Commonwealth Bank of Australia v 122 Eileen Ave Pty Ltd, Noel David Borruso, 119 Kiernan St Pty Ltd, 123 Eileen Ave Pty Ltd
[2021] SADC 112
•5 October 2021
DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
COMMONWEALTH BANK OF AUSTRALIA v 122 EILEEN AVE PTY LTD, NOEL DAVID BORRUSO, 119 KIERNAN ST PTY LTD, 123 EILEEN AVE PTY LTD
[2021] SADC 112
Judgment of his Honour Judge Slattery (ex tempore)
5 October 2021
REAL PROPERTY - TORRENS TITLE - MORTGAGES, CHARGES AND ENCUMBRANCES - POWERS AND REMEDIES OF MORTGAGEE - SALE
The first, third and fourth respondents were the corporate trustees of three property investment trusts. The second defendant was the sole director and shareholder of the three corporate trustees and he therefore controlled the business of those trusts.
In 2007, each of the trustees borrowed funds from the applicant in order to develop three parcels of largely broadacre land in the suburbs south of Perth, Western Australia. Each of the borrowers gave mortgages over the subject properties to secure the borrowings made from the applicant. The second respondent gave a guarantee to the applicant separately of each of the borrowings made by those trustee companies.
The borrower corporations each fell into arrears in the payments of the amounts due under the separate mortgages. In time and under the terms of the mortgages, the applicant sold each property as mortgagee. There was then a deficiency in recoveries on sale and the applicant brought recovery proceedings against each borrower and the second respondent.
All of the respondents defended the proceedings and allege that the applicant was aware of servicing difficulties suffered by the borrowers but proceeded anyway and that the applicant breached obligations under s420A Corporations Act 2001 (Cth) as controller of the properties as well as duties of care owed respectively to the respondents in its conduct as mortgagee.
Immediately prior to the first trial date, the respondents sought an adjournment of the trial and an order of the Court for mediation of the dispute between the parties. On that application, both orders were made by the Court and a date was set for the mediation.
The respondents failed to attend the mediation. The respondents have failed to attend the adjourned trial date.
Whether and if so on what basis is, the applicant entitled to an order for solicitor client costs.
Held:
1. The applicant is entitled to orders for payment of outstanding amounts owed by each borrower, corporation and for the total amount owed under the guarantee against the second respondent.
2. The applicant is entitled for an order for solicitor and client costs.
Land Act 1893 (WA) s 106; Corporations Act 2001 (Cth), referred to.
Catto v Hampton [2008] SASC 231; Sheahan v Northern Australia Land and Agency Co Ltd (No 2) SASC Full Court No S 5363; 18 December 1995; Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ACR 397, considered.
COMMONWEALTH BANK OF AUSTRALIA v 122 EILEEN AVE PTY LTD, NOEL DAVID BORRUSO, 119 KIERNAN ST PTY LTD, 123 EILEEN AVE PTY LTD
[2021] SADC 112
The applicant, the Commonwealth Bank of Australia (“the Bank”), brings an action against four respondents: three companies, the first respondent 122 Eileen Ave Pty Ltd, the third respondent 119 Kiernan St Pty Ltd and the fourth respondent 123 Eileen Ave Pty Ltd. The second respondent Noel David Borruso (Borruso) is sued as a guarantor. Borruso is the sole director and shareholder of the three corporate respondents. Each of the three corporate respondents operate as trustees of various property investment trusts. There is no evidence before me about the financial position of these trusts. Implicitly, the businesses of these trusts were wholly involved with the properties that form part of the subject matter of this action.
The claim of the Bank relates to loans provided by it to the three corporate respondents, the performance of which was guaranteed by the second respondent, for development of largely broadacre land in Western Australia from about 2007. The evidence satisfies me that the loans to the three corporate respondents fell into default and arrears. The Bank executed upon its rights under its securities. There were mortgagee sales of property owned by the three corporate respondents purchased through the loans provided by the Bank and that after those mortgagee sales there has been a deficiency in recoveries. I am satisfied that the bank is entitled to a judgment for the balance of the deficiency against each of the three respondents in the relevant amounts relative to the loans to each of those respondents and in respect of the whole debt against the guarantor, Borruso.
