Don’t hold me back: Injunctions restraining mortgagee sales

This week’s TGIF considers the decision in Six Bruce Pty Ltd v Jadig Finance Pty Ltd [2018] VSC 552, where the Victorian Supreme Court granted a last minute injunction to restrain a mortgagee’s power of sale despite the mortgagor not making any payment into Court.

It considers also how this decision reflects a relaxation of the High Court’s strict rule in Inglis v Commonwealth Trading Bank of Australasia that a mortgagor will only be entitled to restrain a valid power of sale where the mortgagor has paid all funds owing into Court.

What happened?

The property-developer borrower re-financed property in Toorak, Victoria with funds advanced by the financier, who took a first-ranking mortgage over the property as security. Shortly after the re-financing, the borrower defaulted on the loan. The financier subsequently took possession of the property as mortgagee in possession and arranged to sell it at auction.

On the Thursday before the Saturday auction, the borrower secured a letter of “unconditional finance approval” for $36m. The letter expressly referred to the total required to pay out each encumbrance on the property, and appeared to be sufficient to pay out the financier. The letter was provided to the financier on the Friday evening.

When the financier insisted on going through with the auction, the borrower brought an application for an urgent injunction to temporarily put off the auction.

The decision

Justice Moore heard the injunction application at 9.30 am on Saturday morning, a mere 90 minutes before the auction was to commence. As his Honour noted, the borrower had made no payment into court, instead relying only on the incoming financier’s promise of extending credit.

Ultimately, his Honour granted the injunction restraining the financier from exercising its power of sale for 30 days.

The issue: preservation of an equitable right of redemption?

The real issue for Justice Moore was whether the borrower had established a prima facie case to preserve its equitable right of redemption – being the right of a mortgagor to satisfy the mortgage and so have the mortgage discharged.

The essence of the question was whether, in proceeding with the sale after being informed that the borrower had received unconditional finance, the financier would be acting unconscionably.

Rewind the tape – what about Inglis?

Notably, the decision in Six Bruce v Jadig omits any reference to the High Court’s 1972 decision of Inglis v Commonwealth Trading Bank of Australasia.

In Inglis, the High Court unanimously held that in order for mortgagor to restrain the exercise of a mortgagee's power of sale, the mortgagor must pay to the court the amount sworn by the mortgagee as the amount owing, or a lesser amount if it appears from the terms of the mortgage instrument that the lesser amount is due.[1] Specifically, the Court said that:

If the debt has not been actually paid, the Court will not, at any rate as a general rule, interfere to deprive the mortgagee of the benefit of his security, except upon terms that an equivalent safeguard is provided to him, by means of the plaintiff bringing in an amount sufficient to meet what is claimed by the mortgagee to be due.

The Court emphasised that “nothing short of actual payment” is sufficient, meaning promises of repayment, further security or incoming refinancing are not sufficient.

The rule in Inglis is designed to ensure a mortgagee gets the benefit of their security by exercising their power of sale freely. But the operation of the rule in Inglis can be harsh. If strictly applied, the rule means that unless a borrower already has funds on hand sufficient to pay out all amounts owing on a mortgage, they will be barred from restraining a sale (unless they can establish some defect in the power of sale).

Despite the High Court’s unequivocal pronouncement of the general rule, it seems that the rule’s harsh operation has driven Australian courts to create exceptions to it. For instance, Austin J in Harvey v Perpetual Nominees Ltd[2] flagged the exact circumstance in Six Bruce v Jadig as a desirable exception – namely, the tendering of an “absolute and unconditional offer to provide immediate refinance” but no payment into Court.

While Inglis is referred to as ‘controversial’ in Harvey, it is not even referred to in Six Bruce v Jadig. This softening or sidelining of the strict rule is consistent with a view set out in an article written by Justice Bryson titled ‘Restraining Sales by Mortgagees and a Curial Myth’.[3]

In that article, Bryson J expresses a view that the rule in Inglis is too rigid, and that any consideration of whether or not to restrain a mortgagee from exercising its power of sale should include an appraisal of evidence of a potential refinance.[4] His Honour’s view, which appears to have been directly or indirectly accepted, it that it is unduly harsh and uncommercial to hold that only payment of the outstanding monies into the court can justify the intervention of equity to restrain a mortgagee’s right to sell property.

Comment

Ultimately, the effect of the decision in Six Bruce v Jadig is that mortgagees (as well as receivers) should still seek to rely upon the rule in Inglis and demand that a mortgagee pay the balance owing into Court if they propose to delay a sale. The mortgagee or receiver should then be sure to raise Inglis in defending any application to restrain a sale, but also be aware that the Court may not strictly apply the rule.

Is this a satisfactory state of affairs? On one view, it seems to make sense that where a borrower obtains an ‘unconditional’ letter of credit from the incoming financier, a sale can be temporarily restrained without prejudicing the mortgagee’s security. Whether the mortgagee receives their funds from an incoming financier or from exercising their power of sale is ultimately immaterial – so long as they get those funds.

On the other hand, it is difficult to formulate a general rule to replace the strict rule in Inglis. Often the lead up to a mortgagee sale will be a history of unfulfilled promises of refinance, with one more last minute promise of finance seeming just as likely to fall through. This history may be overlooked because the Court simply does not have the time to consider this history on a last minute application to restrain the sale.

Further, exactly how “unconditional” does the offer of finance need to be? Even in Six Bruce v Jadig, the “unconditional” letter was itself unconditional in name only – the offer was still “subject to the usual regulatory processes to be completed, and the execution of the associated loan agreement and security documents.” The effect seems to be that so long as the Court accepts the offer is in substance unconditional, the relief may be granted.

Questions about where the Inglis line might be redrawn are not questions that can be grappled with in the heat of an urgent injunction application. Given the harshness of the general rule and the growing body of jurisprudence that has created ad hoc exceptions to it, it may need to be revisited by intermediate Courts of Appeal or the High Court to produce a clear rule that reflects more fluid commercial realities.