Commonwealth Bank of Australia v Hocknell

[2012] SASC 52

SUPREME COURT OF SOUTH AUSTRALIA

(Civil)

COMMONWEALTH BANK OF AUSTRALIA  v  HOCKNELL

[2012] SASC 52

Reasons of Judge Lunn a Master of the Supreme Court

29 March 2012

REAL PROPERTY

Mortgages - application under s 74 of National Credit Code to capitalise arrears of interest - criteria to be applied - hardship to mortgagor - objects of Code.

Held: Not sufficient injustice to defendant to justify order on two of the loans and further consideration about a third loan adjourned.

PROCEDURE

Large exhibits to affidavits - documents repeated as exhibits to later affidavits - no reference made to contents of the exhibits in submissions - undesirable practice which should not be repeated.

COMMONWEALTH BANK OF AUSTRALIA  v  HOCKNELL
[2012] SASC 52

JUDGE LUNN:

Reasons on defendant’s application to capitalise arrears

1. This action under Part 17 of the Real Property Act 1886 (“Part 17”) is concerned with the following three loans by the plaintiff to the defendant:

Loan	Original advance	Balance owing at 27.1.12	Property over which loan secured
807	$ 124,800	$ 155,547	Morphett Vale
709	$    52,000	$    57,811	Andamooka
301	$    11,100	$    12,602	Morphett Vale

1. The defendant has given to the plaintiff a mortgage over his property at Andamooka (CT 5267/981) and another mortgage over his property at 3 Catherine Crescent, Morphett Vale (CT 5487/387) to secure repayment of all three loans.

2. Prior to 29 November 2006 the defendant was employed and was duly paying the monthly instalments on all of the loans. On that day he was seriously injured in a motor vehicle accident.  He has not worked since and has been receiving a disability pension.  As a result he has defaulted in making his monthly repayments to the plaintiff.

3. On 2 July 2008 the plaintiff instituted an earlier action (SCCIV-08-916) in this Court against the defendant claiming possession under Part 17 of the Morphett Vale property. On 12 November 2008 a possession order was made and on 22 April 2009 a warrant of possession was issued. That warrant was never executed. In about September 2009 the parties agreed to allow loan 807 to continue as an interest only loan with no monthly repayments of principal. This was a considerable indulgence granted by the plaintiff to the defendant.

4. Since 2006 both the Morphett Vale and the Andamooka properties have been rented out by the defendant.  He has used them as investment properties.  He has resided elsewhere.[1]

   [1]    In his affidavits he gives his residential address as an address in Morphett Vale which is not the Morphett Vale property which is the subject of the mortgage. On what basis he occupies this property was not disclosed.

5. The defendant has an action (DCCIV-09-2167) running in the District Court in which he is claiming damages for his injuries received in the accident on 29 November 2006.  If that claim substantially succeeds, he is likely to be awarded damages of many hundreds of thousands of dollars.  However, the liability issues are not straightforward and there is a defence plea that the defendant (in this action) was intoxicated at the time.  This action has not yet been set down for trial and there is no likelihood of it being resolved in the foreseeable future.  There is no prospect of the defendant having resort to these damages within a reasonable time to pay the present arrears on the three loans.

6. Over recent years there have been considerable dealings between the parties about the arrears on the three loans, but they are not material to what I have to decide.  There is no point in detailing them.

7. In early July 2011 the plaintiff served default notices on the defendant for the arrears as at 30 June 2011 on loan 709 of $4,077, on loan 301 of $365 and on loan 807 of $14,786. While continuing to make many of the normal monthly payments on the loans, the defendant did not comply with these notices or challenge their validity under s 55a of the Law of Property Act or s 88 of the National Credit Code.

8. On 28 October 2011 the plaintiff instituted this action under Part 17 claiming possession of both the Morphett Vale and the Andamooka properties.

9. In about January 2012 the defendant listed the Morphett Vale property for sale with Southgate Real Estate.  There have been three open inspections, but no written offers to purchase it have been received. As at 8 March 2012 the agent anticipated a sale within four weeks (i.e. by 5 April 2012).  The plaintiff has offered to consent to an order being made which would not take effect until after 12 April.

