Commonwealth Bank of Australia v Wales

[2012] NSWSC 407

Supreme Court

New South Wales

Medium Neutral Citation:	Commonwealth Bank of Australia v Wales [2012] NSWSC 407
Hearing dates:	2 April 2012
Decision date:	27 April 2012
Before:	McCallum J
Decision:	Defendant's application to set aside default judgment granted
Catchwords:	MORTGAGES - mortgage securing obligations under a credit contract - where defendant sought to invoke hardship provisions of the National Credit Code - dispute lodged with Financial Ombudsman Service resolved on terms - disagreement as to compliance with terms - default judgment entered without formal notice to defendant - whether default judgment should be set aside to allow defendant to revive dispute
Legislation Cited:	National Consumer Credit Protection Act 2009 (Cth) Uniform Civil Procedure Rules 2005
Cases Cited:	Hamafam Pty Ltd v Saadullah [2007] NSWSC 818 Permanent Custodians Ltd v Upston [2007] NSWSC 223 Pope v Aberdeen Transport Co Pty Ltd [1965] NSW R 1550 Roach v B&W Steel Pty Ltd (1991) 23 NSW LR 110
Category:	Interlocutory applications
Parties:	Commonwealth Bank of Australia (plaintiff) Tracey Marie Wales (defendant)
Representation:	Counsel: A Casseldon (plaintiff) P Batley (defendant) Solicitors:
File Number(s):	2010/417445
Publication restriction:	None

Judgment

1. These are proceedings for possession and judgment in a money sum arising out of a home loan agreement secured by a mortgage. The proceedings were commenced by statement of claim filed on 15 December 2010. On 13 October 2011, default judgment was entered against the defendant, Ms Wales, and on 2 November 2011 a writ of possession was issued.

1. The proceedings came before me as Duty Judge to hear an application by Ms Wales to have the default judgment set aside under r 36.15(1) and alternatively r 36.16(2) of the Uniform Civil Procedure Rules 2005. On 10 April 2012, I ordered that the default judgment be set aside and the writ of possession stayed, reserving my reasons. These are my reasons for making those orders.

1. I should first note that the first order made by me on 10 April 2012 requires correction under r 36.17 (the slip rule). The order made (as sought in the defendant's notice of motion) was that the default judgment entered against the defendant on 21 October 2011 be set aside. It appears from the court file that the default judgment was in fact entered on 13 October 2011. The order is corrected accordingly.

Circumstances in which default judgment was entered

1. On 19 September 2009 Ms Wales mortgaged the property to the plaintiff bank to secure a loan in the sum of $231,790 for the purchase of the property. In the second half of 2010, she encountered difficulty servicing the loan as a result of the loss of her full-time employment as a bookkeeper. As already noted, the statement of claim was filed on 15 December 2010. It was served on Ms Wales on 18 January 2011.

1. On about 28 January 2011, Ms Wales contacted the Financial Ombudsman Service (FOS) for assistance with financial hardship. The role of that body is explained further below. An email from the FOS to the bank (Exhibit 1) recorded Ms Wales's dispute in the following terms:

Dispute summary: I was retrenched from my employment and was unemployed for a period of 6 months. I initially called the bank and spoke to an CS officer (sic) to explain the situation I was in who told me they had been sending mail to an incorrect address. This has since been updated. I understand that my payments have been erratic and came to a decision to gain a tenant and move back to my parents. I am presently in the process of this move, and have now received a statement of claim against me. I have tried to speak with a Rachana on (91518690) who is not willing to compromise. I am now in a position to rectify the problem and would like more time.

1. Shortly after that email was sent to the bank, Ms Wales was contacted by Ms Rachana Oza, a "loss mitigation, collections and consumer services officer" employed by the plaintiff. It was Ms Wales's understanding, following her conversation with Ms Oza, that an agreement had been reached which she recorded as follows:

a.I would have to increase my monthly repayments from the current $1,392.00 per month to $1,632.00 per month for the next three months, being the months of February, March and April of 2011. The amount of $450.00 I had paid to my mortgage on 27 January 2011 could go towards the increased February 2011 payment.

b.If I honoured those increased repayments for three months the bank would then adjust the arrears back to zero and my repayments would be returned to the regular monthly repayment of $1,382.00 per month.

