Haynes v St George Bank - [2018] SASCFC 51

SUPREME COURT OF SOUTH AUSTRALIA
(Full Court)
HAYNES v ST GEORGE BANK A DIVISION OF WESTPAC BANKING CORPORATION; HAYNES v WESTPAC BANKING CORPORATION
[2018] SASCFC 51
Judgment of The Full Court
(The Honourable Chief Justice Kourakis, The Honourable Justice Blue and The Honourable Justice Doyle)
12 June 2018
APPEAL AND NEW TRIAL - APPEAL - PRACTICE AND PROCEDURE - SOUTH AUSTRALIA
BANKING AND FINANCE - BANKS - BANK ACCOUNTS - INTEREST, OVERDRAFTS AND ADVANCES
BANKING AND FINANCE - BANKS - LIABILITIES OF BANKS - NEGLIGENCE
MORTGAGES - MORTGAGES AND CHARGES GENERALLY - RIGHTS AND LIABILITIES OF MORTGAGOR AND MORTGAGEE
BANKING AND FINANCE - BANKS - DUTIES OF BANKS
Appeal against two judgments given in trials of related actions which were heard concurrently by a Judge of this Court.
The first of the actions (the debt action) was brought by Westpac Banking Corporation (Westpac) against Mr Haynes for an amount in excess of $1,300,000 due and payable pursuant to an overdrawn portfolio loan account and two fully drawn advances (together the loans). The loans were made by Bank SA but it was common ground that all rights and liabilities of that entity relevant to the transaction with Mr Haynes were ultimately vested in Westpac. The Judge allowed this claim subject to the amount due and payable being adjusted.
The second action was a claim by Mr Haynes against the Bank for damages for breach of a term of the loan agreements which incorporated clause 25.1 of the Code of Banking Practice 2004 (the prudential obligation claim). The Judge dismissed this claim.
Held, per Kourakis CJ (Blue and Doyle JJ agreeing):
1. The Bank was not entitled to rely on the business purpose presumption and Mr Haynes had the benefit of the averment presumption (at [57]). Nonetheless, the Judge’s reasons are equally apt to make, and support, a positive finding that the credit was not provided wholly or predominantly for personal, domestic or household purposes (at [60]). In so far as it is an objective assessment of the purpose of the loan, the Judge’s conclusion is correct (at [65]).
2. There is no inconsistent objective evidence or glaring improbability which demands that this Court reverse the factual finding made regarding the factoring in of potential rental income from the St Peters home in calculating the CCR (at [82]).
3. The Bank did not breach its prudential obligations by relying on a 2007 valuation of Mr Haynes' St Peters home (at [79]).
4. The Bank did not breach its prudential obligation by taking into account potential income of Mr Haynes' partner Ms Ward (at [13] and [88]).
5. The Judge’s ultimate conclusions on whether a prudent banker would have made the loan are plainly right (at [92]).
6. Appeal dismissed (at [92]).
Code of Banking Practice 2004 Cl 25.1; Consumer Credit (SA) Act 1995 (SA) S 5, Sch 1; Credit (Transitional Arrangements) Act 2010 (SA); National Consumer Credit Act 2009 (Cth) Sch 1 S 5(1)(b)(i); Consumer Credit Code (Qld) Act 1994 (Qld), referred to.
Shakespeare Haney Securities Limited v Crawford [2009] 2 Qd R 156, applied.
Linkenholt Pty Ltd v Quirk [2000] VSC 166; Doggett v Sullivan (2015) 47 VR 302; Commonwealth Bank of Australia v Doggett [2014] VSC 423, discussed.

HAYNES v ST GEORGE BANK A DIVISION OF WESTPAC BANKING CORPORATION; HAYNES v WESTPAC BANKING CORPORATION
[2018] SASCFC 51
Full Court: Kourakis CJ, Blue and Doyle JJ
KOURAKIS CJ.
Introduction

Mr Jonathan Haynes appeals against two judgments given in trials of related actions which were heard concurrently. The first of the actions (the debt action) was brought by Westpac Banking Corporation (Westpac) against Mr Haynes for an amount in excess of $1,300,000 due and payable pursuant to an overdrawn portfolio loan account and two fully drawn advances (together the loans and loan agreements). The loans were made by Bank SA but it was common ground that all rights and liabilities of that entity relevant to the transaction with Mr Haynes were ultimately vested in Westpac. I will follow the Judge’s approach and refer to the related corporations Westpac, Bank SA and St George Bank jointly as ‘the Bank’. The second action was a claim by Mr Haynes against the Bank for damages for breach of a term of the loan agreements which incorporated clause 25.1 of the Code of Banking Practice 2004 (the prudential obligation). I will refer to Mr Haynes’ claim as the prudential obligation claim.
Mr Haynes is a land agent and real estate developer. His business activities were supported by loan finance of about $7,800,000 provided by the National Australia Bank (NAB). In 2007 Mr Haynes decided to move some of his debt from NAB to Bank SA. The Bank provided credit in the form of the portfolio loan account[1] with a limit of $1,700,000. Mr Haynes undertook some property developments on his own. Others were undertaken together with his romantic partner, Ms Linda Ward. The portfolio loan account was secured by a number of real property assets including Mr Haynes’ residence in St Peters (the St Peters home). By October 2009, the original credit limit on the portfolio loan account had been reduced to $912,000 and the only real property remaining as security was Mr Haynes’ St Peters home.
[1] A portfolio loan operates effectively as an overdraft facility that (subject to conditions) permits the customer to deposit and redraw funds at their convenience provided the credit limit is not exceeded.
On 24 January 2009, Mr Haynes entered into an unconditional contract to purchase a 14.5 acre property in Longwood (the Longwood property) for $850,000 with a settlement date fixed for 19 October 2009. There were two residential buildings on the Longwood property but it was also used as a flower farm. Substantial areas were planted out with bulbs and green foliage commonly used by florists.
Mr Haynes testified that the vendors of the Longwood property had represented to him that it was the largest source of daffodils in the South Australian market with one million daffodil bulbs in the ground. Mr Haynes testified that he stipulated for settlement on 19 October 2009 so that he could see the spring stocks come through before he settled on the contract.
Mr Haynes had not arranged any finance for the purchase of the Longwood property before signing the contract. He first sought an extension of the portfolio loan account to allow him to settle on the Longwood property in April 2009. On 9 October 2009 the Bank made a formal offer to Mr Haynes to increase the credit limit on the portfolio loan account to $1,790,000 on condition that the Longwood property was added as a security. The Judge described the expectations underpinning the offer as follows:
[10]In broad terms, it was Mr Haynes’ expectation, shared by the Bank, that the St Peters property would sell, and sell easily, for approximately $1,600,000. The proceeds of sale were to be used to reduce the portfolio loan account debit balance to something in the order of $190,000. According to Mr Haynes, this would be a manageable mortgage bearing in mind his intended retirement from active real estate agency and property development work and his plans to take advantage of the flower farm opportunity at Longwood.
…
[12]The extended facility, on the terms granted, did not have the characteristics of the Bank’s standard bridging loan facility. Nevertheless, it was the intention of both parties from the outset that it was only to be a short term facility to enable settlement of the Longwood property to take place before steps had to be taken to enable St Peters to be sold and the portfolio loan account balance substantially reduced in accordance with Mr Haynes’ retirement plan. At first blush, given: that the Bank held a valuation of St Peters of $1,600,000 prepared by one of its panel valuers in October 2007; Mr Haynes’ confidence as an experienced real estate agent that such a price would easily be obtained;[2] and the apparent value of Longwood, a credit limit of $1,790,000 presented to both parties as relatively low risk. Unfortunately, this did not prove to be the case.
[2] In 2007, Mr Haynes himself had obtained two real estate valuer appraisals, one at $1.64 million to $1.8 million and another at $1.875 million.
Mr Haynes’ St Peters home did not sell as quickly as expected. In March 2010 Mr Haynes secured an additional fully drawn advance of $50,000, rising to $130,000 in January 2011 to make improvements on the St Peters home in order to achieve a sale. The St Peters home did not sell until July 2012 and then sold for only $1,040,000. In the period from the draw-down on the portfolio loan account and the sale of St Peters, Mr Haynes was unable to fully service his facilities and his interest expense increased significantly.
