Banksia Mortgages Limited v Croker - [2010] NSWSC 1447

No judgment structure available for this case.

CITATION: Banksia Mortgages Limited v Croker and Ors [2010] NSWSC 1447

HEARING DATE(S): 8 June 2010, 21 October, 22 October, 28 October 2010

JUDGMENT DATE :
17 December 2010

JUDGMENT OF: Schmidt J at 1

DECISION: Relief sought by the defendants in their cross claim refused.
The usual order as to costs would that they follow the event. In the event that the parties are in disagreement as to costs, they should approach.

CATCHWORDS: CONTRACTS - unjust contracts - mortgage and loan contracts - cross claim - two mortgage loans - disclosed purpose to refinance existing borrowings and to make off farm investment - actual purpose differed in part - failure to disclose changed investment strategy and other alterations in purpose - whether plaintiff was aware or failed to take steps to ensure serviceability of first loan - not established - whether plaintiff failed to follow lending guidelines - not established - whether lender engaged in asset lending -not established - whether defendants were inexperienced - not established - whether defendants were not sophisticated borrowers - not established - whether lender failed to establish false information supplied by alleged fraudster- whether lender was aware of fraudster - whether contract was unjust - section 7 of the Contracts Review Act - not established - defendants' conduct - defendants failed to disclose investment decisions to plaintiff - money borrowed for high risk investment - defendants were legally advised against investment - whether plaintiff acted unconscionably - not established - whether defendants' position was result of plaintiff's conduct - not established - loan contract not unjust - relief sought in cross claim refused - costs

LEGISLATION CITED: Australian Securities and Investment Commission Act 2001
Civil Procedure Act 2005
Consumer Credit Code
Contracts Review Act 1980
Fair Trading Act 1987
Trade Practices Act 1974 (Cth)

CATEGORY: Principal judgment

CASES CITED: Banksia Mortgages Limited v Croker and Ors [2010] NSWSC 883
Banksia Mortgages Limited v Croker and Ors [2010] NSWSC 1177
Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413
Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298
Kowalczuk v Accom Finance [2008] NSWCA 343
Permanent Trustee Company Ltd v O’Donnell [2009] NSWSC 902
Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41
Perpetual Trustees Victoria Ltd v Longobardi [2009] NSWSC 654
Perpetual Trustee Victoria Ltd v Yap [2010] NSWSC 761
Riz v Perpetual Trustee [2007] NSWSC 115
Rosenberg v Percival [2001] HCA 18; 205 CLR 434
Spina v Permanent Custodians Ltd [2009] NSWCA 206
The Commercial Bank of Australia Limited v Amadio and Anor (1983) 151 CLR 447
West v AGC (Advances) Ltd (1986) 5 NSWLR 610
Tobaji v National Australia Bank Ltd [2009] NSWSC 41

PARTIES: Banksia Mortgages Limited - Plaintiff/Cross Defendant
Leslie William Croker - First Defendant/First Cross Claimant
Ruth Christine Corker - Second Defendant/Second Cross Claimant
Carigan Pty Limited - Third Defendant/Third Cross Claimant

FILE NUMBER(S): SC 2009/295278

COUNSEL:
Mr G Lindsay SC with Mr P Bolster - Plaintiff/Cross Defendant
Mr J Baird, counsel - Defendants/Cross Claimants

SOLICITORS:
Kell Moore - Plaintiff/Cross Defendant
Barraket Ronayne - Defendants/Cross Claimants

- 60 -

IN THE SUPREME COURT

OF NEW SOUTH WALES

COMMON LAW DIVISION

SCHMIDT J

FRIDAY, 17 DECEMBER 2010

2009/295278 BANKSIA MORTGAGES LIMITED v CROKER AND ORS

JUDGMENT

1 HER HONOUR: By statement of claim filed in July 2009 the defendants sought judgment in respect of moneys outstanding under a mortgage, as well as an order for possession of certain land which secured the mortgage.

2 The claim was defended pursuant to a defence filed in October 2009, which raised the Contracts Review Act 1980 and the Consumer Credit Code. The defendants also filed a cross claim seeking orders under the Contracts Review Act, the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1987 amongst other relief. It was complained that the loan agreements contained terms which were unreasonably difficult to comply with and not reasonably necessary for any parties’ interests; they were not accurately explained by anyone to Mr and Mrs Croker, the first and second defendants, who did not fully understand their effect; that unfair influence, pressure and tactics were exerted against the Crokers; and that the plaintiff had acted unconscionably in the circumstances. An amended cross claim was filed on 8 June 2010, seeking additional relief under the Australian Securities and Investment Commission Act 2001.

3 The matter has had a troubled procedural history. The hearing was twice adjourned, when the defendants encountered difficulties in preparing for hearing, in the face of ongoing financial difficulties, problems in arranging legal representation and putting on expert evidence. The week before the hearing, without filing any motion, the defendants again being in default of the Court’s orders, sought to have the hearing further adjourned, as well as seeking leave to bring a cross claim against a solicitor who had represented the finance broker, who had acted for them on the loan.

4 The application was opposed in circumstances where the plaintiff had received advice that what was owing under the mortgage then outstripped the value of the property. That was disputed by the defendants, but the parties took the opportunity to discuss the possibility that further security could be provided to the plaintiff, to permit a further adjournment while the defendants put their case into order and took steps to bring another cross claim. What emerged was that no agreement was reached, but nor was any motion filed. The valuation which the defendants said they would obtain, in order to support their contention that the plaintiff had adequate security was not forthcoming; the defendants had not even prepared to advance any argument in relation to orders which it would be necessary for the Court to make, if an adjournment were to be granted. Having in mind the provisions of the Civil Procedure Act 2005 and its emphasis on the just, quick and cheap conduct of litigation, the adjournment sought was refused, but the commencement of the hearing delayed by one day, so that the difficulties which had resulted from the negotiations in which the parties had been engaged in, could be dealt with.

5 The hearing then commenced, but was further adjourned for reasons which it is unnecessary to explain. Eventually the parties reached an agreement which resulted in orders for possession being made by consent on 16 August 2010, which involved the defendants remaining in occupation until the settlement of the sale. Subsequently there was an unsuccessful attempt to stay the auction which proceeded on 15 October 2010 (see Banksia Mortgages Limited v Croker and Ors [2010] NSWSC 1177). The properties did not sell, but the hearing of the cross claim was eventually concluded. This judgment deals with that claim.

The transactions

6 Mr and Mrs Croker are graziers. The evidence showed that Mr Croker was the registered proprietor of part of the property which secured the loan and that he and Mrs Croker were the proprietors of other parts of that property and directors of the third defendant, which owned another property which also secured the mortgage. The Crokers' landholdings were built up partly as the result of inheritance and partly by acquisition. They conducted a very substantial farming operation on that land and in 2002, took on borrowings from Suncorp-Metway Ltd ('Suncorp') for a period of 3 years. In March 2005, they were due to repay $2.1 million. They took steps to refinance.

7 The plaintiff loaned Mr and Mrs Croker $4.5 million in February 2006 for a 2 year term, secured by a registered mortgage, a guarantee and indemnity. Interest was payable monthly. Interest was initially fixed and in January 2008 was amended to a variable loan rate. The finance was obtained in order to repay the existing fixed term Suncorp loan. The balance was to be invested, but without disclosure to the plaintiff, was partially used by the Crokers for other purposes.

8 The loan was obtained from the plaintiff after Mrs Croker approached a broker, Lendwide Finance Pty Ltd ('Lendwide'), where she found a Mr Sam Hraiki working. He had previously acted for the Crokers in relation to the Suncorp loan, when it was acquired in 2002. Mr Hraiki had then been working for a different broker. The Crokers were happy to be advised by Mr Hraiki, having been satisfied with his previous services.

9 It was Mr Hraiki who convinced the Crokers that they should borrow additional funds to invest in a venture in which he was involved, Skyder Investments Pty Ltd ('Skyder'). The plaintiff was approached and in November 2005 it issued a conditional letter of offer for a loan of $4.5 million for a 2 year period. In the loan application, two purposes were disclosed that repayment of the Suncorp loan and investment. It was represented to the plaintiff that the investment would achieve 30% returns per annum. Against their solicitor’s repeated advice, the Crokers accepted the offer, intending to make the proposed investment in Skyder, in order that they could finance the interest payments on their borrowings, rather than selling one of their properties.

10 Before that investment was made, the Crokers came to have reservations. Finally they invested only $1.6 million with Skyder, on renegotiated terms, also not disclosed to the plaintiff. The Crokers immediately retained $300,000, representing 6 months prepaid interest. $2.3 million was paid to Suncorp and the balance of the loan monies were used by the Crokers for other personal and business purposes. These developments were not disclosed to the plaintiff.

11 Before receiving the loan the Crokers also purchased another property. They obtained further finance of $1.1 million for that acquisition, partly arranged through another lender and partly through vendor finance. This, too, was not disclosed to the plaintiff.

12 For some time interest payments on the loan from the plaintiff were made direct by Mr Hraiki, or one of his companies. After about 12 months some interest payments were made late and Mr Hraiki’s payments eventually ceased to be made. After 18 months, the defendants fell into arrears on their interest payments. The Crokers came to believe that they had been the victims of a fraudster. In evidence was a statement which Mrs Croker provided in a police investigation into Mr Hraiki’s activities. There was no evidence called from him. What charges he might face and whether they concern the Crokers' investment in Skyder was not revealed on the evidence.

