N5391

PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

OS. NO. 361 OF 2013

BETWEEN:

ANEGO COMPANY LIMITED TRADING AS
KLINKI LODGE
Plaintiff

AND:

FINANCE CORPORATION LIMITED
First Defendant

AND:

MOSES VENAPOE
Second Defendant

AND:

HENRY WASA, REGISTRAR OF TITLES
Third Defendant

Goroka: Yagi J
2013: 23rd September & 10th October

PROPERTY LAW – Sale of Property - Mortgagee Sale – Exercise of Power of Sale - Land Registration Act, ss. 67 and 68 – Requirement to give notice of demand – Whether the notice under s. 67(1) has lapsed or expired – Duty of a Mortgagee – Principles considered and applied - duty to take reasonable precaution – duty to act in good faith – onus on the mortgagor to prove breach of duty.

Cases Cited:

Papua New Guinea Cases 

Esther Torato v PNG Home Finance Limited & 3 Others (2012) N4583
Papua New Guinea Banking Corporation v Pala Aruai and Freeway Enterprise Limited (2002) N2234
Bank of Papua New Guinea v Derrick Niso (2004) N2664
Australia New Zealand Banking (PNG) Limited v Kila Wari (1990) N801

Overseas Cases

Cuckmere Brick Company Limited v Mutual Finance Limited [1971] 2 All ER 633
Clyde Properties Ltd v Tasker [1970] NZLR 754
Lord Waring v London and Manchester Assurance Co Ltd [1934] All E.R. Rep 642
Property and Bloodstock Ltd v Emerton [1967] 3 All ER 321.
Tse Kwang Lam v Wang Chit Sen [1983] 3 All ER 54. 
China and South Sea Bank Ltd v Tan Soon Gin (alias George Tan) [1989 3 All ER 839. 
Downsview Nominees Ltd v First City Corporation Ltd [1993] 3 All ER 626.
Tse Kwong Lam v Wong Chit Sen (1983) 3 All ER 54.

Counsel:

K. Rema, for the Plaintiff
M. Goodwin, for the First Defendant
K. Pilisa, for the Second Defendant
No appearance by or for the Third Defendant

DECISION
10th October, 2013

1.	YAGI J: The plaintiff company is seeking in this action, amongst others, principally a declaration to nullify the sale of its property including its business undertaking between the first and second defendants under a mortgagee sale. In essence this is a case of a registered lessee of a State Lease challenging the mortgagee's power or right to sell his property pursuant to a registered mortgage.

2.	An interim injunction was issued on 02nd August 2013 which effectively maintained the status quo pending the determination of the current proceeding. There is also a related proceeding in OS. No. 344 of 2013 instituted by the second defendant against Mr. Albert Wamiri and the plaintiff company for possession of the property on the basis that it has now acquired legal rights and interest over the subject property pursuant to a contract for sale he entered into with the first defendant. The parties have agreed to park away that proceeding for the time being until the determination of this proceeding.

Preliminary Issue – objection to amended originating summons

3.	A preliminary objection was raised by the first defendant at the beginning of the trial as to the regularity of the amended originating summons filed by the plaintiff company. 

4.	The first defendant submits that the amended summons was filed without leave and therefore should be struck out. The plaintiff company did not make any submission in response to the objection it appears preferring to leave the issue at the discretion of the Court.

5.	The amended summons was filed on 06th September 2013. This was done after the proceeding had progressed to an advanced stage where the court had made orders, such as filing of affidavits for use at trial by the parties and fixing a trial date. As a matter of fact on 26th July 2013 the trial date was fixed by the Court. The trial was fixed on 23rd September 2013. The amended originating summons was filed on 06th September 2013, approximately 2½ weeks prior to trial.

6.	Order 8 Rule 50 of the National Court Rules grants a general power in respect to amendments. The rule states:

"Division 4.—Amendment.

50.	General. (20/1)

(1)	The Court may, at any stage of any proceedings, on application by any party or of its own motion, order, on terms that any document in the proceedings be amended, or that any party have leave to amend any document in the proceedings, in either case in such manner as the Court thinks fit.

(2)	All necessary amendments shall be made for the purpose of determining the real questions raised by or otherwise depending on the proceedings, or of correcting any defect or error in any proceedings, or of avoiding multiplicity of proceedings.

(3)	Where there has been a mistake in the name of a party, Sub-rule (1) applies to the person intended to be made a party as if he were a party.

(4)	This Rule does not apply to the amendment of a minute of a judgement or order."

7.	It is clear from this rule that the Court has power to amend documents at any stage of the proceedings. Any amendments must serve the purpose in ensuring the real issues or questions are determined or to remove any defect or error in the proceedings or to avoid multiplicity in proceedings. See The Papua Club Inc v Nusaum Holdings Limited & Ors (2002) N2273.

8.	However, a party is not at liberty to amend a document as of right especially where proceedings have been served and substantial steps have been taken by the parties. The rule also requires that an application be filed and supported by appropriate affidavit setting out the grounds. Amending an originating process after it being served and especially where steps have being already taken in the proceeding affects the rights of other parties and in many instances may cause prejudice or injustice to the party. A party must therefore apply for leave from the Court. An amendment without leave constitute abuse of process. For the reason that no leave to amend was granted by the Court the amended originating summons was filed irregularly and is therefore struck out.

Primary Facts

9.	The primary facts are not in dispute and the following facts give rise to the issues for determination.

10.	At all relevant times the plaintiff company was the registered proprietor or lessee of a leasehold land situated within the City of Lae which is described as Section 80 Allotment 7 Lae Morobe Province contained in State Lease Volume 41 Folio 111 (the property).

11.	The plaintiff company operates a hospitality business on the property. It contains a 2 level Guest House with 10 guest rooms on the ground level and 13 guest rooms on the top level. Other facilities include the office/reception area, a kitchen, a conference room and other building structures including staff accommodation. The business is known as the Klinki Lodge.

