Bank of Queensland Ltd v Australia Landmark Pty Ltd
[2010] VSC 407
•10 September 2010
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 4483 of 2009
| BANK OF QUEENSLAND LIMITED | Plaintiff |
| v | |
| AUSTRALIA LANDMARK PTY LTD and Others | Defendants |
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JUDGE: | MUKHTAR AsJ | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 23 August 2010 | |
DATE OF JUDGMENT: | 10 September 2010 | |
CASE MAY BE CITED AS: | Bank of Queensland Ltd v Australia Landmark Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2010] VSC 407 | |
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BANKS AND BANKING – Loan agreement – Mortgage security – Special condition requiring borrower to apply expected proceeds of land sale in reduction of principal debt – Proceeds of sale held by superannuation fund – Inability under superannuation laws to apply proceeds in reduction of debt – Whether borrower to be excused – Whether question to be investigated – Summary judgment granted.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr A. Kirby | Thomsons Lawyers |
| For the Defendants | Ms T. Leane | Ravi James Maharaj |
HIS HONOUR:
The Bank of Queensland seeks summary judgment against a borrower for possession of mortgaged land and payment of the secured debt of about $2.5 million. The borrower is the first defendant. There are five other defendants sued as guarantors, but the bank moves for summary judgment only as against the borrower.
This was a commercial dealing. The transactional facts as documented are not in dispute. The bank made three agreements with the borrower, each dated 12 February 2008, giving a total facility of $2 million. The first facility was for $400 000. It was for a maximum term of five years at a variable commercial rate. Interest was payable each six months after drawdown. The second facility was for $600 000 on the same terms. The third loan was for $1 million for a term of 15 years at a fixed commercial rate. The interest period was two years from drawdown, but required monthly payments. All facilities stated that the purpose of the finance was to assist with the purchase of commercial property at 306 Toorak Road in South Yarra. For all three loans, the security was to be a first registered mortgage over that land, as well as the guarantees.
All three facilities contained these “Special conditions”(some of the following verbiage is odd but nothing turns on it) :
End loan of facility is to be reduced to $1,000,000 upon the sales of Shop 8, 194 Toorak Road, South Yarra.
Confirmation letter from Accountant that the sales of Shop 8, 194 Toorak Road, South Yarra to be in accordance with the Superannuation Rule/Law that client is able to withdraw the proceeds and subsequently reduce this facility.
A mandatory caveat is to be lodged by Bank of Queensland at settlement of this $2,000,000 facility on Shop 8, 194 Toorak Road, South Yarra and to stay in place until settlement.
Confirmation of property at Shop 8, 194 Toorak Road, South Yarra has been placed in the market for sales by Fitzroys.
Upon settlement of Shop 8, 194 Toorak Road, South Yarra, facilities $600,000.00 and $400,000.00 to be fully paid out. Any short fall from the sales of the proceeds must be covered by both the personal guarantors, Vishino Gagoomal Pamamull and Neena Vishino Pamamull to reduce the facilities to $1,000,000.00.
The second defendant, Mr V G Pamamull, is also a director of the borrower. He says he was a trustee of the Melbourne Opal Centre Super Fund which owned shop premises at 194 Toorak Road. The shop was on the market when the three facilities were sought and granted. He says the shop was expected to sell for well in excess of $1 million, and the sale proceeds would enable the borrower to repay the first and second facilities, and to reduce the aggregate loan of $2 million to $1 million. These are not exogenous facts; they are consistent with what the special conditions say. The condition concerning the lodgement of the caveat (curiously described as a mandatory caveat) was presumably to protect the Bank’s interests and ensure the transmission of proceeds, although it is questionable what estate or interest the bank had in the shop to be sold.
The bank’s records prove that the three loans were advanced to the borrower on 12 February 2008. The mortgage was dated 16 May 2008, and was registered. It is a typical “all moneys” mortgage. Although an interest payment was made six months after the drawdown of the first two loans, those payments were subsequently reversed. The statements for the $1 million loan show initial payments of monthly interest (around $8 000). But it is clear from the documentation that by December 2008 the borrower had overdrawn all three loan accounts and was in arrears.
On about 19 December 2008, the bank served a notice of demand for each of the facilities. The notices said that as at 11 December 2008 the total amount owing under the first loan was $432 962.93; under the second loan, it was $648 078.73; and under the third loan, it was $1 081 881. The demand was not met.
All three loans were subject to the “Commercial Rate Loan Facility General Conditions”. Rather than copiously refer to the contents it is sufficient to summarise matters as follows (the conditions are typical). A borrower is in default if payment is not made on time for the amount due under the facility. If the borrower is in default the total amount owing on the facility account is payable on demand. After default, the bank was entitled to require the borrower to repay the total amount owing immediately and to enforce a facility agreement or any security. If a borrower has more than one account, then the bank may treat all accounts as one account.