1. Ms Oza subsequently sent a document to Ms Wales headed "resolution and release agreement" which recorded the agreement in slightly different terms, as follows:

Without any admission of liability and to finalise the Complaint the parties agree to the following resolution:

In order to repay the current debt within the 28 years and 1 months remaining of the original 30 year loan term, the loan repayments must be increased to $1632.00 per month.

Commonwealth Bank will accept repayments of $1632.00 per month for loan 834645702. The next repayment is due 23 February 2011 and on the 23rd monthly thereafter.

Repayments will be reviewed after 3 months. If all repayments have been made on time the Bank may adjust the arrears back to zero.

Commonwealth Bank will place the Statement of Claim, served on Tracey Wales, on hold while the repayment arrangement is maintained.

If Tracey Wales fails to maintain these payment arrangements the Bank will pursue possession of the property at 7 Pacific Street Long Jetty NSW in order to recover the full debt.

1. As noted on behalf of Ms Wales the agreement, on either version, reflected little concession to hardship. There was no reduction in the amount of payments and, so it would seem, no extension of the period of the contract. On the contrary, Ms Wales was required to make increased payments for a period of time so as to repay the debt within its original term.

1. Ms Wales understood at that point that she had made a hardship application and was dealing with "the hardship section of the bank". The bank did not consider that to be the case, and would have required her to complete a prescribed form for that purpose. The bank had informed Ms Wales of her right to make a hardship application when it first commenced enforcement proceedings against her the previous year. However, the evidence indicates that Ms Oza did not direct Ms Wales to the bank's designated procedure for considering such an application (or even explain that there was a designated procedure) when Ms Oza contacted Ms Wales in response to the FOS dispute.

1. In the evidence relied upon on behalf of the bank, Ms Oza referred to the resolution agreement set out above as an agreement reached "with the assistance of FOS". Ms Wales disputes that characterisation of the agreement and states that she did not at any stage receive any assistance or indeed speak to anyone from FOS except when she lodged the initial dispute. There is no evidence that the FOS assisted the parties in resolving the dispute, except to the extent that the email to the bank prompted Ms Oza to ring Ms Wales. After agreement was reached, the FOS evidently regarded the dispute as having been resolved without the need for its intervention. I do not think there is any basis for concluding that the resolution agreement was assisted or determined by the FOS.

1. The parties are also in dispute as to whether Ms Wales complied with the resolution agreement. Payments were due on the 23rd day of each month. On Ms Wales's understanding of the agreement, she was required to make the increased payment for three months (February, March and April) and then allowed to revert to the regular repayments of $1,382.00 per month. The first two months' payments were made on time. As to the third, Ms Wales acknowledges that she paid only $940.00 on time. Her further payment was not made until 28 April 2011 (when she paid $1,050.00, resulting in an overpayment for that month). However, Easter and the Anzac Day holiday fell in the intervening period. The date on which the payment was due, 23 April 2011, was Easter Saturday. The second part of the payment was made on the second working day after the Easter break.

1. As set out above, the bank's version of the resolution agreement provided "repayments will be reviewed after three months. If all repayments have been made on time the bank may adjust the arrears back to zero". The bank did not in fact review repayments after three months or make any further contact with Ms Wales until many months later.

1. In accordance with her understanding of the agreement, Ms Wales assumed after April that, having made the three higher repayments, she was entitled to revert to her regular payments. On two occasions, slightly less than the required $1,382 was paid but that was covered by the overpayment in April. On two occasions part of the payment was on time and part was slightly late (one by a week and one by a day). In each such instance a late fee of $20 was debited to the loan account.

1. On 30 September 2011, Ms Oza called Ms Wales complaining that she had not been paying $1,632.00 per month "like you agreed to in the resolution". Ms Oza informed Ms Wales that she would be instructing the bank's solicitors to continue with legal action. Ms Wales disputed that she was in breach of the agreement.

