Commonwealth Bank of Australia v Thompson
[2013] NSWSC 149
•05 March 2013
Supreme Court
New South Wales
Medium Neutral Citation: Commonwealth Bank of Australia v Thompson [2013] NSWSC 149 Hearing dates: 13/02/2013 & 14/02/2013 Decision date: 05 March 2013 Before: Harrison AsJ Decision: (1) The second defendant is to pay to the plaintiff the sum of $1,900,000.
(2) The second defendant is to pay the plaintiff's costs.
(3) Interest is to run from today.
Catchwords: GUARANTEE AND INDEMNITY - enforcement - bank in possession - failure of bank to exercise power of sale since taking possession - whether conduct of bank disentitles it from enforcing guarantee - whether bank engaged in unconscionable conduct Legislation Cited: Australian Securities and Investments Commission Act 2001 (Cth)
Competition and Consumer Act 2010 (Cth)
Conveyancing Act 1919
Trade Practice Act 1974 (Cth)Cases Cited: ACCC v Simply No-Knead (Franchising) Pty Ltd [2000] FCA 1365
Canon Australia Pty Ltd v Patton [2007] NSWCA 246
CG Berbatis Holdings Pty Ltd v ACCC [2001] FCA 757; (2001) 185 ALR 555
China & South Sea Bank Ltd v Tan Soon Gin [1990] 1 AC 536
Hurley v McDonalds Australia Ltd [1999] FCA 1728
Guardian Mortgages v Miller [2004] NSWSC 1236
King Investment Solutions v Hussain [2005] NSWSC 1076
Mailman v Challenge Bank Ltd [1991] NSWCA 182
New Beach Apartments Pty Ltd v Epic Hotels Pty Ltd [2007] NSWSC 474
Palk v Mortgage Service Funding plc [1993] Ch 330
Robertson v Norris (1858) 1 Giff 421; 65 ER 983
Westpac Banking Corporation Ltd v Kingsland (1991) 26 NSWLR 700
Yarrangah Pty Ltd v National Australia Bank Limited [1999] NSWSC 97; [1999] 9 BPR 17,061Texts Cited: C Croft and R Flay, The Mortgagee's Power of Sale, 3rd ed (2013)
A Tyree, Banking Law in Australia, 7th ed (2011)Category: Principal judgment Parties: Commonwealth Bank of Australia (Plaintiff)
Charles Eric Rickard (Second Defendant)Representation: Counsel:
PD Reynolds (Plaintiff)
JE Richards (Second Defendant)
Solicitors:
Corrs Chambers Westgarth (Plaintiff)
Cordato Partners (Second Defendant)
File Number(s): 2011/320564
Judgment
HER HONOUR: The issue for determination is whether the conduct of the Bank, after taking possession of the properties, disentitles it from enforcing the guarantee against Mr Rickard, the second defendant.
The plaintiff is now the Commonwealth Bank of Australia (CBA). On 1 October 2012, the Bank of Western Australia Limited (BankWest) and CBA became a single legal entity pursuant to the Financial Sector (Business Transfer and Group Restructure) Act 1999 (Cth). On 23 October 2012, the Court ordered that Bankwest be substituted by CBA as plaintiff in the present proceedings.
These proceedings comprise the enforcement of a guarantee and indemnity given by the second defendant to the Bank (the guarantee), in which the second defendant provided the guarantee in relation to money owed by a company of which he was director, RHT Developments Pty Limited (RHT Developments), to the plaintiff under certain facilities. The plaintiff is seeking the repayment of the sum of $1.9M, interest from judgment and costs on an indemnity basis. The Bank has foregone interest it is owed under the guarantee arising from June 2008 until judgment. No payments have been made by the second defendant.
The plaintiff has not been able to locate and serve the statement of claim on the first defendant so proceeds only against the second defendant.
The Biloela property development
RHT Developments identified Biloela in Queensland for a development project because of the high level of demand it was experiencing for housing, and in particular, rental housing. The first defendant and the second defendant identified the following economic factors as driving the growth in demand:
(a) the proximity of two major coal mines, and in particular the expansion of the Moura mine with an expected increase of the workforce by 1200 men and their families over a three year period;
(b) the expansion of the Teys meatworks (the largest in Queensland) for the export market;
(c) construction of a new $1 billion coal rail link between Gladstone and Biloela; and
(d) cotton farming and major beef stations surrounding the township which provide a large catchment for additional support of the town's infrastructure.
In 2004, RHT Developments paid a deposit for the land being lots 1 to 11 Gregory Court, Biloela, Queensland (the Biloela property). Between 2004 and 2010 design work, road construction and house construction was undertaken on the land, by agreement between RHT Developments and the vendor. The development consists of nine by four bedroom residential dwellings in a community title scheme. RHT Development have completed six of the nine homes and also the community recreation facilities, a swimming pool. The remaining three homes are only partially completed and cannot be rented out. Four of the completed properties are currently rented out and two remain vacant.
The property is located approximately 1.5 kilometres east of the Biloela Post Office. Surrounding the development are other residential properties. Biloela, with a population of approximately 6000, is a rural service centre located in central eastern Queensland's Callide Valley at the junction of the Burnett and Dawson Highways 594 kilometres northwest of Brisbane, 145 kilometres south west of Rockhampton and 127 kilometres from Gladstone.
RHT Developments sought the facilities from the plaintiff for the purposes of it constructing a number of units in Biloela. RHT Developments provided a mortgage to the plaintiff over these properties as security for the facilities. On 11 April 2011, the plaintiff entered into possession of the Biloela as a mortgagee in possession. To date, the properties have not been sold.
The second defendant complains that the plaintiff has firstly, failed to realise or take adequate steps to realise the Biloela properties; secondly, the plaintiff has removed the Biloela properties from the control of RHT Developments; thirdly, rent on the Biloela properties ought to cover the interest accumulating on the facilities; and fourthly, the second defendant has contributed to payment of rates, land tax and landlord's insurance. The second defendant also says that, by virtue of the above matters, the plaintiff cannot enforce the guarantee until the plaintiff realises or gives up possession of the Biloela property or the plaintiff is only entitled to the difference between the value of the Biloela properties and the amount owing, or alternatively, these proceedings be stayed until the properties are sold. The second defendant has also pleaded that the plaintiff has engaged in unconscionable conduct. He complains about the conduct of the Bank after it took possession of the properties, started to market those properties for a brief period and then did next to nothing for the past 18 months.