13 The Crokers eventually approached another broker, who put a proposal to the plaintiff, as to the provision of further funding to enable them to develop a subdivision of part of their property. The Crokers intended to repay the plaintiff from the profits thereby generated, with the further borrowing to be used in the meantime, to pay interest outstanding and future interest payable on the extension of the first loan from the plaintiff. In December 2007 the plaintiff loaned Mr and Mrs Croker a further sum of $525,000, secured by the existing mortgages and a further guarantee provided by the defendant company. This development venture failed. Interest payments due in 2008 were not made, with the eventual result the commencement of these proceedings.

The orders sought

14 The orders finally pressed were that the second loan of $525,000 be set aside in its entirety and that the $4.5 million originally loaned to the defendants be reduced, in accordance with the evidence of the defendants' expert, to an amount which the Court thought fit. What was really in issue, it was later explained, was the $1.6 million borrowed for the purpose of investment, plus interest. It was accepted that the defendants had received the benefit of the amount used to discharge the Suncorp investment, as well as the balance of the borrowings, which were used for other business and personal purposes.

The issues

15 At the hearing of the cross claim the defendants had again engaged new legal advisers. The principal case then pressed was for relief under s 7 of the Contracts Review Act, (see Spinav Permanent Custodians Ltd [2009] NSWCA 206 at [74] - [75]). The heart of the defendants' case was that the plaintiff had engaged in asset lending from the outset of the first loan. It was also complained that in October 2007, after it became apparent that the defendants had lost the $1.6 million they had deposited with Skyder, the second loan provided on the basis of the same security as the first, with an additional guarantee, resulted in all of the $525,000 then advanced being paid to the plaintiff.

16 The issues were summarised to be:

(a) whether the plaintiff was aware, or failed to take reasonable steps to ensure that it was aware that the defendants could not service the loan, without the assistance promised by Mr Hraiki by way of the returns to be generated by the Skyder investment;

(b) whether the plaintiff was willing to lend to the defendants against security of the assets, without regard to their capacity to service the loan;

(c) whether the plaintiff failed to follow its own lending guidelines, inconsistently with good lending practice;

(e) that it was unconscionable to proceed with the loan in the circumstance when the investment was unlikely to be successful and they were not required to obtain independent financial advice;

(f) that the defendants were not sophisticated borrowers and did not appreciate there was a serious and material conflict of interest and the investment carried the hallmarks of high and uncustomary risks;

(g) that Mr Hraiki was to obtain a trailing commission in relation to the loan;

(i) that the plaintiff was a specialty rural lender and had information available to it which permitted it to particularly appreciate the defendants' circumstances and vulnerability;

(j) whether Mr Nolan (the plaintiff's loan manager) knew of and understood the conflict of interest about which the defendants did not have arms length advice given to them;

(k) whether the plaintiff failed to take steps to ascertain whether the Crokers understood and appreciated the conflict of interest and failed to raise it with them or their advisers;

(l) whether Mr Nolan knew that neither Skyder nor Lendwide had an Australian Financial Services Licence, a matter of public record;

(m) whether the investment was uncustomarily ambitious because it promised an exorbitant rate of return and was risky; and

(a) whether there was a material inequality of bargaining power;

(b) whether the provisions of the contract were not subject to negotiation;

(c) whether the defendants were under great pressure to pay interest owing under the first loan;

(d) whether the conditions imposed were unreasonable and difficult to comply with and not reasonably necessary to protect the plaintiff’s legitimate interests;

(e) whether the defendants did not have the capacity to reasonably protect their interests;

(f) whether the practical and legal effect of the document was not accurately explained to them; and

The first loan

The expert Mr Williams

17 The defendants' case was sought to be supported by evidence called from an expert, Mr Williams. It is convenient to deal with his evidence immediately.

18 There were delays and other difficulties encountered with the production of this report. When it was finally produced, there were other difficulties. The report addressed three issues:

1. Would the loan in question have been given as a matter of responsible practice?

2. Consideration of the Crokers' cash flow data.

19 Mr Williams observed that the plaintiff's lending manual addressed protocols by which, in his experience, lending practice was circumscribed. The application of such protocols is to produce a ‘responsible outcome’ in the interests of both the borrower and lender. That view supported the plaintiff's case.

20 Mr Williams expressed a number of other opinions, however, including critically, it was argued for the defendants, that it was doubtful that the proposed 2 year Skyder investment offering a very high risk investment offering returns of 30% per annum, would produce such returns on a regular basis; that there was a high risk of loss of the principal invested; and that an experienced and responsible lender exercising customary prudence should not have provided the loan as a matter of responsible practice.

21 The report was produced in an unhelpful form. An opportunity was provided for patent difficulties to be addressed. (See Banksia Mortgages Limited v Croker and Ors [2010] NSWSC 883). The steps taken were inadequate and the plaintiff renewed its objection to the receipt of this report. Given that it was argued that the report really lay at the heart of the defendants' case on the cross claim, over the plaintiff’s objections, I allowed evidence to be called from Mr Williams, so that he could identify the assumptions on which his report rested. His explanations provided little assistance. One example will suffice to illustrate the difficulty. Mr Williams' views rested on a number of observations, for example, that ‘the matter was outside customary or rule of thumb indicators’. Mr Williams was asked:

"Q. What assumption did you have in mind or make in relation to customary or rule of thumb indicators when you made that statement in your report?
A. I think this is, comes back to just my, my experience in lending over, over many years and just looking at the nature of the investment proposals and just my experience in, in dealing with and knowing of what I classify this is a very high risk investment and what sort of people or borrowers would be, would be drawn to want or need to borrow from this, this very high risk part of investment.

Q. Remembering, Mr Williams, I'm not here to ask about your opinion. What the Court has allowed me to do is set out the basis of the assumptions on which you base your report. So do we understand your answer to be that in relation to the phrase "outside customary or rule of thumb indicators" you were relying upon your experience, you said?
A. Yes.

Q. Did you have regard to or were you supplied with any other documents in relation to forming that opinion?
A. Um

22 No documents in evidence appear to deal with ‘customary or rule of thumb indicators’. What assumptions this and various other of Mr Williams' conclusions rested on, is simply not apparent. There were other difficulties.

23 Mr Williams was not able to able to provide a copy of the instructions he had been given. Nor was it made clear what documents his report rested on. There were a number of documents annexed to his report, including the lending manual and various of the defendants' financial records. While in his oral evidence, Mr Williams said that he had identified all of the documents to which he had referred in his report, it became apparent that this was inaccurate. It also became apparent from his cross examination, that he had attended conferences with the defendants' former legal representatives, before preparing his report. Who was present, what he was then told and provided with, was unclear. How such matters might have influenced conclusions which he came to, was also not apparent, but led to obvious problems.

24 For example, while Mr Williams did not criticise the plaintiff's lending manual, he said expressly that he had not been briefed with any evidence that the loan had been approved by the lending committee, as was required by the manual. That was addressed in the affidavits of Mr Curnow and Mr McCluskey, material with which Mr Williams cannot have been briefed, or if he was, did not consider.

25 Mr Williams had not been provided with Mrs Croker’s affidavits or police statement, or it would seem the affidavits of the plaintiff's witnesses, or various other relevant material. Mr Williams did not address his report to the basis of the proposed Skyder investment, in the investment strategy provided to the plaintiff. He did not consider whether if that strategy was implemented, any of his stated concerns would have been addressed. That had the result that it was not apparent that Mr Williams had a real understanding even of what the defendants claimed in these proceedings had occurred, let alone what had resulted in the plaintiff making the first loan on conditional terms and the defendants' eventual investment with Skyder.

26 The basis of various of Mr Williams' conclusions and the reasoning which led him to those conclusions were not explained in such a way that they could reasonably be accepted. The opinions expressed by Mr Williams in relation to the Skyder investment were not shown to have a foundation consistent with the evidence and could accordingly not be accepted as persuasive. In many respects their basis was entirely unclear. In other respects his views were contradicted by evidence which he had no opportunity to consider. The result of these various difficulties was that I concluded that while Mr Williams report had to be admitted, it was in the end of relatively little assistance.

Mr and Mrs Croker’s evidence

27 Mrs Croker swore a number of affidavits, on which she was cross examined. Mr Croker swore only a short affidavit adopting her affidavits after reading them. In cross examination, his evidence was that he largely left preparation of the evidence for the case to his wife. They made business decisions together, but she had care of the written work in the running of their farming business, she dealt with their solicitor and accountant and was the primary point of contact with Mr Hraiki.

28 Mrs Croker’s October 2009 affidavit was short. She then said that she and her husband had borrowed $4.5 million from the plaintiff, with $2.3 million being used to pay out a pre-existing debt to Suncorp, with $600,000 to be ‘applied for our farming property’ and $1.6 million to be invested with Mr Hraiki ‘who advised us that he intended to invest the money in bridging loans’. Mrs Croker said that but for the money loaned to Mr Hraiki, they could have serviced a loan of $3 million and would not have had to borrow funds for the second loan. With returns from Mr Hraiki the loan was serviced until October 2006, thereafter it was serviced with the sale of sheep, cattle and wool. It must be noted that this account did not entirely accord with subsequently led evidence. In 2007, the second loan was obtained, in order to address arrears and to make a prepayment of future interest. The defendants were later again unable to meet their interest payments, with the final result the institution of these proceedings.

