Papua New Guinea Banking Corporation v Aruai [2002] PGLawRp 35; [2002] PNGLR 159 (28 June 2002)

NATIONAL COURT OF JUSTICE

PAPUA NEW GUINEA BANKING CORPORATION

V

PALA ARUAI;

And

FREEWAY ENTERPRISES LIMITED

Waigani: Kandakasi J
5, 28 June 2002

MORTGAGES – Possession by mortgagee – Duty of care – Standard of care accountability – Sale – Failure to sell promptly – Negligence – Mortgagee failing to exercise reasonable care in managing the property and failing to properly and fully account to the mortgagor of all rental income and expenditure – Mortgagee also failing to show that it was not actuated by ulterior motive – In the circumstances it would be most unfair and inequitable for mortgagee to proceed to foreclose or enforce the second mortgaged property – If permitted to do so, it could amount to unjust deprivation of property and harsh and oppressive conduct contrary to s 41 of the Constitution – Claim for order for vacant possession of second secured property denied.

UNDERLYING LAW - Mortgage over two or more property as security - Whether enforcement of securities is cumulative –Principles governing enforcement - Development of Underlying Law.

EQUITY AND THE UNDERLYING LAW.

Facts

First defendant mortgaged two properties to the plaintiff to secure a loan to the second defendant (the former's wife) to finance the construction of a hostel. On default the plaintiff took possession of the non-residential property with a view to manage and sell it. As the property remained unprofitable and unsold sought to enforce its remedies against the residential property which was occupied by the defendant and his family. The court found the plaintiff negligent in the management of the hostel.

Held

1. Under the Torren's system of land registration a mortgagee has no automatic right to possession.

2. Where the mortgagee takes possession of mortgaged property he is under an obligation to act bona fide and reasonable, failing which he could be denied the exercise of his other rights.
3. A mortgagee who takes possession must be diligent and account strictly. Failure to act diligently might be tantamount to negligence.

4. If a mortgagee were to pursue sale, in exercising his power of sale he must act bona fide and with reasonable care: ANZ Banking Group (PNG) Ltd v Kila Wari (1990) N801 followed.

5. The mortgagee's remedies over two or more securities may not be cumulative, but subject to such principles set out by the Judge.

6. In the circumstances the enforcement of the mortgagee's remedy of foreclosure of the second security would be inequitable and harsh and oppressive.

Papua New Guinea cases cited

Westpac Bank (PNG) Ltd. v Henderson and Henderson [1990] PNGLR 112.

ANZ Banking Group (PNG) Ltd v Kila Wari (1990) unreported N801.

Bank of Papua New Guinea v Muteng Basa [1992] PNGLR 271.

Rose Tarere & Ors v Australia and New Zealand Bank (PNG) Ltd. [1988] PNGLR 201.

Other cases cited

Cuckmere Brick Co. Ltd. V Mutual Finance Ltd. [1971] Ch. 949.
Davey v Durrrant [1857] EngR 742; (1857) 1 De G. & J. 535; 44 E.R. 830).
Eyfe v Smith [1975] 2 N.S.W.L.R. 408.
Farrar v Farrars Ltd. [1888] UKLawRpCh 209; (1888) 40 Ch. D. 395.
Four-Maids Ltd v Dudley Marshall (Properties) Ltd. [1957] Ch.317.
Kennedy v De Trafford [1897] UKLawRpAC 13; [1897] A.C. 180.
Lord Kingston v Bouverie [1855] EngR 501; (1855) 7 De G.M. & G. 134; 44 E.R. 53.
Martinson v Clowes [1882] UKLawRpCh 160; (1882) 21 Ch.D. 857.
National Bank of Australasia v The United Hand-in-Hand and Band of Hope Co. (1879) 4 App.Cas. 391.
Noyes v Pollok [1886] UKLawRpCh 33; (1886) 32 Ch.D. 53.
Parkinson v Hanbury [1844] EngR 95; (1867) L.R. 2 H.L. 1.
Quennell v Maltby [1978] EWCA Civ 1; [1979] 1 W.L.R. 318.
Richards v Morgan [1846] EngR 113; (1753) 4 Y. & C. Ex. 570; 160 E.R. 1136.
Sandon v Hooper [1843] EngR 450; (1843) 6 Beav. 246; E.R. 820.
Warner v Jacob [1882] UKLawRpCh 61; (1882) 20 Ch. D. 220.

