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  4. Moloney v Bells Securities Pty Ltd - [2005] QSC 13

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Moloney v Bells Securities Pty Ltd[2005] QSC 13

Moloney v Bells Securities Pty Ltd[2005] QSC 13

 

SUPREME COURT OF QUEENSLAND 

 

CITATION:

Moloney & Anor v. Bells Securities Pty Ltd & Ors [2005] QSC 013

PARTIES:

GREGORY MICHAEL MOLONEY AND PETER IVAN FELIX GEROFF AS COURT APPOINTED TRUSTEES TO WIND UP THE MANAGED INVESTMENT SCHEME OF BELLS SECURITIES PTY LTD
ACN 077 236 170
(plaintiffs)
v
BELLS SECURITIES PTY LTD ACN 077 236 170
(first defendant)
JOHN WILLIAM FRADGLEY, GEOFFREY STEPHEN SMITH, PETER JOHN MORGAN AND MICHAEL PETER BAUMANN TRADING AS BELLS SOLICITORS
(second defendant)
GEOFFREY WILLIAM EALES, GRAEME WILLIAM RUSSELL, MAHNED PTY LTD ACN 010 191 983 TRADING AS ACVAL COLLINS AND EALES
(first third party)
GEOFFREY WILLIAM EALES
(second third party)
MCH NO. 194 PTY LTD ACN 060 137 144
(third third party)
MALCOLM JOSEPH MISSINGHAM
(fourth third party)

FILE NO/S:

SC No 1922 of 2003

DIVISION:

Trial

PROCEEDING:

Trial

ORIGINATING COURT:

Supreme Court at Brisbane

DELIVERED ON:

8 February 2005

DELIVERED AT:

Brisbane

HEARING DATES:

8 November 2004 – 12 November 2004; 10 December 2004

JUDGE:

Chesterman J

ORDER:

Judgment for the plaintiffs against the defendants.  The defendants’ claims against all third parties are dismissed. 

CATCHWORDS:

NEGLIGENCE – MONEYLENDING SOLICITORS – LIABILITY OF VALUERS – OTHER MATTERS – where an employee of the second defendant ignored the matter of a lease attached to a property which was the subject of a valuation for mortgage security purposes by the first third party.  The fourth third party was called by a director of the second defendant to review that valuation. Whether or not the lease was mentioned to the fourth third party was a matter in dispute.

Ultimately, the first defendants, who operated a managed investment scheme, raised sufficient contributors’ funds to make a loan to the property owners. A culmination of events led to the amount loaned exceeding the value of the mortgaged security and when the property owners, and any guarantors, failed to make the loan repayment, the plaintiffs were appointed liquidators and trustees of the first defendant’s managed investment scheme, including the loan to the property owners. The property owners subsequently sold the mortgaged property.

The plaintiffs sought to recover the difference between the amount of the loan, together with interest, and the amount recovered from the property owners in the sale of the mortgaged property. Their claims are based upon negligence, breach of retainer, contravention of s 52 of the Trade Practices Act (Cth) 1974 and like Corporations Law provisions.

The defendants sought damages amounting to an indemnity in respect of their liability to the plaintiffs against the third parties for breach of contract and contravention of the Corporations Act (Cth) 2001, the Trade Practices Act and the Fair Trading Act (Qld) 1989.

CASES:

Gates v City Mutual Life Assurance Society Limited (1986) 160 CLR 1 cited

Henville v Walker (2001) 206 CLR 459 discussed

HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54 discussed

Hungerfords v Walker (1989) 171 CLR 125 considered

I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109 discussed

Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413 discussed

Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 cited

Alemite Lubrequip Pty Ltd v Adams t/as Price Waterhouse (1997) 41 NSWLR 45 cited

Australian Securities and Investments Commission (ASIC) v Takaran Pty Ltd (2002) 43 ACSR 46 discussed

Hagan v Waterhouse (1992) 34 NSWLR 308 at 393 cited

Re Dawson; Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd (1966) 2 NSWR 211 discussed

Young v Murphy [1996] 1 VR 279 discussed

Cowan v Scargill [1985] Ch 270 cited

In Re Whiteley; Whiteley v Learoyd (1886) 33 Ch D 347 discussed  

COUNSEL:

Mr KA Barlow for the plaintiff

Mr P O'Shea SC with Mr M Liddy for the first and second defendants

Mr P Hastie for the third party

SOLICITORS:

Gadens Lawyers for the plaintiffs

Minter Ellison Lawyers for the first and second defendants

Ruddy Tomlins & Baxter Solicitors for the third party

Mr M Missingham appeared for himself and by leave for the third third party

  1. The first defendant is a company, the directors and shareholders of which were the second defendants, who at all material times were the also partners in a well known firm of solicitors practising on the Gold Coast. The first defendant was a nominee company, for the purposes of the Queensland Law Society Rules, regulating money lending by solicitors on behalf of clients. According to an advertising brochure published by the defendants:

“Private first mortgage lending gives (clients) the opportunity to invest monies on the security of a First Registered Mortgage over property owned by a borrower. … Bells Securities Pty Ltd … is the nominee company of Bell Solicitors, which holds all its mortgages as trustee on behalf of … investor clients.  This structure allows us (the second defendant) to effectively lend and monitor the progress of the loan.”

  1. The defendants conducted the business of lending clients’ money for a number of years. On 14 May 1999, the first defendant lent $1,040,000.00 to Longhampton Pty Ltd (‘Longhampton’). The monies had been made available in varying amounts by various clients (‘contributors’) of the second defendants. This was the last loan made by the defendants on behalf of clients, and the first in respect of which Mr Smith, one of the partners, was in charge.
  1. The second third party is a valuer. At all material times he was a member of the first third party (‘Collins and Eales’) which carried on business as valuers. The first and second third parties had valued a property owned by Longhampton, an interest in which was given as security for the loan from the first defendant.
  1. The fourth third party is a valuer and is the only shareholder and director of the third third party. It was previously known as HTW (North Queensland) Pty Ltd. At the times relevant to the action, the fourth third party was a director of the third third party (‘HTW’) which carried on the business of valuing real property.
  1. The loan to Longhampton was for a term of 12 months. Repayment was due on 14 May 2000 but was not made. The property taken as security for the loan was worth less than the amount lent. There were, as well, substantial arrears of interest.
  1. The defendants’ moneylending activity fell within the definition of ‘managed investment schemes’ for the purposes of Part 5C of the (Cth) Corporations Act 2001.  The defendants’ scheme was not registered and, following amendments to the Act, they could no longer lend money lawfully.  The defendants chose to discontinue the business rather than seek its registration.  Section 601EE provides that the court might order the winding up of an unregistered scheme on the application of, inter alia, the Australian Security Investment Commission (‘ASIC’). 
  1. On 6 June 2002 the Honourable Justice Wilson appointed the plaintiffs as liquidators to wind up the scheme constituted by the defendants’ money lending practice. The application was made by the first defendant and the contributors were made respondents. Her Honour ordered that the first defendant ‘be removed as trustee of each and every relevant trust created for the purposes of or subsisting in the scheme’ and appointed the plaintiffs ‘the new trustee of each and every trust described’ in the preceding order. A further order was made by which all the property held by the first defendant upon a trust created for the purposes of, or subsisting in, the scheme was vested in the plaintiffs for the purposes of the winding up, and for the purposes of, or in connection with, the scheme. On 29 January 2003 the Honourable Justice Mackenzie varied the order 6 June 2002 to confer on the plaintiffs the powers enumerated in s 477(2)(a) of the Corporations Act.  His Honour further ordered that the plaintiffs be authorised to commence and prosecute proceedings in their own name against the defendants and against Collins and Eales.
  1. The plaintiffs did commence an action against the defendants to recover the equivalent of the difference between the amount of the loan, together with interest, and the amount recovered from Longhampton. Their claims are based upon negligence, breach of retainer, contravention of s 52 of the (Cth) Trade Practices Act 1974 and contravention of like provisions in the Corporations Law.  The defendants in turn joined the third parties, the valuers, alleging that the loan was made in reliance upon representations that Longhampton’s property, taken as security for payment of the loan, was sufficiently valuable for that purpose.  To anticipate and to summarise the point against the valuers, it is that Longhampton had, prior to the loan, leased the property to Galeforce Five Pty Ltd (‘Galeforce’) for a term of five years.  The valuations in question were of Longhampton’s unencumbered freehold interest in the land and expressed that value to be in excess of $1,500,000.  The proprietary interest which Longhampton gave as security for the loan was its lessor’s interest in the lease, essentially the right to receive rent, and the reversion.  The value of this interest was about $900,000, less than the amount of the advance. 

The facts

  1. The only areas of factual controversy concern the terms of conversation between Mr Smith and, to a less extent, Ms Roberts for the defendants, and Mr Eales, the second third party and Mr Missingham, the fourth third party. For the rest, the facts appear all well documented and I will express them as succinctly as I can.
  1. Longhampton was the owner of a backpacker’s hostel located at Horseshoe Bay on Magnetic Island. The hostel was known as ‘Geoff’s Place’ and was sometimes described as a resort, though its buildings and facilities appear to have been too old and dilapidated to justify that appellation. On 4 February 1999 the second third party (‘Mr Eales’) valued the hostel on behalf of the first third party. He did so at the request of Longhampton. Mr Eales assessed ‘the fair market value of the land, improvements, plant and equipment of Geoff’s Place for mortgage security purposes’ at $1,875,000. The assessment was made on the basis of an appraisal of the sustainable net income generated by the hostel. The appraisal was made from the financial statements for each of the years 1994 – 1997, and the six month period 7 July 1998 – 3 January 1999. Mr Eales applied a capitalisation rate of 18 per cent to the estimated annual income. He derived the rate from an analysis of sales of roughly comparable properties. The valuation was expressed to be ‘on the understanding that the business operations are conducted by competent experienced management and the levels of profitability used as a basis for this valuation are achieved and maintained and renewals are retained for all necessary licenses and permits.’
  1. As is customary Mr Eales expressed an opinion on the value of Geoff’s Place derived by an alternative method, the so called ‘summation method’, by which value was ascribed to the land and its improvements without regard to the ‘business goodwill of the property’. This method yielded a value of $1,640,000. It comprised:

‘Land $740,000

Improvements$800,000

Plant and equipment $100,000

Total$1,640,000’