12.	The first defendant is a finance company whose principal business, amongst others, includes lending money to customers. On 26th January 2012 the first defendant advanced an amount of K494,000.00 as loan to the plaintiff company and obtained a registered mortgage over the property including the Klinki Lodge as security for the financial advance. The loan was advanced pursuant to a Loan Agreement dated 11th January 2012 (the agreement). The mortgage was registered on 04th May 2012. 

13.	The plaintiff company failed to meet its obligation under the agreement in terms of making regular monthly installment payments towards the loan. The first defendant therefore exercised its powers as the mortgagee and advertised for sale by tender of the property including the Klinki Lodge. 

14.	The second defendant submitted a tender bid in respect to the mortgagee sale and was successful. Consequently, the first defendant entered into a contract for sale with the second defendant. The contract for the sale and purchase of the property including the Klinki Lodge is for the price of K2,005,555.55. The settlement of the contract took place on 4th June 2012 where the second defendant paid to the first defendant the full contract price and obtained from the first defendant relevant title documents, including deed of title to the property and the discharge of mortgage. However, the registration process in respect to the transfer of title and discharge of mortgage are pending due to the litigations currently pending before the Court. 

Issues

15.	The parties have agreed to the issues for trial. A statement of agreed and disputed facts and legal issues, was tendered in Court at trial on 23rd September 2013. However, the statement of issues does not accurately reflect the keys issues before the Court. In my view the following issues arise for determination in the proceeding:

(i)	Whether a statutory notice under s. 67(1)(a) of the Land Registration Act (LRA) was given to the plaintiff company prior to the sale of the property.

(ii)	Whether the first defendant failed in his duty as a Mortgagee in respect to the sale of the property

Evidence

16.	The parties have filed affidavit evidence. These are the only evidences before the Court and which the parties relied upon during the trial. No oral evidence was called neither were the deponents to the affidavits cross examined. The affidavits were filed by the plaintiff and the first defendant. The second and third defendants did not file any affidavit evidence.

17.	I should say at this juncture that when parties appeared for directions hearing on 26th July 2013 the Court issued directions for the parties to file and serve affidavit evidence, discuss and settle a draft statement of agreed and disputed facts and legal issues for endorsement by the Court, file relevant notices under the Evidence Act and file extract of submissions. 

18.	By then the plaintiff company had already filed and served an affidavit. This is the affidavit of Mr. Albert Wamiri sworn on 2nd July and filed on 4th July 2013. The directional orders made provision for additional affidavits to be filed by the plaintiff company. No further affidavit was filed on behalf of the plaintiff company. 
19.	The first defendant in compliance with the directional orders filed 2 affidavits. These are affidavits of Mr. Don Asbury sworn on 31st July 2013 and Mr. Andrew Field sworn on 16th August 2013. Both affidavits were filed on 27th August 2013 and served on other parties including the plaintiff company. Neither the plaintiff company nor other parties have raised objection or issue with regards to service of these affidavits.

20.	The second defendant has not filed any affidavit evidence. The only document filed is a Notice under s. 36 of the Evidence Act. It was filed on 17th September 2013. The notice required for cross examination at trial the plaintiff company's witness, Mr. Wamiri, in relation to his affidavit filed in the proceeding.

21.	When the matter was called for trial, Mrs. Rema, counsel for the plaintiff advised that the plaintiff company did not and would not be filing additional affidavits. The plaintiff company would be relying entirely on the affidavit of Mr. Wamiri filed on 4th July 2013. In other words the plaintiff company does not take issue with the facts deposed to by the witnesses for the first defendant.

22.	As I alluded to the plaintiff company filed one affidavit. This is the affidavit by Mr. Wamiri. The affidavit was sworn on 2nd and filed on 4th July 2013. This is the only affidavit the plaintiff company relies upon at trial.

23.	As for the first defendant 2 affidavits were filed and relied upon. These are:

(i) 	the affidavit of Mr. Don Asbury sworn on 31st July 2013 and filed on 27th August 2013, and 

(ii)	the affidavit of Mr. Andrew Field sworn on 16th August 2013 and filed on 27th August 2013.

Other affidavit materials

24.	There are other affidavits filed pursuant to Court orders made on 26th July and 02nd August 2013.

25.	The order of 26th July 2013 is in respect to the appointment of a Valuer to provide an independent valuation report on the property. The order was made by consent of the parties and was complied with. The court appointed Valuer, Mr. Leo Digori, a Registered Valuer with LJ Hooker, a private Real Estate Agent in Port Moresby has filed an affidavit which contained his valuation report on 30th August 2013. No issue was been raised by any party as regards his affidavit including his valuation report.

26.	As for the order of 02nd August 2013, it required the plaintiff company to provide to the second defendant monthly audited statement of accounts for the Klinki Lodge operations for the preceding 3 months and thereafter on monthly basis commencing 31st August 2013. In respect to this order an affidavit was filed by Mr. George Kuno of George Kuno Accountants of Goroka on 20th September 2013.

27.	The affidavit of Mr. Kuno is not particularly relevant to the issues for trial; however, the affidavit of Mr. Digori is significantly relevant to one of the issues for determination.

Evidence for the plaintiff

28.	Mr. Wamiri is the Managing Director of the plaintiff company and runs the day to day management of the Klinki Lodge business on the property. 
29.	Mr. Wamiri deposed that the plaintiff company obtained a loan of K494,000.00 from the first defendant in early 2012. The plaintiff company was to repay the loan on periodical installment basis at the rate of K12,081.22 per month. This arrangement was entered into under a Loan Agreement.

30.	The plaintiff company made loan repayments accordingly until June 2012 when the company encountered cash-follow problems. He then realized that the plaintiff company could not continue to repay the loan as per the agreement. He therefore informed the first defendant through its Managing Director, Mr. Andrew Field, by telephone of the plaintiff company's financial difficulty.

