R7(1) It is the duty of the receiver of property of a corporation to take reasonable care in the exercise of the powers of the receiver.
(2) In particular, it is the duty of the receiver to take reasonable care in the management of the property and, if the property is sold, to ensure that it is not sold at a price below its market value.
(3) An agreement is void to the extent that it purports to relieve, or might have the effect of relieving, the receiver from his or her duty as mentioned in subsection (1) or (2).
(4) If a corporation or some other person has suffered loss by reason of a breach of duty as mentioned in subsection (1) or (2), the corporation or person may bring an action for damages against the receiver."
54 All that was very simple and straightforward. The discussion paper had issued in August 1987; the final report, known now as the Harmer Report No 45, issued in late 1988.
55 Paras 231-236 of the Harmer Report reviewed the reaction to the discussion paper. The Commission adhered to its general approach that there should be a statutory duty requiring receivers to take reasonable care in the exercise of their powers and to ensure that the property was not sold at a price below the best price reasonably obtainable, and that an action for breach of duty should be able to be brought. There was discussion as to whether the phrase "market value" was a wise one to employ. Draft s R6 in vol 2 of the Report was similar to the previous draft, but there was an important alteration in subsection (2) which now read:
"In particular, that duty extends to taking reasonable care in the management of the property and, if the property is sold, to ensure that it is not sold at a price below the best price reasonably obtainable."
56 An exposure draft of the Corporate Law Reform Bill 1992 was circulated in that year. In the covering memorandum, clause 28, it was said that Part H of the Bill implements the Harmer Report recommendations that " … Receivers, chargees in possession and their agents have a duty to take reasonable care in exercise of their powers, and in particular, in relation to the sale of company assets." The draft s 420A(1) was:
"In exercising a power of sale in respect of property of a corporation, a controller must take all reasonable care to sell the property for the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold."
57 When the Bill was introduced into Federal Parliament on 3 November 1992, a detailed explanatory memorandum was issued by the then Commonwealth Attorney General. Clause 406 of that memorandum, dealing with proposed s 420A, made it clear that:
"Proposed section 420A will make it clear that, in selling company property, a controller … must take all reasonable care to sell the property for its market value … . The controller's duty under proposed subsection 420A(1) will be owed to the company."
58 Section 420A(1) in the draft Bill that accompanied the memorandum was in identical terms to subsection (1) of that section as passed.
59 It will be seen that there is a complete departure from the text recommended by the Law Reform Commission and that legislature has deliberately moved from the position taken by the Commission of omitting reference to market value and the problems that that term was envisaged to bring about and has reinstated it despite what is in the actual text of the covering memorandum.
60 I wondered for quite a while why this has happened. My own research suggests that what must have happened is that the Parliamentary Counsel looked at s 345B of the New Zealand Companies Act 1955 which had been added in 1980. The section did not survive the rearrangement of New Zealand company law in 1993 but is now to be found as s 19 of the New Zealand Receiverships Act 1993. As at 1998 the section read, so far as is relevant:
"(1) A receiver or manager of the property of a company who sells any of that property shall exercise all reasonable care to obtain the best price reasonably obtainable for the property at the time of sale.
(2) The duty of a receiver or manager under subsection (1) of this section shall be a duty owed to the company."
61 We there see the phrase "all reasonable care" which has come into the Australian section, though the New Zealand section uses the words "best price reasonably obtainable", whereas the Australian section uses in most circumstances the test of market value if the property has a market value, otherwise uses the New Zealand test.
62 Blanchard and Geddes op cit at [11.31] page 307 say:
"Section 420A is an adaptation of s 345B of the New Zealand Companies Act 1955, which now appears in a redrafted version in s 19 of the Receiverships Act 1993 (NZ). That in turn was drafted as a statutory embodiment of Cuckmere Brick. As originally introduced into Parliament in the Companies Amendment Bill 1980 the section used words actually taken from Cuckmere Brick, though they were amended before the bill was passed. At that time Cuckmere Brick was understood to impose liability in tort."
63 What then is the true construction of s 420A?
64 There have been two considered judgments on the section in this court, the first by Campbell J in Artistic Builders Pty Ltd v Elliot & Tuthill (Mortgages) Pty Ltd (2002) 10 BPR 19,565; the second by Bryson J in GE Capital Australia v Davis (2002) 11 BPR 20, 529.