  1. On 8 March 1999 Longhampton leased Geoff’s Place to Galeforce for a term of five years commencing on 23 March 1999. The rent was $130,000 for the first three years. The lease contained five options to renew, each for a term of five years. In the event that all options were exercised the effective term of the lease was 30 years. After three years the annual rent was to be increased by a proportion equal to the increases in the Consumer Price Index for the city of Brisbane. Despite the potential length of the lease at no time was there to be an adjustment of the rent to accord with movements in the rental market.
  1. On 8 March 1999 a finance broker acting for Longhampton applied to the second defendant to borrow $1,620,000 for a period of 12 months. The application drew attention to the fact that Longhampton had leased its hostel but appears to have misstated material terms. The lease was said to be for five years only and that the rent would increase to $146,316 in the fifth year. Increases were, of course, dependent upon movements in the Consumer Price Index.
  1. On 9 March 1999 Longhampton’s solicitors sent to Ms Roberts, an employee of the second defendants, who was responsible for the mechanical aspect of their money lending activities, a copy of the ‘proposed lease’ and an epitome of it which they had prepared. The letter went on to confirm that Galeforce had ‘entered into a business contract’ to purchase the business ‘including plant and equipment and goodwill’ of Geoff’s Place for $395,000 and that the amount would be utilized by Longhampton ‘to retire debt relating to Geoff’s Place’.
  1. Also on 9 March 1999 the finance broker sent Ms Roberts a copy of Mr Eales’ valuation of 4 February.
  1. The defendants had an invariable practice of not lending more that an amount equal to 86 per cent of the amount for which the property, taken for security, was valued on a forced sale basis. The defendants’ definition of a forced sale was one that occurred within 90 days of the property being put on the market.
  1. On 15 March 1999 Ms Roberts telephoned Mr Eales. His account of their conversation was that she told him the defendants could only lend against ‘land and improvements, not on business goodwill.’ She asked Mr Eales whether the figures appearing in his summation method of valuation ‘were appropriate for the land and improvements’. Mr Eales answered that his summation method was part of a going concern valuation, and that his expressions of value for land and improvements would fall if they were not put to their highest and best use, so that if the business changed, or if profits fell, the value of land and improvements would also fall. Ms Roberts asked Mr Eales if he could give her a forced sale value for the property. He said that he thought it would be between $1,300,000 and $1,350,000 and that the lender should take security over the business name, fitting and fixtures, plant and equipment of the hostel. Ms Roberts also asked Mr Eales, and Collins and Eales, to assign the valuation of 4 February 1999 which was addressed to Longhampton to the first defendant. He asked for an instruction to that effect.
  1. Ms Roberts’ recollection of the conversation was that she told Mr Eales that the defendants were ‘interested in getting his estimate of value of the land and improvements only and not the business’. She could not remember ‘exactly’ what she told Mr Eales but ‘definitely told him about the lease’ and that ‘we weren’t interested in the lease. We had to know that we could sell the land and the improvements.’ Ms Roberts made a note of her conversation. It reads only:

‘$1.3m $1-35m – 90 days

He feels ‘FLAT OUT’ to get sold in that period of time.’

  1. On 16 March 1999 Ms Roberts wrote to Collins and Eales:

‘Further to the writer’s telephone conversation with you yesterday, we ask that you advise us by return facsimile as to your estimate of ‘market value’ and ‘forced sale value’ of the security property so far as relates to land and improvements only.’

Mr Eales replied on 17 March 1999:

‘We advise that the valuation as it relates to land and improvements has been assessed at $1.54m and the “forced sale value” of the land and improvements would be $1.3m.’

On 24 March Ms Roberts wrote again to Mr Eales to ask him what he considered ‘the time period required for a “forced sale”’.

Mr Eales replied the same day that the time period required for such a sale would be between 90 and 120 days.

  1. It is of some importance to the case whether or not Ms Roberts told Mr Eales in their conversation of 15 March that Longhampton had leased Geoff’s Place, with the consequence that Longhampton had only a limited interest in the property to offer as security. On this point I prefer Mr Eales’ evidence to that of Ms Roberts. There is no support in the diary note or correspondence for the fact that the lease was mentioned. Of more significance is the fact that the information which Ms Roberts wanted from Mr Eales was irrelevant in the event that the property was leased. Ms Roberts wanted to know what value the land and improvements would have on a forced sale, which was to occur within three months. If the property were leased it would not be expected that if Longhampton defaulted the mortgagee could sell the land and improvements, which would be subject to a lease, within 90 days or at all. There is evidence to suggest that Ms Roberts did not understand these implications which flowed from the lease of the property. The terms of her inquiry suggest she ignored the lease. I doubt that Mr Eales would have replied as he did in writing to Ms Roberts’ inquiries if he had been told of the lease.
  1. Another point of some significance is that Ms Roberts only wanted to know what the land and improvements might fetch on a forced sale. That was her preoccupation, no doubt because she failed to understand the significance of the lease. She thought the lease was inconsequential and is unlikely to have mentioned it. In her evidence Ms Roberts confirmed that she had been instructed by Mr Smith ‘not to get a valuation of the business component. It had to be freehold and improvements only.’ It was, she said, very important – ‘It was really stressed that it had to be land and improvements only, and we needed (the) forced sale figure.’ Ms Roberts also made it clear in her evidence that the defendants ‘were not interested in the lease’.
  1. On 26 March 1999 the second defendants wrote to Longhampton to confirm that they were ‘prepared to recommend to lenders ... to advance the sum of $1,040,000 by way of first mortgage’ over Geoff’s Place for a term of 12 months with interest at 14.5 per cent per annum calculated on monthly rests but reducible to 9.5 per cent if interest were paid punctually. Interest was to be paid monthly in advance. There was to be a management fee of 0.5 per cent per annum and the security was a first registered mortgage over Geoff’s Place together with a first ranking fixed and floating charge over Longhampton’s undertaking, and guarantees from the two directors of Longhampton. The loan was said to be subject to a number of conditions the first of which was that the second defendants would appoint a valuer ‘to conduct a review valuation prior to settlement at the borrower’s cost, which valuation is to be satisfactory to the lender’.
  1. Longhampton was in urgent need of the funds. It accepted the offer on condition that the loan be made no later than 20 April 1999. On 8 April Ms Roberts wrote to Longhampton to confirm that the loan would be made ‘on the basis of the security offered i.e. land and improvements only.’ The letter went on to recite the fact that Longhampton had contracted to

‘sell the business component for $395,000 with the purchaser of that business then entering into a lease with your client for 3-5 years.

...

Our client has no interest in the business contract.’

  1. On 15 April Mr Eales wrote on behalf of Collins and Eales to the first defendant to

‘... confirm that the valuation of 4 February 1999 was prepared for mortgage security purposes and extend liability and use of the report to Bells Securities Pty Ltd.

 

We certify that you can rely on the information as if it had specifically been prepared at your request for the purpose of lending money against the security of the property concerned.’

  1. The defendants maintained a register of persons who had expressed interest in lending money on first mortgage pursuant to the scheme which they operated. On 16 April 1999 the second defendant wrote to a number of such persons whom they thought might be interested in contributing to the advance to be made by the first defendant to Longhampton. The letter enclosed a loan synopsis prepared by Mr Smith. It read, relevantly:

‘1.  Loan amount:  $1,040,000

 

  1. Valuation:  Collins and Eales Valuers Townsville office dated 4 February 1999

Land and improvements only – market value $1,540,000.

Forced sale value - $1,300,000

 

  1. LVR:  67.53 per cent

 

  1. Purpose of Loan:  to refinance existing mortgage of $1,260,000

 

…

  1. Background:  the security property is a complex marketed towards ‘backpackers’ and ‘campers’ providing accommodation and entertainment facilities together with a large restaurant. 

 

The borrower advises –

  • Longhampton is a newly formed company ... incorporated for the acquisition of Geoff’s Place ...
  • The business has been sold to Galeforce 5 Pty Ltd for $395,000 plus $13,000 for stock which was settled recently. 
  • The purchaser has entered into a five year lease with the borrower.  The lease contains five 5 year options and a summary of the lease is attached ...
  • You will note ... that the current rental under lease is $130,000 per annum.

 

  1. Serviceability:

 

The valuation ... which is referred ... is based on land and improvements only and not on the business aspect of the property in particular the lease.  Accordingly lenders in making the decision in respect of this loan should rely solely on the valuation and ascertain the likelihood of full principal and default interest being paid if there is a default from the proceeds of the sale of the property in the event of a mortgagee auction.

 

Certainly the existence of the lease with rental being paid will give you a certain degree of comfort ...’

  1. On 16 April 1999 Longhampton’s solicitors wrote to the second defendants enclosing documents relevant to the preparation of the mortgage and to provide other information. The solicitors emphasised that settlement should occur on 20 April.
  1. On 19 April Mr Smith spoke by telephone to Mr Eales. The content of this conversation is a subject of dispute. It is an important conversation because on it depends very substantially the claim brought by the defendants against Mr Eales, and Collins and Eales. I will analyse the evidence when considering that aspect of the action and will give here only the essence of the respective versions.
  1. Mr Eales’ evidence was that Mr Smith had rung to ask about two things. The first was the state of the real estate market on Magnetic Island because ‘some of his clients apparently were concerned about that.’ The second matter was ‘whether or not there was going to be any competition in the backpacker business on Magnetic Island’. Mr Eales told him there was unlikely to be any competition to Geoff’s Place any earlier than ‘one and two years’, because the only available site for another backpackers hostel had difficulties in terms of zoning and construction, and that that time span would be needed to overcome those problems. Mr Smith replied that he was ‘only lending the money for one year’ so the prospective competition was of no consequence. Mr Smith then asked about another resort on Magnetic Island close to Geoff’s Place, ‘Coconuts’, and ‘asked about the type of operation it was’. Mr Eales said its improvements were inferior to Geoff’s Place. Mr Eales then told Mr Smith that the real estate market on Magnetic Island ‘had turned’ and there looked to be some ‘upside’. Mr Eales went on to tell Mr Smith that he ought to be aware that his valuation depended on the accuracy of Longhampton’s financial statements and, in particular, the net income figure of $330,000, which came by way of unaudited statements. Mr Smith’s response was that ‘it doesn’t matter’ because the property had been leased. This was news to Mr Eales who asked, and was told, the identity of the lessee. Mr Smith asked what the property would be worth and Mr Eales said it would depend upon the terms and conditions of the lease. He asked what the rental was and was told $130,000 net per annum. He asked the term and was told five years with ‘one or two five year options’. Mr Smith ‘thought’ that there was a clause by which the rent would increase to ‘fair market’ at the end of the first five year term. Mr Smith asked again what the property would be worth and Mr Eales replied that he did not know, and that a valuation of the lease would require between seven and ten days to investigate. Mr Smith said he could not wait that long because he was lending the money ‘tomorrow’. Mr Smith asked if Geoff’s Place would be worth ‘$1,300,000 under the lease’ to which Mr Eales replied that ‘it was unlikely’. He thought the value would be between $900,000 and $1,000,000. Mr Smith said he ‘needed the property to be worth $1,300,000’. Mr Eales said that for that value to be achieved the rent would have to be about $165,000 a year. Mr Smith replied that the rent was ‘not negotiable’ at $130,000. Mr Eales said ‘Don’t lend the money ... the valuation is redundant’; ‘the valuation is of no use to you if the lease is now set.’
  1. Mr Smith’s evidence was that he rang Mr Eales because he was concerned that the February valuation showed the value of the property to be dependent on demand for backpacker’s accommodation. Mr Eales response was that Geoff’s Place was well known and had been improved by the present owners who were ‘good operators’. Mr Smith then told him that the business had been sold ‘with a lease back’. He mentioned that the rent was $130,000 a year and the term was five years. Mr Smith said that the lease ‘was on good terms’ which gave him some degree of comfort but he was worried that if the ‘backpackers’ industry fell over the lease would not be worth anything.’ Mr Eales reassured him that there was a healthy demand for backpacker’s accommodation on Magnetic Island and ‘there was nothing that was going to compete with the resort ... for 12 months.’
  1. Mr Smith made a diary note of his conversation. It reads:

