Victorian lenders required to take 'reasonable steps' to verify the identity of borrowers from September 2014

Further to my post of 25 August 2014, the Transfer of Land Amendment Act 2014 (Vic) came into effect on 24 September 2014. 

As previously noted, the amendments require lenders to take 'reasonable steps' to verify the identity of borrowers before executing a mortgage or variation of mortgage. 

The amendments are a part of the legislative package brought in to allow for the full introduction of e-conveyancing.

 
W G Stark
Hayden Starke Chambers

Can I obtain leave to defend an application for summary judgment for possession (part 2)?

Further to my post about summary judgment for possession, the Honourable Justice Ginnane (of the Supreme Court of Victoria) in ANZ Banking Group Ltd v Loftus [2014] VSC 342 was called upon to decide an appeal from an order for summary judgment granted by an Associate Justice in a claim by a mortgagee for possession of a security property.

ANZ sued Mr Loftus ("the defendant") among other things for possession of a property given as security for the loans.  

The defendant denied signing the mortgage in his defence.  

On 2 April 2014, an Associate Justice granted summary judgment in favour of ANZ.  A solicitor appeared for the defendant at the hearing of the summary judgment application. However, no affidavit in opposition was filed on his behalf.  

Ginnane J notes (at paragraph 13) that in her reasons, the learned Associate Justice observed:

In the course of the hearing I directly asked Mr Loftus’ solicitor why an affidavit had not been filed on behalf of Mr Loftus. The Court was informed that Mr Loftus’ solicitor had some concerns about Mr Loftus in that she thought he may have an acquired brain injury and that this presented difficulties in terms of Mr Loftus being able to attend to give instructions and to prepare such an affidavit. This is an extremely serious matter that was put before the Court. Mr Loftus is legally represented and yet no material has been put before the Court. There was no application for an adjournment for more time so that an affidavit could be filed by Mr Loftus.

At paragraph 17, Justice Ginnane also notes: 
    The Associate Justice in reaching her decision stated:

Having considered the evidence and heard submissions, I do not consider Mr Loftus has any real prospect of success. It was open to Mr Loftus to put some material before the Court and he failed to do so. In circumstances where he makes an allegation of fraud, it is incumbent on Mr Loftus to put some evidence to substantiate the allegation or that demonstrates there is at least a question to be tried.

The defendant terminated the solicitor's retainer and appealed to a Judge of the Trial Division against the order granting ANZ summary judgment. 

At the hearing of the appeal, the defendant was represented by duty counsel under the Victorian Bar scheme. He sought to rely upon an affidavit prepared and sworn by him which was not before the Associate Justice.  

In his affidavit, the defendant:

1. explained why there was no affidavit before the Associate Justice.  He alleged that he met with his solicitor to give instructions for an affidavit and it was agreed that the solicitor would send a draft to him.  However, he swore that he did not receive a draft affidavit from his solicitor and he did not do anything further because he thought his solicitor had everything under control;
2. swore that he did not have a brain injury; and
3. set out his version of events concerning the ANZ loans and denied ever signing a mortgage.

In respect of comments regarding a brain injury, the two counsel appearing on the appeal for the defendant informed Ginnane J that they had not seen evidence of a brain injury in their contact with him.  

One of the grounds of appeal from the decision of the Associate Justice was that the amended defence and particulars disclosed a triable issue and should be taken to have been filed and served on a “proper basis”, having regard to s 18 of the Civil Procedure Act 2010 and the obligations that it imposed on persons to whom the overarching obligations applied in responding to allegations that were made in a proceeding. 

Justice Ginnane rejected those submissions. At paragraph 28, he went on to find:

Mr Loftus was in essence making an allegation of fraud against the ANZ.  Whatever may be the position in respect of other defences,[1] in my opinion, a defence of fraud must usually be supported by an affidavit setting out details of the defence.[2]  This is a case in which that was required.

