Commonwealth Bank of Australia v SA Lending Centre - [2014] SASC 178

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
COMMONWEALTH BANK OF AUSTRALIA v SA LENDING CENTRE & ORS
[2014] SASC 178
Reasons of Judge Dart a Master of the Supreme Court
26 November 2014
MORTGAGES - MORTGAGEE'S REMEDIES - POSSESSION - RIGHTS AND LIABILITIES OF MORTGAGEE IN POSSESSION
Defendant established an entitlement to defend the plaintiff's claim for possession of real property - parties are to file pleadings.
Real Property Act 1886 s 192; Australian Securities and Investments Commission Act 2001 s 12DA(1), s 12GM(2), s 12GM(7); Trade Practices Act 1974 s 52, s 87(2), referred to.
Glandore Pty Ltd v Elders Finance and Investment Co Ltd (1984) 4 FCR 130; Moonta Corporation v Rodgers (1980) 26 SASR 143, applied.
Akron Securities Ltd v Iliffe (1997) 41 NSWLR 353; Harvey v McWatters (1948) 49 SR (NSW) 173; Inglis v Commonwealth Trading Bank of Australia (1972) 126 CLR 161; National Australia Bank Ltd v Zollo & Anor [1992] SASC 3628; Salerno v Saunders & Saunders [1993] SASC 4268, considered.

COMMONWEALTH BANK OF AUSTRALIA v SA LENDING CENTRE & ORS
[2014] SASC 178
JUDGE DART:

The plaintiff is the mortgagee of a number of properties owned by the defendants. It says that the relevant facilities are in default and, accordingly, that it is entitled to possession of the subject land.
The first defendant is the registered proprietor of a property at 151 Murray Street, Gawler. The plaintiff provided a facility to the first defendant in 2005 which was in the amount of $367,500 (“original facility”). The original facility was secured by a mortgage of the property. The plaintiff terminated the original facility on or about 1 May 2013. As at 30 January 2014 the plaintiff says the amount of $651,645.53 was owing.
The second defendant, a director of the first defendant, purchased a property at 50-56 Murray Street, Gawler, in 2008. A one year facility in the amount of $1,060,000.00 was provided by the plaintiff for the purchase (“the second facility”). The intention of the second defendant was to purchase that property, a five storey commercial building, and redevelop it. He was to borrow further funds from the plaintiff to carry out that redevelopment.
The third defendant is the wife of the second defendant and a former director of the first defendant. In 2008 she provided a guarantee in respect of the second facility. In order to secure performance of her obligations as a guarantor, the third defendant provided a mortgage in respect of four other properties. The first defendant was also required by the plaintiff to guarantee the second facility. The mortgage granted to the plaintiff in respect of 151 Murray Street, Gawler, became a mortgage also in respect of the second facility. In that way the plaintiff cross-collateralised all of the facilities provided to the first and second defendants.
The second defendant ordinarily dealt with the plaintiff’s State Manager of Commercial Sales. He referred the second defendant to a loans officer in the plaintiff’s Commercial Sales Division.
At the time the second defendant purchased the property at 50-56 Murray Street, Gawler, he was considering selling a property at Elizabeth Street, Evanston (“Evanston property”). That was a property which he owned and on which he had approval to construct 10 town houses. At about that time the Council zoning requirements changed and it became apparent that the Evanston property was large enough to permit the construction of 20 town houses. A new development application was required.
It had been the intention of the second defendant to sell the Evanston property and simply proceed with the redevelopment of the property at 50-56 Murray Street, Gawler. The second defendant says that the loans officer advised him that he need not do so and that the plaintiff would be in a position to fund both the acquisition and redevelopment of the property at 50-56 Murray Street Gawler and also the construction of the 20 town houses at Evanston. The second defendant also says that he was told by the loans officer that the second facility was for a period of 12 months only because at the expiration of that period he would have the approval for the 20 town houses. The plaintiff would then review the position and provide the finance needed to proceed with both projects.
In the result the plaintiff declined to provide the further funding. The second facility was not renewed when it expired in 2009. It has not been repaid and remains in default.
The first defendant had kept the original facility in order and made all necessary payments. However, because of the cross-collateralisation of facilities, when the second facility went into default, the plaintiff regarded all facilities as being in default and applied an additional default interest component of 4.5 per cent per annum to both facilities. This caused financial difficulties for the defendants and the original facility fell into arrears because of the inability of the first defendant to meet the additional default interest payments.