‘• Confirms no business element in valuation

  • Relies on backpackers heavily
  • Magnetic Island going ahead
  • No new thing on the horizon
  • Should be ok for next 12 months
  • Nothing adverse.’
  1. It will be recalled that a condition of the loan was that the defendant should obtain a check valuation. On 19 April 1999 Ms Roberts wrote to Mr Bell, a valuer employed by HTW. The letter was sent by facsimile transmission but probably to a wrong number. It is clear that the letter was not received by HTW until it was retransmitted shortly before 3:00 pm on 14 May 1999. The letter was written by the second defendant on behalf of its client, the first defendant. It mentioned the application for loan made by Longhampton, and enclosed a copy of the Collins and Eales valuation of 4 February on which it was said the first defendant was relying. It pointed out that the valuation was ‘based on the forced sale value of the property and does not take into account any aspect of the business which is conducted thereon.’ The letter asked for a prompt answer to a number of questions. They were:

‘a)Does your firm agree with the market and forced sales values as estimated by Collins and Eales?

b) Is there any other aspect that our client needs to take into account?

c) ... the securities have been dependent on the backpackers market.  In the event this type of market collapses, what other use ... could be made of the security property?

d) Will this effect the value of the property in any way?

e)Do you agree with the methodology used by Collins and Eales?

f)In the event your estimate of the market and forced sale value of the security property differs more than 10 per cent of the estimate given by Collins and Eales we ask that you advise us accordingly.’

  1. The letter went on to say that the loan was to be made the following day. Urgent attention to the questions was asked for. Ms Roberts spoke to Mr Bell on the same day, 19 April. It seems likely that she advised him briefly that her employer required a check valuation of a property against which it proposed to lend money. They discussed the question of fees and Mr Bell said he would call later to advise whether or not HTW could assist. Mr Bell has no recollection of the conversation but it is clear that he would not himself have undertaken the check valuation nor could he commit HTW to provide it. Only Mr Missingham could do that. It is likely that both Ms Roberts and Mr Bell thought that the matter would be taken further on receipt of the letter of 19 April, but nothing happened when that letter went astray. On 21 April Mr Smith spoke to Mr Bell but there is no point in rehearsing the conversation which Mr Smith regarded as ‘a waste of time’ because at its conclusion Mr Bell made it clear that any response to Mr Smith’s questions would have to come from Mr Missingham. Mr Smith’s account of the conversation appears later in these reasons.
  1. It had been hoped, certainly by the borrower, that the loan might be made on 20 April. This was not possible, principally because contributors were reluctant to advance money on the security of a property which depended on the continuing prosperity of a backpacker’s hostel.
  1. On 27 April the second defendants wrote to the contributors to ask whether they were respectively prepared to advance sums to enable the first defendant to make the loan to Longhampton. The letter recapitulated the basic terms of the advance and the security for it. It asserted that a copy of the Collins and Eales valuation of 4 February was enclosed, but it may not in fact have gone, or may have gone to some only of the contributors. Under the heading “Commercial Risk” the letter said:

‘We confirm our previous advice ... that private mortgage lending is not without risk.  The reason you are receiving a higher interest rate reflects the degree of risk involved in the transaction. 

 

The decision whether you wish to lend in this transaction ultimately is a decision for you based on the information enclosed in the loan synopsis ... and any further enquiries you may wish to make.’

  1. On 30 April 1999 Mr Roberts wrote to Longhampton’s solicitors to advise that the defendants were experiencing difficulties raising the necessary funds to make the advance because of the contributors’ reluctance ‘to invest funds in a loan over a backpacker’s hostel and further, the fact that the hostel is based on an island.’ Ms Roberts thought, however, that the funds might be available on 12 May and asked whether that date was acceptable to Longhampton. By 13 May it was apparent that the defendants had secured sufficient contributories’ funds to make the advance, and it advised Longhampton’s solicitors to that effect. Settlement was tentatively arranged for 14 May at 3:00 pm.
  1. Ms Roberts maintained a checklist which set out the defendants’ requirements which had to be satisfied before any contributories’ funds could be advanced. It is likely that on consulting her checklist on 13 May in preparation for the approaching settlement Ms Roberts realised that she had not received the check valuation from HTW. Accordingly she sent a facsimile transmission on 13 May to HTW requesting a response to her earlier letter faxed (to the wrong number) on 19 April. The receipt of the later fax was brought to Mr Missingham’s attention. He telephoned the second defendants. He cannot recall to whom he spoke, but it appears that he was informed of the conversations between Ms Roberts and/or Mr Smith and Mr Bell in the preceding month, and in turn passed on information that HTW had never received Ms Roberts’ fax of 19 April.
  1. At about 4:45 pm that day Mr Missingham spoke by telephone to Mr Smith who told him that he wanted a review of the Collins and Eales valuation of 4 February. Mr Missingham made a brief note of the conversation. Mr Smith did not.
  1. Mr Missingham had in fact valued Geoff’s Place for Longhampton on 14 February 1999. He had then been informed that that company was contemplating leasing the property to Galeforce and he had been given a copy of the proposed lease. He was told that the parties ‘expected’ to sign the lease in the near future. He valued Longhampton’s interest in the lease at $1,100,000. It is likely he had some recollection of these facts when he spoke to Mr Smith because his note records that he discussed the various interests which might be valued when a property was leased: the freehold, the lessor’s interest, and the lessee’s interest. Mr Smith asked him to perform a ‘desktop check valuation of the Collins and Eales valuation’. At the time Mr Missingham thought he did not have that valuation; he did not have the letter of 19 April which had enclosed it. Mr Missingham quoted a fee of $1,000 to perform the check and said it would take him four or five days. Mr Smith replied that that would be ‘a waste of time and money’.
  1. Mr Missingham has no clear recollection of the conversation apart from his notes. It is a fair inference that he agreed with Mr Smith to review the Collins and Eales valuation for a fee of $500 without performing his own valuation of Geoff’s Place. He was not to inspect the property but was to restrict his review to the contents of the Collins and Eales valuation. In the circumstances he can only have been asked to review Mr Eales’ work for obvious errors of methodology or calculation.
  1. Mr Missingham’s note recorded that he spoke to Mr Smith at 4:45 pm. It reads:

‘●Freehold WIWO lessor’s and lessee’s interests

Quote: $1000 plus 4/5 days to do desktop check value of Collins and Eales valn’s.

  • Suggested ‘waste of time plus money’.’

The letters ‘WIWO’ signify ‘walk in walk out’. 

  1. The letter of instruction of 19 April was eventually sent by facsimile transmission to Mr Missingham at 2:47 pm on 14 May. Settlement had been set for 3:00 pm. He answered the questions posed in the earlier letter:

‘(a)Yes.

(b)No.

(c)Very limited, possibly residential subdivision.

(d)No.

(e)Yes.

(f)Not applicable.’

The loan was made at about 4:00 pm on 14 May. 

  1. Mr Missingham in fact had a copy of the Collins and Eales valuation. Apparently it had been given to him earlier by Longhampton’s solicitors anticipating that he would be asked to comment upon Mr Eales’ work. It is not clear when the valuation was given to Mr Missingham. No doubt the information that he would be chosen to perform the check valuation was given in some conversation between Ms Roberts and Longhampton’s solicitors.
  1. Mr Missingham denied emphatically that he knew that Geoff’s Place had been leased by Longhampton when he spoke to Mr Smith on 14 May. He pointed out that his instructions were limited to commenting upon the Collins and Eales valuation which was of the freehold interest in the property. Had he known that the hostel had been leased he would not have expressed any opinion on the Collins and Eales valuation which would have been, in his terms, redundant. No doubt he meant inappropriate on the basis that the valuation was of a proprietary interest which Longhampton did not own and could not offer by way of security.
  1. Mr Missingham had been told in connection with his February valuation that Longhampton had sold its business, i.e. the operation of Geoff’s Place, and he knew that the purchaser and Longhampton were contemplating a lease of the property. It was probably because of that knowledge that he discussed with Mr Smith valuing the property on the basis of the lessor’s interest in it.
  1. Mr Smith’s recollection of the conversation was a little disjointed. He said that he had told Mr Missingham what he had earlier told Mr Bell. This was that:

‘We were advancing money on a first mortgage and needed a check valuation ... I gave him the figures over the phone ... we’ve got a valuation of $1.875m for market value and then an as is valuation of $1.54m and a forced sale valuation of $1.3m. ... I told him I was concerned with the backpacker’s business ... and wanted to be sure that we had it right.  I told him that ... we were not relying on the business aspect ... because the business had been sold and there was the lease for five years with $130,000 a year rental.’

