BETWEEN : MACEDONIAN SOCIETY OF WESTERN AUSTRALIA (INC) (Receiver and Manager appointed)

Interlocutory injunction application - Mortgagee's power of sale - Allegation of lack of bona fides in exercise of power of sale - Application of general rule in Inglis' case - Injunction refused

ANZ Banking Group Ltd v Bangadilly Pastoral Co Pty Ltd [1978] HCA 21; (1978) 139 CLR 195

BHP v Bell Resources (1984) 8 ACLR 609

Carver v Westral [2002] NSWSC 431

Charmac Investments Pty Ltd, unreported; FCt SCt of Tas; No T68 of 1990 Fed No 645; 12 November 1990

Commercial and General Acceptance Ltd v Nixon [1981] HCA 70; (1981) 152 CLR 491

Cook v Northoak Holdings Pty Ltd, unreported; FCt of WA; Library No 980220; 1 May 1998

Custom Credit Corp Ltd v Whitehall Holdings Pty Ltd & Ors, unreported; SCt of WA; Library No 920231; 7 April 1992

Duke v Robson (1973) 1 All ER 481

Eltran Pty Ltd v Westpac Banking Corp (1988) 32 FCR 195

Gattuso v Geelong Building Society (1989) Aust Torts Reports 69,281

Henry Roach (Petroleum) Pty Ltd v Credit House (Vic) Pty Ltd [1976] VicRp 26; (1976) VR 309

Newhart Development Ltd v Co-op Commercial Bank Ltd (1978) 1 QB 814

Shercliff v Engadine Acceptance Corp Pty Ltd (1978) 1 NSWR 729

Southern Goldfields Ltd v General Credits Ltd (1991) 4 WAR 380

Sunlife Properties Pty Ltd v Chellaston Pty Ltd [1993] FCA 206; (1993) 10 ACSR 476

1 BARKER J: In CIV 1080 of 2003 the plaintiff (the Society (Receiver and Manager appointed)) by motion dated 24 January 2003 seeks an interim injunction restraining the defendant (the Bank) from:

"(a) completing the agreement of 20 November 2002 for the sale of 3 Victoria Road, Westminster ('the Westminster property') to the Roman Catholic Archbishop of Perth for $1,730,000;

(b) selling the premises known as 3 Victoria Road, Westminster."

2 In CIV 1086 the plaintiff (Mr Cvetkoski) by chamber summons for inter partes interim injunction seeks similar relief.

3 Each of the Society's (Receiver and Manager appointed) and Mr Cvetkoski's application came before Miller J on 24 January and was adjourned to general chambers on 29 January 2003 before me. The reason for that adjournment appears to have been that I was then due to deliver judgment on the application of the third plaintiff, the Macedonian Orthodox Church Community "St Nikola" Perth Western Australia Inc ("the Church"), in CIV 2179 of 1999, in which the Church had sought to extend a caveat to protect its claimed interest in the Westminster property and thereby effectively to restrain the Bank from completing the sale of the property referred to in the claimed relief, as mortgagee in possession. For the purposes of these reasons I refer to the reasons for decision in CIV 2179 of 1999 delivered by me on 29 January 2003. Those reasons generally set out some material background facts relating to matters now before me.

4 When the two applications presently before me were called on for hearing on 29 January counsel (Mr Marshall) appeared for Mr Cvetkoski on his application and counsel (Mr Bates) appeared for the Bank on each application. At that stage, the ability of Mr Marshall to appear for the Society with a receiver and manager appointed by the Bank was in question. Mr Marshall submitted that an interim injunction might be granted so that full argument on the applications could be made and the consent of the receiver and manager to the Society's proposed action be obtained. In the event, I adjourned the applications for hearing on 31 January 2003 and made directions concerning the filing of further written submissions and affidavits in CIV 1086 of 2003. On 31 January I heard further oral submissions in support of the applications and in opposition to the applications and reserved my decision.