29 In her April 2010 affidavit, Mrs Croker explained how she felt comfortable with Mr Hraiki handling their refinance in 2005 when the Suncorp loan was due to expire and how it was then that he proposed that they borrow additional funds to invest with Skyder, which lent money as bridging loans through another of his companies, Lendwide. This would generate a high rate of interest of 30%. He suggested additional borrowings of $2 million to invest with Skyder and $500,000 to invest in a tractor, stock, school fees and farm operating capital. It was decided to borrow $4.5 million.

30 Mrs Croker’s evidence was not consistent with the loan application, where the purpose of the loan disclosed to the plaintiff was twofold: refinancing an existing loan and an investment in Skyder and Silkwater Investments. It appears that from the outset the Crokers misled the plaintiff as to their intentions.

31 In her oral evidence Mrs Croker explained that when the Suncorp loan fell due to be repaid, they had contemplated selling a property, which they could easily then have done. Mr Hraiki had advised them that it would be foolish to sell an asset and that instead, they should make the asset work for them, by borrowing more and investing that money with him. She was aware that Lendwide was the lending arm of his business and Skyder the investment arm. They were content to deal with Mr Hraiki, because of their previous commercial dealings with him.

32 The plaintiff’s 2005 letter of offer to the defendants was conditional, providing that amongst other things:

33 Mrs Croker deposed that she understood from this that the plaintiff would wish to see Skyder’s investment strategy to determine serviceability. That evidence may not be accepted. Skyder does not appear to have been a financial planner. The defendants had not taken advice from an independent financial planner. They did seek advice from their accountant, who suggested that as he could not provide such advice, they should approach another accountant, who offered such services. Instead, an investment strategy was sought from Mr Hraiki. Later their solicitor pressed Skyder for the provision of that advice. A strategy was provided to the plaintiff which explained that:

" Security

All investments are secured by 1 ^st or 2 ^nd mortgage on residential and commercial property in (NSW, QLD, VICTORIA).

2 ^nd mortgages are either registered where achievable or unregistered with a caveat over the property.

The loan to value ratio will never exceed 75%.

Loan approval is subject to the following:

1. Full CRAA check
2. Sworn and registered valuation by a panel valuer.
3. 100 point ID
4. Copy of council rates notice
5. Property searches by our in house solicitors (Tiernan & Associates Lawyers)
6. Assets and liability statement
7. accountants letter confirming serviceability and income.
8. 12 months loan statements

To conclude, through our origination arm we have the potential to refinance all or most transactions that fail to settle within the due date ... 90% of our borrowers derive directly from our 3000 strong database.

Please be advised that Lendwide Limited which is also owned and operated by Sam Hraiki has recently submitted to ASIC an application for an AUSTRALIAN FINANCIAL SERVICES LICENCE. We have been working on this submission for over 6 months with DEACONS Law firm in Sydney.

34 Mrs Croker explained that she expected that if the plaintiff had concerns with what was provided, it would advise her. The loan was approved on the basis of this strategy.

35 The evidence also showed, however, that without disclosure to the plaintiff, the defendants advanced the $1.6 million to Skyder without obtaining the charge which the plaintiff had also required as a condition of the loan. On Mrs Croker’s evidence and correspondence from the defendants' solicitor, the defendants took that course without even taking prior advice from their solicitor. That it was the failure to obtain a first ranking charge, as had been intended, which permitted what the defendants' claim was the loss caused by Mr Hraiki’s fraud, is a possibility not explored on the evidence. The defendants led no evidence as to what was done with their $1.6 million investment.

36 Mrs Croker also said in her affidavit that she understood that the 30% returns envisaged by Skyder were ambitious and that the investment thus carried with it more risk, but:

37 The difficulty with that evidence was that the extent of the risk being taken by the defendants was the subject of repeated advice to the defendants, by their solicitor, who also put his concerns in writing. It is apparent that they were well aware of the high risk nature of the investment and rejected this advice, which they regarded as being too cautious.

38 Nor is it claimed that it was the result of any conflict of interest that caused the loss of the investment. Mrs Croker certainly said in her affidavit that she was not advised by the plaintiff that Mr Hraiki had a conflict of interest in acting as their broker, given the investment to be made in his company. There is no question, however, that the defendants were themselves aware of the relationship. It appears that unlike the defendants, Mr Hraiki’s involvement in Skyder was not known to the members of the plaintiff’s lending committee, when they conditionally approved the loan. It was disclosed in the investment strategy document later provided to Mr Nolan, the plaintiff's loan manager who dealt with the defendants' loan application. However, in his earlier email to the committee, Mr Nolan referred to having spoken to the clients, the broker and the fund manager. It does not follow that he was, in both instances, referring to Mr Hraiki, indeed, given that Mr Nolan said he spoke to both the broker and the fund manager, it is unlikely that he was referring to only the one person. That is consistent with Mrs Croker’s statement to the police, that the defendants met with both Mr Hraiki and his partner Mr Daryl Tombelson, to discuss investing in Skyder. There was plainly more than only Mr Hraiki working in the Lendwide and Skyder businesses.

39 Nevertheless, what Mrs Croker did not refer to in her affidavit, was that the defendants had been repeatedly advised against making the proposed investment by their solicitor. That advice was first given before the loan was offered. Mrs Croker’s evidence was that they regarded their solicitor to be a conservative man; Mr Croker had known him for many years; they had not instructed him to give them financial advice; and did not accept the advice which he offered them, regarding it to be a ‘mere opinion’. She explained:

40 Not only did the evidence show that the defendants rejected their solicitor's advice, in fact they did seek advice from their accountant. The accountant’s written response of 16 January 2006 to the request was in evidence. In their loan application the Crokers had indicated to the plaintiff that they had an accountant. On Mrs Croker’s evidence, he had declined to provide advice about the investment, because he did not conduct such a practice. The accountant suggested that the plaintiff could make up its own mind about the Crokers' ability to repay the proposed borrowings and interest, but that:

41 That did not occur. Mrs Croker did not regard this as evidencing that their accountant had any reservations about what they proposed. Despite this suggestion, their solicitor’s repeated advice and the plaintiff's special condition, requiring a copy of the planner's financial advice, they did not seek any advice from any other accountant or financial adviser about their proposed investment in Skyder. Instead they relied on Mr Hraiki’s advice and had Skyder provide information about the proposed investment strategy.

42 Mrs Croker also said that she had prepared a cash flow document showing their farm income and the return on the Skyder investment. There was such a document in evidence, but it was not established that this document was ever provided to the plaintiff. The document was found in documents obtained on subpoena from the defendants' accountant. Mrs Croker explained that her accountant had the document, because he had helped her calculate a debt to loan ratio. While she said that she wouldn’t have prepared the document without sending it, there was no evidence that it was ever received by the plaintiff. Neither Mr McCluskey nor Mr Curnow had seen it, although there is no question that tax returns which had been sought were provided and received.

43 Later the Crokers themselves came to have reservations about the investment, as Mrs Croker explained, after Mr Hraiki let them down in arranging finance for another acquisition, the purchase of Seamandale for a further $1.1 million.

44 The result was a renegotiation of terms with Mr Hraiki and an agreement to invest only $1.6 million with an upfront payment to them of 6 months interest of $300,000. Even so, the Crokers paid $1.3 million over to Skyder before the documentation negotiated by their solicitor necessary to protect their investment, as the plaintiff had also required, had been executed. The result was that they failed to comply with the condition imposed by the plaintiff as to security of the investment. Mrs Croker could only explain this seemingly reckless conduct as the result of the defendants' anxiety to begin earning income on their investment.

45 Mrs Croker explained that before she paid the money to Mr Hraiki, no mortgage was provided. There was an agreement and discussion about a charge or security being provided over assets, with Skyder's solicitors, Tiernan & Associates, with whom Mr and Mrs Croker themselves met on more than one occasion. By letter of 28 July the Crokers' solicitors advised that while a deed of charge had been registered with ASIC, assurances that they had instructed had been given that all previous charges were to be discharged, had not occurred. Mrs Croker explained that she paid over the money as the result of pressure from Mr Hraiki. They were concerned to start earning income on the investment with him, in order to meet what was due on their borrowings. She had not appreciated the importance of first attending to the charge, before handing over the money and relied on the assurances she had received from Mr Hraiki and his solicitors, that the investment would be safe. There was no communication between the defendants and the plaintiff, about any of these matters.

46 It does not seem to me that this was the conduct of gullible investors, simply being duped by either Mr Hraiki, or the plaintiff, but rather the conduct of experienced business people making very large scale investments, confident to proceed on the basis of their own assessments, of advice which they were receiving from various sources. As Mrs Croker explained, they acted as they did because they were anxious to begin earning the promised returns.

47 When asked in cross examination whether the defendants could have decided not to proceed with the loan, as was clearly an available option when the defendants came to have reservations about Mr Hraiki, Mrs Croker claimed that:

48 When asked what legal obligation bound her to invest the money in Mr Hraiki’s company, she said:

49 That evidence cannot be accepted. The defendants had sought to borrow $4.5 million in order to repay Suncorp $2.1 million and to invest the balance with Skyder. While they did not disclose to the plaintiff that they intended to keep $500,000 for themselves from the outset, it was they who decided finally to pay Suncorp $2.3 million, only to invest $1.6 million and to use the balance of the borrowings for purposes not disclosed to the plaintiff. Clearly they did not believe themselves bound to make the Skyder investment which had been represented to the plaintiff. Rather, they were anxious not to lose the high returns which had been promised, to enable them to pay down their borrowings, rather than selling one of their properties, as they had originally contemplated. Evidently they came to the view that they would achieve sufficient returns by only investing $1.6 million and decided to use the balance of the borrowings for purposes never disclosed to the plaintiff. It is pertinent that despite the moral obligation which Mrs Croker claimed to have felt towards the plaintiff, the defendants never informed it of the reservations which they came to have about Mr Hraiki, or the renegotiation of the terms of the proposed investment, or the failure to adhere to the security condition it had imposed.