The question of whether to allow the new evidence In considering whether to allow the new affidavit, Ginnane J referred to rule 77.06.9(3) which gives the court power to receive further evidence on appeal on questions of fact by affidavit.  Justice Ginnane also referred to Clark v Stingel [2007] VSCA 292 in which the Court of Appeal set out the principles upon which the Court will grant leave to introduce fresh evidence upon an appeal.  In that case, it was held that leave should be given only if:

• by the exercise of reasonable diligence such evidence could not have been discovered in time to be used in the original trial;
• it is reasonably clear that if the evidence had been available at the trial, and had been adduced, an opposite result would have been produced; and
• the evidence proposed to be adduced is reasonably credible.

The defendant's affidavit and the affidavits of ANZ concerning the relevant facts were in conflict. 

Justice Ginnane decided that where there are disputed questions of fact, those disputes are best resolved at trial after hearing oral evidence of witnesses.  

When applying s 63 of the Civil Procedure Act 2010, the Honourable Ginnane J was of the view that the defendant had real prospects of defending ANZ’s claim because his version of events may be accepted.

Justice Ginnane concluded that it was reasonably clear that if Mr Loftus’ evidence had been before the Associate Justice, summary judgment would not have been granted.

Justice Ginnane also relied on the fact that the judgment was not obtained after a full hearing at trial; it was obtained on a summary judgment application which is made on affidavit.  

The case was therefore distinguished from Clark v Stingel where further evidence was sought to be introduced at an appeal after a full trial.  The principle of finality of litigation was stronger after the completion of a trial than at an application for summary judgment.

The interests of justice were also viewed by the Honourable Ginnane J as an important factor when considering the admission of new evidence on appeal.  Relying on the defendant's account of his dealings with his solicitor and the solicitor's failure to file an affidavit or seek an adjournment to enable an affidavit to be filed, Ginnane J allowed the defendant to use his affidavit.

In the result, the appeal was allowed on the basis of the new evidence filed, because the defendant had established that he had real prospects of defending ANZ’s claim; it was therefore a proceeding that should go to trial.

The case is a good example of the circumstances where leave to defend will be granted to a defendant where a mortgagee is seeking possession of a security property.

There were credible allegations of fraud: the defendant swore that he had not signed the mortgage in question, the mortgage was witnessed by an employee of the bank and the defendant's lawyer had asked the bank to produce the original mortgage for examination. The bank only provided a copy. 

Counsel and solicitors in Victoria will be aware that the making of a false allegation of fraud amounts to professional misconduct. Therefore, making such an allegation will be rare and will only be made by lawyers on proper instructions. As a result, if such an allegation is made by a lawyer, the court will take it seriously. In this case, the allegation was made by the defendant himself after he terminated the services of his lawyer.

W G Stark

Hayden Starke Chambers

Can I obtain leave to defend an application for summary judgment for possession (part 1)?

In an proceeding for possession of a security property by a mortgagee, it can be very difficult to mount an arguable defence.

In the vast majority of claims for possession by mortgagees, either no appearance or no defence is filed, and the mortgagee obtains an order for possession in default.

The second-most common outcome is for a 'holding defence' to be filed, with the borrower really only seeking more time to pay out the mortgagee.

There are some cases where a real defence is filed, where the borrower does not seek more time to pay out the loan. In those cases, mortgagees will often seek summary judgment on the basis that the borrower has no defence to the claim for possession.

There are some recent cases which shed light on the circumstances in which a defendant borrower will be granted leave to defend an application for summary judgment.  

Pagone J in Portbury Development Co Pty Ltd v Ottedin Investments Pty Ltd and ors [2012] VSC 490 had to decide whether a defendant had done enough to be granted leave to defend the claim on the hearing of an application for summary judgment.

