Artistic Builders Pty Ltd v Elliot & Tuthill (Mortgages) Pty Ltd - [2002] NSWSC 16

No judgment structure available for this case.

CITATION: Artistic Builders Pty Ltd v Elliot & Tuthill (Mortgages) Pty Ltd & Ors [2002] NSWSC 16

CURRENT JURISDICTION: Equity

FILE NUMBER(S): SC 4825/01

HEARING DATE(S): 6/11/01-12/11/01

JUDGMENT DATE: 8 February 2002

PARTIES :

Artistic Builders Pty Ltd (plaintiff)
Elliot & Tuthill (Mortgages) Pty Ltd (1st defendant; cross-defendant)
Nova Scotia Developments Pty Ltd (2nd defendant; 1st cross-claimant)
Metlej Developments Pty Ltd (3rd defendant; 2nd cross-claimant)
Kayrouz Constructions Pty Ltd (4th defendant; 3rd cross-claimant)
L.A.D.S. Developments Pty Ltd (5th defendant; 4th cross-claimant)
Nordoc Pty Ltd (6th defendant)

JUDGMENT OF: Campbell J

COUNSEL : M Walton SC (plaintiff)
N Francey (1st defendant; cross-defendant)
J Kelly SC (2nd-5th defendants; cross-claimants)

SOLICITORS: Harris & Company (plaintiff)
Elliot Tuthill (1st defendant; cross defendant)
Metledge & Thompson (2nd-5th defendants; cross claimants)
Foleys, Solicitors (6th defendant)

CATCHWORDS: MORTGAGES - general law duty owed by mortgagee exercising power of sale - duty owed to third mortgagee same as duty owed to mortgagor - MORTGAGES - general law duty owed by mortgagee exercising power of sale - effect of first mortgagee taking deliberate action to keep seriously interested potential purchaser away from auction organised by first mortgagee - MORTGAGES - general law duty owed by mortgagee exercising power of sale - effect of first mortgagee's exercise of power of sale being affected by first mortgagee seeking an advantage for itself - MORTGAGES - general law duty owed by mortgagee exercising power of sale - juristic origin of duty to act in good faith - MORTGAGES - general law duty owed by mortgagee exercising power of sale - remedy for breach of duty - CORPORATIONS - RECEIVERS MANAGERS AND CONTROLLERS - duty of controller of property under s 420A Corporations Act 2001 (Cth) in selling that property - CORPORATIONS - RECEIVERS MANAGERS AND CONTROLLERS - remedies available for breach of s 420A Corporations Act 2001 (Cth). - CORPORATIONS - whether remedy of damages available under s 1324 (10) Corporations Act 2001 (Cth) when there is breach of duty established by the Act, but no injunction is sought concerning that breach - CORPORATIONS - RECEIVERS MANAGERS AND CONTROLLERS - who can obtain a remedy under s 423 Corporations Act 2001(Cth) against a controller who breaches a statutory duty established by Corporations Act - CORPORATIONS - RECEIVERS MANAGERS AND CONTROLLERS - range of remedies available under s 423 Corporations Act 2001 (Cth) - CORPORATIONS - RECEIVERS MANAGERS AND CONTROLLERS - procedure adopted by the Court in conducting an inquiry under s 423 Corporations Act 2001 (Cth). - PROCEDURE - separate hearings on liability and damages - when appropriate to order inquiry as to damages - PROCEDURE - election between remedies - MORTGAGES - general law duty owed by mortgagee exercising power of sale - form of order appropriate when inquiry and account ordered, following breach of duty

LEGISLATION CITED: Real Property Act 1900
Corporations Act 2001 (Cth)
Bankruptcy Act 1924 (Cth)
Bankruptcy Act 1966 (Cth)
Companies Act 1961 (NSW)
Companies Act 1963 (NT)

CASES CITED: Hawkesbury Valley Developments Pty Ltd v Custom Credit Corporation Ltd (1994) 8 BPR 15,581
Southern Goldfields Ltd v General Credits Ltd (1991) 4 WAR 138
Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676
Forsyth v Blundell (1973) 129 CLR 477
Warner v Jacob (1882) 20 ChD 220
Belton v Bass, Ratcliffe and Gretton Ltd [1922] 2 Ch 449
Kennedy v De Trafford [1897] AC 180
Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234
Hughes Brothers Pty Ltd v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (1993) 31 NSWLR 91
Hughes Aircraft Systems International v Air Services Australia (1997) 146 ALR 1
Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349
Burger King Corp v Hungry Jack's Pty Ltd [2001] NSWCA 187
Coroneo v Australian Provincial Assurance Association Ltd (1935) 35 SR (NSW) 391
Forsyth v Blundell (1973) 129 CLR 477
Bank of New South Wales v Adams [1982] 2 NSWLR 659
Adams v Bank of New South Wales [1984] 1 NSWLR 285
Colin D Young Pty Ltd v Commercial and General Acceptance Limited (1982) NSWConvR 55-097
Macquarie Bank Ltd v Clarke (Supreme Court of New South Wales - Commercial Division 22 March 1990 (unreported))
Scandinavian Pacific Ltd v Burke (1991) 5 BPR 97413
Garden Mews St Leonards Pty Ltd v Butler Pullnow Pty Ltd (No.2) (1984) 9 ACLR 116
Prioris Pty Ltd v Inscorp Holdings Ltd (Young J, 4 February 1994 (unreported))
Pulsford v Devenish [1903] 2 Ch 625
Woods v Winskill [1913] 2 Ch 303
In Re: Glyncorrwyg Colliery Co [1926] Ch 951
Westminster Corporation v Haste [1950] 1 Ch 442
Inland Revenue Commissioners v Goldblatt [1972] Ch 498
Executor Trustee Australia Ltd v Deloitte Haskins Sells (1996) 22 ACSR 270
Waterhouse v Waterhouse (1999) 46 NSWLR 449
Permanent Trustee Australia Ltd v Perpetual Trustee Co Ltd (1994) 15 ACSR 722
Commissioner for Corporate Affairs v PW Harvey [1980] VR 669
Blair v Maidstone Palace of Varieties Ltd [1909] 2 Ch 283
Re Siromath Pty Ltd (No.3) (1991) 9 ACLC 1587
Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1990) 8 ACLC 39
R v Judges of the Federal Court of Australia; Ex Parte Pilkington ACI (Operations) Pty Ltd (1978) 142 CLR 113
In Re: Hill & Ellis (1942) 13 ABC 57
Re Ah Toy (1986) 4 ACLC 480
Burns Philp Investment Pty Ltd v Dickens [No.2] (1993) 31 NSWLR 280
Commissioner for Corporate Affairs v Harvey [1980] VR 669
United Australia Ltd v Barclay's Bank [1941]
AC 1
Island Records Ltd v Tring International Plc [1996] 1 WLR 1256
Dr Martens Australia Pty Ltd v Bata Shoe Company of Australia Pty Ltd (1997) 75 FCR 230
Tomlin v Luce (1889) 43 ChD 191
Wolff v Vanderzee (1869) 20 LT 353
Hall v Hayward (1886) 32 ChD 430

DECISION: First mortgagee in breach of both general law duty, and of section 420A Corporations Act 2001 (Cth) in exercising power of sale. Remedies of account, and for payment of loss sustained by the breach, ordered for each respective breach, with plaintiff required to elect between those remedies.

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

CAMPBELL J

8 FEBRUARY 2002

4825/01 ARTISTIC BUILDERS PTY LTD v ELLIOT & TUTHILL (MORTGAGES) PTY LIMITED & 5 ORS

HIS HONOUR:

Nature of the Dispute

1 The plaintiff is the third mortgagee of Real Property Act 1900 land at Bankstown owned by Nordoc Pty Ltd. The first defendant, Elliot & Tuthill (Mortgages) Pty Ltd (“E&TM”) holds both a registered first mortgage, and a registered second mortgage, over that property. Nordoc defaulted under the first mortgage. E&TM entered into possession of the mortgaged property, and in due course entered, on 13 September 2001, a contract to sell it. That contract was entered following a public auction of the property.

2 The plaintiff claims that E&TM has breached the general law duties of a mortgagee exercising a power of sale, and also that E&TM has breached the statutory duty under section 420A of the Corporations Act 2001 (Cth). For each of those breaches, the plaintiff claims damages, or such other relief as the Court thinks fit.

Events Prior to 12 September 2001

3 The land the subject of this dispute is located at 228 South Terrace, Bankstown, just across the railway line from Bankstown Square shopping centre. Bankstown City Council has approved the construction on it of three 10 storey residential towers with ground floor commercial area, associated carpark and communal facilities. Nordoc purchased the property on 12 November 1999. On 12 November 1999 Nordoc granted a first mortgage to E&TM, another mortgage to E&TM, and another mortgage to the plaintiff.

4 The mortgage granted to the plaintiff was expressed to be for the purpose of securing to the plaintiff the promises made by Nordoc in certain collateral securities, together with other monies. The collateral securities included a Deed of Unit Trust dated 10 November 1999. That Deed established a unit trust of which Nordoc was the trustee. The units were divided into two classes, “A” and “B”. There was only one “B” unit, and the plaintiff held it. That unit entitled the plaintiff to require Nordoc to pay it $3.7m, plus interest on that sum, in three instalments, 15, 27, and 30 months after the date of the Trust Deed. There was a provision whereby, if at the time any instalment was due, a building had been constructed on the land, the plaintiff could take certain identified lots in the strata plan of that building instead of the money. The plaintiff also held 10% of the issued “A” class units in the Trust. The “A” class units conferred rights of beneficial ownership to both capital and income of the trust fund.

5 The mortgage, which Nordoc gave to the plaintiff, acknowledged that at the date of the mortgage the sum secured was $4m.

6 The first mortgage which Nordoc gave to E&TM is dated 12 November 1999. It secured a principal sum of $6,111,000, repayable on 24 October 2000.

7 The second mortgage which Nordoc gave to E&TM is also dated 12 November 1999. It is a collateral mortgage, given to provide further security for an advance ($2,296,000) which E&TM had already made to a company called Golf Links Estate Blackheath Pty Ltd. That mortgage is registered as a second mortgage.

8 The first page of the mortgage which Nordoc granted to the plaintiff is in the standard form used by the Land Titles Office. The blanks in that form, where one states the prior encumbrances, have not been filled in. Hence, on its face it is not clear whether it is a first, second, or some subsequent ranking of mortgage.

9 Mr Albert Chahine is a director of the plaintiff and, so far as the evidence discloses, its moving spirit. He asserts that the plaintiff’s mortgage over the Bankstown land should be a second mortgage, not a third mortgage. In July of this year the plaintiff commenced proceedings (“the July proceedings”), to which E&TM is a defendant, in the Supreme Court of New South Wales, seeking to vindicate Mr Chahine’s view concerning the priority of the mortgages. Those proceedings allege that E&TM misrepresented to the plaintiff’s solicitors what the priority of the mortgages would be, and claim damages for that alleged misrepresentation. The July proceedings had, by the time of the hearing of these proceedings, proceeded no further than issue of a statement of claim. The plaintiff has conducted the present proceedings on the basis that it is a third mortgagee. I am not asked to decide, in the present proceedings, what the agreement really was concerning priority of the respective mortgages, or what representation were made on that topic. However, the fact that the plaintiff had made this claim about the priority of the mortgages, and had begun the July proceedings, played a part in the events which led to the present dispute.

10 Companies associated with Mr Chahine spent over $960,000, in the period commencing November 1997, in obtaining building approval from Bankstown City Council for the property. Most of this money was spent on fees paid to the Council and to consultant architects, engineers and other experts. As well, substantial building work had been carried out on the property. There has been a substantial excavation of the site, and construction of retaining walls. Most of the ground or lower basement floor works, including foundations, concrete slab, lift wells and columns have been commenced. Approximately forty percent of the basement carpark has been completed. Millions of dollars have been spent on the building work to date, but at the time of the auction, the subject of these proceedings, very significant amounts of building work remained to be done. Further, there was some uncertainty about the extent to which the work which had been done was in accordance with the Council approved plans.