50 Mrs Croker also claimed in her cross examination that the defendants proceeded with the investment because they would not have been granted the loan by the plaintiff if it had not been considered a sensible investment strategy. She said that “[w]e thought if it wasn’t right we wouldn’t receive the loan’ and when explaining why they rejected their solicitor’s advice, that the defendants thought that the plaintiff wouldn’t approve the loan ‘if they didn’t think it was a worthwhile and safe investment for us and them’.

51 It seems to me that this is a hindsight justification for what the defendants now appreciate were serious mistakes. The plaintiff was their lender, not their financial adviser and had sought to be provided with the strategy their financial planner had provided them. They decided to take no such advice and to reject their solicitor's advice. Had they truly had such beliefs at the time, logically they would not have failed to disclose to the plaintiff what they intended to do with $500,000 of the borrowed moneys from the outset; they would have informed the plaintiff that they were relying on it to assess the wisdom of their investment strategy; and they would have sought further advice, when they significantly altered their investment strategy and renegotiated terms with Mr Hraiki, retaining $600,000 for themselves and repaying Suncorp $2.3 million with the borrowings and investing only $1.6 million, rather than $2.4 million initially proposed. They would also have disclosed the decision to take on additional borrowings of $1.1 million. They told the plaintiff nothing about any of these developments.

52 It was before the loan was approved, in July 2005, that the Crokers' determined to purchase Seamandale, for $1.1 million. Mrs Croker deposed that she asked Mr Hraiki if the borrowings from the plaintiff could be increased by $660,000, it being proposed that they would call up money from the Skyder investment, sufficient to complete the purchase. That did not occur. In December 2005, the plaintiff approved a loan of only $4.5 million and the borrowings necessary for the Seamandale purchase came from the vendor and another lender, Sydney Wide Mortgage Management Group.

53 Mrs Croker explained that the acquisition was made:

54 The defendants did not finally lead any evidence as to their financial circumstances, at the time of the loan and subsequently. Nevertheless, as the plaintiff submitted, an available inference from this evidence was that the defendants used the $300,000 advance on interest on the Skyder investment, or a part of it, in order to acquire the Seamandale property. On Mrs Croker’s evidence, they later sold cattle sheep and wool to make repayments when further returns were not forthcoming on the investment. There is no suggestion that the Seamondale borrowings ever went into default.

55 There can be no question that the final decision about the investment with Skyder, even without the security which had been promised and was a condition of the loan advanced, was one made by Mr and Mrs Croker. It had nothing to do with the plaintiff. On her own evidence Mrs Croker said that she believed that both the defendants and the plaintiff were taken in by Mr Hraiki. Mrs Croker denied that the defendants were then being greedy. They believed that they were being sensible, even when they purchased the other adjoining property. They believed that what they would make off that property over time would make them secure. No evidence was led as to what impact this acquisition had on their financial position. That the property generated returns sufficient to meet interest payments on the $1.1 million borrowings was not shown. Mrs Croker's evidence suggested the contrary. There is also no suggestion that the further $1.1 million borrowed for that acquisition has ever fallen into arrears. The inference from the available evidence is that the defendants diverted resources to paying those further borrowings, rather than meeting their obligations to the plaintiff.

56 While there was some evidence about the defendants' financial position before the loans, because it was information provided to the plaintiff as a part of their loan application, the accounting evidence repeatedly foreshadowed during the course of the adjourned hearings, as to their financial position subsequently was never led. A further affidavit repeatedly foreshadowed from Mrs Croker as a necessary foundation for an accountant's report was never sworn and the report never finalised. Nor was there evidence led of what the Crokers did in respect of their failed investment, or what happened to the money which they invested with Skyder.

The lending manual - loan approval

57 The plaintiff's lending manual was in evidence and two of the members of the committee which considered the Crokers' loan application, Mr Curnow and Mr McCluskey, gave evidence. It was the defendants’ case that their evidence established that the plaintiff had not adhered to the requirements of its lending manual, when dealing with the Crokers' original loan application.

58 That submission may not be accepted.

59 The manual does not expressly require that when an offer is made to a borrower, which imposes special conditions, that satisfaction of the conditions is a matter to be determined by the lending committee. There is a provision in relation to ‘Follow up Outstanding approval items’, which does not make clear whose responsibility that is. As was accepted for the defendants in submissions, however, the credit administration process dealt with in schedule 7, deals with the post approval process, that being Mr Nolan’s role in this case. The argument that by implication, Mr Nolan did not have authority to give credit approval, with the result that he was obliged to refer the question of satisfaction of the condition back to the credit committee, does not find support in the lending manual, nor in the evidence of Mr Curnow, or in my view that of Mr McCluskey, who said finally when pressed that it was a matter for Mr Nolan. On all of the evidence it appears that it was his obligation to follow up satisfaction of the condition imposed by the lending committee and that he accepted what the defendants provided by way of satisfaction of that condition.

60 I am unable to accept the submission advanced for the defendants that:

61 The power to approve the loan was that of the lending committee. It gave conditional approval on terms provided to the defendants. In my view it was not implicit in the manual that there be a reference of the material provided by the defendants to satisfy those conditions to the committee for its final approval. Nor was it the evidence of the members of the lending committee that such was the practice. On the evidence that was a matter left to Mr Nolan, the plaintiff's loans manager, who accepted the document Skyder provided, as satisfying the plaintiff’s requirement that a copy of an investment strategy be provided. That acceptance bound the plaintiff.

62 On Mrs Croker’s evidence, the defendants chose not to obtain independent advice and instead asked Skyder to provide the required document. There is no question that the relationship between Mr Hraiki, Skyder and the Lendwide was known to the defendants and their advisers. Their accountant suggested that the defendants obtain other advice, but they did not do so. They also rejected their solicitor’s advice. The defendants now complain that the plaintiff ought not to have accepted the Skyder document which they provided, in order to satisfy the requirement imposed. Even if the view be taken that Mr Nolan's decision to accept the document which the defendants provided as satisfying the condition involved an error of judgment, that alone simply cannot establish that the loan contract was unfair, as the defendants now complain.

Consideration of the loan application - serviceability

63 Mr Curnow was a risk manager at the time. His evidence was that the plaintiff's lending guidelines were concerned with serviceability of the loan, established by historical financial materials or purported future income on earnings. Evidence that there would not be immediate problems in servicing the loan was required. He sat on the committee which approved the conditional offer made to the defendants. The credit manager provided the committee with a summary of the application for consideration, using a software program known as Loan Works, which the committee considered.

64 Like Mr McCluskey, Mr Curnow did not have a recollection of detailed aspects of the defendants' application, but remembered that it had not initially been approved, because the application did not suggest adequate serviceability of the loan, given historical farming income. While it was known that the Skyder investment was to provide another source of income, how much would be generated was not known. The view taken was that more information was necessary.

65 Mr Curnow explained that regard was later paid to information provided by Mr Nolan, when he advised on 10 November 2005 that:

"On the deal for Croker $2.3m of the amount borrowed is being lodged in a Mortagge(sic) Management Fund that will return 2% per month or 24% per annum. The fund is managed by Skyder Investments (

The income that this investment will generate is $552,000 per annum. Based on a loan of $4,500,000 @ 8.65% the interest cost will be $389,250 prior to adding back any income, depreciation or interest (on the $2,200,000 debt to Suncorp that we are paying out) that is generated from there(sic) sheep and cattle farms. The estimated value of the Farm is $9.3m with a proposed debt of $4.5m (48%)

66 Mr Macrae’s advice was also obtained. He was a former member of the Committee, who advised Mr McCluskey on 10 November:

"The upside is that why would they place a property at risk with a low LVR for the investment. If they did not invest funds to generate income the(sic) would have to sell down assets to protect their significant equity in the property.

Again a difficult point to come to terms with but if they are of considerable assets and the purpose is something that makes sense then there is very little risk for us as a lender with a sub 50% LVR.

I would in my previous roles try to seek some type of confirmation but that the investment funding has been done but it is fairly difficult to police and if they do not do it there is little you can do about it.

67 It was the defendants' case that Mr Macrae's advice revealed that the plaintiff was only concerned to ensure that the security provided by the Crokers was sufficient and that it was unconcerned with serviceability of the loan. On the evidence that case was simply not made out. On 11 November, Mr Nolan advised Mr McCluskey further:

68 On 14 November, Mr McLuskey advised Mr Nolan:

"As discussed with Jackie, the deal is OK but we need the income for the partnership created and entered onto the system. Also with the joint venture you will need to adjust the income to reflect the borrowers share (as it is disbursed between two parties).

69 Mr Nolan advised:

70 This was why the condition as to the provision of the investment strategy was imposed. A condition requiring security to be obtained was also imposed. The advice provided by Skyder was later accepted by Mr Nolan. An investment was later made by the defendants, albeit on different terms than those proposed to the plaintiff. Returns on that investment were received and repayments made for some considerable time, before the investment failed.