Mr Smith said that Mr Missingham told him he did not have a copy of the Collins and Eales valuation and that he would have to go to Magnetic Island to inspect Geoff’s Place.   Mr Smith said there was not enough time and that all he wanted was ‘to know ... if (he) was on the right track,’ by which I take it he meant he wanted to know if it was reasonable to rely upon the Collins and Eales valuation.  Mr Missingham said he would read the valuation and communicate his opinion to Mr Smith.

  1. I prefer the evidence of Mr Missingham to that of Mr Smith. My impression of Mr Missingham was that he was both forthright and candid. Unhappily the same cannot be said for Mr Smith. It emerged in cross-examination that on two occasions when he swore affidavits in connection with the defendants’ application to wind-up the managed investment schemes he misstated facts to present the defendants’ case more favourably than the reality allowed. He admitted also that the defence for which he was responsible contained a false denial. It is also noteworthy that an important part of their conversation which was put to Mr Missingham in cross-examination by senior counsel for the defendants was not that which Mr Smith himself gave in evidence. The contrast may be seen between T 213 lines 1-3 and T 372 lines 52-56. Mr Smith did not make a note of the conversation.
  1. The real contest is whether Mr Smith told Mr Missingham that Geoff’s Place had been leased by Longhampton. I do not believe he did. Had he done so it is inconceivable that Mr Missingham would have answered the questions put to him as he did. It is clear that Mr Missingham discussed the basis on which a valuation might be performed: by reference to the value of the freehold, a lessee’s interest or a lessor’s interest. There can be little doubt that his observation was prompted by what he had been told in February about Longhampton’s proposal to lease Geoff’s Place. Mr Smith instructed him firmly to review the Collins and Eales valuation which, of course, was an appraisal of freehold value. This instruction was tantamount to an intimation that the property was not leased. I will recount later in these reasons Mr Smith’s peculiar idea that the lease was irrelevant to the question of value and the enforceability of the security. It is consonant with that idea that he would ignore the lease in his conversation with Mr Missingham. I am satisfied that despite being warned by Mr Missingham of the appropriateness of valuing a lessor’s interest where that interest was offered as security Mr Smith instructed Mr Missingham to do no more than review the Collins and Eales valuation. He specifically told him he did not require Mr Missingham’s own valuation.
  1. Shortly before the first defendant made the advance to Longhampton the defendants obtained from the contributors an authorisation to lend their respective shares of the aggregate amount to be advanced. The authorisation took the form of a document addressed to both the first and second defendants. The documents were signed by each of the contributors. They authorised and directed the first and the second defendants to contribute a specified amount to the mortgage which was also identified. They then set out seven advantages of using a nominee company, i.e. the first defendant, in the transaction. The document continued with a specific authorisation and direction to both defendants

‘To place the investment amount on the following terms and conditions:

  1. Registered first mortgage security only over the abovementioned property.
  1. Loan amount to be less that 70 per cent of the valuation, which valuation is to be assigned to Bells Securities Pty Ltd.
  1. First mortgage security to be held in the name of Bells Securities ...’

The contributors then acknowledged that, inter alia,

‘The role of Bells Securities Pty Ltd ... is solely that of trustee to hold each mortgage on behalf of contributors to each mortgage.’

  1. On 16 March 2000 the second defendants advised Longhampton that the loan would have to be repaid on 14 May 2000. Interest was payable monthly in advance. The payment due on 14 April for the ensuing month was not paid. The loan itself was not repaid on 14 May. On 23 August 2000 the first defendant obtained judgment by default against Longhampton and on 23 October 2000 default judgment was obtained against one of the guarantors. The judgment went unsatisfied. The other guarantor became bankrupt. On 6 June 2002 the order was made appointing the plaintiffs liquidators and trustees of the first defendant’s managed investment scheme which included the loan to Longhampton. On 8 November 2002 the plaintiffs sold Geoff’s Place for a net price of $634,008.58.
  1. A number of valuations of Geoff’s Place were put into evidence but it is not necessary to discuss them in any detail. I have already described the Collins and Eales valuation of 4 February 1999. Mr Missingham’s valuation of 12 February 1999 was predicated upon the hostel being leased on the terms which were in fact subsequently accepted by Longhampton and Galeforce. On that basis, Mr Missingham assessed the net rental income to be $125,000 and capitalised that at a rate of about 11.5 per cent to arrive at a value of $1,100,000. Mr Caleo of Taylor Byrne conducted a retrospective valuation of Geoff’s Place in November 2000. His valuation was of the lessor’s interest in the property as at 15 April 1999. He assessed the net income from the property to be just under $113,000 to which he applied a yield of 12.5 per cent to arrive at a value of $900,000. Mr Wake, an experienced forensic valuer, valued Longhampton’s interest in Geoff’s Place as at 15 April 1999 at $900,000. His valuation was performed in October 2003.

Plaintiffs’ standing to sue

  1. The first point taken by the defendants is that the plaintiffs have no standing to bring the action they have prosecuted. It is submitted that the only proper plaintiffs were the contributors who advanced and lost money by reason of the alleged negligence of the defendants. The submissions, in summary, are:
  • The plaintiffs’ appointment as liquidators of the first defendant’s scheme does not itself give them standing to bring any proceedings relating to the scheme.  The scheme, unlike a company, has no separate legal existence.  A liquidator may commence proceedings to enforce the rights of a company but the “scheme”, having no existence, has no rights.

 

  • The plaintiffs, having succeeded to the first defendant’s rights as mortgagee and lender could proceed against the borrower, and any guarantors.  Further, the plaintiffs having succeeded the first defendant as trustee of every trust relating to the loan to Longhampton could prosecute an action against the first defendant for any breach of trust it committed.  With these two exceptions the plaintiffs have no right to sue either of the defendants.  They could only bring an action against the second defendants, whether for breach of contract, negligence or breach of the Corporations Law if the right to bring such an action had fully vested in the first defendant as trustee.

 

  • The first defendant performed no function and undertook no activity with respect to the contributors to the loan until the advance was actually made.  Then it held its rights under the loan agreement, guarantee and mortgage on trust for the contributors.  For a brief period prior to the advance it held the contributors’ money on trust but it did so “as a bare trustee or mere cipher” for the contributors.  It had no obligations to the contributors other than to hold the money and apply it to the loan.  This conclusion is said to follow from the terms of the written communication between the second defendants and the contributors (for example exhibit 2 p 225 and p 289) which described the role of the first defendant as providing administrative convenience in making the loan and protecting the contributors’ interests.  It is emphasised that the terms of the contributors’ authorisation to make the loan specified the role of the first defendant to be “solely that of trustee to hold each mortgage on behalf of contributors.”  It is also pointed out that the first defendant “had no existence independent of” the second defendants.  It had no staff and earned no income.  All correspondence with the contributors prior to the loan emanated from the second defendants.

 

  • The number and identity of contributors to the loan fund had altered over time.  Four of the contributors who originally participated in the loan to Longhampton were paid the full amount of their contribution together with interest.  One of the original contributors was paid part of his advance.  Their contributions were replaced by those of other contributors who later became investors in the scheme.  One of those was in turn paid out in full.  Details of the contributors and the movement of their funds are set out in an annexure to the defendants’ submission.  The consequence of the changes in contributors is that the persons whom the plaintiffs purport to represent have different interests.  There is no commonality in their cause.  There is likely to be a contest between them with respect to the proceeds of the action, if it succeeds.  In such circumstances the plaintiffs suing as trustees, cannot represent the conflicting interests of beneficiaries.
  1. These submissions make three points. The first is that because the first defendant was a cipher, or bare trustee, before the loan was made to Longhampton it could not and did not commit any breach of trust by making the loan. This is said to follow from the fact that its duty as trustee was limited to holding the contributions until the time came to make the advance. The second point is a consequence of the first defendant’s alleged inertness. The point is that the second defendant owed it no duty to exercise reasonable care when investigating and preparing the advance. The third point is that the plaintiffs cannot represent the contributories whose money has been lost because their interests are diverse and may conflict.
  1. I do not accept the defendants’ submissions that the first defendant was a cipher, non-entity or bare trustee until the loan was made to Longhampton. It is of particular significance that the assignment of the Collins and Eales valuation was made to the first defendant for the express purpose of allowing it to decide whether or not to make the advance. The letter of 15 April 1999 from Mr Eales was addressed to the first defendant and certified that it could ‘rely on the (valuation) for the purpose of lending money against the security of the property concerned’. The terms of the agreement between the first defendant and the contributors was that the valuation would be assigned to it and held by it.
  1. It is true that the first defendant depended on the second defendant for advice, information and resources. It is not, however, true to say that it had no existence apart from the second defendant. It clearly had an existence and a function separate from the second defendant. Mr Smith was both a partner in the second defendant and a director of the first defendant. Relevantly he was, for present purposes, the controlling mind of the first defendant. In dealing with Longhampton’s application Mr Smith was acting in his capacity as solicitor for the first defendant and director of it. The decision to lend may have been Mr Smith’s but it was a decision made on behalf of the first defendant. It was that company which made the loan.
  1. A trustee has a duty to beneficiaries to exercise its powers in the best interests of the beneficiaries and without negligence. See Cowan v Scargill [1985] Ch 270 at 289 citing with approval the judgment of Lindley LJ in In Re Whiteley; Whiteley v Learoyd (1886) 33 Ch D 347 at 355, a case in which trustees were held liable to the beneficiaries when the trust fund was diminished by investing in an improvident loan.
  1. The first defendant held the contributors’ funds on trust to advance to Longhampton. However it knew (by Smith) that those funds had been solicited by the second defendant on the basis that the Collins and Eales valuation showed the advance to be a prudent investment. If the first defendant knew, or should have known, that the valuation did not show that the loan was provident, the trustee in making the advance was in breach of its duty to act with reasonable prudence to protect the trust fund. If it be said that the trustee was bound to make the advance because of the contributors’ direction the answer is surely that the trustee should have advised them of any doubt about the valuation.
  1. Moreover, it was a term of the advance, and therefore of the trust on which the first defendant held the contributors’ funds, that the loan was to be for an amount less than 70 per cent of the valuation. If there was no valuation which showed whether or not that term had been satisfied the first defendant was not authorised to make the advance.
  1. The plaintiffs have succeeded the first defendant as trustees of all trusts relating to its money lending scheme. The plaintiffs may therefore bring an action in respect of the latter’s breach of trust. See Young v Murphy [1996] 1 VR 279.
  1. There can be no doubt that the second defendant acted as the first defendant’s solicitors in preparing the loan documentation and in making investigations into the value of the security. They negotiated the terms of the loan on behalf of the first defendant. It was the second defendant who obtained all information about the property. In numerous letters the second defendants asserted that they acted for the second defendant. They delivered invoices to the second defendant for their work on its behalf. Mr Smith eventually conceded that his firm had acted for the first defendant.
  1. The first defendant was a trustee of the funds made available by the contributors. It was trustee of those funds when they were lent to Longhampton and trustee of the debt and ancillary obligations owed by Longhampton to it. If it parted with the trust fund on an improvident loan because of negligent advice or misleading statements made by the second defendants, the first defendant could have recovered the loss to the trust fund by action against the second defendant. The plaintiffs, having succeeded the first defendant as trustee of those trusts, can prosecute the same actions against the solicitors.
  1. The defendants base the third aspect of their challenge to standing on passages in the judgment of Brooking J in Young at 283 and 285:

‘But, while the trustee in general sufficiently represents the beneficiaries’ interests for the purposes of proceedings to redress a breach of trust, they should be made parties if their interests may not be properly represented by the trustee.

