Modeca Investments Pty Ltd(ACN 149 915 837) v Commonwealth Bank of Australia(ACN 123 123 124)

[2017] VSCA 203

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2017 0043

MODECA INVESTMENTS PTY LTD (ACN 149 915 837)	Applicant
v
COMMONWEALTH BANK OF AUSTRALIA (ACN 123 123 124)	Respondent

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JUDGES:	TATE, FERGUSON and HANSEN JJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	31 July 2017
DATE OF JUDGMENT:	18 August 2017
MEDIUM NEUTRAL CITATION:	[2017] VSCA 203
JUDGMENT APPEALED FROM:	[2017] VSC 119 (Randall AsJ)

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CORPORATIONS – Statutory demand – Debt being balance of loan owing after sale of land by lender/mortgagee – Application to set aside demand on basis of offsetting claim exceeding debt – Sale alleged to be at under value caused by breach of mortgagee’s duty on sale – Whether offsetting claim or some other reason to set aside demand – Corporations Act 2001 (Cth) ss 420A, 459H and 459J.

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APPEARANCES:	Counsel	Solicitors
For the Applicant	Mr M A Robins QC with Mr A R Morrison	Foster Nicholson Jones Lawyers
For the Respondent	Mr B Carew	Gadens Lawyers

TATE JA
FERGUSON JA
HANSEN JA:

1. This is an application for leave to appeal from the order of Randall AsJ made on 20 March 2017 which dismissed an application to set aside a statutory demand dated 1 June 2016 served by the Commonwealth Bank of Australia (‘CBA’) as creditor on Modeca Investments Pty Ltd (‘Modeca’) as debtor on a claimed debt of $467,824.83.[1]  Modeca now seeks leave to appeal from that order and that, in lieu, it be ordered that the statutory demand be set aside.

   [1]Modeca Investments Pty Ltd v Commonwealth Bank of Australia [2017] VSC 119 (‘Reasons’).

1. The alleged debt arose out of a loan agreement entered into between CBA and Modeca in April 2012;  the agreement provided for an advance of $1.4 million to assist Modeca to complete the purchase of vacant land of approximately 12.21 hectares at 1005–1035 Plumpton Road, Plumpton, for $4.05 million pursuant to a contract of sale entered into in July 2010.  Modeca’s obligations under the loan agreement were secured by a registered mortgage over the land and guarantees by Sebastian Canzoneri, the sole director of Modeca, and a related company.  The loan was duly advanced and Modeca registered as proprietor of the land. 

1. By January 2015, Modeca was in default of payment and CBA commenced the process of enforcement;  it notified termination of the loan and required payment of the amount owing, $1,426,763.42, and, on 4 March 2015 gave notice warning that it intended to sell the land in default of payment.

1. Modeca did not remedy the default.  Rather, it engaged agents, Colliers International (Victoria) Pty Ltd (‘Colliers’) and Biggin & Scott Land Pty Ltd under an exclusive sale authority which included authority to attempt to sell the land for a price between $7.2 million and $7.6 million.  The authority, together with a marketing schedule and a recommendation of Colliers as to the potential sale price, was provided by Colliers to Modeca’s solicitors, MSL Lawyers, who in turn provided it to CBA’s solicitors, on 7 April 2015.  The recommendation referred to pricing as follows:

Pricing

1005 — 1035 Plumpton Road, Plumpton Sale	Low End	High End
Total Site Area:  122,100 m2	$57/m2	$62/m2
ASSESSMENT:	$6,959,700	$7,448,100
SAY:	$7,000,000	$7,600,000

As to the method of sale, Colliers recommended that the property be offered to the market via expressions of interest.

1. On 8 April 2015, CBA’s solicitors advised Modeca’s solicitors of the conditions upon which CBA would allow Modeca the opportunity to sell the land, and requested advice by 15 April 2015 whether Modeca agreed to the conditions.  There is no evidence of a reply to this letter, or of any subsequent action under the sale authority.  It may be taken that nothing further came of Modeca seeking to sell the land.  