Counsel

Mr Bemau, for the plaintiff.

Mr Mitge, for the defendants.

27 June 2002

Kandakasi J. This is an action by the plaintiff ("the Bank") for vacant possession of the First Defendant's ("Mr. Aruai") residential property, Section 22 Allotment 30, Hohola ("residential property"). That property was pledged as one of two properties as security for a loan from the Bank to the Second Defendant, ("FEL") for the construction of a hostel property. The First Defendant's wife owned FEL. Mr. Aruai does not dispute the company's indebtedness to the Bank. He however argues that, the Bank failed to either properly manage or sell off the hostel property, which could have resulted in a substantial reduction or a complete settlement of the amounts due and owing to the Bank. He therefore, argues that the Bank is now precluded from enforcing its security over his residential property.

The defendants also took out an Originating Summons number O.S. 144 of 2001 against the Bank seeking to prevent the Bank from foreclosing on the residential property. By consent of the parties, those proceedings were brought into these proceedings to be dealt with together as the facts and issues are the same. Any decision in this matter would effectively determine the proceedings under O.S. 144 of 2001. I will proceed to deal with O.S. 710 of 2001 to avoid any confusion. The decision at the end of this matter will also be the decision for O.S. 144 of 2001. Hence the reference to the plaintiff or the defendants in the course of the judgement will be in the context of O.S. 710 of 2001.

Issues

This presents three issues for determination:

1. Whether the Bank is obliged to enforce his securities one at a time?
2. Whether the Bank is guilty of negligence in relation to the enforcement of its security tied to the hostel property?
3. If the Bank is guilty of negligence is that sufficient to preclude the Bank from enforcing its security against Mr. Aruai's residential property?

Evidence

The relevant evidence in this case consists of affidavits and oral evidence. Mr. Richard Busby who is the Bank's Assets Manager deposed to an affidavit on 6 of November 2001, and gave oral evidence in Court on 5 June 2002, for and on behalf of the Bank. Mr Arua gave oral evidence for himself and FEL and had admitted into evidence a number of documents as exhibits "D1" to "D6." Included in those exhibits is an affidavit by Mr. Busby sworn on the 30th of March 2001 for the proceedings under O.S. 144 of 2001.

Facts

From these evidences, the facts are quite straightforward. The Bank advanced at the request of FEL various loans totalling K623, 864.00 to finance the construction of a hostel at Allotment 22 Section 03, Hohola, National Capital District ("hostel property"). These loans were drawn down in 1997, 1998 and 1999, at an agreed monthly repayment of K13, 200.00.

The loan was secured by two (2) properties. The first was the hostel property and the second was given by Mr. Aruai, a shareholder of FEL who offered his residence at Allotment 30, Section 22, Hohola, National Capital District. Two separate mortgages were given and registered against the properties under the numbers S17956 and S18040 respectively.

FEL met its monthly repayment schedules until October 1999, when it was unable to pay and went into arrears. By the time this proceedings were issued the total owing stood at K1,133,778.41, inclusive of interests and penalties. The Bank therefore entered into possession of the hostel property on 5 May 2000. Mr. Aruai says, and I accept, that the Bank did that with a view to managing the hostel in a bid to generate rental incomes to pay off the amount owing and monthly repayments. This is confirmed by the fact that LJ Hooker, a professional real estate agent, was appointed to manage the hostel. It is also confirmed by the lack of any argument for the Bank that it entered into possession for the purposes of exercising its power of sale. This is also confirmed by the lack of any evidence that the appointment of LJ Hooker and or his successors was in fact an act of appointment of a receiver. Also, Mr. Aruai was not cross-examined and or discredited on this aspect. Mr. Aruai also says and I accept for the same reasons that he offered to manage the property before the Bank took it over. His offer was rejected and he thought that the Bank would properly manage the property. Previously, his wife who subsequently passed away about the time FEL fell into arrears, managed the property. The death of his wife, complicated matters for Mr. Aruai.

