JOVANOVIC & ORS v COMMONWEALTH BANK OF AUSTRALIA No. SCCIV-03-802 [2004] SASC 61

JOVANOVIC & ORS v COMMONWEALTH BANK OF AUSTRALIA No. SCCIV-03-802 [2004] SASC 61 - SASC 2004 case summary — Zoe

[57]

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

...

4.0 Options

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

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

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

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

4.1 Option 1

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

4.2 Option 2

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

4.3 Option 3

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

- rent for usage of the chattels; and

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

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

4.0 Recommendation

...

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

[90]

The duty of a mortgagee exercising a power of sale has been formulated sometimes as a duty to exercise the power in good faith, sometimes as a duty to take reasonable precautions to obtain a proper price. The divergent strands of authority were referred to in Forsyth v. Blundell and in Australia and New Zealand Banking Group Ltd. v. Bangadilly Pastoral Co. Pty Ltd. In both cases it was found unnecessary to decide between the formulations.

...

In Queensland, whence the present appeal has come, the legislature has intervened by enacting s. 85(1) of the Property Law Act 1974 (Q.):

It is the duty of a mortgagee, in the exercise after the commencement of this Act of a power of sale conferred by the instrument of mortgage or by this or any other Act, to take reasonable care to ensure that the property is sold at the market value."

The balance of opinion in this Court accepts that a duty to take reasonable precautions to obtain a proper price imposes a more onerous duty upon a mortgagee than a duty to act in good faith, the duty to act in good faith requiring the mortgagee to act without fraud and without wilfully or recklessly sacrificing the interests of the mortgagor but stopping short of exposing the mortgagee to liability for mere negligence or carelessness (see Forsyth v Blundell, per Walsh J. (94) and Mason J. (95); Pendlebury v. Colonial Mutual Life Assurance Society Ltd. (96).) Menzies J. expressed a dissenting view in Forsyth v. Blundell when he said (97): "To take reasonable precautions to obtain a proper price is but a part of the duty to act in good faith" though his Honour immediately declared the duty to fall short of the standard which the mortgagee, as a shrewd property owner, would be likely to adopt if the property were his own.

It follows that the statutory duty, which appears to reflect some of their Lordships' language in Cuckmere Brick, is more onerous than a duty to act in good faith. If a breach of the statutory duty is established, as Connolly J. found and as the Full Court affirmed, it is unnecessary to define the limits of the duty to act in good faith or to determine whether the mortgagee's duty would be so limited if it were not for the statute. The respondent mortgagor sued and recovered a judgment upon a statutory cause of action, and the equitable obligation of the appellant mortgagee was not in issue. The extent of the statutory duty is to be ascertained from the terms in which it is expressed, aided by a consideration of those cases in which the same class of conduct as that complained of in the present case has been relied on to sheet home liability to the mortgagee.

[152]

91 In exercising its power of sale, the Bank owed equitable duties to Fortson and the Jovanovics. The Judge defined these duties as a duty to act in good faith, and a duty not to act with calculated indifference or reckless disregard of the rights of Fortson and the Jovanovics. There is authority that there is but one duty, namely a duty to act in good faith (Kennedy v De Trafford [1897] UKLawRpAC 13; [1897] AC 180), and that as part of that duty the Bank must not act with calculated indifference or reckless disregard of the rights of Fortson. For convenience, I will refer to one duty being the duty to act in good faith. There is no doubt that in exercising its power of sale the Bank owed such a duty to Fortson (Pendlebury v Colonial Mutual Life Assurance Society Ltd [1912] HCA 9; (1912) 13 CLR 676; Citicorp Australia Ltd v McLoughney & Anor (1983) 35 SASR 375). The extent to which the equitable duty owed by a mortgagee to a mortgagor involves a duty to take reasonable steps to obtain the best possible price for the property has been the subject of considerable debate in the authorities. In Commercial and General Acceptance Ltd v Nixon (1982) 152 CLR 491, Gibbs CJ said the authorities were irreconcilable (at 494). However, it is unnecessary for me to examine that issue in this case, because it was common ground that the Bank owed the duty in s 420A of the Corporations Law, and I think it is right to say that the statutory duty is at least as extensive as the broadest formulation of the equitable duty. Although the issue was not the subject of submissions to this Court, it seems that the equitable duty the Bank owed to the Jovanovics as guarantors was more onerous than the equitable duty it owed to Fortson (Buckeridge v Mercantile Credits Ltd [1981] HCA 62; (1981) 147 CLR 654 per Brennan J (as he then was) at 675). However, the equitable duty owed by the Bank to the Jovanovics as guarantors is no more onerous than the duty in s 420A (Westpac Banking Corporation v Kingsland (1991) 26 NSWLR 700) and as it is common ground that the Bank owed the duty in s 420A, it is unnecessary to discuss this issue any further.