...

 

The proceedings which the trustee brings may be such as to raise, or be capable of raising, questions between one beneficiary and another ...  In such a case the trustee does not sufficiently represent the interests of the beneficiaries for the purposes of the proceedings.  Accordingly, if in the proceedings the trustee seeks the execution or administration of the trust in addition to seeking to have the breach of trust redressed, the beneficiaries will or may be necessary parties, since their interests … or their rights against the trustee may have to be determined.  This is not so if in the proceedings the trustee seeks only to get in the trust fund ...

 

But the fact that there may be doubt as to the existence or extent of the interest of beneficiaries will not prevent a trustee from suing to redress a breach of trust without making any of the beneficiaries parties.  Such a doubt will have this effect only if the question will or may arise in the proceedings sought to be maintained.  As it was put in Lewin On Trusts, 3rd ed. (1857) at 852 using an expression current at the time, “the frame of the suit” must not involve any matter of contest ... between the beneficiaries themselves.’

  1. These passages do not, in my opinion, support the defendants’ submission. The prohibition on a trustee suing without joining the beneficiaries is limited to the case in which the suit brings into issue a conflict among the beneficiaries as to the fruits of the action. The judgment just quoted makes it clear that the trustee may sue on behalf of the trust where the trustee ‘seeks only to get in the trust fund’ and does not seek the execution of the trust. It is this latter proceeding which will enliven a dispute between beneficiaries. The plaintiffs in this action seek only to recover the deficiency in the repayment of the loan and interest. This represents the loss to the trust estate. It does not seek any further order as to the distribution of the fruits of the action, if it is successful. The ‘frame of the suit’ does not involve any matter of contest between the beneficiaries. There will not necessarily be any such dispute. Should the plaintiff succeed the proceeds of the suit can be distributed by agreement. In the absence of agreement the court can determine the contributors’ rights to the fund on an application brought by the plaintiffs to which the contributors are made respondents.
  1. I was referred to a decision of Barrett J, Australian Securities and Investments Commission (ASIC) v Takaran Pty Ltd (2002) 43 ACSR 46, but I have not found that case of particular assistance.  It involved a managed investment scheme indistinguishable from that operated by the defendants.  His Honour found that obtaining a valuation to support the loan ‘occurred as part of the coordinated and coherent series of events which surrounded that collection and pooling of monies for an identified purpose which was eventually effectual’ and therefore formed a part of the ‘scheme’, as did an action by the lender, trustee for the contributories, to sue the valuers for negligence.  His Honour said [53 – 54]

‘The obtaining of and reliance upon the valuation in connection with the making of the relevant mortgage loan were activities which formed part of the scheme involving that mortgage loan. 

 

...

 

Pursuit of the valuer for damages ... arises naturally from and is a logical sequel to the earlier activities to which I have just referred.  The pursuit of that course must be regarded likewise as a part of the same program or plan of action and the effectuation of the same purpose as comprehended obtaining of and reliance on the valuation in the first place.’

The decision offers some support for the view that the plaintiffs, as liquidators of the defendant’s scheme, may as part of the winding-up, prosecute the action. 

  1. For these reasons I conclude that the plaintiffs have standing to bring the action.

Were the defendants negligent?

  1. I think the answer to the question is so clear that I intend to express my reasons quite briefly. I do not differentiate between the defendants when discussing the question. The relevant conduct is that of Mr Smith who was both a member of the second defendants’ firm, and a director of the first defendant.
  1. The defendants had a prudential requirement that they would not lend or recommend that their clients lend an amount which exceeded 70 per cent of the value of the property to be taken as security for the loan. It was essential when assessing whether a loan should be made to have a valuation of the security. Mr Smith never obtained such a valuation. What Longhampton could offer as security was its leasehold interest in Geoff’s Place. Its interest in the land was relevantly limited to the right to receive rent in the sum of $130,000 per annum. That interest was clearly valuable. Its value was established by the opinions of Mr Missingham, Mr Caleo and Mr Wake at between $900,000 and $1,100,000. Longhampton, the borrower, provided the defendants with the Collins and Eales valuation which it had commissioned in February 1999 prior to the execution of the lease to Galeforce. That valuation did not value the property which Longhampton could provide by way of security for the repayment of the loan of $1,040,000. That fact is obvious from the terms of the valuation. The subject matter of that valuation was the business conducted at Geoff’s Place. The land was income producing. The conventional approach to valuation of such land, ignoring exceptions which are irrelevant in this case, is to value the income stream, as it is called, from the business. It is clear from what Mr Eales wrote that he was valuing the likely profit to be generated from the business on the predication that it would produce income into the future at the level it had generated in the past. It is clear from his valuation that he derived his figure by assessing the capital value of an income of $330,000 a year. But the business had been sold and the vendor’s receipts were limited to a rental income of $130,000 a year. As an alternative, check, method of valuation Mr Eales had valued the land and improvements, the buildings, at $1,540,000 but these were not available for sale by a mortgagee who had lent money to Longhampton. The lessee had exclusive rights to possession of that property while the lease subsisted. Of equal importance is the fact that the land and buildings only had substantial value if utilised to generate income. That is to say, unless the land and buildings were put to some commercial or business use they had no substantial value.
  1. These things were obvious, and should have been obvious to Mr Smith. He knew of the existence and terms of the lease and of the fact that the business had been sold when he sought an assignment of the valuation to the first defendant. He read the valuation. He must have appreciated that it said nothing about the value of any security that Longhampton might provide for the repayment of any advance made to it. He did not ask Mr Eales, nor any other valuer, to provide the defendants with a valuation of Longhampton’s interest in the land. Had he done so the evidence suggests that he would have been given a figure no more than $1,100,000 and perhaps as little as $900,000. If he had received such a valuation the first defendant would not have lent the money. The prudential requirement would not have been satisfied. Indeed it would have appeared that the loan exceeded the value of the security.
  1. The reason for the defendants’ failure to obtain an appropriate valuation is found in Mr Smith’s belief that the lease improved the value of the security and that its effect should be ignored when assessing the value of the property. Mr Smith believed himself to have been conservative in obtaining a valuation of the land and improvements and ignoring what he called the ‘business element’ of the land. The error in this approach is egregious. The land and improvements could not be sold by a mortgagee on the mortgagor’s default, as long as the lease subsisted. Moreover the highest and best use of the land was as a hotel or hostel. It had no substantial value apart from its capacity to generate income from such a business. What was to be valued was the right to receive the rent which the lease gave to Longhampton. By ignoring these factors Mr Smith failed completely to inquire into the value of the security and insisted upon being given irrelevant answers by the valuers to whom he spoke.
  1. The answer advanced on Mr Smith’s behalf was that, as a matter of practicality, the mortgagee could look, in the event of the mortgagor’s default, to the freehold value of the property. The argument was that in all likelihood a default by the mortgagor/lessor would be occasioned by the lessee’s failure to pay the rent. In such a case, the argument continued, the lessor could determine the lease and retake possession of the hostel which the mortgagee could then proceed to sell. The argument depends upon a default being ultimately the responsibility of the lessee and not the lessor/mortgagor. Such an assumption is unwarranted, as is the assertion that, in the event of the lessee’s default, the lessor could forfeit the lease. A default may have had those consequences but they were not inevitable. The only certainty was that the property offered as security for the loan was Longhampton’s interest in the lease, and not the freehold.
  1. Mr Smith’s attitude can be gauged from the following parts of his evidence. He said, (T351-2) that he knew that the Collins and Eales valuation ‘did not take any account of the lease’. He knew that when he prepared the loan synopsis to send to prospective contributors. He understood that the values described in the synopsis ‘were based upon valuation ... undertaken without any regard for the terms of the lease’. He saw the lease as having a ‘positive’ effect on the value of the property and that the ‘entire valuation was based upon ... there being no lease in existence’.
  1. Mr Smith admitted (T381-2) that he had an obligation to obtain a proper valuation of the interest over which the mortgage was to be taken prior to the advance. He conceded he did not obtain any such valuation. His explanation for the omission was that ‘it hadn’t been pointed out ... that that was a real issue and would effect the valuation’. Mr Smith’s thinking is demonstrated in the following passage (T 379-380)

‘You wanted to get a valuation of what you call the land and improvements only, ignoring the business and the lease;  is that right? -- That’s right.

And you wanted to do so because you assumed that, while the lease gave comfort in the sense of a secure income you wanted to know what the land would be worth if the tenant fled or left the premises? -- That’s right.

It’s for that reason that you didn’t ask for a valuation of the lessor’s interest in the property? -- That's right.

Did you consider asking anybody for a valuation of the lessor’s interest in the property? -- No.

Did you even consider the possibility that the existence of the lease might in fact reduce the value of the property to the mortgagee? --No, definitely not.’

Mr Smith admitted that he knew, in April 1999, that the value of an income producing property depended substantially on the income it actually produced, and that the value of a property leased, from the lessor’s point of view, depended substantially on the value of the net rental received.

