Agito Nominees Pty Ltd v Paras
[2015] VCC 1004
•27 July 2015
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
Case No. CI-14-06383
| AGITO NOMINEES PTY LTD (ACN 005 206 002) | Plaintiff |
| v | |
| SUE PARAS AND CHRISTINE PARASKEVAS | Defendants |
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JUDGE: | JUDICIAL REGISTRAR BURCHELL | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 25 June 2015 and 27 July 2015 | |
DATE OF RULING: | 27 July 2015 | |
CASE MAY BE CITED AS: | Agito Nominees Pty Ltd v Paras and Anor | |
MEDIUM NEUTRAL CITATION: | [2015] VCC 1004 | |
REASONS FOR RULING
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Catchwords: Summary judgment – whether substitution of principal debtor - whether novation discharged guarantee – estoppel – non-compliance with s 126 of the Instruments Act 1958 – penalties of interest rate
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr J L Evans | Madgwicks |
| For the Defendants | Mr R Scheelings | Bedelis Lawyers |
JUDICIAL REGISTRAR:
Introduction
1 By summons filed on 9 June 2015, the plaintiff seeks summary judgment against the defendants in the amount of $202,712.80, plus interest and costs, pursuant to s. 61 of the Civil Procedure Act 2010 (Vic).
2 In support of its application, the plaintiff relies on the affidavit of Mr Sotos Agisilaou, Director of the plaintiff, the trustee of the S Agisilaou Family Trust, sworn on 4 June 2015.
3 The defendants rely on the affidavit of Ms Sue Paras, the first defendant and a company director of JSTC Pty Ltd (JSTC), a corporate trustee of the Sarap Family Trust, sworn on 19 June 2015. By leave of the court, the defendant filed two further affidavits in support on 20 July 2015, being the further affidavit of Ms Paras and the Affidavit of Thomas Paraskevas. On 23 July 2015, the defendants filed and served a proposed amended defence and counterclaim.
4 On the first return of the application, counsel for the defendants foreshadowed that the defendants would seek leave to amend the defence and issue a counterclaim should the defendants be successful in opposing the summary judgment application. The grounds would include the substitution of the principal debtor by novation which discharged the guarantee the subject of the present proceeding, estoppel, an implied novation and non-compliance of s 126 of the Instruments Act 1958, that clause 10 of the covenants is incompatible with the discharge of the Hoskin Street mortgages, and a counterclaim in relation to whether the interest rate amounted to a penalty and a declaration that the guarantee has been discharged as the guarantee of the underlying loan agreement no longer exists.
5 I made orders on 24 June 2015 allowing the defendants the opportunity to put forward further affidavit material in support of the proposed defences. It is noted that although the County Court Civil Procedure 2008 Rules permit the defendants to rely on hearsay statements in such applications, where there are facts in dispute, an affidavit on personal knowledge is more persuasive.
The pleadings
6 By statement of claim filed in this Court on 17 December 2015, the plaintiff claims that on or about 21 July 2011, the plaintiff and JSTC entered into a loan agreement wherein the plaintiff lent to JSTC the sum of $360,000. In consideration for entering into the loan, on 21 July 2011, the defendants, being the directors of JSTC, provided a guarantee to the plaintiff in which they agreed to pay all moneys, and perform all obligations, due from JSTC under the loan.
7 The terms of the loan included that JSTC would repay the loan by 21 November 2011. JSTC would pay the fixed interest in the amount of $35,000 for the four month term of the loan. Interest on the outstanding balance of the loan at a rate of 30% per annum calculated daily and payable in arrears on the first day of each interest period until the loan is repaid.
8 The loan was secured as second ranking mortgages by JSTC over two properties, being, 3 Hoskin Street, Shepparton, and 31 Hoskin Street, Shepparton, (the Hoskin Street Properites) by mortgages number AJ113509F and AJ113533J.
9 The secured money under the loan was defined to include the loan and all other money which JSTC agreed to pay under any provision of the loan agreement or the mortgage, including interest.
10 The terms of the guarantee included that the defendants were jointly and severally liable to the plaintiff for the payment of the secured money payable by JSTC.