11 Nordoc did not repay the principal sum due under the first mortgage when it was due, on 24 October 2000. On 4 May 2001 E&TM served on Nordoc a notice under section 57(2)(b) Real Property Act 1900. That notice required repayment of the principal sum ($6,111,000), interest unpaid to 25 April 2001 ($198,607.50) plus interest which continued to accrue (at a daily rate of $2,182.50). That notice was not complied with.

12 E&TM is a company the directors and shareholders of which are Mr Jack Jordan (known as Mr John Jordan) and Mr David Jordan. Those gentlemen are father and son, respectively, and practise together as solicitors in the Sydney suburb of Cronulla. Their firm is known as Elliot Tuthill Solicitors. E&TM is a solicitor’s nominee company for mortgage transactions.

13 After the date of default, Mr John Jordan had many meetings with people who represented to him that they were interested in purchasing the property. There was also some interest expressed to him in purchasing the first mortgage.

14 On 8 June 2001 Mr Chahine was telephoned by Mr Joe Metlej. Mr Metlej told him “we want to buy the property for $9M. We have been trying to find someone who can accept our offer. Can you help us?”. Mr Metlej then, at Mr Chahine’s request, sent Mr Chahine a fax saying “In relation to the abovementioned property, we offer $9M to include land, work to date, DA plus BA and all working drawings including engineers, architects, electrical, hydraulics and mechanical. All fees paid to council and other bodies to become ours.”

15 Mr Chahine promptly passed this facsimile to his solicitor (Mr O’Brien, of Harris & Co). On 8 June 2001 Mr O’Brien in turn faxed Mr Metlej’s written offer to Mr John Jordan, under cover of a document which said:

“We are instructed that your client has taken action to list the Bankstown property for sale by public auction. Please provide full details of your client’s intentions in this regard.

Our client has received an offer from a prospective purchaser of the property. A copy of the offer is attached. You will note that the offer price is $9 million.”

16 By a date no later than 18 July 2001 (the date of an advertising schedule tendered in evidence) E&TM had instructed Jones Lang LaSalle, real estate agents, to conduct an auction of the property. That auction was initially fixed to occur on 30 August 2001. That firm arranged for two signboards, approximately 8 feet by 10 feet to be erected on the property advertising the auction. Advertisements were arranged to be placed in both the Australian Financial Review and the Sydney Morning Herald. Coloured brochures advertising the property were prepared and mailed out to 568 potential purchasers. People who responded to the advertising campaign were sent an information memorandum about the property. In due course, copies of the contract for sale of land in relation to the property were sent to 16 different enquirers.

17 One of those enquirers was Sharon Lightner, a real estate agent at Newport Beach, who was sent a contract on 1 August 2001. She sent a fax, addressed to David Jordan, on 17 August offering $7m for the property, and offering to exchange that day. John Jordan telephoned her, and told her that the property must go to auction.

18 By 6 August there were five caveats lodged on the title of the property. One was lodged by the plaintiff, protecting its interest under the mortgage. Another was lodged by a company connected with Mr Greg Huxley, about whom more will be said later in this judgment. The other three were lodged by companies which appear, from the skimpy evidence I heard on this topic, to be unsecured creditors of Nordoc, whose debts were overdue.

19 On 27 August 2001 Jones Lang LaSalle wrote to John Jordan saying:

“Just to let you know that at approximately 2pm today I received a call from Michael Issac advising that serious disruptions may occur at the auction next Thursday and it was requested that you be advised that the site will be blackbanned by unions until all sub-contractors are paid and that the site will never be constructed until all creditors are paid.

Furthermore it is expected that unions, suppliers, the Securities Commission, sub-contractors and the media will be in attendance at the auction and will be ensuring that prospective purchasers are aware of the implications of purchasing this property.

Obviously threats of this nature need to be considered serious and would appreciate your instructions as to how you would propose us to respond in the period leading up to the auction and on auction day.”

20 Leduva Pty Ltd (“Leduva”) is a company run by Mr Kashlah Taouk. Mr John Jordan had acted as a solicitor for Mr Taouk for more than 25 years and for Leduva for many years. Mr Taouk has been involved in the building industry in New South Wales for about 28 years, in the course of which he has been responsible for the erection of many blocks of flats. He has borrowed money from E&TM on a number of occasions for his developments, borrowing up to $7m on at least one occasion. Mr John Jordan was familiar with the financial state of Leduva as a result of acting for Mr Taouk over the years. In September 2001 Leduva owned a number of properties – six were identified in evidence - some of which were unencumbered, some of which were mortgaged to E&TM but with substantial equity remaining after the mortgage. While Leduva’s net assets were not precisely quantified in the evidence, they were worth at least several millions of dollars. Either Elliot Tuthill Solicitors, or E&TM, held the certificates of title to all Leduva’s properties. Mr Taouk’s business enterprises generated cash flow of the order of $40,000 to $45,000 per month.

21 Some time after advertising of the Bankstown property had commenced, Mr Taouk came to Mr John Jordan’s office and said that he was interested in purchasing the property. Mr Jordan discussed the possible purchase of the property by Leduva with Mr Taouk, on several occasions, but always made it clear that he was acting on behalf of the first mortgagee, and if Mr Taouk decided to buy the property, he would need to get his own advice.

22 However, for a period in August 2001, Mr John Jordan felt able to assist Leduva in its efforts to acquire the property without there being a conflict of interest. On 14 August 2001, Mr John Jordan wrote, on behalf of Leduva, to Nordoc. He set out the basic concept of an offer which Leduva wished to make. It involved Leduva purchasing the land (and all approvals and plans associated with it) from Nordoc for $9.2 million, Leduva completing construction of the buildings, and Leduva giving Nordoc an option to purchase the finished units in the building for $46.5 million, with that option being required to be exercised three months prior to completion of the building. It was another term that:

“Nordoc is to arrange with all mortgagees and caveators on the title to agree to the above arrangement. We would expect that Nordoc would come to some arrangement with these parties to satisfy debts to them at the time the option was exercised.”

23 On 15 August Mr John Jordan wrote again on behalf of Leduva to Nordoc adding two terms to the proposal which he had put the previous day. One was that the option fee which Nordoc would pay on exchange of contract, would be $2.5 million, non-refundable. The other was that the $46.5 million price which Nordoc would pay on exercise of the option would be free of GST.

24 On 16 August 2001 Mr John Jordan wrote to Mr Greg Huxley (of Jencave Pty Ltd) who was seeking, in some manner not fully explored in the evidence, to advance the possibility of Nordoc selling the land to Leduva. In that letter to Mr Huxley, Mr Jordan added some additional content to the proposal that Leduva was putting forward. The additional material included:

[sic]

25 This was the first mention of any suggestion or requirement that the July proceedings be discontinued, as part of Leduva’s proposal for there to be a sale of the land by Nordoc. The evidence did not explore how it happened that Leduva should be putting forward such a requirement.

26 After mentioning other details of Leduva’s proposal to purchase the land from Nordoc, Mr Jordan’s letter said:

“The auction of the property by the first mortgagee is to be held on the 30 August. We expect the first mortgagee will require the abovementioned matters to be completed within 7 days to allow the proper conduct of the auction if consents cannot be obtained.”

27 This paragraph of Mr Jordan’s letter is significantly at odds with the course which E&TM later took.

28 By 28 August 2001 Mr Taouk had retained Mr Steven Sukkar, solicitor, to act for him in connection with Leduva’s possible acquisition of the Bankstown property.

29 On 28 August 2001 a lengthy conference was held at the offices of Elliot Tuthill solicitors. Mr Taouk and his new solicitors attended, as did Mr John Jordan and Mr David Jordan (for E&TM), and Mr Ghassibe and Mr Wypych. Mr Ghassibe and Mr Wypych had introduced the property to Mr Taouk, and had an arrangement with him where they would receive some sort of commission or consultancy fee if Mr Taouk was the successful purchaser. No representative of the plaintiff was present. After that meeting Mr John Jordan wrote to Mr Huxley as follows:

“The Purchaser’s Solicitors are willing to prepare terms of a agreement to purchase the property which they can submit to Nordoc Pty Limited for approval but require, before entering into this expense answers to the following questions which can be faxed to Leduva Pty Limited’s Solicitors. Would you also authorise me to give the Purchaser’s Solicitors your email, fax and phone number.

Leduva Pty Limited wish to be assured of three major points before preparing the terms of Contract:-

1. That all Caveators and Mortgagors other than the Elliot Tuthill Mortgages irrevocably agree, prior to the time that the Contract is entered into, to discharge their Mortgage or Caveat.

2. That prior to exchange of Contracts that interest be brought up to date, by way of bank cheque, as far as the first Mortgagee is concerned. Nordoc Pty Limited should provide evidence that these monies are available and such evidence should include where the monies are presently held.

3. That the contract price be $9.2 million payable as to $6.7 million on settlement and the balance secured by way of second Mortgage. This is to allow Leduva Pty Limited to obtain finance to build the building and the second Mortgagee will need to consent to that Mortgage. An Option Agreement be entered into simultaneously with the sale Contract. Such Option to provide for a deposit of $100.00 and the balance of 2.5 million option fee to be paid either on the exercise of the Option Agreement which shall relate to the purchase of a completed building at $46.5 million. The Agreement will provide for exercise on a time of the essence basis and if not exercised the second Mortgage will provide that a discharge of the same can be registered at the time that the option expires because of non exercise.

In this regard a discharge of Mortgage should be made available at settlement of the land but to be held in trust by a Trustee pending the completion of the option period.

If the option is exercised the Option fee will be paid by Nordoc Pty Limited and used to discharge the second Mortgage. The second Mortgage will contain a condition that once the Strata Plans are presented for the second Mortgagees consent, then if that consent is not endorsed on the documentation within 7 days of presentation that the Mortgagor be appointed as Attorney on behalf of Nordoc Pty Limited to sign the documents of approval for the Plan.

Without the above matters being addressed immediately, Leduva Pty Limited will not take any further action in regard to the exchange of Contracts.

We wish to make it clear that we are acting only on behalf of the first Mortgagees and are writing this letter as a matter of expedition for the Purchaser and the Vendor of the land.”

30 Nothing more was heard by anyone connected with E&TM of this proposal for Nordoc to sell the land to Leduva, until 11 September 2001.

31 The auction did not take place on 30 August. It was postponed to 10.30am on 13 September 2001, and was then to be held at auction rooms in George Street in the city. Mr John Jordan gives evidence, which I accept, that:

“We were advised by a valuer that there were interested parties in the site and that they hadn’t enough time to prepare their due diligence on site. And also it was recommended by the agent that he thought another two weeks advertising would be preferable.”

32 On 30 August, Mr John Jordan went on holidays. He went on a cruise, and was uncontactable. He did not return to the office until the middle of the day on 13 September, after the auction of the property had concluded. Mr David Jordan had the conduct of the matter in his absence.

33 However, Mr David Jordan did not acquaint himself with the correspondence on his father’s file. He gave evidence that his father had “left detailed notes or some notes on each of the matters…which he had carriage of”. Those notes did not inform him that Mr Metlej had offered to purchase the property for $9 million, and he was otherwise uninformed about Mr Metlej’s offer. He could not recall, as at 13 September, that Sharon Lightner had made an offer of $7 million for the property. Notwithstanding the advice from the agent handling the auction, no additional advertising of the property took place. The signboards erected on the property advertising the auction were not altered to show the new auction date and time.