The Bank issued a notice of default on 14 July 2014 for an amount of $1,256,913.60. Mr Haynes did not meet that demand. As a result the Longwood property was sold in August 2015, at a significant capital loss, for $760,000. The net proceeds of sale were applied by the Bank to reducing the balance outstanding on the portfolio loan account.
Judgment was entered in favour of the Bank in the debt action for the sum of $1,370,787.56.[3] Mr Haynes appeals against that judgment on the single ground that in addition to the outstanding debt it wrongly awards the Bank its costs of enforcing the loan agreements on an indemnity basis. The Bank’s claim for indemnity costs was made pursuant to clause 17 of the memorandum of mortgage over the St Peters home which secured the loans to Mr Haynes. It was common ground that the Bank was entitled to its costs on an indemnity basis in accordance with that clause unless it was ‘displaced’ by a Consumer Credit Code provision. The Uniform Consumer Credit Code (the UCCC) was such a provision which had statutory force in South Australia by operation of s 5 of the Consumer Credit (SA) Act 1995 (SA).[4] That provision adopted s 5 of the NCC which is also contained in Appendix 1 to the (since repealed) Consumer Credit Code (Qld) Act 1994 (Qld).[5] Section 6 of the UCCC provides that it applies to a credit contract if at the time the credit contract is entered into the credit is provided, or intended to be provided, ‘wholly or predominately for personal, domestic or household purposes’.[6]
[3]    The judgment sum includes amounts, agreed as to quantum by the parties, for interest and costs.
[4]    The Consumer Credit (SA) Act 1995 (SA) ceased operation on 30 June 2010 and was repealed on 1 July 2010 by the force of the Credit (Transitional Arrangements) Act 2010 (SA). The UCCC was replaced by the National Consumer Credit Protection Act 2009 (Cth) on 15 December 2009. Schedule 1 of that Act provides for the National Credit Code (NCC), which effectively replaced the UCCC from 1 April 2010.
[5]    The Consumer Credit Code (Qld) Act 1994 (Qld) was repealed on 1 July 2010.
[6] A similar provision can be found in sch 1, s 5(1)(b)(i) of the National Consumer Credit Protection Act 2009 (Cth).
The Judge found that prior to the settlement on the Longwood property Mr Haynes intended to conduct a flower producing business on it. The Judge accepted that Mr Haynes also had a domestic or household purpose in borrowing to purchase the Longwood property, but found that the substance and the reality of the loan transaction was to enable Mr Haynes to cease and withdraw from his real estate agency and development work and take up flower farming instead. The Judge’s findings are largely based on his assessment of Mr Haynes’ testimony. They are supported by Mr Haynes’ testimony that he stipulated for an October settlement so that he could see the spring stocks come through and by his tax return. The Judge’s findings, in so far as they are based on Mr Haynes’ subjective state of mind, are neither glaringly improbable nor inconsistent with objective facts. In so far as they are based on objective or undisputed facts the inferences were properly drawn. Mr Haynes has not shown operative error in the Judge’s reasoning or conclusion. I would dismiss Mr Haynes’ appeal against that part of the judgment in the debt action. I elaborate on my reasons below.
On his prudential obligation claim, Mr Haynes contended that if the Bank had acted prudently it would not have extended the portfolio loan account to allow him to settle on the Longwood property causing him to default on its purchase. Mr Haynes’ case was that he would not then have suffered capital and accumulated interest losses on the sale of his St Peters home and the Longwood property.
The Judge dismissed Mr Haynes’ prudential obligation claim because he found that the Bank had properly assessed Mr Haynes’ capacity to repay the loans. The Judge also dismissed the prudential obligation claim because he found that even if the Bank had declined to extend the portfolio loan account Mr Haynes had not proved that he would not have obtained alternative finance and would not have settled on the Longwood property. Accordingly he was not satisfied that Mr Haynes had shown that the loans made by the Bank caused him any loss. Mr Haynes appeals against the dismissal of his prudential obligation claim on the grounds that the Bank imprudently took into account:
(a)rental income that might be derived from Mr Haynes’ St Peters home in the event that its sale were delayed; and
(b)the income of Mr Haynes’ business and romantic partner Ms Ward in assessing his capacity to repay the loan.
There is no complaint that the Bank breached the prudential obligation clause in its assessment of Mr Haynes’ long term capacity to repay his loans once they had been paid down with the equity realised on the sale of the St Peters house. The issue relating to the rental income from the St Peters home is whether the Bank wrongly took into account the rent that Mr Haynes might have obtained from tenanting it during any extended sales period. The Judge found that in taking into account the potential rent, the Bank relied on Mr Haynes’ assurance that he could secure that rental income stream in the event that the St Peters house did not sell quickly. Moreover the bank officers called by the Bank, and an independent banking expert called by Mr Haynes, agreed that it was not imprudent for the Bank to have done so. The finding is therefore supported by the weight of the evidence and that ground must be dismissed. I elaborate on my reasons below.
The claim that the Bank was imprudent because it took into account Ms Ward’s income was not made at trial. In any event there is no evidence that the Bank did take into account Ms Ward’s income in assessing Mr Haynes’ capacity to service the loan. Mr Haynes accepted on appeal that if the Bank properly had regard to the rental from his St Peters home, the income to interest ratios allowed for the loan to be made consistently with the Bank’s prudential obligation even without taking into account Ms Ward’s income. Therefore this ground of appeal too must be dismissed. I elaborate on my reasons below.
As I earlier observed, the Judge also dismissed Mr Haynes’ claim against the Bank on the ground that he had not proven that the making of the loan caused him loss. Mr Haynes entered into the contract for the Longwood property well before securing an increase in the credit limit on the portfolio loan account, and indeed even before he had sought it. Nonetheless Mr Haynes testified that he would have defaulted on the purchase of the Longwood property if the Bank had declined to extend his portfolio loan account even though he would, in that event, have been liable to a claim in damages for breach on the suit of the vendor. The Judge disbelieved Mr Haynes’ evidence to that effect. The Judge found on the evidence of the Bank’s officers, corroborated as it was in this respect by the banking expert called by Mr Haynes, that if Mr Haynes had sought bridging finance rather than an extension of his portfolio loan account, it would have fallen within the Bank’s bridging finance lending criteria and would have been granted. The Judge found that Mr Haynes was committed to the purchase of the Longwood property and would have taken all necessary measures, including accepting bridging finance, to settle on it. Accordingly the Judge found that, even if the Bank had breached the prudential obligation clause by making the advance by extending the portfolio loan account, that breach was not a cause of Mr Haynes’ losses on the Longwood property transaction.
Mr Haynes has not appealed against that finding. The Bank contends that on that finding Mr Haynes’ appeal against the Judge’s findings on liability is futile. Strictly that is so. Even if the Bank did breach the prudential obligation clause, Mr Haynes was left in no worse position than he would have been if the clause were not breached, because he would have taken alternative finance to settle on the Longwood property. Mr Haynes did not put a case that any of those alternative finance options would have saved him from any of the loss he has suffered. Notwithstanding Mr Haynes’ failure to even attempt to clear this final hurdle, I will address Mr Haynes’ appeal against the Judge’s findings that the Bank did not breach the prudential obligation clause.
The Evidence
The Judge found Mr Haynes to be an intelligent and shrewd man. The Judge formed a poor view of his reliability and, ultimately, his credibility during cross‑examination. The Judge was left with the firm impression that Mr Haynes had schooled himself on certain topics which he repeatedly wished to impress upon the Court. The Judge found some of Mr Haynes’ evidence dishonest, particularly on the topics of the leasing of the Longwood property to his company, Performa Real Estate Pty Ltd (Performa), his income tax returns and his evidence concerning how he would have behaved if the Bank had obtained an updated valuation of his St Peters home lower than $1,600,000.
The Judge found that Ms Ward’s evidence was of no assistance in corroborating Mr Haynes’ evidence.
The Judge described Mr Robert Birt, a former senior bank manager with BankSA, called by Mr Haynes as a banking expert, as argumentative and dogmatic.
The officer of the Bank who dealt directly with Mr Haynes was Mr Christopher Pole. Mr Pole was primarily responsible for assessing and recommending the approval of Mr Haynes’ application to extend the portfolio loan account credit limit. Mr Paul Davy held the position of Executive Manager, Risk and Compliance. The Judge found both Mr Pole and Mr Davy to be honest and reliable witnesses.