1. The application for default judgment was filed on 12 October 2011 with no further notice to Ms Wales.

Basis for Ms Wales's application

1. As already noted, Ms Wales seeks to invoke the Court's power under either r 36.15(1) or r 36.16(2) of the Uniform Civil Procedure Rules 2005. Rule 36.15(1) provides:

A judgment or order of the court in any proceedings may, on sufficient cause being shown, be set aside by order of the court if the judgment was given or entered, or the order was made, irregularly, illegally or against good faith.

1. Rule 36.16(2) provides:

The court may set aside or vary a judgment or order after it has been entered if:

(a) it is a default judgment (other than a default judgment given in open court), or

(b) it has been given or made in the absence of a party, whether or not the absent party had notice of the relevant hearing or of the application for the judgment or order, or

(c)in the case of proceedings for possession of land, it has been given or made in the absence of a person whom the court has ordered to be added as a defendant, whether or not the absent person had notice of the relevant hearing or of the application for the judgment or order.

1. It was submitted on behalf of Ms Wales that the judgment was entered irregularly or against good faith within the meaning of r 36.15(1) for two reasons. First, the affidavit in support of the motion for default judgment (sworn by Ms Oza) was inaccurate. Secondly, the motion for default judgment was filed without notice to Ms Wales in circumstances where there had been negotiation and agreement to resolve the complaint to the FOS. Separately, Ms Wales relies upon the lack of notice to her, and the consequent loss of any opportunity to avail herself of the remedies provided for under the National Credit Code (schedule 1 to the National Consumer Credit Protection Act 2009 (Cth)), as a basis for setting aside the judgment under r 36.16(2).

Irregularity - errors in the affidavit

1. Ms Oza accepts that her affidavit sworn in support of the application for default judgment was inaccurate. The affidavit stated (falsely) that no payments had been made by Ms Wales since the time of commencement of the proceedings. In fact, Ms Wales had made payments totalling $13,812 during that period. Separately, Ms Wales complains of the fact that the affidavit made no reference to the negotiations held between the parties after commencement of the proceedings resulting in the resolution agreement.

1. The requirements of an affidavit sworn in support of an application for default judgment on a debt are set out in r 16.16 of the Uniform Civil Procedure Rules. I do not think those requirements mandated the inclusion of reference to the negotiations. However, it is an express requirement of the rule that the affidavit state the amount due to the plaintiff as at the time the originating process was filed and provide particulars of any reduction of that amount since that time.

1. Ms Oza's affidavit was inaccurate in that respect. However, the bank contends (and it is not disputed by Ms Wales) that the total amount in which judgment was entered was accurate. It is unfortunate that greater care was not taken in the preparation of the affidavit, particularly where the application was brought without notice to the defendant. However, on balance, I would not have set the default judgment aside on that ground alone, having regard to the fact that the judgment sum was evidently correct.

Absence of notice to Ms Wales

1. Mr Batley, who appeared for Ms Wales, acknowledged that Ms Oza told Ms Wales by telephone that she was proposing to instruct the bank's solicitors "to continue legal action" against Ms Wales. He submitted, however, that in the context of the dealings between the bank and Ms Wales, and particularly noting the fact that Ms Wales had disputed that she was in breach of the resolution agreement, the bank ought to have given written notice of its intention to move the Court for default judgment.

1. In support of the contention that, in the absence of such notice, the judgment was entered against good faith, Mr Batley relied on the decision of the Court of Appeal in Roach v B&W Steel Pty Ltd (1991) 23 NSWLR 110. In that case, the Court upheld the decision of a District Court judge setting aside an order as being "against good faith" where the order had been entered without proper notice to the defendant's solicitor, contrary to an earlier promise or representation made by or on behalf of the plaintiff: at 113G and following. As submitted on behalf of the bank, there was in the present case no promise or representation made by the bank that Ms Wales would be given written notice of any default judgment application. I was not persuaded that the judgment was entered against good faith on that ground in the present case.

1. I concluded, however, that the default judgment should be set aside under r 36.16(2). Although default judgment may be given without notice to the defaulter in accordance with r 16.3(1A), the absence of notice of a party's intention to enter judgment is a relevant consideration: see Pope v Aberdeen Transport Co Pty Ltd [1965] NSWR 1550.