34 On 11 September, Mr David Jordan received a fax from Mr Huxley, saying that Mr Coote and Mr Palmer (from Nordoc) wanted to meet him the next day. Mr Jordan replied, asking that Messrs Coote and Palmer put any proposal in writing. No written proposal was received from Messrs Coote and Palmer, and no appointment made for Mr Jordan to meet them.

35 On 11 September Mr Jordan phoned Mr Sukkar and asked whether anything was happening with Mr Taouk and the Bankstown property. Mr Sukkar told him:

“Yes. They have got 30 days from exchange to clear the title. If they don’t, the damages for the purchaser are up to five million dollars. So all Caveators will be gone. There will be a second mortgage of two million five hundred thousand dollars. I’ve got a Senior Solicitor, Andrew Thorpe assisting with the final amendments to these agreements.”

This was a reference to agreements to document the proposal that had been discussed on 28 August.

Events of 12 and 13 September

36 Shortly after lunchtime on 12 September, Mr Taouk rang Mr Jordan, saying that he wanted to exchange on the Bankstown property on that day. Mr Jordan said that he would need to look at any contract first. There was some talk between them about payment of a deposit. It seems to me probable that Mr Taouk asked Mr Jordan if he could borrow the amount of a deposit from E&TM, that Mr Jordan told Mr Taouk that it would not be possible for him to borrow the deposit from E&TM, and that Mr Jordan told Mr Taouk he would have to pay a deposit by bank cheque. It is common ground between the two of them, that Mr Jordan told Mr Taouk to come to see him, and that he would have a look at the contract.

37 Mr Jordan telephoned Mr Sukkar and had a conversation to the following effect:

“Look, Kash just phoned me about one and a half hours ago and he was quite “crackly” but what I understand is that he wants to come down and exchange a contract. What about the consent of Artistic Builders?”

“Well, it’s conditional upon them providing that within 30 days”.

“What if they don’t?”

“They pay Kashlah five million dollars”.

“What if they don’t”.

“They are in default”.

“How does that help the mortgagees?”

“Well that’s a matter for you”.

“Our last meeting we had in our office a couple of days before the first auction date of 30 August the arrangement was that they would provide those things before exchange. We won’t be consenting to any contract that’s conditional. What about his finance?”

“It’s approved in principle. A few finance guys have had a look at it but it proved a little bit more difficult than first thought”.

“What if it’s not approved ultimately?”

“He loses his deposit”.

“Does Kash know that? He hears but he sometimes doesn’t listen. It is in your interest to phone him and put that to him.”

38 Mr David Jordan gives evidence that he then telephoned Mr Huxley, and Mr Huxley said to him:

“I am not acting for Nordoc, I don’t know why they blacken my door. Coote & Palmer said that Mr Taouk is paying the deposit from Elliot Tuthill and that construction finance had been arranged for Mr Taouk by Coote & Palmer. Coote & Palmer say that the third mortgagee will release the claim providing they can see that the deposit is paid and contracts are exchanged because they have a deal with Coote & Palmer. Mr Taouk was giving Coote & Palmer a cheque for the deposit and was giving Nordoc an authority to deal with it as they wish but they (Coote and Palmer on behalf of Nordoc) will direct it to be released to Elliot Tuthill Mortgages. Elliot Tuthill received a cheque on a without prejudice basis and make no comment on the Contract. Coote and Palmer go to Chahine and show them that they now have an exchanged Contract and Elliot Tuthill can pay three quarters’ interest to the Mortgagees because Kashlar will give an authority to Nordoc to deal with the cheque as it pleases”.

39 Pausing there, all the concerns which Mr Jordan raised in his telephone conversation with Mr Sukkar, were sensible ones for someone in Mr Jordan’s position to raise. The answers which Mr Sukkar gave concerning them showed that the notion that Mr Taouk should, “come down and exchange a contract”, was not as simple as it sounds. Many questions needed to be answered before Mr Jordan could be satisfied that exchanging such a contract was a real, viable alternative course of action for him. In particular, there was a catch-22 situation concerning the entry into of the contract, and the provision by Artistic Builders of its consent – Mr Sukkar had told Mr Jordan that the contract was conditional upon Artistic Builders providing its consent within 30 days, yet Mr Jordan had made clear to Mr Sukkar that E&TM would not be consenting to any contract that was conditional. Also, the contract being talked about was, of course, one whereby Nordoc sold to Leduva – so more would be required to exchange that contract than simply for Mr Taouk to come to see Mr Jordan, and for those two men to decide what terms were satisfactory to them – Nordoc’s agreement to the terms was also necessary.

40 Mr Jordan’s conversation with Mr Huxley was one which raised even more difficulties. First, Mr Huxley asserted that Coote and Palmer had told him that Mr Taouk was paying the deposit from Elliot Tuthill – yet Mr Jordan had refused Mr Taouk’s request that Elliot Tuthill should provide the deposit. Second, Mr Huxley told Mr Jordan that Coote and Palmer said that the third mortgagee (Artistic Builders) would release its claim (ie the claim made against E&TM in the July proceedings) “providing they can see that the deposit is paid and contracts are exchanged”. There does not seem to be any basis for Mr Jordan to have thought that Artistic Builders would release its claim at any different time to when it consented to the contract. If that is so, that provides another reason why, on the information which Mr Jordan had, there was an impasse – E&TM would not be consenting to a contract which was conditional on Artistic Builders providing consent at some later time, and Artistic Builders would consent, provided it could see that contracts were exchanged. Third, Mr Jordan had told Mr Taouk he would have to pay a deposit by bank cheque – yet Mr Huxley was telling Mr Jordan that Mr Taouk was giving Coote and Palmer a cheque for the deposit, which could be passed on to Elliot Tuthill Mortgages – but without saying that that cheque was a bank cheque. (I confess I am not sure that I understand the last two sentences of the conversation which Mr Jordan attributes to Mr Huxley (beginning “Elliot Tuthill received a cheque…”). Those sentences were not further explored by cross-examination. In those circumstances I would not seek to draw any conclusions from them.)

41 At about 4.30pm on 12 September, Mr Coote, Mr Palmer, Mr Taouk, Mr Ghassibe and Mr Wypych arrived at Mr Jordan’s office. A conversation to the following effect occurred:

“What can I do for you?”

“We want you to consent to a contract being exchanged with Leduva”.

“What about the Caveators?”

“We can get that”.

“Look, the first I knew about this was yesterday after lunch. We [Mr Taouk, his solicitor, Steven Sukkar, Mr Wypych, Mr Ghassibe, Mr John Jordan and myself] had a meeting. It was on the 28 of August, two days before the first appointed date for the auction. Nothing has happened since then. During that meeting it was made perfectly clear that the first mortgagee would do nothing until they received confirmation from the third mortgagee [Artistic Builders Pty Limited] that it would, firstly, consent to the arrangement and secondly, withdraw its proceedings against us. That hasn’t been forthcoming. We haven’t heard from the third mortgagee’s solicitors.”

“No. That wasn’t the arrangement. We were to have fourteen days to get that consent.”

Mr Jordan saw Mr Ghassibe nod his head in agreement.

“I don’t think that’s right, but minutes were taken and I can check. But why wouldn’t I just let this go to auction? There is a lot of interest in this site. What if Chahine doesn’t agree with this arrangement and doesn’t withdraw the proceedings against Elliot Tuthill.”

“But he will. All we have to do is show him a signed contract from you”.

“But what if he doesn’t”.

“But he said he will”.

“But if he doesn’t all we have done is put the auction off. It has already been delayed once. We will lose credibility with potential buyers out there and that surely can’t help the first mortgagee”.

“All we have to [do] is show Chahine an exchange contract”.

“Chahine says ‘show me. Don’t tell me’ so if we show him an exchanged contract he’ll be alright”.

“Kash’s solicitor tells me he’ll get the documents down here later on. I’ll have a look at them overnight”.

“Well, can we meet first thing in the morning?”

“Well no, you will have to leave it until about 8.00am to give me an opportunity to go through the documents”.

42 This conversation made quite clear there was an impasse in that Mr Jordan was insisting that Artistic Builders provide its consent before exchange of contracts, while Mr Wypych and Mr Ghassibe were of the view that Artistic Builders would consent once contracts were exchanged. Further, Mr Jordan, not just once but twice, referred to withdrawal of the July proceedings as a condition of E&TM agreeing to the proposed contract. Further, Mr Jordan agreed to Mr Coote’s proposal that they meet the next morning to discus further the possible entering of this contract. In the context of the conversation, and given that it would be necessary for both Nordoc and Leduva to be present if a contract was to be exchanged, it seems to me that the “we” who Mr Coote suggested, and Mr Jordan accepted, should meet the next morning included representatives of both Nordoc and Leduva, and that Mr Taouk was the relevant representative of Leduva.

43 In fact, Mr David Jordan did not see any contract that day. Mr Sukkar could not get the documents to him before it was time for Mr Jordan’s office to close. The two solicitors made an arrangement that Mr Sukkar would courier the contract to Mr Jordan, and have it left at the fruit shop next door to Mr Jordan’s office, so that Mr Jordan could pick it up from there.

44 Unfortunately on 13 September the fruit shop did not open as early as it normally did, and Mr Jordan was not able to collect the contract from there until about a quarter to eight in the morning. The contractual documentation was 101 pages long, and included not only a contract for the sale of the land by Nordoc to Leduva, but also a draft mortgage, and a draft deed of agreement between Leduva and Nordoc. It was the sort of document which even the most skilled lawyer could not absorb quickly.

45 Mr David Jordan had more to attend to that morning than just the reading of the contract. He had, at 7.10am, received an email from Mr Huxley in the following terms:

“I have been in the office since am and dealing with Coote and Palmer – who called me at 5:05am. They can get this across the line this morning, I believe. But we need to hold the line on this.

They will send you a letter shortly. Whilst it has some merit – I do not think that you will agree with it.

I have suggested to them a way in which I believe they can settle with Chahine – this morning – but it involves them making some sacrifice – which in all the circumstances does not seem to me to be unreasonable – and get Chahine to withdraw against ETM and Jencave – which is what we all want, after all.

[?put]

Of course, you may have your own views and accept what they put to you this morning. If so, that fixes the problem for all of us.

If I can assist you or ETM in anyway, I will.

On another note, Jencave will respond formally to your letter of the 12th September 2001 later today. I understand that you need to send the letter on behalf of mortgagees and we will get a move on. I think that you are aware that the challenges by Chahine etc and other issues re: Blackheath and others etc, has made this matter very difficult for us. We have spent a lot of time and money re-designing the project to make it viable and preserve the council approvals etc – so obviously want to complete. We have made offers to certain caveators to try and get them to agree to release that seems to be a problem which we can mutually overcome – but none the less it is an issue as of today.”

46 At 8.18am Mr Jordan replied by email to Mr Huxley saying:

“Thanks for your email this morning and your help in this matter.

The concerns I have are these:

- There is absolutely no doubt that the arrangement made with respect Chahine was that any exchange by Nordoc to Kashlar would not be ratified by the 1st mortgagee unless we were provided before exchange with confirmation from Chahine that he would discontinue Court proceedings against the 1st mortgagee and we were provided with a Notice of Discontinuance and Terms of Settlement which would prevent Chahine from reinstituting the proceedings. It was said yesterday in our meeting that John Jordan said he would give 14 days after exchange to receive those documents. I was in that meeting and my best recollection was that we required those things before exchange. I have now had the benefit of reading the Minutes taken during that meeting and those Minutes confirm my recollection. In any event it is now the 11th hour and they had had 16 days to obtain these documents and it hasn’t been forthcoming. I received a call from Kashlar just after lunch yesterday informing me that he wanted to exchange that afternoon and could we raise $300,000 for him. My short answer was that we couldn’t raise that sort of money in that time.