31. 	The plaintiff company did not receive from the first defendant any default notice nor notice of intention to sell the property as mortgagee exercising its power. Therefore he was under the impression that the first defendant would allow the plaintiff company to redeem the mortgaged property by refinancing the loan.

32.	On 19th September 2012 he received an email from Mr. Field advising that the property would be advertised for sale. He then instructed Mrs. Karen Rema of PANG Legal Services to apply for injunction to restrain the first defendant from selling the property. He says the basis for this is that the plaintiff company was not served with the requisite notice by the first defendant. Accordingly an application for injunction was filed in the National Court in Waigani in proceedings OS No. 588 of 2012 and an interim restraining order was successfully obtained ex parte from the Court on 4th October 2012 against the proposed sale by the first defendant.

33.	As a result of the restraining order the first defendant through Mr. Field undertook not to proceed with the sale of the property on the condition that the plaintiff company discontinues the proceeding and make payments to reduce the arrears. Based on the undertaking the plaintiff company discontinued the proceeding against the first defendant and made a payment of K20,000.00.

34.	Mr. Wamiri goes on to say that whilst the plaintiff company kept its commitment to the deal the first defendant renegade and hence re-advertised the property for sale without notice to the plaintiff company as the company had taken steps to repay the loan arrears on 15th February 2013. He again on behalf of the plaintiff company met with Mr. Field and a similar deal was struck the second time in which Mr. Field undertook not to sell the property and for the plaintiff company to decrease the arrears as soon as possible. On that basis the plaintiff company paid K22,000.00.

35.	However, he was surprised to learn on 7th June 2013 when the second defendant attempted to enter the property that the first defendant had sold the property to the second defendant. The second defendant made 2 other attempts on 11th and 12th June 2013 to assert his claim of right over the property. He advised the second defendant of his views in relation to the sale and that he would be taking action to challenge the legality of the sale.

36.	Mr. Wamiri says the plaintiff company was not given an appropriate notice after the first defendant had undertook not to sell the property nor was it advised of the value of the sale. The plaintiff company was also not made aware of the sale to the second defendant. He also says the plaintiff company is entitled to all this information to appreciate the value of the property and the selling price so that the company is well compensated for the value of the property.

37.	He says the sale of the property was not done in good faith and hence is irregular. He says the plaintiff company has been operating the Klinki Lodge business for over 30 years and has established goodwill in the business and therefore the goodwill is an added value to the property.
 
Evidence for the first defendant

38.	The first witness is Mr. Don Asbury. He is the National Manager-Commercial for the first defendant. He deposed in his affidavit that on 8th August 2012 during normal working hours he attended the Klinki Lodge situated on the property in Lae and effected a notice of default on the plaintiff company by leaving it with a lady working as the receptionist at the Lodge. A copy of the notice of default is annexed to his affidavit as annexure "A". This notice is entitled "NOTICE OF DEFAULT" and addressed to "ANEGO CO LIMITED P. O. BOX 192 LAE 411 MOROBE PROVINCE" and is dated 01st August 2012. It bears the signature of a person receiving the notice together with the date 08/08/2012. The content of the default notice reads:

"PROPERTY: ALLOTMENT 7 SECTION 80 LAE MOROBE PROVINCE

TAKE NOTICE that FINCORP FINANCE LIMITED being registered as Mortgagee pursuant to Mortgage Registered No. N.18414 over the above property HEREBY DEMANDS that you pay to it the sum of FIVE HUNDRED & TWENTY FIVE THOUSAND AND THREE KINA THIRTY SIX TOEA (K525,003.36) within thirty (30) days from this date AND FURTHER TAKE NOTICE that should you fail to make payment as hereby demanded than pursuant to Section 68 of the Land Registration Act and the Mortgage, the Mortgagee shall be at liberty to sell or deal with the said property in accordance with the said mortgage or by law."

39.	The second witness Mr. Andrew Field is the Head of Credit with the first defendant. His affidavit is primarily in response to the affidavit evidence given by Mr. Wamiri on behalf of the plaintiff company.

40.	Mr. Field agrees that the plaintiff company is the registered lessee of the property which is also known as Klinki Lodge.

41.	He says the plaintiff company provided the property as security for monetary loan obtained from the first defendant pursuant to a number of security documents including a Memorandum of Mortgage Registration No. N18414 which was registered on 16th May 2012. The Mortgage was executed on 11th January 2012. Further securities for the loan given by the plaintiff company were in the form of a Deed of Guarantee and Indemnity and a Registered Deed of Charge. Both documents were also executed on 11th January 2012.

42.	He further says on 26th of January 2012 the first defendant loaned an amount of K494,000.00 to the plaintiff company the purpose of which is to enable the plaintiff company to refurbish the Klinki Lodge. The loan was advanced pursuant to 2 documents; the Letter of Offer dated 14th December 2011 and Loan Agreement executed on 11th January 2012.

43.	He says under the Loan Agreement the plaintiff company agreed to repay the loan at K12,081.22 per month. However, the plaintiff company fell into arrears almost immediately following the advancement of the loan funds in January 2012. He says the first repayment was by way of a cheque in an amount K20,000.00 presented on 26th January 2012, however the cheque was dishonoured upon presentation. He also says the second repayment was made on 03rd April 2012 which was very late. According to the statement of account (Annexure "EE") this repayment was for an amount of K12,131.22. He further says after the second repayment the plaintiff company made no further payment until 27th September 2012.

44.	In respect to Mr. Wamiri's evidence that the plaintiff company received no default notices or notice from the first defendant in connection with the exercise of power to sell the property, Mr. Field disputes this evidence. He says that the first defendant issued to the plaintiff company a number of notices as follows:

(i)	a Friendly Reminder was sent by registered post on 28th February 2012

(ii)	a Very Urgent Reminder was sent by registered post on 3rd April 2012

(iii)	a Letter of Demand was sent by registered post on 29th June 2012

(iv)	between 29th June and 4th July 2012 an Intention to Repossess Notice was sent.

