New South Wales Supreme Court CITATION : Yarrangah Pty Ltd v National Australia Bank Ltd [1999] NSWSC 97 CURRENT JURISDICTION : Equity Division FILE NUMBER(S) : 1295/99 HEARING DATE(S) : 9; 11 February 1999 JUDGMENT DATE : 11 February 1999 PARTIES : Yarrangah Pty Limited (Plaintiff) National Australia Bank Limited (Defendant) JUDGMENT OF : Young J COUNSEL : Plaintiff: F McAlary QC and S Kaur-Bains Defendant: J E Thomson SOLICITORS : Plaintiff: Jackson Smith Defendant: Dibbs Crowther & Osborne CATCHWORDS : Mortgages [72]; Mortgagor's remedies; Judicial sale; Sale may be ordered in appropriate cases; Jurisdiction fully considered; In this case case dismissed on discretionary grounds Conveyancing Act 1919 (NSW) s 103 ACTS CITED : Real Property Act 1900 (NSW) Equity Act 1901 (NSW) s 12 DECISION : Proceedings dismissed with costs THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION YOUNG, J THURSDAY 11 FEBRUARY 1999 1295/99 - YARRANGAH PTY LTD V NATIONAL AUSTRALIA BANK LTD JUDGMENT 1 HIS HONOUR: On Monday 8 February 1999 the plaintiff asked me ex parte to restrain proposed action by a mortgagee to advertise property for sale in a way which could detrimentally affect the price that might otherwise be obtained. The gravamen of the plaintiff's complaint was that disclosure of an asking price or the fact that the sale was a mortgagee sale might prejudice a sale by private treaty that the mortgagor hoped shortly to close. I declined to give that relief ex parte, but in view of the fact that the advertisement, if it was to be restrained, had to be restrained by 2 o'clock on Tuesday, 9 February, put the matter in the list for 9 February at 9.50am. 2 On that day the question as to the extent to which s 103 of the Conveyancing Act 1919 applied was fully argued. During the argument, which finished about noon, the defendant mortgagee agreed to amend the advertisement by taking out reference to price, and that disposed of a lot of the urgency of the case. The advertisement was, in effect, printed this morning in its amended form. 3 Embarrassingly to all of us, at 2 o'clock on 9 February when I was about to give reasons for judgment, Mr Thomson of counsel, who appeared for the defendant, pointed out that s 103 did not apply to Torrens system land, and that this current land was all under the Torrens system. The matter was then adjourned to today to consider whether there was a course available under the general rules of Equity to give some relief to the plaintiff, and if so whether such relief should be given. 4 On Tuesday Mr McAlary QC and Miss Kaur-Bains appeared for the plaintiff and took me through the cases that show the width of the jurisdiction under s 103(2), including my own decision in Manton v Parabolic Pty Ltd (1985) 2 NSWLR 361 at 379-381; Palk v Mortgage Services Funding Plc [1993] Ch 330 and Cheltenham and Gloucester Plc v Krausz [1997] 1 WLR 1558. 5 That line of authority shows that when the section applies the court has a very wide jurisdiction and that where appropriate it will order a judicial sale of the property and it will usually commit that sale to the mortgagor. 6 However, there is flavour in the cases, especially in the Cheltenham case, and in a decision of Kekewich, J in Brewer v Square [1892] 2 Ch 111, 115, that where the mortgagee is actively pursuing its statutory or contractual power of sale then the court usually does not exercise its discretion to order judicial sale. However, the matter, generally speaking, is in the wide discretion of the court. 7 I was expecting today that there would be an argument that there is a general equitable jurisdiction analogous to that under s 103 with respect to Real Property Act land. That submission was formally made, but it was not really backed up with very much material. 8 The main thrust of the argument today was that the mortgagee had breached its duty to act bona fide in and about the exercise of its statutory power of sale and, accordingly, it should be restrained. 9 That argument has tremendous difficulties. The first difficulty is that ordinarily the court requires a mortgagor, where it is challenging the exercise of a power of sale, to pay the money due under the mortgage into court; see for instance Harvey v McWatters (1948) 49 SR (NSW) 173 and Inglis v Commonwealth Bank (1972) 126 CLR 161. There are exceptions, such as an application under s 103(2), and there have been articles written by both Bryson J in (1993) 11 Aust Bar Rev 1 and by myself in (1993) 1 APLJ 61 pointing out that the rule is just the ordinary rule and not an invariable rule. However, even with that modification, some reason has got to be shown why the ordinary rule should not apply and that is not here in the present case. 10 Secondly, it is the accepted law these days that the mortgagee has a fairly wide right to market the property as it considers best in its own interest. It is often said that a mortgagee is not a trustee of a power of sale. These statements probably overstate the law, and as Walsh J pointed out in Forsyth v Blundell (1973) 129 CLR 477, 493 when one reads past the general words and analyses the judgments it cannot be seen that they all speak with the one voice. 