In paragraph 9, Pagone J noted: 

The defendants rely upon the facts in the particulars to para 44 in resisting the application for summary judgment.  They maintained before Gardiner AsJ, and before me, that on an application for summary judgment it was not necessary for a defendant to verify by non hearsay evidence the facts alleged in a pleading.  The defendants submitted that it was sufficient in response to a plaintiff’s application for summary judgment for a solicitor, ... to make an affidavit which referred to the particulars in para 44 of the defendants’ Amended Defence and Counterclaim and depose that he was “informed by [the client] and believe[d] that the facts pleaded [in para 44] are true and correct”.  Portbury contended before Gardiner AsJ, and before me, that this was insufficient to satisfy a defendant’s obligation to show cause under r 22.04 of the Rules or the Civil Procedure Act 2010 (Vic), but did not otherwise controvert the facts in the particulars.  It did, however, through the evidence it filed, give evidence ... from which it maintained an entitlement to summary judgment.

Pagone J then summarised the relevant principles as follows (paragraph 24): 

The plaintiff has the burden of satisfying a court that it is appropriate to give summary judgment whether that is sought under s 63 of the Civil Procedure Act 2010 (Vic) or under Order 22 of the Rules.  The relevant principles were considered by Dixon J in Ottedin Investments Pty Ltd v Portbury Development Co Pty Ltd[6] in which his Honour said:

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[6]          [2011] VSC 222; see also JBS Southern Aust Pty Ltd v Westcity Group Holdings Pty Ltd [2011] VSC 476, [36]-[50] (Croft J).

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Summary Dismissal

7           In moving for summary dismissal, a party may rely on r 23.01 of the Rules, s 63 of the Civil Procedure Act 2010, and/or the court's inherent jurisdiction.

8             By civil procedure reform introduced by the Act, the operative effect of the principles governing applications for summary dismissal is now less stringent...

9             The new test is evident in the plain language of Part 4.4 of the Civil Procedure Act 2010.  Section 62 permits a defendant in a civil proceeding to apply to the court for summary judgment on the ground that a plaintiff's claim or part of that claim has no real prospect of success.  Section 63 provides:

63       Summary judgment if no real prospect of success

(1)          Subject to section 64, a court may give summary judgment in any civil proceeding if satisfied that a claim, a defence or a counterclaim or part of the claim, defence or counterclaim, as the case requires, has no real prospect of success.

(2)          A court may give summary judgment in any civil proceeding under subsection (1)—

(a)          on the application of a plaintiff in a civil proceeding;

(b)          on the application of a defendant in a civil proceeding;

(c)          on the court's own motion, if satisfied that it is desirable to summarily dispose of the civil proceeding.

It will be recalled that in explaining the test used prior to the Act, a variety of expressions describing that test could be found in the cases.  The expression now identified by Parliament is in plain language: "no real prospect of success".

10           ...  The critical qualifying word "real" directs the court to "the need to see whether there is a realistic, as opposed to a fanciful, prospect of success".

11           In two other respects, the provisions of the Act ought be borne in mind when exercising the discretion to summarily dismiss.  First, the court must seek to give effect to the overarching purpose of the Act and the Rules in exercising, or interpreting, the statutory power to summarily dismiss.  This overarching purpose is "to facilitate the just, efficient, timely and cost effective resolution of the real issues in dispute". The court is directed to further the overarching purpose by having regard to the objects and matters articulated in s 9 of the Act.  The manner in which the court will consider these objects and matters will depend on the nature and circumstances of the application before it.  On this application, I bear in mind the following objects (s 9(1)):

(a)       the just determination of the civil proceeding;
(c)       the efficient conduct of the business of the court;

(d)          the efficient use of judicial and administrative resources;

(f)       the timely determination of the civil proceeding; and

(g)          dealing with a civil proceeding in a manner proportionate to—

(i)          the complexity or importance of the issues in dispute; and

(ii)       the amount in dispute:

and I have regard to the following matters (s 9(2)):

(f)          any prejudice that may be suffered by a party as a consequence of any order proposed to be made or direction proposed to be given by the court;

(g)          the public importance of the issues in dispute, and the desirability of a judicial determination of those issues; and

(h)          the extent to which the parties have had the benefit of legal advice and representation.