Mr. Aruai further says and I accept also in the absence of any challenge that the property was able to generate about K480.00 per month per unit. The hostel had a total of 40 units. This meant that the hostel if managed properly could generate an income of about K19,200.00 per month and or K230,000.00 per year. This could have met the monthly repayment of K13,200.00 and substantially reduce the amounts owing within a period of say five years. However, he goes on to say, and I again accept for the same reasons as the above, that the Bank failed to ensure that a competent and impartial manager was appointed to manage the property. Instead, the Bank engaged LJ Hooker who appointed a manager who was a fellow Motuan who did not want him (Mr. Aruai) to progress in his business. Given that, the manager ran his own business at the hostel and adopted management practices that effectively caused the tenants already secured, to leave, and failed to attract any new ones for the hostel.

Mr. Aruai complained to the Bank about this and a joint inspection was carried out. That confirmed the complaints and Mr. Aruai says that resulted in the Bank deciding to terminate the services of LJ Hooker and appoint The Professionals instead. Unfortunately, 'The Professionals' were not able to successfully sell the property as they went into voluntary liquidation. This necessitated the appointment of a new real estate agent, DAC Real Estates, only this year. They are yet to sell off either of the properties.

The Bank says Mr Aruai and his relatives are still occupying the residential property. This is making it difficult for it to sell the property to recover what is due and owing to it from FEL. It is therefore, seeking to get them out by way of an order for vacant possession by against the defendants.

Mr. Aruai says he is not prepared to give up his residential property as yet in view of the way in which the Bank as approached this matter. First, he says if he was allowed to managed the hostel he would have secured enough tenants, without any additional costs as the hostel has been newly built and is mainly of brick. Through his management, he says he could have raised about K19,200.00 per month or K230,400.00 per year and have those paid to the Bank to reduce the debt and service the monthly repayment schedule. He also says it would be most unfair for the Bank to foreclose on his residential property without first disposing of the hostel property which he says is valued at over K1,000,000.00, based on the value of properties in the area and the value of the property itself. A sale of the hostel could result in a complete clearance of the amounts due and owing. If however, there were a short fall he would be prepared to meet that or agree to a sale of the residential property to meet any such shortfall. This was in line with a letter he wrote to the Bank on 6 July 2000, which is annexure "L" to the Mr. Busby's affidavit of 30 March 2001. In that letter he highlighted that large loans to politician in the highlands were not pursued with the same vigour as it was against him, a small businessman, and queried why that was being done.

The Banks response to Mr. Aruai's request has been a short one month, up to the 31st of August, extension for him to repay all of the amounts owing. Obviously, he was not able to do that. The Bank is therefore intent on pursue the mortgagee's right of sale. It is therefore strongly arguing for an order for vacant possession.

First Issue

I now turn to the issues presented for determination, starting with the first one, which is "Whether the Bank is obliged to enforce his securities one at a time?"

Before the Torrens system of title came into existence, a mortgagee had the right to enter into possession to enforce his security. That was not necessarily dependent on a prior default. The only exception to that was where there was something in the contract either expressly or by implication that prevented a mortgagee from exercising that right: see Four-Maids Ltd v Dudley Marshall (Properties) Ltd [1957] Ch.317, at 320.

There is authority such as that of Quennell v Maltby [1978] EWCA Civ 1; [1979] 1 W.L.R. 318, at 322, that say that a mortgagee may be restrained from exercising his right of possession, where the mortgagee is not acting "bona fide and reasonably for the purpose of enforcing his security." A mortgagee will not be entitled to possession when he is actuated by ulterior motives.

Under the new Torrens system, a mortgagee, does not have any automatic entitlement to enter into possession. There must first be default in the payment of the principle and interest under the mortgage. This is reflected in s 74 of the Land Registration Act (Chp. 191) ("LRA").

A mortgagee may exercise his right of possession by either entering into the occupation of the mortgaged property or by taking over the control and management of the premises and collect for example rents: see Noyes v Pollok [1886] UKLawRpCh 33; (1886) 32 Ch.D. 53. When he does that, the mortgagee is under an obligation to act bona fide and reasonable. This, in my view, means to exercise his rights with due care and attention. Where there is a lack of such it amounts to negligence and that may form the basis to deny the mortgagee its right.