At a chance meeting with Mr Pole in mid-2007, Mr Pole suggested that Mr Haynes transfer some of his business to BankSA. Later in 2007 he then refinanced a proportion of Mr Haynes’ NAB facilities with the Bank by taking out a portfolio loan with a credit limit of $1,700,000. At the time Mr Haynes was receiving very little by way of agency sales commissions. Mr Haynes’ income was largely from property developments, including some undertaken with Ms Ward. Mr Haynes derived rental income from some of his development properties. The rentals spreadsheet provided by Mr Haynes to the Bank on 5 June 2007 identified a very substantial shortfall in rental incomes against his expected interest commitments because the rental properties were negatively geared. However the rental shortfall was balanced by expected profits from the sale of developments.
The Judge accepted that Mr Haynes was a good customer of the Bank until October 2009 and found that Mr Pole and Mr Davy had no reason to be concerned about his financial position.

Mr Haynes first spoke to Mr Pole about the Bank financing the Longwood purchase on 23 April 2009 in a meeting at which Ms Ward was also present. Mr Pole made the following note of the meeting, which was described by the Judge as the most reliable account of it:
Met with Jon and Linda today to outline our confirmation of their recent request to release one of Linda’s security properties and apply part proceeds from settlement thereof to her Portfolio Loan.
…
They also advised me of the following:
1....
2....
3.Jon is selling North Street property in July and also intends to place McGregor Close on the market with us to receive full proceeds.
4.Jon has signed a contract to purchase Longwood property for $850,000 plus costs, which he will fund from the sale of North Street, McGregor Close and intends to borrow funds from us to assist. Also proposes to place his Player Court, St Peters property on the market for around $1.7 million following which he plans to extinguish all debt with us.
Mr Haynes first made a written request for finance on the Longwood property by email dated 24 April 2009 addressed to Mr Pole ‘from Performa Real Estate’:
…
JON
The updated valuation on 3a McGregor shows an increase of $30,000. The unconditional contract for the sale of 5/10 North St. Adelaide is for $390,000, an increase of $70,000 from your current valuation for security purposes. Together this increases the security held by the bank by $100,000. Would you please now release the term deposit held in my name for $57,566.56. I am not requesting any increase in facility. The property located at 3a McGregor Close will be on the market within 30 days; anticipated selling price $440,000. As per our discussions, I have contracted at $850,000 for the purchase of a property at Longwood. I will be seeking funding for this purchase to be approved upon the sale of McGregor Close, with a settlement in October of this year.
The Judge described Mr Haynes’ plan for the purchase of the Longwood property as follows:
[135]Mr Haynes’ plan as at April 2009 was a very simple one – the two investment properties once sold would, in effect, fund the Longwood purchase with St Peters then to be sold in order to extinguish all or nearly all debt. In broad terms, Mr Haynes was seeking bridging finance by means of a temporary increase in the portfolio loan credit limit. It is also apparent that Mr Haynes, a very experienced residential real estate agent, was confident about the value of St Peters. He planned to list it at around $1,700,000. However, there is nothing about Mr Pole’s 23 April file note to suggest that the proposed sale price was to be a condition of any financial accommodation. I agree with the following submission by the Bank to the effect that there was no call for this approach (nor, I add, would it have made any sense at all for the Bank to commit itself in such a way).
Mr Haynes’ state of mind was not of that conservative nature at the time ... [H]ad such language been used it is highly likely that Mr Pole would have recorded it ... [T]he fact that Mr Haynes now gives such evidence is obvious reconstruction having regard to ... his changed mindset following bitter experience.
(footnote omitted)
On 22 September 2009 Mr Haynes submitted a Home Loan Application (the Home Loan Application) to the Bank for an increase in his portfolio loan account limit to $1,700,000 in order to secure finance to allow him to settle on the Longwood property.
Mr Pole requested other bank officers to assess Mr Haynes’ application in accordance with the Bank’s standard procedures. For loans needing the approval of a higher delegated authority, the Bank’s officers were required to make a Business Lending Assessment System Tracking (BLAST) application, which included a spreadsheet of actual and projected income and expenses. The data included in BLAST applications is analysed by the Bank’s computer program. The computer program automatically makes allowances for living expenses and income tax liabilities. In July 2009 a BLAST application (the July BLAST) was prepared for the consideration of Mr Pole and Mr Davy.
The Judge described the credit assessment methodology which the Bank applied to the data collected in a BLAST application as follows:
[150]An important mechanism or financial tool which the Bank employs when undertaking its assessment of a customer’s future capacity to service a proposed loan, that is, when determining whether a proposed transaction can be characterised as bankable, is the Commitment Cover Assessment (CCA) leading to a calculated Commitment Cover Ratio (CCR). A CCR represents the amount of surplus income after expenses available to meet projected interest payments. The Bank’s CCA incorporates a conservative approach in that it calculates serviceability against a “buffer” interest rate which is higher than the prevailing interest rate. As at July 2009 (the time of initial assessment of Mr Haynes’ application) the buffer employed was 1.57 per cent and as at October 2009 (the time the portfolio loan credit limit was extended) it was 1.32 per cent. To put this in context, on the total facility of $1,790,000, a buffer of 1.57 per cent increased the projected annual interest bill by just over $28,000 and a buffer of 1.32 per cent increased the projected annual interest bill by more than $23,500.
[151]The Bank’s policy with respect to a loan of the nature proposed for Mr Haynes was that a CCR ratio of 1.25 or greater, that is, a calculation demonstrating that income available to service the loan exceeded the projected interest expense (including the “buffer”) by 125 per cent, was required for the loan to fall within the policy guidelines. However, a failure to achieve such a CCR was not necessarily fatal to the granting of the loan.
(footnotes omitted)
In summary, the commitment cover ratio (CCR) is derived from the commitment cover assessment (CCA). A CCR is a measure of the surplus income after expenses available to meet projected interests payments. The CCR calculation is made by the computer program. The CCA adopted by the Bank was conservative in that it calculated the customer’s ability to pay against a ‘buffer’ interest rate which was higher than the prevailing interest rates. As at July 2009 at the time of Mr Haynes’ first application, the buffer was 1.57 per cent and as at October 2009 it was 1.32 per cent. Moreover the Bank’s policy with respect to loans of the kind made to Mr Haynes was that a CCR ratio of 1.25 or greater was required for the loan to fall within the policy guidelines. Accordingly a borrower like Mr Haynes was required to demonstrate that he or she had income available to service the loan exceeding the projected interest expense, including the ‘buffer’, by 25 per cent.
The July BLAST included rental income of $800 per week generated by the St Peters home for the period before its anticipated sale and for the sale of other of Mr Haynes’ properties.
The Judge summarised the income sources which the Bank factored into the July BLAST as follows:
[158]For the July BLAST, the sources of income and potential income available to Mr Pole, as represented by Mr Haynes, included the following.
(i)    The sum of $26,000, being 50 per cent of the consultancy income represented as being available to Performa as a consequence of the Strathalbyn consultancy. Mr Haynes had provided Mr Pole with an email dated 24 March 2009 from Forme Projects which purported to confirm that Performa had been appointed to provide consultancy services on behalf of Forme with respect to a retirement village and that Performa would be paid $1,000 per week. Performa was, in effect, a joint venture vehicle for Mr Haynes and Ms Ward and, as such, the annual retainer amount of $52,000 represented $26,000 for Mr Haynes and $26,000 for Ms Ward.
(ii)     The sum of $86,500 on account of projected commission income. This representation by Mr Haynes reflected 50 per cent of the commissions that Mr Haynes estimated Performa was to receive in the foreseeable future as particularised in a letter dated 12 May 2009 to Mr Pole from Performa (and signed by Mr Haynes). In that letter, Mr Haynes expressed his confidence that Performa was expected to receive commissions of between $150,000 to $200,000 in respect of various identified property developments being properties that had been sold with commission receipts pending and properties that were yet to be sold with expected commissions. The total of the sales commissions identified as either due or expected amounted to $173,000 of which Mr Haynes would be entitled to 50 per cent, that is, $86,500. As earlier indicated, Mr Haynes was a very experienced real estate agent and property developer. As far as the Bank is concerned, he was well placed to provide a reasonably accurate 12 month forecast of his earnings in this respect. Mr Haynes has not suggested that, at the time this information was provided to the Bank or that at any time prior to the granting and taking up of the extended credit limit, any of the particularised transactions were not bona fide nor that his forecasts were in any way unreliable. Mr Haynes provided supporting materials for these forecasts which were examined and verified by Mr Pole and his assistant, Ms Sareav. The Bank also undertook its own research to verify the information provided with respect to the Performa property listings.
