Australian Secure Capital Fund Ltd v Haider
[2023] ACTSC 205
SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Case Title: | Australian Secure Capital Fund Ltd v Haider |
Citation: | [2023] ACTSC 205 |
Hearing Dates: | 28 July 2023 and 1 August 2023 |
Decision Date: | 1 August 2023 |
Before: | Mossop J |
Decision: | 1. The default judgment entered on 30 June 2023 is set aside. 2. There is no order as to the costs of the application. 3. The proceedings are listed in the Registrar’s directions list at 9.30am on 7 August 2023. |
Catchwords: | PRACTICE AND PROCEDURE – DEFAULT JUDGMENT – Application to set aside default judgment – default judgment sought and obtained in circumstances where defendant failed to file a defence – where default judgment would enable plaintiff to seek possession of premises used by the defendants to secure loan – whether absence of first plaintiff on default judgment application warrants setting aside of judgment – whether the proposed defence is meritorious – whether judgment should be set aside due to a fundamental defect in the mortgage document forming the basis for the claim for possession – default judgment set aside – no orders as to costs |
Legislation Cited: | Court Procedures Rules 2006 (ACT), rr 102, 1128 Electronic Conveyancing (Adoption of National Law) Act 2012 (NSW) National Credit Code (Cth), ss 5(1), 6(1)(a), 13(1), 76, 77(c) |
Texts Cited: | Australian Financial Complaints Authority Complaint Resolution Scheme Rules (13 January 2021) |
Cases Cited: | Haider v Gudelj [2019] ACTSC 213 Haider v Gudelj [2021] ACTCA 9; 16 ACTLR 1 |
Parties: | Australian Secure Capital Fund Ltd as trustee for the ASCF Select Income Fund (First Plaintiff) ASCF Managed Investments Pty Ltd (Second Plaintiff) Iqtidar Haider (First Defendant) Maria Haider (Second Defendant) |
Representation: | Counsel D Robens (First and Second Plaintiff) R Markham (First and Second Defendant) |
| Solicitors Summer Lawyers ( First and Second Plaintiff) Adero Law ( First and Second Defendant) | |
File Number: | SC 8 of 2023 |
MOSSOP J:
Introduction
These proceedings seek the possession of a residential property in Chapman which was given as security by the defendants, Iqtidar Haider and Maria Haider, for a loan made to a company that they controlled, I Haider Pty Ltd (Company). The proceedings were commenced on 12 January 2023 and served on 22 January 2023. Default judgment was granted in favour of the second plaintiff against the defendants on 29 June 2023 and the order entered on 30 June 2023. By application in proceeding dated 11 July 2023 the first and second defendants seek an order that the default judgment dated 30 June 2023 be aside. They also seek an order for costs and certain other directions.
The defendants relied upon the affidavit of Anvesh Bulusu dated 11 July 2023. Mr Bulusu is a solicitor employed by the defendants’ solicitors. The second plaintiff relied upon the affidavit of Blake Palmer dated 25 July 2023. Mr Palmer is the managing partner of the solicitors for the plaintiffs. Various exhibits to those affidavits and other exhibits were tendered.
The defendants acted as guarantors of a loan made to the Company, a company of which each of the defendants was a director. The security for the loan was a residential property in Chapman owned by the defendants. The loan was for a period of two months. At the conclusion of the loan it was not paid out. The plaintiffs sought to enforce the guarantee by obtaining possession of the land and commenced proceedings for possession of the land in January 2023. A notice of appearance was filed by the defendants. Although there was some correspondence between the solicitors and the first plaintiff agreeing to a stay of the proceedings in relation to it, the second plaintiff made it clear that it required the filing of a defence. No defence was filed and on 29 June2023 default judgment was obtained. It is that judgment which is now sought to be set aside.
For the reasons that follow, but for the matter raised at the conclusion of these reasons, I would have concluded that the default judgment should not be set aside and therefore that the defendants’ application should be dismissed. However, as I will indicate, for reasons which I will give, the opposite conclusion should be reached.
Chronology of proceedings
The defendants signed a “Borrowers Application Form” on 26 July 2022. An offer of finance was provided on 1 August 2022.
Documentation to accept the offer was signed on 2 August 2022 as well as on 4 and 7 August 2022. Each defendant signed as a director of the company as well as in their individual capacities as guarantors.
Money was advanced on 15 August 2022. It was due to be repaid by 15 October 2022.
On 2 November 2022, Summer Lawyers (Summer), acting for the plaintiffs, issued default notices to the defendants on behalf of the plaintiffs.
On 12 January 2023, Summer sent a further default notice pursuant to ss 93 and 94 of the Land Titles Act 1925 (ACT).
On 12 January 2023, the plaintiffs commenced proceedings against the defendants.
On 22 January 2023, the defendants were served with the Originating Claim and Statement of Claim.
On 22 February 2023, Adero Law (Adero), acting for the defendants, filed a Notice of Intention to Respond on behalf of the defendants.