1. On 21 April 2015, CBA took possession of the land as controller pursuant to s 427(1B) of the Corporations Act 2001 (‘the Act’).

1. On 29 April 2015, CBA requested Premier Property Valuations Pty Ltd (‘PPV’) to inspect, and provide a valuation of, the land by 8 May 2015, and in May a valuation as at 30 April 2015 was duly provided.  The report expressed the opinion that:

(I)The Current Open Market Value of the property for Realisation Purposes subject to the attached Report, is;

$1,400,000 (One Million Four Hundred Thousand Dollars) GST exclusive.

(II)The Market Value Range for Realisation Purposes subject to the attached Report, is;

$1,000,000 (One Million Dollars) to

$1,400,000 (One Million Four Hundred Thousand Dollars) — GST exclusive.

1. CBA sought from Merc Property, and on or about 14 May 2015 received, advice as to how to best sell the land to achieve the maximum price.  On 18 May 2015, in accordance with the recommendations from Merc Property, CBA appointed PRD Nationwide Melton (‘PRD’) as real estate agent to market and sell the land by way of an informal tender. 

1. On 13 October 2015, the land was sold to Vicsun Pty Ltd for $1.3 million (plus GST), or alternatively $1.43 million inclusive of GST.  This did not cover the amount outstanding under the loan agreement.

1. On 2 December 2015, CBA’s solicitors advised Modeca’s solicitors of the sale. 

1. Settlement under the contract occurred on 29 March 2016, following which the statutory demand was served on 6 June 2016, the debt alleged being the amount then owing after allowing for the amount received.

1. A little later, on 16 June 2016, CBA sued Canzoneri on his guarantee to recover $470,749.04, being the amount then claimed as owing pursuant to the loan agreement.

1. On 22 July 2016, Canzoneri filed a defence and counterclaim in the proceeding. He denied liability on the basis that in selling the land, CBA, in contravention of its duty under s 420A(1)(b) of the Act, sold the land ‘at less than the market value and/or by not obtaining the best price that was reasonably obtainable’. It is alleged that if CBA had not breached its duty as controller, the land would have been sold for an amount that would have repaid the amount owing to CBA. Hence, Canzoneri (and Modeca) had a claim which entirely offset CBA’s claim.

1. It is to be noted that in particulars to the allegation in the defence and counterclaim that CBA sold the land at less than market value or the best price reasonably obtainable, the following is said:  the land was a prime development site;  at the time of sale it had a market value of $150,000 to $200,000 per acre, or $4.5 to $6 million;  it was well known that the land was in the process of being re-zoned and that, once the Plumpton Precinct Structure Plan was approved, the land would be re-zoned as an industrial or residential zone;  after the CBA sale, the land was immediately offered for sale at $6 million plus GST by PRD;  and that further particulars would be provided after CBA provided discovery and Canzoneri had obtained expert evidence.

Modeca’s application

1. Section 420A(1)(b) of the Act required CBA, in exercising its power of sale, to take all reasonable care to sell the land for the best price reasonably obtainable, having regard to the circumstances existing when the land was sold. Modeca’s case is that CBA failed in that duty and that, by reason thereof, the price achieved was less than the market value; accordingly, the shortfall thus produced constituted a claim which Modeca could set-off in total extinguishment of CBA’s claim.

1. The accepted approach to the application of s 420A of the Act was stated by Campbell J in Artistic Builders Pty Ltd v Elliot & Tuthill (Mortgages) Pty Ltd[2] thus:

In deciding whether there has been a breach of s 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 s 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 s 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.[3]

[2](2002) 10 BPR 19,565.

[3]Ibid 591 [126].

