Pearl Beach Property Administration Pty Ltd v Wisewoulds Nominees Ltd [2014] VSC 113

2 The application was brought on an urgent basis with very limited material pursuant to R 4.08 of the Supreme Court (General Civil Procedure) Rules 2005. Pearl Beach gave an undertaking, through its counsel, to commence an appropriate proceeding in this court regardless of the outcome of this application.

3 I am satisfied that the application was informally drawn to the attention of Wisewoulds' solicitors. I was informed from the bar table that the Pearl Beach's solicitor informed Wisewoulds' solicitor on the evening of 20 March 2014 that the application would be made and made further attempts to contact that solicitor on the morning of the hearing. Wisewoulds' solicitor stated that the application was opposed. At my invitation, further contact was made by telephone with that solicitor after the hearing had commenced and I was informed that Wisewoulds was aware of the application, remained opposed to it, but would not be attending.

4 Pearl Beach is the registered proprietor of the land situated at 329 Point Nepean Road, Dromana. The land was purchased by it as an investment or development opportunity. Pearl Beach obtained a mortgage from Wisewoulds securing an initial advance of $3.2 million. Pearl Beach is in default in the repayment of that loan and Wisewoulds obtained a judgment for possession of the property and is now in possession. A notice to pay under s 77 of the Transfer of Land Act 1958 was served. Once Wisewoulds took possession of the property, a mortgagee's auction was scheduled for 12.00 noon on 21 March 2014.

5 The sole director of the Pearl Beach, Jean Arvanitis has deposed that he was informed by the solicitors for Wisewoulds that a valuation of the secured land of approximately $4.8 million had been obtained. That valuation was not before the court.

6 Mr Arvanitis deposed in his affidavit that the balance currently due to Wisewoulds is approximately $3.7 million. Further, there is a registered second mortgage by which approximately $520,000 is secured. The total amount secured by registered mortgages is therefore approximately $4.22 million. There are two caveats on the title. The first of those caveats, lodged on 8 November 2013, protects a charge in favour of a firm of solicitors. Mr Arvanitis deposes that the sum secured is approximately $70,000. The second caveat, lodged 21 March 2014 by Pearl Beach's instructing solicitors, claims an interest as mortgagee for Roman Polidoro. Mr Arvanitis deposes that the sum secured by this unregistered mortgage is approximately $800,000. The total of the identified debt secured against the land is therefore $5.09 million.

7 On 20 March 2014, the day before the auction, Pearl Beach accepted from Eliad Pty Ltd an offer to purchase the Dromana property for $5 million. Mr Arvanitis caused Pearl Beach to enter into a contract of sale with Eliad that provided for a deposit of $500,0000 payable by 20 April 2014, of which $250,000 has been paid. That deposit is held in the trust account of the Pearl Beach's solicitors. Mr Arvanitis deposes that the negotiations for this contract have taken 'a few weeks'. There was no evidence of any direct dealings between Wisewoulds and Eliad.

8 Roman Polidoro is the sole director of Eliad. An affidavit from Mr Polidoro was read on the application. He deposed to two matters. First, Mr Polidoro stated that he was aware that the Vendor's s 32 statement in the contract did not contain all the relevant certificates but that this had not, and would not, affect Eliad's commitment to purchase the property, and that fact would not be used to withdraw from the contract prior to settlement. Secondly, Mr Polidoro asserted that the contract was unconditional, not subject to finance, and that Eliad had the financial capacity to purchase the property for the agreed price. I do not regard Mr Polidoro's affidavit as making good that proposition. He simply states:

I have or control substantial assets which total in excess of $3 million with liabilities of approximately $1 million. This leaves an equity of approximately $2 million. I will cause the purchaser to fulfil its contractual obligations and will be able to raise finance to do so.

These assertions are not supported by any further or other evidence and have not been tested.