On 23 February 2023, Adero wrote to Summer requesting provision of documentation and correspondence relating to the request for finance that was referred to in the “finance offer” dated 2 August 2022. A follow-up email was sent on 3 March 2023.
On 3 March 2023, Summer responded to the email of 23 February 2023 saying, rather unhelpfully, that the documents requested “are a matter for evidence” and that the loan documents upon which the plaintiff relies for its claim for possession have already been provided.
On 7 March 2023, Adero made a request for further and better particulars.
On 22 March 2023, Summer responded to the request for further and better particulars.
On 18 April 2023, a solicitor from Summer emailed a solicitor from Adero asserting that the defendants “ought to be in a position to file and serve their defence by 26 April 2023”. Consent orders to that effect and which provided a timetable for the service of evidence were proposed.
On 26 April 2023, a solicitor from Adero sent a letter indicating that the defendants intended to file a complaint with the Australian Financial Complaints Authority (AFCA) by 28 April 2023 and pointing to r A 7.1(b) of the Complaint Resolution Scheme Rules to the effect that action may not be taken to pursue debt recovery legal proceedings while AFCA is considering a complaint. The AFCA dispute resolution scheme is a form of external dispute resolution run by a company limited by guarantee based upon membership of the scheme. The letter proposed orders staying the proceedings until the resolution of the complaint by AFCA.
On 5 May 2023, a solicitor from Adero emailed a solicitor from Summer referring to the letter sent on 26 April 2023, confirming that the complaint had been lodged and asking whether the plaintiffs consented to orders staying the proceedings.
On 8 May 2023, the complaint to AFCA was officially received. The complaint included:
The Complainants say ASCF acted unconscionably in entering into the loan agreement. Consequently, the agreement, including the guarantees, should be void. ASCF acted unconscionably by: 1. failing to undertake reasonable due diligence into the Company’s ability to repay the loan. Had ASCF undertaken reasonable enquiries, it would have known that the Company had not earned any revenue since 2015 and did not own any assets – making it apparent that the Company could not repay the loan. Despite this, ASCF entered into the loan. 2. Entering into a business loan to avoid the protections under the National Credit Code (the Code). ASCF knew that the purpose of the loan was to fund personal, rather than business, expenses. The only reason to include the Company as a party of the loan was to avoid the protections of the Code, including the requirements under clause 16 of the Code. As ASCF failed to provide these disclosures, despite knowing that the loan was for personal purposes, the loan should be void. Further, the Complainants say that they provided the guarantees under duress, with their son threatening physical violence against them at the time they entered provided the guarantees.
The outcome requested was “The loan be declared void, and the Complainants released from their guarantees.”
On 9 May 2023, a lawyer from Summer wrote a letter to a lawyer at Adero. Having outlined some of the history of the proceedings the letter addressed the AFCA complaint and identified that the first plaintiff was an AFCA member. The letter asserted that the making of the complaint “is a strategic move with the aim of delaying the Supreme Court proceedings”. It referred to the decisions in Haider v Gudelj [2019] ACTSC 213 and Haider v Gudelj [2021] ACTCA 9; 16 ACTLR 1 which outlined “your clients’ previous complex business dealings”. The letter asserted that “[a]t the time your clients caused the Company to enter into the current loan they were well informed and educated in matters of finance and lending.” It asserted that the allegation of duress in the complaint was directly contrary to the written declarations provided when they caused the Company to enter the loan. It indicated that the first plaintiff would not seek judgment while AFCA is considering the complaint. It indicated that a submission would be made to AFCA that the complaint should be dismissed and resolved as part of the Supreme Court proceedings.
The letter then had the heading “Default Judgment” and asserted that there was no reason for the proceedings involving the second plaintiff should be stayed. The mortgage involved second plaintiff claiming a 96% interest in the land. It asserted that there was no reason why the second plaintiff should not be entitled to realise possession of the land. It then pointed out that, given the terms of r 102 of the Court Procedures Rules 2006 (ACT), the defendants had been in default of the requirement to serve a defence since 22 February 2023. It asserted that the second plaintiff was entitled to seek default judgment. The letter indicated that the second plaintiff (incorrectly referred to as the first plaintiff) required that a defence be filed within a further seven days. It continued:
If a defence is not received by 17 May 2023, then ASCF MI [the second plaintiff] will proceed to seek default judgment from the Court and the order in the originating claim seeking the possession of the Land.
On 16 May 2023 Summer sent a letter to the AFCA providing its response to the complaint. That letter addressed:
(a)the position of the second plaintiff as, it was not an AFCA member;
(b)the contention that the more appropriate forum was the Supreme Court proceedings; and
(c)the assertions in the complaint about the due diligence and serviceability of the loan, the purpose of the loan, the application of the National Credit Code (Code) and the allegation of duress.
The letter indicated that the second plaintiff was excluded from the complaint because it was not a member, that AFCA lacked jurisdiction or that it should exercise its discretion to exclude the complaint altogether because the more appropriate forum was the Supreme Court but that if it did not exclude the complaint altogether then it should determine the complaint in the first plaintiff’s favour because it lacked merit and “appears to be a strategic attempt to delay the Supreme Court proceedings”.
