Glodale Pty Ltd & Ors v Investec Bank (Australia) Limited

[2009] HCATrans 334

[2009] HCATrans 334

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M58 of 2009

B e t w e e n -

GLODALE PTY LTD (ACN 007 096 540)

First Applicant

BOZ ONE PTY LTD (ACN 089 415 430)

Second Applicant

THE BOATHOUSE PORT DOUGLAS PTY LTD (ACN 096 331 314)

Third Applicant

and

INVESTEC BANK (AUSTRALIA) LIMITED (ACN 071 292 594)

Respondent

Application for special leave to appeal

CRENNAN J
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 11 DECEMBER 2009, AT 11.45 AM

Copyright in the High Court of Australia

MR M.R. ALDRIDGE, SC:   May it please the court, I appear for the applicants with my learned friends, MR A.W.  SANDBACH and MR D.B. CLOUGH.  (instructed by Goldsmiths Barristers & Solicitors)

MR D.M.B. DERHAM, QC:   If the Court pleases, I appear with my learned friend, MR A.M. DINELLI, for the respondent. (instructed by Arnold Bloch Leibler Lawyers)

CRENNAN J:   Yes, Mr Aldridge.

MR ALDRIDGE:   Your Honours, there are five points I would like to make, if I may, in this matter, by way of the application.  The first is that the issue of the proper construction of the two sections upon which these cases is based is of national importance and significance.  Section 420A of the Corporations Act is national, in effect, and applies to all controllers under that Act and the Queensland Act, of course, applies to all mortgagees in possession in Queensland.  The second point is that the test is a statutory test which is referrable to the market value.  It is not a general test to take reasonable care.  It is a test either to ensure or to take all reasonable steps to sell at the market price.  So the duty is directed to a specific end, namely, the obtaining of the market price.  To some limited degree, assistance can be gained from section 420A(1)(b) which is the test that applies when there is no market price and the obligation on a controller there is to get “the best price that is reasonably obtainable”.

CRENNAN J:   Do you agree that the Bank had the power to sell “in one line”?

MR ALDRIDGE:   Yes, there is no issue about that, your Honour.

CRENNAN J:   Yes, thank you.

MR ALDRIDGE:   That this is so, in our submission, is supported by a number of passages in Commercial and General Acceptance Ltd v Nixon which is behind tab 7 of the authorities bundle.  It is probably sufficient for me only to go to one of those and that is to be found in the decision of Justice Mason at page 505 at about point 75 on the page, halfway through that paragraph:

The duty imposed by the subsection is specific.  It requires “reasonable” to be taken “to ensure” that the property is sold at the market value; it is not a mere duty to take reasonable care in a general sense.

The third point is that, in our respectful submission, the Court of Appeal made two fundamental errors.  The first is it effectively posed the question whether the respondent’s conduct was reasonable in a general and undirected way instead of directing attention to whether or not the Bank took all reasonable steps to obtain the market value.  In doing this, it effectively reversed the order of the test because their Honours, we submit, in fact held that the market value for the purposes of the two sections could in fact be determined by the Bank by the process which they elected to use to sell the property, so that once the Bank elected to sell the property “in one line”, the market value that applied for the purpose of the section was the market value that was determined by that process.

CRENNAN J:   I think there was evidence, was there not, that there was a discount that would apply for a sale “in one line”, 15 per cent, I think?

MR ALDRIDGE:   Yes, there was.  That was proposed.  As it turned out, the evidence was that it was more like when Mr Delios resold some of the apartments; he was making a profit in excess of 50 per cent.  So, the submission put below and we put to your Honours is that there could be – this is the second fundamental error we submit the Court of Appeal made – there can be but one market value.  There are not two market values and the Bank has the opportunity of choosing one by the process it seeks to use to sell ‑ ‑ ‑

CRENNAN J:   You are saying you decide the process and “one line” is a permissible approach and once you determine the process, you then determine the question of market value?

MR ALDRIDGE:   Yes, and we submit in doing so the courts below have reversed the section and, in effect, made it a general duty to take reasonable care rather than a duty to obtain the market value – to take reasonable steps ‑ ‑ ‑

KIEFEL J:   Does it follow from what you say the obligation under the statute, as you would say it, is to ensure that market value by reference to the sale of individual apartments is obtained?  That is it, full stop?

