What has now become known as the general rule established in Inglis v Commonwealth Trading Bank of Australia (1972) 126 CLR 161 is the proposition that the Courts will not grant an injunction to restrain the exercise of power of sale unless the mortgage debt is paid into Court. There are however some exceptions to this rule, including where there is a genuine dispute about the existence of the debt or about the validity of the mortgage. Further, in some circumstances a mortgagor may avoid payment into Court by offering to provide alternative security.
The judgment delivered by his Honour Justice Rein on 27 November 2015 in the matter of Smith & Smith Investments Pty Ltd & Ors v Westpac Banking Corporation & Orsprovides a recent illustration of how these principles are applied by the Courts.
The background factual matrix was complex however can be summarised as follows:
The Bank lent several million dollars to Smith & Smith Investments Pty Ltd to acquire a hotel in western Sydney.
Shortly after making the loan, the Bank became aware of the failure by the sole director and shareholder of Smith & Smith Investments Pty Ltd to inform the Bank when procuring the loan:
- That she was a defendant to New South Wales Supreme Court proceedings in which the trustee in bankruptcy of her de facto partner was seeking to set aside, as a conveyance to defeat creditors, the transfer of a one half share in collateral real property security to her by her partner; and
- That her assets were the subject of a freezing order made by the Court.
Following the appointment of receivers and managers to Smith & Smith Investments Pty Ltd, the Bank permitted the borrower several months to try to obtain a refinancing of the debt.
After the passing of some months and several failed attempts by the borrower to obtain a refinancing, the receivers and managers commenced a campaign for the sale of the hotel which resulted in a number of bids being offered by interested parties. The receivers and managers resolved to accept the best bid which was provided under the cover of an executed counterpart sale contract together with a deposit cheque.
On the eve of the conclusion of the sale campaign, the sole director and shareholder of Smith & Smith Investments Pty Ltd applied to the Court for an injunction to restrain the sale of the hotel by the receivers and managers so as to allow her additional time to finalise and obtain a loan from a potential incoming financier in order to repay the debt owing to the Bank. The proposed potential refinancing submitted to the Court in aid of the injunction remained conditional on certain matters.
The Bank and the receivers opposed the application for an injunction on the basis that the Bank should not be forced to replace the certainty of a sale with a conditional refinancing.
His Honour found that there was no dispute concerning the debt, the appointment by the Bank of the receivers and managers or the exercise of the power of sale.
His Honour then turned to whether the balance of convenience favoured the making of an injunction to allow the proposed potential refinancing to proceed. His Honour ultimately found that the receivers and managers should not be precluded from exchanging a contract for the sale of the hotel and accordingly that the injunction should not be granted for numerous reasons, including that:
- A serious breach had occurred which entitled the Bank to terminate the loan and to immediately require the repayment of all amounts owing;
- The sole director and shareholder had been afforded several months to obtain a refinancing and more than adequate notice had been given by the Bank that if the loan was not repaid, the receivers and managers would sell the hotel;
- The offer of refinancing provided to the Court was conditional and there was no certainty that the loan would be made available;
- The application to restrain the sale was made late and only after the receivers’ campaign to sell the property had nearly concluded; and
- If the sale was injuncted, there were potentially a number of detrimental effects, including the loss of the sale or a reduction in the sale price.
The increasing availability of finance through an ever more saturated lending market has meant that lenders are often prepared to provide “in principle” approvals for finance. However, a conditional loan approval will generally not be a sufficient basis to restrain a mortgagee or receivers and managers appointed by it from proceeding with a sale.
It should be noted that careful consideration should be given to the merits of an application if one is made by a borrower to restrain the exercise of power of sale and each matter should be evaluated on its own facts and circumstances.
HWL Ebsworth Lawyers acted for Westpac and the receivers and managers in this matter.
This artcle was written by Daniel Zabow, Partner.