The plaintiff's position is that these arguments cannot be sustained and judgment in favour of the plaintiff should be granted.
The loan facilities and guarantees
The loan facilities, the guarantee and the non-payment of demands made by the plaintiff are not in dispute. They are as follows:
RHT Developments was a company in the business of property development. In or about 2004, it sought to borrow money so as to engage in a property development project at Biloela. The defendants were directors of RHT Developments.
On 4 July 2005, the plaintiff and RHT Developments entered into a loan agreement (July 2005 loan agreement) whereby the plaintiff agreed to provide to RHT Developments certain loan facilities including a commercial advance facility for $1,840,000.
It was a term of the agreement that certain security, including a Small Business and Consumer Guarantee from the second defendant for $1,840,000, was required. On 4 July 2005, the second defendant signed a Small Business and Consumer Guarantee in favour of the plaintiff (the guarantee) which guaranteed the July 2005 loan agreement. The guaranteed amount was $1,840,000. There have been subsequent variations to the July 2005 loan agreement but in each and every case the plaintiff required a guarantee from the second defendant. He signed each and every further guarantee. The plaintiff subsequently advanced funds pursuant to the July 2005 loan agreement.
On 10 October 2005, the plaintiff and RHT Developments agreed to vary the July 2005 loan agreement (October 2005 loan agreement), whereby the plaintiff agreed to provide RHT Developments with loan facilities totalling $2,065,000 for the purposes of constructing the Biloela properties.
On or about June 2008, the plaintiff and RHT Developments agreed to vary the October 2005 loan agreement (June 2008 loan agreement), whereby RHT Developments existing commercial facility was to be reduced to $1,900,000 and the facility expiry date was to be extended to 30 June 2008.
On 10 July 2008, the plaintiff and RHT Developments agreed to vary the June 2008 loan agreement (July 2008 loan agreement), whereby the term of RHT Developments existing commercial facility was extended to 30 September 2008.
In about December 2008, the plaintiff and RHT Developments agreed to vary the July 2008 loan agreement (December 2008 loan agreement) whereby the term of the facility was extended to 31 March 2009.
Pursuant to the extension granted under the December 2008 loan agreement, RHT Developments existing facility expired on 31 March 2009. No full payment of the facility was made.
On 10 July 2009, the plaintiff and RHT Developments agreed to vary the terms of the October 2005 loan agreement (July 2009 loan agreement), whereby the limit was increased to $1,935,000 and the term was extended to 31 August 2009. The Bank now required RHT Developments to furnish it with monthly sales reports and progress claims. It appears no sales reports or progress claims were submitted to the Bank.
On 13 August 2009, the plaintiff notified RHT Developments of breaches of the facility. On 28 August 2009, the facility exceeded its limit. On 31 August 2009, the facility expired.
On 7 July 2010, the plaintiff emailed the defendants, stating that the plaintiff would arrange for notices of demand to be issued unless satisfactory evidence was provided on the marketing/sale of the houses by 9 July 2010. No satisfactory evidence was provided.
On 30 November 2010, a letter of demand was sent to RHT Developments by the plaintiff's solicitors for the total amount outstanding under the facility, being $2,224,821.23 at the time; and letters of demand were sent to the defendants, which demanded payment within seven days of the sum of $1,900,000 plus interest at the default rate and costs.
As previously stated, on 11 April 2011, the Bank took possession of the properties. I shall refer to what occurred after the Bank took possession later in this judgment.
On 28 August 2009, the loan facility exceeded the facility limit and on 31 August 2009, the loan facility as amended by the July 2009 loan agreement expired. RHT Developments is obliged to repay the money advanced. It has not done so. The plaintiff now proceeds against the second defendant for money owing under the commercial facility granted by the Bank to RHT Developments pursuant to the October 2005 loan agreement pursuant to the guarantee.
Provisions of the loan agreement and guarantee
The terms of the guarantee are not in dispute. Page one of the schedule states that the guarantor requests the Bank to enter into the guaranteed agreement and, in consideration of it doing so, guarantees and indemnifies the Bank in respect of the customer's obligations under the guaranteed agreement on the terms set out in the schedule and the Bank's "Small Business and Consumer Guarantee and Indemnity Terms and Conditions" Booklet (Version April 2005)". The guarantor is defined in schedule item 1 as, including the second defendant, the customer is defined as RHT Developments, the guaranteed agreement is defined as the July 2005 loan agreement and the guaranteed amount is stated as $1,840,000.
On page 2 of the guarantee, it states that by signing, "you request the Bank to enter into the guaranteed agreement, you agree to be bound by the terms of this guarantee and indemnity and you acknowledge you have received a copy of the guaranteed agreement".
There is then a large box headed "IMPORTANT" that sets out a number of warnings. This includes, under the heading "THINGS YOU MUST KNOW", the following:
"Understand that, by signing this guarantee and indemnity, you may become personally responsible instead of, or as well as, the customer to pay the amounts which the customer owes and the reasonable expenses of the Bank in enforcing the guarantee and indemnity.
If the customer does not pay you must pay. This could mean you lose everything you own including your home."
Immediately below this box are the signature blocks including that which is signed by the second defendant. In cross examination, the second defendant admitted that he understood these warnings (T37.50; 38.1-2).
The Bank's "Small Business and Consumer Guarantee and Indemnity Terms and Conditions Booklet (Version April 2005)" then sets out a number of terms including the following, "Guaranteed Agreement" is defined in cl 1.1(e) as the agreement specified in the schedule (ie the July 2005 loan agreement) or "such other agreement with us which you acknowledge in writing to be a 'Guaranteed Agreement' for the purposes of this guarantee and indemnity".