71 The information provided by Mr Nolan that the proposed investment would make up the shortfall in earnings, by generating income of some $552,000, was more than adequate to service the loan. In Mr Curnow’s estimate a half or quarter of that would have been sufficient, given other farm income being earned. The committee was aware that at the time it was not difficult to earn interest rates above the proposed interest rates in the market, on mortgage investments. Second mortgages were also paying higher rates of return. Even so, the committee wanted more concrete information to be provided as to how the investment would work, in the form of a prospectus or advice from a financial adviser. It was expected that Skyder would have some sort of product disclosure statement, which would indicate percentages and annual earnings from the investment. It was not the plaintiff's role itself to offer advice, but it wanted the borrowers to obtain such advice and so the committee imposed conditions on the offer made. The conditions imposed were:

" 15. Special Conditions of this Offer :

a) Completed original Banksia Application Form signed by all parties.

b) Last 2 years tax returns for all applicants, or Tax Assessments or Group Cert/Payment Summaries

c) Mortgage Debenture over Company's assets

72 Mr Curnow said that this was a one off deal for the plaintiff at the time. It had not received many applications for money to invest in these types of investments, in his experience. Since then he understood that it went wrong because of a fraud. He was not aware of the details. At the time of the offer, he was also not aware of the connection between the broker Lendwide and Skyder.

73 Mr Curnow also explained that the committee did not have a role in policing the conditions imposed. He was not aware of whether Skyder was itself a financial adviser, but they expected that advice would be obtained from someone other than Skyder. He expected Mr Nolan to see that the required information was provided, namely some independent recommendation that from the defendants' point of view, given their circumstances, they should proceed with the investment. The loan went ahead when Mr Nolan was satisfied that the condition had been met.

74 On Mr McCluskey’s evidence the committee considered the loan application, the financials and an internal loan submission questionnaire. There were estimated valuations, showing assets of some $10.2 million and loan value ratios (LVR) of less than 50%, well within the applicable guidelines. The most recent available financial information provided was for the 2004 year. It was not unusual that more recent information could not be provided by a borrower. Other information was thus also considered.

75 In cross examination, Mr McCluskey explained that there were different types of rural properties and different maximum LVR’s provided for them. In 2005 for cattle grazing property the maximum was between 60 and 65%. The defendants' loan history was considered and past repayment conduct was found to be acceptable. The properties were drought affected at the time. Mr McCluskey explained that the critical consideration for the committee at the time was serviceability of the loan and the type of security offered. There were credit checks undertaken. The committee was concerned to consider whether the borrowers could comfortably afford to pay back the loan. This involved a serviceability calculation which the committee checked. The sources of funds available to repay the loan were considered. The exit strategy provided was sale of the properties, or refinance.

76 The committee was aware that the broker was Lendwide, but they did not know of Mr Hraiki. The broker was required to have accreditation with the plaintiff. It would receive a trailing commission on the loan.

77 The information provided about the defendants was that the profit and loss statements for 2004 showed a break even position, not generating sufficient income to support the existing loan, but the committee also considered other material which showed that the defendants were in fact then meeting their obligations.

78 Mr McCluskey was the head of the committee. Initially the committee was not inclined to approve the loan. He explained that further information was sought. He looked at the Skyder website and considered information Mr Nolan provided and Mr Macrae's advice. This was the first occasion that the committee had to consider an application for borrowings for an investment such as here proposed. They did not consider it to be a one off. It could have been the first of a number. The likelihood of interest coverage thus had to be considered, so the committee sought more information.

79 Mr Nolan came back to the committee advising that he had spoken to the client, the broker and the fund manager. He understood that what was proposed was a very high return of 30% per annum. At the time the plaintiff was offering 8-9% on funds invested and interest on the loan was being charged at 10%, thus the proposed investment could carry a high degree of risk, but at that time, prior to the global financial crisis, mezzanine finance and second mortgages were in the realms of these returns. Rates of these kinds were also being paid by developers. The proposed rates were accordingly regarded as speculative rather than normal returns. The committee undertook calculations of the serviceability of the proposed loan, concluding that it would be covered if returns of 15% were generated. Given what the market was offering, they also took comfort from the proposal that each loan was to be limited to $100,000; adequate security was to be taken and that the defendants were advised by their solicitors and accountant.

80 The plaintiff itself conducted no assessment as to the capacity of Skyder to produce the income necessary to service the loan. Rather, it was resolved that the loan would be offered conditionally. It was to be a business loan for business purposes.

81 The Skyder document provided by the defendants was not referred to the committee for consideration. Mr McCluskey did not consider it to be the type of independent advice which the committee had considered should be provided, but it did provide information which, if true, would have been relevant to the lending decision. He was cross examined about whether Skyder required a financial services license. That depended on the number of investors in the scheme, but the committee did not require that to be checked.

82 Mr McCluskey also said that in his view what was provided by the defendants did not fully satisfy the condition imposed, but the credit committee did not have the responsibility to ensure that the condition had been satisfied. That involved the settlement team. Mr Nolan had power to approve what was provided as satisfying the condition and while in his view it did not satisfy the condition, Mr Nolan may have had a different view. That he did, was apparent. The loan was made, the plaintiff’s records recording that the condition had been satisfied.

83 Mr McCluskey also explained that the defendants were mature graziers with a long farming history, who had built up a significant asset base working rural properties for many years. They were meeting their obligations in relation to their existing borrowings. He did not anticipate that they would risk their assets on a dangerously speculative investment. While the proposed investment promised very high returns, on the committee’s calculations, even if the investment returned only 15%, rather than 30%, it was viable. It was on that basis that a conditional loan offer was approved by the committee.

Mr Nolan's role

84 Mr Nolan’s position should be dealt with at this point. He was not called to give evidence, with the result, it was argued for the defendants, that a Jones v Dunkell [1959] HCA 8; (1959) 101 CLR 298 inference should be drawn against the plaintiff. I do not accept the submission.

85 Shortly prior to the hearing, an application was made that the plaintiff be required to call evidence from Mr Nolan. He was then no longer employed by the plaintiff and the defendants had not located him. That application was refused (see Banksia Mortgages Limited v Croker and Ors [2010] NSWSC 883). Despite this decision, when the hearing again adjourned for other reasons, the plaintiff found Mr Nolan and subpoenaed him. Who would have to call him was a matter to be resolved. He later attended court on a number of occasions, but on the day he was to be called, he did not appear and could not be located. In these circumstances I am satisfied that there has been an explanation given as to why he was not called.

86 It is apparent that Mr Nolan’s acceptance of the Skyder document as fulfilling the special condition which the plaintiff had imposed, was a decision which Mr McCluskey and Mr Curnow might not have made, had the matter been referred back to the lending committee. Nevertheless, his decision bound the plaintiff.

87 The defendants' case was that the result was that the plaintiff had failed to make adequate enquiries to establish that the Skyder investment would generate the returns on which serviceability of the loan depended. The investment failed. Had the loan not been approved, the defendants would have been protected from this loss. The result was that the loan contract was relevantly unjust. Again, I am satisfied that the case so advanced may not be accepted.

88 The Skyder document provided only some of the information it was envisaged by the committee would be provided, if the plaintiff were given access to advice which the defendants had received from a financial adviser. The defendants elected not to seek such advice, but proffered the information Skyder furnished, in order to satisfy the condition imposed. If Mr McCluskey had seen the Skyder document, he would not have refused the loan, but would have sought further information. That the loan would not have gone ahead, in those circumstances, is not evident. Some of the information which the committee was concerned about had thereby been provided. That the defendants could not have obtained and provided further information, had it been sought by the plaintiff, is not apparent.

89 The defendants were intent on pursuing this investment. They had great confidence in Mr Hraiki. They were taking his advice, indeed, preferring his advice over that of their lawyer and accountant, or taking independent advice. That further information that would have satisfied Mr McCluskey, could not have been provided, if the decision to proceed with the loan had been his, rather than Mr Nolan's, or that further investigation would have revealed that later there was to be a fraud committed by Mr Hraiki, was not shown.

90 At the time the defendants were convinced that it was better to make a high risk investment with Skyder, rather than selling a property to pay down part of their debts, when the Suncorp loan fell due. At that time, returns of the kind which Skyder was offering were available in the marketplace. The defendants later made other investments with Skyder, in respect of which there was no default. On the evidence, the initial investment which was made, initially generated returns sufficient to enable the interest payments due to be made, even though only $1.6 million was invested. Indeed it seems that interest also supported the further borrowings in relation to Seamondale to be met.

91 What impact the further $1.1 million borrowings and the decision to use $600,000 for other business and personal purposes not disclosed to the plaintiff ultimately had on the defendants' financial situation, was also not disclosed on the evidence. The defendants relied on the observations of Handley JA in Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41 at [127] - [128]:

"127 The issue with respect to an ill-advised investment was discussed, hypothetically, by McHugh JA in West (see the passage set out at [86] above) in terms of whether the lender in such circumstances acts "unfairly" in relation to the borrowers and, whether "the lender owed a duty to the borrower to ensure that she used the borrowed money wisely". In relation to the first limb of this approach, his Honour appears to have assumed that these circumstances might only give rise to a form of procedural unfairness. It is at least arguable that the contract may be unjust in a substantive sense. In relation to the second limb of the test, it would, in my view, be an error to look for a duty imposed under the general law to ensure such a result. A contract may be unjust without there being any breach of a general law duty: see Mahoney P in Elders Rural Finance Ltd v Smith (supra) 41 NSWLR at 299B.