65 The Artistic case has some peculiarities about it. The issues presented to his Honour were extremely narrow. In particular it is to be noted that as his Honour said at [128]:
"No submission was put that a breach of s 420A gave rise to an action at common law for a breach of statutory duty."
66 Campbell J took the view that s 420A directs the Court in the first instance solely to whether, in the process of sale, the Bank exercised all reasonable care and on such an inquiry a consideration of the valuations is irrelevant.
67 What his Honour actually said at [126] of his judgment was:
"In deciding whether there has been a breach of s 420A, a court looks at the process that a controller of property of a corporation has gone through in selling that property. The inquiry is whether, in the course of that process, the controller has taken all reasonable care to sell the property but not less than its market value. It is not necessary to prove that the property was in fact sold for less than its market value, a controller could breach s 420A, but, through luck, still manage to sell the property for its market value or more. Further, it is not necessary for me to find what actually was the market value of the property, to be able to find that s 420A(1)(a) was breached, all that I need find is that the process gone through was not one where all reasonable care was taken to sell the property for its market value, whatever that market value might be."
68 With great respect to his Honour, I find great difficulty in that passage. I can understand that there may be cases, and it may be that the case before his Honour was one such, where the conduct of the mortgagee was so careless that it would be impossible to attain the market price even though the property itself did have a market price.
69 However, unless it can be demonstrated, at least later in an inquiry before the Master, that the property in fact sold for under the market price, it is merely a case of injuria sine damnum. If, as his Honour says, by luck, the market price is achieved, then the mortgagor has suffered no loss.
70 In some situations, a person will be able to sue for damages because he or she first proceeded for an injunction under s 1324 of the Corporations Act. In Artistic Builders Pty Ltd v Elliot & Tuthill (Mortgages) Pty Ltd [2002] NSWSC 16, at 128 and following, Campbell J rejected this course saying at [132] that s 1324(10) does not permit a court to award damages in the absence of an actual claim for injunctive relief.
71 However, in the Artistic case Campbell J indicated that in appropriate cases use could be made of s 423 of the Corporations Act. This section is part of the Court's jurisdiction to supervise its officers including receivers. That section contemplates that there be a inquiry to see whether a receiver etc has breached a duty, and if so, to make the appropriate order. Campbell J considered that such an inquiry could be part of an ordinary suit in which the facts and circumstances were fully explored, pointing out that the Court has no machinery apart from adversary type proceedings for conducting such an inquiry.
72 With great respect to his Honour, I find great difficulty in accepting his conclusions on s 423, though that approach does deal with one of the problems intrinsic in the section.
73 The second case was the GE Capital case. That was a suit by guarantors seeking to invoke s 420A. His Honour held that that section conferred no rights on guarantors. His Honour also held that the section did not give a right in common law damages. He said that its basic effect was to substitute the statutory test of liability for the traditional test or impose a cumulative obligation when considering whether a mortgagee had breached its equitable duty in relation to the exercise of the power of sale see [53] p 20,542.
74 Thus s 420A operates by way of statutory pre-emption (vide Graham Barclay Oysters Pty Ltd v Ryan (2002) 211 CLR 540, 621-2 per Kirby J) or else allows the factors mentioned in s 420A to be taken into consideration when accounts are taken between mortgagor and mortgagee.
75 Although no rights are conferred on guarantors by s 420A, Bryson J held that they are able to take a benefit from the accounting in one of two ways.
76 The first way is by way of equitable set-off. As Giles J said in Murphy v Zamonex Pty Ltd (1993) 31 NSWLR 439, 465, there can be an equitable set-off in situations where it would be unjust to allow a plaintiff to recover without taking into account the defendant's counter claim.
77 Thus, where a creditor sues the guarantor, it would be unjust to allow the creditor to claim more against the guarantor than it could have claimed when accounts were taken between mortgagor and mortgagee.
78 The second way is to invoke a series of cases such as Healy v Cornish (1863) 3 SCR Eq 28; Bank of New South Wales v Taylor (1881) 2 LR (NSW) 118, on appeal sub nom Taylor v Bank of New South Wales (1886) 11 App Cas 596 esp 602-3 which recognise rights of guarantors where the principal creditor has acted so as to diminish the value of the security.