5 At the hearing of the applications on 31 January, in relation to the application in CIV 1080 of 2003, Mr Bates effectively conceded on behalf of the Bank that in circumstances such as these, where the receiver and manager had been appointed by the Bank itself, the directors of the Society could resolve to take action against the Bank in the name of the Society without the consent of the receiver and manager: see, for example, Re Geneva Finance Ltd; Quigley (Receiver and Manager Appointed) v Cooke (1992) 7 WAR 496 per Owen J; Deangrove Pty Ltd (Receivers and Managers Appointed) v Commonwealth Bank of Australia [2001] FCA 173; (2001) 19 ACLC 495 per Sackville J.

6 Thus, in the determination of the applications before me, even though the plaintiff in CIV 1080 of 2003 is described as the Society (Receiver and Manager appointed), I proceeded to hear the application in CIV 1086 of 2003 on the basis that the Society on its own would be entitled to institute proceedings and make application of the type before me, as well as on the basis of Mr Cvetkoski's individual application.

7 The Bank challenged the standing of Mr Cvetkoski to maintain an application for interlocutory injunction in CIV 1086 of 2003, as well as his claimed entitlement to bring the application on behalf of the Society. As to his individual right to maintain the proceedings in CIV 1086 of 2003, counsel for Mr Cvetkoski relied on the decision by I W v The City of Perth & Ors [1997] HCA 30; (1997) 191 CLR 1. It is not immediately apparent to me that, in proceedings in which it is said that a mortgagee is not entitled to exercise a power of sale under a mortgage in a particular way, an individual who is not a party to the mortgage instrument should be able to maintain the proceedings. Nonetheless, on the factual material before me in affidavit form, there is perhaps sufficient to suggest that Mr Cvestkoski is at least arguably authorised by the Society to commence proceedings on the part of the Society. Without finally determining the question of standing, I have assumed that Mr Cvetkoski has sufficient interest as President of the Society to maintain the application before me.

8 The Society, through Mr Cvetkoski, recognises that the Bank holds a mortgage over the Westminster property, that the Society is in default under the terms of that mortgage, that the Bank is entitled to be in possession of the Westminster property (as it is) and that the Bank is entitled to exercise its power of sale under the mortgage. What Mr Cvetkoski, on behalf of the Society argues on the applications before me, is that in the exercise of its power of sale the Bank proposes to sell the Westminster property to the Roman Catholic Archbishop of Perth for a sum said to be grossly below the market value of the Westminster property. In that regard, the evidence before me, which is not disputed, shows that the Bank has entered into a sale as mortgagee in possession with the Roman Catholic Archbishop of Perth for a sale price of $1,730,000. Mr Cvetkoski refers to valuation evidence filed on behalf of the plaintiffs in each action, suggesting that the true market value of the property is in the vicinity of $2,200,000. On the basis of this evidence it is contended on behalf of the plaintiffs in each action that the sum of $1,730,000 is well below the value of the land and that the Bank is thereby not acting in good faith and is acting with a wilful and reckless disregard in the interest of the plaintiff in breach of the duty that it owes to the plaintiff for the fiduciary nature and in tort pursuant to the mortgage.

9 In Cachalot Nominees Pty Ltd v Prime Nominees Pty Ltd [1984] WAR 380 at 393, Smith J, having particular regard to Forsyth v Blundell [1973] HCA 20; (1973) 129 CLR 477, and other relevant authorities, stated the obligation of a mortgagee pursuant to a mortgagee's power of sale in the following terms:

"As a Judge at first instance, until the High Court otherwise decides, I think I am bound to apply to this case, the principles enunciated in Pendlebury v Colonial Mutual Life Assurance Society Ltd illuminated as they are by the observations of Walsh J in Blundell's case and Jacobs J in Bangadilly Pastoral Co case: see Public Transport Commission (NSW) v J Murray-More (NSW) Pty Ltd [1975] HCA 28; (1975) 132 CLR 336 at 341. Accordingly, there being no suggestion that Dempster was guilty of fraud, my task is to ascertain whether Dempster wilfully or recklessly sacrificed the interests of Prime; the test is not to be equated with any common law concept of negligence such as want of reasonable care - it is wilful negligence or default in the sense of the earlier authorities I have discussed. If Dempster acted bona fide and, certainly, if he took reasonable precautions to obtain a proper price, Prime's claim must fail even if the price obtained was below market value and even if, by waiting, a better price could have been obtained: cf Expo International Pty Ltd (In Liq) v Chant (1979) 4 ACLR 679, Needham J at 690."