9 Further, by the contract the vendor warrants that it is in possession of the land and will at settlement be the holder of an unencumbered estate in fee simple in the land. Neither the contract nor the s 32 statement discloses that the vendor has been served with a notice to pay under s 77 of the Transfer of Land Act 1958, and is no longer in possession of the land.

10 Entry into a contract of sale of a security property by a mortgagor in these circumstances is unusual. I was informed by Pearl Beach's counsel that the entitlement of Wisewoulds to exercise its power of sale under the mortgage was not challenged. I was also informed that Eliad knew of the exercise by the mortgagee of its power of sale and of the forthcoming auction when it made its contract with Pearl Beach yet Eliad did not negotiate with Wisewoulds. The question of the mortgagor's entitlement to sell the property in these circumstances was not addressed in argument. I am not aware of any case in which a mortgagor's right to sell after the mortgagee has served a notice to pay, entered into possession, and scheduled an auction has been considered other that where the mortgagor acts with the consent of the mortgagee, and none was cited to me. The terms of the mortgage were not in evidence and I say no more about that question. In ordinary circumstances, any equity that Eliad might claim in the property by reason of this contract would be defeated on priorities should the mortgagee, in the valid exercise of its power of sale, enter into a contract of sale, whether at the auction or otherwise. That is why the common commercial practice is for a mortgagor to negotiate with the mortgagee for its consent to deal in the property in its own name, or to introduce its proposed purchaser to the mortgagee.

11 Mr Arvanitis states that on entering into the contract of sale, he instructed his solicitors to contact the solicitors for the first and second registered mortgagees seeking their consent to complete this contract. Wisewoulds, as registered first mortgagee, refused that consent and stated its intention to proceed with the proposed auction. However, the second mortgagee apparently consented, expressing a concern that at auction insufficient funds may be realised to satisfy the whole of the second mortgage debt. These communications have not been directly deposed to by Pearl Beach's solicitor and no letters, emails or diary notes have been exhibited, save for an email from the second registered mortgagee's solicitor stating his client's consent to the proposed sale. That email reveals that Wisewoulds may have declined to consent to the contract, preferring to go to auction, because it anticipates that a price higher than $5 million may be achieved, notwithstanding that the property has been marketed with a price range of $3.9 - $4.2 million.

12 The value range set out in the marketing of the property for auction was central to the Pearl Beach's assertions on this application. Mr Arvanitis exhibited to his affidavit a printout of a page from a real estate website advertising the auction. The material information that may be gleaned about the auction from this exhibit is as follows:

323-333 Point Nepean Road, Dromana

$3.9 - $4.2 million

Residential land

Blue chip

Mortgagee's auction

Will not be sold prior

Amazing investment or development opportunity on this prime real estate alongside the beach in Dromana. Overall site is 4,549 sqm. approx. and zoned residential 1 in a prime front row position with Port Phillip Bay views. Property comprises five adjoining titles to be sold together. Development permit exists for a 3 level luxury apartment complex.

13 The applicable principles on this application are identified by the High Court in Australian Broadcasting Corporation v O'Neill.[1] I summarise them as follows:

(a) The plaintiff must demonstrate a prima facie case. This requirement is to be understood as whether there is a serious question to be tried as to the plaintiff's entitlement to relief, not whether it is more probable than not that the plaintiff will succeed at trial. The sense in which the test is understood is that the plaintiff must prove, prima facie, a sufficient likelihood of success to justify, in the circumstances, the preservation of the status quo pending trial. In context, it must show that it has a putative legal or equitable right in respect of which final relief is sought which will justify the restraint sought. The requisite strength of the probability of ultimate success depends on the nature of the rights asserted and the practical consequences likely to flow from the interlocutory order sought.

(b) The injury which the plaintiff is likely to suffer must be one that damages will not provide an adequate remedy.