(iii)     Rental income derived from a spreadsheet prepared by Mr Haynes and Ms Ward particularising net rents available from various properties. Included in this represented rental income was 50 per cent of net income available from certain Victorian properties owned jointly by Mr Haynes and Ms Ward but after allowing for expenses and interest expense arising with respect to relevant borrowings from the NAB. The total amount of rental income available, as represented by Mr Haynes, was $22,265.
(iv)    For such a period as the St Peters property would be held and Longwood was also held, Mr Pole had regard to an available rental of $800 per week.
Mr Pole also personally calculated separate CCR values for various periods and scenarios taking into account the sale of Mr Haynes’ other properties and the St Peters home. The only scenario in which the CCR fell below 1.25 was the period after the settlement of the Longwood property and before the sale of the St Peters home. Even with the postulated rental income from the St Peters home the CCR ratio for the period preceding the sale of the St Peters home was only 1.19. If the rental income were excluded it fell to below 1. Importantly Mr Birt, the banking expert called by Mr Haynes, accepted that serviceability of a loan was a question of judgment and that a loan might properly be approved on a CCR of less than 1.25. Mr Birt also accepted that a banker can properly have regard to future asset sales.
Mr Pole’s working premise was that the St Peters home would realise the valuation of $1,600,000 made by the Bank’s panel valuer in October 2007.
Mr Pole recommended that the credit limit on the portfolio loan account be lifted. Mr Davy approved Mr Haynes’ application. The Bank informed Mr Haynes by letter dated 9 October 2009 that the credit limit of his portfolio loan account had been lifted to $1,790,000.
At settlement on 19 October 2009 the debit balance of the portfolio loan account increased to $1,771,608.09. At the time of the draw down the annual interest rate was 5.44 per cent with a default rate of 8.44 per cent.
The St Peters home did not sell quickly. The Bank allowed Mr Haynes a fully drawn advance of $50,000 in March 2010 to undertake some improvements on the home and to contribute to monthly interest payments, and extended that advance to $130,000 in January 2011 (the FDA). As has been seen the St Peters home sold for $1,040,000 in July 2012.
Mr Haynes moved from the St Peters home into the Longwood property in very early 2010.
The Bank issued a notice of default on 14 July 2014 demanding payment of $1,256,913.60. Mr Haynes was unable to meet the demand and the Longwood property was sold in August 2015 for $760,000. The proceeds were used by the Bank to reduce the portfolio loan account balance. The Judge ultimately held that the funds should have been applied, first to discharge the FDA, and the balance applied to pay down the portfolio loan account. The Judge adjusted the total indebtedness of Mr Haynes accordingly.
The Uniform Consumer Credit Code did not apply
Clause 17 of the Mortgage Memorandum on the Longwood property is in the following terms:
17.1This clause 17 applies to the extent that a Consumer Credit Code does not apply to this mortgage.
17.2When we ask, you must pay us for:
(a)     our reasonable COSTS, and any receiver’s COSTS and remuneration, in arranging, administering (including enforcing, attempting to enforce or taking any other action in connection with our rights or any receiver’s rights), releasing and terminating this mortgage or any AGREEMENT COVERED BY THIS MORTGAGE; and
(b)     all stamp and other duties, fees, taxes and charges payable in connection with this mortgage, any AGREEMENT COVERED BY THIS MORTGAGE and any transaction or return relating to them and any interest, penalties, fines and expenses in connection with them.
17.3You indemnify us against, and you must therefore pay us for, liability, loss or COSTS (including consequential or economic loss) we suffer or incur:
(a)     if you default under this mortgage (in which case you will also be liable for any loss arising because we require payment of the AMOUNT OWING earlier than its due date); or
(b)     in connection with the property or our monitoring of WORKS.
17.4The indemnity in clause 17.3 is a continuing obligation; independent of your other obligations under this mortgage. It continues after we release the property from this mortgage.
The word ‘costs’ is defined in the Mortgage Memorandum to include:
Charges and expenses, and costs, charges and expenses in connection with legal and other advisers on a full indemnity basis.
In the event that clause 17 of the mortgage does not apply, the Bank is entitled to its costs pursuant to clause 21 of the mortgage which, however, imposes on the Bank the onus of proving the reasonableness of the costs and expenses it claims.
The Judge’s decision that the definition of ‘costs’ rebutted in unequivocal terms the rule of construction or presumption that limits costs, in a provision like clause 17, to party/party costs, is not challenged. The only issue is whether the proviso in clause 17.1 is made out.
As previously discussed in [8] of this judgment, the Consumer Credit (SA) Act 1995 (SA) enacts the UCCC in South Australia by picking up the Consumer Credit Code (Qld) Act 1994 (Qld).
Section 6 of the UCCC provides:
6Provision of credit to which this Code applies
(1)     This Code applies to the provision of credit (and to the credit contract and related matters) if when the credit contract is entered into or (in the case of precontractual obligations) is proposed to be entered into—
(a)the debtor is a natural person ordinarily resident in this jurisdiction or a strata corporation formed in this jurisdiction; and
(b)the credit is provided or intended to be provided wholly or predominantly for personal, domestic or household purposes; and
(c)a charge is or may be made for providing the credit; and
(d)the credit provider provides the credit in the course of a business of providing credit or as part of or incidentally to any other business of the credit provider.
…
(4)     For the purposes of this section, investment by the debtor is not a personal, domestic or household purpose.
(5)     For the purposes of this section, the predominant purpose for which credit is provided is—
(a)the purpose for which more than half of the credit is intended to be used; or
(b)if the credit is intended to be used to obtain goods or services for use for different purposes, the purpose for which the goods or services are intended to be most used.
Section 11 of the UCCC provides:
11Presumptions relating to application of Code
(1)     In any proceedings (whether brought under this Code or not) in which a party claims that a credit contract, mortgage or guarantee is one to which this Code applies, it is presumed to be such unless the contrary is established.
(2)     Credit is presumed conclusively for the purposes of this Code not to be provided wholly or predominantly for personal, domestic or household purposes if the debtor declares, before entering into the credit contract, that the credit is to be applied wholly or predominantly for business or investment purposes (or for both purposes).
(3)     However, such a declaration is ineffective for the purposes of this section if the credit provider (or any other relevant person who obtained the declaration from the debtor) knew, or had reason to believe, at the time the declaration was made that the credit was in fact to be applied wholly or predominantly for personal, domestic or household purposes. For the purposes of this subsection, a relevant person is a person associated with the credit provider or a finance broker (or a person acting for a finance broker) through whom the credit was obtained.
(4)     A declaration under this section is to be substantially in the form (if any) required by the regulations and is ineffective for the purposes of this section if it is not.
The Home Loan Application made by Mr Haynes in September 2009 included the following declaration:
I declare that the credit to be provided to me by BankSA is to be applied wholly or predominantly for business or investment purposes (or for both purposes).
Important
You should not sign this declaration unless this loan is wholly or predominantly for business or investment purposes. By signing this declaration you may lose your protection under the Consumer Credit Code.
Section 6 is the primary provision governing the applicability of the UCCC. Section 6 of the UCCC must be read distributively to apply to both entering into a credit contract and to pre-contractual obligations. The opening lines of s 6(1) of the UCCC operate differentially to fix the relevant time for the application of the criterion in subparagraph (b) to the time of entry into the contract or to the time at which a contract is proposed. Accordingly, in the case of a contract that has been entered into, the question is whether the credit is provided wholly or predominantly for personal, domestic or household purposes and not whether it is ‘intended’ to be so provided. The question of intention arises only in the application of the UCCC to a proposed credit contract. In the case of the actual provision of credit pursuant to credit on a contract, the test is whether on an objective assessment the credit was provided for the prescribed purpose.
The intention of the debtor is not determinative. As Gillard J observed in Linkenholt Pty Ltd v Quirk[7] ‘the substance of the transaction in the context of its performance’ must be considered.[8]
[7] [2000] VSC 166.