To similar effect is the Memorandum of Common Provisions AA796 under the mortgage. The mortgage was security for money owing under any agreement in which the borrower incurred an obligation to the bank. Default occurs if the mortgagor does not pay the total amount owing on time or is in default under any agreement covered by the mortgage.
Both the loan agreement and the mortgage have the usual clause that entitles the bank to give a certificate about the amount payable under the facility agreement and the mortgage, which stands as sufficient evidence unless it is proved to be incorrect. The bank puts into evidence a certificate dated 23 August 2010 from one of its authorised officers. It says that as at 20 August 2010 the amount outstanding on the three loan accounts was $2 464 551.74. The certificate says that amount is still owing and payable. There is no challenge to the certificate or the computation of the debt. Thus, the bank has proved all of the ingredients of its cause of action.
The defence as already filed does not state matters of fact or law to impeach the claim, beyond saying that the bank’s notice to pay was invalid. The borrower resists summary judgment on the basis of two affidavits filed by Mr Pamamull. He refers to a proposed amended defence which he asserts is true and raises an arguable defence or a case to be investigated. The proposed defences are all based on what the borrower says is the effect of the special conditions of the loan agreements which, he says, have not been satisfied and which excuse liability or somehow mean there has not truly been default.
The first affidavit of Mr Pamamull sworn 6 August 2010 says in substance:
(a)the bank’s manager stressed to him the importance of repaying facility 1 and facility 2 as soon as possible, out of the sale proceeds of Shop 8. He says that he, his wife, and their companies agreed to that as the shop was for sale in a favourable market, in the hands of capable estate agents.
(b)The bank’s officers represented in a conversation in late January 2008 that the bank would limit its recourse for the payment of facilities 1 and 2 to the sale of Shop 8, and only in the event of a shortfall would guarantors be required to pay.
(c)In his conversations with bank officers, “Thay (sic) made it clear the total facility was granted only because of the security provided through the MOCSF [the Melbourne Opal Centre Super Fund], in the sale of Shop 8, and the proceeds reducing the facilities for $401,000 and $600,000.”
The fact is that the sale of Shop 8 settled in early May 2008. The problem for the borrower was that the terms of the superannuation fund did not, as it turned out, permit the use of trust funds for the purpose of repaying the loans in question. And that is why there was a default. But, how does that give rise to an arguable defence? The borrower seeks to defend the case on the following grounds.
First Mr Pamamull says “at no time did the bank lodge the caveat, as agreed, nor did it recoup the monies to repay Facility 1 and Facility 2 from the sale proceeds.” I cannot see how that can amount to an actionable breach or arguable defence. The borrower seems to be saying that it was a condition of the agreement that the bank lodge a caveat on the shop. But the lodging of the caveat was for the bank’s benefit.
Care must be taken with the word condition in contract law. There is a misconception (which I think permeates the entire proposed defence) that the effect of the special “conditions” was to create a pre-condition or a contingent condition which has to be satisfied by the bank, or by the borrower, before contractual obligations of the borrower become due: see generally Cheshire and Fifoot’s Law of Contract. [1] I see no way to construe the special conditions as meaning that the borrower’s obligations under the agreement are conditional on the fulfilment of those special conditions. Any promissory content of the special conditions is all for the benefit of the bank. The borrower has promised to reduce the borrowing by $1 million on the sale of Shop 8.
[1]Ninth Aust ed, at 5.21 and 20.1 ff
Nor does it make sense to me to say that the bank acted wrongfully by not recouping moneys to repay the first two facilities. The borrower has the obligation to repay. It agreed it would do so by making sale proceeds available which it thought it could do, and told the bank it would do. The bank could not recoup the first two loans because the borrower, contrary to what it induced the bank to expect, could not make the funds available. The bank has not prevented or disabled the borrower from repaying. Therefore, it is wrong to say that the bank breached the agreement by not recouping part of the debt. It could not apply the sale proceeds because the borrower did not and could not make the proceeds available.
Secondly, Mr Pamamull says to the best of his knowledge, his accountant did not provide a confirmation letter as required under the special conditions. Yet he exhibits a letter dated 31 January 2008 from Guy Biran from JM Partners Pty Ltd which says:
TO WHOM IT MAY CONCERN
We act as accountants for Vishino Pamamull and can confirm that he is able to withdraw funds out of his superannuation fund, the Melbourne Opal Centre Superannuation Fund, and that currently he has above $1m in withdrawable benefits.
The point seems to be that the letter does not say that the proceeds of sale of Shop 8 are withdrawable under the superannuation law. That is a most unmeritorious point. The effect of the letter is clear. It tells the bank that money in the fund is there at the disposal of Mr Pamamull. Moreover, this “condition” is there for the benefit of the bank. It is not a precondition to performance by the borrower.