On 17 May 2023, Adero wrote to Summer maintaining the defendant’s position that it was appropriate for the parties to seek a stay of the court proceedings and providing some reasons for that contention. It indicated that the defendants were currently considering whether to join their broker as a party to the proceedings for the purposes of a cross‑claim and suggested that this should be delayed until resolution of the complaint. It again proposed orders that the proceedings be stayed and indicated that if the second plaintiff continued to seek to advance the proceedings, then the defendants would file an application seeking a stay.
On 18 May 2023, a solicitor from Summer wrote to Adero asserting that there had been no details revealed that would “form a plausible defence”. The letter did not accept that there would be no detriment to the plaintiffs as a result of a stay of enforcement. It indicated that a potential claim against the broker was a matter for the defendants and did not affect the second plaintiff’s right to possession. The email concluded “Your clients are in default and ASCF MI intends to proceed to default judgment without further notice.”
On 29 June 2023, an application for default judgment was filed and default judgment was entered on 30 June 2023.
On 5 July 2023, Summer sent two emails to Adero which attached, by way of service, the default judgment and notice of enforcement options.
On 11 July 2023, the plaintiffs served the application to set aside the default judgment and the affidavit in support.
On 12 July 2023, Summer wrote to Adero by email asserting that the Code did not apply and that the “Stubbings related complaints” were “fundamentally flawed”.
Test for setting aside default judgment
The application is brought pursuant to r 1128 of the Court Procedures Rules which provides:
(1)The court may, by order, amend or set aside a judgment entered under this division, and any enforcement of it.
(2)Without limiting rule 6901 (Orders may be made on conditions), an order may be made on any of the following conditions:
(a)conditions about costs;
(b)conditions about giving security.
(Notes omitted.)
The approach to be taken to applications to set aside default judgments is set out in the decision in Stormer Building Group Pty Ltd v Johnson [2014] ACTSC 23 at [10]-[15]. Factors identified in that case were:
(a)whether or not an arguable defence on the merits is disclosed;
(b)the reasons for the failure by the defendants to file a defence, including considering whether any notice of intention to file a default judgment was provided;
(c)the extent of delay in the application to set aside the judgment; and
(d)whether there is prejudice to the defendants that cannot be compensated by an order for costs.
These appear to be the relevant considerations in the present case.
Evidence
The application
The evidence discloses a borrower’s application form which was completed by the defendants as applicants and also included reference to the Company. The form is a “Borrowers Application Form” with a header for ASCF Funding Solutions Pty Ltd. The first defendant was described as a “Medical Doctor”, the second defendant as a “Medical Practice Manager”. The Company had its principal activity described as “medical practise” (sic). The application identified that the applicants had a solicitor and an accountant. It indicated that the amount of the loan required was $1,250,000, the term was two months and the required settlement date was 1 August 2022. The loan purpose was described as “Refinance & Cash out to gift son for commercial property purchase”. The “Loan Repayment Strategy” was described as “Refinance”. The value of the property at Chapman was identified as being $2 million and the two amounts owing on it were identified as $330,000 and $230,000.
A list of assets included the Chapman property but also another property in Weston, the value of which was identified as $950,000. There was also cash at bank of some $50,000 and superannuation of $900,000 referred to in the list of assets. In addition to the two loans secured by the Chapman property, there was another liability of $650,000 identified in the form. The form indicated net assets of approximately $2.7 million. The loan application involved a declaration by the applicants, which appeared just before their signatures, that the credit provided “is to be applied wholly or predominantly for: Business purposes; or, Investment purposes other than investment in residential property” and “BY SIGNING THIS DECLARATION, YOU MAY LOSE YOUR PROTECTION UNDER THE NATIONAL CONSUMER CREDIT PROTECTION ACT”.
The terms
The terms of the loan were summarised in a table in a letter of offer of finance dated 1 August 2022. That identified the borrower as the Company and the guarantors as the defendants.
The summary of terms identified the amount lent as being $1,300,000. It identified the term of the loan as two months. It identified that interest and monthly service fees of $1,300 would be capitalised for the term of the loan. It indicated the purpose of the loan as being “Refinance” and the “Proposed Exit – how you intend to repay the loan” as being “Refinance”. It set out the fees for the loan including a significant establishment fee of $28,600 and a brokerage fee of $21,450. It indicated that the total amount available under the loan after the various fees were deducted would be $1,225,474.
Acceptance
The offer was accepted by the execution of the Finance Offer Schedule by the defendants in their capacities as directors of the Company as well as their individual capacities as guarantors on 4 and 7 August 2022. They also signed borrower’s advice declarations which included that they “had the opportunity of obtaining and did obtain legal advice from an independent Australian Legal Practitioner prior to executing the Facility as to the legal effect of the Facility and my obligations under it”. They executed the documents in the presence of a lawyer at a legal practice in Gungahlin. The defendants also signed a mortgage on 4 and 7 of August 2022 and “guarantors advice declarations”.