10 The Bank, in opposition to the two applications, says that it has satisfied the test stated by Smith J in Cachalot. To that end, the Bank relies on a number of affidavits including those of Maxine Blount sworn 28 January 2003, Maxine Blount sworn 30 January 2003, Scott Damien Robinson sworn 30 January 2003, Matthew George Zuvela sworn 30 January 2003, Anastasios Goudas sworn 30 January 2003, Dennis John Volk sworn 30 January 2003 and John Bartele Williams sworn 30 January 2003, to show the detailed advice acted on by the Bank and the steps taken by way of prior attempts to sell the Westminster property prior to the conclusion of the conditional agreement with the Roman Catholic Archbishop of Perth referred to above.

11 In light of the affidavit of evidence, the Bank submits that the plaintiffs in the two applications are unable to establish that there is a serious issue to be tried for the purposes of the grant of an interlocutory injunction. In my view, if there is an issue to be tried, it certainly is at the very weak end of the scale of serious issues. On the material before me, there is much to be said in support of the Bank's contention that it has not acted wilfully or recklessly so as to sacrifice the Society's interests as mortgagor.

12 The Bank further contends that Mr Cvetkoski, as representative of the Society, should not be granted any relief in any event because of delay in bringing the applications for interlocutory injunction and for not having clean hands. So far as delay is concerned, the Bank says that the Society and its members have known about the proposed sale by the Bank to the Roman Catholic Archbishop of Perth since November 2002 when it was discussed at a directions hearing in CIV 2179 of 1999, in which proceedings the Society was then represented, and were aware of the considerations that had delayed in bringing this application until 24 January 2003, only a matter of days before the settlement date proposed under the offer and acceptance. That is not disputed. In response to that contention, Mr Marshall, on behalf of Mr Cvetkoski, says, however, that there was no prior need for the Society to institute the present proceedings and make the present application while the caveat previously maintained by the Church was affected to prevent any sale by the Bank. Only when it appeared that there was a chance that the Church's caveat would not be extended did it appear to Mr Cvetkoski and the Society that they might need to take action. There is, in my view, reason in this explanation and to that extent at least the undoubted delay in commencing action has been explained.

13 So far as the unclean hands argument is concerned, it is well established that a fundamental equitable principle or maxim is that "he who comes into equity must come with clean hands": see Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (4th ed) par [3-055]. In other words, where a plaintiff whose conduct has been improper in a transaction seeks relief in equity, such relief will be refused, at least where it has some immediate necessary relation to the equity sued for: Meyers v Casey [1913] HCA 50; (1913) 17 CLR 90.

14 Here, it is said on behalf of the Bank that the Society stands accused by the Church in CIV 2179 of 1999 of having secured the registration of the Westminster property in its name by fraud and that the Court has found that there is a serious question to be tried in that respect. It is then said that if the Church's contention is correct, then it and not the Society is the mortgagor and the Society itself should be considered to have no standing. In the present proceedings the plaintiff asserts that it has standing to resist the Bank's proposed mortgagee sale. In my view, it does not follow that, just because the Society's registration as proprietor of the Westminster property is under challenge, that it may not seek equitable relief if the circumstances justify the granting of such relief. That issue has not finally been determined. While it might be said that there is some inconsistency between Mr Cvetkoski swearing an affidavit in CIV 2179 of 1999 in support of the Church's application for extension of caveat on the basis that the Society's registration was procured by fraud, and the present application of Mr Cvetkoski, effectively on behalf of the Society, to prevent the Bank exercising its power of sale over the mortgage, I do not consider that this alone should prevent the granting of equitable relief if it should otherwise be considered available.

15 The Bank further submits that interlocutory relief should not be granted in this case, as the undertaking as to damages offered by Mr Cvetkoski is unsatisfactory. Affidavit evidence before me discloses that Mr Cvetkoski may not be able to satisfy any award of damages made against him pursuant to the undertaking. On behalf of Mr Cvetkoski, it is said that impecuniosity should not be a factor in discounting the worth of the undertaking in a case such as this and reliance is placed on Eltran Pty Ltd v Westpac Banking Corporation (1998) 32 FCR 195 and, in particular, Custom Credit Corporation Ltd v Whitehall Holdings Pty Ltd, unreported; SCt of WA; Library No 920231; 7 April 1992 at pp 23 - 25. Whilst this proposition may be taken from the Custom Credit Corporation decision, in particular, the facts of that case help to explain the decision arrived at.

