "also complaints related to the payment of EPA levies which were pre-appointment debts".[41]

177 In responding to the application to amend, counsel for the defendant said that there was no pleaded allegation concerning payment of any pre-receivership debt.[42]

178 On 21 April 2005, I gave leave to amend, and the fourth further amended statement of claim was filed. So far as this issue is concerned, the allegations in that pleading were the same as they had been in the third further amended statement of claim. On the same day I dealt with objections to the witness statement of Mr Pattison, an edited version of which eventually was tendered as exhibit P4. In a section commencing on page 29, he dealt with the $525,000 payment to the EPA. The following interchange then occurred with senior counsel for the plaintiffs:

[108]

184 I gave leave to make a further amendment concerning another matter. In the sixth further amended statement of claim which was later filed, the new proposed paragraph 28(iv)(d) was included, notwithstanding Mr Nash's withdrawal of his application to make that amendment.

185 It was necessary for the matter to be re-listed on 12 August 2005. Mr Nash accepted without hesitation that paragraph 28(iv)(d) of the sixth further amended statement of claim should be struck out. He did submit, however, that the $525,000 issue was, or might be, still relevant, and in the light of that I directed that the parties file further submissions on that matter, and on two other matters.

186 The plaintiffs' further submissions dated 17 August 2005 contended that the issue of the $525,000 payment arises under the general allegation in paragraph 29A. They submitted that it had been referred to in particulars delivered in September 2004.

187 It does not seem that the particulars referred to were ever filed, but even if they do refer to it, the matter was unequivocally abandoned in running, and the plaintiffs cannot rely on it. There is no doubt in my mind that the bank's counsel conducted his cross-examination and the presentation of the bank's case in the belief that this payment was not in issue, and counsel for the plaintiffs clearly and explicitly confirmed that understanding. I accordingly proceed on the basis that any complaint made about the $525,000 EPA payment has been abandoned.

Complaints concerning the sale process

Did the property have a "market value"?

188 In my view it is clear that the applicable provision of s 420A is sub-s (1)(b). No witness suggested that the value of the Daameeli land could, prior to the tender process, be ascertained by reference to events in a market. The sale was, in effect, the sale of a business. As Mr Pattison observed in his evidence, the property was unique and required a specialist approach. The evidence of Mr Lindgren, Mr Rockliffe, Mr Acton and Mr Katopodis all confirmed the accuracy of this observation. Other than the tender process itself which was undertaken by the agents, there was no evidence of any market experience which might yield a value having any merit as an integer. In the circumstances, sub-s (1)(b) applies.

Complaints other than complaints related to HQQ and the Westpac Bank guarantee

189 A number of complaints made about the sale process can be dealt with without extensive further analysis.

190 The allegations, the effect of which is that the agents for the mortgagee should not have relied on the then current Fitzroys and Ham & Murray valuations, are untenable. It was quite proper for them to rely on these valuations.

191 Analysis of what was "the best obtainable price" is not a matter required to be determined in considering whether the process of sale was undertaken in compliance with the duty provided for in s 420A. Nevertheless, reliance was placed by the plaintiffs on a number of alternative assertions of market value. The first was $11.3m based upon the evidence of Mr Rockliffe. I have dealt with that. I do not accept that that is a reliable valuation in the circumstances. The second was $8m based upon the evidence of Mr De Lutis as to the figure he was prepared to offer. I cannot accept this as an indication of value. No such offer was made or suggested at the time. The next alternative was $7.5m, based upon a valuation of Mr Brian Nicholson. I do not accept this valuation as being reliable in the circumstances. It was a valuation obtained by HQQ for the purpose of obtaining finance. The valuation methodology was simply to value the air space on a per cubic metre basis. Mr Rockliffe cogently explained why such an approach is misconceived.[49] The final alternative was the contract price with HQQ of $6.5m. In my view, that price is not properly to be seen as a price for the land alone, but rather is a "price" for both the land and release of the Westpac Bank guarantee.