[165]

101 As I have already said, the Judge found that there was great uncertainty as to the legal position of the persons who are entitled to own or manage the business of the hotel, and that that issue would not be determined until litigation between the Jovanovics and the Govedaricas is completed. The Judge was unable to make a finding on the balance of probabilities that the hotel business was owned by Fortson or the Jovanovics. It is true that he did not make a finding that the hotel business was owned by some other party, but the onus was on Fortson to establish that it owned the hotel business either in law and equity, or at least in law. I do not think the Judge erred in not being satisfied of this fact. The Judge found that from 1995 onwards the Jovanovics and the Govedaricas engaged in a devious web that perhaps could also be viewed as fraudulent conduct to defeat their creditors and for the purpose of retaining the ownership of The Plaza Hotel. That finding was amply justified on the evidence. The lease agreement between Roclin and Mr Jovanovic executed on 12 January 1995 was "a sham" and was entered into for the purpose of possibly defeating the creditors of Roclin. The secret agreement between the Jovanovics and the Govedaricas dated 15 November 1995 was not disclosed to the Bank by the Jovanovics until some considerable time after it had been entered into. It was obviously an important and material fact, and the Judge noted Ms Barker's evidence that had the Bank known of the agreement, it may not have made the loan in the terms it did to Fortson. The contract whereby Fortson purchased the property from Roclin in November 1995 evolved as a further attempt by the Govedaricas to defeat and defraud their creditors. The scope of the exclusion in relation to tenants' goods and chattels is not entirely clear. The agreement between Fortson and MRM International Pty Ltd dated 8 July was a sham which was drawn up for the purpose of representing to a financier that the tenancy was occupied. After November 1995 the Govedaricas and, in particular, Mr Slavko Govedarica, continued to conduct the hotel business as they had done before that date. This continued and was the position in July 1997. As I understand it, during this period, the Jovanovics conducted the newsagency business and played no part in the management or operation of the hotel business. The accountants, Ernst and Young, engaged by the Bank at the time to clarify who held the operating rights for the hotel business said that until they received certain documentation they were unable to state with certainty who held the operating rights for the hotel business. When one adds to these matters the fact that the expert accountancy evidence called at trial did not provide a secure basis for a positive finding, I do not think the Judge erred in not being satisfied that Fortson owned the hotel business.

[183]

"My view is that the requirement imposed on the controller by subsection 420A(1) takes the place of, or it may be operates cumulatively to the obligation otherwise existing with the general law of a controller exercising power of sale in respect of property of a corporation. In so doing the section enhances the duty of the controller and the protection afforded to the corporation. This is achieved, and the apparent legislative intention is fulfilled without altering the remedies available to the corporation for breach of obligation in exercising the power of sale, and without altering the means available for obtaining remedies. Where real property subject to a mortgage has been sold and the mortgagor succeeds in establishing that there has been a sacrifice of the mortgagor's interest in the exercise of the power of sale the mortgagor's remedy is to be credited compensation when accounts are taken of the mortgage debt. Subsection 420A(1) alters this scheme by inserting a more stringent rule, but does not otherwise change the scheme.

Section 420A can readily be given full and effectual operation without resorting to any implication of an intention to confer a remedy in damages on corporations which mortgage their property, still less to confer such a remedy on guarantors of the debts of those corporations; section 420A can readily take a place in the existing remedies without supposing that it was intended to confer or that it does confer any rights at all upon guarantors.

...

In my view there is nothing to indicate that it was the intention of the legislature that subsection 420A(1) should confer any right or remedy on guarantors or other persons who involve themselves contractually in consequences of the exercise of the power of sale, but the guarantor is entitled to rely on the availability to the mortgagor of a remedy, whether the remedy was that previously established by Pendlebury v Colonial Mutual Life Assurance Society Ltd [1912] HCA 9; (1912) 13 CLR 676 or is now the remedy available to the mortgagor on breach of the duty declared by subsection 420A(1); the guarantor is entitled to have an equitable remedy on the basis that the mortgage accounts are taken on whatever may be the principle truly applicable to taking mortgage accounts. In my opinion the equitable remedies which in an earlier state of the law were available to a guarantor where there was a breach of the mortgagee's duty to a mortgagor corporation are now to be tested by reference to whether there was a breach of the duty stated in subsection 420A(1)."

At a glance

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Decision date

Before

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Judgment (221 paragraphs)

JOVANOVIC & ORS v COMMONWEALTH BANK OF AUSTRALIA No. SCCIV-03-802 [2004] SASC 61 (3 March 2004)

Parties

Cases Cited (9)