16 The Bank further submits that the plaintiffs should not be entitled to interlocutory relief in a case such as this, where there has been no payment into Court of the sum of $1,731,446.30, or any sum, on account of the current outstanding debt under the mortgage and receiver's costs, which are referred to in the affidavit of Maxine Blount sworn 28 January 2003. In that respect, the Bank relies on the "general rule" described by Walsh J in Inglis v Commonwealth Trading Bank of Australia [1972] HCA 74; (1972) 126 CLR 161 at 164; confirmed by Barwick CJ at 126 CLR, 168 - 169. I recently discussed this general rule and its application in Linnpark Investments Pty Ltd v Macquarie Property Development Finance Ltd [2002] WASC 272. Walsh J said that:

"A general rule has long been established, in relation to applications to restrain the exercise by a mortgagee if power is given by a mortgage and in particular, the exercise of a power of sale, but such an injunction would not be granted unless the amount of the mortgage debt, if this be not in dispute, be paid or unless, if the amount be disputed, the amount claimed by the mortgagee be paid into court."

"In my opinion, the authorities which I have been able to examine establish that for the purposes of the application of the general rule to which I have referred, nothing short of actual payment is regarded as sufficient to extinguish a mortgage debt. If the debt has not been actually paid, the Court will not, at any rate as a general rule, interfere to deprive the mortgagee of the benefit of his security, except upon terms that an equivalent safeguard is provided to him, by means of the plaintiff bringing in an amount sufficient to meet what is claimed by the mortgagee to be due."

17 The Bank says, as is the case, that neither Mr Cvetkoski nor the Society has made any payment in this case, or provided any alternative form of security in respect of the undisputed debt.

18 It is submitted on behalf of Mr Cvetkoski, however, that where a mortgagor claims that a power of sale under the mortgage is being exercised in breach of the equitable duty described above (and there is found to be a serious issue to be tried), there is no requirement for a payment in. In support of that submission, Mr Marshall made reference to a number of texts and an article on the topic. For example, in Fisher and Lightwood's Law of Mortgage (Australian Edition, 1995), at [20.30], it is said:

"Payment into court is generally required where the mortgagor seeks to restrain the mortgagee from selling prior to any contract for sale having been made, where the mortgagee is acting properly; but it seems that the mortgagor need not offer to redeem and therefore need not pay into court where it is alleged that the power of sale is not exercisable. Examples of this are where the validity of the mortgage is in issue, or there is a question whether or not there has been a breach or the notice was effective (see Allfox Building Pty Ltd v Bank of Melbourne (1992) NSW Conv R 55-634; (1992) 66 ALJ 863), or where the power of sale is being used for an improper motive: see Milton Park Country Club Pty Ltd v Yasuda Trust Australia Ltd (1991) ACL Rep R 295 NSW 3. See also United Builders Pty Ltd v Commercial Banking Co Sydney Ltd [1975] QdR 357."

19 Further, in Croft, Mortgagee's Power of Sale (1980) at [198], it is stated that:

"Where the mortgagee is not exercising his powers bona fide a mortgagor need not offer to redeem or bring money into court: Harvey v McWatters (1949) 49 SR (NSW) 173; Murad v National Provincial Bank (1966) 198 Estates Gazette 117; Inglis v Commonwealth Trading Bank of Australia, supra, at 166, Walsh J; and Henry Roach (Petroleum) Pty Ltd v Credit House (Vic) Pty Ltd [1976] VicRp 26; [1976] VR 309 at 319, 320; nor where the mortgagor's right to redeem this denial together; Lloyd v Vickery (1873) 12 SCR (NSW) v Q (4 at 54), Hargreave J."