MR ALDRIDGE:   On the facts of this case, yes, your Honour.  That does not necessarily mean, of course, they have to sell at that way but that is the starting point by which you then make the decision as to what you are going to do and that ‑ ‑ ‑

KIEFEL J:   How do you test reasonableness against an obligation stated in that way?

MR ALDRIDGE:   Because, for example, your Honour, there may be a case where the difference between the market price – in this case the sale by individual units – does not exceed the sale “in one line” by very much at all and the evidence is it will be a long, difficult and expensive process to sell them.  That is not the case here, but one can see that – you must start with that point and say, were all reasonable steps taken to achieve that price?  It does not mean that because you did not eventually sell individual units that you breached that duty.  It is a question of reasonableness as to whether you ‑ ‑ ‑

KIEFEL J:   I am sorry.  It is not so much a question of sitting the duty in absolute terms?

MR ALDRIDGE:   No.

KIEFEL J:   It depends upon the circumstances of the case?

MR ALDRIDGE:   Yes, and we accept as we ‑ ‑ ‑

KIEFEL J:   And so why is there a grant of special leave necessary?

MR ALDRIDGE:   Because in this case, your Honour, firstly, the test as posed by the Court of Appeal is misdirected.  Your Honours will have seen throughout some references by the Court of Appeal to other issues that other courts have determined stating the test is not applicable to the timing of the sale, whether or not mortgagees are obliged to spend funds on sale.  We submit all those things are subject to the test of reasonableness so that, as a matter of principle, this case should not stand.  Descending to the particular facts, this is my point four.  If I can start by reminding your Honours of the test posed by her Honour Justice Dodds‑Streeton which appears at application book 52.  Her Honour set out an analysis and her Honour started by saying:

The expert evidence establishes that the exercise of all reasonable care by a receiver would entail a process of selecting the method of realising the highest net return, by considering the different available means of sale and weighing the prices likely to be achieved against the likely costs and expenses . . . the objective of securing the best possible return for the secured creditor, subject to the obligations imposed by general law doctrines –

Her Honour was probably saying that the duty is to obtain the best possible price both for the mortgagee and mortgagor.  If one then turns to the steps that the Bank took.  They can be found at application book 59 and 60.  Figuratively, if not literally, this exercise was conducted on the back of an envelope and the factors that were taken into account by the Bank were set out at the bottom of page 59 over to the middle of page 60.  Nowhere does there appear the market value.  It is not a test that is capable of fulfilling the Act.  It is not a question of whether what they did was sufficient or whether someone would come to a different view.  It was an exercise that did not fulfil and was not capable of fulfilling the test posed by the Act because the touchstone, the criterion of what was reasonable was simply not taken into account.

What needed to be taken into account, at the least, was the values to be obtained by the two different methods, the time at which those sales were likely to take place.  It has to be remembered, your Honours, that if a sale of individual units is going to take place it is going to take place over a period of time.  As the first sales come in, the debt drops and one indeed might not need to sell all of the units to clear the debt.  So that accepting that that was the analysis that the Bank undertook, it is manifestly and fundamentally inadequate.  It is not capable of meeting the test when correctly posed and, indeed, we would say, your Honours, to the extent it is relevant, was not capable of meeting the test of whether it was reasonable in a general sense or not.

The second reason why this is an appropriate vehicle is that there is a timing issue.  Whilst analysis was conducted by the Bank, I think in March, there were two further occasions on which the Bank can and should have reconsidered.  The first is on 5 May 2003 when it received the letter from Mr Quinn which can be found at application book 45.  Mr Quinn of course was a person who was advising the Bank and in the third paragraph of his letter he said:

We have been approached by several purchasers since the marketing has commenced.  We wish to raise our concerns with you.  These purchasers have indicated to us they will be able to buy the properties in one line at figures at well below what we consider to be achievable.  All purchasers that have contacted us to date are simply looking to purchase the property mortgagee in possession at a heavily discounted price (which they have been given advice from a southern selling agent that they may achieve) and then simply sell on the units for a profit.