1. The order to set aside the statutory demand was sought under s 459H(1)(b) or, alternatively, s 459J(1)(b) of the Act. Each section specifies the conditions for the exercise of the power. Under s 459H(1)(b) the condition is that the Court be satisfied that Modeca has an offsetting claim; an offsetting claim is defined in s 459H(5) to be ‘a genuine claim’.

1. It is well settled that an applicant under s 459H(1)(b) of the Act can establish an offsetting claim without having to advance evidence as would be required at the trial of an action for judgment for the amount claimed. The approach is conveniently summarised in the judgment of the Court of Appeal in Malec Holdings Pty Ltd v Scotts Agencies Pty Ltd (in liq):[4]

In determining such an application, it is not necessary or appropriate for a court to engage in an in-depth examination or determination of the merits of the alleged dispute.  This is because an application alleging a genuine dispute or offsetting claim is akin to one for an interlocutory injunction and requires the applicant to establish that there is a ‘plausible contention requiring investigation’ of the existence of either a dispute as to the debt or an offsetting claim.  It is therefore not helpful to perceive that one party is more likely than the other to succeed or that the eventual state of the account between the parties is more likely to be one result than another.  Further, the determination of the ‘ultimate question’ of the existence of the debt at a substantive hearing should not be compromised. -  

The court is required to determine whether the dispute or offsetting claim is ‘genuine’. It has been said that the criterion of a ‘genuine’ dispute requires that the dispute be bona fide and truly exist in fact and that the grounds for alleging the existence of a dispute be real and not spurious, hypothetical, illusory or misconceived. -   It has also been observed that the dispute or offsetting claim should have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion. It must also have sufficient factual particularity to exclude the merely fanciful or futile.  A rigorous curial approach is essential to the effective operation of the statutory scheme.[5]

[4][2015] VSCA 330.

[5]Ibid [48]–[49] (citations omitted).

1. Under s 459J(1)(b) of the Act the Court may by order set aside the demand if satisfied that there is ‘some other reason’ why the demand should be set aside. Here, Modeca contends that as the issue of CBA’s breach of s 420A of the Act and the matter of the alleged shortfall will be determined in the proceeding brought by CBA against Canzoneri, that constitutes ‘some other reason’ for setting aside the statutory demand, and leaving the issue for determination in that case.

Modeca’s evidence

1. Modeca relied in support of its application on an affidavit sworn by Canzoneri on 23 June 2016 and several affidavits by its solicitor.  CBA filed affidavits, the information in them being incorporated in the chronology above. 

1. In his affidavit, Canzoneri —

(1)referred to the appointment of Colliers and Biggin & Scott, and Colliers’ recommendation on price; 

(2)deposed that on or around June 2016, the Melton Council issued the Plumpton Precinct Structure Plan which provides that, once the Plan is approved, the land will be rezoned as industrial.  He exhibited the Plan.  He questioned why CBA sold the land when it did, given the ‘imminent rezoning’ which would have the effect of increasing the value of the land;

(3)stated his belief that, based on his dealings with other rural land nearby, at the time of the sale by CBA, the land had a market value of $150,000 to $200,000 per acre which would mean the land was worth $4.5 to $6 million.  It is to be noted that this ‘belief’ — also asserted in the defence and counterclaim — was not supported by evidence.  He noted that the sale price of $1.4 million was equivalent to about $40,000 to $45,000 per acre;

(4)stated that he had been informed by Andrew Cowper, a real estate agent familiar with land values in the Plumpton area, and who had appraised an adjacent property, that the subject land was worth around $200,000 per acre in the current market.  This ‘information’ was not supported by evidence from Cowper;  and 

(5)stated that, as a result, he believed that the price achieved by CBA was significantly less than the market value of the land and/or was not the best price reasonably obtainable in the circumstances at the time of sale.

1. It is then necessary to refer to affidavits sworn by Modeca’s solicitor, Jessica Minter, on 12 July and 5 October 2016 respectively.  In the former, she deposed as follows:

(1)PRD was then offering the subject land for sale at $6 million plus GST, describing it as ‘Vacant Land (Residential)’.