  1. Given the evidence just rehearsed the correctness of Mr Smith’s admission must be doubted. If he did have that understanding his belief that the lease could be ignored in deriving the value of Longhampton’s interest in Geoff’s Place is even more inexplicable.
  1. It will be remembered that Mr Missingham suggested that he provide a valuation of the property which he would inspect for that purpose. Mr Smith expressly rejected the suggestion and confined Mr Missingham to a review of the Collins and Eales valuation. But for his stubborn preconception about the effect of the lease on the security Mr Smith would have realised that that valuation was irrelevant and could not justify the decision to make the loan.
  1. Enough has been said to indicate my opinion that Mr Smith in his capacity as solicitor for the first defendant failed to take reasonable care when advising the first defendant whether the loan to Longhampton met its prudential lending requirements. In his capacity as a director of the first defendant he failed to take reasonable care for the preservation of the trust fund constituted by the contributions.
  1. The defendants seek to answer the plaintiffs’ criticisms of Mr Smith by submitting that they obtained a valuation and advice from Mr Eales, a reputable valuer, and confirmation of that valuation from another reputable valuer, Mr Missingham. It was submitted that it was reasonable to rely on the advice of both valuers. In particular it was submitted that Mr Eales, when asked about his valuation was told of the existence and essential terms of the lease, and failed to qualify his opinion as to the value of the land for mortgage security purposes. As to Mr Missingham it was submitted that he expressly confirmed Mr Eales’ valuation, and that there was no other aspect concerning the loan which the lender should take into account.
  1. I have set out the terms of the conversations between Mr Smith and Messrs Eales and Missingham. I have found that Mr Missingham was not told of the lease but did himself raise with Mr Smith the prospect of valuing the security property by reference to the lessor’s interest in it. Mr Smith rejected any such enquiry and limited Mr Missingham’s retainer to review of the Collins and Eales valuation. This was to ask Mr Missingham to perform an unhelpful exercise when Mr Smith knew, and should have appreciated, that what was needed was a valuation of the lessor’s interest. Mr Smith cannot avoid a finding of negligence on the basis that he insisted that Mr Missingham give him an irrelevant opinion.
  1. I have also set out the terms in which Mr Smith and Mr Eales recollect their conversation. For reasons I will develop soon I cannot determine what was, in fact, said. Both versions are unsatisfactory. If one accepted Mr Smith’s account it would not help his cause. On that hypothesis he told Mr Eales of the lease and was not advised that it affected the earlier valuation. That may be a ground for finding negligence in Mr Eales, but it does not exonerate Mr Smith who did not ask the one relevant question: what was the value of Longhampton’s interest in Geoff’s Place? No doubt it was not asked because of Mr Smith’s belief that the lease was irrelevant to that question, but his failure to ask it is conclusive of his negligence.
  1. The defendants raised an argument that the claim against them should fail because there was no evidence that any of the contributors relied upon anything done or said by the defendants with respect to the Collins and Eales valuation in deciding to contribute to the loan. The point is that the plaintiffs called no evidence from any of the contributors to show that they relied upon the Collins and Eales valuation as the basis for deciding whether to lend. Whatever substance there might be in the argument it is answered by the circumstance that had Mr Smith obtained a valuation of the property to be secured he would have been advised that it was worth no more than $1,100,000 and may be worth no more than $900,000. This was less than the amount of the advance. The loan could not have been made in conformity with the defendants’ own lending guidelines. Longhampton’s application would have been declined. The contributors would not have been asked to lend, and would not have parted with their money.

Liability of the third parties

  1. The defendants claim damages amounting to an indemnity in respect of their liability to the plaintiffs against HTW for breach of contract and contravention of the Corporations Act, the Trade Practices Act and the Fair Trading Act (Qld) 1989.  They seek damages amounting to a similar indemnity against the other third parties for contravention of those same Acts.  Additionally the defendants claim contribution from the third parties pursuant to s 6(c) of the Law Reform Act (Qld) 1995 on the ground that their negligence contributed with the defendants’ to cause the plaintiffs’ loss. 
  1. The position is clear with respect to HTW and Mr Missingham and I will consider the defendants’ claim against them first.
  1. The factual basis for the defendants’ claims against HTW and Mr Missingham was that Mr Smith informed them, in his conversation with Mr Missingham, of the existence of the lease. With that knowledge Mr Missingham, and HTW, advised Mr Smith that they agreed ‘with the market and forced sales values as estimated by Collins and Eales’ and that there was ‘no other aspect that (the defendants) need to take into account’. The claim fails at the threshold because I found that Mr Smith did not advise Mr Missingham of the lease. Mr Missingham’s suggestion that the lessor’s interest be valued was rejected by Mr Smith. In the circumstance the advice given by HTW and Mr Missingham contained in their letter of 14 May, answering the questions put to them earlier that day, were not negligent nor were they misrepresentations amounting to misleading and/or deceptive statements.
  1. The circumstances were that Mr Missingham was supplied with the Collins and Eales valuation and asked specific questions with respect to it. He was told he was not to perform his own valuation but to perform a ‘desktop check valuation’. That can only have meant a review of the valuation on the basis that he accepted as correct the information contained in the valuation, and was to check the conclusions drawn from that information, the accuracy of any calculations and the appropriateness of the methodology of the valuation by reference to the facts stated in it. On that limited basis Mr Missingham’s answers to the question were appropriate. What invalidated the Collins and Eales valuation was the lease. Its existence was not revealed to Mr Missingham who cannot fairly be criticised for not drawing attention to its effect on the valuation.
  1. There is an additional reason for rejecting the defendant’s claims against HTW and Mr Missingham. It is that the evidence does not justify a finding that the defendants, by Mr Smith, relied upon their review when deciding that the first defendant should make the loan. The absence of reliance precludes any finding that negligence or misleading conduct was a cause of the decision to make the loan. The doubt arises because of the extreme haste with which the HTW review was obtained and the late hour at which it came. It will be remembered that Longhampton had been pressing for the loan since 20 April. On 12 May the defendants intimated that they believed they had secured sufficient monies to make the loan on 14 May. On 13 May arrangements were made for the advance. On that day, at the last moment, it was realised that the check valuation had not been obtained. The reason for that was the defendants’ error in misdirecting the letter of 19 April and their failure to realise earlier that they had not had a response to it. Mr Missingham was contacted on the afternoon of 13 May. He was not given the letter of instructions until 2:47 pm on 14 May. Settlement had been set for 3:00 pm but was delayed until 4:00 pm. The HTW reply was received by the defendants at 3:08 pm. It must have been obvious to Mr Smith and Ms Roberts that Mr Missingham could only have given cursory attention to the Collins and Eales valuation and the questions asked of him. The letter from HTW was no more than an assertion that the Collins and Eales valuation contained no obvious errors of calculation or methodology given the facts on which the opinion of value was said to be based. Mr Smith must have realised the review could only have been superficial.
  1. No attempt was made to delay the settlement to allow Mr Missingham a decent interval to examine the Collins and Eales valuation. Settlement went ahead on the day and almost at the hour appointed before the letter of instruction was sent to HTW. I infer the decision to lend had been made irrespective of the receipt of the check valuation. Whether or not the advance may have been stopped had Mr Missingham advised that the property was worth only $1,100,000 need not be addressed as a separate question because he was not given the information that might have led to such a statement.
  1. For these reasons I find that the claim against the third and fourth third parties has not been made out.
  1. The claim against Collins and Eales and Mr Eales is more difficult. It too has a factual basis in a conversation between Mr Smith and Mr Eales, that which occurred on 19 April. I have already set out the respective versions of that conversation. I am unable to accept either of them as accurate. I have explained why I regard Mr Smith as an unsatisfactory witness. I am not satisfied that he has a good recollection of what was said. I do accept the accuracy of his diary note which appears to record what Mr Smith understood Mr Eales told him. The note is set out in paragraph 30 of these reasons.
  1. The first note can only be a reference to that part of the Collins and Eales valuation which summarily valued Geoff’s Place by reference to land, buildings and plant and equipment. It is clear from other evidence that it was only that part of the valuation which interested Mr Smith and on which he instructed Ms Roberts to concentrate. It is not possible that Mr Eales told him that there was no ‘business element’ in his valuation. It was a valuation of the income anticipated to be earnt from the business operated at Geoff’s Place. The other points summarised accord with Mr Eales’ account of the conversation, with the exception of his statement that he told Mr Smith, in blunt terms, that the valuation was ‘redundant’. If something to that effect were said it is likely that Mr Smith would have noted it. It may also be observed that Mr Smith did not record any conversation about the lease, but both gentlemen agree that it was discussed and that a brief, and probably inaccurate summary of its terms, was provided by Mr Smith.
  1. Mr Eales gave a detailed and articulate account of the conversation but I was not persuaded that he, or indeed any witness, could have such an extensive and comprehensive memory of a conversation that was some years old when he was called upon to recount it. More significantly the crucial part of the conversation appeared to be inconsistent with some letters written closer to the time. On 4 January 2001 Mr Smith wrote to Mr Eales to advise him of difficulties that had arisen since Longhampton’s default, and that a valuation obtained by Taylor Byrne showed the property to be worth a fraction of the figure Mr Eales had advised. Mr Smith asked for Mr Eales’ ‘views on the valuation which is half of your forced sale valuation.’ Mr Eales replied by letter of 30 January 2001:

‘2. Our letter of 17 March 1999 related to the value of land and improvements only.

 

3. Subsequently a lease of the property was entered into under proposal drafts terms and conditions.  The draft terms and conditions are different to those appearing in the executed lease.

The changes have adversely affected the market value of the property.  These changes have made the valuation that you have relied upon for security purposes redundant.’

  1. On 30 May 2003 the plaintiffs asked Mr Eales to provide an account of his 19 April conversation with Mr Smith. On 2 June 2003 Mr Eales wrote:

‘The initial valuation ... was prepared to determine the fair market value of land, improvements, plant and equipment of Geoff’s Place including the business good will.

 

A verbal inquiry by telephone from Geoff Smith canvassed the possibility of the property being leased under certain terms and conditions, the details of which were never briefed to me in writing.

 

From memory the general outline was that a net rental of $130,000 per annum with CPI or fixed 3 per cent rental adjustments.  The term was for five years with an option for five years.  All building maintenance etc to be the responsibility of the lessee.  The rental to be reviewed to fair market after five years. 

 

My reaction was that the rental was too low and a value of $1.3m to $1.35m would be flat out being achieved in the market place, especially in a short time frame of 90 days.

 

Secondly, it would also depend on the quality of the lessee and their experience in running a business of this type.

 

...

 

The letter of 16 March 1999 from Geoff Smith ... asked specifically for the value of land and improvements only and subsequently a further request asked for the assessment of a forced sale value.