12           Second, the discretionary nature of the power to summarily dismiss is exercisable having regard to s 64 of the Act.  That section provides:

64       Court may allow a matter to proceed to trial

Despite anything to the contrary in this Part or any rules of court, a court may order that a civil proceeding proceed to trial if the court is satisfied that, despite there being no real prospect of success the civil proceeding should not be disposed of summarily because—
(a)       it is not in the interests of justice to do so; or

(b)          the dispute is of such a nature that only a full hearing on the merits is appropriate.

The section affirms the court's broad discretion, exercised judicially, whether to summarily dismiss a proceeding or a claim, which was the basis upon which the previous test was applied.  The circumstances in which the court might consider the dispute to be of such a nature that only a full hearing on the merits is appropriate is equally wide in its compass and plainly to be considered in the circumstances of each case.[7]

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[7]          [2011] VSC 222 [7]-[12] (citations omitted).

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His Honour went on to note the observations of French CJ and Gummow J in Spencer v Commonwealth of Australia[8] that the exercise of powers to terminate proceedings summarily must always be attended with caution.[9] In Karam v Palmone Shoes Pty Ltd[10], decided since the coming into force of s 63 of the Civil Procedure Act 2010 (Vic), it was observed that “the power to order summary judgment is [still] to be exercised sparingly and not ‘unless it is clear that there is no real question to be tried’ ”.[11]

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[8]          (2010) 241 CLR 118.

[9]          Ottedin Investments Pty Ltd v Portbury Developments Co Pty Ltd [2011] VSC 222, [15] (Dixon J).

[10]         [2012] VSCA 97; see also Fancourt v Mercantile Credits Ltd (1983) 154 CLR 87, 99 (Mason, Murphy, Wilson, Deane and Dawson JJ).

[11]         Karam v Palmone Shoes Pty Ltd [2012] VSCA 97, [28] (Nettle and Osborn JJA); see also Ticco Pty Ltd v Complete Family Healthcare Services Pty Ltd [2005] VSCA 221, [20]–[21] (Hollingworth AJA), [36]–[37] (Charles JA).

The result of the Portbury decisions (by Pagone J and Dixon J) is that the principles governing applications for summary dismissal are now less stringent, and the court will grant a mortgagee summary judgment where there is no real prospect of any defence succeeding.

In a claim for possession by a morgagee of land registered under the Transfer of Land Act, 1958, the proof of the claim are relatively simple. 

The usual pleading includes: 
(a) ownership of the land by the borrower, 
(b) the loan of money by the lender to the borrower,
(c) registration of the lender's mortgage on title, 
(d) an obligation to pay interest, or repay principal by the borrower, 
(e) breach of that obligation, 
(f) notice to remedy that breach, 
(g) a failure to remedy the breach despite notice, and
(h) continued possession of the land by the borrower.

Proof of those elements would ordinarily result in an order for possession of the property in favour of the mortgagee.  

The cases confirm that the court is unlikely to refuse an application for summary judgment by a mortgagee without good cause. 

However, in the particular circumstances of the case, Pagone J decided at paragraph 36:

In my view the defendants have shown cause against the application for summary judgment, and the plaintiff has not discharged the onus upon them under either r 22.02 of the Rules or s 63 of the Civil Procedure Act 2010. 

W G Stark
Hayden Starke Chambers

Will Victoria legislate a requirement that lenders must take reasonable steps to identify potential borrowers?

Four mainland states (New South Wales, Queensland, Western Australia and South Australia) have already legislated a requirement that lenders must take positive steps to verify the identity of proposed borrowers. 

On 5 August 2014, the Transfer of Land Amendment Bill 2014 was introduced into the Victorian Legislative Assembly.  