The trial of this action was set for 5 October 2021. This was the second occasion on which the action was listed for trial. On the first occasion the corporate respondents and Borruso requested an adjournment to enable a number of matters to be attended to and for there to be a mediation. A mediation was arranged and the respondents did not attend.
The respondents did not attend the hearing of the trial today. An all courts call was made for them at three places in the court building and there was no response. This call was made more than fifteen minutes after the scheduled start time.[1]
[1] R 145.1(2) of the UCR 2020.
At the hearing, the applicant read into evidence three tender book volumes of documents (Exhibit P1) and two affidavits by the solicitor Mr Cheang sworn 10 May 2001 (Exhibit P2) and sworn 5 October 2021 (P3). The applicant also called viva voce evidence from a bank officer, Mr Carlsson.
The judgment set out below reflects the findings made by me based upon the unchallenged evidence before the court.
Each of the respondents in their capacity as the trustees for the various Borruso Property Trusts entered into a consumer credit contract with the Bank and each of these credit contracts are in largely the same terms and each operated largely in the same manner. Under the consumer credit contracts the bank agreed to make loans to each of the corporate respondents in their capacity as trustee subject to the application to these loans of specified interest rates described as an annual percentage rate with a default interest rate. Each of the consumer credit contract schedules set out the amounts of the loans, the amounts of repayments, when the first repayment was due, the frequency of repayments, the period over which repayments were to be made, the number of repayments and the total amount of repayments.
The security under each was generally established under item K of the consumer credit contract which required each borrower to give a registered mortgage over the relevant property in respect of which the loan was provided. Under item HLA of the credit contract, an interest only period was specified; the contract specified that there was to be an interest only period initially for three years and then for payments of principal and interest. Under each contract there was an extension of that interest only period for about five years (from the initial three year period). There was then a time from which interest and principal were to be repaid.
The documents to which I refer in relation to the various matters are now set out in Exhibits P1, P2 and P3. I will make reference to Exhibit P1 which consists of three volumes by referring to tab numbers and page numbers. I will not repeat the detail in relation to each matter under each of the loans. I am satisfied that the arrangements in relation to each of the loans were largely identical. Under each of these loan arrangements the second respondent executed three separate deeds of guarantee in favour of the Bank. This was a requirement of the loan arrangements under the credit contract. Under the guarantees signed by Borruso the amounts secured were described as all of the amounts owing to the applicant Bank by the first, third or the fourth respondent, under the loan agreement between the bank and those borrowers. The guarantees also applied to every future credit contract between the bank and the borrowers.
The amounts owing by the borrowers and which became an obligation under each of the guarantees included interests, costs, fees and charges debited to the borrowers’ accounts and the reasonable costs of enforcing the guarantees. The limit of the guarantee agreement amount is then set out which identifies the amount the bank could demand for payment from the guarantor in respect of each individual borrower under the terms of the credit contracts. Each of the guarantees record that the bank is asked to give credit to the borrower, (being one of the first, third or fourth respondents), and to release any security in relation to the borrowers’ existing credit or refrain from exercising rights. In relation to each of the guarantees, the terms of the guarantee at paras.1.1, 2, 3, 4, 5 and 6 record that Borruso guarantees that the corporate borrower will pay all amounts owing under each guaranteed agreement and the guarantee continues until all those amounts have been paid.
Under the guarantees, Borruso agrees to indemnify the bank and, when requested, to pay for any loss suffered by the bank if the borrower does not pay in accordance with the loan agreement. Similarly, the indemnity obligation in clause 2.1 of the guarantee terminates when the maximum amount is paid. The extent of the liability is the maximum amount specified on the face of the deed of guarantee. Under clauses 5 and 6, the guarantor must pay the bank on demand the reasonable expenses of enforcing the guarantee and for anything which the bank must do under the guarantee.
This is the structure of each of the arrangements made between the borrowers and the bank and the guarantor and the bank.
The loan arrangements between the borrowers and the bank were secured by mortgages over the relevant properties purchased using the funds provided by the Bank. Each of those mortgages was subject to the memorandum of provisions No.J584291 filed and registered at the Department of Land Information, Western Australia. Those terms and conditions are incorporated into the mortgage agreement. Any reference to the mortgage is a reference to those terms. Those terms are set out in Exhibit P1 at Tab 26. In particular, I refer to clause 6 for loan interest, clause 6.2 default interest, clause 8 capitalising unpaid interest fees and charges and the general terms there set out.
