Ultimate Property Group Pty Ltd v Lord

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

5714/01 - ULTIMATE PROPERTY GROUP PTY LTD v LORD JUDGMENT 1 HIS HONOUR: The first plaintiff mortgaged its land at Silverwater ("the Land") to the second defendant, the St George Bank ("St George"). The second, third and fourth plaintiffs guaranteed the mortgage. 2 On 27 April 2000 St George appointed the first defendant, Mr John Frederick Lord ("Mr Lord"), as controller of the mortgaged property. 3 Mr Lord became controller of the Land and the first plaintiff within the meaning of the Corporations Act 2001. 4 On 12 December 2000 the defendants sold the Land by auction for $1,350,000 and received $1,227,273 after paying $122,727 GST. 5 This meant there was a shortfall of $342,188.77 for which it is agreed that the guarantors are liable subject to the result of these proceedings. This liability will be dealt with in allied proceedings 3048/02 which have been heard together with the current proceedings. 6 Essentially the plaintiffs make two attacks on the price received for the Land, viz:

(1) The defendants, on advice, valued the Land at $1.22 million on a discounted cash flow of the rents form the Land, capitalized at 9.75%. However they made a manifest error in assuming GST was payable on the rentals, an error which diminished the value by $280,000.

(2) The property should have been sold so as to avoid, legitimately, GST of $122,727. 7 Thus the plaintiffs should have an award of $54,538.83 with a consequential verdict for the defendants in 3048/02. 8 The issues I perceive I have to consider are:

(1) What duties in equity or pursuant to statute are applicable to the defendants in the present circumstances?

(2) What was the value of the Land at December 2000?

(3) Does the first attack set out above have validity?

(4) Does the second attack set out above have validity?

(5) What is the result of the case? 9 I will deal with these issues seriatim, but before I do so, I need to note the basal facts which are not really in dispute. 10 St George had obtained a valuation from Mr Phillips, Valuer, of the Land at $1.35 million. Mr Phillips had arrived at this figure by taking the current rental of $150,000 less lessor outgoings and less GST of $124,078 and capitalized at 9.75% which he then rounded off as $1.35 million. 11 Mr Lord said that whilst he had a copy of that valuation and used it to file an early return (Form 508) to ASIC he did not rely on it on sale, but relied on his own valuation and the marketing advice of Jones Lang Wootten. 12 The valuation that Mr Lord and his assistant Mr Goyal relied on to set the reserve price was that of Mr Ford of FPD Savills of 11 December 2000. Mr Ford valued the Land at $1,250,000. This was on the basis of the nett market value based on surrounding properties of $139,750 and capitalized at 11.5%. Mr Ford checked that figure by looking at comparable sales, taking land value at $1,150 per square metre which at 11.50 per square metre gave a figure of $1,240,000. 13 Mr Lord placed a reserve on the property of $1,430,000 deducting 10% GST giving a nett receivable sum of $1,287,000. 14 At the hearing of these proceedings Mr Ivantsoff of counsel appeared for the plaintiffs and Mr Ashhurst of counsel appeared for the defendants. 15 (1) It is first necessary to consider the law as to a mortgagee's and receiver's duty to the mortgagor and guarantors of the mortgage debt in some detail. It is of the utmost importance in this type of case to make a precise classification of the duty owed by mortgagee to mortgagor and guarantors of the mortgagor.

16 In his opening Mr Ivantsoff said that his case was that the defendants had breached both their general law duty and their statutory duty under s 420A of the Corporations Act 2001. All this was rather vague. It was fleshed out a little in Mr Ivantsoff's closing address, but still left vague. 17 In England it was held that a mortgagee owed a duty at law based in negligence. The key decision which took this step is the decision of the English Court of Appeal in Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949 (hereafter referred to as "Cuckmere"). The Court there held that a mortgagee, when exercising his power of sale, owed a duty to the mortgagor to take reasonable care to obtain a proper price or, in the words of Salmon LJ, the true market value of the property. 18 The Cuckmere case was considered in this Court in Expo International Pty Ltd v Chant [1979] 2 NSWLR 820, a decision of Needham J. His Honour said at 835 that despite arguments to the contrary, and reference to what two High Court Judges said in ANZ Banking Group Ltd v Bangadilly Pastoral Co Pty Ltd (1978) 139 CLR 195, he adhered to what he said in Porter v Associated Securities Ltd (1976) 1 BPR 9279. In Porter's case, at 9284 Needham J had reviewed the key points made in Cuckmere including the reliance by the English Court of Appeal on Tomlin v Luce (1889) 43 Ch D 191 which it preferred over other authority. Needham J said at 9285: "Until the High Court decides otherwise, I think I am bound to apply to this case the principles enunciated in Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676. Factually, that case was far removed from the present, but the Court stated the principles applicable."

