The Victorian Court of Appeal considered an appeal from an unsuccessful application to set aside a statutory demand in Modeca Investments Pty Ltd v Commonwealth Bank of Australia [2017] VSCA 203.  The issue was the question of offsetting claim and its value as far as the applicant was concerned.  Ultimately the question became whether the applicant could show there had been a breach of section 420A of the Corporations Act, most importantly whether the process could be successfully attacked.

FACTS

The alleged debt arose out of a loan agreement entered into between the Commonwealth Bank of Australia (“CBA”) and Modeca investments Pty Ltd (“Modeca”) in April 2012 providing that:

• an advance of $1.4 million by CBA to Modeca to assist Modeca to complete the purchase of vacant land of approximately 12.21 hectares at 1005–1035 Plumpton Road, Plumpton, for $4.05 million pursuant to a contract of sale entered into in July 2010.
• Modeca’s obligations under the loan agreement were secured by a registered mortgage over the land and guarantees by Sebastian Canzoneri, the sole director of Modeca, and a related company. [2]

By January 2015, Modeca was in default of payment and CBA  notified termination of the loan and required payment of the amount owing, $1,426,763.42, and, on 4 March 2015 gave notice warning that it intended to sell the land in default of payment [3].

Modeca response was to engage agents, Colliers International (Victoria) Pty Ltd (‘Colliers’) to attempt to sell the land for a price between $7.2 million and $7.6 million. Colliers provided Modeca’s solicitors with a marketing schedule and a recommendation of as to the potential sale price who in turn provided it to CBA’s solicitors, on 7 April 2015. The recommended pricing was:

Pricing

 

Colliers recommended  the property be offered to the market via expressions of interest [4].

On 8 April 2015, CBA’s solicitors advised Modeca’s solicitors of the conditions upon which CBA would allow Modeca the opportunity to sell the land, requesting agreement by 15 April 2015. [5] There is no evidence of:

• a reply to this letter,
• any subsequent action under the sale authority
• anything further  of Modeca seeking to sell the land [5].

On 21 April 2015, CBA took possession of the land as controller pursuant to s 427(1B) of the Corporations Act 2001 (‘the Act’) [6]. On 29 April 2015, CBA engaged  Premier Property Valuations Pty Ltd (‘PPV’) to inspect and provide a valuation of the land.  PPV did a valuation as at 30 April 2015 stating that:

(I) The Current Open Market Value of the property for Realisation Purposes subject to the attached Report, is;$1,400,000 (One Million Four Hundred Thousand Dollars) GST exclusive.

(II) The Market Value Range for Realisation Purposes subject to the attached Report, is;

$1,000,000 (One Million Dollars) to

$1,400,000 (One Million Four Hundred Thousand Dollars) — GST exclusive.

8 CBA sought from Merc Property, and on or about 14 May 2015 received, advice as to how to best sell the land to achieve the maximum price. On 18 May 2015, in accordance with the recommendations from Merc Property, CBA appointed PRD Nationwide Melton (‘PRD’) as real estate agent to market and sell the land by way of an informal tender.

The land was sold on 13 October 2015 for $1.3 million (plus GST), or alternatively $1.43 million inclusive of GST [9] The proceeds did not cover the amount outstanding under the loan agreement [9]. After settlement under the contract, on 29 March 2016, the CBA served a statutory demand  on 6 June 2016, the debt being the amount then owing after allowing for the amount received [11].

On 16 June 2016, CBA sued Canzoneri on his guarantee to recover $470,749.04, being the amount then claimed as owing pursuant to the loan agreement [12]. On 22 July 2016, Canzoneri filed a defence and counterclaim:

• denying liability on the basis that in selling the land, CBA, in contravention of its duty under s 420A(1)(b) of the Act, sold the land ‘at less than the market value and/or
• alleging that CBA did not obtain the best price that was reasonably obtainable’
• alleging that if CBA had not breached its duty as controller, the land would have been sold for an amount that would have repaid the amount owing
• claiming in particulars that the land was a prime development site and:
  •   at the time of sale it had a market value of $150,000 to $200,000 per acre, or $4.5 to $6 million;
  • it was well known that the land was in the process of being re-zoned
  • that, once the Plumpton Precinct Structure Plan was approved, the land would be re-zoned as an industrial or residential zone;
  • after the CBA sale, the land was immediately offered for sale at $6 million plus GST by PRD[14]
• claiming that Canzoneri (and Modeca) had a claim which entirely offset CBA’s claim [13].