(2)She had been informed by an agent, Gavin Gill, that he is acting for the vendor of 12.14 hectares in Plumpton Road, approximately 550 metres from the subject land, and the reserve price is $4.2 million.  This ‘information’ was not supported by evidence from Gill. 

(3)Inquiries as to the Plumpton Precinct Structure Plan disclosed that the Plan was commenced in 2013;  the subject land is within the Plan which was scheduled to go to a Panel hearing in November 2016 where different ‘uses’ could be sought by affected land owners or the council;  and the Plan was likely to be approved by the Minister between March–June 2017.  As to this, the Court was informed by counsel that the Plan has not yet been approved.

1. More importantly, the latter affidavit exhibited two reports prepared by Rodney Stephen of Matheson Stephen Valuations, dated 19 September 2016, pursuant to the instructions of Modeca’s solicitors given on 29 July 2016.  The reports were, respectively, a review of the PPV report (‘the Review Report’), and a valuation of the subject land (together ‘the Stephen reports’). 

1. In the Review Report, in summary, it was stated by way of conclusion that:

(1)the sales analysed by PPV were not comparable to the land;

(2)there was no support for the $130,000 per hectare value used by PPV;  and

(3)the PPV report did not provide a rationale for the application of a value range for the land of $1 million to $1.4 million excluding GST. 

1. The valuation report concluded that the market value of the land in the period May to October 2015 was $1.95 million excluding GST.   

The associate’s judge’s reasons

1. After referring to the chronology of events (which included reference to the PPV report), more detailed references to the Stephen reports, and relevant legal principles, Randall AsJ stated that he was

satisfied, without deciding what ‘the market value’ of the subject land was at the relevant dates, that [Modeca] has done enough to satisfy an arguable contention that the land was sold at under value.[6]

[6]Reasons [24].

1. But that was not enough to establish a genuinely arguable offsetting claim.[7] That was because the question was whether CBA, as required by s 420A of the Act, had taken all reasonable care to sell the property for not less than its market value or the best price reasonably obtainable in the circumstances. In Investec Bank (Australia) Limited v Glodale Pty Ltd[8] the Court of Appeal put it thus:

We accept the bank’s contention that a sale below the estimated market value of the property does not of itself mean that the duty to take reasonable care has not been satisfied.  The question that needs to be answered is whether the process utilised to effect the sale of the property for market value was undertaken with reasonable care.[9]

[7]Ibid.

[8](2009) 24 VR 617.

[9]Ibid 626 [46] (citations omitted) (emphasis in original).

1. Then, having referred to several cases which indicated that a sale below — or substantially below — the market value may be evidence of a failure to take reasonable care in the sale,[10] Randall AsJ referred to the decision of Finkelstein J in Apostolou v VA Corporation of Australia Pty Ltd,[11] and concluded that Modeca must establish to the standard required under s 459H that a want of reasonable care occurred in the sale process. Hence, even if the difference in valuations might be as much as 28 per cent, ‘in the absence of any attack on the process, that is the end of the matter’.[12]  The Associate judge stated that no such attack had been made and the application was dismissed. 

   [10]Stone v Farrow Mortgage Services (in liq) (1999) 12 BPR 22,175 [4] (Hodgson CJ in Eq); Investec Bank (Australia) Limited v Glodale Pty Ltd (2009) 24 VR 617, 636 [83]; Boz One Pty Ltd v McLellan (2015) 105 ACSR 325, 352 [168].

   [11](2010) 77 ACSR 84.

   [12]Reasons [41].

1. In this Court, Modeca’s counsel did not challenge the conclusion that an error in the sale process must be shown.  Counsel submitted however, that Randall AsJ was in error in stating that Modeca’s counsel had not attacked the process.  It was said that the following three specific attacks had been made.