(v)	a Notice of Default was served personally on the plaintiff company on 8th August 2012.

All these notices are in writing and addressed to the postal address of the plaintiff company, P. O. Box 192 Lae Morobe Province and forwarded on or about the dates of the respective notices. 

45.	As regards evidence of Mr. Wamiri relating to the email he received on 19th September 2012, Mr. Field does not dispute sending the email and he agrees that the first defendant in fact advertised Klinki Lodge for sale. However, he strongly denies that no proper notice was given to the plaintiff company.

46.	With regards to the evidence concerning the Waigani National Court proceeding OS No 588 of 2012, Mr. Field says that on behalf of the first defendant he discussed the matter with the lawyer for the plaintiff company and agreed to have the proceeding discontinued. The terms and conditions of the agreement were that the first defendant would not sell the property on the condition that the plaintiff company brings under control the loan account arrears. He confirmed the substance of his discussions with the lawyer for the plaintiff company in writing as soon as possible which he forwarded to the lawyer. That letter is annexure "O" to his affidavit. He therefore says the assertion by Mr. Wamiri that the first defendant undertook not to proceed with the sale of the property if the plaintiff company discontinued the proceeding was misleading. He sets out the chronology of the relevant facts and circumstances in paragraph 17 of his affidavit which he says led to the first defendant consenting to the proceeding being discontinued.

47.	Mr. Field goes further to say that since the execution of the Loan Agreement in January 2012 to the time the property was sold on 4th June 2013 the repayment were grossly inadequate, where repayment was made the amount is about one third of the agreed amount per month and the plaintiff failed to keep the arrears under control as agreed in October 2012 and in consequence of all these matters the arrears became increasing serious. He therefore formed the view that the first defendant was entitled to foreclose on the Klinki Lodge and exercise its rights under the Mortgage.

48.	Mr. Field also says between October 2012 and June 2013 he held numerous telephone conversations with a Marlene Mohamet, the daughter of Sir Akapite Wamiri who is the other director and the major shareholder of the plaintiff company. He did that after receiving a letter of authority dated 21st September 2012 from Sir Akapite in which Sir Akapite expressly authorized the first defendant to have formal communication concerning the matter on behalf of the plaintiff company. That letter is annexure "Q" to his affidavit. He also received 3 email communications from Marlene Mohamet on 22nd January, 19th February and 15th February of 2013. It is interesting to note that from Sir Akapite's letter a number of significant matters including:

(i)	The plaintiff company's stationary (letterhead) was used

(ii)	Sir Akapite held himself out as the "Managing Director" of the 	plaintiff company

(iii)	Sir Akapite expressly denounced the actions of his son, Mr. Albert Wamiri in usurping his powers and authority in particular in stating that "Albert Wamiri my son does not have the mandate and authrority to use my name and position to engage into compromising my business interest"

(iv)	Directed all correspondences and communications be directed to him

I further note that this evidence and in particular Sir Akapite's letter is not disputed. It therefore remained unchallenged or uncontroverted by the plaintiff company including Mr. Albert Wamiri.

49.	He goes on to say during his communications with Marlene Mohamet, various promises were made to make repayments and also to refinance the loan though the Westpac Bank, however, none of these promises were honoured. He says apart from K4,000.00 payment made on 2nd November 2012 and a dishonoured cheque of K22,000.00 made on 21st February 2013, the plaintiff company made no other payments towards the loan following the agreement reached in October 2012 to keep the arrears under control. 

50.	He says because of all these reasons the first defendant advertised the Klinki Lodge for sale in the National Newspaper on 15th February 2013. He says Mr. Wamiri, also advertised the Klinki Lodge for sale in the Post Courier newspaper on 15th February 2013. A copy of that advertisement is annexure "U" to his affidavit. 

51.	He also says that in around April 2013 he was visited at his office by Marlene Mohamet and another person namely Murray Payesi who is the Accountant for the plaintiff company. During this visit he was informed that they were seeking to refinance the loan through the Westpac Bank. He heard nothing further from them since then.

52.	He says as result of the advertisement the second defendant was found to be the highest bidder at K1.8 million. However, he says in acting in good faith he encouraged the second defendant to increase his offer to which the second defendant agreed and so the offer was increased to K2,005,555.55 to which the first defendant accepted.

53.	As to the evidence by Mr. Wamiri that he subsequently met with Mr. Field following the advertisement on 15th February 2013 where an undertaking was again made the second time not to sell the Klinki Lodge, Mr. Field strongly denies this and says there was no such meeting.

54.	He disputes the claim by Mr. Wamiri that the Klinki Lodge is worth more than K3 million and say that the price of K2,005,555.55 is the upper end of the market value taking into account its very rundown state, the value of the property at K1.56 million as at 11th April 2008, the highest offer received following advertisements on 21st September 2012 and 15th February 2013 and the acknowledgment given by Marlene Mohamet that the price of K2,005,555.55 was "a good price".

55.	He says the valuation of Klinki Lodge for K2,825,000.00 obtained by the plaintiff company from CT Valuations Limited on 1st July 2013 should be given little weight because it was produced purposely to serve the interest of the plaintiff company in this proceeding and moreover it was paid for by the plaintiff company. 

56.	Mr. Field also said in addition to the tender from the second defendant the first defendant received 4 other tender bids or offers as a result of the 2 advertisements relating to the sale of Klinki Lodge. The offers are set out in paragraph 32 of this affidavit and range from K700,000.00 to K2,000,000.00. As for the offer of K2,000,000.00 he says the offer was withdrawn due to inability to raise funds. The next highest offer was for K1,600,000.00 which the first defendant negotiated and it was increased to K1,800,000.00. This offer was also withdrawn for the same reason; inability to raise funds. The other lower bids or offers were for K700,000.00 and K850,000.00 respectively.