There is a lot of interest in this site and despite our attitude in the past where we take a ‘dive’ I suspect that this property won’t sell at Auction because the 1st mortgagee will be holding out for all on the money outstanding.

- Whether it sells at Auction or not it seems to me that it would be preferable to deal with other parties. Whilst I have not been involved with a lot of these matters, Nordoc, Blackheath, Batemans Bay etc they all go around in a circle and very rarely, if at all, does anything ‘come off’ that is promised by the Coote & Palmer group. My apologies if they can point me to something that has come off. But without John Jordan’s input I’m flying a bit blind regarding past history.

I look forward to your letter re Blackheath.

Thank you for your assistance.”

47 Mr Huxley sent Mr Jordan a further email at 8.54am, as follows:

“Coote has just rung – he is speeding to meet up with Kash who is now with Chahine as we speak in Cronulla. They are now acting with the speed that we would have expected 14 days ago.

They may get a result this morning.

I will keep you posted.”

48 Mr Jordan met Mr Taouk, Mr Wypych and Mr Ghassibe in his office. Mr Jordan puts the meeting as taking place at about 9.30am. Mr Taouk also puts it at half past nine. Mr Ghassibe and Mr Wypych say they did not get to see Mr Jordan until about 9.50. It is not necessary to resolve this difference in the evidence. I observe, though, that no-one from Nordoc attended Mr Jordan’s office on 13 September. The contract that Mr Jordan was considering was, of course, one whereby Nordoc sold the property to Leduva. Thus, even if Mr Jordan had found the contract completely acceptable, it could not have been executed and exchanged then and there.

49 At that meeting, Mr Taouk produced a wad of $100 notes, and said “I have the money. The rest is in the boot.” (Mr Wypych gave evidence that the money for the deposit was in the boot of Mr Taouk’s car, which was parked very close by.) Mr Jordan expressed doubts about the contract, saying that it was still a conditional contract, that it provided for settlement in mid January, that it did not provide for release of the deposit to the vendor, and that he had not heard from Mr Chahine’s solicitor. There was also discussion to the effect that Mr Jordan was expecting to receive $100,000 from Mr Huxley, but it had not arrived.

50 Mr Jordan told those present that he was going to let the property go to auction. He took from Mr Taouk, his mobile phone number. Mr Taouk waited outside the building where Mr Jordan’s office was located. Mr Jordan telephoned Mr Taouk two or three times in the next half hour or so.

51 Immediately after Mr Taouk, Mr Wypych and Mr Ghassibe left Mr Jordan’s office, Mr Jordan rang the auctioneer, and told him that the reserve was to be $9.2 million. He chose this figure because it was the purchase price in the contract he had just been discussing. Mr Jordan then, with some assistants, did some further work on the figures contained in the draft contract which he had received that morning. He gave evidence that he came to realise, that although the contract made provision for Leduva to purchase the property for $9.2 million, $2.5 million of that sum was being provided in the form of vendor finance, and that, at the end of the transaction, that vendor finance was not required to be repaid.

52 (It is not quite right to say that at the end of the transaction the vendor finance was not required to be repaid. Rather, the structure of the arrangement was as set out in paragraph 3 of the letter which Mr John Jordan wrote to Mr Huxley on 28 August 2001 (quoted in paragraph 29 of this judgment). That is to say, if Nordoc exercised its option to acquire the units, it would pay Leduva $2.5 million, which Leduva would promptly give back to Nordoc to discharge the vendor finance mortgage, while if the option was not exercised then the vendor finance mortgage did not need to be repaid. Thus, under the documents Leduva would in some circumstances be required to repay the $2.5 million vendor finance. It remains a valid point, however, in using that draft contract as an indicator of how Leduva valued the property, that Leduva would never need to find more than $6.7 million to be able to discharge its obligations to pay Nordoc both purchase price and vendor finance mortgage.)

53 Mr Jordan than rang Mr Sukkar, and obtained confirmation from Mr Sukkar that Mr Taouk was not going to have to pay back the $2.5 million of vendor finance, so that Mr Taouk’s outlay would really be $6.7 million. He contacted the auctioneer again, and told him that the reserve was to be $6.7 million. By this stage the auction was already in progress. Mr Jordan had a loudspeaker phone which enabled him to listen to what was happening at the auction as it progressed, and a representative at the auction who was telling Mr Jordan what was happening there. When the bidding reached $6.6 million, and the auctioneer had announced that he was about to bring the hammer down for the third and final time, Mr Jordan gave instructions to the representative to put the property on the market. There were then no further bids.

54 The successful purchaser, at $6.6 million, was a group of four companies, one of which had as a director, the same Joe Metlej who had, in June, offered to purchase the property for $9 million. Another of the four companies had, as directors, two men of the surname Metlej, who had the same address as that Joe Metlej.

55 I have earlier mentioned that, after Mr Taouk left Mr Jordan’s office on the morning of 13 September, Mr Jordan telephoned him two or three times. It is clear that the last of those conversations is one where Mr Jordan informed Mr Taouk that the property had been sold at auction. There is a conflict in the evidence about the content of earlier conversations. Mr Taouk gives evidence that immediately before he left Mr Jordan’s office he said “The last offer you get let me know. I’ll go higher”. Mr Taouk says that, during one of the telephone conversations he said “Please Mr Jordan. I don’t want to lose the land. It doesn’t matter about the price. I’ll pay more”.

56 Mr Jordan gives evidence that in one of his phone calls to Mr Taouk he asked Mr Taouk if he would pay 6.7 (million dollars) to which Mr Taouk replied “No Mr Jordan, Mr Jordan, Mr Jordan”. Mr Jordan continues “Mr Taouk then said something else that was indistinguishable but I couldn’t wait around as the auction was proceeding.”.

57 In my view it is likely that Mr Taouk, in one of those conversations, said that he wanted to buy the land, and would pay more, but that Mr Jordan did not grasp what he was saying. Mr Taouk speaks English well, but with an accent, and that accent, particularly in a telephone call, could hinder comprehension of what he said.

58 So far, I have been recounting the events of 12 and 13 September which Mr Jordan took part in. There were some other events which he did not take part in.

59 Mr Chahine gave affidavit evidence in chief that at around 6.00pm on 12 September he met Mr Palmer and Mr Coote at the Three Swallows Hotel Bankstown. During the course of that meeting, Mr Coote and Mr Palmer said to Mr Chahine:

“Nordoc has finally reached a deal with Elliot Tuthill. A purchaser is prepared to buy the property for $9.2 million. That will result in $7.6 million being paid to Elliot Tuthill for the first mortgage and $2.5 million being paid to Artistic Builders for its second mortgage. We’ve reached agreement with Jordan and he’ll accept the deal provided that Artistic Builders drops its court action against Elliot & Tuthill and the property. Are you interested?”

“Why did you leave this so late?”

“We have been discussing it for a while between the purchaser and the mortgagee.”

“I’ll consider accepting $2.5 million subject to my solicitor approving it and the legal documents being prepared.”

60 His affidavit evidence was that later that night, either Mr Coote or Mr Palmer telephoned him and said:

“We have arranged a meeting with the purchaser tomorrow morning near Jordan’s offices to finalise the deal. I will phone you tomorrow morning after 6.00am to confirm the meeting with the purchaser.”

61 Mr Chahine modified this evidence a little in cross-examination, saying:

“Originally they did not offer me on the second mortgage. They offered me partial and I said I need after first mortgage full benefit of the second mortgage and Nordoc, the directors agreed, they phoned me later that night and confirmed it.”

62 Before 7.00am on 13 September Mr Coote telephoned Mr Chahine and said: “Go to Cronulla as soon as you can. I’ll arrange for the purchaser to meet you near the offices of Elliot Tuthill at 119 Cronulla Street.” Mr Chahine drove to Cronulla and waited near the appointed place. While waiting, he received a telephone call from Mr Ghassibe, who introduced himself and explained that Mr Coote had given him Mr Chahine’s telephone number. He said: “Can I meet you at a coffee shop in Cronulla with my partners and the purchaser? We’ve reached an agreement to purchase the Bankstown property from the mortgagee, subject to your approval”.

63 The information which Mr Chahine was given in these conversations, was in some respects incorrect. Mr Palmer and Mr Coote had not reached any agreement with Mr Jordan, whether subject to Mr Chahine’s approval or otherwise. Insofar as they had had discussions with Mr Jordan, they did not relate to a purchase of the Bankstown property from the mortgagee – rather they related to a proposal for a sale by Nordoc, on terms that (they hoped) E&TM would not object to.

64 A short time later Mr Chahine met Mr Ghassibe, Mr Wypych, and Mr Taouk in a coffee shop in Cronulla. Mr Taouk told him:

“I’m an old client of John Jordans’, although he has now said I need another solicitor for this matter. I’ve had many discussions with Mr Jordan about an offer that my company, Leduva, has made to buy the Bankstown property. We will pay $9.2 million. I have cheques and cash with me now. The contract is ready at Mr Jordan’s office to be signed. It was sent by my new solicitor to Mr Jordan by courier yesterday.”

65 The discussion between Mr Taouk, Mr Ghassibe and Mr Wypych continued for about one hour. Mr Taouk said to Mr Chahine:

“After the first mortgage is paid out, that will leave $2.5 million for you as the second mortgagee. You will get your money in 9 months if you drop your claims against Elliot Tuthill. Mr Jordan has accepted the deal. Will you?”

“Yes, provided that I have solid security and my solicitor approves all the legal documents.”

[Ghassibe]

[Wypych]

66 It will be observed that this scenario which Mr Taouk was outlining, apart from being incorrect in saying that Mr Jordan had accepted the deal, made no mention of what was to happen concerning E&TM’s rights as second mortgagee of the property. Further, none of the conversation to which Mr Jordan was party, and which I have set out earlier in this judgment, appears to have given any consideration to what was to happen concerning E&TM’s rights as second mortgagee. Mr Chahine explained in evidence (T39) that at that time he understood that E&TM had a second mortgage on the property, but that “There were parties to purchase the second mortgage”. This ties in with evidence from Mr Ghassibe (T132) that he thought that Mr Huxley had bought the second mortgage, and evidence from Mr David Jordan (T167) that one of the caveators on the title was ICA, a company of which Mr Huxley was a director. ICA Corporate Services Pty Ltd is named as one of the defendants in the July proceedings relating to priority of the mortgages over the property. (The statement of claim in the July proceedings makes no allegations against ICA apart from alleging that it has lodged a caveat on the title of the Bankstown property.) If Mr Huxley, or a company he was interested in, had indeed purchased the second mortgage, this would provide some explanation for the active role he played in the events of 12 and 13 September. However, his role in the events was not sufficiently explored in evidence to enable me to make any positive findings. It suffices, for present purposes, for me to say that the failure of the proposal which had been put to Mr Jordan on 12 September to make any provision concerning what was to happen about the second mortgage, was not necessarily a fundamental flaw in the proposal.

67 Mr Chahine gave evidence that at the coffee shop meeting.

“My discussion in the morning was what I need for my second mortgage to drop my case against Mr Jordan and I said I need full benefit of the second mortgage. I have no document. They present me with no document at that time, at that particular meeting, only figures, and I said for security will have to be coming as a part of this deed, then I need the security to carry on with the new owner of the property.”

Mr Chahine declined to accompany the other men to Mr Jordan’s office because he was suing E&TM in the July proceedings.

After the coffee shop meeting, Mr Chahine took the train from Cronulla to the city, intending to attend the auction. By the time he reached the auction rooms, the sale of the property had already taken place. He saw Mr Youssef Metlej, Mr Bassil and Mr Kayrouz signing a contract.