Clause 1.3 provides that, where there are multiple guarantors, liability is joint and several;
Clause 2.3 provides that the guarantors' maximum liability is the amount stated in the schedule, plus "any amount (including, without limitation, interest and bank charges) in excess of the Guaranteed Amount which is payable by the Customer to the Bank under the Guaranteed Agreement" plus amounts stipulated in clause 4.1 (which are in essence costs and legal expenses the Bank incurs in arranging, administering (including enforcing or taking any other action in connection with its rights) and terminating the guarantee, calculated on a "full indemnity basis."
Clause 3.1 provides that:
"You guarantee that the Customer will pay the Bank all amounts payable under the Guaranteed Agreement when they are due. Your guarantee continues until all these amounts have been paid in full."
Clause 3.2(b) provides that:
"You must pay the Bank any amount which the Customer does not pay the Bank when it is due under the Guaranteed Agreement without the need for the Bank to first ask the Customer to pay it."
Clause 3.3 provides that:
"You indemnify the Bank against any loss the Bank suffers under, or as a result of entering into the Guaranteed Agreement because the Guaranteed Agreement is unenforceable by reason of the Customer's death, insolvency or incapacity. This indemnity is a continuing obligation, separate and independent from your other obligations under this guarantee and indemnity."
Clause 5.2 provides that:
"Subject to clauses 9 and 10 the rights given to the Bank under this guarantee and indemnity and your liabilities under it are not affected by any act or omission by the Bank or by anything else that might otherwise affect them under law relating to guarantees and indemnities including:
(a) that the Bank varies or replaces the Guaranteed Agreement, such as increasing the Guaranteed Amount or extending the term;
(b) that the Bank releases the Customer or gives them a concession, such as more time to pay;
...
(d) that the Bank releases, loses the benefit of, or does not obtain any security..."
Clauses 5.4 provides that:
"As long as an amount payable under the Guaranteed Agreement remains unpaid, you may not, without the Bank's consent:
(a) reduce your liability under this guarantee and indemnity by claiming that you or the Customer or any other person has a right of set-off or counterclaim against the Bank (except to the extent you have a right of set-off granted by law which the Bank cannot exclude by agreement);
(b) claim the benefit of:
(i) another guarantee or indemnity; or
(ii) a mortgage, charge or other security,
given to the Bank in connection with an amount payable under the Guaranteed Agreement or this or any other guarantee or indemnity given in connection with the Guaranteed Agreement, (for example, you may not try to enforce any mortgage the Bank has taken to secure repayment of amounts payable under the Guaranteed Agreement..."
Clause 7.6 provides that:
"The Bank is not liable for any loss caused by the exercise, or attempted exercise of, failure to exercise, or delay in exercising a right or remedy, whether or not caused by its negligence";
Clause 7.7 provides that:
"The Bank's rights and remedies under this guarantee and indemnity are in addition to other rights and remedies provided by law independently of it or by any security (such as a mortgage)."
Clauses 13.2 and 14.1 of the mortgage memorandum together provide that the plaintiff "will have full power to do all or any of the following" and goes on to refer to the taking of possession, receipt of rents and sale of the property (my emphasis added).
Effect of the loan agreement and guarantee under contract law
The plaintiff relied upon Westpac Banking Corporation Ltd v Kingsland (1991) 26 NSWLR 700. The second defendant relied upon Palk v Mortgage Service Funding plc [1993] Ch 330 at 336E-339E, 341.
In Westpac Banking Corporation Ltd v Kingsland, Cole J (as he then was) held that a mortgagee in possession is not obliged to (1) sell at all or at any particular time (see 704G-706D), (2) to lease or permit occupation of premises at any particular time (see 707B-C), (3) or to exercise its power of sale in circumstances where its exercise would extinguish the liability of its debtors and guarantors (707F-709F), even if the debtor or the guarantor believed that he was suffering damage by failure of the mortgagee to exercise the power to sell it (705B-C). In relation to the first and last propositions, his Honour relied on China & South Sea Bank Ltd v Tan Soon Gin [1990] 1 AC 536.
Subsequently, the obligations of a mortgagee in possession were considered by the Court of Appeal in Mailman v Challenge Bank Ltd [1991] NSWCA 182. The contention was that the Bank breached a duty owed to the guarantor by failing to sell security upon the request of a guarantor when the market was falling. It was said that a creditor had a duty, if requested by a guarantor, to act in a manner which was not prejudicial to the guarantor provided by so acting he was not acting to his own prejudice and that a failure to do so lacked bona fides (6.25-6.29) Sheller JA (with whom Gleeson CJ and Handley JA agreed) also after referring to the Privy Council decision of South Sea Bank Ltd rejected the argument, stating (8.10 - 8.13):
"If the surety is worried that the mortgaged securities may decline in value the surety may request the creditor to sell and if the creditor remains idle then the surety may bustle about, pay off the debt, take over the benefit of the securities and sell them."
Counsel for the plaintiff submitted that the principle that the only recourse of the guarantor is to pay out the debt and take over the security is an old one. He referred to A Tyree, Banking Law in Australia (7th ed, 2011) at 512 where the learned author stated:
"When the creditor bank holds securities, it might be thought that the guarantor could force the banker to resort to those securities before calling on the guarantor, but such is not the case. In spite of some earlier confusion, it is clear that the creditor has the right to sue the guarantor without resorting to the securities: see Duncan, Fox & Co v North & South Wales Bank (1880) 6 App Cas 1 per Lord Watson at 22. In Ewart v Latta (1865) 4 Macq 983 it was said:
Until the debtor [that is, the guarantor] has discharged himself of his liability, until he has fulfilled his own contract, he has no right to dictate any terms, to prescribe any duty, or to make any demand on his creditor. The creditor must be left in possession of the whole of the remedies which the original contract gave him, and he must be left unfettered and at liberty to exhaust those remedies, and he cannot be required to put any limitation upon the course of legal action given to him by his contract by any person who is still his debtor, except upon the terms of that debt being completely satisfied.
Once again, it will be found that most bank guarantee forms contain clauses which are intended to put the matter beyond doubt."