(c) The balance of convenience must favour the granting of an injunction. The balance of convenience requires a consideration of the relevant matters favouring or militating against the granting of an injunction and will necessarily involve a consideration of the strength of the plaintiff's claim assuming that a serious issue has been identified. In Victoria, this consideration is further clarified by the decision of the Court of Appeal in Bradto Pty Ltd v State of Victoria[2]. The court must, in determining whether to grant an interlocutory injunction, "take whichever course appears to carry the lower risk of injustice if it should turn out to have been wrong, in the sense of granting an injunction to a party who fails to establish his right at the trial, or in failing to grant an injunction to a party who succeeds at trial".[3]

(d) There may be other discretionary considerations which militate against the grant of the injunction.

14 As Pearl Beach had not issued a proceeding, and did not come to court with a draft statement of claim, I invited counsel to articulate the serious question(s) to be tried. Counsel stated that Pearl Beach would contend that, having regard to the obligation under s 77(1) of the Transfer of Land Act 1958 to sell the mortgaged property 'in good faith and having regard to the interests of the mortgagor, grantor or other persons' and/or the obligation under s 420A of the Corporations Act, the serious questions to be tried were whether Wisewoulds was acting in good faith or was negligent in relation to the forthcoming auction sale. Section 420A states:

In exercising a power of sale in respect of a property of a corporation, a controller must take all reasonable care to sell the property for:

(a) if, when it is sold, it has a market value - not less than that market value; or

(b) otherwise - the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold.

15 Counsel drew attention to the following matters as indicating a want of good faith or a failure to take reasonable care on the part of Wisewoulds.

(a) Wisewoulds appeared to be marketing the property in a price range that was less than the valuation it had obtained.

(b) The purchase by Eliad should be viewed as a bona fide contract and an arm's length transaction at a fair market value.

(c) If the contract settled in accordance with its terms, it would enable Pearl Beach to pay off all of the debts secured on the property.

16 None of these matters demonstrated, ipso facto, a want of good faith or a failure to exercise reasonable care on the part of the mortgagee. Each matter can only acquire legal significance and possibly then demonstrate that there was a serious question to be tried when compared to the conduct of the auction. I drew to counsel's attention the paucity of evidence concerning the conduct by Wisewoulds of the auction, which remained extant. As Pearl Beach explained its contentions for a want of good faith or a failure to exercise reasonable care on the part of the mortgagee, there would never be a serious question to be tried. If the auction is restrained, there will be no evidence of a want of good faith or a failure to exercise reasonable care by virtue of the restraint. There was, for example, no evidence of the degree of interest in the property from purchasers other than Eliad. It is perfectly feasible that a fair market value may be obtained for the property that is higher, or lower, than the contract price offered by Eliad. The court cannot know such matters at this stage prior to the auction.

17 Counsel contended that it is a particular feature of quia timet applications that they must be determined in anticipation of breach of the plaintiff's rights. Where the court is concerned with future breaches of the plaintiff's rights, it is necessary to have regard to the degree of probability which appears from the evidence that the apprehended acts in breach of a legal right will occur. Here, there is no evidence of any prior breach of the obligation to act in good faith or without negligence in the conduct of the sale. Commonly, evidence is relevantly provided by a request for an undertaking not to act in a certain way, and the refusal or failure of the defendant to provide that undertaking provides a basis for an inference that the apprehended breach of the plaintiff's rights is likely to occur.

18 That is not this case. Pearl Beach put the contract of sale before Wisewoulds for its consent and it was refused. It appears from the limited information before me that the property was being marketed on the basis that no offers would be accepted prior to the auction, but I do not know whether Wisewoulds refused consent on that basis. Whether or not that approach to auctioning the property was appropriate in the context of the duties alleged cannot be assessed on the material before me. It is likely to be a matter of judgment in the circumstances. On the basis of the material before the court, I am not persuaded to the requisite degree that any serious question of breach of the alleged duties will probably occur at the auction, or, alternatively, occurred when the Eliad contract was rejected, judged by what may occurr at the auction.