One of the amendments contained in the Bill is to require a lender to verify properly the authority and identity of a proposed borrower by taking "reasonable steps" (proposed Section 87A) to ensure that the proposed borrower is the same person as the registered proprietor or proposed registered proprietor of the property.

This proposal, if passed, will bring Victoria into line with the existing requirements in Queensland, New South Wales, South Australia, and Western Australia. 

The proposal means that a potential lender will be obliged to take certain legislated steps (set out in proposed section 87A(2) to verify the identity of the mortgagor. 

The sanction for lenders who fail to take those steps is that they will not obtain the benefit of indefeasibility of title in respect of the mortgage and the mortgage will be void. 

These proposals have gained currency in Australia, and Victoria has followed suit, as a result of allegations that the registration of fraudulent mortgages have become more commonplace. See, for example, the Victorian Bill's second reading speech, which alleges that there have been instances where a fraudulent mortgage was registered as a result of a financial institution neglecting to verify adequately the party with whom it was transacting (and thereby contributing to the fraud). 

In my opinion, it is good lending practice for potential mortgagees to undertake a detailed identity verification procedure, whether the Bill passes into legislation or it lapses when Parliament is prorogued for the forthcoming state election.

The problem with fraud is that identity theft is becoming more common, and fake identity documents are being used by fraudsters to trick lenders into lending money even if a thorough identity check is conducted. 

Electronic conveyancing and Electronic Certificates of Title are also nearly upon us, potentially creating more opportunities for fraud as a result of identity theft.

Whilst casting a heavier onus on lenders appears to be a simple answer to the problem, in reality identity theft is the real problem. If a lender has been duped by fake identity documents, these proposed legislative changes are unlikely to save the registered proprietor from the consequences. Lenders are more likely to be able to protect their position than registered proprietors. If a lender has conducted a thorough identity check as required by the proposed legislation, and it has still failed to uncover the identity theft, the registered proprietor will lose his or her property when the lender takes steps to recover the loan secured by its mortgage. This proposal will give mortgagees extra protection, by forcing them to prove that they took appropriate steps. Once those steps are proven, the registered proprietor will lose the mortgaged property even though they are not a party to the transaction.

W G Stark
Hayden Starke Chambers  

What are the duties of a mortgagee to a borrower when exercising its power of sale under the Transfer of Land Act?

In MBF Investments Pty Ltd v Nolan [2011] VSCA 114, the Victorian Court of Appeal considered a mortgagee’s duty when exercising its power of sale under section 77(1) of the Transfer of Land Act 1958 (Vic).

The mortgagee held a first mortgage over a property in the leafy Eastern Melbourne suburb of Kew. The property included a house where the borrower, Mr Nolan, and his family had lived for many years, and 2 vacant blocks. Mr Nolan defaulted; the mortgagee notified him it would sell the property. Mr Nolan proposed to subdivide the land for sale as 3 separate lots.

At the auction the first lot (a vacant block) was sold for more than the estimated sale price. After discussion between borrower, mortgagee and selling agent, the home lot was sold next. Those 2 lots resulted in there being a surplus over the amount owing to the selling mortgagee (there were a number of other secured creditors). The remaining lot was passed in at auction but sold by negotiation that day.

Mr Nolan sued the mortgagee claiming a breach of duty under s 77(1) of the Transfer of Land Act 1958 (Vic). Vickery J at first instance upheld the claim. The mortgagee appealed.

In examining the mortgagee’s duty under s 77(1), the Court of Appeal decided:

1. In exercising its rights over the security, the mortgagee must act fairly towards the mortgagor, and in a way that does not unfairly prejudice the mortgagor. The duty of a mortgagee to act in good faith can be equated to the duty to not act unconscionably.
2. The mortgagee must take reasonable steps to obtain the best price consistently with its right to enforce its security interest. This requires the mortgagee to consider how the property should be advertised and allow an appropriate time between the advertisement and the sale.  
3. The mortgagee’s interest in the property has priority over the interest of the mortgagor so that the mortgagee can protect its own interest. The mortgagee must also have regard to the interests of subsequent security holders.  

