Fire Sale Just Makes Market Hotter - Section 420A And Controller’s Duty Of Care In Exercising Power Of Sale

In the recent case of Manda Capital Holdings Pty Ltd v PEC Portfolio Springvale Pty Ltd [2022] VSC 381, the Supreme Court of Victoria considered a claim by a borrower against a lender and mortgagee for breach of its duties under section 420A of the Corporations Act 2001 (Cth) (Corporations Act) in exercising its power of sale.

Manda Capital Holdings Pty Ltd (Manda) had loaned funds to PEC Portfolio Springvale Pty Ltd (PEC) and had subsequently entered into possession of and sold certain property provided by PEC as security.  When Manda pursued PEC for the remaining shortfall on the loan, PEC counterclaimed alleging that Manda had breached its duties under section 420A by (amongst other things) over-emphasising that the sale of the property was a “mortgagee sale”.

In considering whether Manda had discharged its duty of care in exercising its power of sale over the mortgaged property, the Court carefully analysed the steps taken to sell the mortgaged property with reference to the dynamic circumstances that the mortgagee faced at the relevant time, including the effect of COVID-19 lockdowns on the property market.


On 28 August 2019, Manda and PEC entered into a loan agreement pursuant to which Manda advanced $6.39m to PEC (Loan).  PEC mortgaged certain properties in Springvale, Victoria as security for the Loan (Property) and Mr Martin Craig Barnes provided a personal guarantee and indemnity in support of the Loan (Guarantee).

PEC defaulted under the loan agreement and Manda exercised its right as mortgagee to enter into possession of the Property.  It should be noted that when Manda entered into possession of the Property in around September 2020, Melbourne was subject to a second and prolonged government-imposed lockdown due to the COVID-19 pandemic. 

Manda sought marketing proposals from two experienced agents and also retained a certified practicing valuer to assess the market value of the Property.  The agents engaged by Manda then ran a four-week sales campaign between early November and early December 2020.  The proposal brochure for the campaign included the words “Mortgagee Sale” which Manda requested be made more prominent and which was highlighted in bright red in the final brochure.  Subsequent newspaper advertisements were in similar form to the brochure, and the signboards erected on site at the Property also prominently featured the words “Mortgagee Sale”.

The sales campaign drew considerable interest from prospective buyers and Manda subsequently entered into a contract to sell the Property for $7m in December 2020.  The sale settled in March 2021. 

Manda then issued a demand to PEC and to Mr Barnes for the remaining $974,036.66 owing under the Loan.

The demand was not complied with, and Manda commenced proceedings against PEC and Mr Barnes in March 2022 to recover the outstanding amount.

The Counterclaim

While PEC and Mr Barnes accepted the existence of the Loan, the Guarantee and the default under the Loan Agreement, they claimed that Manda had breached its duty of care in exercising its power of sale over the Property pursuant to section 420A of the Corporations Act on the basis that:

  1. the four-week sales campaign was too short (Ground One);

  2. Manda should have extended the sales campaign into 2021 in light of the quality of the offers that it had received (Ground Two); and

  3. the advertising strategy was inappropriate and insufficient as it gave undue prominence to the fact that the sale was a mortgagee sale (Ground Three).

PEC and Mr Barnes alleged that if Manda had complied with its duties under section 420A, it would have sold the Property for at least $7.8m which would have been sufficient to pay out the Loan as at the date of settlement of the sale of Property. 

Section 420A of the Corporations Act

Section 420A(1) of the Corporations Act provides that:

Controller’s duty of care in exercising power of sale

(1)  In exercising a power of sale in respect of property of a corporation, a controller must take all reasonable care to sell the property for:

(a)  if, when it is sold, it has a market value – not less than that market value; or

(b)  otherwise – the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold.