192 In so far as Mr Pattison dealt with the process of sale, it seems to me, again, that properly understood, his evidence did not support a finding of failure on the part of Mr Martin and Mr Carson to act in the manner expected of competent insolvency practitioners. Mr Pattison said they should have assessed the property and engaged an accredited valuer. They did so. The accredited valuer was Ham & Murray. The valuation from that valuer was $4.2m as at February 2003. They also obtained an up-to-date valuation from Fitzroys. He said they should have considered an aerial survey. They did consider it. They decided it was too expensive and acted on the basis that its results would not affect assessments of value. This approach was consistent with the valuation of Ham & Murray which they held at the time, and with the evidence of Mr Rockliffe, the plaintiffs' principal expert. Mr Pattison said that if the tender offers were below the valuations held, then they ought to have re-considered their sales strategy. At least two of the tender offers (Delta and HQQ) were not below the valuations.

193 Mr Pattison did express the view that it was unwise to extend the date for acceptance of tenders, but he agreed that the tender conditions were usual and appropriate. Clause 4 of the tender conditions permitted extension.

194 Mr Pattison expressed the view that the sale price of the land to HQQ was $4.5m, but he had not been informed of the impediments to recovery on the Westpac Bank guarantee.

195 Mr Pattison said that competent insolvency practitioners ought to act on their lawyers' advice. Mr Martin and Mr Carson engaged Herbert Geer & Rundle extensively, relied upon them in relation to all of the relevant issues, and did act upon their advice.

The complaints concerning HQQ and the Westpac Bank guarantee

196 The complaints which do have substance all relate in one way or another to the fact that the bank's sale to HQQ was not just a sale of the land. The bank did not simply sell the land for $6.5m. Byrne J found it "sold" both the land and the Westpac Bank guarantee for $6.5m. There was, of course, no "sale" of the Westpac Bank guarantee. It was released. In commercial terms the two securities were realised "in one lot". This is how Mr Martin himself characterised the arrangement.

197 The evidence given concerning the decision to accept HQQ's "in one lot" tender was confusing.

198 The evidence revealed that the selling agent, Mr Sutherland, did not relevantly take part in the decision. He was instructed to assess the HQQ tender as being one for $6.5m and he proceeded accordingly. Thus, he did not pursue Mr De Lutis and Degroup Pty Ltd, who he knew were potential purchasers above $4.5m.

199 Mr Martin's evidence in his witness statement was to the following effect.

200 Mr Carson and he took part in a telephone conference with Mr Peter Nankwell and Ms Julie Armstrong of Herbert Geer & Rundle on 19 May 2005, which discussed the then current position of the Autocaps proposal. A time limit of 5.00 pm on Tuesday, 20 May 2003 had been imposed on Autocaps by Herbert Geer & Rundle by a letter of 15 May 2003. Autocaps did not meet that time limit.

201 On 21 May 2003, Mr Carson and Mr Martin wrote to Mr Rod Lawless at the bank. In that letter, they advised that Autocaps had not met the time limit. In relation to the Westpac Bank guarantee, the letter stated:

[110]

202 In relation to the HQQ proceeding, the letter referred to Herbert Geer & Rundle's initial view that HQQ's claim was without merit and to their subsequent concerns, particularly as to the reliability of the defence witnesses.

203 The letter recommended acceptance of the HQQ offer. Mr Martin's witness statement said Mr Lawless confirmed that they should proceed as recommended.

204 In cross-examination, Mr Martin's evidence was to the following effect.

205 He said he had approached the HQQ offer of $6.5m as being an offer for both the land and for release of the Westpac Bank guarantee.

206 He said his assessment was that the Westpac Bank guarantee was of an "indeterminate" value. He and Mr Carson had no involvement in the Tranteret proceeding. He described resolution of that claim, by accepting the HQQ offer, as a "bonus".

207 He said that the decision to accept the HQQ offer was reached after discussions involving the agents, Herbert Geer & Rundle and the bank. In that context the bank officer he identified was Mr Alan Bateson. In this respect his evidence in cross-examination differed from his evidence in his witness statement.

208 In cross-examination Mr Martin said that the agents were very concerned that the unresolved HQQ claim to a mining lease meant they could not have given vacant possession to another purchaser. Part of the attraction of the HQQ tender was resolving that claim. He was asked why he did not litigate the claim first and then sell the land. His response was that he did not take that course because of Herbert Geer & Rundle's more pessimistic advice in April 2003, and because he was concerned at the possibility of substantial delay whilst interest was running. In my view, these concerns were reasonable in the circumstances.