The law requires a mortgagee who exercises his right of possession to fully account to the mortgagor. This is so not only for rents and profits received but the rents and profits that would have been received but for his failure to so collect. There are numerous authorities on this but see, for example, Parkinson v Hanbury [1844] EngR 95; (1867) L.R. 2 H.L. 1 at 15; National Bank of Australasia v The United Hand-in-Hand and Band of Hope Co. (1879) 4 App.Cas. 391 at 409. The reason for this is simple. A mortgagee takes possession for the purpose of protecting his right to repayment of the principle of his loan and interest under the mortgage and in equity he has security in the property only for repayment. So the law requires him to be diligent in realising the amount which is due, in order that he may restore the estate to the mortgagor, who is entitled to it. There is ample authority for this also, going back as early as Lord Kingston v Bouverie [1855] EngR 501; (1855) 7 De G.M. & G. 134, at 157; [1855] EngR 501; 44 E.R. 53 at 62. Because of this, a mortgagee in actual possession could be charged a rent for doing so (Eyfe v Smith [1975] 2 N.S.W.L.R. 408). He is also required to effect all necessary repairs (Sandon v Hooper [1843] EngR 450; (1843) 6 Beav. 246; E.R. 820) but only to the extent of the income to the property after deducting what is due under the mortgage (Richards v Morgan [1846] EngR 113; (1753) 4 Y. & C. Ex. 570; 160 E.R. 1136.

The duty to act "bona fide and with "reasonable care" still applies in a mortgagee sale situation. This is why the law says a mortgagee cannot sell to himself or his agents the mortgaged property. This is long established, starting with cases like that of Farrar v Farrars Ltd. [1888] UKLawRpCh 209; (1888) 40 Ch. D. 395, at 409; Martinson v Clowes [1882] UKLawRpCh 160; (1882) 21 Ch.D. 857, at 860. The authorities also say that there must in fact be a sale so as to exclude gifts (see Davey v Durrant [1857] EngR 742; (1857) 1 De G. & J. 535; 44 E.R. 830) .

There appears, however, to be two lines of authorities on this. One line of authority emphasises the need for the mortgagee to exercise reasonable care to ascertain the market value and to the exercise such care throughout the sale or the exercise of the power of sale. This was an old principle restated by the English Court of Appeal in Cuckmere Brick Co. Ltd. v Mutual Finance Ltd [1971] Ch. 949, per Salmon L.J. at 966 and Cairns L.J. at 978.

The second line does speak only of "bona fides." A clear expression of that is found in the judgement of Kay J. in Warner v Jacob [1882] UKLawRpCh 61; (1882) 20 Ch. D. 220, at 224. But the judgment in Kennedy v De Trafford [1897] UKLawRpAC 13; [1897] A.C. 180 at 185 by Lord Herschell has been considered as containing the classical statement of this line of authority. According to the headnote to that judgment, he is reported and often cited to have held that, "the only obligation incumbent on a mortgagee selling under and pursuance of a power of sale in his mortgage is that he should act in good faith." However his actual words in the body of the judgement at page 185 is in terms of "the mortgagee is bound to take reasonable precautions in the exercise of his power of sale, as well as to act in good faith."

In Papua New Guinea, the line of authorities requiring reasonable care by a mortgagee exercising its power of sale has been adopted. The cases on point are the case of Westpac Bank (PNG) Ltd v Henderson and Henderson [1990] PNGLR 112; and ANZ Banking Group (PNG) Ltd v Kila Wari unreported but numbered judgemnt of (Salika AJ, delivered 16 February 1990), N 801. These cases do not discuss the two lines of authorities and have proceeded to adopt the line of authorities which require the exercise of reasonable care on the part of a mortgagee.

On my part, I find that if any thing is clear as to the duties of a mortgagee entering into possession or foreclosing and or exercising its power of sale, there is always the need to exercise care. Indeed I find that in almost every given case of human conduct there is an entitlement to act with care. This is carried through even in the various declarations on human rights. This is clear, in the acceptance that a person has a right to do as he pleases in the exercise of his or her rights as long as that is done without injuring the rights of the others. This requires care not to infringe upon the rights of others. All of these are to ensure that the rights and or interest of the other person is respected and is not overridden. In the case of a mortgagee exercising his rights, there is a danger in not recognizing and respecting the rights or the interests of a mortgagor to a fair market value, and the exercise of due diligence, in the case of a sale. Similarly, in the case of mortgagee entering into possession the mortgagor is entitled to expect the mortgagee to manage the mortgaged property with such care and skill to ensure that the property fetches the best rent or income it can toward a repayment of the principle and interest under the mortgage. In view of these, it is necessary to require a mortgagee to exercise reasonable care in the exercise of his powers under a mortgage. I therefore consider the line of authorities requiring a mortgagee to exercise care in the exercise of his powers appropriate and necessary in our country and I follow my brother, Justice Salika AJ (as he then was) in accepting that line of authority.