 

...

 

No brief was ever received enclosing a copy of the executed lease agreement.  If it were briefed or if we had knowledge of a lease our assignment of the valuation would have been on the basis of a lease and ... the full documentation would have been sought and ... considered ...

 

Subsequently, when the loan was in default Geoff Smith was advised of the lease arrangements which on discovery ... were completely different to the “possible” lease ... he urgently canvassed with me.  This revelation was amazing ... in that a lender had not instructed me as the contents of the lease in preparing the letters of advice.’

  1. The contents of the letter do not provide an entirely consistent nor coherent answer to the question. Significantly there is no mention that Mr Smith was told that the lease had made the valuation redundant. The thrust of the letter appears to be that Mr Eales was not told there was a lease, but only the possibility of one, and that its terms differed significantly from those which Mr Smith described in the conversation. This difference accounted for the discrepancy in valuations. The letter cannot stand with Mr Eales’ testimony that he was told that there was a lease and that he was given information about its term and rent. He then understood that his valuation was ‘redundant’. It is not to the point that Mr Smith may have misstated those terms. The letter is inconsistent with Mr Eales’ evidence that he understood the effect of the lease on his valuation and told Mr Smith about it.
  1. The consequence is that Mr Eales’ evidence does not permit a finding to be made about what he said on the topic of the effect the lease had on the valuation. I do not accept this part of his evidence, but it must be said that there is substantial corroboration for his description of other aspects of the conversation. I think he has exaggerated, and perhaps invented, his response to the intimation about the lease. This is not to find that he said nothing about it. It would be surprising if he did not make some comment, but I have no way of discerning what that was.
  1. Likewise my reservations about Mr Smith’s evidence mean that I do not accept that Mr Eales made no comment on being told of the lease. Mr Smith says he did not, but I am not satisfied I should accept that assertion. It is abundantly clear that Mr Smith himself paid no attention to the lease, consciously disregarded it, and believed it to be irrelevant for his purposes in understanding the value of the property. It is not likely that he paid any attention to anything Mr Eales might have said about the effect of the lease on value.
  1. The defendants allege that Mr Eales’ failure to advert to the deleterious effect of the lease on his valuation was negligent and, in the circumstances, amounted to misleading or deceptive conduct. There is no doubt that silence may be so categorised. Where in any case a failure to speak is relied upon, the question must be whether, in the particular circumstances constituted by acts, omissions, statements, or silence, there has been conduct which is misleading or deceptive or amounts to a misrepresentation. See Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 40-41. 
  1. Mr Smith was concerned that Geoff’s Place might not be a suitable security for the proposed advance to Longhampton. His particular concern, reflecting that of the contributors, was that the value ascribed to it by Mr Eales depended upon its success as a backpacker’s hostel. He rang Mr Eales for advice about the suitability of the property as security for the advance. He mentioned the lease. In those circumstances had Mr Eales not said that the lease would have an effect on his valuation his advice would have been insufficient and, for that reason, negligent or misleading, notwithstanding that the occasion for the advice was gratuitous and that Collins and Eales had already assigned the valuation to the first defendant. The terms of, and reasons for, Mr Smith’s enquiry, and the person to whom it was addressed, obliged Mr Eales to take reasonable care in the expression of his opinion. Not to have mentioned the important feature which the lease constituted would have made his advice misleading or deceptive.
  1. Notwithstanding these observations, I am unable to conclude that the terms of Mr Eales’ advice amounted to a negligent statement of fact, a misrepresentation, or conduct that was misleading or deceptive. The inability arises from the uncertainty about what was actually said in relation to the lease and its effect on value. I repeat, I do not accept that Mr Eales gave the forceful advice he claims, but it does not follow that he said nothing about the lease. I cannot reply upon Mr Smith’s evidence that Mr Eales said nothing on the topic. I expect, as I have said, that something was said, but what it was lies entirely in the realm of speculation.
  1. The rather unsatisfactory consequence is that the defendants’ claim against the first and second third parties fails for lack of proof.
  1. It is unnecessary, but it may be helpful, to say that I doubt whether Mr Smith would have responded appropriately to advice that the lease would have affected Mr Eales valuation. A sufficient response to Mr Smith’s enquiry would have been that the earlier valuation was based on the income generated by the freeholder utilising its own property to conduct a business, and that the sale of the business and lease of the realty meant that a new approach to valuation was called for. No more could reasonably be expected in a conversation of the type in question. Had that advice been given it is, I think, doubtful that Mr Smith would have altered course and advised contributors against participation in the loan, or even commissioned a valuation of Longhampton’s leasehold interest. The strength of Mr Smith’s conviction that the lease enhanced the value of the security and that he should have regard only to the value of land and buildings was such that he would not have been dissuaded from his course by reasonable advice. It is to be remembered that he ignored a warning from Mr Missingham that the lessor’s interest should be valued when he knew that that was all Longhampton had to offer. It was clear in his evidence that Mr Smith, as late as the trial, adhered to his opinion that what was important was the value of the land and its improvements, and that all ‘business activity’ was to be ignored. His lack of understanding that the land and improvements of Geoff’s Place only had a value to the extent that they could generate income was profound.
  1. Mr Smith gave evidence that he relied upon what was said by Mr Eales, and by Mr Missingham, in their respective conversations, and he expected that if the lease adversely affected value they would have told him. For reasons I have already expressed this evidence cannot be accepted at face value.
  1. Other evidence provides some support for the conclusion that appropriate advice given by Mr Eales would not have been heeded. The offer to finance made on 26 March was accepted by Longhampton on the basis that the loan would be made no later than 20 April. The defendants sought contributors and recommended that advance to them on 16 April (exhibit 2 p 149). The defendants in fact anticipated making the advance on 20 April (exhibit 2 p 173). The loan documents were executed by Longhampton on 20 April and got to the defendants on 22 April. Ms Roberts accepted that the defendants were under pressure to make the advance (T 423). The conversation on 19 April came too late to affect the making of the advance that had already been put in train.
  1. Mr Smith said that the purpose of his call to Mr Eales ‘was to make sure that the backpacking industry was alive and well and was flourishing ... because if the lease “fell over” ... we would be left with an empty backpackers resort’ (T 363-4). I think there is no doubt that Mr Eales reassured Mr Smith on that score and said that there was unlikely to be any additional competition for backpacker’s accommodation for the 12 months of the loan. Having received that assurance, which is not said to have been wrong, Mr Smith was encouraged to make the advance.

Damages

  1. The parties differ significantly in their approach to the question of damages. The differences concern the nature and rate of interest to be awarded and whether the plaintiffs’ professional costs of the liquidation are a proper item of damage.
  1. Before dealing with the details of the submissions it is well to recall the causes of action which I have found to be made out. The second defendant was negligent and failed to discharge its retainer from the first defendant with reasonable care. It is unnecessary to consider whether there was any contravention of the relevant statutory provisions of the Trade Practices Act, Fair Trading Act or Corporations Act.  The only cause of action made out against the first defendant is a breach of trust constituted by Mr Smith’s failure to act with reasonable prudence with respect to the advance to Longhampton.  The rules for determining the appropriate measure of loss may not be identical for all causes of action.
  1. The plaintiffs’ claim by way of damages the difference between the amount due under the loan agreement at the date of sale and the amount recovered, after expenses, from the sale of the mortgaged property. There are several problems with this approach. The first is that the plaintiffs claim interest on the amount of the deficiency at 14.5 per cent per annum compounding monthly. This is not an amount that the contributors would have received had Longhampton performed its agreement. In that event the contributors would have received interest at 9.5 per cent compounded monthly. The second difficulty is that the plaintiffs seek this inflated return for two and a half years beyond the term of the loan.
  1. I take the principle to be, in the ordinary case, that where a party makes a contract by reason of another’s negligent misstatement or failure to advise, whether the cause of action be in negligence, contract or contravention of the Trade Practices Act or like statute, the measure of damage is not the loss of the bargain the contract would have yielded, but the cost to the plaintiff of making the contract.  This will often be the difference between what the plaintiff paid to enter the contract and the value of what he received from it.  The point is made in Gates v City Mutual Life Assurance Society Limited (1986) 160 CLR 1.  More recent cases in the High Court, such as HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54 and Henville v Walker (2001) 206 CLR 459, show that there is no rigid formula which will determine how to assess damages in every case.  Rather a degree of flexibility is required so the damages assessed in a particular case are apposite to the circumstances of that case. 
  1. The point remains that the ‘contractual’ measure of damages, an award of the profits a plaintiff would have made from entering a contract, is inapplicable in circumstances where, had a defendant not contravened the statute or been negligent, the plaintiff would not have made the contract. In ‘no transaction’ cases, of which this is one, the assessment depends upon the extent to which the plaintiff is worse off as a result of entering the contract which, on the relevant hypothesis, he did because of the negligence or statutory contravention.
  1. The plaintiffs are therefore entitled to recover the difference between the amount of $1,040,000 advanced by the contributors and the amount recovered from the sale of the mortgaged property. This amount will reflect appropriate expenses incurred in the realisation. As well the plaintiffs are entitled to interest from the date of the advance to judgment. The capital amount on which interest accrues will be the amount of the initial advance until the date of receipt of the proceeds of sale and thereafter on the amount reduced by those proceeds. The contributors received payment of interest from Longhampton for the first 11 months of the loan. They must give credit for this amount in the computation of their loss which is predicated upon the return of their capital and interest of an appropriate kind and at an appropriate rate since the date of the investment, 14 May 1999.
  1. What the contributors lost by way of interest was not the amount payable under the mortgage but the lost opportunity to invest elsewhere. The point was made by McHugh J in I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109 at 147:

‘The opportunity cost of lending the principal sum ... was the interest that it was deprived of in not being able to lend that principal to another borrower.  ... And it was the opportunity cost, not the interest that Camworth failed to pay, that was the relevant loss for the purpose of s 82.’