57.	Mr. Field also says Mr. Wamiri had deposed to false and misleading statements in his affidavit in respect to material facts and also omitted to state material facts which included the following matters:

•	Failing to mention various notices sent to the plaintiff company.

•	Loan repayment history since its inception was extremely poor.

•	Falsely claiming that the loans funds were used to refurbish Klinki Lodge.
•	Failing to state that Marlene Mohamet expressly authorized the first defendant to sell the Klinki Lodge.

•	Failing to mention that he (Mr. Wamiri) also advertised Klinki Lodge for sale in the Post Courier on 15th February 2013.

•	Failed to state or disclose any bids or offers, if any, he received in relation to the advertisement he placed in the Post Courier newspaper on 15th February 2013.

•	Falsely representing that the payment of K20,000.00 made towards the loan on 27th September 2012 was in direct response to the undertaking given by the first defendant not to sell the property. He says in fact the payment was made before he made the undertaking.

58.	Finally Mr. Field says the plaintiff company has been treated with leniency and given ample opportunity over a long period of time to bring the loan arrears under control in view of the plaintiff company's extremely poor repayment history including numerous missed installment payments, dishonoured cheque repayments and numerous broken promises to repay. Under the circumstances Mr. Field says the first defendant was entitled and justified in selling the Klinki Lodge.

Finding of Facts

59.	Based on the affidavit evidence I find the following facts established. On 11th January 2012 the plaintiff company obtained a loan of K494,000.00 from the first defendant. The loan was facilitated by way of a Loan Agreement dated 11th January 2012. As a consequence the plaintiff company mortgaged the property as security for the loan. A deed of mortgage was executed and is dated 11th January 2012. There were additional securities given by the plaintiff company including the Deed of Guarantee and Indemnity also executed on 11th January 2012. The loan funds were not actually released to the plaintiff company until 26th January 2012. 

60.	Under the agreement the plaintiff company is legally obliged to repay the loan at the rate of K12,081.22 per month over a 5 year period. The payment falls due each and every month. The first installment payment was due and payable in February 2012.

61.	The plaintiff company failed to repay the loan in accordance with the terms of the agreement and it fell into substantial arrears. The failure started from the outset. The company did not pay the first installment for the month of February and except a couple of payments the failure was chronic. Although the plaintiff company made a cheque payment in January 2012 the cheque was dishonoured. The statement of the loan account produced by Mr. Field in his affidavit (annexures "BB", "CC" and "DD") provides clear evidence of the astounding default. 

62.	By the end of July 2012 the plaintiff company had been in default by four consecutive months. The arrears had by then increased the plaintiff company's debt level to over K525,000.00. This included the interests and other charges due under the agreement. The first defendant then issued a notice of default on 01st August 2012.

63.	Prior to the first defendant issuing this notice it also issued a number of letters of reminders and demands to the plaintiff company about the fact that the company was failing to meet its legal obligations. These reminder and demand notices were ignored by the plaintiff company. The letters were issued on 28th March, 3rd April and 29th June 2012. By a letter dated 18th July 2012, Mr. Wamiri, the Group Managing Director of the plaintiff company wrote to first defendant and acknowledged fully its "blatant disregard to honour" the loan commitment. The plaintiff company also advised that it was reorganizing its internal revenue structure and would be able to meet its on-going loan obligation.

64.	The notice of default dated 01st August 2012 was served on the plaintiff company on 8th August 2012. It was served personally at the Klinki Lodge office which is situated on and operated by the plaintiff company within the property. The plaintiff company does not dispute service of the notice. The notice, amongst others, demanded the payment of K525,003.36 within thirty days from the date of the letter. It also advised that failure to pay the sum demanded the first defendant will be at liberty to exercise its rights under s. 68 of the Land Registration Act and the Mortgage or by law. The content of the notice is set out in full in paragraph 38 of this judgment.

65.	Despite the service of the notice the plaintiff company failed to pay on the demand. As a result the first defendant advertised for the sale of the property by tender. The advertisement was published in the National Newspaper on 21st September 2012. Prior to the property being advertised in the newspaper the plaintiff company was notified by email on 14th September 2012. That email, in noting that the plaintiff company had lodged a loan refinancing application with Westpac Bank, and is pending approval, advised that the Klinki Lodge will be advertised for sale the following week by the first defendant. The email communication was forwarded by Mr. Field on behalf of the first defendant to Mr. Wamiri on behalf of the plaintiff company.

66.	On or about 12th October 2012 the plaintiff company filed court proceeding in Waigani and successfully obtained ex parte injunctive orders restraining the first defendant from selling the property. This led to discussions between the two parties. Following discussions between Mr. Field and the lawyer for the plaintiff company the parties agreed that the court proceeding be discontinued. The agreement was based on two fundamental terms:

(i)	the first defendant is not to sell the Klinki Lodge 

(ii)	the plaintiff company is to bring the loan arrears under control

67.	Accordingly the court proceeding in Waigani was discontinued when the parties filed a consent notice of discontinuance on 31st October 2012.

68.	The first defendant kept its commitment under the agreement. It refrained from further pursuing the sale of the property as advertised in September 2012. However, the plaintiff company failed to honour its commitment under the agreement. It renegaded from his undertaking in terms of bringing the loan arrears under control. The failure increased, if not exacerbated, the unacceptable level of arrears. The plaintiff company made no payment until February 2013 when it paid an amount of K22,000.00. Notwithstanding the payment the plaintiff company's arrears was still not under control. It caused the first defendant to become increasingly concerned.

69.	The first defendant then re-advertised the property for sale. The sale was advertised in the National Newspaper on 15th February 2013. This advertisement attracted 4 interested purchasers including the second defendant. The successful bid or offer was made by the second defendant for an amount of K2,005,555.55. In fact the second defendant's initial bid was for an amount of K1,800,000.00, however, it was increased after serious negotiation was pursued by the first defendant. Overall the highest bid was an amount of K2,000,000.00, however, this offer was withdrawn when the proponent was unable to raise the required amount.