Counsel for the plaintiff also referred to C Croft and R Flay, The Mortgagee's Power of Sale (3rd ed, 2013) at [7.6] where those authors stated:
"In more modern cases it was held that the mortgagee is entitled to sell at a time convenient to him or her regardless of the state of the market, but subject to the duties that the law imposes on the mortgagee in the exercise of the power. Indeed, in Commonwealth Bank of Australia v Lee (1996) 22 ACSR 574 at 578 Wheeler J held that in the absence of any rights under a mortgage or other security promptly or at all. As to guarantors, it has been held that if a surety is concerned that the security may decline in value, he or she may try to persuade the mortgagee to sell, but if the surety does not succeed he or she should pay off the debt and take over the security. If the existence of other guarantors prevents this course of action, it does not impose any greater onus on the mortgagee, [citing China and South Sea Bank Ltd v Tan Soon Gin [1990] 1 AC 536; [1989] 3 All ER 839 (PC); Westpac Banking Corp v Kingsland (1991) 26 NSWLR 700; Mailman v Challenge Bank Ltd (1991) 5 BPR 11721.]"
In summary, it is my view that the second defendant has agreed to terms under the successive loan agreements that he had an obligation to repay the Bank the money without the Bank first seeking payment from RHT Developments. The second defendant has also separately indemnified the plaintiff against loss suffered by the Bank by virtue of the guarantee. The obligation of the second defendant to repay the money owing is an independent one that extends to the entirety of the debt, irrespective of the position of the first defendant (Guarantee, clauses 1.3, 3(2)(b)).
The second defendant has also agreed to terms that the Bank is not liable for any loss caused by the exercise, or attempted exercise of, failure to exercise, or delay in exercising a right or remedy, whether or not caused by its negligence and that the plaintiff will have full power to do all or any of the following: the taking of possession, receipt of rents and sale of the property (Mortgage Memorandum, clauses 7.6, 13.2 and 14.1)
Counsel for the second defendant does not dispute that the plaintiff has the power to enter into possession and the power of sale. However, the second defendant's complaint is that in taking possession of all of the properties offered by RHT Developments as security, and in failing to realise any of those properties (since May 2011), the plaintiff prevents RHT Developments from taking steps to sell or improve the properties for sale, and applying the proceeds of sale against what it owes to the Bank, and interferes with the second defendant's ability to cause RHT Developments to pay the plaintiff. The second defendant says that in the circumstances, the Court should decline to grant the relief sought by the plaintiff or alternatively stay the proceedings until the properties are sold. The second defendant further submitted that the right to possession exists only as an incident to sale and possession and is not a remedy in itself. There is no evidence to show that RHT Developments has any funds to take steps to sell or improve the properties.
Between 2007 and 2011, prior to the Bank taking possession, the second defendant employed Bill Hamilton a real estate agent, to sell the houses. The second defendant did not see the point in engaging a marketing expert as he had Bill Hamilton who knew the area, had lived there all his life and he trusted him. The second defendant thought there might have been two or three auctions (T39 and T41-42). The reality is that only one property was sold.
The second defendant holds a very strong opinion that since the Bank took over the management and sale of the properties, their advertising for sale has been inadequate, the agent had demonstrated a lack of interest in renting the houses and the site has been very poorly maintained. This view is shared by two experts, Ms Kerrie Young and Mr Paul Turner. Ms Young is a researcher and consultant with experience in evaluating the market and economic aspects of property development including residential development. She prepared a report dated 22 October 2012. Mr Turner is a registered valuer. He prepared two reports dated 3 February 2012 and 8 October 2012. Both experts gave evidence and were cross examined.
Mr Turner valued the properties based on the comparison of sales of similar properties. As at 8 October 2012, he was of the opinion that the properties, if completed, would sell at a total value of $2.830M. However, if the properties were sold in an incomplete state, or as is, he valued it at $2.515M.
It is necessary to briefly outline what has occurred since the Bank took possession of the Biloela property on about 11 April 2011.
Steps taken by the Bank since it took possession in April 2011
It is fair to say that after the Bank took possession it has done very little. Initially, it instructed First National Real Estate Biloela to put some advertisements in newspapers. Then nothing was done by the Bank to market or sell the properties until late 2012. Neither bank officer Mr Gaetano Di Gregorio or Aaron Browne, Manager - Portfolio Groups of BankWest, who were responsible for this portfolio, ever visited the property.
Initially, after the Bank took possession, three real estate agents were approached by the Bank. On 25 April 2011, Bill Hamilton of Bill Hamilton Property Sales was also approached by Aaron Browne. He estimated that to market the property would cost approximately $10,000. It appears that nothing came of this. Pam Schneider and Angie Guppy of Ray White Biloela were also approached. Pam Schneider provided Aaron Brown with a marketing submission. Her preferred marketing method would be to offer the properties for sale by public auction. Nothing came of this either.
On 15 April 2011, Ross Munroe of First National Real Estate Biloela provided Aaron Browne with a sales proposal. First National's marketing strategy would have been to list and sell by way of private treaty. Mr Munroe envisaged that the property would be marked by exclusive signage, colour brochures, window cards, marketing cards and open for inspection flyers. It appears that all that happened was that between July and August 2011, First National placed advertisements in various newspapers (referred to earlier) and one sign outside the common entrance to the property. The property was listed on the internet. The individual properties have also been put on the internet but internet listings have not been of any value for reasons I shall explain shortly.
From about May 2011 to recent times, Mr Munroe's interest in selling the properties waned, to say the least. His attitude is best illustrated by a recent telephone conversation he had with a solicitor for the plaintiff, Mr Mason on 4 February 2013 (Aff, 12/2/2013 at [4], [5] and [6]). Mr Mason said words to the effect, "I am calling on behalf of BankWest in relation to the advertising for sale of the Biloela properties. There is a proceeding in Sydney where it is alleged that BankWest did not adequately advertise the Biloela properties for sale." Mr Munroe said words to the effect, "I am sick of hearing about the Biloela properties. I will be happy if I am never asked about the Biloela properties ever again. I don't want to waste any more of my time on the Biloela properties. I do not want any part in any proceedings relating to the Biloela properties." The second defendant's evidence is that if anyone were interested in the property they would approach Bill McAvoy, the builder, or his wife who ran the café across the road from First National. They would refer the inquiry to Mr Munroe but he was not interested in selling or renting the Biloela properties. Mr McAvoy reported to the second defendant that while he received weekly calls from people interest in renting house No 2 he was not going to bother referring them to Mr Munroe because he [Munroe] tells them he is not interested. The second defendant notified the Bank of this situation by email dated 6 June 2012.
