What are the duties of a mortgagee in exercising a power of sale and do those duties extend to a sale by a liquidator?
In QNI Resources Pty Ltd & Anor v Vannin Capital Operations Limited & Ors  QCA 216, these issues arose when a liquidator and not the mortgagee effected the sale of an aircraft and there was a shortfall on the loan secured over the aircraft and the guarantors to that loan were found liable for the shortfall.
A predecessor in right to the first respondent funded the purchase of an aircraft by the second respondent pursuant to a loan facility and associated documents.
The repayment of the loan was secured by a mortgage over the aircraft, and the repayment obligations of the second respondent under the loan were the subject of a guarantee and indemnity provided by the third respondent.
The aircraft was in fact sold by the liquidator of the second respondent and the first respondent sought to recover that shortfall from the guarantors.
On hearing, the primary judge found in favour of the First respondent.
On appeal, the Court had to consider several issues, including specifically as discussed in this article, the extent of the mortgagee’s duty and whether and how it applied to a sale by a liquidator.
Boddice J, with whom Mullins J and Applegarth J agreed, dismissed an appeal by the guarantor appellants.
The appellants had argued on appeal that the primary judge erred in framing the duty owed by a mortgagee and in concluding that the mortgagee’s duty did not apply to the sale process as the aircraft was sold by the liquidators.
The conventional principles require that a mortgagee exercising a power of sale “owes a duty to exercise the power in good faith”, and that to act in good faith, the mortgagee “must not wilfully and recklessly deal with the mortgaged property in such a manner that the interests of the mortgagor are sacrificed” has to be considered in the context of the case at hand.
The primary judge had expressly recognised that in order to show a breach of that duty, there must be a departure from reasonable standards, so serious as to be properly characterised as unconscionable.
After specific reference to those conventional principles, the primary judge went on to state:
“Contrary to the defendants’ pleading and submissions, the duty does not require the mortgagee to sell for the best price obtainable or to act in such a way as to advance the interests of the mortgagor. The power is given to the mortgagee for its own benefit to enable realisation of the debt. Its exercise is subject only to the qualification that the mortgagee must act in good faith in the sense I have just explained. That has been the position in this country for over a century and caution is required before mistaking conclusions of fact for statements of principle regarding the scope of the duty, especially where those conclusions concern duties which are imposed by statute.
It may be in a particular case that a ‘failure to follow up the prospect of obtaining a higher price when it was known that a prospective purchaser was prepared to pay more’ might amount to such a ‘serious departure from accepted standards’ as to amount to a breach of duty to act in good faith but, in the end, if a duty was owed by GEC/Harrenvale, the relevant enquiry is whether it acted in good faith or whether it sacrificed the interests of [the first appellant, the second appellant and/or the third respondent] by acting in a wilful or reckless way.”
Viewed in that context, there was no error by the primary judge in enunciating the relevant duties of the mortgagee.
Further, there was also no error in the primary judge’s conclusion that the first respondent did not sell the aircraft; the evidence showed that it was in fact sold by the liquidators.
Further, nothing in earlier correspondence relating to an offer and counteroffer to buy both the debt and the aircraft supported a conclusion that [the mortgagee] undertook the process of the sale of the aircraft, or that the liquidators acted as agent of the [mortgagee]. Those communications were in relation to purchasing the debt, the subject of the facility agreement, a condition of which would be acquiring the aircraft. The offer was specifically conditioned on the giving of releases in relation to that debt.
The duties of the mortgagee require them to exercise power in good faith and to enable realisation of the debt for its own benefit, but such duty needs to be considered in context.
Any failure to follow up a higher offer which may be characterised as unconscionable, willful, or reckless might, in certain circumstances, be seen as a breach of such duty. However, there must be evidence to support such a failure of the duty.
That duty is however differentiated from a sale by a liquidator, who in effecting a sale does so in accordance with powers under the Corporations Act 2001(Cth).