The application for an order to set aside the statutory demand was sought under:

1. s 459H(1)(b), the condition is that the Court be satisfied that Modeca has an offsetting claim; an offsetting claim is defined in s 459H(5) to be ‘a genuine claim’  or, alternatively,
2. s 459J(1)(b) of the Act [17]

The Court noted that at first instance that:

• while the Associate Justice was satisfied that Modeca had done enough to satisfy an arguable contention that the land was sold at under value [26] it was not enough to establish a genuinely arguable offsetting claim because the question was whether CBA had taken all reasonable care to sell the property for not less than its market value or the best price reasonably obtainable in the circumstances [27].
• the Associate Justice cited In Investec Bank (Australia) Limited v Glodale Pty Ltd^. in support of the contention that:
  • a sale below the estimated market value of the property does not of itself mean that the duty to take reasonable care has not been satisfied.
  • the question is whether the process utilised to effect the sale of the property for market value was undertaken with reasonable care [27].
•  the market value may be evidence of a failure to take reasonable care in the sale
• Modeca must establish to the standard required under s 459H that a want of reasonable care occurred in the sale process.
• even if the difference in valuations might be as much as 28 per cent, ‘in the absence of any attack on the process, that is the end of the matter’
• no attack had been made on the process and the application was dismissed [28].

DECISION

Their Honours defined the dispute, at [15], as:

1. that Section 420A(1)(b)  required CBA, in exercising its power of sale, to take all reasonable care to sell the land for the best price reasonably obtainable, having regard to the circumstances existing when the land was sold
2. on Modeca’s case CBA failed in that duty.
3. as a result the price achieved was less than the market value
4. the shortfall constituted a claim which Modeca could set-off in total extinguishment of CBA’s claim [15].

The Court, at [16], cited Campbell J in Artistic Builders Pty Ltd v Elliot & Tuthill (Mortgages) Pty Ltd  as the accepted approach to the application of s 420A of the Act as:

• the court looks at the process that a controller of property of a corporation has gone through in selling that property.
• the enquiry is whether the controller took all reasonable care to sell the property for not less than its market value.
• it is not necessary to prove that the property was in fact sold for less than its market value
• it is not necessary to find what actually was the market value of the property
• to be able to find that s 420A(1)(a) was breached requires a finding  that the process gone through was not one where all reasonable care was taken to sell the property for its market value, whatever that market value might be.

The Court, at [18], summarised the approach to be taken in establishing an offsetting claim under s 459H(1)(b) by citing 2015  judgment of the Court of Appeal in Malec Holdings Pty Ltd v Scotts Agencies Pty Ltd (in liq) as :

• it is not necessary or appropriate for a court to engage in an in-depth examination or determination of the merits of the alleged dispute
• because an application alleging a genuine dispute or offsetting claim is akin to one for an interlocutory injunction all that is required is to establish a ‘plausible contention requiring investigation’ of the existence of either a dispute as to the debt/offsetting claim.
• the court is required to determine whether the dispute or offsetting claim is ‘genuine’.
• the criterion of a ‘genuine’ dispute requires that the dispute be bona fide and truly exist in fact and that the grounds for alleging the existence of a dispute be real and not spurious, hypothetical, illusory or misconceived.
• the dispute or offsetting claim should:
  • have a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion.
  • have sufficient factual particularity to exclude the merely fanciful or futile.
• A rigorous curial approach is essential to the effective operation of the statutory scheme

Modeca evidence in in support of its application was:

• on or around June 2016, the Melton Council issued the Plumpton Precinct Structure Plan which provides that, once the Plan is approved, the land will be rezoned as industrial [21].
• why CBA sold the land when it did, given the ‘imminent rezoning’ which would have the effect of increasing the value of the land [21];
•  based on his dealings with other rural land nearby, at the time of the sale by CBA, the land had a market value of $150,000 to $200,000 per acre which would mean the land was worth $4.5 to $6 million [21].
• the sale price of $1.4 million was equivalent to about $40,000 to $45,000 per acre [21];
•  a real estate agent familiar with land values in the Plumpton area, and who had appraised an adjacent property, that the subject land was worth around $200,000 per acre in the current market. This ‘information’ was not supported by evidence from Cowper [21];
• based on the above the price achieved by CBA was significantly less than the market value of the land and/or was not the best price reasonably obtainable in the circumstances at the time of sale [21].
• the purchaser of the land from the CBA subsequently offered it for sale at $6 million plus GST, describing it as ‘Vacant Land (Residential)’  [22].
• an agent acting for the vendor of 12.14 hectares in Plumpton Road, approximately 550 metres from the subject land advised that it had a reserve price is $4.2 million[22]
• the Plumpton Precinct Structure Plan which covered the land disclosed that the Plan commenced in 2013 was scheduled to go to a Panel hearing in November 2016 where different ‘uses’ could be sought by affected land owners or the council and the Plan was likely to be approved by the Minister between March–June 2017. That said, during the hearing, counsel  advised that the Plan has not yet been approved [22].
• to, at [23] & [24], exhibited two reports by valuers which reviewed the PPV report concluding:

(1) the sales analysed by PPV were not comparable to the land;

(2) there was no support for the $130,000 per hectare value used by PPV; and

(3) the PPV report did not provide a rationale for the application of a value range for the land of $1 million to $1.4 million excluding GST.