At 9287 his Honour continued: "As I have said, I think that I am bound to follow the expressions of principle in Pendlebury's case , illuminated as they are by their statement by Walsh and Mason JJ." 19 His Honour was referring to Forsyth v Blundell (1973) 129 CLR 477, where Walsh J at 493 and Mason J at 506 discussed the authorities but because of the facts of that case, did not need to reach any conclusion. 20 I will return to Pendlebury's case shortly. 21 There has been some Australian flirtation with the principle in Cuckmere including obiter dicta by some of the Justices of the High Court in the various leading cases with the view that Cuckmere might be applicable. 22 Indeed, in Commercial & General Acceptance Ltd v Nixon (1981) 152 CLR 491, 519-520 (the CAGA case to which I will return, though it must be noted that this case was focused on a statutory provision in Queensland), Wilson J, whilst acknowledging that the Cuckmere question had not been determined authoritatively in Australia, found the judgments persuasive. 23 The textbook writers make the position quite clear. In Fisher & Lightwood's Law of Mortgages Australian ed (Butterworths, 1995) [20.18] at the foot of p 458, the learned authors say: "The Cuckmere principle has not been followed in Australia where the courts have preferred to retain the good faith test."

Fourteen authorities are then cited for that proposition, and they then continue at p 459: "In any event the English courts seem to be moving back from the Cuckmere principle (or at least from an independent duty in tort) to the good faith test (see per Nourse LJ in Parker-Tweedale v Dunbar Bank plc [1991] Ch 12 at 18-19) as also does the Privy Council; see China and South Sea Bank Ltd v Tan Soon Gin [1990] 1 AC 536; Downsview Nominees Ltd v First Citicorp Ltd [1993] AC 295 at 315 … ". 24 In Law of Company Receiverships in Australia and New Zealand 2nd ed by Blanchard and Gedye (Butterworths, Wellington, 1994) pp 301-303, the learned authors say (at 302): "The courts in Australia were reluctant to follow the line of tortious liability, though they were in a number of cases able to impose liability on a mortgagee or a receiver simply on the basis of failure to act in good faith, recklessly sacrificing the interest of the mortgagor." 25 They then refer to what they call "the leading modern Australian decision, Expo International Pty Ltd v Chant". At p 303 they say: "In New Zealand, in contrast, Cuckmere Brick was whole-heartedly embraced and interpreted as imposing on a mortgagee or a receiver a general duty of care. The present writers are of the view that this was an appropriate development in the law, whether the duty was to be found in tort or, more properly, in equity. The Australian Law Reform Commission in its general insolvency inquiry considered that this should be the law in Australia, though noting that the courts in Australia had been reluctant to follow the English line of authority. It recommended that there should be a statutory duty requiring receivers to take reasonable care in the exercise of their powers."

My reasons for quoting this passage will, I trust, become apparent in due course. 26 In my view, authority compels me to say that there is no common law duty in negligence on a mortgagee in NSW which makes a mortgagee liable in common law damages if he fails to get a good price for the mortgaged property. 27 I now need to consider in some depth the nature and extent of the equitable duty on mortgagees. 28 Pendlebury (supra) was an action in damages brought in the Supreme Court of Victoria by a mortgagor because the defendants had been guilty of wilful default or neglect when selling the mortgaged property. Isaacs J at 700 made it quite clear that mere negligence or carelessness in carrying out the sale was not sufficient to attract liability, but that it was necessary that there be recklessness in the mortgagee failing to act in good faith. All the High Court Judges (Griffith CJ, Barton and Isaacs JJ) held that there was such recklessness. Griffith CJ said at 692 that: "A mortgagee selling under circumstances which show a reckless disregard of the interests of the mortgagor is responsible to the same extent and on the same principles as an accounting party who is liable for wilful default."

