B&M Engineering Ltd v Westpac Bank (PNG) Ltd [2022] PGSC 134; SC2332 (16 December 2022)

SC2332

PAPUA NEW GUINEA
[IN THE SUPREME COURT OF JUSTICE]

SCA 126 OF 2020

BETWEEN:
B&M ENGINEERING LTD
Appellant

AND:
WESTPAC BANK (PNG) LIMITED
First Respondent

AND:
JAY LW CONTRACTORS LTD
Second Respondent

AND:
MR ALA ANE in his capacity as ACTING REGISTRAR OF TITLES
Third Respondent

Waigani: Kassman, Logan and Kaumi JJ
2022: 12^th & 16^th December

MORTGAGES – obligation of mortgagee – where appellant alleges that bank sold mortgaged property at undervalue – where no evidence to establish sale was anything but a reflection of actual market value – appeal dismissed

APPEALS – where appellant seeks to raise grounds not argued in National Court – where material prejudice to respondent in being prevented to lead evidence in response to new allegations – grounds dismissed

CONSTITUTION – prohibition on harsh, oppressive not warranted, disproportionate or otherwise not reasonably justifiable acts under s 41 of the Constitution – whether mortgagee exercising power of sale under mortgage contravenes s 41 of the Constitution – Held: mortgagee did not contravene Constitution

Facts:

The appellant was the registered proprietor of four State leasehold properties in Mount Hagen, Western Highlands Province. The properties were used by the appellant to secure a loan of K2.6 million from the first respondent, Westpac Bank (PNG) Limited (the Bank). The loan was secured by registered mortgages over each of the properties.

In November 2014, the appellant ceased paying installments under the loan agreements with the Bank. This resulted in the Bank issuing a formal demand for payment to the appellant. The appellant paid some, but not all of the amounts outstanding. From that date, all payments by the appellant to the Bank ceased.

On 12 May 2015, the appellant wrote to the Bank requesting that it exercise its rights as mortgagor to realise two of the properties which acted as security for the loan. The Bank declined that request. The appellant commenced proceedings in the National Court seeking to restrain the Bank from exercising its power of sale.

The appellant and the Bank ultimately agreed to dispose of the National Court proceedings by consent. A consent order was entered, which (inter alia) provided for the Bank obtaining a valuation of the relevant properties and then a process for their orderly realisation (consent order).

The Bank took steps to sell two of the allotments. Those steps ultimately resulted in the Bank entering into a contract of sale with the second respondent, with a purchase price of K700,000 in October 2019.

The appellant was aggrieved by the value of this sale. It commenced proceedings in the National Court alleging that the Bank had sold the relevant properties at an undervalue. Injunctions were sought and granted by the National Court on an interlocutory basis.

Subsequently, and in response, the Bank sought to have the proceedings dismissed on grounds that they were an abuse of process. That application was ultimately successful. The proceedings were dismissed and the interlocutory injunction was dissolved.

The appellant appealed the decision of the National Court. In doing so, the appellant contended that the Bank had sold the properties below their market value and that constituted a violation of s 41 of the Constitution. The appellant also alleged that the sale was done in contravention of the consent order. Such an argument had not been raised in the National Court.

Held:

1. The appellant is precluded from raising grounds on appeal which were not raised in the original jurisdiction. To permit the appellant to do so would visit an injustice on the respondent, who would have been able to lead evidence in response to the allegations raised in those grounds: Fly River Provincial Government v Pioneer Health Services Ltd [2003] PGSC 4; SC705; Lupari v Somare [2010] PGSC 21; SC1071 applied.
2. The learned trial judge was justified in dismissing the proceeding as an abuse of process as there was no evidence (and no prospect of the appellant obtaining such evidence) to warrant the granting of declaratory relief sought by it.
3. There is no violation of s 41 of the Constitution to be found in the valid exercise of a mortgagee’s power of sale: Tarere v Australia and New Zealand Banking Group (PNG) Ltd [1988] PNGLR 301; Max Umbu v Steamships Ltd [2004] PGNC 44; N2738; James Geama v OTML Shares in Success Ltd [2011] PGNC 39; N4269 applied.
   