Mr Taouk’s Interest in Purchasing

68 Mr Taouk gave evidence in his affidavit in chief as follows:

“If I had prior knowledge of the fact that either John Jordan or David Jordan would not have approved Leduva entering into the contract to purchase the property from Nordoc or alternatively not further postponing the auction, I would have attended at the auction on 13 September 2001 and bid on behalf of Leduva at the auction to purchase the property. I would have bid above the $6.6 million that was accepted at the auction to between $7.8 million and $8 million if Leduva was to purchase the property on the terms of the auction contract.”

69 When cross-examined on this, he gave evidence as follows:

70 (The transcript reference to “8.8.3” in the third last answer should be a reference to “8.2 or 8.3”.)

71 Over his many years of experience as a builder and developer Mr Taouk had become familiar with the way that auctions were conducted in New South Wales, and aware that it was possible for someone who was not personally present at an auction to have bids made on their behalf, and indeed had previously had bids made on his behalf at an auction. It was put to him, in cross-examination, that he had not made that type of arrangement concerning the auction of the Bankstown property:

72 In assessing Mr Taouk’s interest in purchasing the property, it is also relevant that, when Mr David Jordan made his final telephone call to Mr Taouk on 13 September, telling Mr Taouk that the property had been sold at auction, Mr Taouk became angry.

73 Mr David Jordan was cross-examined as follows:

74 I am satisfied that Mr Taouk had a serious interest in purchasing the property, and that if he had attended the auction he would have been prepared to bid more than the $6.6 million that the property was actually sold for. While Mr Taouk would not have paid a dollar more than he was required to, by the strength of the actual bidding on the day, I am satisfied that his interest in the property would have kept him bidding at figures well in excess of $6.6 million, if the competition on the day required him to do so. Further, it seems to me likely, from Mr Metlej’s previous offer of $9 million, and from the evidence concerning the market value of the property, that it is likely that other bidders at the auction would have continued to bid well above $6.6 million, if Mr Taouk had been at the auction.

Evidence of the Market Value of the Property

75 As the present hearing was a hearing on questions of liability alone, questions of the value of the property were not fully explored.

76 The fact that a solicitor’s mortgage company was prepared to advance $6.1 million on the security of the Bankstown property and the E&TM would lend of the order of 65% of the value of a property, is evidence that, at the time of the advance, the value of the property was well in excess of $6.6 million. However, by the time of the auction the property had incomplete building works constructed on it, at least some of which were probably not in accordance with council approved plans. The prospect of needing to pay unpaid expenses connected with the building work, before work could resume, would also depress the value. Neither of the valuers called in the case placed reliance on the value which the land had at the time of granting of the mortgage. I do not propose to take that value into account.

77 The offers which were received from Mr Metlej and Ms Lightner, of $9 million and $7 million, are consistent with the land having a value in excess of $6.6 million at the time of the auction, though by themselves nowhere near an adequate basis for reaching that conclusion.

78 That the land was sold for $6.6 million at an auction which, by reason of the absence of Mr Taouk as a bidder, was flawed, is evidence that its market value is no less than $6.6 million. The facts I have found, that Mr Taouk would have been willing to bid well above $6.6 million, if he had needed to, and that the bidding on the day would probably have exceeded $6.6 million if Mr Taouk was at the auction, support a conclusion that the market value of the land was, in fact, more than $6.6 million.

79 However, the most significant evidence concerning the market value of the land at the date of the auction must be the evidence of the valuers.

80 Two valuers gave evidence in the case. Mr Edmonds had prepared a valuation on 30 August 2001 for E&TM, which had valued the Bankstown land at $5.5 million. The methodology which Mr Edmonds employed in that report was to look at sales of comparable development sites for home units. From that market evidence, he concluded that $32,500 per unit was a fair market value for this site. As there were a 169 units proposed to be constructed on the site, that gave the site a value of approximately $5,500,000.

81 All the sites which Mr Edmonds used as comparables were ones where no building work had been carried out at the time of sale. When he was listing the various sites, he gave brief descriptions of each, and concluded in relation to each “supports a value for the subject property of $32,500 per unit site”, or words to similar effect. While his report showed that he was well aware that there had been works constructed on the Bankstown site, the report also stated (page 9) that his instructions were:

“1. The works carried out to date are not in accordance with the drawings by EGO Architects and approved by Bankstown City Council.

2. The works carried out are based on new designs by Form Architects. We have not been provided with these drawings.

3. The proposed main changes are the deletion of external brick walls to be replaced with concrete panel walls, the addition of an en-suite bathroom to all two bedroom units and re-configuration of the top floor apartments to provide penthouse type units.

4. The works completed to date provide for an additional 30 car spaces in the basement levels and re-configuration of the placement of columns and footings.

These changes will require that an application for a Section 96 amendment be lodged with Council for approval.

We are advised that not all of the works completed to date have certification, that some consultants including engineers and architects have outstanding monies due to them and that they will not certify these works until their outstanding fees are paid. A potential purchaser will seek to purchase the site at a discount reflecting these risks and costs.”

82 A reader of Mr Edmonds’ report could easily get the impression that he had arrived at a value of $32,500 per unit site as a value of unimproved land, and allowed nothing for the works constructed on the site because of potential problems associated with them. However, Mr Edmonds gave evidence that that was in fact not the way he proceeded. He said, in a supplementary report, that the rate of $32,500 per unit site took into account the value of the partly completed works. He said that he regarded the bare land value of the site as being in the order of $26,000 per unit site (or around $4,400,000), and that the additional $1.1 million in his valuation reflected the value of improvements to the site.

83 Mr Healy was a valuer who valued the site, as at 13 September 2001, at $9.4 million. Mr Healy made assumptions that the work done on the site was substantially in accordance with the development approval and building approval, and that if any minor variation existed it would not be a cause to delay continuation of the projects. Mr Healy used comparable sales of unit sites to value the bare land value of the site. He put this bare land value at $36,000 per unit site, which, multiplied by 169 sites, gives an amount a little short of $6,100,000. He then set about valuing the work. There were two components of work. The first was work done prior to October 2000, which included retaining walls, excavation of the two level basement carpark and site preparation. This work had cost $3,200,000. Other more recent work was valued (on the basis of a quantity surveyor’s analysis) at $3,550,000. This gave a total value of work on the site of $6.75 million. However, on the information available to Mr Healy, an amount of $107,000 was owing to consultants, which would need to be subtracted from the cost of the work. Performing this subtraction resulted in a total figure of $6,643,000. He then said that, given the problems that there were with the work, it was probably appropriate to value the work at fifty percent of cost. He calculated fifty percent of $6,643,000, and by that process valued the existing building works at $3,321,500. This was then added to the bare land value of the site to come up with his final figure.

84 Mr Edmonds makes a variety of criticism of Mr Healy’s valuation. He disputes Mr Healy’s assumption, that the departures from the approved plans were minor, and says that any prudent purchaser would want to have a section 96 approval from the local council before proceeding with the works, which would take a minimum of six to eight weeks to obtain. Also, he says that far more than $107,000 is owing for consultancy fees – he says that in fact the figures should be an additional $281,000. I would add that there is a fairly clear methodological error in Mr Healy’s report – he deducted the consultancy fees from the total value of the work before applying the fifty percent discount. This means that he is reducing the value of the land by only fifty percent of the amount of the consultancy fees outstanding, yet it is fairly likely that, if any purchaser wanted to obtain the benefit of the work the consultants had done, he would need to pay the full amount of the consultancy fees.

85 I have considerable doubt about the bare land value per unit site of $26,000 which is Mr Edmonds’ starting point. However, even if one accepts that figure for present purposes, it is clear that Mr Edmonds has undervalued the work on the site. The work which was done prior to October 2000, costing $3.2 million, is work which is not subject to criticism in any way, and had been certified. It is only the work done after October 2000 which is, to some extent, not in accordance with Council approved plans. Mr Edmonds had proceeded on a basis that the total cost of the work done on the site was $3.2 million). He was not aware that the work on site could be split up into the two components that Mr Healy split it into, nor of the full extent of the work performed. Mr Edmonds accepted this in cross-examination:

86 Even if one takes Mr Edmonds’ figures of $4.4 million for the bare land value of the site, it is not allowing enough additional value to add only $1.1 million for the value of the works on the site. It seems to me that in assessing the value of the works on the site a very small discount, if indeed any discount, ought be applied to the cost of the work done prior to October 2000 works. Further, it is unlikely that the work done after October 2000 would be completely valueless or of negative value. While it would be appropriate to deduct the full amount of the unpaid consultancy fees, in arriving at any value, it still seems to me likely that the value of the land, as at 13 September 2001, will exceed $6.8 million. I mention the figure of $6.8 million not because it is necessarily an approximation of what I think the value of the land is, but because it is an approximation of the figure which the plaintiff must establish if the plaintiff is to be granted an enquiry as to damages.

The Legal Principles and their Application – General Law Duty

87 The general law obligations of a mortgagee exercising a power of sale have been stated by McLelland CJ in Eq in Hawkesbury Valley Developments Pty Ltd v Custom Credit Corporation Ltd (1994) 8 BPR 15,581 at 15,582-15,583 as follows:

Corporations Law

The powers of sale exercised by Custom Credit were statutory powers conferred by s.58 of the Real Property Act. That section empowers a mortgagee to "sell the land mortgaged ... or any part thereof ... either altogether or in lots by public auction or by private contract, or both such modes of sale, ... subject to such conditions as he thinks fit ...". In exercising the power thus conferred, the mortgagee is, however, subject to obligations arising from the application of equitable principles equivalent in nature and extent to the obligations similarly arising in respect of legal or equitable mortgages under the general law (as is implicit in the decision in Pendlebury v Colonial Mutual Life Assurance Society). Those obligations apply to the exclusion of any duty of care arising from the principles of the law of negligence (Coroneo v Australian Provincial Assurance Association 35 SR 391; Colin D Young v Commercial and General Acceptance (Court of Appeal 24 August 1982 unreported); Downsview v First City Corporation 1993 AC 295).

The content and scope of the relevant equitable obligations were considered by the High Court in Pendlebury. That case is authority for the proposition that 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.

Subsequent discussion of the question in the High Court (particularly in Forsyth v Blundell (1973) 129 CLR 477; 1 ALR 68, Australia and New Zealand Banking Group Ltd v Bangadilly Pastoral Co (1978) 139 CLR 195 and Commercial and General Acceptance Ltd v Nixon (1981) 152 CLR 491; 38 ALR 225) has not displaced the authority of the decision in Pendlebury, although in Bangadilly a mortgagee was said by Aickin J (with whose judgment Stephen and Jacobs JJ agreed) to be in breach of its obligation to the mortgagor where there was "a serious departure from accepted standards in seeking to obtain the best price then available" (at 288). 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 (cf Australian Apple & Pear Marketing Board v Tonking (1942) 66 CLR 77 at 110). What matters is the underlying equitable principle, which in the modem idiom usually finds expression in terms of unconscionability. The mortgagee in equity is not answerable for what Isaacs J in Pendlebury describes (at 700) as "mere negligence or carelessness in carrying out the sale". 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."

88 The pleadings in the present case alleged as an alternative case, that the first mortgagee owed the plaintiff a duty to take reasonable precautions to obtain a proper price for the land. However, that argument was not pressed.

89 It was common ground at the trial that, at general law, a mortgagee exercising a power of sale owes the same duty to a subsequent mortgagee as it owes to the mortgagor. The first mortgagee was, in my view, correct to concede this. At common law, mortgages subsequent to a first mortgage were equitable interests carved out of the mortgagor’s equity of redemption, so it is to be expected that the same duty would be owed to the owners of each of the subdivided parts of the equity of redemption. Further, the practical capacity for the wrongful exercise of the power of sale to affect the interests of a subsequent mortgagee arises from exactly the same circumstances as the practical capacity of the wrongful exercise of the power of the sale to affect the interest of the mortgagor, so there are no factors which would affect the conscience of the first mortgagee differently in relation to those two people.

