Vol 1 (2004) - Issue 4

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420A and the Receiver’s/Controller’s Duty of Reasonable Care

Introduction

What is the duty of a mortgagee when selling property over which they have obtained control? Traditionally, in Australia the test is stated as merely one of good faith. By contrast, English courts have alternated between a test of good faith and that of reasonable care. Whatever the resolution of this may be, the purpose of this case note is to explore the impact that s420A of the Corporations Act 2001 (Aus) has had in resolving or contributing to the jurisprudence surrounding this debate. What will be demonstrated is that whilst the parameters of the legislation are unclear, in the scenarios that come within the ambit of the section, the debate may well have little practical impact.

The legislation

Section 420A of the Corporations Act 2001 provides that:

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.

A number of issues arise in relation to this:
- What are the consequences of breach (particularly given that the legislation does not specify any);
- Does a guarantor have protection of the statute, or is limited to the mortgagor corporation;
- Does this legislation statutorily provide for the equivalent of a common law duty of care, (thus rendering any debate redundant); and finally,
- Does the section dictate that market value is a relevant consideration in determining any breach, or is it simply the case that examination extends to the process designed to achieve market value?

Two recent decisions (the judgments delivered one day apart) demonstrate, not only the unpredictability of a Federal system of jurisprudence (the State courts diametrically opposed on certain aspects), but also that the parameters of s420A are rather ephemeral in nature, and that many more decisions will be required to tease out the boundaries of this section.

Jovanovic, Jovanovic and Fortson Pty Ltd v Commonwealth Bank of Australia

The Jovanovics controlled Forston Pty Ltd. Through this company they had purchased a property on which a hotel business was conducted. The vendors were the Govedaricas and a company controlled by them, Roclin Developments Pty Ltd. At this time, the Govedaricas and the Jovanovics were said to be in a close friendship - this friendship complicating the business arrangements with allegations of a secret agreement between the parties to disguise the ‘true’ owners of the property. Documentary evidence indicating the existing of the following term:

The Jovanovics agree that notwithstanding any arrangement that involves their possession of sole legal title of the property, that they hold on trust for the benefit of the Govedaricas, ownership of the property based upon the proportions of ownership outlined above [the Jovanovics holding a one-third entitlement, the Govedaricas the remainder].