11 The allegation made against the mortgagee is essentially that the mortgagee is a second mortgagee which is owed $1.8 million and the first mortgagee is owed $88,000. Apart from the costs of sale and any necessary legal costs which could be tacked on to the mortgage $1.888 million will clear the mortgagor's debts. 12 There was an aborted auction sale last year, at which considerably less than this sum was offered. The mortgagee is pursuing an advertising campaign which can be seen to only be seeking a sum of this figure, or a little less. On the other hand, the mortgagor has a bona fide offer in excess of this sum and is reasonably hopeful of getting even more offered after negotiations, so long as those negotiations are not kiboshed by the bidder becoming aware that it can deal with the mortgagee much more cheaply. 13 The general line of authority under the mortgagee's duty cases would tend to suggest that unless there is a great discrepancy between the amount the mortgagee is seeking to obtain and the true value of the property, so that that great disparity in itself suggests fraud, and provided that the mortgagee is pursuing a course of obtaining a fair price by acting on the advice of valuers and professional real estate marketers, the court does not interfere. 14 Accordingly, it is very difficult for the court to grant any injunction on the argument that the mortgagee is not bona fide carrying out its duty. 15 I realise as an interlocutory case I have just to find that it is a sufficiently arguable case, but it is very difficult even to get to that stage, even if I can do so without a payment into court. 16 Although it is rather unsatisfactory, I think I have to deal with the wider argument because it seems to me that it may well be valid, but that even if it were valid the present case is not a case where the court in its discretion should order that there should be a judicial sale. 17 In the late 16th century and in the 17th century Lords Nottingham and Hardwicke, two of the fathers of Equity, by their decisions showed that Equity would regard a mortgage as merely being security for a debt, and that even though the mortgagee might have legal title, and for all intents and purposes the property would appear to be the absolute property of the mortgagee, the mortgagee would be confined in its activities and restrained from doing anything that would not recognise that its property was merely security for its debt. Accordingly, if its debt could be satisfied by other methods the mortgagee may be restrained from exercising its powers if that would prejudice the mortgagor. 18 By the turn of the 19th century, it was clear that where the mortgaged property was in the name of an infant there could never be a decree for foreclosure because the infant could never make admissions so as to get a decree, and any defence put on by a guardian ad litem could be set aside after the infant came of age. Accordingly, it was the practice, where an infant was involved in a suit for foreclosure, to order sale. 19 The English cases were reviewed by Chancellor Kent in Mills v Dennis (1818) 3 Johnson's Chancery 367 (NY). At 368-369 Chancellor Kent said that he could see no reason why there was not jurisdiction to order judicial sale in a foreclosure case in the situation of an adult because the jurisdiction was no different to that of an infant. The flavour that comes through the judgment is that Equity has jurisdiction to order judicial sale in a mortgage case when it is generally more beneficial to both parties. 20 In the first half of the 19th century, for the reasons that I set out in Australia and New Zealand Banking Group Ltd v Comer (1993) 5 BPR 11,748, there was a great amount of delay in foreclosure suits in the Court of Chancery. This at the time led money lenders to insert a contractual power of sale into the mortgage. The Equity Court thought that that was not the gentlemanly thing to do and said so on many occasions in the first half of the 19th century, but, by 1850, the legislature had recognised powers of sale and, indeed, given them statutory authority. 21 We also find at the same time that statute reformed Chancery procedure to make foreclosure suits able to be speedily heard and at the same time the predecessor of s 103 of the Conveyancing Act was inserted into the statute governing the Equity side of this Court and the Chancery Court in England. 