70.	Consequently a contract for the sale and purchase of the property was executed between the first defendant as the Mortgagee exercising its power of sale under the Mortgage and the second defendant. The contract price was for the sum of K2,005,555.55. The second defendant has paid to the first defendant the full contract price and obtained the title to the property. The process of registering the title has been stalled pending the outcome of this litigation. For all intentional purposes the second defendant is a bona fide purchaser for value.

The Law

71.	The law pertaining to the powers, rights and duties of a mortgagee in respect to the sale of a mortgaged property is governed by statute and case law authorities. In terms of statute, it is the Land Registration Act. The relevant provisions are ss. 67 and 68 of the Act. These provisions are reproduced below:

"67.	Notice of default.

(1)	Where default is made—

(a)	for the period of one month in payment of any secured money the creditor may give to the debtor written notice to pay the money then due or owing; or

(b)	in the observance of a covenant binding on the debtor by virtue of a provision expressed or implied in a mortgage or charge the creditor may give to the debtor written notice to observe the covenant.

(2)	The notice referred to in Subsection (1) may be given to the debtor—

(a)	in person; or

(b)	by leaving the notice on the land subject to the mortgage or charge; or

(c)	by leaving the notice at the usual or last-known address in the country of the debtor or other person claiming to be entitled to the secured land.

68.	Sale of property by mortgagee, etc.

(1)	Subject to Section 72, where the default referred to—

(a)	in Section 67(1)(a), continues for a further month from the date of the notice referred to in that subsection; or

(b)	in Section 67(1)(b), continues for a month from the date of the notice referred to in that subsection,

the creditor may sell the land the subject of the mortgage or charge or a part of that land.

(2)	For the purpose of effecting a sale under this section the creditor may execute any document.

(3)	The land may be sold in the following ways:—

(a)	altogether or in lots; or

(b)	by public auction or by private contract or partly by public auction and partly by private contract.

(4)	The creditor may sell the land subject to any conditions of sale which he thinks fit.

(5)	On a sale under this section the creditor may buy in and resell without being liable for loss occasioned by that purchase or resale.

(6)	The purchase money arising from a sale under this section shall be applied—

(a)	firstly, in payment of the expenses occasioned by the sale; and

(b)	secondly, to the extent that money remains after the payment specified in Paragraph (a)—in payment of a registered mortgage or charge taking precedence to the mortgage or charge to which the power of sale was exercised and to which the sale was not subject; and

(c)	thirdly, to the extent that money remains after the payment specified in Paragraph (b)—in payment of the creditor; and

(d)	fourthly, to the extent that money remains after the payment specified in Paragraph (c)—in payment in order of priority, of registered mortgages or charges that are subsequent to the mortgage or charge in relation to which the power of sale was exercised; and

(e)	finally, to the extent that money remains after the payment specified in Paragraph (d)—in payment to the debtor."

Issue 1 – whether statutory notice (s. 67(1)(a) of LRA) was given by the first defendant to the plaintiff prior to the sale of the property

72.	The contention by the plaintiff company is fundamentally based around ss. 67 and 68 of the Land Registration Act. It is contended that the first defendant is required to give notice before exercising its power of sale as a mortgagee. In that regard, it is argued that no notice was given by the first defendant in respect to the sale when the property was re-advertised on 15th February 2013. There is no argument that the notice dated 01st August 2012 was regular, proper or valid. However, it is submitted that; the notice dated 01st August 2012 had lapsed or expired and was not longer valid and effective when the first advertisement on 21st September 2012 was discontinued and therefore a fresh notice was required to be issued under s. 67(1)(a) of the LRA. 

73.	As I noted earlier the mortgagee's power of sale is conferred by both statute and the deed of mortgage. The statutory power arises when the mortgagor defaults in repaying the money secured under the mortgage for a period not less than one month. However, the mortgagor and the mortgagee may agree to a shorter or longer period of notice after the one month period. This is permissible under s. 73 of the LRA.

74.	The mortgagee's power of sale is also subject to notice as required by statute. It is a pre-condition to the exercise of the power by a mortgagee.

75.	It is expressly provided under s. 67(1(a) of the LRA that a written notice must be given to the mortgagor requiring him to pay the money due or owing. For the purposes service of the notice on a company, s. 431 of the Companies Act authorizes the manner of service of documents. It provides that a document including a notice may be served on a company, amongst others, by delivering to a director or secretary of the company or delivering to an employee of the company at the company's head office or by posting it to the company's registered office, or address for service or postal address. A notice is not defective or invalid merely because of immaterial errors such as an error in stating the correct amount of arrears due or owing. Clyde Properties Ltd v Tasker [1970] NZLR 754. The power of sale must not be exercised prior to the period stipulated in the notice. However, there may be special reasons or extraordinary circumstances which may require the power to be exercised prior to the expiry of the notice period and in such circumstance, in my view, the consent of the mortgagor or leave of the Court may be required.

76.	Where the mortgagee enters into an arrangement with the mortgagor during the currency of the notice it does not mean that the notice under s. 67(1)(a) of LRA is effectively at end. In my view the notice is merely being suspended temporarily and is automatically revived when the arrangement falls through and the mortgagee may proceed to sell the property and in that event, there is no legal obligation or requirement to issue a fresh notice. The acceptance by the mortgagee for the mortgagor to make good his default to bring the arrears under control does not negate or nullify the notice. As I said it has the effect of merely suspending the notice which notice is revived upon the mortgagor breaching any condition of the agreement. 