[8] Linkenholt Pty Ltd v Quirk [2000] VSC 166 at [98].
I would, with respect, adopt the approach taken in Shakespeare Haney Securities Limited v Crawford:[9]
An approach to the construction of s 6(1)(b) which considers the substance of the subject transaction and requires an objective assessment would, in my view, be preferable to one which looks to the actual intention of either the borrower or the lender. Plainly, “the purpose” for which credit is provided or intended to be provided has nothing to do with the lender’s general commercial purposes: the reference is to the use to which the credit is to be put. In the great majority of transactions there would be no difficulty in determining the relevant purpose by reference to the terms of the application for credit and of the approval. If the borrower requests credit for a stated purpose and the lender approves the request and makes the loan, there should be no difficulty in concluding that the purpose for which the loan was made was the purpose for which it was requested.
The focus of s 6(1)(b) is on the provision of credit rather than on the obtaining of credit. That is inconsistent with a construction which looks to the debtor’s state of mind. Also, one would think that if the legislature had in mind that, in determining the purpose for which credit was provided, the debtor’s intention was the governing consideration, s 6(1)(b) would have been worded along these lines:
“The debtor intended to apply the credit wholly or predominantly for personal, domestic or household purposes.”
[9] [2009] 2 Qd R 156 at [31]-[32].

It is not necessary to decide on this appeal whether the word ‘intended’ in its application to a proposed credit contract in s 6 of the UCCC is also meant in the objective sense.
Section 11(1) of the UCCC creates a rebuttable presumption in favour of an averment that the Code applies to a credit contract (the averment presumption). On the other hand, s 11(2) of the UCCC creates a conclusive presumption of the converse, that the credit is not provided wholly or predominantly for personal purposes, if the debtor declares that the credit is to be applied wholly or predominantly for business purposes (the business purpose presumption).
However, a credit provider cannot take the benefit of the business purpose presumption if the credit provider has the state of mind described in s 11(3) of the UCCC. Plainly it will not be possible to show that a credit provider knew that the credit was in fact to be applied wholly or predominantly for a personal, domestic or household purpose unless that is also the fact. If a debtor establishes that the credit provider knew that the purpose of the loan was personal use, the UCCC will apply both because the presumption is rebutted and because s 6 of the UCCC satisfied.
A debtor may be able to establish that a credit provider had reason to believe that the credit was to be used wholly or predominantly for a domestic purpose without proving that the credit was provided wholly or predominately for personal purposes. The policy rationale for that provision appears to be that a credit provider should not be able to evade the averment presumption by procuring a business purpose declaration when it has reason to believe otherwise. Accordingly, if a debtor establishes that a credit provider had reason to believe that the purpose of the credit was personal, the business purpose presumption will be set aside and the debtor will take the benefit of the averment presumption.
Mr Haynes complains that the Judge erred in failing to find that the Bank had reason to believe that the credit it provided was for personal purposes. The Judge did not address that question directly. It is necessary to consider that issue first because its determination affects the onus of proof.
Mr Haynes testified that he told Mr Pole that his purpose in purchasing the Longwood property was to reside there but that there was a ‘chance’ he might pick some foliage and daffodils to generate some modest income.
A note made by Mr Pole soon after the first approach by Mr Haynes concerning the Longwood property recorded that the property was in the Watershed Primary Product Zone of the Adelaide Hill Zone in the Rural Landscape Policy Area. He noted that it was a 5.8 hectare property. The note refers to a conversation which Mr Pole then had with another bank officer, Graeme Green. Mr Pole recorded Mr Green’s advice in these terms:
Graeme confirmed to me that for properties up to 40 ha in size and where residential home/s are on the property, we are in a position to consider funding as long as an established business ie winery, dairy etc is not being run from the property and resultant income is not proposed to be used to service the debt.
The evidence shows that the advice was given in the context of whether Mr Pole could continue to consider the application for the advance within his division of the Bank or whether it should be transferred to the rural lending division. Mr Pole explained that the note referred to the Bank’s loan product grouping. If the criteria referred to by Mr Green were not met, the application would ‘come out of the consumer lending area and would require a different product from the Bank’. Mr Pole explained that he:
… was endeavouring to ensure … that the purchase of a 5.8 hectare property in the Watershed area of the Adelaide Hills, was something that we could accommodate under a residential property product.
Be that as it may, the provision of information to the Bank concerning Mr Haynes’ sources of income did not rely on any income from the flower farm production or the rent of the Longwood property. The Bank and Mr Pole in particular always understood that it was Mr Haynes’ intention to reside in the Longwood property.
Mr Pole testified that he was not aware of any intention to lease the property to Mr Haynes’ corporate vehicle, Performa. Mr Pole explained that an intention to lease the property would have taken it out of the portfolio loan regime. He said:
If there was commercial income involved in the transaction, then I don’t believe it would have fitted the portfolio loan arrangement.
I accept that the Bank had reason to believe that the credit was to be applied wholly or predominantly for personal, domestic or household purposes. It follows that the Bank was not entitled to rely on the business purpose presumption and Mr Haynes had the benefit of the averment presumption.
In this case therefore, by reason of the averment presumption, the Bank carried the onus of proving, for the purposes of s 6 of the UCCC, that the credit was not in fact provided wholly or predominantly for personal, domestic or household purposes.
The Judge’s reasons for finding that the UCCC did not apply were as follows:
[41]Mr Haynes did not suggest in his evidence that the business purpose declaration signed in October 2009 had been signed in error. This is consistent with the fact that Mr Haynes at all times intended to conduct the flower farm business that had been established at the Longwood property. It wasn’t as if Mr Haynes proposed to enter into full time retirement according to the common understanding of that notion. Mr Haynes’ plan was to substantially stop working as a real estate agent and a property developer so as to live in the Adelaide Hills at Longwood and conduct the flower farm. This was to be more than a hobby, as is evident from the nature and potential of the business, as earlier described. The flower farm business, which was named “Flower Folly”, was to be conducted through Performa, the company fully owned and controlled by Mr Haynes and his domestic and business partner, Ms Ward. The evidence supports the following findings.
(i)Some three weeks or so before settlement of Longwood, on or about 24 September 2009, Performa registered the business name “Flower Folly”. The application form recorded that Mr Haynes was the contact person with respect to the application. The business to be conducted was recorded as flower growing and the address for the conducting of the business was Longwood. The application was signed by Mr Haynes.
(ii)The application was lodged on 1 October 2009, prior to the settlement of Longwood.
(iii)Mr Haynes claimed a tax deduction with respect to interest paid for the Longwood borrowing to be offset against rental income earned by him from Performa.
(iv)Performa recorded in its financial statements for the year ending 30 June 2010 a rental expense of $21,000 which correlated with the Longwood rental income disclosed by Mr Haynes in his 2010 tax return.
[42]I am satisfied that prior to the settlement of Longwood and, in particular, at the time that the business purpose declaration was signed in October 2009, Mr Haynes intended to conduct the Flower Folly business from the Longwood property as well as to reside at that property. Mr Haynes structured his arrangements with respect to his borrowing for the purchase of Longwood and the conduct, by his company Performa, of the Flower Folly business in a way that would permit him to claim the expenses associated with occupying Longwood and in particular the interest expense on the portfolio loan extension used to acquire Longwood, as tax deductable expenses.
…
[46]In adopting this approach, I am satisfied that, on the evidence, the substance and reality of the loan transaction was to enable Mr Haynes to acquire Longwood in order to conduct the Flower Folly business through the structure he put in place whilst residing there.
[47]It can be accepted that Mr Haynes did have a personal, domestic or household purpose in borrowing in order to procure the Longwood property. However, I am also satisfied that at the time Mr Haynes obtained the loan extension there was also an underlying business and/or investment purpose. As such, it is necessary for me to determine for the purpose of section 11(3) whether the purpose to reside at the property was the predominant purpose, being more than 50 per cent, for which the credit was applied and, if so, whether the Bank knew that the predominant purpose provided was for Mr Haynes to purchase Longwood as a residential property. According to section 11(3) the business purpose declaration signed by Mr Haynes would be ineffective if, inter alia, the credit advanced was in fact to be applied “wholly or predominantly for personal, domestic or household purposes” and the Bank knew of such fact. I am not satisfied on the evidence available that the extension of the loan to permit the acquisition of Longwood was, as far as Mr Haynes is concerned, “wholly or predominantly” for personal, domestic or household purposes.