Drawdown
Funds were paid on 15 August 2022.
On settlement there was a payout of loans in the amount of $327,379.54 and $271,467.54 which were secured against the defendants’ property in Chapman. The evidence does not disclose the purpose of these earlier loans. The amount transferred to the Company after discharge of these other amounts and the payment of fees associated with the loan was $624,760.94.
The net effect of the transaction appears to have been to discharge existing loans that were secured by mortgages over the property (totalling around $599,000), giving to the Company an amount of $624,000 which the defendants appeared to intend to give to their son for a commercial property investment. However, the loan was always a short‑term one and hence required immediate action to secure a refinance. There is no evidence as to what, if any, steps were taken in order to arrange a refinance or why the loan was allowed to go into default.
Submissions
The submissions made by the defendants were directed to the following issues:
(a)whether there was an irregularity arising from the fact that default judgment was entered in favour of the second plaintiff only;
(b)whether there is a defence on the merits;
(c)that there had been no unreasonable delay in filing the defence; and
(d)that there was an absence of prejudice to the second plaintiff.
These issues will be addressed below.
Irregularity
The defendants submitted that there was an irregularity in that the application for default judgment was made by the second plaintiff, even though the originating claim was for possession by both the first and second plaintiffs. The mortgage over the land was registered on 22 August 2022. The terms of the memorandum of provisions which was signed by the defendants identifies the interests of the first plaintiff as being four percent and the second plaintiff being 96 percent in the land respectively. It is alleged that this gives rise to a potential of prejudice to the first plaintiff in the event that the second plaintiff is given possession of the land but not the first plaintiff and prejudices the defendants in respect of their ability to answer any judgment awarded to the first plaintiff.
This is not an irregularity warranting interference with the default judgment. The loan documents indicate that the reference to the lender is “each of them separately and every 2 or more of them jointly”. It is not essential that any judgment be jointly applied for. Further, although the first plaintiff has not pursued the application it does not seek any interference with the default judgment. Notwithstanding that it is a self-imposed limitation on its capacity to enforce the loan agreement as a result of its membership of the AFCA scheme, it is content for the other plaintiff to do so. The submission that there is potential for prejudice to the defendants “in respect of their ability to answer any judgment awarded to the First Plaintiff” was not articulated in a manner that indicated there was some real prejudice in the circumstances of this case.
Merits of the defence
The defendant submitted that the draft defence disclosed a defence on the merits. This was said to raise three issues:
(a)Whether the loan was for the benefit of I Haider Pty Ltd, or in fact for Mr Nicholas Haider.
(b)Whether the plaintiffs engaged in unconscionable conduct in:
(i)engaging in asset-based lending; and
(ii)failing to engage in any reasonable due diligence as to the ability of the Company to repay the Loan.
(c)Whether Nicholas Haider procured the loan by exercising undue influence over the defendants.
Not all of these matters are actually raised by the draft defence which was put into evidence.
The draft defence
The draft defence which the defendants indicated will be filed if the default judgment is set aside raises a number of different matters as a positive defence to the claim.
Paragraph nine asserts that the agreement was subject to the National Credit Code contained in Sch 1 of the National Consumer Credit Protection Act 2009 (Cth). Central to this contention is that “the agreement was intended to provide credit to Mr N Haider, a natural person, with the inclusion of the Company as debtor under the Agreement solely intended to avoid the protections of the Code”. Mr Nicholas Haider was introduced earlier in the pleadings where it is alleged that he had contacted a broker “to seek assistance obtaining a personal loan”.
It is then alleged in paragraphs 10 and 11 that as a result of the application of the Code there was an obligation to provide certain information prior to ending the agreement and that information was not provided. Paragraph 12 asserts that as a result of three matters “it would be unjust for the Plaintiff’s to enforce the Agreement”. The three matters are the failure to comply with the asserted disclosure obligations, the taking of “deliberate actions to attempt to avoid the protections provided under the Code” and that the interest rate under the agreement “is in excess of any rate that may be reasonably necessary for the protection of the Plaintiffs’ legitimate interests”.
Orders are sought under s 77(c) of the Code to set the agreement aside to the extent that it would require the payment of interest or costs. The invocation of the powers of the court under s 77(c) suggests that the reference to it being “unjust” for the plaintiff to enforce the agreement was intended to invoke the powers in s 76 of the Code to reopen an unjust transaction even though the language of the pleading does not match that in s 76 and there is no reference to s 76 in the pleading.
There is then a heading “Defence of Asset-based lending”. The pleading is paragraph 14 which provides:
14.The Lender did not provide necessary disclosures for the purpose of this loan facility by both:
a. Failing to engage in proper conduct required for such lending; and
b. Failing to provide express contract disclosures.
Particulars
Can be provided on request.
Lastly, there is a claim of unconscionable conduct. This appears to be an equitable claim as there is no reference to any statutory unconscionability provision. The assertion at paragraph 15 is that the lender failed to undertake due diligence by reviewing the Company’s business activity statements to identify its capacity to repay any loan moneys and requesting and reviewing records of the assets owned by the Company.