11 On or about 4 December 2014, the plaintiff, by its lawyers, Madgwicks, sent a letter of demand on the defendants requiring payment of the sum of $167,928,90 then due and payable by the defendants pursuant to the loan and the guarantee.
12 By defence dated 9 April 2015, the defendants claim that as they were not a party to the loan, they could not be in breach of the loan agreement or be liable for moneys owing under the loan agreement. Further, by about December 2013, all moneys owing to the plaintiff under the loan agreement had been fully paid. Alternatively, that by about December 2013, the loan agreement had been transferred to a third party, being CVC Shepparton Pty Ltd (CVC Shepparton). Lastly, if the defendants are liable to the plaintiff then they seek to set off the amount claimed.
13 By amended defence and counterclaim dated 23 July 2015, the defendants relied on the following matters:
(a) moneys owing to the plaintiff under the loan agreement had been novated to CVC Shepparton;
(b) alternatively, the plaintiff is estopped because of its representation by conduct, by letters sent to CVC Shepparton and not to JSTC in relation to repayments that the defendants relied upon to their detriment;
(c) alternatively, that the defendants’ obligation under the guarantees came to an end upon the incorporation of JSTC’s obligation by CVC Shepparton;
(d) alternatively, the plaintiff repudiated the guarantees resulting in consequential damages;
(e) alternatively, the mortgage executed by the plaintiff and CVC extinguished the obligations owed by the defendants under the guarantee;
(f) alternatively, if there was a new oral or implied guarantee then this was not evidenced in writing and is unenforceable;
(g) alternatively, the plaintiff breached s. 18 of the Australian Consumer Law in representing that the remainder of the loan moneys were now owed by CVC Shepparton;
(h) alternatively, that the payment of interest is a penalty and whether this was conferred under mistake of law;
(i) the defendants set off contractual damages, equitable damages and/or damages pursuant to the Australian Consumer Law.
14 Section 63 of the Civil Procedure Act 2010 (Vic) is as follows:
63 Summary judgment if no real prospect of success
(1) Subject to section 64, a court may give summary judgment in any civil proceeding if satisfied that a claim, a defence or a counterclaim or part of the claim, defence or counterclaim, as the case requires, has no real prospect of success (emphasis added).
(2) A court may give summary judgment in any civil proceeding under subsection (1)—
on the application of a plaintiff in a civil proceeding;
on the application of a defendant in a civil proceeding;
on the court's own motion, if satisfied that it is desirable to summarily dispose of the civil proceeding.
See the Court of Appeal in Lysaght Building Solutions Pty Ltd v Blanalko Pty Ltd [2013] VSCA 158.
The issues
Novation
15 The main issue between the parties is an allegation by the defendants that there was a transfer of the loan to a third party, being CVC Shepparton.
16 The evidence of Mr Agisilaou was that in about February 2012, he met with Mr Ken Phillips of Kysi Pty Ltd, who acted as the agent for JSTC and the defendants in managing the loan from the plaintiff. During this meeting, Mr Phillips informed Mr Agisilaou that JSTC could not repay all of the loan but instead JSTC would:
(a) repay to the plaintiff as much of the loan as it could from a third party refinancer which would leave about $84,725 of the loan outstanding;
(b) give the plaintiff a variation of mortgage for the mortgage over the Hoskin Street properties so that a new loan balance could be recorded and the refinancer could register a first ranking mortgage;
(c) procure a second ranking mortgage for the plaintiff for the balance of the loan from CVC Shepparton in addition to the existing security already held from JSTC and the defendants.
17 On 15 February 2015, Mr Agisilaou met with Mr Phillips and gave him a letter addressed to the defendants and Mr Paras which stated:
(a) that he enclosed a loan account statement and confirmed that an amount of $90,000 remained owing by JSTC upon the refinance settlement the following day;
(b) that the plaintiff would release the two registered mortgages secured upon the Hoskin Street properties upon condition that CVC Shepparton provide a registered second mortgage over its property at Benalla Road, Shepparton (the CVC property).
18 The letter enclosed a proposed variation of mortgage, an additional mortgage in duplicate for the CVC property and a statutory declaration for Mr Paras to sign.
