Circuit Finance Pty Ltd v Glenauchen Pty Ltd No. Scciv-00-285

[2001] SASC 41

CIRCUIT FINANCE PTY LTD v GLENAUCHEN PTY LTD
[2001] SASC 41

Appeal from a Master

1................ DEBELLE J...... This is an appeal from the decision of a Master dismissing the appellant’s application for a stay of a warrant of possession.

1. In December 1998 the appellant borrowed $300,000 from the respondent.  The terms of the loan are expressed in a loan agreement dated 18 December 1998.  The repayment of the loan and interest was secured by a registered mortgage over the land owned by the appellant.  It is memorandum of mortgage number 8605874.  It is the second mortgage.  The principal sum due on the first mortgage is about $1,356,172.

2. The appellant fell into arrears in repaying the respondent the interest on the loan.  The principal was to be paid on 18 December 1999.  It was not paid and has not since been paid.  The respondent served a Notice of Default and Intention to Sell (“the Notice of Default”).  The appellant remained in default.  On 23 March 2000 the respondent applied for an order for possession.  The application was heard on 3 May, 1 June, 5 July and 2 August 2000.  The appellant was not present at the hearing on 3 May.  The Master caused a letter dated 8 May 2000 to be sent to the appellant enclosing a copy of remarks he had made at the hearing on 3 May.  The remarks were in these terms:

   “The plaintiff’s solicitor informs me that his client agrees to an adjournment of four weeks with a view to the matter being resolved without the necessity of an order.  I have indicated to the plaintiff’s solicitor that in view of the interest rates provided for in the schedule for the loan agreement (RFM 3), I would need to be satisfied that a contractual penalty does not exist.  At the moment I think it is arguable that such a penalty may have arisen in circumstances of this case.”

The appellant was present at the hearings on 1 June, 5 July and 2 August.  However, it was not represented by any legal representative.  It was represented by Mr Moore, one of its directors.  On 2 August 2000 an order for possession was made and the order was served on 22 August 2000.

1. On 26 September 2000 a warrant of possession was issued.  Execution of the warrant was postponed upon the appellant agreeing to pay $20,000 to the respondent and a further sum of $30,000 on 27 October 2000.  Execution of the warrant was postponed by the Sheriff until 20 November 2000.

2. On 7 November 2000 the appellant entered into a contract to sell its land to a company called Schutara Pty Ltd (“Schutara”) for $1.8 million.  The contract was to be completed on 12 January 2001.  The contract was subject to several conditions being satisfied by 25 November 2000.  Those conditions related to the remittance of funds to Schutara from third parties.  The appellant informed the respondent of the contract by letter dated 8 November 2000.  On 10 November 2000, Mr McNamara, a director of Schutara, informed the solicitors for the respondent of the contract.

3. The deposit was payable in two amounts.  The first payment was $25,000 payable on the execution of the contract.  The second payment of $100,000 was payable on or before 27 November 2000.  The deposit was not paid.  Schutara agreed to lodge securities totalling $150,000 as the deposit.  That deposit was in fact lodged with the appellant.

4. The contract was not completed on 12 January 2001 because the conditions of the contract relating to the remittance of funds to Schutara from third parties had not been fulfilled.  The respondent decided to enforce its order for possession.  On 22 January 2001 Mr McNamara wrote to the solicitors for the respondent stating that settlement was due to take place on 31 January.  He referred to the fact that his companies were providing finance to Mr Moore in relation to another business transaction.  He offered to purchase the respondent’s mortgage.  The respondent did not accept that offer.

5. On 24 January 2001 the appellant applied for an order staying the execution of the warrant and, in the alternative, that the order for possession be set aside.  The application was heard by a Master on 24 January.  There was evidence before the Master that settlement might take place in the week commencing 29 January or, alternatively, in the week commencing 5 February.  The Master adjourned the application until 9 February, that is to say, until the end of the week commencing 5 February.  As he said in reasons published on 9 February, he was satisfied that a temporary stay should be granted to enable settlement to take place.  He noted that the respondent had not accepted the offer made by Mr McNamara to purchase the mortgage.

6. On 9 February the solicitor for the appellant sought a further adjournment.  The Master refused the application.  The Master noted that settlement had not taken place on the contract for the sale of the respondent’s land.  The Master then heard submissions as to whether the order for possession should be set aside.  He held that there was no basis upon which to set aside the order.  He further held that there was no ground upon which it was appropriate to extend the time within which the appellant might appeal against the order made on 5 August 2000.  The Master dismissed the application to set aside the order for possession and dismissed the application for a stay of the warrant of possession.  From that decision the appellant appeals to this Court.  On 14 February 2001 Olsson J made an order staying the execution of the warrant of possession pending the hearing and determination of this appeal.