These terms that governed the Consumer Credit Contract at 29 August 2007 between the first respondent as trustee for the Borruso Property Trust No.4 and the Bank. The same terms also governed the Deed of Guarantee executed by Borruso in favour of the Bank.[2]
[2] The consumer credit loan statement for the first respondent is Exhibit P1 Tab 57; the common terms of the consumer mortgage is Exhibit P1 Tab 23; the applicable bank statements are in P1 Tab 60; the mortgage security granted to the Bank is Exhibit P1 Tab 25; the mortgage common provisions are in P1 Tab 61; the deed of guarantee given by the second respondent is Exhibit P1 Tab 58.
Under the first loan agreement the bank agreed to and did provide to the first respondent a loan in the amount of $784,000 secured under the terms and conditions of the Consumer Mortgage and the first respondent agreed to repay the first facility to the bank, together with interest under the loan contract.
The first respondent also agreed to pay interest on this facility on a monthly basis at the Bank's investment home loan standard variable rate, less a margin of 0.6% per annum, the total amount of interest being 7.72% per annum. This was described as the first contractual rate and it varied as time progressed. It also agreed to pay monthly expenses incurred in the Bank protecting its rights.
Under the second loan contract, the Bank agreed to provide to the third respondent, 119 Kiernan Street Pty Ltd, a loan amount of $760,000 under the same terms and conditions as in relation to the first respondent. Each of the terms of this credit contract were largely the same, although there was a specific difference in some respects in relation to the applicable interest rates payable upon default of the borrower.[3]
[3] The consumer credit contract for 119 Kiernan Street Pty Ltd, third respondent is in Exhibit P1 Tab 52; the common terms of the consumer mortgage is Exhibit P1 Tab 23; the applicable bank statements are in Exhibit P1 Tab 54; the mortgage security granted to the applicant is Exhibit P1 Tab 56; the mortgage common provisions are in Exhibit P1 Tab 26; the deed of guarantee given by the second respondent is Exhibit P1 Tab 53.
Under a third loan contract, the Bank agreed to provide to the fourth respondent 123 Eileen Avenue Pty Ltd a loan in the amount of $1,020,200 under the same terms and conditions as I have already described. There was an obligation to pay interest in accordance with the terms of the loan facility at the rate of 7.17%, being the applicable rate after taking into account a reduced margin of 0.9%. Consistent with the obligations of the first and second respondents, there was an obligation to pay any expenses reasonably incurred by the applicant Bank in enforcing or protecting its rights as lender under the credit contract.[4]
[4] The consumer credit contract for the fourth respondent is Exhibit P1 Tab 19; the common terms of the consumer mortgage is Exhibit P1 Tab 23; the applicable bank statements are in Exhibit P1 Tab 24; the mortgage security granted to the Bank is in Exhibit P1 Tab 28; the mortgage common provisions are in Exhibit P1 Tab 26; the deed of guarantee is in Exhibit P1 Tabs 20 and 22.
The second defendant Borruso guaranteed each of the obligations of the first, third and fourth defendants under each of the guarantees. The limit of the obligation under the guarantee of Borruso under the first loan contract was in the amount of $784,000. As earlier described, Borruso agreed to pay any amount which the first defendant did not pay to the Bank when due under the first loan contract and he provided an indemnity for any loss suffered.
Borruso guaranteed the obligations of the third respondent up to a limit of $760,000 and also entered into guarantee of the obligations of the fourth defendant up to a limit of $1,020,200, each of which were on the same terms and conditions.
The first defendant defaulted in making payments to the Bank under the loan contract, and on 22 November 2017 the Bank issued to the first respondent a letter of demand requiring payment under the facility. Each of the third and fourth respondents also fell into default on their loans from the applicant. There were demands issued to them in the same fashion as for the first respondent. There was no compliance with the Bank’s demands and on 4 April 2018 the Bank, through its solicitors, issued to the first, third and fourth defendants notices of default, pursuant to s.106 of the transfer of Land Act 1893 (WA), requiring payment of the arrears and enforcement expenses under the first, second and third facilities. The demands made were for outstanding interest and principal then owing upon each loan: there was a demand for $46,194.83 in respect of the first facility, $19,467.69 in respect of the second facility and $22,683.73 in respect of the third facility.