19 Between the 15 February meeting and the settlement on 16 February 2012, Mr Phillips informed Mr Agisilaou that he had obtained JSTC’s refinance from the Bank of Queensland (the Bank) and the Bank would not agree to the plaintiff having a second ranking mortgage over the Hoskin Street properties. Mr Agisilaou deposes that he accepted this.
20 On 16 February 2012, Mr Agisilaou met with Mr Phillips together with representatives of the Bank and St George Bank. Mr Agisilaou received a bank cheque in the sum of $332,920 together with signed versions of the CVC Mortgage and the Statutory Declaration. He handed over discharges of the mortgages over the Hoskin Street properties.
21 Due to the position of the Bank, the variation of Mortgage with the plaintiff and JSTC was not executed. The CVC Shepparton Mortgage was for the principal sum of $90,000. Paragraphs 9 and 10 of the covenants provided that:
9. The Mortgagor hereby acknowledges that the security being provided to the Mortgagee herein constitutes additional security to satisfy an existing loan facility made by the Mortgagee to [JSTC Pty Ltd] by mortgages number AJ113509F and AJ113533J. The Mortgagor further acknowledges that its Director is aware that the amount of the loan represents an amount that remains as a debt between the Mortgagee and [JSTC Pty Ltd] upon the securities described in the said above registered mortgages and that it is not an amount to be paid by the Mortgagee and the Mortgagor herein.
10. The Mortgagor hereby accepts and incorporates into this mortgage the terms and conditions of the Loan Agreement, Mortgages number AJ113509F and AJ113533J and any other documentation relating to the loan facility made by the Mortgagee to [JSTC Pty Ltd] and dated 21 July 2011.
22 Mr Agisilaou deposes that during his discussions with Mr Phillips it was not suggested not him that the arrangements entered into on 16 February 2012 had the effect of discharging the liability of JSTC for the balance of the loan or under the guarantee.
23 On 26 March 2012, Mr Agisilaou wrote to Mr Paras enclosing a copy of the registered CVC property mortgage and advised that the interest payment due on 16 February 2012 remained outstanding. The letter relevantly stated:
I act on behalf of [the plaintiff] in the loan made to CVC Shepparton P/L for the amount of $90,000 on 16 February 2012. I enclose copy of registered second mortgage number AJ496706M and confirm that the monthly interest of $1,800.00 was due and payable IN ARREARS on 16 March 2012 [sic].
24 On 11 July 2012, Mr Agisilaou wrote to Mr Paras to advise that the loan principal was due and payable on 15 August 2012 and enclosed a current statement for the loan. The letter relevantly stated:
I act on behalf of [the plaintiff] in the loan made to CVC Shepparton P/L for the amount of $90,000 on 16 February 2012. I enclose copy the current statement for your records. Payments of $1,800.00 have been made IN ARREARS to 16 June 2012.
25 On 10 September 2012, Mr Agisilaou wrote to Mr Paras to confirm his agreement to the loan repayment date being extended to 15 December 2012 and enclosed a current statement for the loan.
26 Ms Paras, the first defendant, deposed that on or about February 2012, JSTC refinanced the debts owed by JSTC to the first mortgagee and to the plaintiff as second mortgagee. The Bank of Queensland funds paid off the first mortgagee and the majority of the loan from the plaintiff. The Bank took a mortgage over the Hoskin Street properties and the plaintiff’s mortgages were discharged.
27 Ms Paras was informed Mr Paras, the second defendant’s husband, that at around the same time as the refinancing, CVC Shepparton took over the remaining $90,000 owing to the plaintiff. CVC Shepparton undertook to pay the periodic interest with the principal to be paid upon sale of the Benalla Road property. Ms Paras deposed that no guarantee was obtained from CVC Shepparton or from Mr Paras and that neither she nor the second defendant provided any new guarantees for the transferred loan.
28 Counsel for the defendants submitted that the issue raised by the defence is that by the 16 February 2012 agreement and by conduct, the remaining liability under the JSTC loan was released or novated to CVC Shepparton and JSTC was no longer liable or had been discharged by the plaintiff.
29 Counsel for the plaintiff contended that the letter dated 15 February 2012 was conduct of the parties at the time of the transaction. The letters of 26 March 2012, 11 July 2012 and 10 September 2012 constituted subsequent conduct which was not admissible.