19 It is not the case that the proposed purchaser is at arm's length in the transaction as its sole director is the second ranked caveator, claiming an unregistered mortgage securing approximately $800,000. On the material before the court, I can do no more than accept the contract at face value, but so accepting the contract does not, to my mind, raise any question about whether Wisewoulds is not acting in good faith or is not exercising reasonable care in conducting the sale.[4] The duties that are in law imposed upon a mortgagee exercising a power of sale require that a mortgagee must pay some regard to the interests of the mortgagor or other persons, such as the holders of subsequent encumbrances. Where there is a conflict of interest, the mortgagee is not entitled to act in a manner which sacrifices the interests of the mortgagor.[5]

20 As the editors of Fisher & Lightwood's Law of Mortgage[6] point out, these duties regulate, but do not prevent, a mortgagee from choosing the time of sale, how the property is prepared for sale, the conditions of sale and the manner and extent to which the selling mortgagee need consult with the mortgagor. Although a selling mortgagee does not necessarily relieve its obligations by appointing professional advisers, independent valuations and marketing campaigns conducted by professional estate agents are commonly employed by selling mortgagees as prudent steps towards the discharge of their obligations.

21 There is no evidence that in respect of any of these considerations, Wisewoulds is in breach of the duties that Pearl Beach intends to allege. At its highest, Pearl Beach complains of underquoting by the mortgagee's agent. It is not properly open to infer a want of good faith or a want of reasonable care in the conduct of the proposed sale from the fact that the property has been advertised as available within a range that is below the apparent sworn valuation. Underquoting is a practice that, for other reasons, attracts criticism and it has been the subject of some legislative attention. Those criticisms are usually advanced by purchasers rather than vendors. Because it is, apparently, the objective of marketers to attract buyers to the property by underquoting in advertising, it does not follow that the property is likely to be sold at an undervalue at an auction. Vendors usually appreciate the efforts of estate agents to attract the attention of potential purchasers to the sale. The apparent enthusiasm of estate agents for underquoting, and the reasons for it, may be well appreciated by a mortgagee. Equally, serious purchasers may allow for underquoting in assessing an advertised range. At its highest, it is a matter that might require some consideration when evaluating all of the circumstances of the conduct of the sale. Without some evaluative consideration of the issue, which is not possible on the evidence before me, Pearl Beach cannot show, prima facie, a sufficient likelihood of success at a trial to justify, in the circumstances, the preservation of the status quo pending trial, that is that the auction should be restrained. The practical consequences likely to flow from the interlocutory order sought would be to require the mortgagee to deal with Eliad, in lieu of conducting a public auction when the only established criticism being made of the auction process is that of underquoting to possible purchasers.

22 I was also invited to infer that the mortgagee might have set a reserve, or might accept an offer at auction, that was in the quoted range on the basis of the evidence that the property has been marketed in that range. I do not think that inference is properly open.

23 In all of the circumstances, I am not persuaded that there is a reasonable probability that in the conduct of the auction there will be a breach by Wisewoulds of either its duty to act in good faith when conducting the sale, or its duty to exercise reasonable care in and about the price obtained for the property that will justify the restraint sought. In my view, were an interim injunction to be granted, there would be no serious question that could be raised for trial in the proposed proceeding.

24 I am also of the view that damages would be an adequate remedy in the circumstances. It is clear from the vendor's s 32 statement that this property represents an investment or development opportunity and that the motivation of parties to sell, or buy, the property is financial. What is sought is a profit. Further, unlike many cases, the hypothetical alternative course of conduct that the mortgagor will allege that a prudent mortgagee could have taken will be clear. A court will be able to assess the conduct of the mortgagee on the sale in relation to the requirements of the duties alleged against the mortgagee's knowledge of the Eliad contract. Damages will be capable of assessment, and an award of appropriately assessed damages will be an adequate remedy.

25 Further, I am satisfied that refusing to grant the injunction carries the lower risk of injustice if it should turn out not to have been the proper course. If I am wrong in determining that there is no serious question to be tried, it must nevertheless be so that the plaintiff's case on the question to be tried is weak. Further, the adequacy of damages as a remedy remains a relevant consideration on this inquiry.