There was no compliance with these notices and therefore the Bank took possession of each of the properties of the first, third and fourth respondents over which the mortgages were registered. Each of those properties were sold by the applicant Bank pursuant to its rights as mortgagee. The proceeds of the sale of these properties were not sufficient to pay out in full each of the facilities. As at 28 January 2020, the date of issue of these proceedings, the sum of $1,148,440.45 was due and owing under the first, second and third loan contracts.
An issue arose during the course of the evidence before me about the contents of the bank statements that record the transactions, debits and credits for each of the three loans. The bank statements, for each loan shows a nil balance.[5] This entry does not reflect the position that there is a nil balance amount or that the borrower’s liability has been discharged. Rather, it shows that there has been a write-off by the Bank of the indebtedness. In this instance,[6] on 23 January 2020, the Bank wrote off the amount of $123,247.28 attributable to the interest component and $459,199.12 in relation to the principal component. After allowance for a balancing figure, there was a closing balance of nil.
[5] Viz Exhibit P1 Tab 24 pp 206.
[6] Viz N5.
In of each of the three loans, the Bank has followed the same procedure. Mr Carlsson said in his evidence, that the usual procedure for the Bank was to ensure that there was a nil balance in the books of account of the Bank. This means that the Bank has treated the loans as being irrecoverable and in effect, each of them has been written off to a nil balance to reflect the actual position of the Bank for tax and accounting purposes.
In recording the balance owing by each debtor prior to the write off of the debt, the Bank separates the amount attributable to interest and principal being written off. The bank statements also show that after the sale of the properties, there were further costs incurred in connection with them related to the handover. The evidence of Mr Carlsson was that these amounts represent costs incurred by the Bank in preparation of the properties for sale. Under the security documents, these are costs claimable by the Bank and are due and payable.
Claims are made under the guarantee against the second respondent: under the first facility, the claim is $320,148.89; under the second facility, the claim is $248,409.92; and under the third facility, the claim is $579,881.64. I am satisfied on the evidence that all of these amounts are due and payable by the second respondent under his guarantee. None of those amounts have been paid. The Bank claims to have suffered loss and damage as a result of these breaches of the loan contracts and the failure of the second respondent to pay under his guarantees. The Bank claims for payment by the respondents of the outstanding amount in full of $1,148,540.45.
The court also received into evidence two affidavits of Mr Gar Sing Gavin Cheang, the first sworn 10 May 2021 (Exhibit P2) and the second sworn 5 October 2021 (Exhibit P3) which record in the main information given to him by the applicant bank. Mr Carlsson gave evidence affirming the accuracy of the contents of these affidavits and I am satisfied that the contents of the affidavits received into evidence as Exhibits P2 and P3 are accurate, credible and truthful. Mr Cheang describes the rates of interest applicable under the credit contracts. The rate is described as the Investment Home Loan Standard Variable Rate. He sets out extracts from the website of the Bank which shows the historical and current Investment Home Loan Standard Variable Rates. At the time of the issue of the second statement of claim on 12 February 2020, the facilities remained as principal and interest loans and the relevant base rate was 5.38% per annum for the period 29 January 2020 to 23 May 2021 and 5.13% per annum thereafter.
Under the credit contracts for the first facility and the second facility the applicable interest rate was the base rate less a margin of 0.6%. However, the bank statements also show that at the time that the second statement of claim was issued, the applicant was calculating interest at the base rate, of less a margin of 0.7%. The interest rate for the third facility was base rate less the margin of 0.9%.
Under the applicable consumer mortgages that are described above, the applicant is entitled to charge default interest of 2% above the applicable interest rate. As a result, the default interest rates for the facilities in the period 29 January 2020 to 23 May 2020 were 6.68% per annum in respect of the first respondent and third respondent and 6.48% in respect of the fourth respondent.