Cases Cited:
Papua New Guinea Cases:

Lupari v Somare [2010] PGSC 21; SC1071
Fly River Provincial Government v Pioneer Health Services Ltd [2003] PGSC 4; SC705
James Geama v OTML Shares in Success Ltd [2011] PGNC 39; N4269
Max Umbu v Steamships Ltd [2004] PGNC 44; N2738
Tai v Bank South Pacific [2020] PGSC 40; SC1941
Tarere v Australia and New Zealand Banking Group (PNG) Ltd [1988] PNGLR 301
Torato v PNG Home Finance Ltd (SCA No 16 of 2012, Salika DCJ, Sawong and Logan JJ, 19 December 2014, not reported)

Overseas Cases

Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949
Farrar v Farrars Ltd [1888] UKLawRpCh 209; (1888) 40 Ch D 395
Kennedy v De Trafford [1897] UKLawRpAC 13; [1897] AC 180
Pendlebury v Colonial Mutual Life Insurance Ltd [1912] HCA 9; (1912) 13 CLR 676

Legislation Cited:
Papua New Guinea Legislation

Constitution

Counsel:

Ms. E Ngomba, for the Appellant
Mr. W Mininga, for the First Respondent

Decision delivered on
16^th December 2022

1. BY THE COURT: In 2005, the appellant, B & M Engineering Limited (B & M) borrowed a sum in excess of K2.6 million from the first respondent, Westpac Bank PNG Limited (Westpac). That loan was secured by registered mortgages granted by B & M to Westpac over four State leasehold properties in Mount Hagen in Western Highlands Province owned by B & M. Those properties were:
   • (a) Allotment 12, Section 45 (Allotment 12);
   • (b) Allotment 7, Section 39 (Allotment 7);
   • (c) Allotment 20, Section 58 (Allotment 20); and
   • (d) Allotment 17, Section 45 (Allotment 17).
2. It appears that B & M was reliant for cash flow to service its loan upon a cash flow under a contract it had with PNG Sustainable Energy Limited. It also appears that the cash flow under this contract did not meet B & M’s expectations. Whether that gave rise to a cause of action in damages is the subject of separate, present litigation. In any event, in November 2014, B & M ceased paying loan instalments to Westpac as and when they fell due. Westpac made a formal demand of B & M in March 2015 for payment of the sum then owing under the loan, K2,097,308.44. In response, B & M paid a further instalment of K48,084.00 later in March 2015. Although Westpac accepted this sum, it did so without prejudice to its rights to exercise its mortgage security so as to realise the net sum owed to it under the loan (Westpac letter to B & M of 25 March 2015 refers).
3. By a letter dated 12 May 2015 to Westpac, B & M requested that it first realise Allotments 7 and 20 in order to clear its outstanding loan balance. This request was not taken up by Westpac. B & M then instituted a proceeding in the National Court at Mount Hagen (OS No 366 of 2015) to restrain Westpac from exercising the power of sale it held under the mortgages. In the result, this proceeding was resolved consensually by an order entered on 17 July 2015, which provided:

BY CONSENT THE COURT ORDERS that [sic]:

1. The Defendant shall obtain valuation [sic] for the four (4) properties described as Allotment 07 Section 39 Rui Place Mt. Hagen, Allotment 12 Section 45 Dei Place, Mt. Hagen, Allotment 17 Section 45 Dei Place Mt. Hagen and Allotment 20 Section 58 Corner of Minimp Road & Rot Place Mt. Hagen.
2. The Defendant shall advertise for sale by tender the four (4) properties referred to in Order 1 above with proper descriptions of the respective properties.
3. The Defendant shall sell the two (2) properties described as Allotment 20, Section 58, Mt. Hagen and Allotment 07, Section 39 in the first instance.
4. If the proceeds of the sale of the two (2) properties referred to Order 3 [sic] above are not sufficient to clear or pay-off the Plaintiff’s loan with the Defendant then the Plaintiff shall clear or pay-off the balance of the loan outstanding within seven (7) days.
5. If the Plaintiff fails to settle or pay-off the loan outstanding within seven (7) days pursuant to Order 4 above, the Defendant shall be at liberty to sell the property described as Allotment 12, Section 45 Dei Place Mt. Hagen.
6. If after the sale of the property referred to in Order 5 above, the loan is not cleared or paid off [sic], the Plaintiff shall clear or pay-off the loan outstanding within seven (7) days.
7. If the Plaintiff fails to clear or pay-off the loan outstanding pursuant to Order 6 above, the Defendant shall be at liberty to sell the property described as Allotment 17, Section 45, Dei Place Mt. Hagen.
8. If the Defendant is prevented by any reason whatsoever that cannot be addressed by the Defendant as a mortgagee by legal redress in the Court from selling or completing the sale of any of the properties in the order referred to in Orders 3, 4, 5, 6 & 7 above, the Defendant shall, after giving notice to the Plaintiff to clear or pay-off the loan outstanding within seven (7) days, be at liberty to sell any of the properties referred to in Order 1 above.
9. The Plaintiff shall discontinue this proceeding forthwith.
10. The Defendant shall pay the Plaintiff’s cost of the proceeding if not agreed, to be taxed.
4. Thereafter, Westpac took steps to sell Allotment 7 and Allotment 20. The proceeds of sale of these properties were insufficient to pay in full the amount by then owing by B & M under its loan. Accordingly, Westpac took steps to sell Allotment 12. Between 2017 and 2019, Westpac publicly advertised Allotment 12 for sale. In October 2018, Westpac accepted an offer of K1,050,000 in respect of Allotment 12. Unfortunately, the purchaser proved unable to secure finance to complete that purchase. Allotment 12 was then re-advertised publically by Westpac. On this occasion, the highest offer received was K700,000, from Jay LW Contractors Limited (Jay LW), the second respondent. Westpac decided to accept that offer. In October 2019, Westpac entered into a contract with Jay LW for the sale of Allotment 12.
   
5. In May 2020, B & M instituted proceedings in the National Court at Mount Hagen (OS No 134 of 2020), by which it sought declaratory relief concerning the conduct of Westpac in seeking to sell Allotment 12. Apart from Westpac, B & M named Jay LW and the Registrar of Titles as defendants. Neither of these parties took any active part in those proceedings. Further, although named as respondents, neither took any active part in the appeal. From the outset, Westpac has been the only active party.
   
6. By its amended originating summons in that proceeding, B & M sought the following orders:
   
   1. AN ORDER FOR DECLARATION that the First Defendant’s dealings and the exercise of its powers by mortgage sale in respect of the securities taken under the mortgage agreement it entered into with the Plaintiff prior to and at the time of the signing of the Contract for Sale of Land with the Second Defendant in respect of the property described as Allotment 12, Section 45, Mount Hagen Western Highlands Province, State Lease 41, Folio 45 by mortgage sale at the sum of K700, 000.00 [sic] when the property is now valued more than K1, 744, 000.00 [sic] are reckless as it is an unfair bargain below the ‘market value’ of the property without taking into account the Plaintiff’s interest and is therefore unlawful.
   2. AN ORDER FOR DECLARATION that the First Defendant’s dealings and the exercise of its powers by mortgage sale in respect of the securities taken under the mortgage agreement it entered into with the Plaintiff prior to and at the time of signing of the Contract for Sale of Land with the Second Defendant in respect of the property described as Allotment 12, Section 45, Mount Hagen Western Highlands Province, State Lease 41, Folio 45 by mortgage sale at the sum of K700, 000.00 [sic] when the property is now valued more than K1, 744, 000.00 [sic] without taking into account the Plaintiff’s proposal and interest are [sic] reckless and it amounts to a sale at an undervalued price and is therefore unlawful.
   3. A PERMANENT RESTRAINING ORDER against the Defendants from taking any steps to implement the Contract of Sale of Land it entered into with the Second Defendant or transfer the title or take vacant possession of the property in respect of the property described as Allotment 12, Section 45 Mount Hagen Western Highlands Province, State Lease 41, Folio 45 Mount Hagen Western Highlands Province.
   4. Any other Orders this Court deems fit.
   5. Costs be in the cause.

[Underlining in original].

7. B & M secured an interlocutory injunction restraining the sale.
   
8. In response, Westpac sought to have the proceeding dismissed as an abuse of process. That application was heard and determined by the primary judge on 15 September 2020. For reasons delivered ex tempore that day, his Honour granted that application and dismissed the proceeding accordingly.
   