The Bank should then, in the light of that knowledge, reconsider its marketing campaign.  To fail to do that is to fail to take all reasonable steps.  The second opportunity occurred in the middle of August 2007 when the Bank became aware of the resales by Mr Delios.  Your Honours might recall the slightly complicated facts were that the Bank had appointed receivers and they entered into contracts to sell.  The second mortgagee refused to discharge its mortgage, so the Bank then went into possession as a mortgagee and sold the properties.  It did so by adopting the contracts of the receiver.  It did that on 12 and 15 August.  As appears at the top of application book 47:

Between 22 June 2003 and 26 September 2003 –

not quite the same timeframe – Mr Delios had already on sold 19 of the 20 units at The Verandahs for $6.1 million, which was well above the four point something that the Bank was selling to him.  So, at the time the Bank came to choose whether to adopt the receiver’s contracts or not, it was well aware of not only the market price that was being obtained by Mr Delios, but the quick timeframe in which he was obtaining them.  So, this case is not an arid exercise in determining whether or not the Court of Appeal was wrong in principle.  It is an appropriate vehicle because the facts are very suitable for the application of that principle when there was in fact no consideration and no adequate consideration of the market value by the Bank.  It is not a case where the Bank conducted a process upon which minds may differ as to whether the outcome was reasonable or unreasonable.  It is a process that fundamentally failed.

CRENNAN J:   There were special circumstances, though, were there not?  The debt was increasing at a significant rate and there had already been a failed attempt to sell individually, had there not?

MR ALDRIDGE:   There had at an earlier time in 2002.  Almost inevitably in these cases debt is increasing.

CRENNAN J:   Just by reason of the default, of course.

MR ALDRIDGE:   Of course.  They are factors that do need to be taken into account in conducting any test of reasonableness but they ‑ ‑ ‑

CRENNAN J:   They certainly influenced the Court of Appeal, I think it is fair to say.

MR ALDRIDGE:   Yes, they did.  In fact, another criticism we make of the criteria that the Bank used and that the Court of Appeal approved is that almost all of those factors are entirely Bank centric, that is, they are factors that impact on the Bank.  They are relevant factors in a mortgagee’s ‑ ‑ ‑

CRENNAN J:   Increased debt also has an impact of a debtor – the defaulter.

MR ALDRIDGE:   It certainly does, but there needs to be taken into account because of the nature of the duty the things on the debtor’s side of the ledger too.  The difference between selling “in one line” and selling individually is not just a question of price because individual units may be able to be sold quickly and reduce the debt and reduce the interest rather than waiting for a purchaser “in one line”.

CRENNAN J:   Was the finance originally provided over the units as a parcel?

MR ALDRIDGE:   Yes, it was.  One also has the effect that if one is selling individual units, you may not need to sell them all to pay back the debt.  So to look at the process as if you have to sell all of the units and extend the timeframe to that means that you are not really taking into account the true nature of the sale.  So that whilst there are factors that point one way, the one factor that is absolutely missing is consideration of the market value in this and what is it going to take to get the market value and then balancing these factors against the market value.  What the Bank simply did and what the Court of Appeal approved was simply taking into account factors that suited the Bank and justified what the Bank saw was a quick sale. 

I have tried to use that, not in a pejorative sense, but that seems to be what the Bank was focused on primarily, whereas what the Bank had to do was to test that against the market value because the general purpose and the statutory purpose of the legislation is to require the Bank to take reasonable steps to ensure or to take all reasonable steps to obtain – probably means the same thing – the market value.  You cannot do that until you start with the market value, whereas the Court of Appeal reversed that, so the market value is determined by the very process that it in fact was designed to achieve, so the test is greatly diminished and it becomes just a test of general reasonableness.  Unless I can assist your Honours further, they are my submissions.

CRENNAN J:   Thank you, Mr Aldridge.  We will not trouble you, Mr Derham.

This application involves no question of principle, but rather the application of settled principle to the particular facts and circumstances of this case.  Accordingly, special leave to appeal is refused with costs.

MR ALDRIDGE:   If the Court pleases.

MR DERHAM:   If the Court pleases.

CRENNAN J:   We will leave the Bench to reconstitute.

AT 12.04 PM THE MATTER WAS CONCLUDED