Duggan v Thomas - [2002] FCA 830

FEDERAL COURT OF AUSTRALIA
Duggan v Thomas, in the matter of William Joseph Duggan [2002] FCA 830
BANKRUPTCY – applicant’s company had interest in adjoining freehold and leasehold properties – Bank held first registered mortgage over freehold property – applicant guaranteed company’s debt – Bank and holder of first registered mortgage over leasehold property entered into agreement to sell properties in “one-line” and distribute sale proceeds in fixed ratio – money received by Bank insufficient to discharge debt – whether Bank could recover shortfall from applicant guarantor – whether Bank breached obligations to applicant by entering into agreements – value of freehold property compared to leasehold property – applicant made bankrupt on own petition – whether Bank’s proof of debt properly admitted – whether proof of debt should be expunged
GUARANTEE – duty of mortgagee to guarantor – result of breach of duty
Bankruptcy Act 1966 (Cth) s 99
Corporations Law s 420A s 423
Real Property Act 1900 (NSW) s 58(3)
Tooth & Co Ltd v Lapin (1936) 53 WN (NSW) 224, referred to
Yorkshire Bank Plc v Hall [1999] 1 WLR 1713, referred to
Medforth v Blake [2000] ChD 86, referred to
Taylor v Bank of New South Wales (1886) 11 App Cas 596, referred to
State Bank of Victoria v Parry (1989) 7 ACLC 226, referred to
O’Day v Commercial Bank of Australia (1933) 50 CLR 200, referred to
Phillips and O’Donovan The Modern Contract of Guarantee 3^rd ed. 1996
Tyler et al Fisher & Lightwood’s Law of Mortgage Australian Edition 1995
WILLIAM JOSEPH DUGGAN v GAVIN FREDERICK CRICHTON THOMAS (AS TRUSTEE OF ESTATE OF WILLIAM JOSEPH DUGGAN) (IN THE MATTER OF WILLIAM JOSEPH DUGGAN) & ANOR
N 7847 of 2000
STONE J
28 JUNE 2002
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

N 7847 OF 2000

IN THE MATTER OF WILLIAM JOSEPH DUGGAN

BETWEEN:

WILLIAM JOSEPH DUGGAN
APPLICANT

AND:

GAVIN FREDERICK CRICHTON THOMAS (as Trustee of the bankrupt Estate of William Joseph Duggan)
FIRST RESPONDENT

COMMONWEALTH BANK OF AUSTRALIA
(ACN 123 123 124)
SECOND RESPONDENT

JUDGE:

STONE J

DATE OF ORDER:

28 JUNE 2002

WHERE MADE:

SYDNEY

THE COURT ORDERS THAT:
1.The Court declares that the proof of debt lodged by the Commonwealth Bank of Australia in the Estate of William Joseph Duggan has been wrongly admitted by the Trustee;
2.The Court orders that the proof of debt lodged by the Commonwealth Bank of Australia in the Estate of William Joseph Duggan be expunged.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

N 7847 OF 2000

IN THE MATTER OF WILLIAM JOSEPH DUGGAN

BETWEEN:

WILLIAM JOSEPH DUGGAN
APPLICANT

AND:

GAVIN FREDERICK CRICHTON THOMAS (as Trustee of the bankrupt Estate of William Joseph Duggan)
FIRST RESPONDENT

COMMONWEALTH BANK OF AUSTRALIA
(ACN 123 123 124)
SECOND RESPONDENT

JUDGE:

STONE J

DATE:

28 JUNE 2002

PLACE:

SYDNEY

REASONS…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

Keep reading for free

Create a free CaseChat account to read Duggan v Thomas and more:

Read every judgment in full
Ask AI and get answers linked to paragraphs
See how each paragraph was cited in later cases
Download judgments as PDF or Word

Continue with Google

One click creates your free account or signs you in.

By continuing you agree to the Terms and Privacy Policy.

Details

Case: [2002] FCA 830
Decision Date: 28 JUNE 2002

CaseChat Overview and Summary

In the case of Duggan v Thomas, the applicant, Mr Duggan, sought to have a proof of debt expunged under section 99 of the Bankruptcy Act 1966 (Cth). Mr Duggan, a director and shareholder of Raffindale Pty Limited, contested the sale of a waterfront property by the Commonwealth Bank of Australia, which held a mortgage over the property. The property in question consisted of a freehold property and a Maritime Services Board lease, which was essential for the operation of a marina business. Mr Duggan argued that the Bank breached its duties in the sale of the property, resulting in insufficient funds to cover his obligations under a guarantee to the Bank.

The primary legal issue the court had to address was whether the Bank breached its duties as a mortgagee in the sale of the property. Mr Duggan claimed the Bank failed to exercise reasonable care and act in good faith when selling the property, resulting in a gross undervaluation. The Bank, on the other hand, denied any breach of duty and argued that the sale was conducted in accordance with proper procedures. The court had to determine if the Bank owed any duty to Mr Duggan as a guarantor of the debts of Raffindale and if such a duty was breached.