22 As I explained in Manton v Parabolic (supra), s 12 of the Equity Act 1901 and its predecessor, which in due course became s 103 of the Conveyancing Act, were part of the Equity procedure in foreclosure suits. Because foreclosure under the Torrens system is dealt with administratively after an aborted sale by auction the matter never comes before the Court of Equity and so s 103 and its predecessor did not apply to purely Torrens system land. 23 However, this did not affect the power that there was in the court to order judicial sale in an appropriate case. It is merely an illustration that in some situations the statute had set out a power that was previously part of the general law. There were arguments against that because it would seem that by 1850 courts had ceased making orders for sale in foreclosure suits and the full reason for that is not quite clear. Cases such as Jenkins v Jones (1860) 2 Giff 99; 66 ER 43 show, however, the same spirit as earlier cases. 24 Mr Thomson for the defendant said that judicial sale is really just a species of specific performance, or alternatively is part of the remedial package used under Torrens constructive trusts, et cetera. With respect, the cases show that it goes further. Story on Equity Jurisprudence 13th ed (1887, Boston, Little Brown & Co) p 559 shows some of the width, and if one goes to cases, such as Curtis v Curtis (1789) 2 Brown's Chancery Cases 620, 633; 29 ER 342, 349, one can see that the practice even 200 years ago was to give judicial sale, whenever it was appropriate. 25 Arden, MR said: "The law gives the creditor only the land to hold, until he is satisfied. Equity goes further, and says, if the remedy at law is not sufficient, we will sell the inheritance in the estate, and if that will not do, we will direct an account of rents and profits against the heir." 26 Accordingly, the decree was made in a widow's suit for the dower where the heir at law had been, he thought, particularly clever in moving the property out of the widow's reach. 27 It would seem that the remedy of judicial sale in a mortgage case is one that is only applied almost as a last resort. It is applied in America more often than it is in Australia. One of the reasons for that is explained in Nelson Whitman Real Estate Finance Law 2nd ed (1985, St Paul, West Publishing Co) at pp 530 and following, that the statutory powers of sale in some US States are unconstitutional as they are a deprivation of property other than on just terms and, accordingly, it is necessary to apply more often to the courts for judicial sale which is constitutionally unassailable. 28 The powers of judicial sale have been used in America to make sure that in periods of depression properties are not sold for a few dollars when waiting may well produce the full amount, and in the appropriate case the court will put in a receiver to run the land at profit for a period and only after that period permit the property to be sold. The reason for this approach is that the court recognises that the mortgage is a mere security for a debt and that the mortgagee is entitled to its money, but it is only the master of the legal estate in the property up to a point, and when that point is reached Equity will interfere by judicial sale, if necessary, or by some other method. Illustrations are Potter Matlock Trust Co v Warren County 207 SW 709 (Kentucky) (1919) and Suring State Bank v Giese 246 NW 556 (Wisconsin) (1933). 29 It would seem to me that the extraordinary judicial power to order sale in Equity would apply by an analogy to certain cases that would be dealt with under s 103 for Old System land. Palk's case (supra) would be one, though it may be that Mr Thomson is correct in submitting the Palk situation could be dealt with under Equity's jurisdiction to protect sureties. 30 Accordingly, in my view, the probability is that there is an equitable power to award judicial sale at the suit of a mortgagor where the circumstances show that there is clear prejudice from the application of the ordinary methods of foreclosure or sale under a power of sale. 31 However, the law that has developed and has been recognised in decisions in the High Court, such as Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676, do set up the ordinary regime, and that is that the mortgagee is given considerable liberty to sell as it thinks appropriate and it is only when a certain point is reached that the court considers it appropriate to interfere with that liberty. 32 However, having said that, I should stress again what I said earlier that there are a whole lot of catcalls about mortgagees not being trustees of the powers of sale which are apt to mislead unless one looks very closely at what the courts really mean by a detailed consideration of the authorities. 