Internet searches
Mr Rickard says that since April 2011, he has carried out internet searches on the two websites of First National Biloela, and to ascertain whether the Page Place properties were listed for sale or rent. On no occasion could he find the Page Place houses listed for sale or rent on those websites. Mr Rickard did not print out the results of those searches so on 14 August 2012 he carried out a further search of the websites and printed out the results he found.
On 14 August 2012, there were 55 properties listed for sale and nine properties listed for rent in Biloela on website. The Page Place houses did not appears in these searches and he could not locate them on the websites, whether he searched by location, street, postcode or property type. He has since been made aware that the Page Place houses did not in fact have an entry or listing on the First National Website. He could not find a link to this page anywhere from the main website itself. The only way he was able to find this page was by typing "page place Biloela first national" into the Google Search engine, which led him to following URL: As a consequence, a visitor to the First National Biloela website would not find the Page Place houses by clicking on any of their website. It would be only potential buyers who already knew of houses for sale in Page Place, and who conducted a general search on Google, that would be able to find the online advertising of the Page Place houses. Mr Rickard has done this on a number of occasions since April 2011, but did not print out the results. On 4 September 2012, he again carried out the same Google search for "page place Biloela first national" which led him to the same URL.
On a number of occasions since April 2011, Mr Rickard has carried out searches for Page Place houses for sale or rent on but has not found any listings. On 14 August 2012, he searched for properties available for sale in Biloela. The Page Place houses appeared under a single listing as the 99th listing out of a total of 133 listings.
Similar evidence was given by Ms Young, a research, development and marketing consultant, as to the inadequate listing of the Biloela properties on the internet (T61.18). Both Ms Young and the second defendant experienced the same lack of information after trying internet searches for the sale of the Biloela property, as a whole or as individual lots. On 15 October 2012, Ms Young's internet search revealed no listings for Page Place. It is apparent from the searches carried out over time that the property as a whole or as individual lots would not have been located by an interested purchaser. Overall, the internet listings were an ineffective method of marketing the property either as a whole or as individual lots.
Both Mr Turner and Ms Young, on different occasions, requested staff at First National to look up the properties on the website which has a list of properties available for rent or have been rented in the town (T29.36-38). Ms Young attended the office of First National Biloela. She looked in the window where they had numerous cards of other properties that they had for sale. There was not a window card in their window for Page Place. No vacant rental properties at Page Place showed up in their database.
When Ms Young attended the Biloela site the one sign, referred to earlier, was at the front of the properties from First National Biloela and was aged. The sign had exclusive agency on it and a telephone number. There were no other signs to notify you that the other individual properties were for sale (T61.1-8). When Ms Young inspected the property it was untidy, the pool was closed and green. She said that it was the body corporate's responsibility and if the Bank was accepting body corporate funds from the individual owners, the Bank needed to take some of those funds and pay for the caretaking that is their role. She said that some of the properties do need to be brought back to a habitable condition (T59.35-43). Substantial work is needed to complete the properties. Work is needed to be done on improving the grounds and on the presentation of the property. Ms Young says that the presentation of the property for sale is not up to the standard it should be. Nobody is actually inspecting the properties. The body corporate should be doing a better job looking after the grounds and the swimming pool, they should be maintained regularly. Somehow that seems to have broken down (T65). While a number of the properties are at lock-up stage, the ones that are habitable have not been well maintained. Mr Turner also agrees that given the state of the properties they would be very difficult to sell.
Ms Young says that she found if very difficult to work out who was actually responsible for the upkeep and maintenance and appearance of the project itself. Both the second defendant and Ms Young requested a property management letting agreement with any agent. Neither have been shown one. The Bank confirms that they are not able to produce such an agreement. It is probable that none exists. However, the rents are being diverted to the mortgagee.
It was Ms Young's view that there was very little to indicate to her, as if she were a buyer, that these properties were actually for sale and in her opinion the sales strategy undertaken by the Bank was flawed (T61.11-18). As a minimum there could have been a window card in the agent's office, which is a main street location. There could have been for sale signs on the individual properties. This would have raised the awareness that the properties were actually for sale. Also, as a minimum the properties could have been advertised open for inspection once a month rather than not at all (T65.48-50; T66.1-3).
Ms Young suggested that a revised marketing campaign be undertaken. She recommended that a specialist marketing and sales consultant or a specialist project marketing real estate agent be engaged, that person to be someone who was used to this particular type of property as the features of the Biloela property mean it is not the sort of property that is a general real estate agent's brief. She believed that given the property was in a particular state, it needed a more targeted marketing campaign (T57.1-16). While Page Place is a community title arrangement, which is something that the local market is not used to, it requires a different sales approach to sell the properties and that the sales person would need to explain the benefits of that to a purchaser (T56.29-37).
The observations of Ms Young, Mr Turner and the second defendant about the state of the property are correct. Little has been spent on maintaining the property. The Bank has outlaid $360 on 8 May 2012 for "work completed as quoted"; $525 on 25 June 2012 for mowing/slashing at the site; $340 on 27 July 2012 for lawns mowed, whippersnip, pathway blown clean and poison sprayed at four of the properties. This maintenance came about partly because a tenant complained about snakes on the property. Finally, $425 was paid on 17 October 2012 for lawns mowed, whippersnip, spray poison and blow pathways at five properties.
Recent appointment of new real estate agents
In early December 2012, after about 18 months of almost complete inactivity, the Bank appointed Chris McLeod from Chesterton International as the exclusive real estate agent for the sale of the properties. Mark Simpson of Ray White Biloela was appointed co-agent by Chesterton International as the local agent to assist with marketing. Mr Di Gregorio deposed that a marketing budget had been agreed between Chesterton International and the Bank. The total of the marketing campaign is $13,668.49. The properties are currently listed for sale with expressions of interest closing on 6 March 2013.