90 Further, I note that in Southern Goldfields Ltd v General Credits Ltd (1991) 4 WAR 138, at 141 Franklyn J (with whom Malcolm CJ and Pidgeon J agreed) recorded, without any criticism that:

“It was common ground at the trial that is before us that in the exercise of its power of sale under the mortgage the appellant owed to the respondent as second mortgagee the same duty of care as that owed by it to the mortgagor.”

91 In my view E&TM has breached its general law duty by the manner in which it conducted the auction sale.

Breach by Keeping Mr Taouk Away From the Auction?

92 The proposal which was put to Mr David Jordan on 12 September, related to a sale of the mortgaged property by Nordoc. It was a sale on completely different terms to the sale, in exercise of the mortgagee’s power of sale, which was being planned to result from the auction. As presented to Mr Jordan on 12 September, it was an arrangement that was a long way from fruition, and had many significant unresolved problems in it. Mr Jordan had not, at that time, even seen the contract by which Nordoc was proposing to carry that arrangement out. He had no basis for believing the arrangement would be acceptable to Mr Chahine. Notwithstanding all these matters, on 12 September Mr David Jordan did not take the stance that he was not prepared to discuss the proposal for the time being, that the auction should be allowed to proceed in a way which would let it truly test the market, and that he would resume discussions about the proposed Nordoc sale when, and if, the property failed to sell at auction. If he had read his father’s file, he would have seen that that was the type of course which his father had previously intended to follow – see paragraph 26 above in this judgment. Instead, he set up a meeting for the next day, which Mr Taouk was to attend. Given the time the meeting was set for, and the distance of Cronulla from the city, this had the inevitable consequence of keeping a seriously interested purchaser away from the auction. For Mr Jordan to set up the meeting for the next day, was to take a deliberate action, which had the consequence that the auction was not a true indicator of the worth of the property.

93 Mr David Jordan gave evidence as follows:

94 In my view, the conduct of Mr Jordan shown by this evidence amounts to exercising the power of sale with a reckless disregard for the interests of the subsequent mortgagee.

[citations omitted]

120 All these considerations, apart from the last, affect the taking of accounts between a first mortgagee and a third mortgagee. It is necessary to know how much is truly secured by the first mortgage, before the third mortgagee can know how much, if anything, it is entitled to receive from the sale proceeds. Similarly, it is necessary, in any such taking of accounts, to know how much will ultimately be secured by the second mortgage.

121 One of the elements which goes into striking the final balance of the account between the first mortgagee and the third mortgagee, is that the first mortgagee is required to account, not for the actual amount it received on exercising the power of sale, but for the amount it would have received if it had exercised the power of sale properly. However, it can be seen that there are many items besides that one, which potentially affect the ultimate balance due as between first mortgagee and third mortgagee. That is why it is an explanation for the law’s failure to grant a remedy of damages for breach of a mortgagee’s duty concerning exercise of a power of sale that:

(Per Hutley JA,

(1982) NSWConvR ¶55-097 at 56,573;

[1984] 1 NSWLR 285 at 296 per Hutley JA)

The Legal Principles and their Application – s.420A

122 Section 420A(1) of the Corporations Act 2001 provides as follows:

“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.”

123 Section 9 of the Corporations Act 2001 provides:

“Controller, in relation to property of a corporation means:

(a) a receiver, or receiver and manager, of that property; or

(b) anyone else who (whether or not as agent for the corporation) is in possession, or has control, of that property for the purpose of enforcing a charge.”

124 E&TM admits in its defence that, at the time of exercising the power of sale, it was a controller for the purposes of section 420A of the Corporations Act 2001. Thus, it is not necessary to decide whether, on the true construction of section 420A, a mortgagee in possession of a single item of the property of a company counts as a controller (cf Garden Mews St Leonards Pty Ltd v Butler Pullnow Pty Ltd (No.2) (1984) 9 ACLR 116, Prioris Pty Ltd v Inscorp Holdings Ltd (Young J 4 February 1994 (unreported)).

125 I can see no reason why the Bankstown property should not be regarded as property which has a market value. Thus, the presently relevant inquiry is whether section 420A(1)(a) was breached.

126 In deciding whether there has been a breach of section 420A, a court looks at the process that a controller of property of a corporation has gone through in selling that property. The enquiry is whether, in the course of that process, the controller has taken all reasonable care to sell the property for 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 section 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 section 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.

127 In my view, section 420A(1)(a) was breached, because the process by which E&TM sold the property was one where reasonable care was not taken to sell the property for not less than its market value. When the sale process was seriously flawed, as a result of the mortgagee who conducted the auction keeping a seriously interested purchaser away from the auction, for the purpose of advancing a means of realising the property which was at odds with the mortgagee’s own auction sale, this conclusion is inevitable.

A Remedy for the Plaintiff under Section 1324(10) Corporations Act 2001 (Cth)?

128 The plaintiff claims it is entitled to receive damages for the breach of section 420A, on the basis of section 1324(10) Corporations Act 2001, or alternatively of section 423(1)(b) Corporations Act 2001. No submission was put that a breach of section 420A gave rise to an action at common law for breach of statutory duty (cf Pulsford v Devenish [1903] 2 Ch 625; Woods v Winskill [1913] 2 Ch 303; In Re Glyncorrwyg Colliery Co [1926] Ch 951; Westminster Corporation v Haste [1950] 1 Ch 442; Inland Revenue Commissioners v Goldblatt [1972] Ch 498.)

129 Section 1324 of the Corporations Act 2001 provides:

“Injunctions

the Court may, on the application of ASIC, or of a person whose interests have been, are or would be affected by the conduct, grant an injunction, on such terms as the Court thinks appropriate, restraining the first-mentioned person from engaging in the conduct and, if in the opinion of the Court it is desirable to do so, requiring that person to do any act or thing.

This subsection does not limit subsection (1) in any way.

(i) the company making a reduction of its share capital to which Division 1 of Part 2J.1 applies; or

(iii) the company giving financial assistance to which Part 2J.3 applies;

the Court must assume that the conduct constitutes, or would constitute, a contravention of that paragraph, section or provision unless the company or person proves otherwise.

grant an injunction, on such terms as the Court thinks appropriate, requiring the first-mentioned person to do that act or thing.

(4) Where in the opinion of the Court it is desirable to do so, the Court may grant an interim injunction pending determination of an application under subsection (1).

(5) The Court may discharge or vary an injunction granted under subsection (1), (2) or (4).

(6) The power of the Court to grant an injunction restraining a person from engaging in conduct may be exercised:

(7) The power of the Court to grant an injunction requiring a person to do an act or thing may be exercised:

(8) Where ASIC applies to the Court for the grant of an injunction under this section, the Court must not require the applicant or any other person, as a condition of granting an interim injunction, to give an undertaking as to damages.

(9) In proceedings under this section against a person the Court may make an order under section 1323 in respect of the person.

(10) Where the Court has power under this section to grant an injunction restraining a person from engaging in particular conduct, or requiring a person to do a particular act or thing, the Court may, either in addition to or in substitution for the grant of the injunction, order that person to pay damages to any other person.”

130 When the present proceedings were commenced, the four companies which together were the purchasers of the Bankstown land at the auction, were defendants. Well before the hearing began, the mortgagor was also added as a defendant. The statement of claim sought, inter alia, injunctions restraining E&TM, and the purchasers, from completing the contract which they entered on 13 September 2001. On the first day of the hearing, those claims were abandoned by the plaintiff, and the purchasers ceased to play any part in the hearing. In the course of the hearing, I also ordered, on the plaintiff’s application, that the proceedings be dismissed against the mortgagor. An interlocutory injunction had been granted prior to the trial, to restrain completion of the contract of sale, but that interlocutory injunction expired in the course of the hearing without any application being made to extend it. Thus, by the time addresses were made, there was no application for a final injunction on foot, and no interlocutory injunction on foot.

131 Counsel for the plaintiff argued that section 1324(10) of the Corporations Act 2001 still permitted the awarding of damages, because the Court had power to grant an injunction.

132 In my view section 1324(10) does not authorise the award of damages in the present case. It has been decided in both the Supreme Court of South Australia (Executor Trustee Australia Ltd v Deloitte Haskins Sells (1996) 22 ACSR 270 per Perry J) and the Supreme Court of New South Wales (Waterhouse v Waterhouse (1999) 46 NSWLR 449 at 490-491 per Windeyer J) that section 1324(10) does not permit a court to award damages in the absence of an actual claim for injunctive relief.

133 As there had been some remarks, possibly obiter, by Cohen J in Permanent Trustee Australia Ltd v Perpetual Trustee Co Ltd (1994) 15 ACSR 722 which construed a closely analogous section of the Companies (NSW) Code in a wider fashion, it is appropriate for me to say that I agree with the reasons given by Perry J and Windeyer J for their decisions.

A Remedy for the Plaintiff under Section 423 of the Corporations Act 2001 (Cth)?

134 Section 423 Corporations Act 2001 provides:

“Supervision of controller

(iv) in any case—this Act, the regulations or the rules; or

(2) ASIC may report to the Court any matter that in its opinion is a misfeasance, neglect or omission on the part of a controller of property of a corporation and the Court may order the controller to make good any loss that the estate of the corporation has sustained thereby and may make such other order or orders as it thinks fit.

(3) The Court may at any time:

135 There have long been provisions which bear some similarity to section 423. Statutory provisions which include the notion of one person having control of another’s property, complaint being made to the court about the actions of that person, the court inquiring, and taking such action as it thinks fit, can be found in bankruptcy statutes (section 149, Bankruptcy Act 1924 (Cth); section 179, Bankruptcy Act 1966 (Cth)) and in statutory provisions governing liquidators (section 278, Companies Act 1961 (NSW), section 420, Companies (NSW) Code, section 536, Corporations Law) and receivers (section 324E, Companies (NSW) Code). Marks J has traced some of the history of such provisions in Commissioner for Corporate Affairs v PW Harvey [1980] VR 669, at 684.

136 Part of the rationale for such provisions was that the people to whom they applied were officers of the court, who the court would both protect, and control. Thus in, In ReMaidstone Palace of Varieties Ltd; Blair v Maidstone Palace of Varieties Ltd [1909] 2 Ch 283 at 286 a court appointed receiver was granted an injunction to restrain a company, with which he had dealt, from suing him anywhere but in the court which had appointed him. Neville J said, at 286:

“In the course of that management he made use of certain plant which is claimed by the respondent company as their property. They say that he had no right to use it except on the terms of paying them a rent, and they claim a considerable sum. It appears to me that dispute of that kind is one which…the court will deal with itself, and that it will not allow its officer to be subject to an action in another court with reference to his conduct in the discharge of the duties of his office, whether right or wrong. The proper remedy for anyone aggrieved by his conduct is to apply to this Court in the action in which he was appointed. If any wrong has been done by the officer, the Court will no doubt see that justice is done, but no-one has a right to sue such an officer in another court without the sanction of this Court.”

Re Siromath Pty Ltd (No.3)

137 Section 423 applies the sort of remedy which the Court developed to supervise its own officers to controllers of property who are not appointed by the Court.

138 Various of the statutory predecessors of section 423 could be activated only by a complaint made by someone who fell within a particular category of people. Section 420 of the Companies (NSW) Code permitted the Court to inquire into the conduct of a liquidator if complaint was made to the Court “by any person”.

139 Section 420 of the Companies (NSW) Code has been construed so that “any person” was read literally. In Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1990) 8 ACLC 39 McLelland J contrasted section 538 of the Companies (NSW) Code with section 420. Section 538 permitted “a person aggrieved by” a decision of a liquidator to appeal to the Court. McLelland J held that a person who was disappointed that a provisional liquidator had sold an asset of the company to someone else was not a “person aggrieved”. His Honour said (at 43):

“In particular it has not been shown that any legal right or interest of Northbourne was affected by that decision, or that the decision constituted a breach of any legal duty owed by Mr Harkness to Northbourne. What Northbourne relevantly lost was the chance that if Mr Harkness had not contracted with Dovapa, he might have contracted with Northbourne. This in my view is not a “legal grievance” sufficient to give standing to Northbourne under section 538.”