At paragraph 16 it is asserted that had such due diligence been carried out, the lenders would have been on notice that the Company had no realistic capacity to repay any loan moneys. At paragraph 17 it is alleged that it was unconscionable for the lenders to enter the agreement.
The relief sought at paragraph 17 is that the agreement be set aside or that it be set aside to the extent that it would require the payment of interest or costs.
Application of the Code
Two points can be made about this pleading. The first is a factual one. The second is a legal one.
The factual point arises because it is asserted in the pleading that Mr Nicholas Haider sought assistance from a named broker for “a personal loan”. No evidence is provided on this application that would indicate that this allegation has any factual basis. The Code can apply to credit provided for the purposes set out in s 5(1)(b) of the Code which includes loans “wholly or predominantly … for personal, domestic or household purposes”. There is a presumption that the Code applies unless the contrary is established: s 13(1).
In the present case, a substantial portion of the funds was to be provided for the refinance of loans secured by residential property but there is no evidence as to what the purpose of those loans were and hence the purpose of paying them out. In any event, the payout figures for those loans indicate that a majority of the loan funds (approximately $650,000) were for a different purpose. The statement in the loan application was that the purpose was a refinance and cash to give to their son for “commercial property purchase”. Having regard to that evidence it is not clear what the foundation for the pleading is.
Had there been some arguable basis to dispute what was said in the loan application, then evidence might have been put on from one or other of the defendants or Mr Nicholas Haider. In the absence of such evidence the defendants have failed to demonstrate that there is a reasonably arguable contention available that the purpose was in fact “predominantly” for one of the purposes to which the Code would apply.
The legal point is that the Code did not apply because the loan was to a company and not an individual, and hence the requirement of the Code that “the debtor is a natural person” could not be satisfied: s 5(1)(a). A further reason why it did not apply was because it was for no longer than 62 days: s 6(1)(a). I do not accept the submission that because of the possibility of the loan being extended or as a result of the potential for the Company to default on the loan it should be treated as a loan for longer than 62 days. Neither of these aspects of the application of the Code are addressed in the proposed pleading in a manner that would indicate that the pleading discloses a reasonably available defence.
Further, no submission was advanced that would explain a reasonably arguable basis for the assertions in the pleadings that because the agreement was intended to provide credit to Mr Nicholas Haider that the Code would apply notwithstanding that the loan was never made to a natural person and hence overcome this barrier to it being within the scope of the Code.
It may be accepted that the loan arrangements were deliberately structured so as to avoid the application of the Code. However, no statutory provision or other legal principle was identified which would provide a basis for avoiding the legal consequences of the arrangements entered into. Although some reference was made to the decision in Integrated Securities Number 3 Pty Ltd v Creatrix Web Development & Online Marketing Solutions Pty Ltd [2021] NSWSC 596, the outcome of that case depended upon the interpretation of the meaning of “debtor” in s 5(1)(a) in the context of the agreements entered into in that case. No submission was made which would suggest an arguable contention along those lines in the present case.
Defence of Asset-based lending
The full pleading related to the “Defence of Asset-based lending” is set out above. The submissions made did not explain the basis of this pleading. No particulars were referred to which might explain it. It does not make clear whether it is alleged to arise from some statutory obligation. If it is alleged to arise from the application of the Code then, as pointed out earlier, there is no proper basis for the pleading.
This pleading does not disclose a reasonable defence to the second plaintiff’s cause of action.
Unconscionable conduct
This is a pleading which appears to be designed to invoke a claim of unconscionability similar to that which was successfully made in Stubbings v Jams 2 Pty Ltd [2022] HCA 6; 96 ALJR 271. That was a case which discussed and explained the concept of asset‑based lending. It was explained as follows:
This type of lending has the distinguishing feature, which often makes it easier for a borrower to obtain finance, that loans are made exclusively on the basis of the value of the assets securing the loan “without regard to the ability of the borrower to repay by instalments under the contract, in the knowledge that adequate security is available in the event of default”.
The circumstances in Stubbings may be described in summary form as follows. The respondents engaged in a business of asset-based lending. The lending involved a law firm acting through an intermediary facilitating secured loans by the respondents. The law firm acted as the agent of the respondents. The law firm never dealt directly with the appellant, who was managed by a broker. The appellant was unemployed with no regular income and poor financial literacy. The appellant guaranteed a loan made by the respondents to a company owned and controlled by the appellant. The company had no assets and never traded. The loan and guarantee were secured by mortgages over the appellant’s three properties. The appellant provided signed certificates of independent financial advice and independent legal advice drafted by the law firm but those were characterised as “window dressing”. The company defaulted on the loan and the respondent sought to enforce rights against the appellant. The court concluded that the respondents acted unconscionably in seeking to enforce the rights because the respondents’ agent, the lawyer, had knowledge of the appellant’s circumstances. In particular, the lawyer knew what a dangerous course was being embarked upon by the appellant, knew he would almost certainly default and that the obtaining of interest payments upon default would be good business for the respondent. The circumstances of the case put it within that established class of equitable relief where there is an agreement entered into as a result of unconscientious exploitation of special disadvantage. While the circumstances of the case arose from the practise of asset‑based lending, the issue before the court was not whether or not asset-based lending was inherently unconscionable but rather on the basis of the findings of fact made by the primary judge the enforcement of the respondent’s rights against the appellant was unconscionable: [4].