Simply stated, the position of (at least the second and third) defendants is that the plaintiff engaged in misleading and deceptive conduct in respect of the second facility and that the contract of loan and the mortgage should be set aside. Any order of the Court setting aside the second facility would be conditional upon restitution of, at the very least, the principal amount lent.
The position is not a happy one for any of the litigants. On the plaintiff’s figures, even if it obtained possession of the properties and was able to obtain the expected sale prices, it will suffer a significant shortfall. The parties have conducted a mediation. These reasons were delayed pending the conduct of mediation. The mediation did not resolve the matter.
Summary procedure
A registered mortgagee is entitled to proceed pursuant to Part 17 of the Real Property Act 1886.[1] That Part permits a registered mortgagee, who is able to establish a default, to obtain an order for possession after a summary determination of the matter by the Court.
[1] Section 192.
If a defendant is able to establish an arguable case in opposition to the claim for possession, the matter is not dealt with summarily. The usual practice is to direct the parties file pleadings and have the matter proceed to a trial in the ordinary way.[2]
[2] Moonta Corporation v Rodgers (1980) 26 SASR 143 at 154.
The plaintiff concedes, in respect of the second facility, that the material before the Court establishes an arguable case in respect to a claim of misleading and deceptive conduct. The plaintiff notes that the matter would have to proceed by way of a cross-action but, nonetheless, the second defendant has established an entitlement to go to pleadings and have a trial in the ordinary way in respect of that claim. The third defendant has foreshadowed a “Garcia” defence in the affidavit material filed by her. Again, that should go to pleadings.
That leaves two matters to be resolved by the Court. The first is whether there is any arguable defence or cross-claim by the first defendant in respect of the 2005 facility. The second issue is what conditions, if any, should be imposed upon the defendants in respect of permitting them to defend the plaintiff’s claim.
I will deal with the second issue first.
This is a general rule that where a mortgagor wishes to restraint a mortgagee exercising a power of sale it is necessary to pay into Court the full amount claimed by the mortgagee. The starting point for a discussion of the general rule is invariably the decision of the High Court in Inglis v Commonwealth Trading Bank of Australia.[3]In that case Walsh J said: [4]
In my opinion, the authorities which I have been able to examine establish that for the purposes of the application of the general rule to which I have referred, nothing short of actual payment is regarded as sufficient to extinguish a mortgage debt. If the debt has not been actually paid, the Court will not, at any rate as a general rule, interfere to deprive the mortgagee of the benefit of his security, except upon terms that an equivalent safe guard is provided to him, by means of the plaintiff bringing in an amount sufficient to meet what is claimed by the mortgagee to be due.
[3] (1972) 126 CLR 161.
[4] Inglis v Commonwealth Trading Bank of Australia (1972) 126 CLR 161 at 164.
In the earlier case of Harvey v McWatters[5] Sugerman J referred to the general rule and determined that it applied to a situation where there was no dispute that the mortgagee’s powers were properly exercisable. His Honour said:[6]
The considerations which arise where it is sought to restrain a mortgagee from exercising an undoubted legal power do not appear to arise where the existence of the power is itself the subject matter of the dispute.
[5] (1948) 49 SR (NSW) 173 at 177.
[6] Harvey v McWatters (1948) 49 SR (NSW) 173 at 177.
In Glandore Pty Ltd v Elders Finance and Investment Co Ltd[7] Morling J determined that the matter before him was in the second class of case referred to by Sugerman J in Harvey v McWatters. That is it was a case in which the mortgagee’s entitlement to exercise its powers were called into question. His Honour said: [8]
This being so I am not constrained by authority to acquire the applicants to pay into court the whole amount of the mortgage debt as a condition of obtaining interlocutory relief. Rather I think the proper approach is to mould an order so as to ensure adequate protection to the mortgagee and to otherwise do justice between the parties during the period pending the final hearing.
[7] (1984) 4 FCR 130.
[8] Glandore Pty Ltd v Elders Finance and Investment Co Ltd (1984) 4 FCR 130 at 135.
Each of the three cases mentioned above were dealing with situations where mortgagors were seeking an injunction to prevent a mortgagee from exercising powers of sale. This is not such a case.
In Salerno v Saunders & Saunders[9] this Court considered the issue. Burley J considered the position set out in Glandore Pty Ltd v Elders Finance and Investment Co Ltd. He noted that although that case dealt with an application for an interlocutory injunction to restrain a mortgagee from enforcing a mortgage, the principle was equally applicable where a mortgagor opposes a summary application for possession on the basis that the mortgagor has arguable grounds of defence.[10]
[9] [1993] SASC 4268 (19 November 1993).
