ANZ v Johnson No. Scgrg-99-912
[2000] SASC 151
•9 June 2000
AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED
V JOHNSON
[2000] SASC 151
JUDGE BURLEY. The plaintiff has applied by application dated 14 March 2000 to have a number of paragraphs of the defendant’s more explicit defence struck out. The application came on for hearing on 12 May 2000 when most of the application was disposed of without me having to reserve my decision. There was, however, one point which required more detailed consideration. It concerns the assertion by the plaintiff that paragraph 20 of the more explicit defence is defective because it pleads a duty of care based on the principles of the law of negligence as between a creditor and a guarantor of the primary debtor’s debt. The plaintiff contends that paragraph 20 of the defence raises no arguable ground of defence because if any duty is owed, it is a duty of good faith as opposed to a duty of care in negligence.
By its statement of claim the plaintiff claims the sum of nearly $1.4 million from the defendant pursuant to the provisions of a guarantee and indemnity in writing between the plaintiff and the defendant dated 23 July 1987. It is alleged that the primary debtor defaulted in its obligations to the plaintiff. The plaintiff subsequently demanded payment of the monies due by the debtor from the defendant. That demand has not been met by the defendant. Paragraph 20 of the more explicit defence is as follows:
“20... Further and in the alternative the guarantee was discharged by operation of common law as:
20.1.......... The plaintiff owed the defendant a duty of care to ensure that the value of any security was maintained, and that the defendant’s right of contribution against the Company was not prejudiced. The said duty arises pursuant to the common law;
20.2.......... The defendant estimates the value of the land comprised in Certificate of Title Register Book Volume 4383 Folio 103 and referred to in paragraph 16.3 above to have been $2.1m based upon a report by JLW Advisory Services dated 31 December 1996 which estimated the value as follows:
20.2.1....... Open Market value as a going concern $2.1M;
20.2.2....... Land on existing use $600K;
20.2.3....... Plant and equipment $1m;
20.2.4....... Goodwill $500,000;
20.2.5....... Forced Sale Value $1.4m.
20.3.......... The effect of the plaintiff issuing the demand referred to in paragraph 4 was that the Company had no option other than to appoint an administrator.
20.4.......... The effect of the matter referred to in paragraph 20.3 was that the final realisable value of the company’s assets (excluding stock and accounts receivable) $380,000 of which $353,287.00 was paid to the plaintiff by the liquidator, as opposed to the JLW estimate of $2,100,000.
20.5.......... As a consequence of the matters referred to in paragraphs 20.3 and 20.4 the defendant has lost the ability to recover against the Company, (or in the alternative that ability has been prejudiced) and further the actions of the bank referred to in paragraph 20.3 were amounted to a breach of the duty referred to in paragraph 20.1, as the bank could reasonably foresee that:
20.5.1....... If the bank made a demand for $1,353,777.69 in 7 days that the Company could not meet the same;
20.5.2....... That if the Company could not meet the demand within 7 days that it would be placed in Administration or Liquidation;
20.5.3....... That placing the Company into Administration or Liquidation would reduce the value of the security held by the plaintiff and would reduce the ability of the defendant to exercise its right of contribution against the Company.”
At the hearing Mr Ericson appeared for the plaintiff. The defendant, who is a legal practitioner, appeared on his own behalf. Mr Ericson contended that the alleged “duty of care to ensure that the value of any security was maintained and that the defendant’s right of contribution against the company was not prejudiced” could only be characterised as a duty of care ascertained by reference to the principles of the law of negligence. I accept this submission, particularly as the defendant has asserted that the duty arose “pursuant to the common law” and a reference is made in paragraph 20.5 to the fact that “the bank could reasonably foresee” certain matters. The defendant has used the language of the law of negligence.
Mr Ericson referred to a number of cases in support of his contention that the only duty that could have arisen in these circumstances was a duty of good faith on the part of a creditor realizing securities. He first referred me to Pendlebury v The Colonial Mutual Life Assurance Society Limited (1912) 13 CLR 676. That case involved a mortgagee exercising a power of sale. It is clear from the judgments in that case that the mortgagee had a duty to act in good faith and could not “recklessly or wilfully sacrifice the interests of the mortgagor ...” per Griffith CJ at 680.
The position was made plain by Isaacs J where he said (at 700):
“Regarding the matter from the standpoint of principle it seems to me clear that the word ‘recklessly’ cannot include mere negligence or carelessness in carrying out the sale.”
This approach was followed by Zelling J in Citicorp Australia Limited v McLoughney and Anor (1983) 35 SASR 375. His Honour reviewed the authorities, including Pendlebury and the English decision of Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949, a decision of the Court of Appeal. In that case it was held that a mortgagee when exercising a power of sale owed a duty to the mortgagor to take reasonable care to obtain a proper price for the property.
That approach has not been followed in Australia and was not followed by Zelling J in Citicorp Australia v McLoughney. Zelling J said (at 381):-
“The view of the High Court of Australia in Pendlebury’s case on mortgagee’s duties under powers of sale is supported by the leading text-book on powers: Farwell on Powers (3rd ed., 1916), p. 620. The decision in the Cuckmere Brick case has been criticized, and in my opinion rightly, in Meagher, Gummow and Lehane: Equity, Doctrines and Remedies (1975) pages 46-47, pars. 229-230. I would go further. The basic flaw in my respectful opinion in the reasoning in Cuckmere Brick is to formulate the test as equating common law negligence with the equitable duty on a mortgagee to take reasonable steps in exercising his power of sale to obtain the best possible price. The latter is merely one aspect of the doctrine of equity relating to fraud on a power, i.e. the misuse of a power given for a particular purpose. Negligence is the breach of a duty of care owed by A to B causing damage and here (if applicable) by a mortgagee to a mortgagor. But a mortgagee has two duties: one not to sacrifice the mortgagor’s rights in the mortgaged property otherwise than so far as is necessary to realize his security; and the other to realize his security so as to protect adequately his own interests. It is because these two duties interact and there is no hard and fast sole duty of care to the mortgagor, that equity has provided the solution adopted in Pendlebury’s case and referred to in Farwell on Powers. In my opinion, that solution is still the law in South Australia today.”
The cases referred to to date deal with the position of a mortgagee. Mr Ericson relied upon Johnson and Ors v AGC Limited (1992) 59 SASR 382 to support the proposition that the same duty of good faith applies as between a creditor and a guarantor. That case involved a mortgagee dealing with the mortgaged property in a manner which, according to the guarantors, had disregarded their interests. The Full Court held that the relevant principle was to be derived from Pendlebury’s case. There was a duty to act in good faith and not recklessly such as might sacrifice the mortgagor’s interest. In addition, the Court held that even where the mortgagor acted in bad faith, that did not discharge the guarantee. It merely enabled the guarantors to off-set the difference between what was obtained and what should have been obtained against the debt by the creditor from the guarantor. This constitutes an additional basis for concluding that paragraph 20 of the more explicit defence is bad.
In accepting Mr Ericson’s submissions, I conclude that paragraph 20 should be struck out because it purports to plead a duty of care according to the principles of the law of negligence whereas the only duty which arises is a duty of good faith as enunciated by the High Court in Pendlebury and subsequent cases. Those principles apply to the position as between creditor and guarantor. It must follow that paragraph 20 of the more explicit defence should be struck out. However, the defendant should be given the opportunity to overcome the defect that I have found to exist by amending the defence if he so chooses.
I will hear counsel as to costs.
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