The court found that the Bank did not breach any duty to Mr Duggan or Raffindale in the sale of the property. The court noted that the Bank did not owe any duty to the applicant as a guarantor of the debts of Raffindale, as the agreement with AGC did not affect the applicant's interests. The court accepted that the Bank exercised reasonable care and acted in good faith when selling the property. The court relied on the valuation reports, the consistency of the sale price with the obtained valuations, and the one-line auction sale after extensive marketing. As a result, the court rejected Mr Duggan's claim and found no breach of duty by the Bank.

The court declared that the proof of debt lodged by the Commonwealth Bank of Australia in the Estate of William Joseph Duggan had been wrongly admitted by the Trustee and ordered that the proof of debt be expunged.

Orders

Orders of the court

1. The Court declares that the proof of debt lodged by the Commonwealth Bank of Australia in the Estate of William Joseph Duggan has been wrongly admitted by the Trustee;

2. The Court orders that the proof of debt lodged by the Commonwealth Bank of Australia in the Estate of William Joseph Duggan be expunged.

Background

Background to the litigation

By application filed on 3 October 2000, Mr Duggan seeks to have the proof of debt expunged under s 99 of the Bankruptcy Act 1966 (Cth) (“Act”). The facts surrounding this dispute are complex.Factual background The applicant was a director and shareholder of Raffindale Pty Limited (“Raffindale”). In October 1987 Raffindale was the registered proprietor of a waterfront property at 5 Wunulla Road, Point Piper, New South Wales (“the freehold property”) being the land in folio identifier 1/804365. Raffindale was also the lessee from the Maritime Services Board of an area of land adjoining the freehold property below the high water mark (“MSB lease”). When referring to these properties together I shall use the term, “combined property”. Another company, Point Piper Marina Limited (“PPM”) carried on the business of a marina on the MSB lease and on part of the freehold property. Land access to the MSB lease was possible only by going through the freehold property. The applicant accepted on cross-examination that if access to the MSB lease was denied by the owner of the freehold property the marina business could not survive. The following brief description of the freehold property and the MSB lease is taken from a valuation review report prepared for the purpose of this proceeding by Mr Robert Ten Kate at the request of the solicitors for the Bank. The description of the property was consistent with the descriptions given by both parties and was not challenged by the applicant. “The subject property comprises the Freehold interest in Lot 1 of Deposited Plan 804365 also known as Computer Folio Reference 1/804365 and, the Leasehold interest in an area of land below High Water Mark identified by Deposited Plan 118021 being an area of approximately 1,620 square metres. It is also understood that at the time of sale the marina had annual licences for 100 moorings in the adjacent waters of Rose Bay.The freehold land has a frontage of 15.24 metres with a site area of approximately 336.7 square metres. It is noted that the land has no frontage to Wunulla Road but has two easements for pedestrian access onto the subject land.…Erected on the freehold land is a detached three level rendered brick and tile residence with the upper two levels providing four bedroom accommodation and the ground floor (basement level) being utilised by the marina, containing toilet amenities and workshop areas.…Erected on the leasehold land is a timber framed weatherboard building, marina slipway and marina berthing facility. The weatherboard building contains a number of offices, open office area, stationary (sic) store, kitchen, mechanical workshop, mezzanine storage and toilet amenities. The marina has 25 berths and is of timber framed construction with a timber jetty and mooring poles. A petrol pump is also located on the marina. Outside the leasehold area are 100 moorings under licence from the Waterways Authority (Maritime Services Board).Annexed to the basement level of the residence are two large slipways equipped with five cradles. It is understood that the slipways can accommodate vessels up to 50 tonnes and 20 metres in length.” (emphasis removed)