9. B & M has now appealed against that order of dismissal. Its grounds of appeal are as follows:
   

3.1 The trial Judge erred in law and in facts when he dismissed the entire proceeding for abuse of the Court process on the basis that the Appellant never took any steps to offset the loan without considering that:-

(a) The First Respondent as mortgagee had exercised its power of sale and had already sold two (2) of the Appellant’s properties at an undervalued price and not at a fair market value and this breached its duty as a mortgagee to:-

(i) Act in good faith and without willful or reckless disregard of the Appellant (mortgagor).

(ii) take reasonable care to obtain the valuation of the property that will guide itself to obtain a fair market value;

(iii) sell the two (2) previous properties at the market price;

(iv) take into account Section 68(6) of the Land Registration Act (Ch 191) in all the sales, especially the aspect of having money remaining to pay the mortgagor and the debtor.

(b) The First Respondent failed to comply with the Term one (1) [sic] of the Consent Order of 17^th June 2015 which is a precondition to sale when it did not obtain valuations of all the properties that it sold including the recent sale the subject of this proceeding.

(c) There was overwhelming evidence that the First Respondent entered into a Contract of Sale with the Second Respondent for the sale of property described as Allotment 12 Section 45 at an undervalued price of K700, 000.00 [sic] when the property is now valued at K1, 744, 000.00 [sic].

3.2 The trial judge erred in law and in fact when he dismissed the entire proceedings for abuse of process without taking into consideration the following circumstances that disclosed a reasonable cause of action:-

(a) The Appellant had filed an originating summons that raised meritorious issues regarding the breach of duty of the First Respondent when exercising its powers of sale as the Mortgagee;

(b) The First Respondent had failed to exercise its power of sale of the two (2) earlier properties in accordance with Term 1 of the Consent Order of 17^th June 2015 when it failed to obtain a valuation of the properties to be able to sell the properties at the fair market price;

(c) The First Respondent sold two (2) of the Appellant’s properties at an undervalued price resulting in the mortgage debt not fully settled [sic] and is attempting to sell the third property at an undervalued price again with no regard to the Appellant’s interest as the mortgagor.

3.3 The trial Judge contravened Section 41 of the Constitution when he reached the decision to summarily dismiss the proceeding which is harsh and oppressive, not warranted by or disproportionate to the requirements of the particular case in the circumstances where:-

(a) There was overwhelming evidence that the First Respondent entered into a Contract of Sale with the Second Respondent for the sale of property described as Allotment 12 Section 45 at an undervalued price of K700, 000.00 [sic].

(b) The First Respondent has not categorilly [sic] denied that:-

(i) it has unilaterally sold two (2) previous properties and it is selling the property the subject of this proceeding at a undervalued price;

(ii) it has not obtained a valuation of the properties to be able to sell the properties at the fair market price.

(c) The interest of the Appellant (Mortgagor) and the Court Orders of 17^th June 2015 were blatantly disregarded by the First Respondent (Mortgagee) in exercising its power of sale.

(d) The Mortgagee was inconsiderate by putting the property, the subject of these proceedings on sale without taking into account Section 68(6) of the Land Registration Act even after selling two (2) properties at undervalued prices.

(e) The proceeding disclosed a reasonable cause of action.

10. Of these grounds of appeal, grounds 3.1(b) and 3.2(b) are attended, as Westpac highlighted in its submissions, with the fatal difficulty that they seek to raise on appeal issues which were not raised in the original jurisdiction. To permit them now to be raised would visit an injustice on Westpac in that, had they been raised below, Westpac may have been able to lead evidence in respect of them. In these circumstances and not having raised the issue below, B & M is now precluded from raising these issues on the appeal: Fly River Provincial Government v Pioneer Health Services Ltd [2003] PGSC 4; SC705; Lupari v Somare [2010] PGSC 21; SC1071.
    
11. Ground 3.1(a) does not concern Allotment 12. It is directed to other properties offered as security for the loan. As Westpac correctly submitted, it is thus irrelevant to any issue raised by B & M in the National Court and thus also irrelevant to the appeal.
    
12. Considered together, as they should be, grounds 3.1(c), 3.2(a) and 3.2(c) allege that the primary judge ought at least to have found that B & M had raised a triable issue that Westpac had sold Allotment 12 at an undervalue.
    