[48]The situation may have been different if Mr Haynes had not intended to “retire” from his real estate agency and development work but rather to continue to work in his profession whilst also living at Longwood and running a “hobby farm”. However, that was not the case. The substance and reality of the loan transaction was to enable Mr Haynes to cease one form of business occupation and to take up another form of business occupation. Mr Haynes was only 51 at the time and it was not as if the flower farm (as described earlier in these reasons) was a modest enterprise. At the least, it had the potential to be the largest supplier of daffodils in the State. The phrase in section 11(3) “wholly or predominantly” must be given work to do. The onus is on Mr Haynes to have demonstrated a “wholly or predominantly” personal, domestic or household purpose in taking out the portfolio loan extension. Mr Haynes has demonstrated a household purpose associated with the acquisition of Longwood. As at October 2009, Longwood was to be his future residence. However, as I have indicated, I am not satisfied on the evidence that Mr Haynes has demonstrated that this was “wholly or predominantly” the purpose of the portfolio loan extension.
(footnotes omitted)
The Judge’s reasons focus on s 11(3) of the UCCC and record that the Judge was not satisfied that the extension of the loan was wholly or predominantly for personal domestic or household purposes. The imposition of the onus on Mr Haynes in the way in which the reasons are expressed results from a failure to address the ‘reason to believe’ question. The onus was, by operation of the averment presumption, on the Bank. Nonetheless, the Judge’s reasons are equally apt to make, and support, a positive finding that the credit was not provided wholly or predominantly for personal, domestic or household purposes. I would make that finding on the evidence to which I now turn.
In his personal tax return for the 2009/2010 financial year Mr Haynes claimed as an expense interest on loans in the sum of $41,060. That interest was calculated on the basis of the interest payable to the Bank on the entirety of the advance provided to settle on the Longwood property. That interest was claimed as an expense on the basis that Mr Haynes had rented the Longwood property to Performa. Performa had registered the business name Flower Folly. Performa claimed as an expense of its flower production business rent in the sum of $21,000. Mr Haynes’ claim for the whole of the interest payment as a business expense is an implied admission against interest that the predominant, if not the whole, purpose of the advance was to lease the property commercially to Performa. It is of no consequence that a formal lease was not prepared. In the absence of a satisfactory or contrary explanation, the implied admission was weighty evidence.
Mr Haynes’ declaration to the bank that the credit would be applied wholly or predominantly for business purposes, even though ineffective in raising the business purpose presumption pursuant to s 11(2) of the UCCC, nonetheless is also evidence of the business purpose of the loan.
Other evidence which supports the conclusion that the credit was provided predominantly for a business purpose includes:
·The historical use of the Longwood property for substantial flower production; and
·Mr Haynes’ decision to delay settlement so that he could inspect the spring stocks.
The Judge took into account that Mr Haynes also intended to, and did in fact, move his residence to the Longwood property, but observed that Mr Haynes proposed to rely on the income from flower production to support him after his retirement, or at least semi-retirement, from real estate agency and development work. It can be accepted that it is not uncommon for persons to make a lifestyle change which allows them to reside in, and earn income from, a rural property. Some purchases for that purpose may be characterised as predominantly residential and others as predominantly commercial. The Judge found the latter with respect to the purpose of the advance to purchase the Longwood property.
In so far as that finding rejects Mr Haynes’ testimony as to the predominant use to which he intended to put the Longwood property, it is neither glaringly improbable nor inconsistent with any objective evidence. In so far as it is an objective assessment of the purpose of the loan, the Judge’s conclusion is correct. It is the inference I would draw from all of the evidence.
The Prudential Obligation Term
Clause 25.1 of the Code of Banking Practice 2004 which the parties agreed was incorporated into the loan agreements provides:
25Provision of credit
25.1Before we offer or give you a credit facility (or increase an existing credit facility), we will exercise the care and skill of a diligent and prudent banker in selecting and applying our credit assessment methods and in forming our opinion about your ability to repay it.
On its face clause 25.1 requires that a credit provider exercise the care and skill of a diligent and prudent banker in:
·selecting credit assessment methods;
·applying the credit assessment methods so selected to the facts and circumstances of the borrower; and
·forming an opinion about the borrower’s ability to repay the loan.
The most obvious purpose of clause 25.1 is to provide a remedy for the wrongful refusal of credit. Its application to claims that credit was wrongfully given is both problematic and counterintuitive.
In Commonwealth Bank of Australia v Doggett, Hargrave J, at first instance, observed:[10]
Clause 25.1 of the Code is in my opinion a contractual obligation extending beyond the previously recognised duties or obligations of banks. It is expressed in promissory language (“we will”) and the promise is expressly one to “exercise the care and skill of a diligent and prudent banker” for a specific purpose. …
[10] Commonwealth Bank of Australia v Doggett [2014] VSC 423 at [118].
The plain words of clause 25.1 apply the obligation to exercise due diligence to the formation of opinion about the debtor’s ability to repay and not just to the selection and application of credit assessment methodologies.[11] It is implicit in the imposition of that obligation that the credit provider forms a positive opinion about the borrower’s capacity to repay the loan. That does not mean that a loan cannot be made if there is a risk of default; all lending would stop if that were so. However an assessment of whether the degree of risk is nonetheless acceptable is, in itself, a matter to which the skill of a diligent and prudent banker must be applied.
[11] cf. the obiter observations in Doggett v Sullivan (2015) 47 VR 302, in an action by a guarantor.
A mere departure from the internal rules or guidelines of the credit provider, or the rules or guidelines of another institution, is not determinative of a breach of the prudential obligation. The professional standard set by clause 25 is an objective one which may be evidenced by the practices of other professional bankers but is not fixed by them.
The capacity to repay need not be assessed exclusively by reference to present and future income streams. Capital amounts available to a borrower may also be taken into account. Bridging finance is an obvious example of a case in which it is proper to have regard to a capital asset which is on the market but has not yet been sold. A capital asset might also properly be considered if the borrower determines to effectively make it available to repay the loan when and if it becomes necessary to rely on it. On the other hand, clause 25 does preclude a credit provider advancing money if, on the income and capital resources from which the borrower proposes to repay the loan, a default is likely, merely because there are sufficient other assets of the borrower, or third party security, available from which to recover the loan.
The Judge accepted the Bank’s contention that the separately expressed limbs of the prudential obligation clause should be read as a ‘compound proposition’ which regulates both the manner of assessment and ultimate formulation of the opinion on the loan application. The Judge continued:
[63]The ultimate issue to which clause 25.1 is directed is the Bank’s opinion about the ability to repay. It is to the formation of this opinion that the selection and application of credit assessment methods is relevant. In other words, clause 25.1 is confined to the formation of an opinion concerning serviceability of a proposed loan. It is not directed to the Bank’s opinion as to whether or not a loan or financial accommodation should be advanced or to the various other criteria to which a Bank might have regard when deciding whether to, in fact, grant a financial accommodation including the additional protection a Bank might seek for itself as to the nature and level of security available. Clause 25.1 makes no reference to the question of security but only to credit assessment methods and an opinion as to ability to repay.
The Judge also accepted the following proposition put by the Bank:
The construction of clause 25.1 must also account for its commercial context and purpose. The evident purpose of the clause is to protect against imprudent or unfair lending practices that operate to the customer’s detriment. The purpose of the clause is to protect a customer who is not able to look after himself or herself. Absent such a protection, the lender may be content to lend on the basis of security alone [so called, “pure asset lending”].
This is to emphasise why the focus of the clause is upon the assessment of the capacity of the borrower to repay the loan, and why the assessment of security is outside the ambit of the clause. The former conforms to the consumer protection nature of the clause. The latter stands only for the protection of the bank. A lender that takes inadequate security does so to its own detriment rather than that of the customer.
Whether or not that proposition is sound, the question of the adequacy or inadequacy of a proffered security should not be conflated with the capital assets which the borrower proposes to liquidate to repay the loan if made. Mr Haynes’ proposal for his St Peters home was of that kind. It is not uncommon for borrowers to make an application for finance to purchase a residence on the basis that they intend to sell their existing home and/or an investment property or properties. In considering proposals of that kind, a bank is duty bound to diligently select and apply credit assessment methods to the proposed capital payment.