10. As at 24 January 2012 the defendant’s solicitor stated in a letter that there were arrears of $285 on loan 301, of $18,372 on loan 807 and of $12,608 on loan 709.  Hence there has been a significant increase in the arrears on loans 807 and 709 since 30 June 2011, although it is not clear whether some of the increases were attributable to penalty interest and/or enforcement costs.  The defendant claimed in his affidavit that he had kept the payments on loan 709 on the Andamooka property up-to-date, but the other evidence is inconsistent with this.   I do not accept the defendant’s evidence that it has been kept up-to-date.  (I was not referred in argument to any particular parts of the voluminous bank statements which are in evidence on this point and I do not intend myself to calculate the accrual of the arrears from them.  Such bank statements are of no evidentiary value unless they are interpreted for the Court so that it can be readily seen what, if any, arrears have been accruing.  I act on what is in the affidavits and correspondence on the topic.)

11. On 8 February 2012 the defendant’s solicitors wrote to the plaintiff’s solicitors requesting under s 72 of the National Credit Code (“the NCC”) that the plaintiff agree to change the terms of both mortgages to capitalise all the arrears.  By a letter, also of 8 February 2012, the plaintiff’s solicitors refused to agree to this.

12. On 10 February 2012 the defendant took out an application (FDN9) seeking orders under s 74 of the NCC that the arrears be capitalised.  It was agreed that the NCC applies to both mortgages.

13. Sections 72 and 74 of the NCC provide:

    Division 3 – Changes on grounds of hardship and unjust transactions

    72    Changes on grounds of hardship

    General principle

    (1)A debtor who is unable reasonably, because of illness, unemployment or other reasonable cause, to meet the debtor’s obligations under a credit contract and who reasonably expects to be able to discharge the debtor’s obligations if the terms of the contract were changed in a manner set out in subsection (2) may apply to the credit provider for such a change.

    Changes

    (2)An application by a debtor must seek to change the terms of the contract in one of the following ways:

    (a)extending the period of the contract and reducing the amount of each payment due under the contract accordingly (without a change being made to the annual percentage rate or rates);

    (b)postponing during a specified period the dates on which payments are due under the contract (without a change being made to the annual percentage rate or rates);

    (c)extending the period of the contract and postponing during a specified period the dates on which payments are due under the contract (without a change being made to the annual percentage rate or rates).

    …

    74    Changes by court

    (1)If the credit provider does not change the credit contract in accordance with the application, the debtor may apply to the court to change the terms of the credit contract.

    (2)The court may, after allowing the applicant, the credit provider and any guarantor a reasonable opportunity to be heard, by order change the credit contract in a manner set out in section 72, and make such other orders as it thinks fit, or refuse to change the credit contract.

    …

14. There is no reported authority on their meaning or operation.  Section 74 is predicated on the borrower having satisfied the following two conditions for the application of s 72, namely:

    A.The borrower is “unable reasonably, because of … reasonable cause”[2] to meet his obligations under each of the three loans; and

    B.The borrower reasonably expects to be able to discharge his obligations if the proposed changes were made.

    [2]    The argument proceeded on the basis that there was hardship to the defendant. The term “hardship” is not used in the text of s 72 or s 74. It only appears in the heading to Division 3 and s 72. Under s 13 of the Commonwealth Acts Interpretation Act, ss 2(d) the heading to the Division is a part of the Act. However, what needs to be established is “reasonable cause” and not merely hardship.

15. It was not suggested here that the defendant did not satisfy both A and B, and I find that he does.

16. Section 74 confers a broad judicial discretion on the Court whether to change the loan agreements or not.  The discretion is at large and, while the reasonable causes referred to in s 72(1) are obviously to be taken into account, the Court is not limited to them in exercising its discretion, and it is to do so on the whole of the relevant circumstances.  The Court is to give effect to the purpose and objects of the NCC (see its s 5), and is to make a determination which meets the justice of the case.