209 Mr Bateson's evidence was that he was responsible for the account at the time of the sale but he was not present in the office when the sale was consummated. He said that the bank had relied heavily on the advice of Mr Martin and Mr Carson and upon Herbert Geer & Rundle. He also said he had placed considerable reliance upon the then current valuations, from Ham & Murray and from Fitzroys. In relation to the decision to accept the HQQ tender, he said that the existing legal proceedings were a consideration in the decision and that the bank's objective was "to get the best result in terms of dollars". As he saw it, the decision was between accepting $4.5m and the risk of fighting the litigation over the Westpac Bank guarantee, or accepting the $6.5m offer. He observed that taking the course the bank did, in his view the bank got "full value" for the guarantee without the risk. In relation to his knowledge of offers or potential offers over $4.5m, he said he believed there had been a non-conforming tender for $5.2m but it had been withdrawn. He said he had not been told of any further discussions in relation to that offer. He said he had not seen the email of 15 May 2003 from Mr Sutherland to Mr Martin. He said that if there had been a tender of $5m he would have had to seriously look at that alternative.[50] Mr Lawless was not called as a witness.

210 Whilst the evidence is somewhat confusing, the conclusion I reach is that the decision to accept the HQQ offer was made by the bank as a consequence of Mr Martin's recommendation. Mr Martin's recommendation was influenced by his concern to resolve the HQQ mining lease claim. He left the decision as to the assessment of the Tranteret proceeding, concerning the Westpac Bank guarantee, to the bank, but made his own views known both by his overall recommendation and by his reference to the risks and expense of litigation.

211 The process of sale adopted by the agents was an entirely appropriate one. They obtained valuations. They took advice from estate agents as to marketing and they followed that advice. They undertook a tender process and they sought to maximise competition between prospective tenderers. They entertained offers that did not comply with the tender conditions, including those put by Soiltech and by Autocaps, and the retained real estate agent dealt with Mr De Lutis. Whilst it might be said that the position with Mr De Lutis could have been taken further, in all the circumstances it seems to me that their conduct in around the middle of May, when Mr Sutherland's email recording his discussions with Mr De Lutis was sent to Mr Martin, cannot now be validly criticised. On the facts as I have found them, Mr De Lutis withdrew the only offer which he made which might be said to have been genuinely competitive with the HQQ proposal.

212 It is also most important that the agents and the bank did not seek to resolve the issue of the Westpac Bank guarantee through the process of sale. They were required to address the issue and make a decision about it because of the terms which HQQ included in what was, in simple money terms, the highest tender received by a substantial amount. Under s 420A, the bank and the agents had to consider whether this alternative represented the best price reasonably obtainable. The decision which the bank made, on Mr Martin's recommendation, was that it did.

213 My conclusion is that the plaintiffs have failed to establish that in making this decision, there was a failure by the bank to take all reasonable care to sell the property for the best price reasonably obtainable in the circumstances. The HQQ tender was $1.7m above the next highest tender (Delta), and Mr Martin's unchallenged evidence was that it was the only tender that complied with the tender conditions. Accepting that tender resolved the HQQ proceeding. The solicitors' advice had become pessimistic as to Pinnacle's defence to that claim. The bank itself could have resisted HQQ's claims but, in my view, the agents were rightly concerned that HQQ could have, at the least, caused considerable delay. The need for a possible new court application to remove the existing caveats had been foreshadowed by Herbert Geer & Rundle. Whilst the agents' own view was made fairly clear, it was left to the bank to factor in the risks in the Tranteret proceeding. Even if one attributed the full $2m to the Westpac Bank guarantee, accepting the HQQ tender would still realise an amount in excess of both the then current Fitzroys and Ham & Murray valuations, although below the Delta tender. It seems to me that with even the most modest discount for risk on the Tranteret proceeding, acceptance of the HQQ tender would produce a better likely outcome than pursuing Delta for a complying tender, continuing the Tranteret proceeding, and continuing either the HQQ proceeding, or perhaps a new proceeding against HQQ, or perhaps resisting a new proceeding by HQQ. The plaintiffs submitted that the allegations in the Tranteret proceeding were of misleading conduct by the bank, and that Pinnacle should not, in effect, bear the burden of whatever risk that claim represented. This approach is misconceived. If Tranteret succeeded, part of the bank's security would be lost. The plaintiffs did not submit, and could not submit given Byrne J's judgment, that Pinnacle's debt would thereby be reduced. In all the circumstances, the decision taken did not constitute a failure to exercise the care required by s 420A. Indeed, in my view, the course taken was a commercially prudent one.