1. As noted on behalf of Ms Wales, the considerations relevant to the exercise of the discretion under rule 36.16 were summarised by Hislop J in Hamafam Pty Ltd v Saadullah [2007] NSWSC 818 at [7] as follows:

(a) whether the defendants have shown a satisfactory explanation for the delay in filing a defence or moving to set aside the judgment;(b) whether the default judgment was obtained without notice to the defendants;(c) whether the proposed defence is asserted bona fide;(d) whether, if the judgment was set aside, prejudice would be occasioned to the plaintiffs;(e) whether the proposed defence presents an arguable or triable issue;(f) whether it would be futile to set aside the judgment.

1. In my view, the only consideration against granting relief in the present case is the absence of a formal defence to the bank's claim. Otherwise, there is a strong case for the relief sought. The circumstances of the dispute and the negotiation of the resolution agreement adequately explain the defendant's delay before judgment was entered. In fact, much of that delay is due to the conduct of the bank in failing to review Ms Wales' payments after three months, despite the terms of the resolution agreement.

1. Telling Ms Wales by telephone that the bank's solicitors would be instructed "to continue legal action" does not amount, in my view, to her being put on notice of the motion for default judgment. Proper notice of that motion would have required that the motion and supporting affidavit be served in accordance with the rules. The default judgment was obtained without notice to her.

1. It was not suggested that prejudice would be occasioned to the bank if the judgment was set aside.

1. It was submitted on behalf of the bank that there is a real question as to futility in the present case, as there is no evidence that Ms Wales will be able to service the loan even if a hardship application is granted. I note, however, that with some insignificant exceptions, she was able to comply with a repayment schedule more draconian than that provided for in under the original loan agreement. There is no reliable basis to apprehend that she would not continue to meet her regular repayments in the future.

Power to set aside default judgment in the absence of a defence

1. I acknowledge that, ordinarily, it will be necessary for a defendant to demonstrate a defence on the merits before default judgment will be set aside. Mr Batley frankly acknowledged that there is none in the present case, and that the entitlement to have a hardship application determined under the National Credit Code does not amount to a defence. The application thus raised a point that, so far as the parties were able to inform me, has not previously arisen in such circumstances.

1. It may be acknowledged that the principal object of the power to set aside default judgment is to allow the defendant to defend the proceedings. However, the existence of a defence is not an express requirement for the exercise of the power. In terms, it is enough to enliven the power that the judgment was entered upon default (other than default judgment given in open court). The power may accordingly be seen as being directed to affording fairness in the processes of the court.

1. Plainly, the discretion must be exercised judicially and in accordance with the dictates of justice. In the novel circumstances raised by the present application, I formed the view that the power to set aside default judgment could properly be exercised notwithstanding the acknowledged absence of a defence.

Entitlement to have a hardship application determined

1. A critical consideration in the present context is the practical relevance of the failure to give notice of the default judgment application. It is undisputed that the loan agreement and mortgage sought to be enforced by the bank are governed by the National Credit Code, which has effect as a law of the Commonwealth (see s 3 of the National Consumer Credit Protection Act). My principal reason for setting aside the default judgment was that the bank's conduct, combined with its failure to put Ms Wales on notice of its motion for default judgment, deprived Ms Wales of the opportunity to avail herself of the remedies provided for in Division 3 of Part 4 of the Code.

National Consumer Credit Protection Act

1. To explain that conclusion, it is appropriate to set out some relevant aspects of the regime imposed by the National Consumer Credit Protection Act. The Act requires that the bank be licensed to provide services as a credit provider. One of the obligations of a licensee is to be a member of an approved external dispute resolution scheme: s 47(1)(i) of the Act. The FOS is one of two such approved schemes.

1. The Code is a schedule to the Act and governs credit contracts, which include loans for personal purposes (such as home loans) and mortgages that secure such loans (see ss 5 and 7 of the Code).

1. Part 4 of the Code deals with changes to obligations under credit contracts. Division 3 of Part 4 creates a series of remedies to effect such changes on grounds of hardship and in the case of unjust transactions. The remedies include applying to the credit provider and applying to the court. In the case of an application to the credit provider, a credit provider who does not agree to the change sought must refer the applicant to its approved external dispute resolution scheme.