17. By placing the Morphett Vale property on the market before making his s 74 application, the defendant has acknowledged that there is no benefit for him in continuing to hold the Morphett Vale property as an investment. If the arrears on loans 301 and 807 were capitalised as he proposes, he could take an extended time to get the best possible price for this property provided he continued to make his monthly payments. However, usually in Part 17 cases the court would not give a mortgagor more than about 8-10 weeks to enter into a satisfactory binding contract for the sale of the property which would result in the discharge of the mortgage.

18. The arrears on the two properties have increased over the past eight months.  If, as the defendant says, the rents from the tenants have been applied to pay the mortgage instalments, there should have been no such increase in the arrears.  However, as the defendant admitted in his affidavit of 20 February 2012, he had used some rent “to pay personal family loans”.  Why such loans should take priority to the plaintiff was not explained.

19. The defendant’s statement of his income and expenses in his affidavit shows that his weekly income (including the rents) exceeds his expenses by approximately $338 per week.  Thus, he does not need the rent from the two properties to meet his ordinary living expenses.

20. Most “hardship” cases under the NCC concern depriving mortgagors of their family home.  This is obviously a serious matter and one that should only be allowed where there is no viable alternative reasonably available.  However, that is not the case here.

21. The objects of the NCC in its s 5(1)(b)(i), (ii) and (iii) do extend to loans for investment in residential properties which is now the case here.  It is a much less serious matter to deprive mortgagors of their investment properties than of their own homes.[3]  In the light of the plaintiff’s offer to allow until after 12 April for the defendant to sell the Morphett Vale property, I do not consider there is any significant injustice to the defendant in refusing to capitalize the arrears.  The plaintiff should be entitled to hold the defendant to his bargain as expressed in the terms of the mortgages.

    [3]    And particularly where they do not need the income from the rental properties for their living expenses. (There is no suggestion here there would be any particular prejudice to the tenants of the properties if possession orders were made).

22. As I understood the oral submissions of the plaintiff’s counsel, the plaintiff was now only seeking a possession order over the Morphett Vale property.  He did not press for an order over the Andamooka property at this stage, but said the plaintiff would await any sale of the Morphett Vale property by the defendant to see how much of the net proceeds of sale of that property were applied in reducing loan 709.

23. I have today made the following orders:

    1Application FDN9 refused for loans 807 and 301.

    2Possession order in usual terms for Morphett Vale property, but not to take effect until 14 days after service of the order on the defendant.

    3Further consideration of FDN9 on loan 709 adjourned to Wednesday 30 May 2012 at 9.30am for mention only.

    4Costs reserved.

    Addendum

24. The affidavits filed in respect of FDN 9 regrettably illustrate the increasing trend towards filing voluminous exhibits which do not assist the Court in the resolution of the matter.  They clutter the Court file and make it difficult to handle.  On 8 March 2012 the plaintiff filed an affidavit (FDN12) with exhibits LEP 7, LEP8 and LEP9 which were the bank statements for all of the defendant’s loans with the plaintiff from 2005 until the present time.  They comprised several hundred pages.  The plaintiff’s counsel did not refer to them in his written or oral submissions.

25. On 13 March 2012, which was three business days after the filing, and I presume the service, of FDN12, the defendant filed an affidavit (FDN13).  Exhibited to that affidavit were almost 200 pages of copies of bank statements for the defendant’s loans with the plaintiff.  On a cursory scanning they appear to be the same documents which were already part of the exhibits to FDN12.[4]  The defendant’s counsel made no reference in his submissions to any of these bank statements.

    [4]    Hence their filing was contrary to Practice Direction 3.1.4.

26. Also exhibited to FDN13 were 37 pages of copies of the pleadings in the District Court action.  The current pleadings in that action had already been exhibited to FDN12.  These exhibits to FDN13 also included earlier versions of the Summons, Statement of Claim, Defence and Third Party Statement of Claim which had been superseded.  No reference was made to the superseded pleadings by the defendant’s counsel and they were of no relevance.

27. I give fair warning that if the practice of filing voluminous exhibits to which no reference is made in the course of submissions continues, I will consider striking them out and making appropriate costs orders against the parties filing them.