Consideration of Palk v Mortgage Services Funding plc
Counsel for the second defendant relied upon Palk v Mortgage Services Funding plc [1993] Ch 330 to establish the proposition that while the power of sale is conferred to enable a mortgagee to realise its debt, that mortgagee does not have an unfettered discretion to delay a sale indefinitely and once the Bank started to exercise its power of sale it cannot stop and do nothing. According to the second defendant's counsel, there is no good reason to limit the principles in Palk to mortgagors as similar principles apply to guarantors.
According to the second defendant, the decisions referred to by the plaintiff earlier in this judgment do not detract from Pal v Mortgage Services Funding plc k. In particular, Westpac Banking Corporation Ltd vKingsland concerned an offer to purchase that the Bank declined to consider. The second defendant submitted that the facts of that decision are not the facts in the present case, namely, the argument in Kingsland did not concern delay after taking possession. The second defendant does not say that it has the right to be prescriptive about how the Bank goes about selling the properties, only that the Bank should take reasonable steps to do so and that unless and until it does, it should not be entitled to proceed on the guarantee.
Counsel for the plaintiff submitted that these current proceedings differ from Palk v Mortgage Services Funding plc because no order for judicial sale has been sought. According to the plaintiff there is nothing in Palk v Mortgage Services Funding plc that would provide a basis upon which, firstly, the second defendant's liability under the guarantor would be extinguished; secondly, the Court could order that the plaintiff release possession of the security; and thirdly, some credit be applied to the guarantor's liability with reference to the estimated value of the secured property. But the second defendant does not seek any of those remedies.
In Palk v Mortgage Services Funding plc, a mortgagor applied to the Court under s 91(2) of the Law of Property Act 1925 (UK) for an order for judicial sale of property that the mortgagee was not selling. On appeal, the Court considered the circumstances of that case exceptional and ordered the sale of the property. In Palk v Mortgage Services Funding plc, the English Court of Appeal stated at 336-338:
"A new problem
So far as I am aware, foreclosure actions are almost unheard of today and have been so for many years. Mortgagees prefer to exercise other remedies. They usually appoint a receiver or exercise their powers of sale. Take the present case: the security is inadequate, but Mortgage Services is not seeking to foreclose, nor is it seeking to sell at once. It is seeking to hold on to the house, preferably without becoming accountable as a mortgagee in possession, with a view to exercising its own power of sale at some future date. It is seeking to do this despite the income shortfall mentioned above. The 19th century cases were not concerned with this situation. The principle applied in those cases does not address the problem which has now arisen.
Underlying the present case is not merely a disagreement between a mortgagor and a mortgagee about the likely future trend of house prices. I suspect that probably another feature is a difference in their attitudes towards taking risks. We were told that Mortgage Services has many properties in a similar situation and that this case raises an important question of principle for the company. A substantial lender may be prepared to take risks that would be imprudent for a householder with limited financial resources.
There is also the further feature that the interests of the mortgagor and the mortgagee do not march hand in hand in all respects. The security afforded by the house is not the only remedy possessed by Mortgage Services: the company also has a personal claim against Mrs. Palk. If the property market does not improve as Mortgage Services hopes, and so the shortfall ultimately becomes larger than it is now, the company can have recourse against Mrs. Palk for the increased shortfall. Hence, it is said, Mortgage Services is intent on speculating at Mrs. Palk's expense. If its gamble on property prices fails, the company can still go against Mrs. Palk. Whether she is worth powder and shot is not the subject of evidence before the court. However, in the course of the hearing of the appeal, the suggestion was made that Mortgage Services should take over the house at its current sale value. That would stop interest accruing on part of the debt, and Mortgage Services would keep for itself any increase in the value of the house. Mortgage Services showed no interest in this suggestion. Clearly the company wishes to retain its right to sue Mrs. Palk for the shortfall, whatever it may turn out to be.
The thrust of Mortgage Services' answer is that, in exchange for the loan, it acquired a security and several remedies. The company may choose which remedy it wishes to pursue and when, so long as it acts in good faith and not for some collateral purpose. It may choose the time of sale, however disadvantageous this may be for the mortgagor. If it decides to sell, it must exercise reasonable care to obtain the proper market value, but it is under no duty to exercise its power of sale. Mr. Lightman relied on the observations of Lord Templeman in China and South Sea Bank Ltd v Tan Soon Gin (alias George Tan) [1990] 1 A.C. 536, 545:
'If the creditor chose to exercise his power of sale over the mortgaged security he must sell for the current market value but the creditor must decide in his own interest if and when he should sell.'
Thus, he submitted, if the mortgagee decides to postpone a sale indefinitely, there is no occasion for the court to intervene. If the mortgagor asks the court to intervene and direct a sale against the wishes of a mortgagee who has not misconducted himself, the sale should be on terms that provide for repayment of the whole indebtedness. Thus the argument runs full circle, and ends where it started with the established practice of the court as described above.
A duty to be fair
The first observation I make on this argument is to emphasise that a mortgagee does owe some duties to a mortgagor. As Lord Templeman noted in the China and South Sea Bank case, at p. 545, a mortgagee can sit back and do nothing. He is not obliged to take steps to realise his security. But if he does take steps to exercise his rights over his security, common law and equity alike have set bounds to the extent to which he can look after himself and ignore the mortgagor's interests. In the exercise of his rights over his security the mortgagee must act fairly towards the mortgagor. His interest in the property has priority over the interest of the mortgagor, and he is entitled to proceed on that footing. He can protect his own interest, but he is not entitled to conduct himself in a way which unfairly prejudices the mortgagor. If he takes possession he might prefer to do nothing and bide his time, waiting indefinitely for an improvement in the market, with the property empty meanwhile. That he cannot do. He is accountable for his actual receipts from the property. He is also accountable to the mortgagor for what he would have received but for his default. So he must take reasonable care to maximise his return from the property. He must also take reasonable care of the property. Similarly if he sells the property: he cannot sell hastily at a knock-down price sufficient to pay off his debt. The mortgagor also has an interest in the property and is under a personal liability for the shortfall. The mortgagee must keep that in mind. He must exercise reasonable care to sell only at the proper market value. As Lord Moulton said in McHugh v Union Bank of Canada [1913] A.C. 299, 311:
'It is well settled law that it is the duty of a mortgagee when realising the mortgaged property by sale to behave in conducting such realisation as a reasonable man would behave in the realisation of his own property, so that the mortgagor may receive credit for the fair value of the property sold.'