The court distinguished the case at hand from a case where there was a desire by an asset rich person to meet a temporary liquidity problem saying (at [51]):
The transaction in this case cannot be regarded as if it were, for example, a loan to an asset‑rich but income‑poor individual sought for the purposes of meeting a temporary liquidity problem.
There are obvious parallels between this case and the circumstances in Stubbings. The loan was made to a company in circumstances where this may be seen to be commercially unnecessary and for the purpose of avoiding the application of the Code. However, there are a number of fundamental distinguishing features:
(a)There is no evidence in this case of any lack of financial sophistication on the part of either of the defendants. If there was to be some arguable basis for such a contention then some evidence would need to be put on, but it has not been. Indeed, the proposed pleading does not allege any lack of sophistication.
(b)Nor is there any evidence from the defendants that they were under any disability, disadvantage or misconception about the loan that was entered into, or that there were financial or other circumstances that might be relevant to a decision to set aside or not set aside the default judgment.
(c)The fact that the Company itself may have been a two-dollar company with no business of its own would, if established, not, in the absence of other circumstances, provide an arguable foundation for a claim of unconscionability. Although the interposition of the Company may have been commercially unnecessary and designed to avoid the operation of the Code, it would not be at all unusual to make a loan to a company subject to a guarantee given by natural persons in circumstances where the loan was to be discharged by payments made available from those natural persons.
(d)In the present case there is no evidence of a lack of financial capacity on the part of the defendants or their son Mr Nicholas Haider, let alone any such lack of capacity known to the lender. On the contrary there was evidence of substantial assets held by them, namely, the security property and another property worth $950,000 as well as a significant superannuation fund. The defendants were identified on the “Borrowers Application Form” as a “Medical Doctor” and a “Medical Practice Manager” respectively.
(e)The loan on its face was a short-term loan and the exit strategy for the loan was identified as being a refinance by another lender. It was, therefore, a case more analogous to the sort of case contemplated by the plurality of the High Court in Stubbings as being one in which asset-based lending may be appropriate, namely, a person seeking to address a short-term liquidity problem.
A remarkable feature of the loan application is that nowhere is there any requirement to disclose any income of the borrower or any income of the guarantors. The sole focus is on the asset position of the guarantors. That is consistent with a short-term loan in the form of bridging finance. It nevertheless tends to reinforce the impression that entry into the loan could only have been a sensible thing to do if there was a very clear exit strategy by way of a refinance as, it must be said, was indicated on the loan offer document.
The material put before the court upon this application to set aside the default judgment was completely inadequate to indicate that there is a reasonable claim for unconscionability. It may well be that asset-based borrowing is a dangerous course for some borrowers. It may be that the high establishment and broker fees charged for such loans are indicative of them being at the exploitative end of the lending spectrum. However, subject to the application of statutes such as the Code and the doctrines of equity such as unconscionability, the law permits competent adults to make financial decisions that either are bad ones or turn out badly. In this case the defendants have neither pleaded nor put on any sufficient evidence to indicate that there is a reasonably arguable claim that the enforcement of the agreement would be unconscionable. Rather, the evidence before the court tends more to suggest that:
(a)they have fully understood the transaction which was entered into;
(b)they have used the funds to give a gift to their son and discharge existing liabilities;
(c)knowing that the loan was only ever one for two months, they have failed to take any steps to arrange the refinancing of the loan and have allowed themselves to fall into default; and
(d)they have failed to make any attempt to remedy that default in the many months since.
That the court may be left wondering why they were operating in the world of non-bank lenders and seeking short-term loans involving substantial application fees, substantial broker fees and substantial “management” fees does not provide a basis for a reasonably arguable defence and hence does not provide a basis upon which the default judgment should be set aside.
Undue influence
Although the draft defence does not contain any allegation that the loan agreement was procured by way of undue influence, the complaint to AFCA and the submissions made on behalf the defendants contain the assertion that there “is a bona fides dispute as to … whether Nicholas Haider procured the loan by exercising undue influence over the defendants.” The evidence indicates that the purpose of the loan was to obtain funds to allow the defendants to assist Nicholas Haider to invest in commercial property. However, there is no evidence put on in support of the present application that would provide an arguable basis for a defence based on unconscionability arising from undue influence. Compounding that, there is no suggestion that the plaintiffs had any knowledge of whatever circumstances might be relied upon in order to establish such undue influence that would impeach their conduct.
The assertion in the submissions made by the defendants is not made out.