[10] Salerno v Saunders & Saunders [1993] SASC 4268 (19 November 1993) at [7].
When a matter is of the second class of case, the conditions upon which a mortgagor is permitted to defend the mortgagee’s claim can be moulded to the particular circumstances.
It should also be noted that in National Australia Bank Ltd v Zollo & Anor[11] Legoe J considered the authorities and accepted that he had a discretion to order payment into court of the full amount claimed by the mortgagee. His Honour declined to do so and declined to make any other formal orders because he felt that there was insufficient material before him to mould an order to do justice between the parties.[12]
[11] [1992] SASC 3628 (22 September 1992).
[12] National Australia Bank Ltd v Zollo & Anor [1992] SASC 3628 (22 September 1992) at [50].
For the reasons that follow, I consider that this is a matter which falls in the second class of cases referred to above. The validity of mortgages given by at least the second and third defendants, and the entitlement of the plaintiff to enforce them, is in issue. There is a discretion to mould an appropriate order to protect both the mortgagor and mortgagee. There were submissions on the topic when the argument was heard. However, I propose to hear further from the parties before finally making such an order.
As discussed above, the second defendant has indicated a desire to pursue a claim for misleading and deceptive conduct against the plaintiff. Such a claim would be pursued by the second defendant, pursuant to the provisions of the Australian Securities and Investments Commission Act 2001[13] (“ASIC Act”) or the Trade Practices Act 1974 (“TPA”) as it then was.[14] Assuming for the purposes of discussion that the second defendant was to succeed in his assertion that, but for the misleading and deceptive conduct of the plaintiff, he would not have entered into the second facility, one then needs to consider what remedies might be available to him.
[13] Section 12DA(1).
[14] Section 52 .
The remedies available under the ASIC Act and the TPA are similar.[15] Broadly stated, where a court finds there was relevant misleading and deceptive conduct the court may set aside the contract entered into by reason of the impugned conduct. A court may, if it sees fit, also declare the contract to have been void ab initio and order a party who engaged in misleading and deceptive conduct to refund money or return property to the party who suffered a loss. The remedial provisions found in the statutes go beyond the remedies available at common law and permit the court to make orders to do complete justice between the parties.[16]
[15] ASIC Act s 12GM(2) and (7); and TPA s 87(2).
[16] Akron Securities Ltd v Iliffe (1997) 41 NSWLR 353.
Assume the court made an order that the second facility, and the mortgages and guarantees given in respect of it, was void ab initio. That would presumably mean:
1The second defendant was never in default with respect to the facility.
2The plaintiff had no entitlement to charge default interest on the second facility.
3Neither the first or third defendants are liable on the guarantees in respect of the second facility.
4The original facility did not go into default in 2009 by reason of the default on the second facility.
5The plaintiff had no entitlement to charge default interest on the original facility.
6The Notice of Dispute and intention to sell served on the first defendant on or about 20 December 2013 significantly overstated the amount due on the original facility.
The plaintiff chose to link the facilities together and put in place cross-guarantees to enhance its security position. The question now is whether it is entitled to untangle that arrangement and treat the original facility as a stand-alone facility in default, such that it is entitled to an immediate order for possession.
It seeks an order for possession because it says it terminated the facility in 2013 and the facility was and remains in default. If the second defendant succeeds in obtaining an order to set aside the second facility as being void ab initio, that would mean the plaintiff was wrong to treat the original facility as being in default in 2009, or subsequently because it had no entitlement to charge default interest. The plaintiff’s decision to terminate the original facility in 2013 and assert that it was in default may have been made on a wrong assumption.
In my view, the justice of the situation requires that the position of all of the facilities and guarantees be dealt with together. It would be an injustice to grant possession at the moment and allow the plaintiff to sell the property at 151 Murray Street, Gawler, only to find later that the account was never in default and that the amount actually owing on that facility was significantly less than claimed by the plaintiff. No injustice will be occasioned by allowing all matters to proceed together. The plaintiff remains protected by its position as a mortgagee.
I decline to make an order for possession in respect of any of the properties. The matter is to go to pleadings.
What is required is a truncated timetable for the filing of pleadings and the making of disclosure, to permit the matter to go to an early trial. I propose to hear the parties further on the question of moulding an appropriate order to ensure that the defendants continue to make appropriate payments in a way that provides justice to both parties.