7. The notice of appeal contains many grounds.  Some raise questions of law.  Others raise questions of fact which are relevant only to the exercise of the course of discretion whether to grant the stay.  I deal first with the issues of law.

8. One ground of appeal is that the loan agreement is invalid by reason of the provisions of the Credit Act 1984 (Vic). That ground is now abandoned. It is relevant to note also that the appellant concedes, quite correctly, that the provisions of s 55A of the Law of Property Act 1936 do not apply.

9. The first ground of appeal is that, at the date of service of the Notice of Default, the appellant had paid all money due to the respondent.  This ground ignores several facts, the most significant of which is that the respondent had failed to pay the principal sum which was due to be paid on 18 December 1999.  In addition, the appellant was in arrears in payment of interest.  This contention is plainly wrong and must fail.

10. The next ground of appeal is that the respondent has failed to comply with s 132 of the Real Property Act 1886. Section 132 provides:

    “Every mortgage and encumbrance under this Act shall have effect as a security, but shall not operate as a transfer of the land thereby charged and in case default be made in the payment of the principal sum, interest, annuity, or rent-charge, or any part thereof thereby secured, or in the observance of any covenant therein expressed or implied, and such default be continued for the space of one month, or for such other period of time as may therein for that purpose be expressly limited the mortgagee or encumbrancee may give to the mortgagor or encumbrancer notice in writing to pay the money then due or owing on such mortgage or encumbrance, or to observe the covenants therein expressed or implied, as the case may be, and that sale will be effected if such default be continued, or may leave such notice on the mortgaged or encumbered land, or at the usual or last known place of abode in South Australia of the mortgagor or encumbrancer.”

It is contended that the Notice of Default is invalid in that it does not specify and provide particulars of the alleged default and that it does not correctly state the amount due.

1. This ground too is misconceived.  The Notice of Default plainly states the nature of the appellant’s default.  It states that the default lies in the fact that the appellant had “not paid in full to the mortgagee the amount due pursuant to the mortgage”.  As already mentioned, the date for repayment of the principal sum had passed.  That is the default relied on.  The notice correctly states it.  Secondly, the notice clearly states what is required of the appellant to remedy the default.

   “1..... To remedy such default by the payment to the mortgagee of the amount of principal owed in the sum of THREE HUNDRED AND EIGHTEEN THOUSAND NINE HUNDRED AND NINETY DOLLARS ($318,990.00) together with outstanding interest of $29,863.09; and

   2To pay to the mortgagee the further sum of TWO HUNDRED AND FORTY DOLLARS ($240.00) being further costs and expenses incurred by the mortgagee in consequence of your breach of the covenants and conditions pursuant to the mortgage.”

The notice therefore stated the nature of the required remedy, namely, payment of what is outstanding and the amount to be paid.  This attack upon the Notice of Default therefore fails.

1. The next challenge to the Notice of Default asserted that the notice was defective in that it did not allow the appellant one month in which to remedy the default. Reliance was placed on s 132 and s 133 of the Real Property Act. There are at least two answers to the appellant’s contention. The first is that at the date of the Notice of Default the appellant was more than two months in default. Thus, the period of one month referred to in s 132 was satisfied. Secondly, the period of one month specified in s 132 is but one of two possible periods of time. An alternative period may be the period stated in the mortgage. Clause 39 of the mortgage provides:

   “If an Event of Default occurs and continues for the space of 3 days then (subject to compliance by the Mortgagee with the provisions of Section 55a of the Law of Property Act 1936 if applicable) the whole of the Monies Secured shall immediately thereupon become due payable and receivable and the Mortgagee may give to the Mortgagor notice in writing to pay the money then due or owing or to remedy the Event of Default and that sale shall be effected if such Event of Default continues for the further space of 3 days from the date of such notice. If the Event of Default shall be so continued for the said space of 3 days from the date of the giving of such notice the Mortgagee may (subject as aforesaid) exercise its power of sale under this Mortgage.”

The period of three days first referred to in clause 39 is the relevant period and the appellant’s default had accrued for considerably longer than three days. Further, s 133 does not assist the defendant in that the time available to the mortgagor to remedy the default is a period of one month from the Notice of Default “or such other period as may in such instrument be for that purpose limited”. In this case, the Notice of Default specified five days. Clause 39 allowed three days to remedy the default. However viewed, the period given to the appellant to remedy the default was within s 133.