Thirdly, Mr Pamamull says the bank represented that it would limit its recourse for the repayment of the first and second facilities to the proceeds of Shop 8. The borrower seems to be saying that the only source of repayment for the first two loans was the proceeds of sale. That is, it was the bank’s misfortune that contrary to what the accountant had said, the terms of his superannuation fund did not permit the use of trust funds for the purpose of repaying the first two loans.
I am afraid to say this does not make much sense to me. It was the borrower who was procuring the loan on the basis that it could repay the first two facilities using the expected proceeds of sale. If it turned out, contrary to the borrower’s expectation and contrary to what the borrower’s accountant had said, that the funds could not be used, then I fail to see how that can be said to be wrongful conduct by the bank. There are no facts whatsoever to raise a case that the whole idea of using superannuation funds was inspired by the bank in circumstances where the bank had to take legal responsibility in the event that the superannuation laws would not permit the funds to be applied in such a way.
Facing these problems, the Court gave Mr Pamamull another opportunity to file further material before deciding the application. He swore an affidavit on 19 August 2010 in which he tried to change something said in his first affidavit. His second affidavit said:
3.I refer to the second sentence of paragraph 7 of my affidavit sworn on 6 August 2010 which is incorrect. It should have read that the difficulty was that in order to be a complying superannuation fund pursuant to the Superannuation Industry (Supervision) Act 1993 (“the Act”) certain standards must be met. My accountant told me in or around August 2008 and I believe that the Act does not permit the use of superannuation trust assets as security for loans and does not permit the withdrawal of superannuation trust funds in excess of 10% of the value of the fund. My accountant also told me and I believe that at the time 10% of the value of the fund was approximately $23,500.00.
4.Prior to my accountant telling me that the Act had prohibitions as described in the immediately preceding paragraph, I thought the proceeds from Shop 8, 194 Toorak Road, South Yarra could be used to satisfy $1,000,000.00 of the first defendant’s loan with the plaintiff.
5.I am not legally trained and I, my wife and all of the Defendants were relying upon the bank to ensure that the documents that were signed between the Defendants and the bank complied with all applicable legislation.
He then says that had the bank not made the representations concerning recourse to the sale proceeds, then the borrower would have insisted upon a longer term for repayment, or, would not have agreed to borrow so much money, or, would not have agreed to the loan or would not have bought the property. Which one is it?
He attached a proposed second further amended defence the contents of which he said were true and correct. This proposed pleading is similar to the previous proposed pleading. It maintains the allegation that the bank’s failure or neglect to lodge a caveat was in breach of the loan agreement. It also alleges that the bank’s failure to obtain the necessary accountant’s confirmation was a breach of the agreement. It adds the additional allegation that “the plaintiff represented to the defendants that the agreement would comply with all applicable Australian legislation and specifically with the requirements of Superannuation Industry (Supervision) Act 1993.” That representation is said to be implied by the inclusion of the special condition. It goes on to say that the defendants acted to their detriment and relied on that representation. The detriment is said to be that the borrower signed the facility agreement.
It also alleges that the parties were operating under a common mistake that the proceeds of the sale of Shop 8 could be used to satisfy the borrower’s obligations under the first and second facility agreement.
On those allegations a counterclaim is made that the bank misled and deceived the borrowers in contravention of s 52 of the Trade Practices Act or that the bank’s conduct was unconscionable in breach of the Trade Practices Act. Ultimately the allegation is that the facility agreement and the guarantees are not binding or enforceable. Yet the borrower has obtained $2 million.
Mr Pamamull’s second affidavit and the proposed pleading does not really alter or advance the borrower’s pre-existing basis for resisting this application for summary judgment. It is not said, as sometimes occurs in these cases, that representations were made by bank officers to somehow relieve a customer of obligations under a loan agreement or representations were made which reasonably led the customer to think that rights would be relaxed or not strictly enforced. The implied representation case is based on nothing more than the terms of the special condition itself. It is not alleged that there was something in this relationship between banker and customer that put the bank in the position of advising the borrower about the borrower’s rights under superannuation laws or the borrower’s rights to have recourse to proceeds of sale held by a superannuation fund in property. There is nothing to suggest that the bank somehow assumed the responsibility for the ability of the defendant to obtain the superannuation funds. This would be surprising as ordinarily the relationship between banker and customer is neither fiduciary nor is it advisory or productive of a duty to take reasonable care. Nor are there some other circumstances of the Amadio or Blomley v Ryan variety to suggest that somehow the borrower’s directors were labouring under some special disability in which they were unable to conserve their own interests and were led to make an improvident bargain. Nor is there reason to think that somehow the bank were responsible for inducing the borrowers to go about selling the shop premises. As I see the facts, it was the borrowers who had already put the shop for sale and were obtaining finance on the basis that they could quickly repay the bank for the first $1 million.