Esanda Finance Corp Ltd v Tong

Elkofairi

92 Unquestionably, the initial Skyder investment proved to be ill advised. I will return to the matter of asset lending, but observe at this point that in my view, in the face of all of the evidence, it may not be concluded that the plaintiff acted unfairly in relation to the defendants when it made the conditional offer which the defendants accepted, nor when it accepted the Skyder document provided by the defendants as fulfilling the condition it had imposed. In my assessment, that acceptance did not have the result that the contract was unjust, because Mr Nolan did not insist on the provision of more information than that which the defendants had provided. While the defendants accepted the loan offered, they did not act in accordance with their loan proposal. In fact, the defendants did not disclose to the plaintiff the course they intended to pursue from the outset. Nor did they disclose when they elected to depart from what they had disclosed in the loan application. The defendants have not demonstrated an inability to protect their own interests. That they made bad decisions in relying on Mr Hraiki, may reveal that they were foolish, gullible or even greedy, in the course which they pursued in 2005 and 2006. The 'something more', so far as the plaintiff is concerned, of which Handley JA spoke in Khoshaba, was not here established.

93 While the Crokers were farmers, the nature and size of their grazing operation and how they conducted it may not be overlooked. Nor may the advice which they were receiving at the time, of which the plaintiff was not made aware, be ignored. That they were suffering from the disadvantages which they claimed, or that they were unable to protect their own interests, in the circumstances, may simply not be accepted.

The second loan

94 Mr Arnold, the plaintiff’s credit risk manager, dealt with the defendants when they began to fall behind with their interest payments. He then spoke to Mrs Croker, who told him that the payments were coming from a third party, Mr Hraiki. While there were some delays the payments were made direct by Mr Hraiki. One cheque was dishonoured, before payments ceased. Mr Arnold was not aware of the details of the defendants' investment with Skyder, but was aware that after it stopped making payments, Mr and Mrs Croker themselves made some payments. They fell into arrears in August 2007.

95 Mrs Croker phoned Mr Arnold to advise that they were awaiting funds to clear the arrears. Mr Arnold was later approached by a broker, Mr Michael Charlton of ACS Residential Pty Ltd, on behalf of the Crokers, who asked if the plaintiff would look at an application from them. Mr Hraiki was not involved. The purpose of the proposed loan was to clear arrears, pay ongoing interest for 12 months, to allow them to subdivide and sell a property and to reduce their loan to a more manageable level. Mr Arnold spoke to and met with Mrs Croker and a second loan was eventually agreed and the first loan extended for a further 12 months. The result was that the Crokers would not be in default before February 2008. That addressed the risk that the plaintiff would seek to take possession of the properties which secured the existing loan.

96 Mrs Croker also wrote to the plaintiff on 11 September 2007 explaining that the purpose of the loan was a debt reduction and exit strategy. Valuers, surveyors and real estate agents had been engaged. Again, the defendants were legally represented on the transaction.

97 The application was considered by the plaintiff’s default managing committee of which Mr Arnold was a member. Conditions imposed were:

" 14. Special Conditions of this Offer:

a) $384,000.00 of loan funds are to be held in a Banksia Securities Limited (BSL) account to cover 12 months loan repayments on loan CRO0159B and the new loan.

b) Arrangements will need to be place(sic) to lift the Caveat to Sea-Ori Pastoral Co Pty Limited at settlement.

c) BSL account will form part of the security for your loan facilities with Banksia Mortgages Limited.

d) Provision of a written undertaking from Leslie Croker and Ruth Croker to meet the market with property sales and within 12 months to reduce Banksia debt to less than 45% Loan to Value Ratio of remaining security properties.

e) To provide Bi-monthly progressive reports on progress of any subdivision or sale of land.

98 Mr Arnold did not accept that at the time, the defendants had no alternative but to pursue further borrowings from the plaintiff. While they were in default, Mrs Croker advised him that they had finance ready to go. That was before he first spoke to the defendants' new broker, who advised that he was sourcing finance and raised the possibility that it might be advanced by the plaintiff. Mr Arnold agreed to consider the application. The broker was also pursuing other sources of finance and Mr Arnold was given the impression that the defendants would be able to obtain finance from other sources. He was never informed that they had been unsuccessful.

99 Mr Arnold disagreed that the plaintiff’s purpose in advancing the second loan was to put its interests first and foremost. He explained that the committee considered Mrs Croker’s application in order to enable a subdivision and sale of property to proceed. The loan was then not seriously in default. One payment had been missed and there had been delays in some earlier payments, but Mrs Croker advised that they had no capacity to meet further interest obligations. The proposal was put as an exit strategy, which was assessed as being feasible within the 12 months proposed. In March 2008, Mrs Croker gave a report as to their progress, which included plans for a presentation to prospective purchasers for introduction to proposed house and land packages, offering environmentally conscious cottages. Mrs Croker advised that the process was seen as costly at first:

100 Mr Arnold later met Mrs Croker after their exit strategy failed, when the defendants were unable to sell the land and they again fell into default.

101 It is impossible to see, on that evidence, that the second loan was unjust. To the contrary, it had the potential to put the defendants into a significantly better position. Had the property development succeeded, their commercial position would have been improved. It is not suggested that the failure of the venture which the defendants pursued had anything at all to do with the plaintiff. The evidence simply does not show that the plaintiff conducted itself unfairly towards the defendants in relation to this further borrowing.

Asset lending

102 Asset lending is a concept which was discussed in Khoshaba. It involves circumstances where a lender is content to lend on the value of the security alone, where there is no demonstrated ability to pay other than through sale of that security and where effectively the lender risks nothing and the borrower risks all (see the discussion at [82] per Spigelman CJ and [128] per Basten JA). As explained by Brereton J in Riz v Perpetual Trustee [2007] NSWSC 1153 at [70]:

103 In my view this was simply not a case of asset lending. The evidence certainly showed that the value of the properties the subject of the mortgage more than satisfied the plaintiff’s guidelines for a loan of this size, protecting the plaintiff against loss, if the defendants defaulted. The plaintiff was satisfied that the Crokers had been able to support the Suncorp loan of $2.1 million, but the information it had, showed that they could not service the interest on a loan of $4.5 million, without returns to be generated by the Skyder investment. That was also entirely appreciated by the defendants. On Mrs Croker’s own evidence they could have serviced a loan of only $3 million, without the Skyder returns. They were convinced by Mr Hraiki to borrow more, on the basis of what they well knew to be a high risk investment strategy and the consequences, if that strategy failed. They were not in a position where there was any pressure on them to invest in Skyder, other than their own desire to achieve the income which the investment promised. That was a risk which they took on voluntarily, rejecting their solicitor's advice and instead, being content to rely on Mr Hraiki's advice.

104 That risk was also appreciated by the plaintiff's lending committee. Initially the committee refused the loan, but when it received further information from Mr Nolan about the proposed investment, knowing that rates of the kind envisaged were available in the marketplace, a conditional offer was made. The defendants met that condition by providing information from Skyder, rather than from an independent adviser, as they could have done. In truth their real complaint is not that the plaintiff was unconcerned with serviceability of the loan they sought, but rather that the plaintiff was prepared to proceed on the basis of what they themselves had determined to provide, in order to address the plaintiff's concerns about serviceability and the conditions it had imposed.

105 The evidence established that the plaintiff was not indifferent to the question of whether or not the loan was serviceable. I cannot see that in making its decision to proceed with the loan, it was unjust that the plaintiff had regard to the information it was provided by the defendants, in response to the special condition it had imposed. Even if it be accepted that Mr Nolan's decision involved error, that did not reveal any lack of concern on the plaintiff's part with serviceability of the loan. On the committee's calculations, there was a considerable margin. Even if returns of only 15% were achieved on the initially proposed investment, the loan could have been supported by the defendants. That was not challenged by the defendants, nor could it have been, given that for a period the loan and the Seamondale borrowings were serviced by returns achieved on the Skyder investment which was finally only of $1.6 million.

106 Clearly the investment delivered some of the promised returns. There was initially a 6 month prepayment of interest of $300,000 paid on the smaller investment finally made, of only $1.6 million and on the evidence, for a time thereafter Mr Hraiki met payments due. Had that continued, there would have been no problem. On the defendants' own case, had there been no fraud, there would have been no difficulty in the defendants meeting the interest payment on the $4.5 million borrowings even though the Crokers invested only $1.6 million, rather than the $2.2 million they proposed to the plaintiff in the loan application. The defendants in fact made other investments with Skyder in respect of which there was no complaint or default. The plaintiffs never disclosed in their application that they had decided to use $600,000 of the loan for non income producing purposes and that they proposed to repay $2.3, not $2.1 million to Suncorp. In those circumstances, it is not open to conclude that the plaintiff was simply engaging in ‘asset lending’, when it made the first loan.

107 The result of the failure of the investment, after some 12 months, was a situation where the defendants initially met the repayments from other of their resources. After 18 months they decided that they could not continue to do so and had to take steps to reduce their borrowings, to more manageable levels. That was when they obtained the second loan, in order to subdivide and sell part of their properties.