No unreasonable delay
The defendants assert that there was no unreasonable delay that has been a result of the filing of the AFCA complaint and health complications of the first defendant. The plaintiffs were advised of the intention to file a complaint on 26 April 2023. The defendants contended that both the first and second plaintiffs should be bound by the relevant rule notwithstanding that only the first plaintiff is a member of the scheme.
No proper basis was established for the assertion that both plaintiffs were bound by the AFCA scheme. Apart from this, there was no explanation as to why a defence was not filed, particularly in circumstances where the defendants were on notice that the second plaintiff intended to seek default judgment in the event that they failed to file a defence.
The second basis on which the defendants say there was no unreasonable delay is stated as follows:
The First Defendant was unable to provide instructions from the period 18 May until 5 July 2023 due to extended health complications resulting from a COVID-19 diagnosis in late 2022.
The Second Defendant is not and was not in a position to provide instructions on behalf of the First Defendant in respect of this matter.
There was only very minimal evidence in support of this contention. On 18 May 2023 there was email communication between Adero and the first defendant providing fee estimates, requesting payment of funds into trust and making clear that “in the ASCF matter, the second plaintiff has stated that it will seek summary judgment against you should you not file a defence.”
There was evidence that on 20 June 2023 there was telephone communication which, according to the file note, appears to relate to a different matter involving a bill of costs in which Adero was to seek an extension of the timetable to file a document and the first defendant was asked to send through details of his medical conditions in the last two months. The first defendant then did so, the email saying:
I am suffering from Post COVID Syndrome.
After infection and COVID Immunisation.
I have painful joints and muscle’. Fatigue all the time,
Difficulty concentrating and sleep.
There was no other evidence put on for the purposes of this application indicating any medical difficulty that would have affected the capacity of the first defendant or the second defendant to provide instructions relevant to the filing of a defence or, alternatively, instructions to seek some further time in which to file a defence.
The evidence just referred to is inadequate to establish the assertions made in the submissions. The nature and form of the evidence, even coming from someone who appears to be a medical practitioner, is of limited probative value. Further, even if it was accepted at face value, it does not support a contention of incapacity. Similarly, there is no evidence as to any incapacity on the part of the second defendant to provide instructions necessary in order to protect the defendant’s position. Health difficulties are obviously matters which may excuse a failure to file a defence and may warrant the setting aside of a default judgment. However, they must be established by evidence and the evidence in this case fails to provide an appropriate basis upon which to set aside the default judgment. That is manifestly so when at all relevant times the defendants had solicitors acting for them.
No prejudice to the second plaintiff
The defendants submitted that there would be no prejudice to the second plaintiff in setting aside the default judgment. That is because the second plaintiff still retains the interest in the land. Further, it was submitted that this would remedy the prejudice to the first plaintiff arising as a result of the second plaintiff being awarded possession.
I do not accept that there would be no prejudice to the second plaintiff. The evidence disclosed that the value of the property at the time of the application was identified as being $2 million. Current estimates of the value of the property that were in evidence indicated a likely sale price in the range $1.5 to $1.7 million. The amount owing on the loan as at 28 July 2023 was $1,515,065.14. The prejudice that would arise from the setting aside of the default judgment would be that the amount owed exceeds or is likely to soon exceed the proceeds of the sale of the security. It is not a case where the prejudice to the plaintiff may be appropriately remedied by an order for costs.
Decision
The defendants were very clearly put on notice of the intention to apply for default judgment. They have failed to provide an explanation as to why they failed to put on a defence. While the delay in making an application to set aside the default judgment was minimal, the evidence put before the court does not disclose that the grounds proposed to be included in a defence would provide any reasonably arguable grounds of defence. In those circumstances, subject to the matter to be dealt with next, it is not appropriate to set aside the default judgment.
But for what follows under the next heading the order of the court would have been: The application in proceeding dated 11 July 2023 is dismissed with costs.
Final matter
In the course of finalising these reasons I examined the terms of the mortgage instrument that had been registered with the registrar-general. It was this registered instrument upon which the entitlement to possession was necessarily based. The registered instrument was an annexure to the affidavit relied upon in support of the application for default judgment. It was not a document specifically relied upon by the defendants or referred to in the submissions made on behalf of the second plaintiff.
In contrast to the mortgage instrument that had been signed by each of the defendants which incorporated “Additional terms and conditions” which corresponded to the instruments that they had executed, the mortgage instrument that was filed with the registrar and became the registered instrument did not correspond with what the defendants had signed.
It differed from the terms that the defendants had agreed on. The document that was registered incorporated terms that have not been agreed upon by the defendants. It appears, in fact, to have incorporated terms which relate to a completely different loan, given to a completely different person. The error bears all the hallmarks of a cutting and pasting error when preparing an electronic document, committed by the person who prepared it, a legal practitioner from Kingston and Partners, the solicitors who acted for the plaintiffs at the time the loan agreements were entered into.