In the period 24 May 2020 to 10 May 2021, the applicable default interest rate was 6.43% in respect of the first respondent and third respondent and 6.23% in respect of the fourth respondent. Mr Carlsson gave evidence that no payments had been made towards either the first, second or third facilities since the second statement of claim has been filed.
The amounts outstanding after taking into account the calculation of interest accrued under the first facility in the sum of $355,144.94, under the second facility the sum of $275,564,05 and under the third facility the sum of $641,312.24 is claimed for payment. The total of these three accounts is $1,272,021.23. Mr Carlsson has also executed a certificate of debt in accordance with the terms of the security documents and it forms part of P3. It is dated 1 October 2021 and in evidence he affirmed the content of the calculations of the debts owed on these loans. The content of those calculations are as follows:
Facility in relation to the First Respondent
From
To
No. of Days
Amount Claimed
Default Interest Rate (for this period)
Interest Accrued
29/01/2020
23/05/2020
116
$320,148.89
6.68%
$6,796.63
From
To
No. of Days
Amount Claimed
Default Interest Rate (for this period)
Interest Accrued
24/05/2020
5/10/2021
500
$320,148.89
6.43%
$28,199.42
Total
$34,996.05
Facility in relation to the Third Respondent
From
To
No. of Days
Amount Claimed
Default Interest Rate (for this period)
Interest Accrued
29/01/2020
23/05/2020
116
$248,409.92
6.68%
$5,273.64
From
To
No. of Days
Amount Claimed
Default Interest Rate (for this period)
Interest Accrued
24/05/2020
5/10/2021
500
$248,409.92
6.43%
$21,880.49
Total
$27,154.13
Facility in relation to the Fourth Respondent
From
To
No. of Days
Amount Claimed
Default Interest Rate (for this period)
Interest Accrued
29/01/2020
23/05/2020
116
$579,881.64
6.48%
$11,942.07
From
To
No. of Days
Amount Claimed
Default Interest Rate (for this period)
Interest Accrued
24/05/2020
05/10/2021
500
$579,881.64
6.23%
$49,488.53
Total
$61,430.60
The amounts claimed in paragraph 36 of the Second Claim plus the interest accrued as set out in paragraph 4 above is as follows:
Facility
Amount Claimed
Interest Accrued
Amount Claimed plus Interest Accrued
First Facility
$320,148.89
$34,996.05
$355,144.94
Second Facility
$248,409.92
$27,154.13
$275,564.05
Third Facility
$579,881.64
$61,430.60
$641,312.24
Total
$1,272,021.23
Following the failure to satisfy the default notices issued to each of the first, third and fourth respondents, the Bank enforced its rights under each of the mortgages over the three properties, having entered into possession and sold as mortgagee-in-possession. In relation to the property at 123 Eileen Avenue, the date of settlement under the sale was 6 January 2020, the sale price was $520,000 and the net proceeds received by the Bank was $490,794.77. Taking into account the balance due by the borrower immediately prior to settlement in the amount of $1,058,835, the balance owing to the Bank after settlement of the property secured by the mortgage was $568,085.23. For the property at 122 Eileen Street, the date of settlement was 5 April 2019, the sale price was $565,000 and the net proceeds received were $540,259.62. The balance owing by the borrower immediately prior to settlement was $833,194.37 and therefore the balance owing to the Bank after settlement was $292,934.72. For the property at 119 Kiernan Street, the settlement was 14 November 2019, the sale price was $560,000 and the net proceeds received by the Bank was $532,763.83. The balance owing by the borrower immediately prior to settlement was $779,239.40 and the balance owing after settlement is $246,475.57.
Under clause 6.2 and clause HL5.4 of the conditions of the credit contracts, each of the outstanding debts continued to incur interest for so long as those debts remain outstanding. Interest has continued to accrue on the amounts set out in the claim. I am satisfied on the evidence that for the 123 Eileen Avenue property, the amount outstanding is $641,312.24, for the 122 Eileen Street property, the amount outstanding is $355,144.94; and for the Kiernan Street property, the amount outstanding is $275,564.05. Demands have been made for payment and these demands have not been met.
