Yesterday in Zhou v Kousal & Ors [2012] VSC 187 Vickery J considered the equitable principles relating to people with disabilities arising out of the Amadio cases and the responsibilities of the Sheriff in conducting distress sales. It has received some media coverage (here).

FACTS

The facts are quite extraordinary. The Plaintiff, Zhou, the registered proprietor of a property in Braybrook [2],owed the fifth defendant, Mr Wu, a judgement debt of over $100,000. The property was subject to a mortgage in favour of Suncorp and a charge of Council rates. Pursuant to a warrant of seizure and sale the Sheriff undertook two auctions of the property.  Prior to the first auction (see generally [23] – [31])  the Valuer General valued the property at $630,000 following a kerbside valuation and provided a copy of the valuation to the Sheriff.  At the time of this auction Zhou had putative equity in the sum of $171,615.76.  This sum became the Sheriff’s reserve at auction [26]. No bids were received at the first auction and the property was passed in [27]. The Sheriff then applied to the the Supreme Court where, per Muckhtar AsJ , it permitted the Sheriff to sell the property without a reserve [28] , save for the the following orders [29]:

1. Subject to paragraph 3 there be leave to the Sheriff to conduct a sale of the property known as 2 Wirraway Avenue, Braybrook (in exercise of powers under a warrant of seizure and sale filed 9 November 2009) without a reserve price provided that such leave does not thereby derogate from, or relieve the Sheriff of a duty at law to the owner of the land when exercising a power of sale.

…………..

3.There be leave to the owner of the property to notify the Plaintiff of an intention to discharge the order in paragraph 1, and apply to this Court for a discharge of that order. Unless such an application is filed and served within 10 days after the date of the service of this order, the order will take effect upon the Plaintiff’s solicitor giving to the Sheriff evidence of service of this order and the absence of any application to discharge it.

(Emphasis added)

At the time of the second auction (see [32] – [40] generally) the market value of the property was accepted as being $630,000, with the sum of $457,345.50 outstanding on the mortgage and $7691.10 owing as council rates.  Zhou had equity in the sum of  $164,963.40 [33]. The Sheriff offered the property for sale without a reserve price.  The First Defendant, Mr Kousal (“Kousal”), described as an experienced purchased a property at public options conducted by the Sheriff [37], made the final and successful bid of $1,000. The property was knocked down to  Kousal. Soon after purchasing the property Kousall wrote to Zhou asking what his intentions were regarding remaining in the property and he later spoke to him through an interpreter.  He commenced legal proceedings ([42] – [43]) against Suncorp seeking orders delivering up the duplicate certificate of title of the property so that Kousal could register his interest in the property with the Registrar of Titles.  Zhou sought and obtained an injunction restraining the Registrar of Titles from registering any transfer on the property [44].

Zhou alleged the Sheriff owed him a duty to act reasonably in his interests in executing a warrant and obtain a fair price for the interest being sold under that warrant [45]. He alleged that Kousal  knew or ought to have known that a bid of $1,000 was illusory, unfair, unreasonable and as a consequence the purported sale was unconscionable in equity and ought be set aside [46].  Interestingly the court, (at [48]) raised with Zhou’s counsel whether a writ of certiorari was also arguable on the grounds of jurisdictional error on the part of the Sheriff. Curiously this option (and broad hint) was not adopted.

DECISION

Claim against the purchaser (Kousal)

His Honour cited the equitable principles underpinning the claim against Kousal, ( [52] – [58])  stating:

…the present litigation was conducted on the well established equitable principle that a transaction may be set aside where unconscientious advantage was alleged to be have been taken by one party of the disabling condition or circumstances of the other. In such cases, equity may intervene either because the will of the complainant is overborne so that it is not independent and voluntary or when advantage is taken of an innocent party who is unable to make a worthwhile judgment as to what is in his or her best interests.

The court did not accept that Zhou’s lack of command in English was such as to constitute a special disability. The evidence pointed to Zhou being able to function adequately as an owner builder in a 10 year period (see [61] – [64]). It was relevant, consistent with authority, that there was no evidence that Kousal knew of the alleged disability.  Prior to the second auction Kousal did not know nor had he met Zhou [64].

Zhou’s counsel framed the disability in terms of the following:

….by reason of the sale by the Sheriff being of a compulsory nature under the statute, and conducted under the provisions of the Sheriff Act, and being further conducted pursuant to the order of Mukhtar AsJ, which permitted, amongst other things, the sale to be conduced without a reserve, Zhou was placed under a special disability in relation to the sale of his property.

The court identified the two broad categories of special disadvantage the purposes of the debt equitable doctrine as [67]:

(a) special disadvantage which is constitutional: that is, deriving from age, illness, poverty, inexperience, lack of education or some other such circumstances peculiar to the complainant; or

(b) special disadvantage which is situational: that is, deriving from particular features of a relationship between actors in the transaction such as emotional dependence of one on the other.

The principles are not fixed or rigid ( [68] – [70]) and the kinds of special disability which may invoke the principles can take a wide variety of forms [71]. The court found that Zhou suffered from neither constitutional or situational disability [73] and that any special disadvantage that applied to him applied equally to all that falls within the Sheriff’s  jurisdiction ([75] – [76]).  As such there was nothing special about this disability for the purposes of the equitable doctrine. Accordingly Kousal had a legitimate expectation that the sale conducted by the Sheriff was according to law and he was entitled to make the bid he did even if it was unreasonable.