140 However, his Honour held that the disappointed potential purchaser had standing under section 420. His Honour said, at 43:

“I turn now to the application under section 420. That section empowers the Court to act on the complaint of ‘any person’. It was submitted that the ambit of that phrase should, by implication, be limited in some way sufficient to exclude Northbourne. In my opinion, when regard is had to the scope and purpose of the section, no such limitation should be implied.

Section 420 is concerned with aspects of the conduct of liquidators which are liable to attract sanctions or control from what might broadly be described as disciplinary reasons. Although the section applies to liquidators it has particular significance in the case of a liquidator appointed by the Court who is, in that sense, an officer of the Court, and to a liquidator whose qualification for office is that he is a registered official liquidator or a registered liquidator with the public accreditation that such registration involves and who is in that sense a public officer.

In such circumstances the legislature may well have taken the view that it is not in the public interest to limit the class of persons who might bring a complaint to the Court of misconduct by a liquidator. The phrase ‘any person’ must, I think, be taken to have its literal meaning. Therefore, Northbourne has standing to make a complaint to the court under section 420.”

141 It is not possible to apply that reasoning directly to the construction of “a person” in section 423(1)(b) Corporations Act 2001. A controller of property includes a receiver or receiver and manager of the property, and section 418 of the Corporations Act 2001 requires a person appointed as receiver of property of a corporation to be a registered liquidator. However, the definition of “controller” also extends to “anyone else who (whether or not as agent for the corporation) is in possession, or has control, of that property for the purpose of enforcing a charge.” Thus, controllers can include people who are not public officers in the sense in which a liquidator is a public officer.

142 However it is not necessary for present purposes to decide whether “a person” in section 423(1)(b) includes any person whatsoever (cf R v Judges of the Federal Court of Australia; ex partePilkington ACI (Operations) Pty Ltd (1978) 142 CLR 113). It is sufficient for present purposes to say that the duty which is imposed on a controller by section 420A is one imposed for the benefit of, amongst other people, subsequent mortgagees of the property. “A person” in section 423(1)(b) includes, at least, a person who makes complaint to the court concerning the manner in which a controller of property has performed a duty which is imposed on the controller by the Corporations Act 2001 for the benefit of a class of people which includes that complainant. Thus, in relation to the breach of section 420A the present plaintiff is “a person” with the meaning of section 423.

143 That a provision such as section 423 can be used to provide a remedy for a duty which the Act itself establishes was decided by Lukin J, in relation to section 149 of the Bankruptcy Act 1924, in ReHill & Ellis (1942) 13 ABC 57, at 65:

“The duties of the inspectors the failure to properly perform which is here made the subject of this motion are nowhere to be found set out in the deed of inspectorship. Those duties are to be found in the Bankruptcy Act. In their dual office as inspectors and trustees, these inspectors have imposed on them by the Act various duties the failure to perform which renders them liable to have such action taken against them by the court as the court shall, having power, consider necessary. Such action may be punitive or compensatory or both.”

144 The corresponding provision concerning court control over liquidators has been used to require a liquidator to pay money (reAh Toy (1986) 4 ACLC 480 at 483), as well as to challenge the allowance to a liquidator of his claimed costs and disbursements (Burns Philp Investment Pty Ltd v Dickens [No.2] (1993) 31 NSWLR 280). Ordering a controller to make good the loss which its breach of statutory duty has caused, is within the range of remedies which can be granted under section 423.

145 It will be observed that section 423 confers on the court a power to “inquire into the matter”. It has been recognised, in relation to the corresponding section concerning liquidators, that this empowers the trial judge to examine witnesses (Commissioner for Corporate Affairs v Harvey [1980] VR 669, at 687). As well;

“(d) Once embarked upon the inquiry, the court is not confined to the contents of any report (subsection (2)) or complaint (subsection (1)) or other application.

(

at 698.

146 As the full court of the Supreme Court of the Northern Territory said In Re Ah Toy (supra) at 483, concerning section 278 of the Companies Act 1963 (NT):

“The section is unusual in two respects. First, it provides for an inquiry the scope of which is not necessarily confined to issues raised by the participants. We agree with the comment made by Marks J in Commissioner for Corporate Affairs v Harvey (1980) VR 669 at 689 that ‘once the court is apprised of any matter bearing on the conduct of the liquidator it has jurisdiction to inquire into that conduct and the ambit of the inquiry is for the court to determine. Secondly, the powers of the court are not confined to making substantive orders. The court may ‘take such action as it thinks fit’. This power is sufficiently wide to include the making of findings regarding the conduct of the relevant liquidator; findings which, in a practical sense, may be of considerable significance to the liquidator notwithstanding that they do not involve the payment of any money. In this regard we refer again to the judgment of Marks J in Harvey also at page 689.”

147 Notwithstanding the breadth of power conferred on the court by section 423, in a particular instance the court might be of the view that the appropriate way to exercise that power was by treating the complaint as though it instigated an ordinary piece of adversary litigation. Thus, in Burns Philp Investment Pty Ltd v Dickens [No.2] (1993) 31 NSWLR 280 Young J said, when granting an inquiry into whether a liquidator’s costs and disbursements were justifiable, “The inquiry is really adversary proceedings between the plaintiff members and the liquidator personally.” As well, the court will be conscious of its own practical limitations in conducting an inquiry by any means other than adversary procedures. As Marks J said in Commissioner for Corporate Affairs v Harvey, supra, at 687:

“…fundamentally, this Court is not geared to arrange the presentation of evidence, to investigate its availability or to effect the calling of witnesses.”

148 Another factor which, it seems to me, leads to the conclusion that an inquiry under section 423 need not proceed by means different to those used in ordinary adversary litigation, arises from the fact that the power under section 423 is conferred on “the Court”. Section 58A Corporations Act 2001 defines “the Court” as including the Federal Court, and the Family Court. Those courts, exercising as they do the judicial power of the Commonwealth, would be incapable, when exercising their powers under section 423, of conducting an inquiry analogous to a Royal Commission, the direction and agenda of which was dictated by the court itself. If the Federal Court, in exercising powers under section 423, cannot conduct an inquiry of that kind, it must be open to the State court, under section 423, to actually not do so.

149 In Burns Philp Investment Pty Ltd v Dickens [No.2] (1993) 31 NSWLR 280 the court decided, in one hearing, that an inquiry should be held, and orders were made for the later conduct of the inquiry before a Master in Equity. However, there is no jurisdictional necessity that the court proceed that way. As Marks J said in Commissioner for Corporate Affairs v Harvey [1980] VR 668 at 689:

“Section 278 does not dictate split hearings for example, examination first and inquiry later. By section 278(1) the court has jurisdiction with respect to the conduct of a liquidator. It may proceed, paying due regard to the dictates of fairness, as it considers fit in the particular circumstances.”

150 The Corporations Law Rules contained a provision setting out the procedure to the followed when section 423(1)(b) of the Corporations Law was invoked. Rule 4.1 says:

“A complaint to the Court under paragraph 423(1)(b) of the Law about an act or omission of a receiver, or a controller appointed by the Court, must be made by an originating process seeking an inquiry in relation to the complaint.”

151 It will be observed that this rule says nothing about the procedure to be adopted when a complaint is made under paragraph 423(1)(b) of the Law about an act or omission of a controller who (like E&TM) has not been appointed by the court. As well, this rule, like all rules of court, can be dispensed with if the circumstances are appropriate.

152 It will be apparent from what I have said so far that an order for payment of money by a controller, made under section 423(1)(b) by reason of a controller’s breach of the duty contained in section 420A of the Corporations Act 2001, is conceptually a different thing to an action for damages. In the present case, no explicit claim was made in the statement of claim for an order for payment of money under section 423. However, counsel for the plaintiff made it clear, both in opening and in final address, that reliance was placed on section 423 to found a remedy. No objection was taken by counsel for E&TM to section 423 being relied on in this way. The question of whether there had indeed been a breach of section 420A was fully litigated. It seems to me that there has thus been an inquiry, of the type envisaged by section 423, into the liability aspect of a complaint by the plaintiff that E&TM has breached its statutory duty under section 420A, notwithstanding that that inquiry was one conducted in accordance with the ordinary rules of adversary litigation, with the court playing no inquisitorial role.

153 Having found that there was a breach of section 420A, the action which seems to me to be fit is that E&TM should pay the plaintiff the amount of the loss which the plaintiff has sustained by reason of E&TM’s breach of its statutory duty under section 420A. Counsel for E&TM did not argue that any other, or lesser, remedy would be appropriate if breach were established. The quantum of that loss can be established by an inquiry before a Master.

Should there be an Inquiry as to the Quantum of Loss?

154 Even though this hearing is one on liability alone, it is still necessary for me to be satisfied on the evidence before me, that the plaintiff has suffered some loss before it would be appropriate to order an enquiry as to the amount of that loss.

155 As a result of the property being sold for $6.6 million, the plaintiff will receive nothing from the proceeds of sale. If an auction conducted without there being any breach of section 420A by E&TM would have resulted in the plaintiff receiving any money at all, it has established loss.

156 While the auction was held on 13 September 2001, the terms on which the auction was conducted required settlement on the forty-second day after the contract date. That day is 25 October 2001. Interest would have continued to run on the first mortgage until that date. Mr John Jordan has performed a calculation (annexure B to his affidavit 25 October 2001) of the amount required to discharge the mortgage as at that date. An amount of $6,706,822.50 in principal and interest, was secured by the mortgage as at that date. In addition there are various other amounts which he says were secured by the mortgage, which bring the total secured to $6,769,618.84. While these additional amounts were not explored in evidence, I shall accept, for the purposes of this part of the judgment, that all of those amounts are properly secured by the first mortgage. My findings in this part of the judgment, however, about whether the third mortgagee has demonstrated it has suffered any loss, are necessarily ones which are interlocutory, as they are being made for the purpose of deciding whether there should be an enquiry as to the amount of any loss. They do not, therefore, create an issue estoppel, and it will be open to the third mortgagee, on any such enquiry, to explore whether these additional amounts are truly secured by the first mortgage.

157 The amount of any sale proceeds which would have been applied to pay the debt secured by the second mortgage, was not established in evidence. As I have said, the second mortgage is a collateral mortgage, given to provide further security for an advance on $2,296,000 which E&TM had made to a company called Golf Links Estate Blackheath Pty Ltd. No evidence was called by E&TM (the party who would have this evidence available to it) to establish the amount owing on the second mortgage. For all the evidence tells me, the amount secured by the second mortgage might be zero. Further, though I infer from the expression “collateral mortgage” that that was some other mortgage which secured the same debt, no evidence was called about precisely what other mortgages had been given, and to whom, by Golf Links Estate Blackheath Pty Ltd, or any other entity, to secure that debt. Nor was any evidence called about the value of any other security which E&TM had for its advance to Golf Links Estate Blackheath Pty Ltd. The second mortgage which Nordoc gave over the Bankstown property, is in the nature of a guarantee of the obligations of Golf Links Estate Blackheath Pty Ltd. There would therefore be (unless it was negatived by an express term) an implied term that the guarantor would be indemnified by the principal debtor. Further, it might be the case, as the evidence stands, that E&TM is the only mortgagee of other property mortgaged by Golf Links Estate Blackheath Pty Ltd while there are several mortgagees of the Bankstown property – in those circumstances, it is possible that an equity of marshalling might exist, so that, on an ultimate taking of accounts, E&TM was required to be treated as though it satisfied itself to the extent possible from the other mortgaged property. In all these circumstances, I cannot be satisfied that any sum of money would ultimately have flowed to E&TM under its second mortgage from the proceeds of sale of the Bankstown property. I therefore proceed, for the purposes of this part of the judgment, on the basis that the second mortgage will ultimately prove to secure nothing. Again, this is an interlocutory finding, which further evidence, on the holding of an enquiry, might displace.