The duty of care in exercising power of sale is imposed on a receiver, receiver and manager, or anyone else who is in possession, or has control, of the property for the purpose of enforcing a security interest.1

The Decision

Justice Osborne considered the cases of Boz One Pty Ltd v McLellan [2015] VSCA 68 and Investec Bank (Australia) Ltd v Glodale Pty Ltd (2009) 24 VR 617, and reaffirmed that:

  • the relevant test for the purposes of section 420A is ‘whether the controller has failed to do what a reasonable and prudent person would do or has done what a reasonable or prudent person would refrain from doing in the circumstances’;2
  • the scope of the duty in section 420A is not defined by prescriptive steps which always must be undertaken by a controller when exercising a power of sale, but a general obligation to take all reasonable care;3
  • what must be done to comply with the general obligation will depend on the circumstances of each case, including the nature of the assets being sold and the circumstances of the chargor;4
  • in deciding whether a controller’s failure to take a particular step constitutes a breach of section 420A, that step should not be considered in isolation, and the controller’s conduct must be considered as a whole and in context;5
  • the controller’s conduct must be looked at holistically by reference to the dynamic circumstances that the controller faced at the relevant time;6 and
  • the rigorous duty imposed by section 420A does not detract from the common law principle that a mortgagee may sell at the time of its choosing and does not have to wait until a time when a better price might be obtained.7

Osborne J then considered each of the grounds raised by PEC and Mr Barnes.

Length of the sales campaign and failure to extend to 2021

With respect to Grounds One and Two, his Honour determined that the four-week campaign was entirely adequate, if not best practice, in the circumstances by having regard to the fact that:

  • the two estate agents engaged by Manda, who had clear and unchallenged expertise in the particular market in which the Property was advertised, had recommended that a four-week campaign was appropriate;
  • the four-week sales campaign elicited considerable interest from prospective buyers; and
  • the sales campaign ultimately generated a sale for $7m, which was within the estimate sale price contemplated in the sales authority executed between Manda and the estate agents.

His Honour expressly rejected PEC’s submission that the COVID-19 lockdown meant that a longer campaign should have been run and found that there was no evidence that prospective purchasers had dropped out or failed to make an offer due to difficulties in conducting due diligence or engaging advisers.

His Honour also rejected PEC’s submission that a longer sale campaign was necessary to counter the ‘market fatigue’ suffered by purchasers after 150 days of COVID-19 lockdown on the basis that this submission contained a significant element of generality and speculation. 

Finally, His Honour accepted Manda’s expert evidence that an extension of the sale campaign would have led to an impression that the vendor’s expectations were in excess of the market value, thereby removing competitive tension from the sale process. 

Failure to sufficiently advertise

With respect to Ground Three, PEC pointed to the prominent references to ‘mortgagee sale’ in the sale campaign to suggest that Manda’s intention was to sell the Property quickly and without due regard to the best obtainable price.  It relied on its expert evidence that the references to ‘mortgagee sale’ negatively affected the sale price as it created the perception that the vendor was ‘acting with compulsion’, leading purchasers to believe that the Property could be purchased at a discount. 

Against this, Manda’s expert gave evidence that this advertising strategy was standard practice, and was in fact particularly appropriate during the period of COVID-19 because it showcased that the vendor did not hold an elevated view of the Property’s worth.  Instead, the references to ‘mortgagee sale’ indicated the existence of a motivated vendor who was not simply ‘testing the market’, and that this had in fact generated a higher sale price. 

After considering this evidence, as well as Manda’s evidence that the ultimate sale price was in accordance with the valuations from the agents and even a bit better than the independent valuer’s view, Osborne J was ultimately satisfied that advertising the sale of the Property as a mortgagee sale had obvious commercial advantages and had not resulted in a breach of section 420A.


Overall, Osborne J concluded that Manda had taken all reasonable care to sell the Property for not less than its market value and therefore had fulfilled its duty of care in exercising its power of sale over the Property in accordance with section 420A of the Corporations Act. 

Lavan Comment

This case serves as a useful reminder that the relevant test for the purpose of section 420A is whether the controller has done what a reasonable and prudent person would have done in the circumstances.  The test requires consideration of the controller’s conduct as a whole and in the context of the circumstances that the controller faced at the relevant time.

If you have any questions about the exercise of a power of sale in accordance with section 420A of the Corporations Act, the experienced Lavan team is here to help.

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.
Lawrence Lee
Joseph Abberton
Restructuring & Insolvency


[1] Corporations Act 2001 (Cth), s 9.

[2] Boz One Pty Ltd v McLellan [2015] VSCA 68, [158] (Whelan, Santamaria and Kyrou JJA).

[3] Ibid [371].

[4] Ibid.

[5] Ibid [372].

[6] Ibid.

[7] Investec Bank (Australia) Ltd v Glodale Pty Ltd (2009) 24 VR 617, 627 [48] (Neave ad Redlich JJA and Forrest AJA).