121 The defendants' case was advanced on the basis of a complaint that they were farmers, not experienced in making commercial investments, who were enticed by Mr Hraiki into making a risky investment, in circumstances where the plaintiff ought to have taken steps to protect them, by putting them on notice of the considerable risk which they were taking in making the investment they proposed to pursue with their borrowings. The difficulty with the claim, so advanced, is that the defendants were on notice of the nature of the risks they were taking in pursuing the investment which they were contemplating. That was their solicitor's advice. They understood the risk, but regarded this approach to be too cautious. Had the plaintiff also given them the obvious advice that the investment was a high risk one, it is difficult to see on their own case that would have protected them. The plaintiff did impose a condition on the loan that they provide to it a copy of an investment strategy from a financial planner. It was the defendants who chose to take such advice from Mr Hraiki. The plaintiff cannot fairly be held responsible for that choice.

122 In truth, the defendants' case is not that the investment failed because of the high risk nature of the investment proposed by Skyder, but rather that it failed because Mr Hraiki was a fraudster. The evidence of Mr Curnow and Mr McCluskey that returns of this kind were available in the marketplace at the time, was not challenged. How Mr Hraiki dealt with the $1.6 million Mrs Croker gave him, was not revealed. How his subsequent conduct was something which the plaintiff could have detected, or warned the defendants about, is not apparent. Contrary to the approach adopted for example in Permanent Trustee Company Ltd v O’Donnell [2009] NSWSC 902, in this case no evidence was led as to what in fact became of the money which was invested with Skyder. All that is known is that the proposed lending terms were varied by agreement between the defendants and Mr Hraiki, after the plaintiff had advanced the loan, with the result that initially the first 6 months interest on $1.6 million was paid up front and that thereafter, the repayments on the entire loan were for a period made direct by Mr Hraiki.

123 The security which the plaintiff had required was not put in place before the money was advanced. The result was that the intended first charge was not obtained. It is not even clear that if that had occurred, that the Crokers' investment would not have been protected. Perhaps it would have.

124 The difficulty with the claim advanced in relation to the second loan, was that it was the result of an approach to the plaintiff by the defendants' then broker and pursued by the defendants themselves on a basis they had developed. They proposed to subdivide and sell a part of their property, in order to enhance its value and sell it to reduce their borrowings. The second loan facilitated this, by enabling the defendants to repay the interest outstanding on the first loan, the extension of the first loan, and the payment of further interest which they would incur on that loan, while the subdivision of that property was undertaken. It was only when the plaintiffs were unable to sell the land, that they again fell into arrears.

125 Having put a commercial proposal to the plaintiff, to advance them further monies so that they could reduce their borrowings by a redevelopment and sale of part of their property, that the development which the defendants pursued failed, when they were unable to sell the land, made the further loan unjust, is impossible to see.

Unconscionability

126 There are also difficulties with concluding that the loans were unconscionable. In Elkofairi at [51], Beazley J observed:

Teachers Health Investments Pty Ltd v Wynne

" ... two matters need to be established to invoke the court's jurisdiction to set aside an unconscientious transaction. The first is that the party seeking to impugn the transaction was under a relevant disability. In describing this disability, Deane J at 476 referred to the statement of McTiernan J in Blomley v Ryan (1956) 99 CLR at 392 that:
... as taking surreptitious advantage of the weakness, ignorance or necessity of another. The essence of such weakness is that the party is unable to judge for himself.

...

127 The evidence established neither matter, so far as the defendants are concerned. The defendants were not under any relevant disability. They were graziers who had long operated a successful farming enterprise which they had grown over the years through acquisition, as well as inheritance, into a very substantial business. Even at the time of securing a $4.5 million loan in order to pursue a non-farm investment which they were well aware was high risk, they also took on further borrowings of $1.1 million in order to acquire another property. Their solicitor advised against the Skyder investment. The plaintiff imposed conditions which envisaged that they take independent financial advice and that the borrowings be secured by a charge. Their accountant could not provide that advice and suggested that they obtain it elsewhere. Even so they were not only content to rely on Mr Hraiki's advice, but to take on even further substantial borrowings, not disclosed to the plaintiff and not to put in place the security their solicitor advised, before advancing Mr Hraiki $1.6 million. These were not defendants suffering from any disability, which had the result that they could not make decisions for themselves, but business people making business decisions. Nor was the plaintiff seeking to take surreptitious advantage of them.

128 This was not a case of borrowings pursued through any weakness, ignorance or necessity, where the defendants were not able to judge for themselves, the wisdom of the pursuit of their commercial objectives. To the contrary, they were entirely content to reject the advice which they did receive that they should not entertain such a high risk off farm investment, in view of their high regard for Mr Hraiki. They were intent on pursuing the possibility of achieving the very high returns which the proposed investment offered, at a time when they were only in a position themselves to meet $3 million worth of borrowings. After the initial $1.6 million investment they loaned Skyder other sums, on which they achieved the returns on investment they had been promised.

129 In Perpetual Trustees Victoria Ltd v Longobardi [2009] NSWSC 654, after discussing the applicable authorities, McDougall J said at [139] that:

130 So approaching the questions which here arise for determination, I cannot see that the case advanced by the defendants may be accepted, especially given the evidence as to how the defendants conducted themselves, in ways which they did not disclose to the plaintiff, but which were plainly relevant to its position and decisions which it had to make in relation to the loans which the defendants sought of it. Contrary to the defendants' reliance on what James J discussed in Perpetual Trustee Victoria Ltd v Yap [2010] NSWSC 761 at [225] - [226], this was not a case which cried out for someone to talk to the defendants face to face, because they were not independently advised. They had such advice from their solicitor and accountant, but rejected it. They were also legally advised in relation to the second loan, which Mr Arnold also discussed with Mrs Croker.

131 The claim that the defendants were reliant on the plaintiff to assess the wisdom of the investment they proposed to pursue may simply not be accepted. That the plaintiff was not itself offering such advice, or aware of the defendants' purported reliance upon it for such advice, was also apparent from the special condition it imposed.

132 The sophistication of the property development proposal which Mrs Croker later pursued with the plaintiff, which resulted in the second loan, which, if it had succeeded, would have resulted in the defendants’ problems being addressed, puts that beyond question. At that point their borrowings appear to have amounted to $5.6 million. That it was again appreciated that there was a necessity to sell some of their extensive property holdings, in order to retire some of that debt and that steps were taken in order to maximise the return such a sale would achieve, through a property development, does not lead to the conclusion that the plaintiff’s agreement to support that proposal by advancing the second loan, was unconscionable. The suggestion that the defendants were not able to obtain finance for this development elsewhere was not established. To the contrary, that was not Mr Arnold’s understanding from the defendants’ then broker. The broker was not called to give evidence to dispute that understanding.

133 In terms of the High Court’s discussion in The Commercial Bank of Australia Limited v Amadio and Anor (1983) 151 CLR 447, there was here no failure by the plaintiff to make any necessary disclosure, or any other misrepresentation. The defendants were not ignorant of any relevant matter, nor were they at any special disadvantage for reasons such as illnesses, ignorance, inexperience, impaired facilities, financial need, or other circumstances which affected their ability to conserve their own interests (see Gibbs CJ’s discussion at 459 and Mason J at 461). That they had financial needs was apparent. They needed to refinance the Suncorp loan initially and later they pursued a redevelopment, in order to redraw their borrowings. That the plaintiff made unfair use of its position in its dealings with the defendants, in view of those needs was not, however, established.

134 To the contrary, the defendants were very experienced, successful operators of an extensive farming operation, who made a decision to embark on a highly speculative investment, against their solicitor's express advice, knowing that the plaintiff sought a copy of advice they had obtained from a financial planner. They chose not to take independent advice, despite their accountant's suggestion and were content to rely on Mr Hraiki’s advice. When confronted with the consequences of his fraud, they took steps to deal with their financial situation, by a sale of part of their property. That was the situation they were in, when the Suncorp loan had to be refinanced. In the meantime, they had acquired another property.

135 The evidence does not establish that the plaintiff unconscientiously took advantage of the defendants, in making either loan. Accepting the proposal advanced to it by the defendants in relation to the second loan, gave them the opportunity to overcome their difficulties, by implementing a property development proposal which they had developed. It was thereby agreed to extend the first loan. While the moneys borrowed went to the plaintiff, by way of payment of interest on the first loan, that, of itself cannot result in the unconscionability of which the defendants now complain. While the properties which secured the loan were sufficient to secure the further borrowings, there was no evidence that this was an ill advised proposal, or that there was any lack of business experience which resulted in the failure of this venture, or that it should have been apparent to the plaintiff that the redevelopment would fail. Mrs Croker’s letters to the plaintiff when seeking its continuing support for the further borrowings put this beyond question.

136 There was no evidence called to explain why the defendants' expectations of the property development failed to materialise. That the plaintiff acted unconscionably, or that it ought to have foreseen that the development would fail and therefore ought to have refused to loan the further moneys which the defendants sought of it, was not established.

The defendants' position was not the result of the plaintiff’s conduct

137 The evidence does not leave open the conclusion that the circumstances in which the defendants found themselves was as the result of the plaintiff's unfair conduct, or the unjustness of the impugned contracts. It was rather the result of a number of decisions which the defendants themselves made, when deciding to rely on Mr Hraiki’s advice about the investment strategy which they pursued; to reject other advice which they had received; and finally, on their case, as the result of Mr Hraiki’s alleged fraud and its consequences and the steps which they decided to take to deal with the situation they then found themselves in. There is no question that the defendants were aware that they were making a high risk investment, having been repeatedly warned against taking that risk, by their solicitor. They were prepared to do so because of their confidence in Mr Hraiki and their desire not to sell a property, to repay their $2.1 million Suncorp debt, as they had originally proposed, but to make the substantial returns he promised from a non-farm investment.