In the context of Mr Haynes’ application, the Bank was bound by clause 25.1 to exercise due diligence in making an assessment of the likely proceeds of sale from the St Peters home. However the Judge found, in any event, that the Bank was not negligent in relying on its 2007 valuation of the St Peters home even though its own rules required valuations to have been made within two years of approval.

Mr Haynes’ testimony on the likely sale price of the St Peters home was:
QYour opinion that the St Peters property would sell for $1.6 million was based not only on the bank’s 2007 valuation but also the appraisals you had done.
AYes.
QAs at 2009 you thought that the market was moving well.
AI thought it was a fine market, yeah. I didn’t have any hesitation at the time.
QYou don’t dispute the characterisation that you thought the market was moving well.
ANo.
QAs at 2009 you thought a sale of St Peters at $1.6 million presented a minimal risk.
AYes.
QYou yourself profess an understanding of valuation methodology.
AI am sorry, repeat the question?
QYou profess an understanding of valuation methodology.
AYes, I do.
QYou are prepared to do your own research as to prices of property.
AI have been known to, yes.
QYou are capable of extrapolating from your own research the value of your St Peters property.
AYes.
QIt was something you in fact did on occasion.
AYes.
QYou accept that valuation comprises an expression of an opinion by a valuer.
AYes.
QIt is not a matter of objective fact, is it.
ANo, it is a subjective process.
QI suggest that were a valuer to have put a value of only $1.1 million on your St Peters peters [sic] property in 2009, that you would have thought it erroneous.
AI wouldn’t have liked what I heard and perhaps would have stipulated some more research, but I wouldn’t have liked it, I agree.
QYou would have thought that the valuer had it wrong.
AYes, I would have.
QYou wouldn’t have simply accepted what the valuer said. You would have challenged the bank as to whether the opinion that it obtained from a valuer was wrongly expressed.
AProbably.
.
AWell, I had two alternatives, didn’t I? I had the alternative of not settling and incurring the wrath of the vendor, and the $10,000 deposit, and a potential caim against me for liquidated damages or, alternatively, I could perhaps have negotiated a further extension on the settlement with the vendor because I had a very good relationship with the vendor at the time. There are all sorts of alternatives that would have presented themselves. I am not fussed at all in terms of the value. In fact, the agent that I bought the property from, from you heard testimony, thought I bought particularly well. 12 months after the acquisition we had it valued by the bank and it went up $100,000 after that, so I am not fussed at all about the valuation of the bank.
QYou gave evidence a moment ago of the capacity to seek an extension from the vendor of the Longwood property for an extension of the settlement date.
AYes.
QWould his Honour understand that to mean that what you would have been seeking to do was push the settlement out until such time as you could be comfortable with the valuation of the St Peters property.
ANo, you can’t draw that bow. I could have negotiated an extended settlement to give me time to flick the contract to someone else if in fact a valuation came in at such a low price, because you must remember the objective to buying Longwood was to be able to retire and to have minimal debt. If the property in St Peters wasn’t going to achieve that which we all thought at the time, I would have perhaps had a valuation done. Then the whole exercise becomes academic, doesn’t it? I wouldn’t have tried to be a real estate agent and I couldn’t live there with the distance and no mobile phone coverage. I couldn’t work like that.
QWhat was the question I asked you.
AIt was quite confusing because you asked the question: if I negotiated a long settlement, would it mean for me to wait for the valuation of St Peters until it got up to 1.6 and I answered that.
QYou thought that St Peters was worth well more than $1.2 million.
AI personally did, yes.
QAnd you would have argued the case strongly had you had received a valuation that suggested any such thing.
AI would have argued the case. Yes, I would have.
QIndeed, you would have maintained the view that the property was worth still at least $1.6 million.
AI would have argued the case, but what difference does it make, because the banks only rely on their values and their panel values? I can have valuations done by anyone but the bank won’t necessarily accept it.
QLooking at this document produced, I suggest that in 2011, when BankSA got a valuation of $1.2 million for your St Peters property, you refused to accept it.
AI did but it didn’t stop them using it.
QYou said the bank had it wrong, didn’t you.
AI did.
QYou thought that the extrapolated value for your property was that set out about two-thirds of the way down the page where you have got $1.965, $1.529 and then $1.1 million for land only, absent improvements.
AYes, 1.965, yes. Yes, they were comparable sales in the area.
(emphasis added)
The Judge’s reasoning in support of his conclusion was as follows:
·the general practice of both Mr Davy and Mr Pole was, in effect, to rely on a Bank panel member residential valuation for up to two years but with the discretion, in appropriate circumstances, to rely on such a valuation for longer;
·even though some monthly real estate publications indicated softening in the residential market after the global financial crisis in 2008 both Mr Davy and Mr Pole took account of their own, relatively sophisticated, understanding of the market in South Australia, particularly as it related to high end suburbs such as St Peters when forming their view that an update to the valuation was not warranted;
·the evidence did not establish that the high end properties in the inner “upmarket” Adelaide suburbs were known or expected, at the time, to have been affected in any significant way at the time the Bank approved the extended credit limit;
·Mr Haynes himself, who was very experienced in real estate sales and property development and a resident of St Peters, remained very confident about the market for high end residential real estate at the time and was strongly advocating that St Peters would sell for $1,600,000 if not more;
·Mr Haynes’ expert real estate valuer, Mr Christodoulou accepted that in 2009 the market for higher end property was “buoyant”; and
·The Bank’s expert valuer, Mr Waterhouse, expressed the view that St Peters is a prime residential area and that the market there was, essentially, unaffected by the global financial crisis.
Accordingly, the Judge found that the Bank had not failed to exercise the skill and care of a diligent and prudent banker in adopting and applying its policy with reference to the age of the 2007 St Peters valuation, and in relying upon that valuation in support of its decision to extend the credit limit. The finding is supported by the evidence relied on by the Judge and not inconsistent with any objective evidence. The mere departure from the Bank’s own rule of general application does not show a breach of its prudential obligation. Nor does the general concern arising from the global financial crisis displace the more particular evidence of Adelaide’s real estate market relied on by the Judge in reaching his conclusion.
I turn next to the appellant’s complaint that the Bank failed to discharge its prudential obligation because it included the potential rental income from the St Peters home in calculating the CCR. Mr Haynes contends that the Bank must have known that it was impractical for him to move to Longwood before his St Peters home was sold. Mr Haynes also contends that it should have been obvious to the Bank that renting St Peters would have made its sale more difficult. Those contentions must fail, primarily because the Judge accepted the evidence of Mr Pole that the proposed rental income source was suggested by Mr Haynes, who was an experienced real estate agent. The Judge rejected Mr Haynes’ evidence to the contrary.
The Judge’s findings on the issue are as follows:
[163]In a handwritten note dealing with these scenarios, Mr Pole recorded the following.
Between purchase of Longwood and sale of St Peters proposed to rent St Peters for maximum 12 months at $800 per week = $41,600 per annum
Mr Pole said in his evidence that he had been advised by Mr Haynes to the effect that letting St Peters would be an option in the event it became necessary to derive income to service the loan during any extended period when both properties were being held. In other words, the availability of rent for St Peters was only as a contingency, in the event that St Peters did in fact prove difficult to sell. It was an option available to ensure or at least assist with serviceability in the event that there were to be a significant delay between the purchase of Longwood and being able to sell St Peters at an appropriate price.
[164]The notion makes perfect sense if the situation were to arise where both properties were being held for a substantial period of time. Of course, there would be practical considerations to be navigated when putting such a contingency arrangement into place. But these could be managed. In order to do so a decision would need to be made to either take St Peters off the market or to let St Peters while keeping it on the market but bearing in mind that a sitting tenant (perhaps depending on the length of the tenancy) might have an effect on the marketability of the property. It is to be remembered, that once Mr Haynes’ son completed year 12 (at the end of 2009) he was always in a position to move to Longwood and for St Peters to remain either vacant or tenanted and in either case available for sale. As it happened Mr Haynes did move to Longwood very early in 2010.
