A high profile Sydney court battle highlights the inherent conflict between the industry adopted meaning of “Market Value” and a Mortgagee’s duty under Section 420A of the Corporations Act when undertaking a “Forced Sale”.
The Act requires in exercising a power of sale in respect of property of a corporation, a controller must take all reasonable care to sell the property for not less than that market value; or otherwise the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold.
A common and vexatious issue for Valuers in providing ‘forced sale’ value advice arises when mortgagees & receivers are exercising power of sale and their instructions to provide a “Market Value”. In these instances there are often abnormal market circumstances e.g.
- The physical condition of the property
- The availability of historical information
- The strict terms of purchase deposits, settlement payments
- The restricted conditions /warranties of sale contracts
In this case the Judge considered the duties of a bank or lender in possession selling a corporate property. The guarantor claimed the bank had breached its duty under s420A of the Corporations Act to take all reasonable care to sell the property for not less than market value, in particular advertising the sale as a “mortgagee sale”.
The Judge considered that in determining whether there had been a breach the focus was on the process gone through in selling the property, not merely whether the sale in question did not in fact achieve market value. It must be established that a lender failed to take reasonable care to sell the property for not less than the market value having regard to all the circumstances existing when the property was sold. The Judge stated that, although s420A confers no right or remedy on guarantors to mortgages as such, a guarantor is entitled to an equitable remedy if the lender breached its duty.
The Judge did not agree that advertising as a “mortgagee sale” would necessarily lower the price. Rather, it will depend on the type of property being sold and the way in which the words “mortgagee sale” are used in the advertising campaign. His Honour commented that it could, in fact, increase the price if it attracted a larger number of potential buyers, thereby creating a larger and stronger market for the property. In any event, any experienced purchaser would immediately become aware that it was a mortgagee sale once they had seen the contract for sale. The Judge also stated there is no obligation on a bank or lender to spend further money on a property to improve the value of it as part of the duty.
In this case, the Judge determined that advertising the property as a “mortgagee sale” did not breach any duty on the part of the Bank. His Honour found that on the evidence of the witnesses advertising the property as a “mortgagee sale” was a considered position, and opinions had been sought and agreement reached that selling the property as a “mortgagee sale” was the best way to maximise the price. His Honour found that was by no means an inappropriate or unacceptable strategy in the circumstances. Further, the price achieved did not of itself prove any breach of duty (particularly because no evidence had been given about what the market value of the property was at that time).
The Judge was satisfied that the bank had retained professionals and engaged in a marketing campaign and tender process that resulted in many expressions of interest and several tenders resulting in the purchase price as the highest offer. The allegation of breach of duty was rejected.
Commonwealth Bank of Australia v Geoffrey Anthony Shannon [2013] NSWSC 1076