20 Counsel also relied on a brief note by Mr P Butt in 63 ALJ at 696 where it is stated:

"Normally, a court will not grant an injunction to restrain a sale by a mortgagee unless the mortgagor "offers to redeem" the mortgage. ... This long-settled principle was authoritatively restated in the High Court in Inglis v Commonwealth Trading Bank of Australia ... The qualification 'normally', is added to the statement of the rule, because in recent times a number of exceptions have begun to emerge. One exception - no doubt warranted as a matter of morality - is that the mortgagor is not required to 'offer to redeem' where the mortgagor is challenging the very existence of the power to sell or the propriety of a manner of exercise of the power (see, for example, Harvey v McWatters ...; Brutan Investments Pty Ltd v Underwriting and Insurance Ltd (1980) 39 ACTR 47 at 56)."

21 In my view, these statements, or at least some of them, tend to overstate the position. The decision of Sugerman J in Harvey v McWatters (1949) 49 SR (NSW) 173 is the case primarily relied upon for the suggestion that, where a mortgagor's challenge is based on the bona fides of the exercise of the power of sale under a mortgage, an application for an interlocutory injunction might be granted without payment in. However, in my view, a close examination of that decision does not support this view. At 49 SR (NSW) at 176, Sugerman J described "the ordinary case" as "the case in which there is no dispute that the power of sale is presently exercisable but there is a dispute about the amount due or a challenge to the mode in which the mortgagee proposes to exercise this power." In such cases there should be a payment of the undisputed amount or a payment in of the amounts said to be due. Sugerman J then drew a distinction between that type of case and a circumstance where the real dispute is "whether the power of sale is presently exercisable at all". Accordingly, at 178, Sugerman J summarised the position as follows:

"There is a distinction between what I have called the ordinary case and the case in which the existence of the power of sale or the question whether it is exercisable at all is in question. The present case is of the second class. What is called the ordinary rule applies to cases of the first class, and to those cases only. This flows from the principle and reasoning on which that rule depends. Cases of the second class are, as regards interlocutory applications, governed by a rule of similar type. But it is a rule resting on different principles and reasoning. These permit of a greater flexibility. They do not require that in every case the whole amount claimed or sworn to by the mortgagee was seen from the terms of the instrument to be the greatest amount that could be due should be paid in. The terms may be moulded so as to require payment in of so much only as suffices to give adequate protection to the mortgagee."

22 In my opinion, nothing said by Sugerman J in Harvey v McWatters stands for the broader propositions referred to in some of the passages relied upon by counsel for Mr Cvetkoski in this case. In particular, in my view, there is no warrant for the proposition that, whenever a mortgagee challenges the bona fide of the mortgagor to exercise the power of sale in a particular way or a particular circumstance, no payment in is required in order to satisfy the equitable maxim that to receive equity one must do equity. Indeed, in my view, the true position is that set out in Meagher, Gummow and Lehane Equity: Doctrines and Remedies (4th ed) (supra) at [3 - 080], namely, that a mortgagor in default cannot obtain an injunction to restrain his mortgagee's breach of duty unless he either repays all principal and interest claimed - not admittedly owing - to the mortgagee or else pays them into court. The learned authors observe, in my view rightly:

"This is a rule which can, obviously, operate somewhat harshly if, for example, the mortgagee is exercising his power of sale in an improper manner. Yet, so far, the rule has been applied almost inflexibly: a mortgagor in default who is unable to repay the moneys secured is almost invariably denied equitable relief and relegated to his pecuniary claim [footnote omitted]."

23 It should be noted, however, that, while Sugerman J in Harvey v McWatters described "the ordinary case" as the case in which there is no dispute that the power of sale is presently exercisable, but there is a dispute about the amount due or a challenge to the mode in which the mortgagee proposes to exercise this power, his Honour, at 175 also suggested that the clearest exposition of the subject was that in Fisher and Lightwood, Law of Mortgages (7th ed) page 409. In an article by Justice P W Young "A Mortgagor's Right to Approach the Court" (1993) 1 APLJ 61, the author points out that the relevant account of the rule in the 7th edition of Fisher and Lightwood is in the following terms:

"The mortgagee will not be restrained from exercising his powers of sale because the mortgagor has commenced a redemption action [footnote omitted] or because he objects to the arrangements for the sale [footnote omitted] or because the amount due is in dispute [footnote omitted]. Where it was alleged that a breach of trust had been committed by the mortgagee, an interim injunction was granted [footnote omitted]. Although, where the mortgagor is a company the presentation of a winding-up petition is not in general a ground for stopping a sale, an interim injunction may be granted in special circumstances [footnote omitted] ... "

24 On the one hand, it might be said that the plaintiffs in the instant case are merely objecting to the arrangements for the sale. On the other hand, the complaint may be said to be more than that, as it appears to allege a "breach of trust", at least in the sense of acting without good faith in the manner described in Forsyth v Blundell and Cachalot.