214 As I indicated earlier, it seems to me that that conclusion resolves the matter, notwithstanding the decision in Ross. This is because, in my view, Ross has been overtaken by s 420A where that section applies.

215 If this is incorrect, then in accordance with Ross it is necessary to turn to the terms and conditions of the mortgage to see whether it expressly empowers the bank as mortgagee to do what it has done.

216 What has the bank done? It has not "sold" the Westpac Bank guarantee. It has released it. It has achieved a significantly higher price for the land which is the subject of its mortgage, as compared to the next highest tender, by agreeing to release another security which it held, being the Westpac Bank guarantee. The evidence before me does not enable me to assign any particular value to the Westpac Bank guarantee. I cannot determine what the outcome of the Tranteret proceeding would have been. It is clear, however, that HQQ offered significantly more for the land on the basis that the Westpac Bank guarantee would be released.

217 The relevant mortgage contains the following provisions (in the Memorandum of Common Provisions):[51]

[117]

218 If the position is analysed in terms of the judgment of Holroyd J in Ross, which represents the high watermark for the plaintiffs in my view, the relevant question is: do the terms of this mortgage express an intention, in plain terms, that the bank may release the Westpac Bank guarantee in order to recover a greater sum than it otherwise would on the sale of the land? Clearly they do. The bank's right to sell is unaffected by any release or discharge of any person or other security, by conduct rendering any security unenforceable, or by any failure of any person to assume any obligation to pay secured money, by virtue of express provisions in the mortgage to that effect. Thus, if I am wrong about the effect of s 420A on the decision in Ross, in my view Ross is not applicable here as the mortgage does empower the bank to do what it did do.

Other issues raised on the plaintiffs' claims

219 I have already referred to paragraphs 29A and 29B of the sixth further amended statement of claim concerning the allegation that there were costs and expenses improperly incurred. In the course of oral submissions it was put that the legal costs and the related fees charged by the receivers in relation to the Tranteret proceeding, the HQQ proceeding, and the attempts to recover the EPA levies from Soiltech all ought to be the subject of an order for the taking of accounts. The evidence does not establish any relevant improper incurring of costs and expenses in relation to those matters and I will not make the order sought. I do not, in reaching this conclusion, intend to in any way affect any party's entitlement to have any legal costs for which they are liable, directly or indirectly, taxed.

220 My findings as to compliance with the duty provided for in s 420A, and with the decision in Ross in so far as it is applicable, still leave unresolved the issue of apportionment. No issue of apportionment arises in relation to the plaintiffs in their capacity as guarantors as the total amount recovered ($6.5m) reduces Pinnacle's indebtedness and it is of no consequence whether the reduction is notionally said to be as a result of realisation of the Daameeli land or realisation of the Westpac Bank guarantee. That is not the case in relation to Dr Kermani's position as second mortgagee of the Daameeli land. The bank must account to her on the basis that the Daameeli land was sold for $6.5m. Counsel for the bank before me accepted that that was the position. It seems to me that this is the only proper conclusion for these reasons. First, it reflects the alternative under special condition 26 of the contract of sale which the bank elected to take, namely return of the Westpac Bank guarantee and receipt at settlement on the sale of the land of the full $6.5m. Secondly, the evidence before me cannot support any other alternative. This approach is consistent with Commonwealth Bank of Australia v Duggan. It is the outcome on apportionment which is most advantageous to Dr Kermani and most disadvantageous to the bank. I emphasise that this apportionment has significance only in so far as the bank must account to Dr Kermani as second mortgagee.

221 Counsel for the plaintiffs at one point characterised the bank's acceptance that they must account to the second mortgagee on the basis that the amount recovered for the land is $6.5m as a "pea and thimble trick", given their position before Byrne J that the Westpac Bank guarantee had not simply been given away, a position which Byrne J accepted. This is not correct, however. The $6.5m was recovered as the "price" of both the land and the release of the Westpac Bank guarantee. The bank must account to the second mortgagee on the basis that the amount realised for the land was $6.5m because that is the course they elected to take at settlement, and because there is no other basis for apportionment open on the evidence which ensures there is no failure to account in full to the second mortgagee.