30 It was common ground between the parties that Mr Phillips acted as agent for JSTC and CVC Shepparton. However, counsel for the plaintiff suggested that the agreement had been completed on 16 February 2012 and that subsequent conduct including the letters exhibited to Mr Agisilaou’s affidavit went to subjective intentions which is irrelevant in contractual interpretation.
31 Counsel for the defendants submitted that what happened on 16 February 2012 was a novation of the debt of $90,000 from the JSTC original loan to CVC Shepparton. Mr Agisilaou’s own affidavit set out the factual dispute that required a trial as a new mortgagee was appointed on 16 February 2012 at the meeting between the mortgagees. The defendants claimed that the 15 February 2012 letter was not contemporaneous as the documents were pre-signed before the 16 February 2012 meeting. What occurred in between was that the Bank would not allow the plaintiff to maintain its second mortgage over the Hoskin Street properties. The mortgages number AJ113509F and AJ113533J had to be discharged and therefore covenants recorded at paragraphs 9 and 10 are wrong.
32 Counsel for the defendants submitted that the terms “accepts and incorporates” in paragraph 10 of the mortgage had a technical legal meaning which went to the legal and factual dispute between the parties as to whether the defendants and CVC Shepparton were joint debtors or whether there was an extinguishment.
33 The defendants rely on novation whereby the first loan agreement has been extinguished and substituted by another. Novation can be implied and in writing. The defendants were not present at the 16 February 2012 meeting and did not sign any variations to the guarantee. However, Mr Phillips was present and he was agent for both JSTC and CVC Shepparton. In order for JSTC to be discharged from its obligations by way of novation, it has to be a party to the novation in the sense that CVC Shepparton was to assume its obligations in consideration of which it was to be discharged: McMahon v National Foods Milk Ltd(2009) 25 VR 251 at [80] per Nettle JA (Neave and Dodds-Streeton JJA concurring).
34 A novation by which the principal debtor is substituted by another fully discharges the surety: J O'Donovan and J C Phillips, The Modern Contract of Guarantee, 3rd ed, Thomson LawBook Co, Sydney, 1996 pp320-322.
35 Therefore, the effect of an absolute release of a debtor is to extinguish the debt. Accordingly, the creditor also loses his or her remedy against the surety since there is no debt unsatisfied in respect of which a guarantor can be liable. It is therefore not possible to reserve rights against the guarantor of the extinguished debt. The plaintiff seeks to allege that all that took place on 16 February 2012 was a substitution of surety. The Benalla Street property for the Hoskin Street properties.
36 It is necessary to construe the 16 February 2012 agreement carefully. Although it is noted that the usual rule in relation to construction of contracts is that where a document exists, other evidence in terms of the document is not admissible, in the case of novation, it is a question of intention whether there has been an actual release of the original loan and extrinsic evidence may be admitted to show the relevant intention: Fightvision Pty Ltd v Onisforou (1999) 47 NSWLR 473 at [75], cf Lewison and Hughes, the Interpretation of Contracts in Australia, Lawbook Co 2012 at pp 20, 24, 27-28, 30, 122-123, 126. The subsequent conduct is therefore a relevant consideration: Re Mount Costigan Lead and Silver Mining Co Ltd (Nelson’s Case) (1895) 17 LR (NSW) Eq 80.
37 Where the agreement amounts to a novation, the original liability covered by the guarantee is discharged: Commercial Bank of Tasmania v Jones[1893] AC 313 at 316; McMahon v National Foods Milk Ltd(2009) 25 VR 251 at [78]-[94] per Nettle JA (Neave and Dodds-Streeton JJA concurring).
38 The object to be achieved in interpreting any contract is to ascertain the mutual intentions of the parties as to the legal obligations each assumed by the contractual words in which they sought to express them. Unless there is a case for rectification, the law of construction is an objective theory. The method is to ascertain the contextual meaning of the relevant contractual language which can be inferred from the language used by the parties judged against the objective contextual background.