I have given two examples where the law imposes a duty on a mortgagee when he is exercising his powers: if he lets the property he must obtain a proper market rent, and if he sells he must obtain a proper market price. I confess I have difficulty in seeing why a mortgagee's duties in and about the exercise of his powers of letting and sale should be regarded as narrowly confined to these two duties. In addition to the mortgaged property, a mortgagee normally has a right of recourse against the borrower personally. He may also have the benefit of a guarantee from a third party. There is no problem when the borrower or guarantor can raise the necessary money, or the security available is adequate and readily realisable. Then the borrower should arrange to pay off his debt in full. The difficulty arises when that is not possible. Then the borrower is in the mortgagee's hands. Whether in that situation a mortgagee is at liberty to exercise his rights of leasing and sale in a way that in all likelihood will substantially increase the burden on the borrower or guarantor beyond what otherwise would be the case is not a question I need decide on this appeal, for a reason I shall mention later. That he can act in such a cavalier fashion is not a proposition I find attractive. That is a question which may call for careful examination on another occasion. For present purposes it is sufficent to note that, quite apart from section 91(2), there is a legal framework which imposes some constraints of fairness on a mortgagee who is exercising his remedies over his security."
Palk involves a mortgagor seeking statutory relief. This relief overrides the contractual obligations between parties. Section 91 of the Law Property Act (1925) UK is in materially the same terms as s 103 of the Conveyancing Act 1919. It appears that s 103 does not apply to Torrens Title land. However, there is a view that this Court has inherent jurisdiction to direct a judicial sale: see Yarrangah Pty Ltd v National Australia Bank Limited [1999] NSWSC 97; [1999] 9 BPR 17,061 at [22] to [30]; New Beach Apartments Pty Ltd v Epic Hotels Pty Ltd [2007] NSWSC 474; Guardian Mortgages v Miller [2004] NSWSC 1236 at [121]-[122]; and King Investment Solutions v Hussain [2005] NSWSC 1076. In Yarrangah Pty Ltd v National Australia Bank, Young J (as he then was) was of the view that Palk may fall within equity's jurisdiction to protect sureties.
I agree that the second defendant has not sought statutory relief. While in Palk, the Bank chose not to put the property on the market, the Bank in these current proceedings took preliminary steps to put the property on the market and then did nothing for over 18 months. It has recently taken steps to sell the properties. Even if the second defendant had sought statutory relief in these proceedings, there are two reasons why I would not have granted that relief. They are, firstly, because the Bank has now belatedly commenced marketing the Biloela property for sale; and secondly, much of the prejudice that the second defendant has suffered by the Bank's inaction has been ameliorated.
One can well understand the second defendant's frustration when interest under the guarantee was accruing at $1,468.31 per day and the amount owing under the guarantee as at 5 February 2013 had risen to $3,068,176.64, while the Bank sat by for over a year and did nothing. However, on the last day of this hearing, the Bank made a concession that it is only seeking the recovery of the amount of $1.9M together with costs of enforcement on an indemnity basis with interest to run from the date of judgment. Hence, the second defendant is no longer obliged to pay the interest on $1.9M that accrued over the period when the Bank was dilatory.
While counsel for the second defendant agrees that a mortgagee is required to exercise a power of sale in a provident way, with a due regard to the rights and interest of the mortgagor, she submitted that not taking adequate steps to obtain sale of the secured property is improvident, all the more so when the rental income received by the mortgagee does not exceed the interest charged to the mortgagor and referred to Robertson v Norris (1858) 1 Giff 421; 65 ER 983 at 984. Counsel for the plaintiff submitted that Robertson is not authority for imposition of an overarching and broad duty to act "in a provident way, with a due regard to the rights and interest of the mortgagor", as contended by the second defendant. I agree with the plaintiff's submission.
In these current proceedings there is no evidence that the power of sale is being exercised by the mortgagee for other purposes, and with other views than merely recovering the payment of the debt, so this case is not of assistance.
The second defendant also submitted that the plaintiff is in breach of its obligation of good faith which arose when it took possession and commenced to exercise its power of sale. This point was not fully argued. The contractual documents gave the Bank the option to do all or any of the following, taking of ... possession .... sale of property. The Bank was tardy in selling the property but I cannot conclude that it did not act in good faith.
Unconscionability
Finally, the second defendant alleges that the plaintiff has engaged in unconscionable conduct and relied upon either section 12CB and 12CC of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and ss 21 and 22 of Schedule 2 the Competition and Consumer Act 2010 (Cth), that Schedule comprising the Australian Consumer Law.
The ASIC claim
Sections 12CB and 12CC are contained in Division 2 of Part 2 of the ASIC Act which deals with unconscionable conduct and consumer protection in relation to financial services.
Section 12BAA(1) of the ASIC Act defines a "financial product" as a "facility" through which a person, among other things, makes a "financial investment". Subsection 7(k) specifies that a "financial product" includes "a credit facility (within the meaning of the regulations)". Regulation 2B(l)(h) of the ASIC Act's regulations provides that a "credit facility" includes a "guarantee of an obligation under a credit contract".
Section 12CB(2)(a) provides that the section does not apply to conduct that is engaged in only because the person engaging in the conduct institutes legal proceedings in relation to the supply or possible supply, or in relation to the acquisition or possible acquisition.
Section 12CC sets out a non-exhaustive list of matters which a court may consider in determining whether "a person (the supplier) has contravened s 12CB in connection with the supply or possible supply of financial services to a person (the service recipient)", including, among other things:
(a) relative strengths of the bargaining positions of the supplier and the service recipient (s 12CC(l)(a)),
(b) whether, as a result of conduct engaged in by the supplier, the service recipient was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier (s 12CC(l)(b)),
(c) whether the service recipient was able to understand any documents relating to the supply or possible supply of the financial services (s 12CC(l)(c)),
(d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the service recipient or a person acting on behalf of the service recipient by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the financial services (section 12CC(l)(d)), and
(e) the extent to which the supplier unreasonably failed to disclose to the service recipient (s 12CC(l)(i)):
(i) any intended conduct of the supplier that might affect the interests of the service recipient, and
(ii) any risks to the service recipient arising from the supplier's intended conduct (being risks that the supplier should have foreseen would not be apparent to the service recipient),
(f) if there is a contract between the supplier and the service recipient for the supply of the financial services (section 12CC(l)(j)):
(i) the extent to which the supplier was willing to negotiate the terms and conditions of the contract with the service recipient, and
(ii) the terms and conditions of the contract, and
(iii) the conduct of the supplier and the service recipient in complying with the terms and conditions of the contract, and
(iv) any conduct that the supplier or the service recipient engaged in, in connection with their commercial relationship, after they entered into the contract,
(g) the extent to which the supplier and the service recipient acted in good faith (s 12CC(1)(l)).