Conclusions on the plaintiffs' claims

222 Returning then to the issues which I indicated I was required to determine, my conclusions are as follows:

[122]

[1] Irani v St George Bank Ltd [2004] VSC 260.

[2] Ibid [35].

[3] Ibid [37].

[4] Ibid [70].

[5] Ibid [74].

[6] This is one of many relevant documents in evidence as part of tendered witness statements, in particular P2 and P5.

[7] Pendlebury v Colonial Mutual Life Assurance Society Ltd [1912] HCA 9; (1912) 13 CLR 676; Forsyth v Blundell [1973] HCA 20; (1973) 129 CLR 477.

[8] Expo International Pty Ltd (in liq) v Chant [1979] 2 NSWLR 820.

[9] Williams v Frayne [1937] HCA 16; (1937) 58 CLR 710, 738; Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295.

[10] Forsyth v Blundell [1973] HCA 20; (1973) 129 CLR 477, 499.

[11] The general law duty remains, as do other duties such as those provided for in ss 180 to 184 of the Corporations Act 2001 (Cth). But where a power of sale is in issue, attention is likely to now primarily focus upon s 420A: see Florgale Uniforms Pty Ltd v Orders [2004] VSC 65, [358] ("Florgale").

[12] Florgale Uniforms Pty Ltd v Orders [2004] VSC 65, [388]. The alternative view that s 420A creates an independent cause of action is suggested by Young CJ in Eq in Ultimate Property Group Pty Ltd v Lord [2004] NSWSC 114. Like Dodds-Streeton J in Florgale, I prefer Bryson J's analysis in GE Capital Australia v Davis [2002] NSWSC 1146.

[13] Florgale Uniforms Pty Ltd v Orders [2004] VSC 65, [405] quoting GE Capital Australia v Davis [2002] NSWSC 1146, [116].

[14] Florgale Uniforms Pty Ltd v Orders [2004] VSC 65, [410], [412].

[15] See Kyuss Express Pty Ltd v Sellers [2001] VSC 10; (2001) 37 ACSR 62.

[16] [1882] VicLawRp 33; (1882) 8 VLR (E) 254 ("Ross").

[17] (1876) 4 Ch D 802 ("Cooper & Allen's Contract").

[18] Ibid 814.

[19] Ibid 815.

[20] Ibid.

[21] Ibid.

[22] Ibid 818.

[23] Halfhide v Beaven [2003] NSWSC 1207, [44] (Barrett J).

[24] Ross v Victorian Permanent Property Investment & Building Society [1882] VicLawRp 33; (1882) 8 VLR (E) 254, 265.

[25] Ibid 266.

[26] Ibid 265.

[27] Ibid 266-267.

[28] Ibid 271.

[29] Ibid 272-273. Part of the passage said to be "thoroughly unsound" was that recently quoted and relied upon by Barrett J.

[30] Ibid 273.

[31] Ibid 276.

[32] (1977) 1 BPR 9570.

[33] (1993) V ConvR 54-478 ("Gesualdi").

[34] Ibid 65,592.

[35] Ibid 65,593.

[36] [2003] FCAFC 64.

[37] C Croft and J Johannsson, The Mortgagee's Power of Sale (2nd ed, 2004) [6.6].

[38] Butterworths, Halsbury's Laws of Australia (online), [295-7485].

[39] E I Sykes and S Walker, The Law of Securities: An Account of the Law Pertaining to Securities Over Real and Personal Property Under the Laws of Australian Jurisdictions (5th ed, 1993).

[40] In Commonwealth Bank of Australia v Duggan [2003] FCAFC 64 there are suggestions that it was argued that the Commonwealth Bank had had no choice but to agree to the apportionment as part of the "price" of a combined sale. It seems that that approach was rejected by the Court. It is not necessary for me to consider this issue here and I do not wish to be taken as endorsing the Federal Court's approach or conclusion on that issue.

[41] Transcript 6.

[42] Transcript 30.

[43] Transcript 94.

[44] Transcript 105-106.

[45] Transcript 465, 468, 481.

[46] Transcript 518.

[47] Transcript 622.

[48] Transcript 673.

[49] Transcript 163-164.

[50] The transcript incorrectly records this as "serious he looked at".

[51] Exhibit D22.

Irani v St George Bank Limited

At a glance

Court

Decision date

Before

Source

Judgment (122 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (3)