An account was directed and the order made at 703 that there be judgment for the plaintiff for a sum equal to the difference between the amount ascertained on inquiry as would have been produced if the sale had been conducted without wilful default and the price actually obtained. 29 Pendlebury really cannot be considered without reference to the previous decision of the High Court in Barns v Queensland National Bank Ltd (1906) 3 CLR 925. In that case the trustee of a will mortgaged properties to the defendant bank. The bank sold the properties under its power of sale. The beneficiary sued the trustee, the bank and the purchasers seeking, inter alia, damages for wrongful and improper sale or for an account. Cooper CJ (Queensland) found a verdict for the plaintiff. The Full Court in Queensland set this aside, but it was restored by the High Court. The amount of the verdict was the difference between the value of the mortgaged property as found by the jury and the amount of the mortgage debt after taking into account the amount recovered on the sale. Questions were put to the jury and questions were dealt with in the High Court on the basis that a duty was to act in good faith. 30 It is unusual that in Barns the matter was submitted to a jury which found the true value of the property so that a verdict for a lump sum could be given. However, the High Court said nothing about this and it may be that the Queensland Judicature Act provisions made this the norm. 31 Likewise in Pendlebury the action was for damages and although an account was directed, the Court found a matter of damages and set out how they were to be assessed. 32 In Coroneo v Australian Provincial Assurance Association Ltd (1935) 35 SR (NSW) 391, 395, a judgment in which Halse Rogers J and P W Street J concurred, Jordan CJ said: "The proper remedy of the plaintiff is a suit in equity in which, upon his offering to redeem or to account, he may if he so desires, litigate the question of any equitable delinquencies on the part of his mortgagee." 33 NSW at that time was not a Judicature Act State. However, even in 1935 with great respect to the learned Chief Justice, that statement is only true sub modo. Once a sale takes place of the mortgaged property the mortgagor's equity of redemption is destroyed and the mortgagee is constituted a trustee of the surplus proceeds of sale; see Fisher & Lightwood op cit [20.34]. It follows that at this point of time there is no room for any redemption or foreclosure suit and thus no room for the usual accounting between mortgagor and mortgagee in such a suit. After all, what such a suit would determine is how much the mortgagor must pay to the mortgagee to redeem the land. 34 As redemption is now impossible, the suit cannot be run. What happens when a binding contract for sale is entered into by the mortgagee if there is an allegation that the mortgagee has recklessly sacrificed the mortgagor's interest is that either accounts must be taken between the mortgagor as beneficiary and the mortgagee as trustee as to what amount should be deemed to be the surplus, or alternatively, as happened in Pendlebury's case an inquiry is made before the damages are awarded. However, it is not a case where there is the sort of suit referred to by Jordan CJ in Coroneo's case. 35 If that analysis were not completely correct in a jurisdiction where law and equity are separated, Barns and Coroneo show that in a Judicature Act court, it is certainly the correct method of approach. 36 This view is reinforced by the decision of the Court of Appeal in Commonwealth Bank of Australia v Hadfield (2001) 53 NSWLR 614. In that case, Beazley JA, with whom Mason P and Bryson J agreed, made it clear that after the exercise of the power of sale the action is not one for account but is one for equitable damages. 37 The content of the equitable principle now needs to be considered in detail. 38 The duty is a duty to act conscionably towards the mortgagor and persons under the mortgagor. The duty is not to be considered in some mechanical way, but the whole of the mortgagee's conduct with respect to the sale is to be considered. The mortgagee may, up to a point, act solely in its own interests, but it must also act conscionably towards the mortgagor and those claiming under the mortgagor. 39 Thus, I find difficulty with the approach taken by counsel for the guarantors which seems to pinpoint two possible errors in a valuation and then reason from them that there must have been a breach of duty. 40 Indeed, it is a fundamental principle in the textbooks that mere inadequacy in the price obtained and the value will not normally of itself be sufficient for a mortgagor to upset a purported sale; see eg Nelson & Whitman, Real Estate Finance Law, 2nd edition (West, St Paul, Minnesota 1985) p 540. 41 Most modern mortgages confer a power of sale on the mortgagee if certain events occur and such a power is also conferred by s 109 of the Conveyancing Act 1919.