33 The courts still consider that a power of sale is a power and there must not be a fraud on the power, and if there is a fraud on the power Equity will intervene. This is quite apparent when one looks at Barns v Queensland National Bank Ltd (1906) 3 CLR 925, which is really the first of the High Court decisions following cases like Kennedy v De Trafford [1897] AC 180 because at p 943 in Barns the High Court expressly referred to the principles of fraud on a power as set out by Lord Westbury in Portland (Duke) v Topham (1864) 11 HLC 32; 11 ER 1242. 34 More guidance as to the exact way in which courts approach the mortgagee's duties not to commit a fraud on the power are set out in judgments such as that of Kekewich, J in Colson v Williams (1889) 61 LT 71 (referred to with approval by Fox J in Blundell v Associated Securities Ltd (1971) 19 FLR 17, 30-31), and the decision of the Supreme Court of Ireland in Holohan v Friends Provident and Century Life Office [1966] IR 1. 35 However, the view that I have formed, that the jurisdiction probably exists, is not sufficient to get the plaintiff home. The plaintiff needs also to show that in this particular case the court in its discretion should apply the principle in aid of the plaintiff. 36 Because I am firmly of the view that the court should not exercise its discretion, I have been perhaps a little more free in coming to the view that the principle exists. It is a little dangerous to do that because Miss Kaur-Bains for the plaintiff today did not precisely formulate that argument and, accordingly, Mr Thomson was in no position to answer it, and it is always dangerous for judges to form their own views without argument of counsel. 37 Assuming that the jurisdiction exists, it is one to be exercised in the special case. It is not to go against the normal procedures of permitting the mortgagee under its statutory or contractual power wide liberty to conduct the sale and, indeed, on analogy with s 103 of the Conveyancing Act, it would seem to me that where the mortgagee's sale is actively proceeding the equitable power should not ordinarily be exercised. 38 However, over and above all those matters, in the present case is the consideration that there have been two previous proceedings between these parties. The first in 50187/97, which ended in a consent decree for the $1.8 million and a consent setting up of a regime for possession. Then there was suit 4403/98 commenced by the mortgagor in October last year for orders, including orders under s 103. 39 The second suit was settled by consent orders that the suit be discontinued and that there would be an undertaking to the court that, inter alia, the present plaintiff would not in any way prevent, obstruct or seek to prevent the defendant exercising its power of sale, and further that the parties agreed that the mortgagor could effect the sale at any stage up to 5pm on 11 November 1998, and thereafter the mortgagee would conduct the sale. 40 There has been some argument presented that an undertaking to the court not to prevent a mortgagee sale does not prevent an application being made to the court such as the present. I do not wish to deal with that argument, but I will assume its correctness for the moment. 41 However, even if it is correct, the court will not ordinarily grant any relief to a party who has contracted not to apply for that relief, a fortiori when there are additional provisions setting up a regime for sale which conditions were for the consideration of settling the suit. 42 Miss Kaur-Bains merely says that circumstances have changed, but with great respect that is no answer to the fact that the parties addressed this matter last November and settled their differences on the regime that was set up and that gives the mortgagee at present the power to sell and to go ahead and market in the way it thinks fit. 43 I should note that this morning Miss Kaur-Bains asked for a further adjournment so that she could consider the matter further. That was opposed by the defendant on the basis that relatively speedy action was required and that it should not be prejudiced by being brought back to the court time and time again because the plaintiff's counsel had not thought out her position. Although the argument that the court had jurisdiction had not been presented thoroughly, I was prepared to assume its correctness. However, even on this basis I would still decline to give relief in my discretion, so there was no point in granting any further adjournment. 44 Accordingly, the proceedings should be dismissed with costs. oOo Last Modified: 06/30/2000 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. 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