1. The appellant adduced a further argument in support of the contention that the Notice of Default did not comply with s 132. It contended that the notice demanded more than was due and was therefore flawed. Where a default in fact exists, a Notice of Default is not necessarily invalid because it demands more than is due: Bunbury Foods Pty Ltd v National Bank of Australasia Ltd (1984) 153 CLR 491 at 504 and the cases there cited; Websdale v S & JD Investments Pty Ltd (1991) 24 NSWLR 573 at 579; Wongala Holdings Pty Ltd v Mulinglebar Pty Ltd (1994) 6 BPR 13, 527, 13,533. Mr Sallis, who appeared for the appellant, sought to avoid this principle by asserting that it does not apply where the amount said to be due is grossly inaccurate. Whatever may be the force of that argument, the appellant has not adduced any evidence to show that the amount claimed is grossly inadequate. Furthermore, the evidence suggests that the claim for interest is not grossly inaccurate. The appellant was in default in paying both principal and interest. Clause 6 of the loan agreement provides that unpaid interest as at the date of repayment of the principal sum may be added to the principal sum. Given that the appellant was in default in payment of both principal and interest, it cannot be said that the demand to pay $318,990, which is plainly the principal and capitalised interest, is grossly inaccurate. Clause 6 of the loan agreement also provides for payment of interest on the principal sum and capitalised interest. It cannot, therefore, be said that the claim for outstanding interest in the sum of $29,963.09 is grossly inaccurate. As the person applying to invalidate the notice, the appellant must adduce evidence to show that the mortgagee’s calculation of interest is grossly inaccurate. The appellant has not adduced any satisfactory evidence to prove that fact. The submission must therefore fail. There are no grounds, therefore, for holding that the respondent has failed to comply with either s 132 or s 133 of the Real Property Act.

2. There are two further difficulties with the appellant’s contentions.  The first is that an order for possession and for subsequent sale will not be prevented by reason of the fact the amount due to the mortgagee is disputed: Cockell v Bacon (1852) 16 Beav 158; 51 ER 737; Ewart v General Finance Guarantee & Agency Society of Australia (1889) 15 VLR 625 at 631; Armor Coatings (Marketing) Pty Ltd v General Credit (Finance) Pty Ltd (1978) 17 SASR 259. It is incumbent on a mortgagor who seeks to stay an order for possession to pay into court the amount of the mortgage debt if it is not disputed or, if it is disputed, the amount claimed by the mortgagee: Inglis v Commonwealth Trading Bank of Australia (1972) 126 CLR 161 at 164 per Walsh J, whose reasons were upheld by the Full High Court at 168 – 169. The appellant has neither paid into court the amount claimed by the respondent as mortgagor nor offered to pay any part thereof. This was one ground on which the Master relied. It is a factor disentitling the appellant to relief.

3. The other factor is the appellant’s delay in claiming relief from the order for possession. As already noted, the appellant did not attend on the first hearing of the summons seeking the order for possession but it received notice in writing of the tentative view of the Master on the question of interest. The appellant, therefore, had clear notice of a possible defence. The appellant attended on the next three occasions. It is clear that it was content to seek a commercial resolution of the dispute. It continued to maintain that attitude even after the order for possession had been made and even after the warrant of execution had been issued. It was not until 24 January 2001 that it sought to set aside the order for possession and to stay the warrant. The application was prompted by the fact that the respondent’s patience had run out after the date for completion (12 January 2001) had passed. That application was some five months after the order for possession had been made notwithstanding that the appellant had had notice of a potential defence. Expressed another way, the appellant stood by for a period of some eight months after it had notice of a possible defence to the notice and was content to seek to negotiate a commercial resolution. As late as November 2000 until mid-January 2001, the appellant was content to pay the balance due on the mortgage from the proceeds of the sale of its land. In addition, the appellant had paid $40,000 in October 2000 in reduction of its debt to the respondent. The appellant as mortgagor has stood by and not asserted any defect in the Notice of Default. For its part, the respondent as mortgagee would reasonably have believed that the appellant was not asserting any defect in the Notice of Default and that its notice would not be called into question. The appellant deliberately refrained from making any legal challenge when it had notice of a possible defence. Had it asserted invalidity at an early stage, the respondent could have remedied the situation with a fresh notice. Because it has stood by and done nothing, the appellant has placed the respondent in a situation where it would be inequitable and unreasonable to allow it to assert any remedy based on s 132 or s 133 of the Real Property Act:  Orr v Ford (1989) 167 CLR 316 at 341; Websdale v S & JD Investments Pty Ltd (supra) at 581 – 583.