1. First was the fact of the price of $4.05 million paid by Modeca in 2012, of which CBA must have been aware, and the knowledge of which should have put it on inquiry that the PPV valuation was or could have been substantially inconsistent with the true market value of the land. The PPV valuation did not explain the collapse in value of the land over that period and CBA’s decision to proceed with the sale established a plausible contention of a breach of s 420A of the Act.

1. Secondly, CBA did not inform PPV of Colliers’ recommended sale price or attempt to reconcile the substantial difference between that recommendation and PPV’s valuation. In the circumstances, proceeding to sale without further inquiry created a plausible contention as to a breach of s 420A of the Act.

1. Thirdly, CBA was vicariously liable for the defaults of its servants or agents in the conduct of the sale.[13] 

   [13]Commercial & General Acceptance Ltd v Nixon (1981) 152 CLR 491; Florgale Uniforms Pty Ltd v Orders (2004) 11 VR 54.

1. The final matter to note is that having concluded as he did, Randall AsJ did not consider the application under s 459J(1)(b) of the Act.

Consideration

1. The parties’ submissions may be summarised thus. 

1. For CBA, the essential point was that the process by which CBA sought advice and appointed the selling agent was appropriate for the purpose of s 420A of the Act, and that Modeca’s submissions did not constitute an attack on that process. For Modeca to succeed on the application, it was necessary for it to establish default by CBA or its agent in or relating to the conduct of the matter which may have detrimentally affected the sale price, to the extent of establishing a genuine offsetting claim. But here all that was shown was a difference between two valuers in their respective assessments of market value; and, as to that, even if the Stephen valuation was preferred, Modeca had not established negligence of CBA or its agent that led to the sale price at the lower value of $1.3 million (plus GST), or $1.43 million (including GST).

1. As mentioned, Modeca’s counsel accepted that, for Modeca to succeed on the application, there must be shown, prima facie, to have been negligence in the process.  Counsel submitted that such negligence had been shown or was to be inferred in the circumstances.  In seeking to demonstrate that negligence was shown, counsel referred to the matters submitted to Randall AsJ, the Stephen reports and the conclusion of Randall AsJ that the land was sold at an undervalue.  But when pressed as to what evidence there was as to negligence in relation to the marketing of the land and any attendant action or default of CBA or its agent, counsel acknowledged that there was no evidence from Modeca, asserting in explanation that the evidence lay in CBA’s camp.  It was then said that in the absence of the provision of evidence by CBA, it could, and should, be inferred that the alleged undervalue was the result of some negligence in the process.  As to this, it is to be noted that Modeca’s evidence did not depose as to the manner of the conduct of the sale process, such as, for instance, how PRD marketed the land or otherwise of any relevant action or event in that process.  It was, counsel submitted, for CBA to adduce such evidence, as it lay in its knowledge.  The difficulty with this submission is that Modeca put on no evidence of matters concerning the sale process which were within its knowledge.  A fair reading of the evidence it relied upon shows that it focused not on the process, but solely on the sale price achieved. 

1. Central to Modeca’s case was an attack on the PPV valuation, based on the Stephen reports. 

1. A point may be noted before turning to the Stephen reports.  Modeca submitted that, by selling by way of an informal tender following a marketing campaign rather than public auction, CBA was dependent on the PPV valuation being accurate, in assessing the adequacy of any offers to purchase.  The PPV valuation was thus a material element in the sale process.  As to this, it may be accepted that the PPV valuation was material, but nothing is added by the reference to the sale being by way of informal tender.  Either way, the valuation might be used in setting a reserve price or assessing any offers.  Modeca’s counsel further pointed to Colliers’ recommendation that the land be offered by expressions of interest, suggesting that was preferable to sale by tender.  But counsel could point to no relevant difference between them. 