Section 21 of the Australian Consumer Law largely mirrors s 12CB of the ASIC Act in that it also prohibits a person, "in trade or commerce", from engaging in "conduct that is, in all the circumstances, unconscionable" in connection with "the supply or possible supply of goods or services" or "the acquisition or possible acquisition of goods or services", respectively, to and from a person (other than a listed public company).
Similarly, s 22 of the Australian Consumer Law largely mirrors s 12CB of the ASIC Act in that it also sets out a non-exhaustive list of matters which a court may consider in determining if s 12CB is contravened.
There is no substantive difference between the applications of either regime for present purposes.
The second defendant's criticism of the plaintiff arises from its conduct after the guarantee was entered into so much of s 12CC(1) is not applicable. It is the Bank's conduct after it took possession of the property that the second defendant claims in unconscionable: see s 12CC(1)(j)(iv) of the Act reproduced above.
Principles
The predecessor provisions of the relevant ACL provisions may be found in sections 51AA - 51AC of the Trade Practice Act 1974 (Cth) (TPA) and it is accepted that the authorities concerning the interpretation of the TPA "unconscionability" regime are applicable to the current statutory regimes.
It is accepted that "unconscionable" under the statutory provisions is not limited to the cases of equitable or unwritten law unconscionability ACCC v Simply No-Knead (Franchising) Pty Ltd [2000] FCA 1365 at [31] per Sundberg J.
It is also accepted that the list of factors are non-exhaustive. The Court is "aided but not controlled by the factors listed...": ACCC v Simply No-Knead (Franchising) Pty Ltd at [37] per Sundberg J.
Nevertheless, the provision sets a high bar to be met by a plaintiff. As stated in Hurley v McDonalds Australia Ltd [1999] FCA 1728, (2000) ATPR 41-741 their Honours Heerey, Drummond and Emmett JJ said at [22]:
"For conduct to be regarded as unconscionable, serious misconduct or something clearly unfair or unreasonable, must be demonstrated - Cameron v Qantas Airways Ltd [1995] FCA 1304, (1994) 55 FCR 147 at 179 Whatever 'unconscionable' means in sections 51AB and 51AC, the term carries the meaning given by the Shorter Oxford English Dictionary, namely, actions showing no regard for conscience, or that are irreconcilable with what is right or reasonable - Qantas Airways Ltd v Cameron [1996] FCA 1483; (1996) 66 FCR 246 at 262. The various synonyms used in relation to the term 'unconscionable' import a pejorative moral judgment - Qantas Airways Ltd v Cameron [1996] FCA 1483; (1996) 66 FCR 246 at 283-4 and 298."
Similarly, in Canon Australia Pty Ltd v Patton [2007] NSWCA 246, it was stated by Campbell JA at [41]-[43]:
"In Attorney General (NSW) v World Best Holdings Ltd [2005] NSWCA 261; (2005) 63 NSWLR 557, Spigelman CJ (at [119], 583) said, concerning a different statutory provision,
'Over recent decades legislatures have authorised courts to rearrange the legal rights of persons on the basis of vague general standards which are clearly capable of misuse unless their application is carefully confined. Unconscionability is such a standard.'
He continued (at [121], 583):
'Unconscionability is a concept which requires a high level of moral obloquy. If it were to be applied as if it were equivalent to what is "fair" or "just", it could transform commercial relationships...'
Those remarks can equally, in my view, be applied to the notion of 'unconscionable conduct' in section 51AC."
Further, ordinarily, it may be necessary to demonstrate some special disadvantage: CG Berbatis Holdings Pty Ltd v ACCC [2001] FCA 757; (2001) 185 ALR 555 at [70] per Hill, Tamberlin and Emmett JJ.
Counsel for the second defendant submits the circumstances of this case are such that there has been a high level of moral obloquy because in taking possession of the property as security, and in failing to realise any of those properties since May 2011, the plaintiff prevented RHT Developments from taking steps to sell or improve the properties for sale and applying the proceeds of sale against what the Bank owed to the plaintiff. The second defendant submitted that it interfered with his ability to cause RHT Developments to pay the plaintiff. The second defendant says that in the circumstances it would be premature to allow the plaintiff judgment in the full amount of the debt owed by RHT Developments and that the Court should decline to grant relief to the plaintiff or alternatively the proceedings should be stayed under further order.
My conclusions for finding that the Bank has not engaged in unconscionable conduct are the same reasons that I have given earlier. While the Bank has been dilatory since taking possession of the Biloela property in about April 2011, the Bank has now taken steps to sell the property, something that the second defendant wants to be done. The prejudice that the second defendant has suffered by the Bank's inaction has been ameliorated. He is no longer obliged to pay interest on $1.9M that accrued over the period when the Bank was dilatory. In these circumstances, the conduct of the Bank over this period is not unconscionable as described in Hurley v McDonalds Australia Ltd and Canon Australia Pty Ltd v Patton.
The defendant's defences raised in the amended defence fail. The Bank is entitled to enforce the guarantee. The result is judgment should be entered in favour of the plaintiff. The second defendant is to pay to the plaintiff the sum of $1,900,000.
Costs are discretionary. Costs usually follow the event. The second defendant is to pay the plaintiff's costs.
The Court orders that:
(1) The second defendant is to pay to the plaintiff the sum of $1,900,000.
(2) The second defendant is to pay the plaintiff's costs.
(3) Interest is to run from today.
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Decision last updated: 11 March 2013
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