The facts of the case were quite unusual: the mortgaged land was initially one lot, although prior to the mortgagee sale it was sub-divided into 3 lots, leaving room for an argument (which was accepted by Vickery J, but rejected by the Court of Appeal) that the borrower had a special interest in the house lot of which the mortgagee had to take notice.

This case provides valuable guidance as to how a mortgagee should exercise the right of sale.

W G Stark
Hayden Starke Chambers 

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[1] [2011] VSCA 114

Can I obtain an injunction to restrain the imminent mortgagee auction of land?

In March 2014, Dixon J of the Supreme Court of Victoria had to deal with an eleventh hour application for an injunction to restrain a mortgagee's sale (see Pearl Beach Property Administration Pty Ltd v Wisewoulds Nominees Limited [2014] VSC 113). 

The usual requirement in order to restrain a mortgagee sale is that a borrower must pay into Court the amount owed under the mortgagee’s security, even if that amount is disputed (according to the High Court decision in Inglis v Commonwealth Trading Bank of Australia (1972) 126 CLR 161).

As is the usual outcome in these types of cases, Dixon J refused the borrower's application.

The facts
Pearl Beach (the borrower) was the registered proprietor of land at Point Nepean Road, Dromana. The land was purchased by it as an investment or development opportunity. The borrower obtained a mortgage from Wisewoulds Nominees Ltd ( the lender) securing an initial advance of $3.2 million. The borrower defaulted in repayment of that loan and the lender obtained a judgment for possession of the property and took possession. A notice to pay under s 76 of the Transfer of Land Act 1958 was served. Once the lender took possession of the property, a mortgagee’s auction was scheduled for 12.00 noon on 21 March 2014.

The borrower believed the value of the security property was approximately $5 million. Despite that, the lender's selling agents had advertised the security property for auction with an expected selling price range of $3.9 - $4.2 million. 

While the lender was in possession, and on the day before the auction, the borrower purported to arrange a sale of the security property to a third party company for $5 million. Despite the purported sale, the mortgagee continued with the mortgagee sale and refused to accept the borrower's sale.

On the day of the auction the borrower sought an injunction to restrain the lender from proceeding. The borrower alleged that the lender was in breach of its duties as a result of marketing the security property in a price range that was less than the valuation, and in refusing to agree to the sale with the third party.

In refusing the injunction, Dixon J noted that the borrower had not provided enough proof that the lender had breached any of its duties.  

One matter that his Honour observed was that 'underquoting' does not necessarily indicate that a property will sell at an undervalue at an auction, on the basis that it is a technique often used by agents to attract buyers to an auction.  

His Honour dealt with the issue of underquoting in this way: 

Underquoting is a practice that, for other reasons, attracts criticism and it has been the subject of some legislative attention. Those criticisms are usually advanced by purchasers rather than vendors. Because it is, apparently, the objective of marketers to attract buyers to the property by underquoting in advertising, it does not follow that the property is likely to be sold at an undervalue at an auction. Vendors usually appreciate the efforts of estate agents to attract the attention of potential purchasers to the sale. The apparent enthusiasm of estate agents for underquoting, and the reasons for it, may be well appreciated by a mortgagee. Equally, serious purchasers may allow for underquoting in assessing an advertised range. At its highest, it is a matter that might require some consideration when evaluating all of the circumstances of the conduct of the sale.

In the circumstances, the borrower was unable to establish a prima facie case that it would be entitled to relief, or that damages would be an insufficient remedy.

In this case, there was no suggestion that the borrower had any ability to pay the amount owing under the mortgage into court as security for the injunction that was sought.

