Mortgagee owes a duty of care to a deregistered mortgagor

Where a mortgagor company is deregistered, a mortgagee exercising power of sale still owes a duty of care.

In Golden Mile Property Investments Pty Ltd (In Liq) v Cudgegong Australia Pty Ltd [2015] NSWCA100 the mortgagor company was deregistered when the mortgagee exercised power of sale. One of the issues considered by the Court was whether the duty of care under section 420A of the Corporations Act still applied.

Section 420A

Section 420A provides that when exercising power of sale in respect of property of a corporation that has a market value, a controller (which includes a mortgagee) must take all reasonable care to sell the property for not less than the market value.

Deregistration provisions

Under the deregistration provisions in the Corporations Act:

• a company ceases to exist on deregistration;
• on deregistration all of the company’s property vests in ASIC; and
• ASIC has all of the powers of an owner in respect of the vested property.

If a company is reinstated, the company is taken to have continued in existence as if it had not been deregistered and any property of the company that is still vested in ASIC re-vests in the company.

The Court’s decision

The Court held:

• because the mortgagor was deregistered it did not mean:
  • there was no mortgagor to whom a relevant duty could be owed; or
  • there was no entity that could seek to restrain an improper exercise of the power of sale; and
• during the period of deregistration, ASIC has the capacity and can enforce the rights of the deregistered mortgagor.

Implications for mortgagees

When exercising power of sale, a mortgagee should always proceed on the basis that it must comply with the duty of care owed to the mortgagor.

In addition to the duty under section 420A, a mortgagee exercising power of sale also has a duty of care under the law of the applicable state where the property is situated.

If you would like more information about these issues, please contact Graham Roberts on +61 7 3231 2404.

Graham Roberts has been recommended in Doyle’s Guide in its 2015 list of leading Queensland insolvency lawyers.