1. The terms of reference of the FOS dated 1 January 2010 provide remedies that may be imposed by the FOS in resolving a dispute. Those remedies (set out in clause 9.1 of the terms of reference) include deciding that the bank resolve the dispute by variation of the terms of a credit contract in cases of financial hardship. As the parties informed me, any such decision would have been binding on the bank.

1. Further, clause 13.1 of the terms of reference provides that, where a dispute has been lodged, the financial services provider must not pursue legal proceedings related to debt recovery instituted prior to the lodging of the dispute and, in particular, must not seek judgment in those legal proceedings provided the dispute is lodged before the applicant takes a step in those proceedings beyond lodging a defence or a defence and counter claim. It does not appear to have been determined whether the existence of an unresolved hardship application under the Code would sustain a cross-claim to a claim for possession.

Existence of hardship application and conduct of the bank

1. The bank contends that Ms Wales did not actually make an application to have the terms of the loan contract changed on the grounds of hardship, as contemplated by s 72 of the Code. Whilst that may be technically correct according to the bank's internal procedures, the absence of any formal application was wholly the result of the way in which the bank approached the administration of the Code.

1. Ms Wales lodged a dispute with the FOS, which plainly invoked the language of the hardship provisions. The FOS email to the bank (Exhibit 1) indicates that she did so after unsuccessfully seeking changes to the contract from Ms Oza. Upon receiving notice of the dispute, Ms Oza was prompted to contact Ms Wales but, rather than informing her of the mechanism for making a hardship application, Ms Oza proceeded to negotiate a resolution of the dispute herself. When Ms Wales was contacted by the bank in respect of the complaint, she thought she was dealing with its "hardship section". She received no assistance from the FOS or a lawyer in those negotiations.

1. In those circumstances, it is difficult to see why Ms Wales should be prejudiced by her failure to complete the bank's prescribed form for a hardship application when she was not invited or directed to do so. It is clear to me that, had the bank embraced the principles embodied in the Code rather than treading a careful path around their application, there is at least a reasonable prospect that changes would have been made to the loan agreement, either by agreement, by decision of the FOS or by the Court under s 74 of the Act.

1. Mr Caseldon, who appeared for the bank, further submitted that the time for consideration of any such application has passed with the entry of default judgment, citing Permanent Custodians Ltd v Upston [2007] NSWSC 223 at [97] (a decision dealing with the Consumer Credit Code). To refuse the relief sought on that basis would be a triumph of form over substance.

1. That is not to say that the existence of grounds for an application under s 72 of the Code should always be seen as a basis for setting aside default judgment. On the contrary, as acknowledged in Upston, the entry of judgment should ordinarily be seen as the end-point past which the opportunity for hardship consideration is lost. The critical consideration in the present case is that the defendant endeavoured in good faith to engage the processes contemplated by the Code but was defeated by the bank's passive resistance to those processes, coupled with its decision to move the court for judgment without notice to her.

1. It may well be open to conclude that the judgment was obtained against good faith on that basis. As held in Roach at 114D, a rule in the terms of r 36.15(1) may be satisfied if a party or his legal advisors knew or ought to have known the relevant facts - it is not necessary to find that any individual person was guilty of conduct "against good faith". However, it is enough for present purposes to exercise the power under r 36.16(2). In my view, the considerations to which I have referred afford a proper basis for favourable exercise of the Court's discretion to set aside the default judgment under that rule, even though there is no defence proper to the plaintiff's action.

1. In my view, the bank's approach to the resolution of the dispute duly lodged with the FOS by Ms Wales was calculated to defeat the ameliorative objects of the hardship provisions in the Code. Its approach to resolution of the dispute combined with the absence of notice to Ms Wales of the motion seeking default judgment deprived her of the opportunity to have a hardship application determined by the FOS or the court before judgment was entered. In my view, those circumstances provided sufficient cause to set aside the default judgment under r 36.16(2).

Orders

(1)The default judgment entered against the defendant on 21 October 2011 be set aside.

(2)The writ of possession issued on 2 November 2011 is stayed until 5 pm on Monday, 7 May 2012.

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Decision last updated: 11 May 2012