Both counsels were not able to help me with any authority to show how I should answer the first issue. I have not been able to find any authority on point that could be of any assistance. Sections 74 and 68 of the LRA, which are the provisions covering mortgagee entering into possession and sale, are silent on the issue. I therefore fall back on the Constitutional mandate under section 155 (4) of the Constitution to do justice. Pursuant to this provision and powers vested in the National and the Supreme Courts to develop the underlying law by Schedule 2.3 of the Constitution, I consider it appropriate in this case to develop the law to fill in the apparent vacuum in this area of the law.

I consider it more fair and equitable that a Bank should not be allowed to enforce his security all at the same time if it has secured more than one mortgage from a borrower as in this case. This should be the case where the properties mortgaged are of varying value. The security against the most valuable of the secured property should be the first to be enforced, particularly where the value of the property is likely to match or exceed the amounts due and owing either through a mortgagee selling or being in possession. After all, the purpose of any mortgage is to secure a repayment of the principle and interest under the mortgage and not to unjustly deprive a borrower of his property or cause him to incur unnecessary expenses.

If a bank or a lender chooses to enter into possession and appoints an agent to manage the property mortgaged, the duties and obligations on a mortgagee doing so as stated above applies. That includes the need to act bona fide and to exercise reasonable care. It also includes the need to fully account to the mortgagor all income and expenditure for the property during the mortgagee's for possession. If for whatever reason, it is not able to realize the repayment of the principle and interest under the mortgage through this means, then it must provide good reason justifying a departure from being in possession to exercising a power of sale. A failure to act bona fide and with reasonable care may deny the bank or the lender from exercising such a right.

Further, where a third party to a loan agreement or arrangement gives security to a bank to facilitate an advance or a loan to a borrower, it is only fair and reasonable that every step must be taken to recover the principle and the interest from the borrower first. Failing any success in that direction, the mortgagee may then turn to the third party mortgage as a last resort. He could take such a step either for the principle and interest under the mortgage or any shortfall in the proper sale or entering into a management of the borrower's mortgaged property.

What I am suggesting here may represent a departure to some extent from the well-established common law positions especially in order of enforcement. I consider necessary and relevant to the circumstance of Papua New Guinea. Papua New Guinea is not advanced like England from where all of the common principles have come from. Most people are trying to get into the modern economy with bank loans and mortgages. The banks seem to be ever ready to quickly foreclose on defaulting clients without first giving a real chance to the client to improve on his repayments, either by giving him or her more time or re-arranging the loan in terms of repayment schedules. Inevitably people change employment either for the better or for the worse and even well to do businesses may go bad. If the borrower is able to come up with a proposal to ultimately repay the principle and interest under a mortgage that should be given some serious thought instead of rushing to mortgagee sales or as the case may be.

Finally, where a bank such as the Bank in the present case is faced with a challenge or an allegation of writing of much bigger or other loans for political or other not strictly partiably for speaking commercial reasons, it should in my view address such allegations first. The Bank should be obliged to state truthfully whether the allegation or suggestion is true and then provide convincing reasons why enforcement of its security is the only option in the case that might be at hand. I consider this is necessary in the interest of fairness and equity.

In short, therefore, I answer the first issue in the affirmative, particularly where one of the properties mortgaged is likely to match or off set the principle and interest owing under the mortgage. This proceeds on the basis that the main reason for mortgages is to secure a repayment of the principle and interests under the mortgage. Therefore, if that aim can be achieved by a bona fide and reasonable exercise of the rights of a mortgagee by enforcing on one of the securities first, it would not be necessary to enforce the other. In such a case the enforcement of the other security may in fact be unnecessary and may indeed amount to an unjust deprivation of property for a mortgagor and could also amount to forcing the mortgagor to incur unnecessary expenses.

Second Issue

This of course leads me to the next issue in the present case, which is one of "whether the Bank in this case is negligent?" That question can be answered by taking a careful look at the Bank's conduct.