42 It should be borne in mind that a power of sale is an odd concept in law. One of the better definitions is that of Cotton LJ in Re Hodson & Howes' Contract (1887) 35 Ch D 668, 672, "An equitable authority which enables the mortgagee to sell so as to give the purchaser the estate discharged from the equity of redemption". See also Coroneo at 394. Because it is given for value, the authority is irrevocable by the mortgagor: Hunt v Rousmanier's Administrators (1823) 21 US 379, 381 per Marshall CJ following Walsh v Whitcomb (1797) 2 Esp NP 565; 170 ER 456.

43 There has been development in the law in this area over the past 250 years. Indeed the recognition by equity that it was legitimate to include a power of sale in a mortgage was slow in coming because of the "once a mortgage always a mortgage rule". However, equity had accepted the validity of the grant of the power by the time Lord Eldon gave judgment in Clay v Sharpe (1802) 18 Ves 348; 34 ER 348. 44 Once the power of sale had been recognized, there was a shift too far in the other direction to permit unfettered exercises of powers of sale. This trend, in turn, was reversed about 1875, and we can commence meaningful discussion of the modern law with the case of Colson v Williams (1889) 61 LT 71, 72; [1886-1890] All ER Rep 1040, 1043 where Kekewich J said of a mortgagee's obligations when exercising power of sale: "If there is a margin which can be reasonably obtained, he must remember that there is the mortgagor, or possibly a second mortgagee, claiming through him, or possibly other persons having charges to be considered. But so long as he exercises the power fairly, with that in view, so long as there is no fraud in the legal aspect of the case, so long as he does that which he fairly can to realise a fair price, he is… entirely free." 45 Modern cases have strongly endorsed this approach. In Hawkesbury Valley Developments Pty Ltd v Custom Credit Corporation Ltd (1994) 8 BPR 15,581, 15,583, M McLelland CJ in Eq said, omitting reference to the copious authorities cited: "… in exercising its power of sale, a mortgagee must act in good faith, which involves an obligation to deal fairly with the interests of the mortgagor, which in turn involves an obligation to refrain from acting in wilful or reckless disregard of those interests. "… This is an area of the law where particular phrases used in judgments should not be construed and applied as if embodied in an Act of parliament….What matters is the underlying equitable principle, which in the modern idiom usually finds expression in terms of unconscionability…. Any departure from reasonable standards must be so serious as to be properly characterised as unconscionable, in order to render the mortgagee accountable. If a failure by a mortgagee to take reasonable steps to obtain a proper price is sufficiently serious to be characterised as unconscionable as that expression is understood in equity, then in the taking of accounts between the mortgagee and the mortgagor, the mortgagee will be accountable on the basis of wilful default for the price which would have been obtained if the mortgagee had not been guilty of unconscionable conduct." 46 The passage from the Hawkesbury Valley case which I have cited has been followed on many occasions since; see eg State Bank of NSW v Vincent (Giles J, 7 April 1995); ANZ Banking Group Ltd v Wright (Giles J, 3 July 1997); Qorum Pty Ltd v Younger [1995] NSW Conv R 55-738. See also Stone v Farrow Mortgage [1999] NSWCA 435 [3]. 47 The same approach has been taken in the Federal Court. In Gomez v State Bank of NSW [2001] FCA 1059, Branson J said, after quoting the passage from the Hawkesbury Valley case that the borrower was: "required to satisfy the Court that … the Bank had so failed to take reasonable steps to obtain a proper price for the Properties that it was guilty of unconscionable conduct. It will be insufficient for [the borrower] to satisfy the Court merely that the properties, or one of them, was sold at an undervalue." 48 I will apply these principles when considering the facts with respect to the first attack in my answer to issue 3. I shall now pass to a consideration of s 420A of the Corporations Act 2001.