77.	Under s. 67(1)(a) of the LRA a mortgagee is required to give a mortgagor a written notice of demand where the mortgagor is in default for at least one month in respect to any monies secured by the mortgage. Where the mortgagor continues to default or fails to pay the sum demanded by the mortgagee pursuant to notice, the mortgagee is authorized and empowered by s. 68(1)(a) to sell the mortgaged property to recover its money. The mortgagee's power of sale under s. 68(1)(a) of the LRA is therefore not automatic. The power arises when the mortgagor fails to pay the sum demanded within a further period of one month from the date of the notice under s. 67(1)(a). The one month notice period under s. 68(1)(a) is not inflexible. Under s. 73(1) of the LRA, the notice period may be extended or reduced. In Esther Torato v PNG Home Finance Limited & 3 Others (2012) N4583 Hartshorn J took the same view where his Honour found that the parties agreed to a reduction in the notice period under the deed of mortgage. In this case, I note that the parties have expressly agreed to reduce the notice period to three days under clause AD(d) of the deed of mortgage. This clause reads:

"(d)	For the purposes of Section 68 and 73 of the Land Registration Act three (3) days are hereby fixed as the period of time for which default must continue after the service of notice before the power of sale given by Section 68 of the Land Registration Act can be exercised."

78.	However, the contention by the plaintiff company is not about the period of notice. Rather is whether notice dated 01st August 2012 had lapsed or expired in or about October 2012. The plaintiff company argued that the notice expired when the first defendant agreed not to proceed with the sale in October 2012 and therefore a fresh notice is required to be served prior to re-advertisement on 15th February 2013 and entering into the contract for sale with the second defendant. The plaintiff company has not pointed to any statutory provision or case authorities that it relies in support of its argument. There is nothing in the LRA which provides for the period of validity of a notice under s. 67(1)(a). In my view, the scheme under the LRA does not envisage a situation where a notice of demand is required to be issued afresh every time a mortgagee decides to postpone, suspend, delay or defer the exercise his power of sale. So long as the default continues, the initial notice is valid and effectual for the purposes of ss. 67(1) and 68(1) of the LRA. It does not lapse or expire unless it is expressed cancelled or withdrawn by the mortgagee. It also ceases to have any effect once the sum demanded is settled in full. 

79.	It has been held that the Court will generally not interfere with the exercise of a statutory power of sale where a contract for sale has been executed in respect to the sale of the property unless the contract was entered into in bad faith or there is clear evidence of fraud. see Lord Waring v London and Manchester Assurance Co Ltd [1934] All E.R. Rep 642 and Property and Bloodstock Ltd v Emerton [1967] 3 All ER 321.

80.	The notice under s. 67(1)(a) of LRA, in my view, serves 3 important purpose:

(i)	to notify the mortgagor of his default

(ii)	to prompt the mortgagor to remedy the default by paying the sum due on the amount secured

(iii)	to fore warn the mortgagor that if the default is not remedied, the mortgagee has the legal right and power to sell the mortgaged property to redeem its secured funds under the mortgage.

81.	In the upshot I am not satisfied that the plaintiff company has shown any proper basis that the first defendant is legally obliged to give a fresh notice under s. 67(1)(a) of the LRA before it exercised its power of sale. Accordingly, I find that the first defendant has duly complied with ss. 67(1)(a) and 68(1)(a) of the LRA in terms of giving notice to the plaintiff company. This ground has not merit and is dismissed.

Issue 2 - Whether the first defendant failed in its duty as the Mortgagee in respect to the sale of the property

82.	The plaintiff company submits that the first defendant has a duty to act in good faith which includes a duty to ensure that the property is sold at a true market value. In this case, it submits that the first defendant sold the property at an undervalue price when the true market price is over K3,000,000.00.

83.	The plaintiff company relies primarily on the 2 decisions of Kandakasi J in Papua New Guinea Banking Corporation v Pala Aruai and Freeway Enterprise Limited (2002) N2234 and Bank of Papua New Guinea v Derrick Niso (2004) N2664 to argue that the first defendant was under a duty to act in good faith by ascertaining the true market value before selling the property to the second defendant.

84.	The law on the mortgagee's duty of care is in my view clearly pronounced in a number of decisions in this jurisdiction. One of the early cases was Australia New Zealand Banking (PNG) Limited v Kila Wari (1990) N801 where the Court held that a mortgagee has a duty of care which duty includes the duty to act in good faith in obtaining the true market value of the property. The same principle was followed in a number of subsequent cases including that of Kandakasi J in Pala Aruai (supra) and Derrick Nisi (supra). A recent decision is that of Hartshorn J in Esther Torato (supra) where his Honour also applied the same principle. These decisions followed the principle developed by the English case Cuckmere Brick Company Limited v Mutual Finance Limited [1971] 2 All ER 633 which dealt with the question of a mortgagee's duty whilst exercising the power of sale where Salmon LJ stated the principle as follows:

"In exercising the power of sale, however, the mortgagee was not merely under a duty to act in good faith, ie honestly and without disregard for the mortgagor's interest, but also to take reasonable care to obtain whatever the true market value of the mortgage property at the moment he chose to sell it."

85.	I am satisfied this is the applicable principle of law that must apply to the facts of the case.

86.	In this case there is evidence that at the time of making the loan application the plaintiff company provided to the first defendant a 2008 valuation of the property assessed at K1,560,000.00. When the property was advertised for sale in September 2012, an offer of K2,000,000.00 was received. It appears that was the only offer received. When the property was re-advertised in February 2013 the offers received ranged between K700,000.00 and K2,000,000.00. A valuation obtained by the plaintiff company at the time it commenced this action puts the value of the property at K2,825,000.00. The valuation done by the court appointed valuer puts the value of the property at K2,260,000.00 as at 18th August 2013.

87.	The valuation obtained by the plaintiff company is the highest. However, I accept the submission by the first defendant that this valuation was done for a specific reason and purpose, and that is to serve the interest of the plaintiff company in the court proceeding. It was also paid for by the plaintiff company and therefore the valuation cannot be said to be fair and independent. For these reasons I pay little regard to the valuation. I accept the valuation done by the court appointed valuer for two reasons. Firstly, it is compiled by a qualified, experienced and independent valuer appointed by the Court. Secondly, the parties agree to be bound by the valuation. This is the commitment of the parties as reflected in the consent order made on 26th July 2013.