The Bank advanced various loans for the purpose of constructing the hostel property. There is no clear evidence of the actual value of the property. Mr. Aruai says the hostel could be sold at a price up to or over one million Kina. This is based on the prices at which properties in that area have been sold and the fact that the hostel is a hostel and that it has been built very recently consisting mainly of brick construction. The Bank on the other hand says, it tried to sell at prices between K600,000.00 and K700,000.00. In the circumstances I can only find that the hostel was of substantial value.

I also find that if the hostel was properly managed it has the potential of generating an income of over K19,000.00 a month or over K230, 000.00 a year. These could easily meet the monthly repayment of K13,200.00 and help reduce the amount owing. The Bank engaged LJ Hooker who engaged a manager who was running his own business at the hostel. Not only that, that manager adopted management practices such as opening and shutting of gates and entertainment of his wantoks. I find that these conducts caused the already secured tenants of the hostel to leave and failed to attract any more new tenants. Mr. Aruai offered to manage the hostel himself and was rejected. Also the bank did not act quickly on Mr. Aruai's complaints against the Bank's appointed manager. The Bank changed its management of the hostel property from LJ Hooker to The Professionals only when LJ Hooker decided to discontinue with its appointment. The Professionals have since gone into voluntary liquidation and only recently, the Bank appointed a new real estate agent. Granted that Mr. Aruai took out a Port Moresby District order restraining the Bank from selling the residential property on the 7th August 2001, the Bank has still not sold off the hostel property and a period of more than 2 years have passed.

The Bank has not provided the defendants with any full account of its entering into possession of the hostel property on of May 2000. The lapse of the two years means a denial of the defendants entitlement to raise over K460,000.00 based on a K480 per monthly rentals per unit (40 altogether) over the last two years the Bank has been in occupation. There is no evidence before me of the Bank taking any concerted and meaningful effort to sell the hostel property and in the meantime have it rented out fully. It has also failed to provide a response to the defendant's concern that other substantial loans have been written off for political reasons. That comes with the unspoken suggestion that the Bank is trying to make up the loss represented in the write offs by enforcing mortgages against simple people and business people like them who are trying their best to survive as best as they could. Although, the Bank may not be legally bound to justify its decisions, it is at least required not to enforce a security for its loans for ulterior motives. A failure to address a concern that was legitimately raised in my view amounts to negligence on the part of the Bank.

In view of all of the foregoing, I find that the Bank was negligent in the exercise of its entering into possession, and generally in the steps it has taken to enforce its security against the hostel. As I have already found, the hostel is of substantial value and if it was properly managed it could have certainly met the agreed monthly repayment schedules and substantially reduce the loan within say a period of less than 5 years in which the rentals could have amounted to over K1.5 million.

Third Issue

This leads me to the next and final issue of "whether the Bank's negligence is sufficient to preclude the Bank from enforcing its security against Mr. Aruai's residential property?"

This issue can be resolved by reference to the effect of the Bank's negligence. The obvious effect of the Bank's negligence is that it failed to have the hostel fully tenanted. Mr. Aruai called for an earlier intervention in the management of the hostel but the Bank failed. This resulted in the already secured tenants leaving and a distraction of any new and prospective tenants. This also denied the parties a possible income of K19,200.00 per month or K230,000.00 per year. If the hostel was properly managed these amounts could have been raised and they could have gone to both reduce the amount owing and meet the monthly repayments of K13,200.00. Mr. Aruai was ready, willing and begging the Bank to give him a chance to manage the hostel but the bank refused and in the process it has allowed the hostel to remain idle without generating any income for over two years now. This meant a lost of K460,000.00 in rental income during that period. If the property was properly managed and tenanted it could have raised the amounts owing in full within a period of five years which is not a very long time. The Bank's own conduct has meant that two years passed without any income being raised and accounted for.

The bank now appears to have completely abandoned the idea of being in occupation and proceed to a mortgagee sale. Before doing so it has failed to provide a detailed account or report to all income and expenditure in respect of the hostel property. It has not taken any real and meaningful step to sell the hostel property at its true market value. As noted earlier, if the hostel property was sold off, the proceeds would have and does have the ability to substantially reduce the amounts due and owing to the Bank. I am also of the view that, if the Bank secured tenants for each of the units at the hostel and or sold off the hostel property promptly, most of the interest under the mortgage after the Bank entered into possession could have been avoided. So the Bank has contributed to the build up on interests up to this time and denied the defendants of about K460,000.00 in rental income. Hence, I would have no or little regard to the Bank's concern over the building up of interests after it entered into possession of the property.