The most prominent features of the differences between the “Additional terms and conditions” on the registered mortgage when compared with the instrument that the defendants had agreed to are as follows:
(a)it relates to a loan for a term of 12 months;
(b)the borrower for the loan is identified as an individual not referred to anywhere in the evidence in this case;
(c)the amount of the loan is $392,000;
(d)the interest rates identified are different to those agreed to by the defendants; and
(e)the relevant memorandum of provisions incorporated into the mortgage and acknowledged as having been received by the mortgagor is identified as SFMCPV2-C (rather than LFMCPV1 referred to in the mortgage instrument signed by the defendants).
The errors appear to have occurred when the solicitor then acting for the plaintiffs completed a webform necessary to complete the preparation of a mortgage using the national mortgage form used in the system of electronic conveyancing allowed under the Electronic Conveyancing (Adoption of National Law) Act 2012 (NSW) which is adopted as a Territory law under the s 6 of the Electronic Conveyancing National Law 2020 (ACT).
Having regard to the difference between the mortgage which is sought to be enforced and that which was agreed to by the defendants and the absence of any evidence of any default arising under the terms stated in the mortgage (that is in relation to the loan of $392,000 to the named person), the defendants have a good defence to the claim for possession pursuant to the mortgage relied upon by the second plaintiff. They may well be liable under the loan but not to give up possession of their property pursuant to the registered mortgage relied upon.
The court has now heard submissions from the parties in relation to the terms of the registered mortgage. The defendants indicated an intention to rely upon the defect in the registered mortgage so as to resist the claim for possession. The second plaintiff indicated that steps would be taken immediately to prepare a mortgage which corresponded to the documents which had been executed by the defendants and that this would be registered as soon as possible. Counsel indicated that the subsequent caveat on the title was a “friendly one” and would consent to the registration of the new mortgage with priority. He submitted that in circumstances where the court concluded that there was no substantive defence in relation to liability under the loan, the defect in the mortgage should not lead to the default judgment being set aside as, following whatever amendments were necessary, there would be an opportunity to apply for summary judgment. He accepted, however, that the notice given pursuant to ss 93 and 94 of the Land Titles Act made reference to a memorandum of provisions different to that referred to in the mortgage and therefore notice may need to be given again.
I accept that this was not a matter raised by the defendants in their draft defence or otherwise raised in submissions prior to the court drawing attention to the issue. However, given the nature of the defect and the fact that it is now relied upon by the defendants, I consider it open to the defendants to rely upon this as indicating that they have a good defence available to them.
The strength of that defence is such that, notwithstanding the absence of a good explanation for the failure to file a defence, having regard to the short period between the filing of the default judgment and the application being made to set it aside, I now consider that it is appropriate to set aside the default judgment. Insofar as that exposes the second plaintiff to a risk of prejudice arising from the limited value of the security available, I do not consider that to be a reason to refuse to set aside the default judgment. The second plaintiff either knew or ought to have known of the defect in the mortgage that it relied upon, yet despite that, brought an application for default judgment.
I observe that the defect in the mortgage was a matter which the solicitors for the plaintiffs ought to have been aware. While their state of knowledge is not a matter on which it is necessary to form a final conclusion for the purposes of this application, I note that the drafting of paragraph 10 of the affidavit of 22 June 2023 affirmed in support of the application for default judgment appears to reflect a degree of care in relation to how the terms of the mortgage and its relationship with the memorandum of common provisions that the second plaintiff would liked to have been able to rely upon is described.
In my view, if solicitors acting for a party are in fact aware that their client was bringing an application for default judgment for possession in circumstances where there was a fundamental defect in the instrument giving an entitlement to possession or doing so without drawing attention to that defect, they would be falling below the standards required by an officer of the court.
I do not accept the submissions made by counsel for the second plaintiff that because the documentation that is in evidence has proved an entitlement to recover the loan funds and an entitlement to lodge a mortgage to secure those funds the court should refuse to set aside the default judgment. In my view, given the fundamental defect in the document that provides the essential foundation for the claim for possession, the court should not ignore that defect. Not only is it likely to require the registration of a new mortgage and the giving of further notice pursuant to s 93 of the Land Titles Act, there may be difficulties with an amendment within the current proceedings so as to accommodate the new circumstances because the cause of action will not have been complete as at the date of commencement of the proceedings. This last issue is not one on which the parties have had an opportunity to make submissions and I express no concluded view on it. However, the need, at least, for further notice and amendment of the proceedings, indicates that the matter should proceed in the ordinary way rather than via a default judgment.
Having regard to the fact that there has, in my view, been a lack of merit in the diligence on the part of the parties on both sides of the record, notwithstanding that the setting aside of the default judgment involves the granting of an indulgence to the defendants, it is appropriate that there be no order as to the costs of the application.
The orders of the Court are:
1.The default judgment entered 30 June 2023 is set aside.
2.There is no order as to the costs of the application.
3.The proceedings are listed in the Registrar’s directions list on 9.30am on 7 August 2023.
| I certify that the preceding ninety-nine [99] numbered paragraphs are a true copy of the Reasons for Judgment of his Honour Justice Mossop Associate: Date: |
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