39 Therefore, the common intention of the parties, as expressed by conduct and words, assessed from the viewpoint of a reasonable person imbued with knowledge of the surrounding circumstances, including evidence of the subsequent conduct of the parties in a case of novation and estoppel, will determine the proper construction of the relevant agreement.
40 In her supplementary affidavit, Ms Paras deposed at paragraph 5 that the outcome of the refinance meeting on 16 February 2012 was to “replace the current mortgage holders with [the Bank], and that Agito would be out of the picture as far as JSTC was concerned. It was also [her] understanding that neither [defendants] would have any further obligations as guarantors”.
41 Ms Paras’ understanding was that:
(a) CVC Shepparton would be responsible for any shortfall in the refinance from the Bank;
(b) as a result of the refinancing with the Bank, this would discharge the obligations of JSTC and the defendants;
(c) from the time of the refinance meeting and afterwards, Mr Phillips’ actions were consistent with Agito being out of the picture as far as JSTC was concerned.
42 Mr Paras also deposed that any shortfall upon refinance was to be transferred to CVC Shepparton, with a registered mortgage to be placed on its property if necessary. He agreed with Mr Phillips that all obligations owed by JSTC were to be discharged and transferred to CVC Shepparton.
43 At paragraph 10 of his affidavit he states:
After his refinancing meeting of 16 February 2012, [Mr Phillips] relayed to me by phone the successful outcome of that meeting, and that JSTC had been released of all of its liabilities, which had now been transferred to my company. From that day I considered that I had, as sole director of CVC Shepparton, sole responsibility for the small amount that Agito had secured on my company, and from that point onwards Agito certainly acted, in its dealings with me – through [Mr Phillips] – that they also considered me responsible.
44 In the present case, I am satisfied on the evidence before me that there is a triable issue as to whether by the 16 February 2012 agreement and by conduct, the remaining liability under the JSTC loan was released or novated to CVC Shepparton. The same factual matrix informs the newly pleaded estoppel, breach of contract, repudiation and s 18 of the Australian Consumer Law allegations.
Instruments Act
45 Although a variation of a guarantee need not be evidenced in writing if the variation is within the general purview of the guarantee, if a new agreement is to secure where the original loan has been novated, there must be a new guarantee evidenced in writing pursuant to s 126 of the Instruments Act 1958; McMahon v National Foods Milk Ltd at [84].
46 The plaintiff sought to rely on paragraph 3 of the guarantee to argue that the defendants’ guarantee provides that a variation does not affect the rights such that if the creditor discharges the principal debtor then the guarantors are still liable for the debt.
47 Counsel for the defendants argued that because the effect of a novation is extinguishment, paragraph 3 was irrelevant as it only dealt with “any release variation exchange renewal or modification”.
48 In my view, given my findings on ground one above, it is a matter for trial as to whether there was a variation within the purview of the guarantee given to the plaintiff by the defendants or whether there was a new agreement by novation such that a new guarantee must be evidenced in writing.
Default Interest Rate
49 The plaintiff submitted that the foreshadowed defence of a penalty interest rate did not give rise to a breach. For the first four months there was a fixed rate of $35,000 on the short term loan. Thereafter there was a 24% to 30% default interest rate applied in a commercial transaction. In the plaintiff’s view, this being second mortgage lending, it was not a penalty: Yarra Capital Group Pty Ltd v Sklash Pty Ltd [2006] VSCA 109 (Sklash) at [11], [16] and [17].
50 Contractual damages are intended to be compensatory rather than punitive. The High Court’s recent decision in Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30 establishes that a fee which secures compliance with contractual obligations will only be enforceable if it represents a genuine estimate of the loss that is likely to flow from a breach. This case broadened the reach of the common law rule and equitable jurisdiction in relation to relief against penalties. Previously, cases confined the penalties doctrine to situations where the relevant liability for penalty was triggered by a breach of contract. The High Court found that the doctrine could apply when an event was not technically a breach.
51 In Sklash the Court of Appeal considered whether the interest rate on a short term loan constituted a penalty in that the degree of disproportion between the stipulated sum for interest and the loss likely to be suffered by the lender if not repaid on time would need to be great, possibly extreme, to justify the relief against the terms as stated as being unconscionable or oppressive. Sklash involved a case where both parties were money lenders providing loans and funds for high risk, short term and high interest rate loans.