79 In addition, it must be noted that under the general law the mortgagee does owe a fiduciary duty of some kind at least to the guarantor, of the mortgage debt; see Fisher & Lightwood [20.18], p 459.
80 That proposition is broadly stated. In Australia, it is clear that if the mortgagee sues the guarantor, then the guarantor is able to say that the quantum of the claim must be reduced by the amount at which the creditor sold the security at an under-value as the guarantor was entitled to have the security sold for its proper value; see eg Tooth & Co Ltd v Lapin (1936) 53 WN (NSW) 224, 225.
81 In England, where Cuckmere holds sway, the proposition is put more starkly. For instance, in American Express International Banking Corp v Hurley [1985] 3 All ER 564, 571, Mann J was able to state the law in simple propositions, including "(i) the mortgagee when selling mortgage property is under a duty to a guarantor of the mortgagor's debt to take reasonable care in all the circumstances of the case to obtain the true market value of that property."
82 Bryson J took the same view to Campbell, J as to the inapplicability of s 1324 of the Corporations Act, and seems to share my doubts as to the extent of the applicability of s 423 of that Act.
83 Mr Ashhurst submits that Bryson J was in error in holding that some equitable rights flowed though to the mortgagor and guarantor by virtue of section 420A.
84 First, Mr Ashhurst says that Bryson J overlooked the fact that under s 1311(2) and (5) of the Corporations Act 2001, there is a penalty of five penalty units for a breach of s 420A.
85 Secondly, Mr Ashhurst puts that the absence of reference to s 420A in sections such as s 1317H of the Corporations Act is a strong indication that the purpose of s 420A was to control controllers not to give rights to mortgagors.
86 Thirdly, Mr Ashhurst points to the drafting history which he rightly says points to a deliberate omission of a right of action.
87 There is a lot of force in those submissions. However, I consider that other factors support the view that Bryson J took in the GE Capital case.
88 My starting point is the decision of the Full Court of this Court in Castlereagh Motels Ltd v Davies-Roe (1966) 67 SR (NSW) 279. In that case it was decided that on the form of the legislation that existed in 1966, the predecessor of s 181 of the Corporations Act did not give rise to a civil action. The Court asked whether the statutory intendment was to provide a civil cause of action at law. The Court noted that there was already in equity an action for breach of a similar duty if the director concerned was guilty of self dealing. In the light of this, and in the light of there being a criminal penalty imposed for breach of the section, it was hardly likely that a statute would have intended that the company itself should have an action for damages no matter whether the company suffered loss or not. The Court applied the test stemming from O'Connor v S P Bray Ltd (1937) 56 CLR 464 and which has been applied on many occasions since.
89 The Corporations Act is odd in that it provides various remedies in various parts of the statute, but contains no overall provision for the enforcement of duties. The closest provision (putting aside s 423) that might be applicable to the instant case is s 598, the problem being, however, that the present plaintiffs are not eligible applicants.
90 In my view it would be a complete nonsense to say that s 420A was inserted into the Corporations Act with no consequences at all (other than the obtaining of an injunction if someone had asked in time) if there was a breach. It is not a civil liability provision; it is not a criminal provision, except to a very minor extent and there is no other way in which it can be enforced.
91 The legislature could not have meant a solemn farce. The Act does not provide any realistic scheme for controlling controllers with respect to price. The purpose of the section, viewed in the light of its drafting history was to give some protection to borrowers. I thus conclude that the legislature intended that there be a private action.
92 The next question is what sort of private action?
93 As I have indicated earlier, the trend of authority is away from even Cuckmere damages, being damages in tort to the idea of equitable damages and, though it probably does not matter, in my view that is the appropriate remedy here.
94 In my view the breach of 420A gives rise to an action for equitable damages against the controller in the same way as there would have been an action to recover surplus proceeds of sale in equity where a mortgagee had wrongly sold the property contrary to the Pendlebury rule. This is much the same conclusion that Bryson J reached in the GE Capital case.
95 It was odd that there was not much argument placed on the key concept in s 420A, namely the term "market value".
96 Probably the term derives from the words of Salmon LJ in Cuckmere at 965 where he said:
"The defendants owed the plaintiffs a duty to take reasonable precautions to obtain the true market value for the site."