Claim against the sheriff

The court undertook a detailed analysis of the history in operation of writs of fi fa, which empowered, at common law, the Sheriff to undertake a sale of seized properties ([82] –[113]).  His Honour noted that, at common law:

• there is a duty in selling property to act reasonably in the interests of both the judgment creditor and debtor respectively in order to obtain a fair price [93]
• a sale not properly conducted was not a real sale [95]

Under section 24 of the Sheriff Act the Sheriff is empowered to sell properties seized in accordance with the relevant court and enforcement legislation [116]. His Honour found, at [117], that the common law duties continue to apply after the operation of the Sheriff Act, being:

..important protections for both judgment creditors and judgment debtors alike. They should not be swept away except by clear words which abrogate the duties or which seek to protect the Sheriff from suit, provided he observes the statutory requirements.

(Emphasis added)

Vickery J found that the immunity from suit granted the Sheriff under section 25  applies only to sales of properties sold validly where all statutory requirements have been met ([118] – [119]).  A sale which is conducted where the statutory requirements have not been met the immunities will not apply [120].  The immunity would not in any event be relevant because an order setting aside a sale conducted by the Sheriff will not, in the usual case, give rise to any liability being imposed on the Sheriff in respect of the sale of the property [121].

The power of the Sheriff to sell the property is limited by the operation of section 24, [122],whereby property can only be sold:

(a) if the transaction can in truth be regarded as a “sale” and not an illusory sale founded upon a price which is so low that it could be said that there was no sale at all, or that it was not a real sale or that it was in fact illusory;

(b) if the sale is undertaken in accordance with the relevant court and enforcement legislation, or a warrant that authorises the seizure of property; and

(c) if the sale in undertaken for the purpose of applying the proceeds of the sale to the payment of a payable amount.

The Sheriff is also bound to apply the principles of common law in the conduct of a valid sale [123]. Those principles are [124]:

(a) The Sheriff is bound to act reasonably in the interests of both the judgment creditor and the judgement debtor in order to obtain a fair price;

(b) A fair price is not necessarily the market value, for it is well recognised that compulsory sales under legal process rarely bring the full value of the property sold. In making a determination as to the adequacy of the highest bid, the Sheriff is entitled to take into account that the sale, being a compulsory process, is usually one at which a full and fair market value for the property will not be expected and some allowance must be made for low prices being obtained at such sales;

(c) In determining the fair price in all the circumstances, matters from the prospective buyer’s perspective must be weighed. Such factors may include: the fact that buyers must be prepared to complete their purchases on the spot; the fact that buyers, particularly in the case of real estate, will not have usually have had the opportunity to inspect the property sold (at least internally); the fact that the title to the property may be encumbered or it may be physically occupied, giving rise to risks for the purchaser in acquiring clear title or rights of occupation without undue expense or delay; and other such risks which may be attendant for the purchaser on the purchase;

(d) Another factor to be weighed in the balance will be the amount, if any, obtained for the judgment creditor after the expenses of the sale have been deducted;

(e) If it is apparent to the Sheriff that in fact or in all probability the highest bid received is so far below the true value of the property offered for sale that he would be acting unreasonably if he was to accept it, the Sheriff should not accept the bid and pass in the property;

(emphasis added)

If the Sheriff breaches his common law duty and sells property for a price which, in all circumstances is unfair, [124], then:

(i) the transaction may be set aside. On setting the transaction aside, no damages would arise in the usual case for which the Sheriff could be liable; or

(ii) where the price obtained on the highest bid is so low that it could be said that there was no sale at all, or that it was not a real sale or that it was in fact illusory, there would be no sale within s 24 of the Sheriff Act, and therefore no sale within Division 5 with the result that the immunity of the Sheriff from a suit in damages conferred by s 25 would be removed. … if the transaction is not set aside and loss and damage is in fact sustained, the Sheriff could be exposed to an award of damages at common law.

His Honour found that the second auction was not conducted in accordance with common law and the Sheriff Act, and further there was a breach of the order of the Supreme Court (see [126] – [132]). Given the proceeds of sale did not even cover costs of conducting the second auction his Honour found the only proper inference to be drawn was that the second auction was carried out for the purposes of offsetting to a substantial degree the costs incurred by the Sheriff  [134]. This is not permissible and therefore it was not a sale conducted under the Sheriff Act [135].  If the sale was set aside there is no loss and damage suffered by Zhou hence the immunities under section 25 do not apply [137].  The sale conducted pursuant to the second auction could not as a matter of law be allowed to stand [139]. The sale was set aside and accordingly Kousal did not have good title to the property.

 

ISSUE

The issue of obtaining a fair price is an occasional and real issue when dealing with mortgagee sales by creditors, often banks.  This decision makes it clear that the Sheriff has a common law duty to take steps to sell a property for a fair price as well as statutory obligations.  While the court set out principles that are applicable when selling a property they are drawn in broad terms and requiring a balancing of factors.  While auctioning of a property for $1,000, less than the cost of conducting the auction itself, is an extreme case and one where, on its face, it appears unfair and inequitable there is a real question of what would be the appropriate quantum such that the Sheriff complies his common law duty.  There is no obligation to obtain market price on the sale of seized properties.  The nature of forced sales are such that it is common to find that optimum prices are not realised. A significant question a legal representative for the Sheriff or another party undertaking a distress sale pursuant to a warrant, or by other means, is to what extent of undervalue, with regard to a valuation as a comparator (as was applicable here), constitutes unfairness.

The Court adopted a cautious and, given the circumstances, prudent approach to Kousal’s liability. The facts did not sustain a claim of a special disability and it was relevant that Kousal had no prior knowledge of or interaction with Zhou prior to successfully bidding for the property.  On the well established case law of Amadio and its descendants there was no basis for claiming an breach of equitable obligations by Kousal.  He was necessarily drawn in as a purchaser of the property.