52 The Victorian Court of Appeal found at [11], [16]-[17] that market conditions were a relevant consideration as there was a real difference between the institutional lending market (where there are industry benchmarks and prevailing interest rates that can be used to establish the loss to the lender arising from a borrower’s default) and the short term money market (where loans are often unsecured, cost of borrowing is high and establishing the loss that is likely to flow from a repayment default is far more complex). This made it difficult to say that a high rate of interest on a short term loan was out of all proportion to the loss that may be suffered from a repayment default and, therefore, amounted to a penalty.
53 The defendants foreshadow seeking equitable relief against the terms of the interest rate as being unenforceable in equity by reason of being unconscionable or oppressive: see AMEV-UDC Finance Limited v Austin (1986) 162 CLR 170.
54 In AMEV-UDC Finance Limited v Austin [1986] HCA 63; (1986) 162 CLR 170 Mason and Wilson JJ of the High Court of Australia said:
But equity and the common law have long maintained a supervisory jurisdiction, not to rewrite contracts imprudently made, but to relieve against provisions which are so unconscionable or oppressive that their nature is penal rather then compensatory. The test to be applied in drawing that distinction is one of degree and will depend on a number of circumstances including (1) the degree of disproportion between the stipulated sum and the loss likely to be suffered by the Plaintiff, a factor relevant to the oppressiveness of the term to the Defendant, and (2) the nature of the relationship between the contracting parties, a factor relevant to the unconscionability of the Plaintiff's conduct in seeking to enforce the term. The Courts should not, however, be too ready to find the requisite degree of disproportion lest they impinge on the parties' freedom to settle for themselves the rights and liabilities following a breach of contract.
55 Unlike Sklash, the present case involves a small lending entity and a borrower for commercial purposes. Further, the loan was not unsecured. The Court of Appeal found that it was only on the terms of Sklash’s particular agreement and intended operation that it was not persuaded that it was reasonably arguable to the defendant in that case to argue that the default clause was so out of proportion with the loss that was likely to flow from the breach such that it could be characterised as oppressive: [18]. In my view, a Court must look at the unique circumstances and the status of the parties in each specific case in characterising a liquidated damages clause.
56 Further, counsel for the plaintiff referred the Court to Beil v Pacific View (Qld) Pty Ltd [2003] QSC 043 at [18], where Holmes J found that the question of whether an increase to 25 per cent if a loan was repaid from 16 per cent was a penalty was a triable issue. His Honour allowed judgment for the unpaid principal at the lower interest of 16% and ordered that the remaining claim proceed to trial. In Beil, his Honour had rejected the maintenance of the remaining defences based on Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549.
57 A further issue is whether the payments made pursuant to the interest terms where conferred under mistake of law. It is arguable whether the inclusion of the interest rate term can be seen to be “unusual”. As such, it may require the plaintiff to take special steps to bring it to the attention of the defendants for otherwise it may not be reasonable to assume that the defendants consented to the term. The Victorian Supreme Court of Appeal has found that a term may be unusual because it is more than ordinarily onerous. The relevant question is whether the defendants can be reasonably taken to have assented to the term: Maxitherm Boilers Pty Ltd v Pacific Dunlop Ltd [1998] 4 VR 559 at 569. This is a question of fact for the trial judge.
Conclusion
58 In my view there are triable issues which have been raised by the defendants. Further investigation is required as to whether the transactions of 16 February 2012 resulted in simply extra security or an implied novation. There are clearly factual matters in dispute between the parties and questions of law which cannot be determined without full argument. Therefore, I am not satisfied that the defence and counterclaim has no real prospect of success pursuant to s. 63 of the Civil Procedure Act 2010 and Lysaght Building Solutions Pty Ltd v Blanalko Pty Ltd [2013] VSCA 158.
59 Even if I am wrong in my analysis about the defendants’ prospects, I rely on s. 64 of the Civil Procedure Act. In my view this is a matter that ought not be disposed of summarily because it is not in the interest of justice to do so and the dispute is of such a nature that only a full hearing on the merits is appropriate.
60 The orders that I propose to make are that the plaintiff’s application for summary judgment be dismissed.
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