138 Those decisions were not the result of any undue influence, unfair pressure, or unfair tactics which the plaintiff or anyone acting on its behalf exerted upon the defendants. If such conduct occurred, it was on the part of Mr Hraiki, not the plaintiff. There was no evidence from which it could be concluded that any fraud on Mr Hraiki’s part could have been foreseen. That was not why the defendants were warned against making the investment by their solicitor. His concern was whether the promised returns could be achieved. In fact, at least for a time, such returns were achieved.

139 It was not the plaintiff’s obligation to protect the defendants from this potential fraud. The evidence did not establish that it could have foreseen what later occurred. Why it was that the Skyder investment failed, was not even explored on the evidence. That the reasons for its eventual failure were matters which the plaintiff, could or should have foreseen or discovered, is impossible to see. The evidence did not even establish, for example, that the information which Skyder provided and which Mr Nolan accepted as to how the defendants' money was to be invested, was false. On their own evidence, they later made other investments with Skyder, with which no difficulty arose and which were repaid. That the $1.6 million investment also made returns, before it failed, suggests that the investment strategy and other information provided by Skyder may not have been false.

140 Nor may it be overlooked that the evidence also established that the Crokers themselves misled the plaintiff from the outset, by not disclosing that they intended to retain $500,000 of the loan for non-income producing purposes. Nor did the defendants disclose that instead of investing $2.4 million in an income producing investment, they only invested $1.6 million, retaining $600,000 for themselves and paying Suncorp $2.3 million, not $2.1 million, or that they had taken on a further $1.1 million in borrowings. This, too, was all relevant to the plaintiff's decision, but was not revealed by the defendants.

141 In those circumstances, it cannot be concluded that the loan contract was unjust. The defendants were represented and advised by their solicitor. The loan was proposed on a basis which was assessed for serviceability. Even though the defendants departed from the proposal with which they approached the plaintiff, the smaller investment made in fact generated returns for over 12 months, sufficient to make the entire loan repayments. Mr Hraiki’s subsequent conduct cannot be sheeted home to the plaintiff. Even Mrs Croker accepted that it, too, had been misled by him. The plaintiff’s failure to detect that the investment would eventually fail for those reasons, does not establish that the contract was unjust.

142 When pressed as to why in all of these circumstances the plaintiff was to be made responsible for the situation in which the defendants found themselves, the submission was:

"Had the bank followed its own guidelines, your Honour, then possibly that would be a difficult argument to contend with. But my proposition that the bank was aware of a risk at a high level the credit committee it took steps to address that risk and its procedures were not followed internally. A junior officer, a lending officer without authority, took it upon himself purportedly to issue satisfaction with the condition which was by no means satisfaction. Had the condition been properly followed then in all probability we submit this loan would not have proceeded and there would have been a proper independent financial analysis of what, on any view, was clearly an unregistered management investment scheme. I haven't put that in the transcript references your Honour but I did put that to Mr McCluskey that he had some awareness of an investment manager scheme and relayed there were 20 or fewer members. He was aware of the proposition.

143 That case may not be accepted. The risk with which the credit committee was concerned with was serviceability, not fraud. It was known that Skyder did not have a financial services license. It was not sought to be established that it was obliged to have one, or that the absence of such a licence of itself made the proposed investment so risky, that the loan ought to have been refused. I am not satisfied that the case so argued was established,

Discretion to grant relief

144 Even if these conclusions be wrong, it is difficult to see how the discretion to grant relief for all that was pressed by the defendants could be exercised in their favour. There was here no indifference on the part of the plaintiff to the purpose of the loan. Its serviceability was assessed and conditions were imposed on the offer, namely that the investment strategy which the defendants had received be provided and that their investment be protected by a particular charge. The defendants were content to rely on Skyder and Mr Hraiki’s advice. Once the loan was advanced, even though the defendants only invested $1.6 million rather than the proposed $2.4 million, the loan was serviced consistently with the plaintiff’s assessment that even if returns of only 15% were achieved on the proposed investment, the borrowings were serviceable. They made other investments with Skyder which did not fail.

145 Whether the $1.6 million investment would have been lost even if the proposed charge had been put in place, before the money was advanced, is not apparent. That the investment would not have been protected from fraud by the charge, is not apparent. What caused the loss was not explored. What happened to Skyder and the money invested with it, is unknown. It was not the defendants' case that it was the failure of the proposed investment strategy, which resulted in the loss of its investment, rather, that it was lost as the result of a fraud.

146 On Mrs Croker’s evidence without the investment return they could themselves have managed interest on borrowings of $3 million. They received an upfront payment of $300,000. Interest on the $4.5 million was calculated at $29,000 per month, so that payment covered some 10 months’ interest. Mr Hraiki also met some interest payments direct for a further period. What was received would have covered a significant proportion of the interest owing on the $1.6 million investment.

147 Still, the defendants pressed orders setting aside the whole of the $1.6 million which they had invested, plus interest, notwithstanding the returns which that investment had achieved. Such relief was simply not warranted.

148 Nor can I see that the failure of the land development venture, which the second loan permitted the defendants to pursue, could result in any discretion exercised in their favour.

Orders

149 For the reasons given, I am satisfied that the relief sought by the defendants in their cross claim must be refused. I order accordingly. The usual order as to costs would be that they follow the event. In the event that the parties are disagreed as to costs, they should approach.

**********

Actions

Download as PDF Download as Word Document

Citations

Banksia Mortgages Limited v Croker [2010] NSWSC 1447

Most Recent Citation

Banksia Mortgages Limited v Croker [2013] NSWSC 270

Cases Citing This Decision

1

Banksia Mortgages Limited v Croker [2013] NSWSC 270

Cases Cited

17

Statutory Material Cited

6

Banksia Mortgages Limited v Croker [2010] NSWSC 1177

Spina v Permanent Custodians Ltd [2009] NSWCA 206

Banksia Mortgages Limited v Croker [2010] NSWSC 883

CITATION:	Banksia Mortgages Limited v Croker and Ors [2010] NSWSC 1447
HEARING DATE(S):	8 June 2010, 21 October, 22 October, 28 October 2010
JUDGMENT DATE :	17 December 2010
JUDGMENT OF:	Schmidt J at 1
DECISION:	Relief sought by the defendants in their cross claim refused. The usual order as to costs would that they follow the event. In the event that the parties are in disagreement as to costs, they should approach.
CATCHWORDS:	CONTRACTS - unjust contracts - mortgage and loan contracts - cross claim - two mortgage loans - disclosed purpose to refinance existing borrowings and to make off farm investment - actual purpose differed in part - failure to disclose changed investment strategy and other alterations in purpose - whether plaintiff was aware or failed to take steps to ensure serviceability of first loan - not established - whether plaintiff failed to follow lending guidelines - not established - whether lender engaged in asset lending -not established - whether defendants were inexperienced - not established - whether defendants were not sophisticated borrowers - not established - whether lender failed to establish false information supplied by alleged fraudster- whether lender was aware of fraudster - whether contract was unjust - section 7 of the Contracts Review Act - not established - defendants' conduct - defendants failed to disclose investment decisions to plaintiff - money borrowed for high risk investment - defendants were legally advised against investment - whether plaintiff acted unconscionably - not established - whether defendants' position was result of plaintiff's conduct - not established - loan contract not unjust - relief sought in cross claim refused - costs
LEGISLATION CITED:	Australian Securities and Investment Commission Act 2001 Civil Procedure Act 2005 Consumer Credit Code Contracts Review Act 1980 Fair Trading Act 1987 Trade Practices Act 1974 (Cth)
CATEGORY:	Principal judgment
CASES CITED:	Banksia Mortgages Limited v Croker and Ors [2010] NSWSC 883 Banksia Mortgages Limited v Croker and Ors [2010] NSWSC 1177 Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413 Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 Kowalczuk v Accom Finance [2008] NSWCA 343 Permanent Trustee Company Ltd v O’Donnell [2009] NSWSC 902 Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41 Perpetual Trustees Victoria Ltd v Longobardi [2009] NSWSC 654 Perpetual Trustee Victoria Ltd v Yap [2010] NSWSC 761 Riz v Perpetual Trustee [2007] NSWSC 115 Rosenberg v Percival [2001] HCA 18; 205 CLR 434 Spina v Permanent Custodians Ltd [2009] NSWCA 206 The Commercial Bank of Australia Limited v Amadio and Anor (1983) 151 CLR 447 West v AGC (Advances) Ltd (1986) 5 NSWLR 610 Tobaji v National Australia Bank Ltd [2009] NSWSC 41
PARTIES:	Banksia Mortgages Limited - Plaintiff/Cross Defendant Leslie William Croker - First Defendant/First Cross Claimant Ruth Christine Corker - Second Defendant/Second Cross Claimant Carigan Pty Limited - Third Defendant/Third Cross Claimant
FILE NUMBER(S):	SC 2009/295278
COUNSEL:	Mr G Lindsay SC with Mr P Bolster - Plaintiff/Cross Defendant Mr J Baird, counsel - Defendants/Cross Claimants
SOLICITORS:	Kell Moore - Plaintiff/Cross Defendant Barraket Ronayne - Defendants/Cross Claimants