The case is a recent example (in a long line of cases) confirming how difficult it is for a defaulting borrower to restrain a lender from selling a security property at auction. 

W G Stark
Hayden Starke Chambers

Are there any more recent cases in 2013 on a mortgagee's duty to a mortgagor on a mortgagee sale?

Since the decision of the Victorian Court of Appeal in Nolan v MBF [2011] VSCA 114 (see my blog post of 26 August 2011 - amended on 20 August 2014), there have been a few cases on a mortgagee's duty to a borrower upon a sale by the mortgagee. 

In CBA v Thompson [2013] NSWSC 149, Harrison As J of the Supreme Court of NSW, was called upon to consider a claim by a guarantor that the Bank had done the wrong thing, and as a result the guarantor was excused from liability. 

Background
The bank (as successor in title to the Bank of Western Australia Ltd) took possession of a failed residential development in Biloela in Queensland. After a considerable delay, the bank took proceedings against the guarantor for $1.9m, plus accrued interest of over $1m, plus costs. 

The guarantor claimed that the bank:
1. Had to sell the security property before enforcing the guarantee;
2. Could not recover any amount from the guarantor until the security property was sold; and 
3.  Had engaged in unconscionable conduct by starting to market the security property for a brief period and then did nothing for 18 months.

Harrison As J examined the terms of the guarantee and concluded (at paragraphs 46 and 47):

... it is my view that the second defendant has agreed ... that he had an obligation to repay the Bank the money without the Bank first seeking payment from [the borrower]. 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 ...

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

Her Honour found that the Bank had indeed done "very little" (paragraph 53; after about 18 months of almost complete inactivity - paragraph 67) to market or maintain the properties for a considerable length of time, but had more recently taken steps to sell the properties. The court noted that the Bank did not seek interest over the period it had taken little action; this factor must have been relevant in the ultimate decision of the court.

Counsel for the guarantor argued that the circumstances of the case were such that there had been a high level of moral obloquy by the lender, on the basis that it took possession of the property as security, and in failing to realise any of those properties for nearly 2 years, it prevented [the borrower] 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. This action by the lender interfered with the guarantor's ability to cause [the borrower] to pay the plaintiff.

The guarantor relied upon an English Court of Appeal decision: Palk v Mortgage Services Funding plc [1993] Ch 330.  In that case, the mortgagee had taken possession of the security property, and proposed to do nothing for the foreseeable future, until the market improved. The consequence was that the guarantor in that case (Mrs Palk) may have had to pay for a shortfall if the market did not improve. The guarantor argued that the lender was speculating about the future of the property market at her expense.

The lender argued that it may choose which remedy it wishes to pursue and when, so long as it acted 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. 

The Court of Appeal concluded under the heading "a duty to be fair": 

... a mortgagee can sit back and do nothing. 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.

Relying on Palk, the guarantor in Thompson argued that by doing nothing the Bank was in breach of an implied duty to be fair to a mortgagor, and its guarantor.

Her Honour considered the decision in Palk, but decided not to follow it for 2 reasons:
(a) while the Bank had been dilatory since taking possession of the Biloela property, at the time of the hearing it had taken steps to sell the property, in accordance with the guarantor's wishes; and 
(b) the prejudice that the guarantor suffered by the Bank's inaction had been ameliorated, because he was no longer obliged to pay interest on $1.9M that accrued over the period when the Bank was dilatory (due to a concession by the Bank about that issue, apparently on the last day of trial). 

In these circumstances, the court concluded that the conduct of the Bank over the delay period was not unconscionable.

Implication from findings 
The implication from the court's finding is that if the Bank had not waived its claim to interest for the extended period of its delay, it would have engaged in unconscionable conduct.

In the circumstances, it seems that lenders will be found to owe a duty to a borrower and its guarantors to act in a timely manner in selling security properties, or "a duty to be fair".


W G Stark
Hayden Starke Chambers