49 Section 420A of the Corporations Act 2001 is disarmingly simple in its wording. I will quote the whole of sub-section (1): "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: (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." 50 Unfortunately, the legislature has not specified what are the consequences of breach of the duty set out in the sub-section. 51 It is instructive to note how s 420A came to be inserted in the Corporations Act. 52 One starts with a discussion paper issued by the Australian Law Reform Commission in its general insolvency inquiry, an inquiry headed by Ronald Harmer. The Commission issued its discussion paper, DP32, in which it said at para 164, so far as is relevant: "The Commission proposes a new provision containing a clear statement of the duties of a receiver in the exercise of a receiver's powers of management and sale of property of a company (sR7). This proposal is advanced because, in Australia at least, the duty of a receiver would appear to be only to act in an honest and non-reckless manner. A receiver who exercises a power in a negligent manner does not breach that duty. "In England, however, the position is otherwise. Recent authorities have determined that a receiver does have a duty to take reasonable care in the exercise of the receiver's powers. If a receiver acts negligently that duty is breached and the receiver is liable. The Commission considers that this should be the law in Australia. However it does not seem that this will be developed by the courts in Australia which have been reluctant to follow the English line of authority. "There are theoretical difficulties with the English line of authority. It has been criticised in judgments given by Australian judges for equating the common law action for negligence with the equitable duty which a mortgagee has in exercising a power of sale. Nevertheless, it is desirable that a receiver should be subject to a duty to take reasonable care … . However, as the Australian cases have thus far held, that accountability cannot be achieved by attempting to impose common law duties on receivers. If proper accountability is to be imposed a legislative base is necessary." 53 Draft s R7 in the appendix to the report, which was proposed to be inserted in the then Corporations Law as s 324B was: "Duties of Receivers

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."