158 I have earlier given reasons why it is likely that the proceeds of sale of the Bankstown property, at a properly conducted auction, would have exceeded $6.8 million. That suffices to show that, for the purposes of deciding whether there should be a further enquiry, the plaintiff has adequately proved that it has suffered some loss. It is, therefore, appropriate to order an inquiry as to the quantum of the loss which the plaintiff has sustained by reason of breach of section 420A.

Election Between Remedies

159 I have held that the plaintiff is entitled to an account, and also payment under section 423 Corporations Act 2001 (Cth), of the amount of loss it sustained by reason of breach of section 420A. These two remedies are inconsistent, and the plaintiff cannot actually receive both of them. Prior to final judgment, the plaintiff must make an election which remedy it will take (United Australia Ltd v Barclay’s Bank [1941] AC 1; Island Records Ltd v Tring International Plc [1996] 1 WLR 1256; Dr Martens Australia Pty Ltd v Bata Shoe Company of Australia Pty Ltd (1997) 75 FCR 230.)

160 As Lightman J said in Island Records Ltd v Tring International Plc [1996] 1 WLR 1256 at 1258-9, concerning the election between damages and an account of profits:

“…a party should in general not be required to elect or be found to have elected between remedies unless and until he is able to make an informed choice. A right of election, if it is to be meaningful and not a mere gamble, must embrace the right to readily available information as to his likely entitlement in case of the two alternative remedies. It is quite unreasonable to require a plaintiff to speculate totally in the dark as to whether or not the sum recoverable by way of damages will exceed that recoverable under an account of profits.”

161 As well, however, “…the exercise of the right of election should not be unreasonably delayed to the prejudice of the defendant.” (Ibid, at 1259). Precisely when the present plaintiff will be required to make its election between the remedies will depend upon when it has enough information to enable it to make an informed choice between them.

Form of Order

162 The inquiry that would be necessary to give effect to the plaintiff’s right to account would be, broadly, an inquiry into:

(1) What sum the Bankstown property would have sold for if Mr Taouk had been present at the auction.

(2) The amount due to E&TM which is secured by the first mortgage. This would include principal and interest, costs of selling which are properly chargeable under the mortgage, and any adjustments which might be necessary to arrive at the final sum which is secured by the first mortgage.

163 It is probably desirable for there to be a self-executing order made, so that the results of the inquiry can then be translated into a judgment for a particular sum of money. Such a self-executing order could involve ordering that, after such inquiry, the Master certify what amount, if any, would have been payable to the plaintiff as at 25 October 2001, for there then to be an order for payment of the amount so certified, and provision for interest to run on that amount from 25 October 2001 until the date of payment. For examples of the form of order directing inquiries and an account following defective exercise of a power of sale, see Tomlin v Luce (1889) 43 ChD 191, Wolff v Vanderzee (1869) 20 LT 353, Seton’s Judgments and Orders, 7th ed. (1912) page 1888-1891. However, no submissions have been made about the form of order. Thus, I think it would be appropriate for the precise form of an order to give effect to an account to be drafted by the plaintiff’s legal advisors and, unless agreed to by the first defendant’s legal advisors, settled by me.

164 I mention that it may be appropriate for consideration to be given to whether the mortgagor should be sought to be made a party to the taking of these accounts. In Tomlin v Luce (1889) 43 ChD 191 the English Court of Appeal saw no difficulty in ordering an account between a first mortgagee and a second mortgagee (ie without the mortgagor), where the first mortgagee had breached its duty in exercising its power of sale. That case, was one where Cotton LJ said, at 194, that the plaintiffs “as second mortgagees may be treated as owners of the equity of redemption”. While a person is not bound by an account which has been taken in his or her absence (Hall v Hayward (1886) 32 ChD 430), if there were any realistic prospect that the mortgagor might be entitled to receive money upon a taking of accounts on the basis I have indicated, it may be a less wasteful course to give the mortgagor the opportunity to be involved in the taking of those accounts.

165 The order for an inquiry as to loss under section 423 can be far more simply stated.

166 If the plaintiff is not sufficiently well informed about its two alternative remedies to make an election now between them, the order will also need to make provision for such an election being made in the future, and for any self-executing judgment, following an inquiry, to be contingent on such an election having been made.

167 I direct that the plaintiff bring in short minutes of order to give effect to these reasons for judgment.

**********

Last Modified: 02/11/2002

Citations

Artistic Builders Pty Ltd v Elliot & Tuthill (Mortgages) Pty Ltd [2002] NSWSC 16

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CITATION:	Artistic Builders Pty Ltd v Elliot & Tuthill (Mortgages) Pty Ltd & Ors [2002] NSWSC 16
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 4825/01
HEARING DATE(S):	6/11/01-12/11/01
JUDGMENT DATE:	8 February 2002
PARTIES :	Artistic Builders Pty Ltd (plaintiff) Elliot & Tuthill (Mortgages) Pty Ltd (1st defendant; cross-defendant) Nova Scotia Developments Pty Ltd (2nd defendant; 1st cross-claimant) Metlej Developments Pty Ltd (3rd defendant; 2nd cross-claimant) Kayrouz Constructions Pty Ltd (4th defendant; 3rd cross-claimant) L.A.D.S. Developments Pty Ltd (5th defendant; 4th cross-claimant) Nordoc Pty Ltd (6th defendant)
JUDGMENT OF:	Campbell J

COUNSEL :	M Walton SC (plaintiff) N Francey (1st defendant; cross-defendant) J Kelly SC (2nd-5th defendants; cross-claimants)
SOLICITORS:	Harris & Company (plaintiff) Elliot Tuthill (1st defendant; cross defendant) Metledge & Thompson (2nd-5th defendants; cross claimants) Foleys, Solicitors (6th defendant)
CATCHWORDS:	MORTGAGES - general law duty owed by mortgagee exercising power of sale - duty owed to third mortgagee same as duty owed to mortgagor - MORTGAGES - general law duty owed by mortgagee exercising power of sale - effect of first mortgagee taking deliberate action to keep seriously interested potential purchaser away from auction organised by first mortgagee - MORTGAGES - general law duty owed by mortgagee exercising power of sale - effect of first mortgagee's exercise of power of sale being affected by first mortgagee seeking an advantage for itself - MORTGAGES - general law duty owed by mortgagee exercising power of sale - juristic origin of duty to act in good faith - MORTGAGES - general law duty owed by mortgagee exercising power of sale - remedy for breach of duty - CORPORATIONS - RECEIVERS MANAGERS AND CONTROLLERS - duty of controller of property under s 420A Corporations Act 2001 (Cth) in selling that property - CORPORATIONS - RECEIVERS MANAGERS AND CONTROLLERS - remedies available for breach of s 420A Corporations Act 2001 (Cth). - CORPORATIONS - whether remedy of damages available under s 1324 (10) Corporations Act 2001 (Cth) when there is breach of duty established by the Act, but no injunction is sought concerning that breach - CORPORATIONS - RECEIVERS MANAGERS AND CONTROLLERS - who can obtain a remedy under s 423 Corporations Act 2001(Cth) against a controller who breaches a statutory duty established by Corporations Act - CORPORATIONS - RECEIVERS MANAGERS AND CONTROLLERS - range of remedies available under s 423 Corporations Act 2001 (Cth) - CORPORATIONS - RECEIVERS MANAGERS AND CONTROLLERS - procedure adopted by the Court in conducting an inquiry under s 423 Corporations Act 2001 (Cth). - PROCEDURE - separate hearings on liability and damages - when appropriate to order inquiry as to damages - PROCEDURE - election between remedies - MORTGAGES - general law duty owed by mortgagee exercising power of sale - form of order appropriate when inquiry and account ordered, following breach of duty
LEGISLATION CITED:	Real Property Act 1900 Corporations Act 2001 (Cth) Bankruptcy Act 1924 (Cth) Bankruptcy Act 1966 (Cth) Companies Act 1961 (NSW) Companies Act 1963 (NT)
CASES CITED:	Hawkesbury Valley Developments Pty Ltd v Custom Credit Corporation Ltd (1994) 8 BPR 15,581 Southern Goldfields Ltd v General Credits Ltd (1991) 4 WAR 138 Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676 Forsyth v Blundell (1973) 129 CLR 477 Warner v Jacob (1882) 20 ChD 220 Belton v Bass, Ratcliffe and Gretton Ltd [1922] 2 Ch 449 Kennedy v De Trafford [1897] AC 180 Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 Hughes Brothers Pty Ltd v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (1993) 31 NSWLR 91 Hughes Aircraft Systems International v Air Services Australia (1997) 146 ALR 1 Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 Burger King Corp v Hungry Jack's Pty Ltd [2001] NSWCA 187 Coroneo v Australian Provincial Assurance Association Ltd (1935) 35 SR (NSW) 391 Forsyth v Blundell (1973) 129 CLR 477 Bank of New South Wales v Adams [1982] 2 NSWLR 659 Adams v Bank of New South Wales [1984] 1 NSWLR 285 Colin D Young Pty Ltd v Commercial and General Acceptance Limited (1982) NSWConvR 55-097 Macquarie Bank Ltd v Clarke (Supreme Court of New South Wales - Commercial Division 22 March 1990 (unreported)) Scandinavian Pacific Ltd v Burke (1991) 5 BPR 97413 Garden Mews St Leonards Pty Ltd v Butler Pullnow Pty Ltd (No.2) (1984) 9 ACLR 116 Prioris Pty Ltd v Inscorp Holdings Ltd (Young J, 4 February 1994 (unreported)) Pulsford v Devenish [1903] 2 Ch 625 Woods v Winskill [1913] 2 Ch 303 In Re: Glyncorrwyg Colliery Co [1926] Ch 951 Westminster Corporation v Haste [1950] 1 Ch 442 Inland Revenue Commissioners v Goldblatt [1972] Ch 498 Executor Trustee Australia Ltd v Deloitte Haskins Sells (1996) 22 ACSR 270 Waterhouse v Waterhouse (1999) 46 NSWLR 449 Permanent Trustee Australia Ltd v Perpetual Trustee Co Ltd (1994) 15 ACSR 722 Commissioner for Corporate Affairs v PW Harvey [1980] VR 669 Blair v Maidstone Palace of Varieties Ltd [1909] 2 Ch 283 Re Siromath Pty Ltd (No.3) (1991) 9 ACLC 1587 Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1990) 8 ACLC 39 R v Judges of the Federal Court of Australia; Ex Parte Pilkington ACI (Operations) Pty Ltd (1978) 142 CLR 113 In Re: Hill & Ellis (1942) 13 ABC 57 Re Ah Toy (1986) 4 ACLC 480 Burns Philp Investment Pty Ltd v Dickens [No.2] (1993) 31 NSWLR 280 Commissioner for Corporate Affairs v Harvey [1980] VR 669 United Australia Ltd v Barclay's Bank [1941] AC 1 Island Records Ltd v Tring International Plc [1996] 1 WLR 1256 Dr Martens Australia Pty Ltd v Bata Shoe Company of Australia Pty Ltd (1997) 75 FCR 230 Tomlin v Luce (1889) 43 ChD 191 Wolff v Vanderzee (1869) 20 LT 353 Hall v Hayward (1886) 32 ChD 430
DECISION:	First mortgagee in breach of both general law duty, and of section 420A Corporations Act 2001 (Cth) in exercising power of sale. Remedies of account, and for payment of loss sustained by the breach, ordered for each respective breach, with plaintiff required to elect between those remedies.