13. The assertion that Allotment 12 had a value of K1,744,000 had its origin in a very abbreviated valuation report dated 15 February 2012 by which valuers working in the Western Highlands branch of The Professionals real estate agency placed that value on Allotment 12. That apart, Mr Ron Reed, the Managing Director of B & M placed the value of that property as at least that amount, if not more because of the passage of time since then.
    
14. The difficulty about this valuation report is that it was, by 2019, hardly contemporaneous with the sale. By then, Westpac had advertised that property on numerous occasions. Further, as counsel for B & M conceded, there was no evidence whatsoever of any collusion between Westpac and Jay LW in relation to the sale of Allotment 12. It was on the evidence an arm’s length sale on the open market after public advertising. Further again, a mortgagee realizing a security is not obliged to wait indefinitely in the hope that a better price might thereby be obtained. As it was, Westpac waited four years and advertised Allotment 12 repeatedly over that period. This was hardly a hasty, sacrificial sale.
    
15. There is nothing to suggest that Mr Reed’s view of the worth of Allotment 12 is anything other than genuine. But it is the view of a layman. And the experience of testing the worth of the property on the open market demonstrates that his view was overly optimistic.
    
16. In Torato v PNG Home Finance Ltd (SCA No 16 of 2012, Salika DCJ, Sawong and Logan JJ, 19 December 2014, not reported) (Torato) the Supreme Court considered the nature of the duty which falls on a mortgagee in exercising a power of sale. The Court noted that there were conflicting lines of authority as between England and Australia with respect to the nature of this duty. An English line of authority, of which Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949 (Cuckmere Brick) is an exemplar, holds that a mortgagee exercising a power of sale is under a common law duty to take reasonable care to ensure that the secured property is sold at market value. There is an Australian line of cases for which Pendlebury v Colonial Mutual Life Insurance Ltd [1912] HCA 9; (1912) 13 CLR 676 (Pendlebury) is the root authority, which holds that any liability of the mortgagee to the mortgagor in relation to the price at which the secured property is sold is to be determined by reference to equitable principles of good faith. It proved unnecessary in Torato for the Court to resolve which line of authority was to be preferred as, on the facts neither negligence nor absence of good faith were made out. The question arose again in the Supreme Court in Tai v Bank South Pacific [2020] PGSC 40; SC1941. On this occasion, the Court noted that there were a number of examples in this jurisdiction of Cuckmere Brick being applied in the National Court. However, after an examination of English authority referred to in Pendlebury, Kennedy v De Trafford [1897] UKLawRpAC 13; [1897] AC 180, at 185 and also the earlier decided Farrar v Farrars Ltd [1888] UKLawRpCh 209; (1888) 40 Ch D 395, the Court concluded that the better view was that the duty of a mortgagee exercising a power of sale in respect of secured property fell for determination by reference to equitable principles of good faith.
    
17. Viewed by reference to the evidence before the primary judge concerning Westpac’s realizing Allotment 12, and we have set that out above, B & M had no evidence whatsoever to warrant the granting to it of any of the declaratory relief sought, nor even the prospect of obtaining such evidence. The evidence before the primary judge admitted only of a conclusion that Westpac had acted in good faith in accordance with the duty it owed to B & M as mortgagee exercising a power of sale. The consent order which resolved the earlier National Court proceeding placed no more elevated duty than this on Westpac in relation to the realization of Allotment 12.
    
18. The conclusion just reached is also fatal to ground 3.3 in the notice of appeal. There is, as Westpac correctly submitted, no violation of s 41 of the Constitution to be found in the valid exercise of a mortgagee’s power of sale: Tarere v Australia and New Zealand Banking Group (PNG) Ltd [1988] PNGLR 301; Max Umbu v Steamships Ltd [2004] PGNC 44; N2738; James Geama v OTML Shares in Success Ltd [2011] PGNC 39; N4269.
    
19. Against this background, the primary judge was entitled to form the view that the proceeding before him had been brought merely to frustrate the realization by Westpac in accordance with the order to which B &M had consented and without any reasonable cause by B & M. He was entitled to conclude that the proceeding was an abuse of process.
    
20. It follows that the appeal must be dismissed, with costs.
    

Orders

1. The appeal be dismissed.
2. The appellant pay the first respondent’s costs of and incidental to the appeal, to be taxed if not agreed.

__________________________________________________________________
Tamutai Lawyers: Lawyers for the Appellant
Bradshaw Lawyers: Lawyers for the First Respondent