His Lordship was using the term "market value" in its ordinary sense. 97 There is quite a considerable amount of dicta as to the meaning of market value in the current context. 98 In Emerson v Custom Credit Corporation Ltd [1994] 1 Qd R 516, the Queensland Court of Appeal had to consider the term "market value" when used in s 85(1) of the Property Law Act 1974 (Queensland). That section provides: "It is the duty of a mortgagee, in the exercise … of a power of sale conferred by the instrument of mortgage … to take reasonable care to ensure that the property is sold at the market value." 99 In Jeogla Pty Ltd v ANZ Banking Group Ltd (1999) 150 FLR 359, 447 at [423] Einstein J said that this section is "close to word perfect" with s 420A. I think, with respect, the differences are more pronounced but certainly for present purposes the decision in Emerson gives guidance. 100 At 521, Davies JA and Williams JA said, after discussing Spencer v The Commonwealth (1905) 5 CLR 418 and other cases: "The context in which the phrase 'market value' is used may indicate that the market in which the value is to be determined is one which has some special features. … However there is no identifiable mortgagee's market; a mortgagee sells in the general real estate market. No doubt, as the appellant says, mortgagees' sales are often forced sales, but that is not invariably the case and sales by registered proprietors are also sometimes forced, perhaps often so in the current market. But we think that the purpose of a phrase such as 'market value' is to enable a hypothetical value to be determined disregarding the desire to sell of particular vendors or classes of vendors. Furthermore, there is no suggestion in the common law cases concerning a mortgagee's duty that the phrase or any similar one should be construed as the appellant contends. In Cuckmere … for example, Salmon LJ appears to have used the phrase 'the true market value' and Cairns LJ the phrase 'proper price' in a general objective sense." 101 The appellant had argued, as appears at p 520 of the report, that the term "market value" in s 85(1) "is not the price which a willing but not anxious vendor would obtain from a person desiring to buy but the price which an anxious vendor would obtain upon a forced sale because a mortgagee is always an anxious vendor and a mortgagee sale is always a forced sale." The third Judge, Pincus JA, dissented but held that market value did have its ordinary meaning (p 519). However, he held that any failure to take reasonable care did not give rise to any damage because the property did not sell for less than its market value. 102 It will not have escaped notice that this conclusion appears directly contrary to what Campbell J said in the Artistic case, though it would not appear that his Honour was referred to Emerson's case. 103 Einstein J in the Jeogla case came to the view that "market value" had the meaning ascribed to it in Spencer v The Commonwealth at 441, viz what a prudent purchaser would be prepared to give a vendor, not by means of a forced sale, but by voluntary bargaining, both parties being willing to trade, but neither being so anxious to do so that he or she would overlook any ordinary business consideration, both parties being cognizant of all circumstances which might affect value. 104 Jeogla came up before the Court of Appeal, but not as a direct appeal. Because one of the leading parties had gone into liquidation, leave to appeal was necessary and the Court of Appeal's decision, Skinner v Jeogla Pty Ltd [2001] NSWCA 15, deals with that leave. However, in the giving of reasons refusing leave, Spigelman CJ made some pertinent observations on the present problem. He said at [37] and following: "[37] The central difficulty in the construction of s 420A(1) is that it is premised on the basis that there is a category of property that is in fact 'sold' but which has no 'market value'. This incongruity is enough to indicate that a very particular concept of 'market value' is being employed. [38] The construction favoured by Einstein J was to the effect that the words 'market value' meant that a value was, in effect, ascertainable. Two alternative constructions suggest themselves as reasonably arguable. First, that 'market value' means a definite value. Secondly that 'market value' means a readily determinable value. [39] By 'definite value' I mean a value that is clearly and obviously established as a market price. By way of example, a small parcel of shares in a company listed on the Stock Exchange has a definite market value which can be ascertained at any point of time simply by looking up a document. Shares in a company which is not listed do not have a definite value in this sense. [40] By the alternative of 'determinable value' I mean to refer to property for which the number and nature of comparable sales, and the closeness of the degree of comparability, is such that at any point of time a market value can be readily determined. This is in contrast with property which has so unique a quality that comparisons cannot readily be made, or are so scarce that sales are rare." 105 Emerson's case does not appear to have been cited to the Court of Appeal, though it was cited by Einstein J at first instance at [416]. 106 The present case does not raise many of these difficulties. I will deal with the question of market value of the land in my answer to issue 2. 107 It must follow from the above discussion that the plaintiffs' claim must wholly fail as neither the general equitable duty nor s 420A operate to give a "wronged party" damages or compensation. Their only effect is to adjust the accounting. However it is necessary to pursue the remaining issues as there may need to be some adjustment in 3048/2002. 108 (2) The valuation evidence in this case has been from the written valuations of Mr Phillips and Mr Ford to which I have already referred and the evidence of Mr Stamoulis called by the plaintiffs in these proceedings. 109 The evidence of Mr Stamoulis was in some respects, bizarre. I do not say that in any way at all that might be derogatory of Mr Stamoulis who appeared to be a thoroughly competent and skilful valuer. The bizarre aspect was that Mr Stamoulis was not asked to value the Land. His brief was to comment on the error that may have been made in Mr Phillip's valuation, but otherwise to accept everything Mr Phillips said. 110 Mr Ivantsoff submits that the value of the land was $1,504,000. He derives this figure by making adjustments to Mr Phillips' valuation to correct the so called error in making a deduction for GST from the rental. 