4. The appellant also seeks to invalidate the notice on the ground that the mortgage secures a rate of interest which is a penalty.  The rate of interest charged by the loan agreement and secured by the mortgage was 40 per cent per annum reducing to 20 per cent per annum if the interest was paid on the due date and the appellant was not otherwise in default under the loan agreement.  Again, the appellant’s argument is misconceived and betrays a confusion between the principles which distinguish liquidated damages from high rates of interest which constitute a penalty because they are not a genuine pre-estimate of loss.  Subject to any provision in a statute stipulating rates of interest, the general rule is that there is no restriction on the rate of interest to be charged.  Equity does not reform mortgage transactions merely because they are unreasonable: Knightsbridge Estates Trust Ltd v Byrne [1939] Ch 441, 457; Multiservice Bookbinding Ltd v Marden [1979] Ch 84. It is well settled that a mortgage may provide for a high rate of interest but reduce that rate of interest for punctual payment without it constituting a penalty: Astley v Weldon (1801) 2 Bos & Pul 346 at 353; 126 ER 1318 at 1322. The rule does not sit well with a rule which enables equity to grant relief where there is an agreement to pay a higher rate of interest for non-payment on the due date on the ground that the higher rate of interest constitutes a penalty: Wallingford v Mutual Society (1880) 5 App Cas 685. But as the authors of the Australian edition of Fisher and Lightwood’s Law of Mortgage point out at para 3.17, the two rules are too well entrenched to be altered: see also O’Dea v Allstates Leasing System(WA) Pty Ltd (1993) 152 CLR 359 at 366 – 367; David Securities Pty Ltd v Commonwealth Bank of Australia (1990) 23 FCR 1 at 29, (reversed on other grounds (1992) 175 CLR 353). The appellant’s argument fails on this point also. Furthermore, for the reasons already expressed, the appellant’s conduct in taking no action to challenge the validity of the notice until 24 January 2001 renders it inequitable for it now to seek to rely on this ground.

5. Thus, the appellant fails on all of the legal grounds on which it has sought to set aside the judgment.  There is no ground available to it which would justify an order being made under Rule 84.12.  The appellant sought to rely on the Full Court’s decision in Monte Paschi Australia Ltd v Manno (unreported, Full Court, 15 July 1997, Judgment No. S6251).  But that decision is clearly distinguishable.

6. I turn to the question whether there is any basis in fact for granting a stay.  The appellant relied on the fact that it was anticipated that Schutara would soon complete the contract to buy the appellant’s land.  It submitted that a stay should be ordered until the contract was completed.  The evidence does not give rise to any confidence that the contract will soon be completed.  First, the date for completion has on several occasions passed without settlement occurring.  The first date was 12 January 2001.  Then it was 31 January 2001.  Then it was to be a date in the week commencing 5 February 2001.  The contract is conditional on Schutara seeking funds from third parties.  The evidence shows that those funds are not yet available.  Furthermore, there is no evidence which satisfies me that they will soon be available.  In an affidavit sworn on 22 February 2001, the day of the hearing before me, Mr McNamara said that the funding for this contract had been obtained.  However, his affidavit is silent on the question when the funds would become available.  The best he could proffer was that the relevant documentation to enable the funding to be made “will be available for execution in the next 14 days”.  Mr McNamara is a solicitor and, as he says in his affidavit, he has practised mainly in commercial law.  He would therefore be all too well aware of the need for a prompt and certain completion of this contract if the appellant is to be able to stay the execution of the order for possession.  Plainly, there will not be any prompt settlement.  In addition, there is no certainty.  Mr McNamara has given assurances in the past as to the date of completion but they have not proved to be reliable.  There is nothing certain about his present assurances.  It will have been noticed that Mr McNamara has been careful not to give any date for settlement.  He merely stated that the necessary documentation will be available for execution.  The appellant has failed to adduce any cogent evidence that completion will occur in sufficiently prompt time to justify ordering a stay.  Furthermore, while delay occurs, the liability of the appellant to the first mortgagee increases.  It is already a substantial liability.  Interest is accruing at the rate of approximately $14,000 per month on the first mortgage.  The respondent will, therefore, be prejudiced by the delay.  I am not persuaded that there are any grounds in which to order a stay.

1. For all of these reasons, the appeal will be dismissed.