25 There is no doubt that some authorities suggest that an exception to the ordinary rule includes a case where the mortgagee is improperly exercising the power of sale or is exercising it harshly and oppressively. However, I am not sure this is correct. One authority cited by the texts in support of such an exception is Allfox Building Pty Ltd v Bank of Melbourne Ltd [1992] NSW Conv R 55-634.

26 In Allfox, Powell J stated the principles of law which he considered relevant in cases such as the present. His Honour considered the general rule is that a mortgagee "will not be restrained from exercising a power of sale merely because the amount due is in dispute, or because the mortgagor has commenced a redemption action, or because the mortgagor objects to the manner in which a sale has been, or is being, arranged; in such cases a mortgagee will be restrained only if the mortgagor pays the amount claimed into court, unless, on the terms of the relevant mortgage, the claim is clearly excessive". His Honour relied, in particular, on Harvey v McWatters and Inglis' case (supra) in support of this proposition.

27 Powell J then addressed the "apparent exceptions" to the general rule and considered they are limited to cases in which either:

(b) the present availability of the power of sale is in issue, because either:

(i) the alleged breach of covenant which is relied upon by the mortgagee is challenged; or

(ii) the occurrence of some other pre-condition, whether statutory, or otherwise, to the arising of the power of sale, is in issue.

"In a case in which a mortgagor, or one who appears to be a mortgagor, seeks to challenge a threatened, or actual sale by his mortgagee, or apparent mortgagee, one's first task is to determine whether or not the challenge is based upon the non-existence, or lack of present availability, of a power of sale or upon some other ground."

29 His Honour then added that, if the challenge is based upon the non-existence, or lack of present availability, of the power of sale, then what is invoked is the auxiliary jurisdiction of Equity - an injunction to prevent interference with one's legal rights - in which event the plaintiff is not to be required as a condition of obtained relief "to do equity", that is to say, to bring money into court or to offer to redeem. However, if the challenge is not based upon such a ground, but rather is based upon the allegedly improper exercise of the relevant mortgagee of the duties which Equity imposes on him in relation to the exercise of a vested and presently exercisable power of sale, this invokes the exclusive jurisdiction of Equity, in which event the relevant plaintiff is required "to do equity", that is, to bring money into court and to seek redemption as a condition of obtaining relief.

30 In my view, the proposition stated by Powell J in Allfox governs the application before me.

31 Thus, in my view, properly understood, the allegation, even if there be a serious issue to be tried in respect of it, that the mortgagee is improperly exercising the duties imposed on him by Equity in respect of a presently exercisable power of sale, as in this case, requires the plaintiffs to bring money into court in order to seek redemption as a condition of obtaining an interlocutory injunction pending suit.

32 In these circumstances, there being no payment in, and there being no other circumstances put forward to support the granting of an interlocutory injunction in a case such as this, the Court should decline to grant the interlocutory relief sought.

33 To put the matter as clearly as one can, this is not a case where the existence of the power of sale of the Bank is in question, nor is it a case where the question whether it is exercisable at all is in question. The Bank plainly is entitled to exercise the power of sale under the mortgage by reason of the admitted default of the Society under the mortgage. Accordingly, even if one assumes there is a serious issue to be tried on the merits, no interlocutory relief should be granted unless there is a payment in. As no such payment in has been made or proposed, or any other form of security designed to give adequate protection to the Bank has been offered, I would decline to grant the interlocutory injunction sought by the applicants.

34 For these reasons I would refuse the applications for interlocutory injunction in CIV 1080 of 2003 and 1086 of 2003.