The respondents filed defences on these proceedings and alleged that at the time of the loans or very soon afterwards, the Bank was aware that the respondent corporations could not service their borrowing debts and yet it continued to offer credit arrangements to them. The legal or equitable basis of that defence is unclear. It appears to be the genesis of a breach of duty plea. It is also alleged that the Bank breached obligations as a property controller under s 420A Corporations Act 2001 (Cth). Finally, it is alleged that the Bank failed to take reasonable care as mortgagee in the sale of the three secured properties.
The respondents did not attend the trial date and time set for this claim and the Bank proceeded in their absence. In my view, each of these defences is meritless.
I make the following orders:
1.Judgment against the first respondent in the amount of $355,144.94.
2.The first respondent pay interest on any unpaid portion of the judgment sum set out in para.1 above, calculated at 2% above the applicant’s investment home loan standard variable rate less 0.7% from 6 October 2021 until the judgment sum is paid in full.
3.Judgment against the third respondent in the sum of $275, 564.05.
4.The third respondent pay interest on any unpaid portion of the judgment sum set out in para.3 above calculated at 2% above the applicant's investment home loan standard variable rate less 0.7% from 6 October 2021 until the judgment sum is paid in full.
5.Judgment against the fourth respondent in the amount of $641,312.24.
6.Fourth respondent pay interest on any unpaid portion of the judgment sum set out in para.5 above calculated at 2% above the applicant's investment home loan standard variable rate less 0.9% from 6 October 2021 until the judgment sum is paid in full.
7.Judgment against the second respondent in the amount of $1,272,021.23.
8.The second respondent to pay interest on any unpaid portion of the judgment sum set out in para.7 above calculated at 2% above the applicant's investment home loan standard variable rate less 0.9% from 6 October 2021 until the judgment sum is paid in full.
I turn to the question of costs. The application of the applicant is for costs to be taxed or agreed on a solicitor and own client basis.
The Bank has an entitlement to be paid its costs that are reasonably incurred. The Bank argues that all of the costs which it has expensed were reasonably incurred and it is entitled to an order that costs be paid on a solicitor and client basis. It relies upon the decision in Catto v Hampton.[7] In my view the question of amounts or costs reasonably incurred require the insertion of value judgments in relation to what is reasonable.
[7] [2008] SASC 231.
The issue of costs necessarily or reasonably incurred and in a reasonable amount is generally associated with the language connected with the assessment of costs on an indemnity basis or alternatively on a solicitor and client basis. Such discussion usually follows an order by the court that such an order should be made following the application of well settled authority. These security documents on which the Bank relies raise a different question to a degree because they require an assessment first of reasonableness. That is a very broad enquiry especially if contested. For present purposes there is no evidence before me precisely on point although a court will often be inclined to form some value judgments of the behaviour of a litigant depending on the state of the action. However, I will leave that to one side because in this matter I consider that the common law rules in relation to the appropriate circumstances in which solicitor/client costs should be awarded are applicable.[8]
[8] Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397; Sheahan v Northern Australia Land and Agency Co. Ltd (No 2) SASC Full Court No S 5363; 18 December 1995.
The respondents each filed a defence and put the Bank to proof in relation to its claims; that was their right as litigants. The Bank has pursued its claims and has efficiently brought this matter to its conclusion before me today. None of the respondents have appeared. A mediation was arranged, and this was the basis for an earlier application for the adjournment of the first trial date before this Court. The Court treated this request of all of the respondents as genuine; as matters transpired that was not the case. There was no appearance at the mediation by any of the respondents and this was contumacious behaviour because the court had ordered the delay of the trial following the defendant’s request connected with their decision to resolve the matter by mediation. This was obviously a ruse and an abuse of the process of the court due to their failure to attend the mediation. Then, their failure to attend this trial is consistent with the contumacy displayed by the failure to attend the mediation.
In my view an inference clearly arises on all of the evidence that the respondents have not genuinely defended these proceedings and that the conduct of the respondents which I have earlier described as an abuse of process in all of the circumstances brings this matter within circumstances where, at common law it is appropriate to make an order in favour of the applicant Bank for solicitor/client costs. The respondents have misused the court proceedings for their own benefit to put off the inevitable and have put the Bank to trouble, expense, and unnecessary costs in the conduct of these proceedings. In those circumstances I am satisfied that by the terms of the agreement and in any event at common law it is appropriate to make an order for solicitor/client costs.
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