• the valuers concluded that the market value of the land in the period May to October 2015 was $1.95 million excluding GST [25].

Their Honours noted, at [29], that Modeca’s counsel while not challenging the conclusion that an error in the sale process must be shown submitted however, that Randall AsJ was in error in stating that Modeca’s counsel had not attacked the process.

Modeca submitted that three specific attacks had been made on the process being:

• the price of $4.05 million paid by Modeca in 2012, of which CBA must have been aware, and the knowledge of which should have put it on inquiry that the PPV valuation was or could have been substantially inconsistent with the true market value of the land [30]
• CBA did not inform PPV of Colliers’ recommended sale price or attempt to reconcile the substantial difference between that recommendation and PPV’s valuation. Proceeding to sale without further inquiry created a plausible contention as to a breach of s 420A of the Act [31].
• CBA was vicariously liable for the defaults of its servants or agents in the conduct of the sale [32]

Modeca also submitted that:

• Randall AsJ did not consider the application under s 459J(1)(b) of the Act [33].
• negligence had been shown or was to be inferred in the circumstances referring to the matters submitted to Randall AsJ, the valuers reports and the conclusion of Randall AsJ that the land was sold at an undervalue [36]
• the reason Modeca did not profer evidence about  negligence in relation to the marketing of the land and any attendant action or default of CBA or its agent was because that evidence  lay in CBA’s camp.  In the absence of the CBA providing that evidence it could, and should, be inferred that the alleged undervalue was the result of some negligence in the process [36].
• it was for CBA to depose as to the manner of the conduct of the sale process, such as, for instance, how PRD marketed the land or otherwise of any relevant action or event in that process as it lay in its knowledge [36].
• its reports attacked the reliability of the PPV valuation, revealing material errors in the PPV valuation. In relying on the PPV valuation, the errors contained in it ‘became the errors of’ CBA & called into question whether CBA had taken all reasonable care in effecting processes that would achieve market value. The Court regarded this submission as “arguing backwards” to impose on CBA an awareness of ‘errors’ of which it was not shown to be aware[39]

 

CBA submitted that:

• the essential point was that the process by which CBA sought advice and appointed the selling agent was appropriate for the purpose of s 420A of the Act,
• Modeca’s submissions did not constitute an attack on that process.
• rather than establishing default by CBA or its agent in or relating to the conduct of the matter which may have detrimentally affected the sale price all that was shown was a difference between two valuers in their respective assessments of market value;
• Modeca had not established negligence of CBA or its agent that led to the sale price at the lower value of $1.3 million (plus GST), or $1.43 million (including GST) [35].

The Court noted that Modeca put on no evidence of matters concerning the sale process which were within its knowledge & it focused not on the process, but solely on the sale price achieved [36].

The Court noted:

• regarding the 2010 sale price of $4.05 million the “obvious point” was that market value of a property fluctuates and the land was vacant  with the possibility of a change in zoning [41].
• that speculation might have inflated the price of the land [41]. Noting also that that was a terms sale, he calculated the cash equivalent as $3.57 million.
• the history of the purchases of the land differed, occurring in a different market, at a different time, and on contracts of a different nature [41].
• the Colliers recommendation were not founded upon a valuation such as that provided by PPV and were provided at a time when Modeca both needed time, and money [43]
• it was mere speculation that CBA did not inform PPV of Colliers’ recommendation or consider it [43].
• the references to value were not supported by evidence, let alone valuation, and could not constitute the basis for an attack on the sale process [44].

The Court found that Randall AsJ was correct to conclude that the matters relied on by Modeca did not attack the sale process as there was nothing to link the several matters to the conduct of the sale process and thereby to show neglect in the course of that process that could have constituted a breach of the duty under s 420A of the Act [45].  As such the application under s 459H failed [46].

Regarding the application under s 459J   the the existence of the claim under the guarantee did not warrant setting aside the statutory demand because the statutory demand regime relies on speed and enables a presumption of insolvency to arise where there is no genuine dispute as to the debt.

Their Honour’s stated that if the debtor has failed to satisfy the genuine dispute/offsetting claim threshold the the mere pleading of a defence or counterclaim by a guarantor challenging the creditor’s right to the debt does not give rise to some other reason why the demand should be set aside [47].

The Court granted leave to appeal but dismissed the appeal.

ISSUE

This case makes clear that the Court requires significantly more than inferential argument to show that there had been a breach of section 420A of the Corporations Act.  It is necessary to attack the process adopted by the bank or other creditor.  That can pose challenges given the creditor is generally control of those document which may highlight flaws in the process and there is no discovery in statutory demand applications.