Mortgagee in possession sale causes Manda-monium – a tale of section 420A obligations in the COVID-19 era

In the first reported final decision that has considered the effect of COVID-19 lockdowns on the property market in the context of a mortgagee discharging its duties under section 420A of the Corporations Act 2001 (Cth) (Act), the Victorian Supreme Court in Manda Capital Holdings Pty Ltd (Manda) v PEC Portfolio Springvale Pty Ltd (PEC) [2022] VSC 381 found in favour of a mortgagee that was alleged to have breached its duty in exercising its power of sale under section 420 of the Act.

Manda commenced proceedings against PEC seeking the repayment of outstanding debt after Manda (as mortgagee in possession) sold PEC’s property just subsequent to Melbourne’s second pandemic-induced lockdown in 2020 and the proceeds did not satisfy Manda’s debt. PEC admitted default under the loan agreement and accepted the outstanding debt. PEC however brought a counterclaim against Manda, contending that Manda’s sale of the property was contrary to section 420A of the Act.

PEC claimed that if Manda had complied with section 420A of the Act, it would have achieved a sale price of $7.8 million (PEC submitted was the market value outlined PEC’s expert in a retrospective valuation as at December 2020 and March 2021) leading to Manda’s debt being satisfied in full.

Section 420A of the Act provides:

‘(1) 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:

(a) if, when it is sold, it has a market value – not less than that market value; or

(b) otherwise – the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold.’

Justice Osborne outlined that the parties did not differ on the relevant legal principles to be applied, summarised in Boz One Pty Ltd v McLellan [2015] VSCA 68:

“As the authorities illustrate, what must be done to comply with this general obligation will depend on the circumstances of each case, including the nature of the assets being sold and the circumstances of the chargor. In deciding whether a controller’s failure to take a particular step constitutes a breach of s 420A(1)(a), that step should not be considered in isolation. Rather, the court should consider the controller’s conduct as a whole in the context in which the controller was required to make decisions about which steps to take and which steps not to take. The controller’s conduct must be looked at holistically by reference to the dynamic circumstances that the controller faced at the relevant time”

In this scenario the ‘dynamic circumstances’ that existed were the COVID-19 pandemic and associated lockdowns.

In light of that above, the crucial issue was the steps taken by Manda to sell the property.

The counterclaim was dismissed and in the absence of any further defences, judgment awarded in favour of Manda. Justice Osborne made findings in respect of each of PEC’s arguments, summarised as follows:

• The four-week expression of interest sales campaign was entirely adequate, if not best practice, in the circumstances:
  • Savills and Gross Waddell were experienced real estate agents, with expertise in development sites in inner suburban Melbourne.
  • The sales campaign attracted considerable interest. The uncontradicted evidence from Mr Gross and Mr Baxter for Manda was that prospective buyers did not withdraw because they did not have sufficient time to undertake an assessment of the property (due to COVID-19 restraints). Rather, they withdrew because they were told that the vendor was seeking a price of $7 million or more, where the buyers’ interest was generally at a price of up to $6 million.
  • The sales campaign obtained the $7 million sale in a difficult and unpredictable market, which was within the (low) range of the agent’s estimate and exceeded the market value as assessed in the valuation obtained from Charter Keck Cramer on 15 December 2020 prior to entering into the sale contract.
• There was no breach of section 420A of the Act by not extending the sales campaign – Manda’s experts’ views (preferred by the Court) were that readvertising in 2021 would suggest to the market that the late 2020 sales campaign failed, removing the competitiveness tension from the sales process. In addition, it would result in significant risk, noting the additional interest accruing under the loan (about $110,000 to $130,000 per month).
• The emphasis in the advertising campaign on the fact of the mortgagee sale was entirely consistent with usual practice and had obvious commercial advantage – The evidence of Manda’s experts were again preferred that that it is common for properties to be advertised as mortgagee sales, indicating a motivated vendor and is not simply testing the market. One of Manda’s experts considered that this was particularly appropriate for the property during the COVID-19 lockdown and opined that without a mortgagee sale tag, it may have been perceived by many in the market that the vendor had an elevated view of the property’s worth.

This decision emphasised that the mortgagee’s conduct as a whole will be considered with reference to the ‘dynamic circumstances’ faced when determining if duties under section 420A of the Act have been complied with. Contemporaneous valuations, reputable agents and carefully considered advice from those agents are paramount.

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Authored by: 

Guy Edgecombe, Partner
Alicia Auden, Director