26 Another matter of relevance is the extreme lateness of the application and the failure to give Wisewoulds a reasonable opportunity to contest the application. The explanation that was proffered was that it was only on the day preceding the auction that the contract of sale was negotiated. That explanation is inadequate in many respects. It must have been clear for some time that the property was to be put up for a mortgagee's auction. That information is likely to have been available to Eliad, having regard to the interest of its sole director in the property. The refusal of Wisewoulds to divert its attention from the proposed auction to contest this application is unsurprising. Wisewoulds presumably takes the view that the contract creates no rights that can affect its position in respect of a sale achieved at the auction, while rejecting the contention that it has not acted in good faith or by exercising reasonable care. The motive that appears to underlie this application is to require Wisewoulds to deal only with the mortgagor's chosen purchaser. That must be the consequence of determining that there is a serious question to be tried as formulated by Pearl Beach.

27 If the proposed injunction is granted, it is certain that additional expenses will be incurred through postponement or cancellation of the auction. An undertaking in the usual form was proffered by counsel on behalf of Pearl Beach. Its value is unknown. I would draw more comfort from the probable entitlement of the mortgagee to recover such additional expenses against the security, which might not be in the interests of second and subsequent security interests. What is also uncertain is the impact on the future conduct of the auction of a postponement or cancellation of the present auction. It is unclear what irreparable harm might be suffered by Pearl Beach if the injunction is refused. The future interest of bona fide purchasers of the property may be negatively affected by such events. Finally, if it is an objective of Mr Polidoro to recover his loan to the Pearl Beach through this contract, there should be no impediment to offering at auction the price he offered to Pearl Beach the day before.

28 The rule in Inglis[7] is also relevant on the question of the balance of convenience.

... the general rule applicable when it is sought to restrain the exercise by a mortgagee of his rights under the mortgage instrument. Failing payment into court of the amount sworn by the mortgagee as due and owing under the mortgage, no restraint should be placed by order upon the exercise of the respondent mortgagee's rights under the mortgage.

29 The rigid application of this rule has at times been questioned. In Bayblu Holdings Pty Ltd v Australian Capital Finance Ltd[8] Campbell JA, with whom Tobias and Macfarlan JJA agreed, said:[9]

It is not altogether clear what is meant by saying that there is a "general rule" of the type adverted to in Inglis. Does it mean that as a matter of law it is impossible to obtain an injunction to restrain exercise of a power of sale without bringing the money into court - that the rule is "general" in the sense of universally applicable? Or does "general" have the force of "applying usually but not always"? Is the structure of the law in this area that a positive rule of law creates a prohibition on obtaining an injunction without bringing the money into court, but that that positive rule of law is itself subject, as a matter of law, to a number of exceptions? Or does "general rule" simply mean that, as an empirical generalisation, one can say that usually a court will not grant an injunction to restrain a power of sale without bringing the money into court. If "general rule" is meant as an empirical generalisation, that conclusion would arise because the court takes into account the balance of convenience in deciding whether to grant such an injunction, and in the vast majority of cases failure to bring the money into court will be a very powerful factor, maybe often an overwhelming factor, in deciding where the balance of convenience lies . The remark of Walsh J at 164-165, quoted at [55] above, seems to provide some support for the latter view but it is not necessary to reach a concluded opinion about that.