In these circumstances, I consider it most unfair and inequitable that the Bank should be allowed to foreclose on the residential property as well. If the Bank was allowed to do so, it would in my view amount to an unjust deprivation of property and may even be harsh and oppressive in the particular circumstances of the case. In arriving at that view, I am of course aware of the judgments in the Bank of Papua new Guinea v Muteng Basa [1992] PNGLR 271 and Rose Tarere & Ors v Australia and New Zealand Bank (PNG) Ltd [1988] PNGLR 201. Both of these were judgements of the National Court.

In both of the above cases, they were straightforward mortgagee sales of properties. The properties were the security for the advancement and creation of the respective mortgages. The mortgagors in both cases fell into arrears and that resulted in the respective banks exercising their respective powers of sale under their respective mortgages. In the first case, the defendant lost his employment and had no means to service his loan from the plaintiff bank. The facts in the second case are silent on the plaintiffs' ability to repay the loan or meet their loan commitments. In both cases the actions were founded on s 41 of the Constitution. The Court in both cases came to the conclusion that where a bank legitimately exercises its power of sale under a mortgage, which is in effect an exercise of a contractual right granted to it by a mortgagor, no issue under s 41 of the Constitution arises. No issues of negligence or more than one mortgage involving more than just one property arose in those cases.

The present case is therefore to be contrasted with the above cases. The plaintiff in this case secured two mortgages for advancing money to FEL for the construction of the hostel property. Mr. Aruai a third party pledged and gave a mortgage over his residential property in addition to the hostel property. Due to a loss of Mr. Aruai's wife, who was the main person behind FEL and the management of the hostel (becoming deceased), the hostel was not able to fully function as well as it should have. This contributed to FEL falling to arrears. Mr. Aruai offered to manage the hostel but the Bank refused that offer. The Bank instead entered into possession. Mr. Aruai raised allegations that suggested the Bank's actions being motivated by ulterior motives but the Bank failed to address that allegation.

The hostel was capable of raising K19,200.00 a month and or K230,000.00 per year if properly managed and fully tenanted. The Bank took possession with some tenants secured. These tenants, however, vacated the hostel by the management style and conduct of the Bank's appointed agent. These conduct also distracted other would be tenants from becoming tenants. Mr. Aruai complained about this conduct but the Bank failed to respond appropriately and promptly. The Bank failed to take any serious and meaningful step to either secure tenants for each of the units at the hostel or sell it at its true market value up to this time. It has also failed to fully account to the defendants for the period it has been in occupation of the hostel, which amounts to over two years. It is now moving to foreclose on the residential property.

As I found and noted earlier, the rental income or the proceeds of a proper sale of the hostel property has the potential of either substantially reducing the amounts due or owing (less the interests added on from the date of the Bank entering into possession) or completely off setting those amounts. That being the case a sale of the residential property may be unnecessary and therefore amount to an unjust deprivation of property to Mr. Aruai. It may also amount to an harsh and oppressive action not actuated by a genuine desire to recover the principal and the interests due under the mortgage prior to the Bank entering into possession of the hostel property.

For this reasons I am disinclined to granting the orders sought. Instead I would and I order as follows:

1. The plaintiff (the Bank) shall not foreclose on Allotment 30 Section 22, Hohola, National Capital District (residential property) until (a) it has first instituted proper management and has secured tenants for each of the units at Allotment 22 Section 03, Hohola, National Capital District (the hostel property); or has sold off that property at its true and or correct market value and properly dealt with the proceeds in accordance with s 68 of the LRA, (c) and there is established a shortfall, which Mr. Aruai is not able to pay within a period of not less than 14 days.

2. In applying the proceeds in accordance with the terms of order 1 above, the interests accruing from the date of the plaintiff entering into possession of the hostel property shall be omitted from a calculation of the amounts due and owing under the mortgage on account of the Bank's negligence.

3. Since the plaintiff has failed in the main relief sought, I order costs of these proceedings to be borne by the plaintiff.

Lawyers for the plaintiff: Posman Kua & Aisi, Lawyers.
Lawyers for the defendants: Powes Parkop, Lawyers.