88.	The question is did the first defendant acted in bad faith in selling the property at K2,005,555.55. The plaintiff company contends that the first defendant acted in bad faith in two respects. Firstly, it went ahead and sold the property despite the undertaking in October not to sell. Secondly, it did not ascertain a true market value of the property before selling the property.

89.	In regards to the first contention it appears that the gist of the argument is that the plaintiff company was not appropriately informed of the intention to sell the second time in February 2013. I find this argument mischievous and without merit for the same reasons I discussed when I earlier dealt with the issue of notice. The undertaking given by the first defendant was based on the condition that the plaintiff company must reduce its loan arrears and bring it under control. When the plaintiff company found itself unable to uphold its commitment under the agreement surely it cannot expect that the first defendant will retract from the pursuit of its interest lightly. In any case, in addition to what I have found in relation to the issue of notice, there is ample evidence of continued dialogue and communication between the first defendant and the plaintiff company between the period October 2012 and April 2013 through a duly authorized agent (Marlene Mohamet) and a Director (Sir Akepita Wamiri) where they were kept informed of the first defendant's intention to sell the property. The plaintiff company does not dispute the representative capacity and authority of Marlene Mohamet and Sir Akepita Wamiri to act for and on behalf of the plaintiff company in the matter during the relevant period. I am satisfied on the evidence that the first defendant had maintained close communication with the plaintiff company and the company was aware of the intention to sell the property. This argument has no merit and is dismissed.

90.	As regards the true market value of the property, the general principle is that the mortgagee is under a duty to ascertain the true market value of the property at the time he chooses to sell the property. 

91.	The principle in Cushmere Brick (supra) is that the mortgagee is not in a special position as a trustee, he does not have the same standard of duty of care as a trustee. Therefore the mortgagee does not have a special duty of care when exercising the power of sale. He is not obliged to exercise the power of sale however advantages it might be for the mortgagor. Palk v Mortgage Services Fonding [1993] 2 All ER 481. He is also under no obligation to delay the sale with a view to securing a better price for the property. Tse Kwang Lam v Wang Chit Sen [1983] 3 All ER 54. The mortgagee may also sell the property on the basis of his own interest but he is not permitted to sell it to himself or to his agent. China and South Sea Bank Ltd v Tan Soon Gin (alias George Tan) [1989] 3 All ER 839. However, the mortgagee owes to the mortgagor a duty in equity to exercise the power in good faith for the purpose of obtaining a repayment of the secured money and therefore to that extent has a duty to take reasonable precaution to secure a proper price in the respect to the property. Downsview Nominees Ltd v First City Corporation Ltd [1993] 3 All ER 626.

92.	The decision to sell was made in or about July/August 2012. As I have already stated, at that time, the available valuation as submitted by the plaintiff company as part of its loan application indicate the property value to be worth K1,560,000.00. An offer of K1,800,000.00 was negotiated by the first defendant and was increased to K2,005,555.55 was accepted and the property was sold on that price. Given the primary purpose of the loan was to refurbish the Klinki Lodge and there is no evidence of the property being refurbished and the level of bids that were received it poses is a serious question as what might be a true market value of the property.

93.	One must also not lose sight of the competing interest of the plaintiff company and the first defendant. The first defendant wants to ensure that it recovers its money as soon as possible without incurring unnecessary costs. As for the plaintiff company, the need to settle the outstanding loan as soon as possible to minimize escalation is loan arrears which are compounded by additional fees, interests and charges but more importantly the need to obtain the best possible price on the true market value of the property. 

94.	The evidence showed that the first defendant subjected the property on open market by appropriate publication over a reasonable period on 2 ocassions. The market responded accordingly. The evidence is that a very low percentage of interest was shown. A handful of interest were expressed and received. Even those that expressed interest could not confirm their interest mainly due to financial capacity. In my view, this is a clear indication that the market is volatile, insecure and uncertain. Therefore there is uncertainty as to what is or might be a true market value.

95.	There is also evidence that Mr. Wamiri had subjected the property on open market in a similar manner in February 2013. He has not disclosed the result especially the level and extent of the interest expressed by the public, if any. This would have assisted the Court draw a comparative view as to whether the offers received by the first defendant reflects the true market value. The variance in the valuation between the plaintiff company's Valuer and the court appointed Valuer is again indicative of the fact that the true market value cannot be easily ascertained. A one-off higher valuation is not necessarily a proper and sound basis for concluding that it is the true market value. Conversely, a one-off lower valuation cannot be regarded as the true lower-end market value. In my view it would take a good number of independent valuations, possibly 5 if not more, coupled with a sustained period of advertisement in order that a fair, reasonable and true market value can be safely ascertained.

96.	In my view the plaintiff company has failed to prove on the evidence that the K2,005,555.55 was a gross undervalue and not a true market value. The plaintiff company also alleges that there is added value in 'goodwill', however, I find no evidence to support such allegation. There is no evidence as to what the value of the goodwill might be. This is a generalized claim and is unsupported by evidence. In the circumstances I am of the view that the first defendant did not act in bad faith in terms of ascertaining the true market value of the property. To the contrary, the evidence indicates that the property was sold at a "good price". 

98.	The onus is on the plaintiff company as the mortgagor to prove on the balance of probabilities that the first defendant as the mortgagee acted in breach of his duty in terms of taking reasonable precaution to secure a true market value. The preponderance of evidence is that the first defendant did not act in bad faith in selling the property. 

99.	For all the foregoing reasons I dismiss the entire claim by the plaintiff company with costs awarded in favour of the defendants. The interim injunctions granted on 02nd August 2013 in this proceeding and extended to date are also discharged forthwith.

Orders accordingly.
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PANG Legal Services: Lawyer for the Plaintiff
O'Briens: Lawyer for the First Defendant
Pilisa Lawyers: Lawyer for the Second Defendant
No representation for the Third Defendant