1. As mentioned, Modeca relied on the Stephen reports to attack the reliability of the PPV valuation.  It was submitted that they revealed material errors in the PPV valuation.  Of course, the Stephen reports were prepared after the land was sold;  hence, CBA and its agents did not have the benefit of them at any time prior to the sale.  Nevertheless, Modeca submitted that in relying on the PPV valuation, the errors contained in it ‘became the errors of’ CBA.  Hence, it was submitted, Modeca’s ‘attacks went far beyond mere criticism that the sale price was too low —  they called into question whether [CBA] had taken all reasonable care in effecting processes that would achieve market value’.  With respect, insofar as this submission relied on the subsequent Stephen reports, it was arguing backwards to impose on CBA an awareness of ‘errors’ of which it was not shown to be aware.  Moreover, it remained necessary to show negligence in the process of sale.

1. It was probably in recognition of this that Modeca submitted that it had otherwise relied on all the evidence that was available to it, which was known to CBA and which CBA ignored.  This evidence would be the fact of the 2010 sale price of $4.05 million, the Colliers material provided on 7 April 2015 and the matters deposed to by Canzoneri.  As to these, the following should be noted. 

1. Dealing first with the fact of the 2010 sale price of $4.05 million, the obvious point is that market value of a property can fluctuate from time to time, and this was vacant land with the possibility of a change in zoning.  This point was made strongly by Stephen in his valuation report and with particular reference to the subject land.  Indeed, Stephen referred to speculation having been rife, and that this may have been the case with Modeca’s purchase in 2010 for $4.05 million;  that is, that speculation might have inflated the price.  Noting also that that was a terms sale, he calculated the cash equivalent as $3.57 million.  By contrast, CBA did not sell on a terms contract.  The transactions occurred in a different market, at a different time, and on contracts of a different nature.   

1. Stephen also referred to having been advised by PRD, who since May 2016 had been offering the land for sale by private treaty on, he understood, an expected selling price of $3 million but the vendor was asking for $6 million.  He also referred to market value being affected by uncertainty due to the unsettled planning position. 

1. The Colliers recommendation as to price, and the authorised selling range, were not founded upon a valuation such as that provided by PPV, or Stephen subsequently, and were provided at a time when Modeca both needed time, and money.  Further, the whole thing quickly fell away.  It is, of course, axiomatic that a vendor’s desired selling price is not the same thing as market value.  Further, it is mere speculation that CBA did not inform PPV of Colliers’ recommendation or consider it. 

1. Likewise, the references to value in Canzoneri’s affidavit referred to at [21(3)] and [21(4)] above were not supported by evidence, let alone valuation, and could not constitute the basis for an attack on the sale process. 

1. Randall AsJ was correct to conclude that the matters relied on by Modeca did not attack the sale process. There was nothing to link the several matters to the conduct of the sale process and thereby to show neglect in the course of that process that could have constituted a breach of the duty under s 420A of the Act.

1. For these reasons, the application under s 459H must fail.

1. That leaves the application under s 459J. Modeca having failed under s 459H, the existence of the claim under the guarantee does not warrant setting aside the statutory demand to await determination of the issue in that proceeding. The statutory demand regime relies on speed and enables a presumption of insolvency to arise where there is no genuine dispute as to the debt and where no genuine offsetting claim exists. The merits of the claim are not investigated fully with the benefit of discovery and a trial. As a counterbalance, the threshold for establishing that there is a genuine dispute or offsetting claim is relatively low. Once the presumption of insolvency arises, action can be taken quickly through the winding up process to prevent an insolvent company from continuing to trade. In that context, it is difficult to see how if the debtor has failed to satisfy the genuine dispute/offsetting claim threshold that the mere pleading of a defence or counterclaim by a guarantor challenging the creditor’s right to the debt can give rise to some other reason why the demand should be set aside. Certainly, in this case, there is no basis for it.

Conclusion

1. In these circumstances it is appropriate to grant leave to appeal but, having regard to these reasons, order that the appeal be dismissed.