111 Mr Ashhurst points out that there has never been any valuation of the Land at that figure. 112 Mr Phillips valued the Land at $1,350,000. Mr Ford valued it at $1,250,000. Mr Stamoulis gave evidence in cross examination that if he were to make a valuation he would be inclined to consider the three matters I detail in the following paragraphs. 113 First he may not have used the actual rental but rather average rentals for the area. He said this was because it was not uncommon in a sale with lease back arrangement for a freehold owner to charge itself an excessive rental in order to boost the capital value. 114 Secondly he said that the capitalization figure used by Mr Phillips was within the acceptable range, though he may have used a different figure. 115 Thirdly, he agreed that he would have inspected the property before giving a valuation (he had not been asked to do so) and that he would have taken into account that there had been failed auctions of the property in 1999. 116 As to this last matter, it seems that common sense prevails in the valuation profession and that experts do not take the judgment of the High Court in Spencer's case that unaccepted offers are no evidence of value as precluding them from factoring in the evidence that at a recent auction properly advertised, there was no bid above the reserve. I consider that they are correct in doing so. 117 The evidence which I accept in this case is that the auction which brought about the sale in December 2000 was properly conducted after a professionally managed advertising campaign. It brought a price of $1,350,000. 118 As has been said many times over, valuation is not an exact science. However, Mr Ford's valuation plus the fact that the Land realised $1,350,000 makes me find that $1,350,00 was its market value at the relevant date. 119 There was some discussion before me as to whether the price of the Land was the full $1,350,000 paid by the purchaser (though it might have been entitled to some GST rebate) or the nett sum credited to the mortgagor's account after GST had been paid. 120 Mr Ashhurst put that the price was the amount in the contract of sale. He submitted that the true analysis of the situation was that Mr Lord got a price of $1,350,000 and assumed a liability to pay GST of $135,000. Mr Ivantsoff put that the price was the amount received after the tax was paid. 121 I am of the view that Mr Ashhurst's submissions must be upheld. I say this both because I accept his analysis and also because that solution is closer to the natural meaning of the word "price". 122 A similar situation presented itself in London and Cheshire Insurance Co Ltd v Laplagrene Property Co Ltd [1971] Ch 499, 511 where Brightman J said that the concept of "price paid" looked to the consideration expressed in the relevant document rather than cash actually received. 123 Accordingly the market value of the land is $1,350,000 and the price obtained was the same sum. There is no room for any question of sale at an undervalue. 124 (3) The first attack was that Mr Phillips' valuation contained a clear error. Correction of that error resulted in a value of $1,504,000. The controller did not attempt to sell for that sum, therefore he was in breach of duty. 125 I have already noted a number of flaws in the proposition. However, even accepting it as correct does not get the plaintiffs to their desired result. 126 Mr Lord gave evidence which I accept that he never relied on Mr Phillips' valuation for the purpose of fixing a reserve or for the purpose of sale. He relied on Mr Ford's valuation which he obtained the day before the auction. Mr Ford's valuation contains no similar error. 127 Thus, whichever way one looks at the attack, it must fail. 128 (4) The second attack is based on the failure by Mr Lord to avail himself of the margin scheme under the GST legislation. It is not necessary for present purposes to go into the details of that scheme. It is sufficient to say that, if the margin scheme is adopted, either no GST would have been payable or else GST might only have to be paid on the difference between the value of the property as at 30 June 2000 and the date of sale. 129 Mr Ashhurst submits that the present attack must fail in limine as, whilst there is an obligation to sell at a proper price, there is no duty to sell in a tax effective way. I would prefer just to note this submission and not to comment on it as it is not necessary to do so and let its evaluation await a day when it might be critical to a decision. 130 The submission again must fail on the facts of the case. 131 Mr Lord gave the following evidence in cross examination which I accept: "Q. In making the decision to sell the property, did you give any consideration or did you take account of the prospect of using the margin scheme? A. There was consideration to whether this was appropriate or not. We would have had from discussions with auctioneers and so forth. And I am of opinion it makes little or no difference whether you sell on margin scheme, using the margin scheme or not on the basis that the net cost to the purchaser is the amount that they are prepared to spend on the purchase of the property. In addition to that, you have also had to incur the effect of further valuation to use the margin scheme because you are required to have a value of the property as at 30 June, 2000 to be able to invoke the margin scheme. There are, therefore, additional costs involved in using the margin scheme as opposed to not using the margin scheme." 132 It follows that the controller considered the question and rejected using the margin scheme for reasons which appear to have logical force. 133 Thus, the second attack fails. 134 (5) The result of the above is that the present proceedings must be dismissed with costs. 135 It follows that in 3048/2002 there must be a verdict for the plaintiff St George Bank Ltd for $342,188.77 and costs. 136 I give judgment accordingly. The exhibits may be returned. ***********************

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