Evidence

Evidence Before The Court

Despite the complexity of the facts in this proceeding the applicant’s case is simple. It is claimed that in the sale of the freehold property the Bank owed a duty to the applicant and to Raffindale not to act recklessly or sacrifice the property, to exercise reasonable care in the sale of the property and to sell it in good faith at the best price reasonably available. It is claimed that the Bank breached these duties by entering into the agreement described in [9] above, by failing to obtain valuations of the freehold property and the MSB lease in May 1994 and by failing to sell the freehold property on its own for $2 million or thereabouts. It should be noted that at issue in this proceeding is the sale of the freehold property only. No complaint is made concerning the sale of the MSB lease. The applicant claims that because of the above the Bank failed to realise a sum sufficient to meet the obligations of the applicant under the guarantee to the Bank.VALUATION EVIDENCEMr Rowan’s valuation For the applicant, Stuart Nevin Rowan, a registered valuer, deposed that the fair market value of the freehold property as at October 1995 was $2,300,000. In a report dated 16 June 2001 and attached to his affidavit, Mr Rowan noted that the property had “no legal access from Woollahra Road but relies on crossing a proportion of land known as Lot 1 in Deposited Plan No. 3556, owned at the date of valuation by Woollahra Municipal Council.” He noted that the use of the property for residential purposes was permitted within the zoning and that the use of the basement of the residence as a workshop for the adjoining marina and the use of a weatherboard structure for office and showroom space were permitted under the “continuance of usage provisions.” Mr Rowan’s report noted that the land is irregular in shape but did not appear to draw any adverse conclusion from this fact. Mr Rowan’s report compared the freehold property with a number of other more or less comparable residences in the immediate area, the sales prices of which were known to him. Three of the four properties he considered were said to be superior or substantially superior to the subject land. One was considered to have been much inferior. Mr Rowan also made some comments about the marina business:“It is our view that the value of the residence was inexorably linked to the marina business. Clause 21 of the Maritime Services Board Lease appears to give the MSB the right to determine the lease upon written objection from the proprietor of the adjoining freehold land [the subject land]. The value of the marina business would be severely compromised, if it were not rendered unsaleable should the properties fall into separate ownership. The marina has no land access except through the freehold lot, and no provision for a right of way has ever been made. We understand that the property was sold by the mortgagee together with the Maritime Services Board lease for the marina and the licence for the moorings.We have not had an opportunity to assess the value of the marina itself or the combined value of the two, but it is our view that the freehold house and land alone were worth well in excess of the amount of $2,150,000 for which the entire property was sold.”

Decision

Reasons for decision

STONE J

Full text does not contain this section.

Ratio Decidendi

Legal Principle Established

Established by: STONE J

In rejecting the applicant’s claim that the Bank was in breach of its duties as mortgagee, the Bank denied that the properties were sold at a gross undervalue. The Bank relied on:1.the valuation of Mr Dundas prepared in 1994 which put a value of $1,700,000 on the properties;2.the fact that the price obtained for the properties was consistent with Mr Ten Kate’s valuation; and3.that the properties were sold in one-line at auction after extensive marketing.CONSIDERATION The Bank’s first submission, that the Bank did not owe any duty to the applicant, as guarantor of the debts of Raffindale, cannot be accepted. There is ample authority for the proposition that a mortgagee exercising a power of sale owes the same equitable duty to a surety as to a mortgagor; Tooth & Co Ltd v Lapin (1936) 53 WN (NSW) 224 at 225; Yorkshire Bank Plc v Hall [1999] 1 WLR 1713 at 1728; Medforth v Blake [2000] ChD 86 at 98. Similarly there is no reason to doubt that where a mortgagee breaches such a duty that the surety cannot rely on that breach as a defence to a claim by the mortgagee with the result that the guarantor’s liability is reduced to the extent that the value of the security has been diminished; Taylor v Bank of New South Wales (1886) 11 App Cas 596 at 601, and see generally Phillips and O’Donovan The Modern Contract of Guarantee 3rd ed. 1996 at p. 405 to 410. Section 420A of the Corporations Law (the Corporations legislation in force in 1995) also imposes obligations on a controller of a corporation to take “all reasonable care” to sell the property for:“(a)if, when it is sold, it has a market value – not less than the market value; or(b)otherwise – the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold.” Under s 423(1)(b) of the Corporations Law if a person complains to the Court that the controller is not observing the obligation imposed by s 420A, the Court can inquire into the matter and “take such action as it thinks fit”. It is clear from Artistic Builders Pty Ltd v Elliot & Tuthill (Mortgages) Pty Ltd [2002] NSWSC 16 that s 423 allows the Court, after due inquiry, to impose a remedy including that the mortgagee pay to the complainant the amount of the loss sustained by reason of the mortgagee’s breach of its statutory duty under s 420A; see also Jeogla Pty Ltd v Australia & New Zealand Banking Group (1999) 150 FLR 359. I accept that the Bank did not breach any duty to Raffindale or to the applicant by entering into the agreement with AGC. The Bank supports this proposition with reference to the fact that the amount realised by the one-line sale was greater than the amount that would have been realised by selling the freehold property alone. This is not the reason why I accept the initial proposition. It seems to me that the fact that the property was sold in one-line is irrelevant to the propriety of the agreement. Entry into the agreement was not a breach of any duty owed to the applicant because the agreement had no power to affect the interests of the applicant. It is a principle of contract law so fundamental as to need no authority, that parties to a contract can create rights and duties as between themselves but they cannot, as a matter of contract law, bind or benefit persons who are not party to the contract.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 7847 OF 2000

BETWEEN:	WILLIAM JOSEPH DUGGAN APPLICANT
AND:	GAVIN FREDERICK CRICHTON THOMAS (as Trustee of the bankrupt Estate of William Joseph Duggan) FIRST RESPONDENT COMMONWEALTH BANK OF AUSTRALIA (ACN 123 123 124) SECOND RESPONDENT
JUDGE:	STONE J
DATE OF ORDER:	28 JUNE 2002
WHERE MADE:	SYDNEY

JUDGE:	STONE J
DATE:	28 JUNE 2002
PLACE:	SYDNEY