  1. There was no evidence as to what any of the contributors would have done with their money had they not lent it to Longhampton. It is clear that none of them was a particularly cautious investor. The loan attracted a higher rate of return than a secure deposit with a bank or the purchase of government bonds. The point was made by the second defendant when it invited the contributors to participate in the loan. Some of the contributors may have hazarded their money and lost all or part of it. Some may have invested it safely for low return. There is no factual basis on which to make an accurate assessment. The defendants accept that the plaintiffs are, on behalf of the contributors, entitled to interest but submit that the rate should be modest reflecting the guaranteed return, and the computation should be simple, reflecting the law’s natural conservatism on the question of interest. I accept those submissions. Indeed compound interest is only awarded where there is a contractual basis for it, or where there is a claim against a defaulting trustee who has been guilty of serious misconduct, or has himself used the trust fund for his own commercial purposes. There is in the present case no claim for damages of the type described by the High Court in Hungerfords v Walker (1989) 171 CLR 125.
  1. There is a claim against the first defendant for breach of trust but its basis lies in a failure to take care when investing the trust funds. There is no allegation of dishonesty or misuse of the trust funds for the trustee’s own purposes. Apart from these instances a defaulting trustee is only chargeable with simple interest. See Hagan v Waterhouse (1992) 34 NSWLR 308 at 393 and Alemite Lubrequip Pty Ltd v Adams t/as Price Waterhouse (1997) 41 NSWLR 45. 
  1. I propose to allow simple interest at five per cent.
  1. The other challenges to the plaintiffs’ claim concerns two categories of expense which the defendants submit they should not have to pay. The plaintiffs took these expenses from the sale proceeds thereby reducing the net amount returned to the contributors. The first category is the plaintiffs’ own professional costs of conducting the liquidation of the defendants’ managed loan, including amounts paid to their solicitors. The second concerns the cost of effecting insurance for the mortgaged property until its sale.
  1. The costs of the liquidation have been substantial. This is not, in itself, surprising. The plaintiffs are partners of a large accounting firm who have utilised the services of their own firm and various employees of varying seniority to preserve, and then sell, the mortgaged property. Additionally the plaintiffs engaged the services of a large commercial firm of solicitors, Messrs Gadens, to assist in the realisation. It will be recalled that the plaintiffs were appointed in June 2002 and the property was sold five months later. The solicitor’s fees amount to about $35,000. The plaintiffs’ own fees are almost $45,000. No doubt some costs would have been incurred in the management and realisation of the mortgaged property whether that task was performed by the defendants or by professional liquidators. There was, however, no evidence as to the cost which would have been incurred had liquidators not been appointed. One can be confident that the amount would have been less.
  1. The appointment of the plaintiffs as liquidators was not sought by either the defendants nor the contributors. The first defendant’s application for the winding-up of their loan portfolio pursuant to s 601EE of the Corporations Act was unsuccessful because of the intervention of ASIC in the proceedings.  There is no clear record of what occurred when Justice Wilson heard the application.  ASIC’s intervention may have been prompted by some concern expressed by the court.  Whether or not this is so it was ASIC’s intervention which led to the plaintiffs’ appointment, an outcome not requested by contributors or mortgagee.  There is no evidence that the realisation of the secured property could not have occurred at least as quickly and with as great a return to the contributors had the defendants preserved their earlier roles.
  1. In my opinion the liquidators’ costs were not a reasonably foreseeable consequence of the defendants’ negligence. Nor should they have been within the parties’ contemplation when the second defendant accepted the retainer from the first defendant. The appointment and substantial costs of a liquidator are different in kind and extent to the costs that would be foreseen or contemplated by a solicitor carelessly recommending a loan to a client. Loss of principal and some interest and cost occasioned in a recovery action would be foreseeable and contemplated but that, as I say, is different in kind and degree.
  1. The appointment did not flow causally from the defendants’ failure in connection with the loan. There were two intervening causes. The first was the court’s (or ASIC’s) intervention when there appears to be no evidence that the defendants could not themselves have effected a sale of the mortgaged property. The second was the change of legislative policy which forbad solicitors from engaging in contributory mortgage lending without becoming registered under the Corporations Act so that they were obliged to wind-up their lending schemes. 
  1. In a case involving valuers, not solicitors, Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413 McHugh J (with whom Gummow J agreed), held that the proper approach was to apply the principles of contract law whether or not the claimant was a contracting party, or was a person to whom the valuer owed a duty of care.  Speaking generally the valuer was said to be liable only for such losses as a reasonable person would regard as flowing naturally from the negligent valuation or which were of a kind that should have been within the valuer’s contemplation.  In the case of money lent on a valuation damages were confined to the difference between what was lent and what would have been lent on the true value of the property, together with such expenses and other losses as were sufficiently likely to result from the breach of duty so as to make it proper to hold that they flowed naturally from the breach of duty or were within the reasonable contemplation of the parties to the contract.  If one applies that approach the liquidator’s costs did not flow naturally from the solicitor’s breach of duty nor were they within the reasonable contemplation of the solicitors when they accepted the first defendant’s retainer.
  1. The plaintiffs also claim insurance costs incurred between 6 June 2002 and the sale of the property in November. The evidence in support of the claim was unsatisfactory. The plaintiffs took out a policy of public liability insurance which the mortgagee, which had gone into possession, had not previously thought appropriate. The tenant, Galeforce, was required to effect such insurance and had done so. The plaintiffs feared the adequacy of that policy but made no enquiries about it. Rather they obtained their own insurance, which was not cheap. The plaintiffs’ decision in this regard is not one which flowed naturally from the defendants’ default.
  1. A curious aspect of the insurance cover effected by the plaintiffs is that the buildings at Geoff’s Place were insured for an amount greater than the value of the land and improvements. Additionally the liquidators insured against loss of the rental income. Without in any way criticising the plaintiffs’ business decisions they cannot be said to be a consequence of the defendants’ failure with respect to the inception of the loan.
  1. Moreover the plaintiffs appeared to have paid an excessive amount by way of brokerage fees to effect the policies. On one policy the brokerage was greater than the amount of the premium. No satisfactory explanation was given.
  1. Accordingly the plaintiffs are entitled to an award of damages which represents:

(a)The loss of principle advanced.

 

(b)Interest on the full amount of the advance from 14 May 1999 to receipt of the proceeds of sale.

 

(c)Interest on the amount advanced less proceeds of sale from receipt of the proceeds to the date of judgment.

  1. Interest should be simple and at a rate of five per cent per annum. In calculating the net proceeds of sale the two categories of expense I have just discussed, the liquidators’ fees and insurance costs, should be disregarded. That is, they should not be included in the expenses deducted from the sale price to arrive at a net amount. The parties should calculate the amount due in accordance with these findings.
  1. There was no suggestion from the parties that the assessment of loss should differ as between the defendants. They accepted that the same measure of loss should apply to both first and second defendants. The cause of action made out against the first defendant was, of course, a breach of trust. There was no suggestion that the observations of Street J in Re Dawson; Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd (1966) 2 NSWR 211, that the obligation of a defaulting trustee is one of effecting a restitution to the estate and that the common law considerations of causation, forseeability and remoteness of damage are inapplicable.  Had the point been taken there might have been some difficult questions to resolve concerning the expenses which I have disallowed.  As the case was presented it is not necessary to look into the matter or to decide whether the expenses were not a loss to the trust estate occasioned by the first defendant, but a charge legitimately made, or an expense incurred, by the new trustees in the administration of the trust.
  1. There will be judgment for the plaintiffs against the defendants. The defendants’ claims against all third parties are dismissed.
Close

Editorial Notes

  • Published Case Name:

    Moloney & Anor v Bells Securities Pty Ltd & Ors

  • Shortened Case Name:

    Moloney v Bells Securities Pty Ltd

  • MNC:

    [2005] QSC 13

  • Court:

    QSC

  • Judge(s):

    Chesterman J

  • Date:

    08 Feb 2005

  • White Star Case:

    Yes

Appeal Status

Please note, appeal data is presently unavailable for this judgment. This judgment may have been the subject of an appeal.

Cases Cited

Case NameFull CitationFrequency
Alemite Lubrequip Pty Ltd v Adams t/as Price Waterhouse (1997) 41 NSWLR 45
2 citations
Jump To
Cite 1 - (1997) 41 NSWLR 45
Cite 2 - (1997) 41 NSWLR 45
Australian Securities and Investments Commission v Takaran Pty Ltd (2002) 43 ACSR 46
2 citations
Jump To
Cite 1 - (2002) 43 ACSR 46
Cite 2 - (2002) 43 ACSR 46
Cowan v Scargill (1985) Ch 270
2 citations
Jump To
Cite 1 - (1985) Ch 270
Cite 2 - (1985) Ch 270
Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31
2 citations
Jump To
Cite 1 - (1992) 39 FCR 31
Cite 2 - (1992) 39 FCR 31
Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1
2 citations
Jump To
Cite 1 - (1986) 160 CLR 1
Cite 2 - (1986) 160 CLR 1
Hagan v Waterhouse (1992) 34 NSWLR 308
2 citations
Jump To
Cite 1 - (1992) 34 NSWLR 308
Cite 2 - (1992) 34 NSWLR 308
Henville v Walker (2001) 206 CLR 459
2 citations
Jump To
Cite 1 - (2001) 206 CLR 459
Cite 2 - (2001) 206 CLR 459
HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54
2 citations
Jump To
Cite 1 - [2004] HCA 54
Cite 2 - [2004] HCA 54
Hungerfords v Walker (1989) 171 CLR 125
2 citations
Jump To
Cite 1 - (1989) 171 CLR 125
Cite 2 - (1989) 171 CLR 125
I & L Securities Pty Ltd v HT W Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109
2 citations
Jump To
Cite 1 - (2002) 210 CLR 109
Cite 2 - (2002) 210 CLR 109
Kenny & Good Pty Ltd v MGICA (1999) 199 C.L.R. 413
2 citations
Jump To
Cite 1 - (1999) 199 C.L.R. 413
Cite 2 - (1999) 199 C.L.R. 413
Re Dawson (decd); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd (1966) 2 NSWR 211
2 citations
Jump To
Cite 1 - (1966) 2 NSWR 211
Cite 2 - (1966) 2 NSWR 211
Whiteley; Whiteley v Learoyd (1886) 33 Ch D 347
2 citations
Jump To
Cite 1 - (1886) 33 Ch D 347
Cite 2 - (1886) 33 Ch D 347
Young v Murphy [1996] 1 VR 279
2 citations
Jump To
Cite 1 - [1996] 1 VR 279
Cite 2 - [1996] 1 VR 279

Cases Citing

Case NameFull CitationFrequency
BHP Coal Pty Ltd v O & K Orenstein & Koppel AG [2008] QSC 141 2 citations
CB Darvall & Darvall v Moloney (No 2) [2007] QSC 3372 citations
1

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