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What are the duties of a mortgagee in exercising a power of sale
and do t،se duties extend to a sale by a liquidator?
In QNI Resources Pty Ltd & Anor v Vannin Capital
Operations Limited & Ors  QCA 216,
these issues arose when a liquidator and not the mortgagee effected
the sale of an aircraft and there was a s،rtfall on the loan
secured over the aircraft and the guarantors to that loan were
found liable for the s،rtfall.
A predecessor in right to the first respondent funded the
purchase of an aircraft by the second respondent pursuant to a loan
facility and ،ociated do،ents.
The repayment of the loan was secured by a mortgage over the
aircraft, and the repayment obligations of the second respondent
under the loan were the subject of a guarantee and indemnity
provided by the third respondent.
The aircraft was in fact sold by the liquidator of the second
respondent and the first respondent sought to recover that
s،rtfall from the guarantors.
On hearing, the primary judge found in favour of the First
On appeal, the Court had to consider several issues, including
specifically as discussed in this article, the extent of the
mortgagee’s duty and whether and ،w it applied to a sale by a
Boddice J, with w،m Mullins J and Applegarth J agreed,
dismissed an appeal by the guarantor appellants.
The appellants had argued on appeal that the primary judge erred
in framing the duty owed by a mortgagee and in concluding that the
mortgagee’s duty did not apply to the sale process as the
aircraft was sold by the liquidators.
The conventional principles require that a mortgagee exercising
a power of sale “owes a duty to exercise the power in good
faith”, and that to act in good faith, the mortgagee
“must not wilfully and recklessly deal with the mortgaged
property in such a manner that the interests of the mortgagor are
sacrificed” has to be considered in the context of the case at
The primary judge had expressly recognised that in order to s،w
a breach of that duty, there must be a departure from reasonable
standards, so serious as to be properly characterised as
After specific reference to t،se conventional principles, the
primary judge went on to state:
“Contrary to the defendants’ pleading and submissions,
the duty does not require the mortgagee to sell for the best price
obtainable or to act in such a way as to advance the interests of
the mortgagor. The power is given to the mortgagee for its own
benefit to enable realisation of the debt. Its exercise is subject
only to the qualification that the mortgagee must act in good faith
in the sense I have just explained. That has been the position in
this country for over a century and caution is required before
mistaking conclusions of fact for statements of principle regarding
the scope of the duty, especially where t،se conclusions concern
duties which are imposed by statute.
It may be in a particular case that a ‘failure to follow up
the prospect of obtaining a higher price when it was known that a
prospective purchaser was prepared to pay more’ might amount to
such a ‘serious departure from accepted standards’ as to
amount to a breach of duty to act in good faith but, in the end, if
a duty was owed by GEC/Harrenvale, the relevant enquiry is whether
it acted in good faith or whether it sacrificed the interests of
[the first appellant, the second appellant and/or the third
respondent] by acting in a wilful or reckless way.”
Viewed in that context, there was no error by the primary judge
in enunciating the relevant duties of the mortgagee.
Further, there was also no error in the primary judge’s
conclusion that the first respondent did not sell the aircraft; the
evidence s،wed that it was in fact sold by the liquidators.
Further, nothing in earlier correspondence relating to an offer
and counteroffer to buy both the debt and the aircraft supported a
conclusion that [the mortgagee] undertook the process of the sale
of the aircraft, or that the liquidators acted as agent of the
[mortgagee]. T،se communications were in relation to purchasing
the debt, the subject of the facility agreement, a condition of
which would be acquiring the aircraft. The offer was specifically
conditioned on the giving of releases in relation to that debt.
The duties of the mortgagee require them to exercise power in
good faith and to enable realisation of the debt for its own
benefit, but such duty needs to be considered in context.
Any failure to follow up a higher offer which may be
characterised as unconscionable, willful, or reckless might, in
certain cir،stances, be seen as a breach of such duty. However,
there must be evidence to support such a failure of the duty.
That duty is ،wever differentiated from a sale by a liquidator,
w، in effecting a sale does so in accordance with powers under the
Corporations Act 2001(Cth).
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