In my view, there has been an attempt here to transform special conditions of the loan into obligations upon the bank or to impose responsibilities on the bank. They are special conditions that are imposed upon the borrower. They do not give rise to burdens imposed upon the bank. The problem for the borrowers is that they have assumed they were entitled to use the funds. As it turns out they were not entitled to do so and now seek to blame the bank for that. I see nothing in this agreement expressly or impliedly to suggest that it was a condition of the agreement that the funds be made available. I think the borrower is confusing special condition with a condition precedent of some sort.
Above all, I see no basis, in fact or law, for an argument that the special conditions impliedly represented that the loan agreement would comply with the requirements of the Superannuation Industry (Supervision) Act. They purport to represent no such thing. In any case, the case for an alleged representation does not make sense to me. This was a loan agreement. A loan agreement creating a debtor-creditor relationship does not have to “comply” with superannuation laws. It was the borrower’s inability to pay over money by reason of superannuation laws (contrary to what the borrower’s accountant told the bank) that has caused the default, not any alleged misrepresentation.
In my view the only proper construction of this transaction was in effect the giving of an undertaking by the borrower that it would pay from the proceeds of sale the first two facilities, and any representation about the source of the funds came not from the bank but from the borrower.
In my view the allegation of a common mistake is also misconceived. There was little argument on this. It is sufficient for me to say the borrower is bound by the agreement unless it has to be rectified or a plea of non est factum is raised: Equuscorp v HGT Investments.[2] Mistake in contract law is exclusively concerned with a mistake made by one or both parties at the time of contract formation.[3] But it truly has to be a mistake, that is, in the legal sense. As leading authors in the field have put it: the law does not take the simple line that that a contract should be set aside merely because one of the parties would not have made it had the true facts been known; and no case of legal mistake arises if, to the disappointment of one or both parties an assumption turns out to be ill founded. [4]
[2](2004) 218 CLR 471.
[3]See generally Cheshire and Fifoot’s Law of Contract, Chapter 12.
[4]Cheshire and Fifoot’s Law of Contract, above, at 12.2 and 12.3.
I think the same point lies if one considers common mistake in equity. It cannot be said that the bank knew the borrower was labouring under a mistake which renders the bank’s insistence on repayment unconscionable. At the very least a borrower could not expect equitable intervention unless it was on terms that the bank be restored to its former position, and have the secured money repaid.
The thrust of Ms Leane’s submission was that there was sufficient in the materials to show a case to be investigated. She submitted that there was a question of the bank’s credibility and the necessity to inquire into the competing versions of conversations had at the time the contract was made. I do not accept that is so. The issue in this case concerns the meaning and effect of the special conditions, which I think is plain.
Of course the power to summarily terminate proceedings must always be exercised with caution by application of the conventional test of demonstrated certainty of ultimate outcome of the proceeding if it were allowed to go to trial in the ordinary way: see Webster v Lampard,[5] Agar v Hyde[6] and the recent discussion of the High Court in Spencer v Commonwealth.[7]And adapting what was said in Spencer, once a judgment is made that a case is untenable, there is no need for intensifying epithets such as “clearly” “manifestly” or “obviously”.
[5](1993) 177 CLR 598 at 602-3.
[6](2000) 201 CLR 552 at 575.
[7][2010]HCA 28 at [24]-[27] and [53] ff.
In my view the borrower’s case is bound to fail. There ought be summary judgment. The defendants’ argument all proceeds on a misconception about the meaning or effect of the special conditions. To my mind the facts are clear. It was the borrower that procured this loan in the expectation that it could use the superannuation funds. Nothing on the facts would give rise to the possibility that somehow the bank is to blame or that contractual legal rights are to be adjusted because the purchaser was not able to obtain the funds. Ultimately, the borrower seems to be contending that it should be excused from having to repay the funds at all. I think that position is also untenable. Finally, there is also the fact that whatever may be said about default under the first two facilities and the problem with superannuation, there has been default under the third facility.
The borrower submitted ultimately that if summary judgment was to be granted it ought be confined to monetary judgment but not for an order for possession. I see no basis for such a limitation. If there has been default under the loan agreement then the plaintiff is entitled to its rights under the mortgage which includes the right to take possession.
Accordingly, subject to hearing from counsel (including updated figures since the Court reserved its decision) I propose to order that:
1.The plaintiff have possession of the lands known as 306 Toorak Road, South Yarra Victoria being Lot 1 on Plan of Subdivision 038916, being the land more particularly described in Certificate of Title Volume 08414 Folio 467.
2.There be judgment for the plaintiff against the first defendant for $2,364,551.74.
3.The first defendant pay the plaintiff’s costs of this proceeding, including this application and any reserved costs, on an indemnity basis (under the terms of the mortgage).
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