An exception to this "general rule" has long been recognised when there is an issue about whether the power of sale has arisen at all ... In [Allfox Building Pty Ltd v Bank of Melbourne Ltd (1992) NSW Conv R 55-634] Powell J at 59,627 recognised, obiter, another exception when the validity of the mortgage was in issue. Clarke v Japan Machines (Australia) Pty Ltd (No 2) [1984] 1 Qd R 421 recognised another exception where the amount claimed by the mortgagee is obviously wrong. First instance decisions have also recognised some other exceptions where the plaintiff claims that he can redeem the mortgage within a fairly short time by carrying out a refinancing proposal that is reasonable on its face, or where the plaintiff has a demonstrable capacity to secure or, at the least, refinance the mortgage debt: Grose v St George Commercial Credit Corporation Ltd (1991) NSW Conv R 55-586 at 59,300-1 per Bryson J; Parist Holdings Pty Ltd v Perpetual Nominees Ltd [2006] NSWSC 599 at [16]-[21] per Hamilton J. I express no view about the correctness of those two last mentioned decisions beyond saying that I do not regard the decision of this Court in Notaras v Sly & Weigall [2005] NSWCA 275 [133] as necessarily providing support for the last mentioned exception. In Notaras at [133], Mason P identified four difficulties that stood in the way of a mortgagor succeeding in an action for negligence against its solicitors on the basis that the solicitors had not sought an interlocutory injunction to restrain exercise of a power of sale. Mason P noted that one of these difficulties was "the futility of approaching the court without a demonstrable capacity to tender or secure or at least refinance the $4 million undoubtedly due under the mortgage". That is not saying that the injunction would definitely have been obtained if the mortgagor had such a demonstrable capacity.

However, in the present case, there is no dispute about the validity of the mortgage; there has been an undoubted default; there is no dispute that the power of sale has become exercisable; there is no suggestion that the amount the Respondent claims is wrong; and the sole dispute is about the manner in which the Respondent has exercised the power of sale. It is not contended that the facts fall within any of the exceptions that previous first instance decisions have recognised.

30 Pearl Beach contends that its contract with Eliad is analogous to 'a refinancing proposal that is reasonable on its face or where the plaintiff has a demonstrable capacity to secure, or at the least, refinance the mortgage debt'. The Court of Appeal in Bayblu declined to express a view about whether that circumstance is correctly recognised as an exception to the Inglis rule, and I do not think it is necessary to determine that question on this application. In my opinion, the remarks made by Campbell JA in the final paragraph that I have set out are apposite in the present circumstances. Pearl Beach has not made any suggestion that it can bring into court the amount owing on the mortgage to which the land is subject. Further, Eliad has effectively deposed that it does not have sufficient net worth such that it might be regarded as being akin to a financier contractually bound to advance the relevant amount. Eliad must, itself, raise the purchase price by finance and there is no evidence beyond an ipse dixit, that such finance has, or will, become available.

31 In summary, I am not satisfied that there is a serious question to be tried. I am not satisfied that the balance of convenience favours Pearl Beach and I am of the view that, if I am wrong in either of these conclusions, damages would be an adequate remedy.

[1] [2006] HCA 46; (2006) 227 CLR 57 (Gleeson CJ and Crennan J) [19], (Gummow and Hayne JJ) [65]-[83]. See also Beecham Group Ltd v Bristol Laboratories Pty Ltd [1968] HCA 1; (1968) 118 CLR 618 and Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199, [8]-[13].

[2] [2006] VSCA 89; (2006) 15 VR 65.

[3] Bradto Pty Ltd v Victoria; Tymbook Pty Ltd v State of Victoria [2006] VSCA 89; (2006) 15 VR 65 at [35]. See also Magna Alloys and Research Pty Ltd v Coffey [1981] VicRp 3; [1981] VR 23.

[4] Henry Roach (Petroleum) Pty Ltd v Credit House (Vic) Pty Ltd [1976] VicRp 26; [1976] VR 309; Goldcel Nominees Pty Ltd v Network Finance Ltd [1983] VicRp 86; [1983] 2 VR 257.

[5] Forsyth v Blundell [1973] HCA 20; (1973) 129 CLR 477, 494.

[6] Tyler, Young and Croft (2nd Aust ed), [20.21]-[20.37].

[7] Inglis v Commonwealth Trading Bank of Australia (1972) 126 CLR 161, 169.

[8] [2011] NSWCA 39; (2011) 279 ALR 166.

[9] At [57]-[59]. See also Garry Patrick Joiner v Firstmac Finance Pty Ltd [2013] VSC 633 (4 October 2013).