[165]Mr Pole said that he followed his established practices when he dealt with Mr Haynes. It was Mr Pole’s practice not to include a source of income in a credit application without having first discussed that source of income with the customer. Mr Pole also said, not surprisingly, that he would not include or rely on rental income for a property if he was aware that the customer was going to remain living in the property. The proposition is self-evident. I accept Mr Pole’s evidence on this topic and that Mr Pole did have a discussion with Mr Haynes to the effect that St Peters would be available to rent, if necessary, as a contingency or fall-back position in the way I have described above.
[166]Mr Pole’s evidence was to the effect that his handwritten note of 1 July 2009 on this topic (referred to earlier) was a record of a discussion he would have had with Mr Haynes. I accept this evidence. I have no doubt and notwithstanding Mr Haynes’ evidence to the contrary that, as part of Mr Haynes’ urgings to the Bank throughout the period as to his financial position and his capacity to service the applied for increase in credit, in the same way as he had been able to service the earlier facilities with the Bank and with the NAB over a number of years, Mr Haynes said to Mr Pole something to the effect – if it becomes difficult, St Peters can always be leased for a substantial amount pending sale.
[167]The rental income represented by Mr Haynes as available (see (iii) and (iv) earlier) was adjusted by Mr Pole according to each of the scenarios. For the period following the sale of McGregor Close and prior to the Longwood purchase, Mr Pole allowed $22,265 per annum. For the period following the sale of McGregor Close but after the Longwood purchase, Mr Pole allowed $63,865 per annum by incorporating the St Peters rent. For the final period, being that following the sale of St Peters but with the continued retention of Longwood, Mr Pole returned to the represented rental property income of $22,265.
Mr Haynes has not established any error in those findings of facts as to the conversations between Mr Haynes and Mr Pole. The Judge’s acceptance of Mr Pole’s credibility generally, and his account of the conversation concerning the rental of the St Peters home in particular, is based on his assessment of the testimony of Mr Pole and Mr Haynes. There is no inconsistent objective evidence or glaring improbability which demands that this Court reverse the factual finding made with that forensic advantage.
It is possible, and indeed common, for a house to be sold whilst it is tenanted even though, admittedly, it is more difficult to do so. Moreover income might have been derived from the St Peters home by renting it for a period between the first marketing campaign, if it failed, and a subsequent attempt at a later more suitable time.
Mr Haynes’ banking expert witness Mr Birt gave the following evidence as to imputing the St Peters loan rental income stream:
Q.You say in your report at s.5(2)(e), which we will find at p.593 of the bundle, that you were unable to reconcile how the bank’s officer to include a rental income stream attributable to the borrower’s owner/occupier’s property. ‘It beggar’s belief’.
A.Yes.
Q.When you are writing that you are there saying, I take it, that if the borrower is occupying the property, you would not ever impute a rental income stream.
A.Absolutely.
Q.And, indeed, that’s what you mean in para.2(d) by the use of the word ‘imputed’, I take it.
A.Yes.
Q.When you are writing that, I take it you don’t suggest that it mightn’t be included in a relevant case as part of a transaction, for example, a bridging loan, where the customer says ‘I am moving to a new residence and my existing residence will be available for rent’. Do you follow the difference.
A.Yes.
Q.In that instance you’re not talking about an owner-occupied property in respect of the property that you’re moving out of, are you.
A.No, no.
Q.It’s quite a different scenario if the customer is contemplating a new acquisition: moving into the new property and the old property being available for rent.
A.Yes, yes, I see.
Q.You agree that’s a different scenario.
A.Yes.
Q.In that event you can include rentals in certain circumstances, do you agree with that.
A.Well, in certain circumstances you can but, I mean, it just - the borrowers were occupying the property as at - well, if you go back to this analysis dated 1 July, they have included $41,600 in rent from St Peters, $800 a week, and yet the borrowers were in occupation.
…
Q.And, indeed, it would be a sensible analysis, I would suggest, for a banker to assess the risk mitigant when the property hasn’t sold as the customer intended within the ordinary marketing campaign which, for present purposes, I ask you to assume might be a period of zero to three months.
A.Right.
Q.Would you agree with that.
A.Yes.
Q.What you are then assessing as a banker under that scenario is what I would suggest is a logical step for a customer, that you’re not going to let your property sit stale on the market after you’ve moved out of it, but instead to derive a rental income if you need to in order to service your facility, do you agree with that.
A.That’s a decision for the client.
Q.Assuming that it’s the subject of discussions between the banker and the customer, it’s something that the banker would take into account.
A.Yes.
Q.There’s nothing in any of that that would be beggaring belief, is there, which I think was your language that you applied in your report.
A.I did.
Q.And when you said that notion of imputing a rental income ‘beggars belief’, that’s because you were proceeding on the basis that what was there being addressed by the banker was an imputed rental to a property that the owner was still living in.
A.Correct.
Q.Not the type of scenario that I’m here describing, which is one involving the rental of the property after the second property is being bought and after departure from the first property, you agree with that.
A.Yes.
It must also be remembered that the proposal to rent the St Peters home was no more than a fall-back position in the event that its sale became protracted. The most significant feature of the sale of St Peters was the realisation of its capital. It was the realisation of that capital which was a source of funds from which the loan could be met. A failure to sell quickly, or at the anticipated price, simply affected the final level of borrowing, because of the shortfall or accumulated capitalised interest, over the longer term. It was not Mr Haynes’ case that the Bank should have anticipated a delay or lower sales price of such a magnitude that it would have adversely affected the long term ability of Mr Haynes to repay the balance of the loan.
It follows that the Bank did not breach its prudential obligation by taking into account the potential rental income from Mr Haynes’ St Peters home. Mr Haynes’ complaint that the CCR, on one scenario, fell below the Bank’s general guideline of 1.25 was correctly rejected by the Judge as a departure within the proper discretion of the Bank’s officers. In particular it is to be remembered that Mr Birt accepted that a banker’s discretion could properly be exercised to depart from the guideline. In that respect the significant buffer allowed by the Bank must be taken into account. So too the fact that the CCR fell below the guideline only in that period before the sale of the St Peters home, the proceeds from which were always intended to pay down the loan.
On the question of the guarantee, the Bank documentation did not show that Ms Ward’s income was attributed to Mr Haynes. The Bank did not assess the application on the basis that Mr Haynes had Ms Ward’s income available to him. Indeed the July BLAST assessed both Mr Haynes’ capacity to repay the extended limit on the portfolio loan account so that he could purchase the Longwood property, and Ms Ward’s capacity to service an extension of the loans advanced to her so that she could develop a property at St Andrews. In making its assessments the Bank ensured that their respective incomes were not double counted in order to protect its own position. Indeed far from taking into account Ms Ward’s income earning capacity to support Mr Haynes’ loans, the Bank noted that there was some deficiency in Ms Ward’s capacity to pay but that it might be made up by Mr Haynes’ capacity.
It follows that the Bank did not breach the prudential obligation clause by taking into account Ms Ward’s financial resources.
On the appeal Mr Haynes relied on the following evidence given by Mr Davy about taking into account the income of a guarantor. Mr Davy said:
AIt was common in the commercial corporate section to bring guarantors income into the lending assessment…
QGoing back to the question of guarantors, do you agree that, as a prudent banker, you should be assessing the loan by reference to Mr Haynes’ ability to repay it in accordance with its terms and not by reference to Mr Hayne [sic] plus a guarantor.
ANo, it was considered as a group between Haynes and Ward.
QIs that one of the reasons why, in the 2009 BLAST report, you recorded a condition that there be a guarantor.
AYes.
QWas one of the purposes in doing that to capture, as you like, Ms Ward’s income when looking at serviceability.
AI don’t specifically recall but likely.

That testimony was given without Mr Davy being taken to the detailed BLAST calculations. They show, as I have observed, that Ms Ward’s income was not used as a make weight for a deficiency in Mr Haynes’ financial resources.
Conclusion
The Judge’s ultimate conclusions on whether a prudent banker would have made the loan were as follows:
[183]However, consistent with the evidence given by Mr Pole, Mr Davy, Mr Debenham and, ultimately, Mr Birt, the transaction was one that a diligent and prudent banker was entitled to assess as “bankable” when all the circumstances are considered. Further, there has been no proved failure by the Bank to have exercised the care and skill of a diligent and prudent banker in selecting and applying the assessment methods, in fact, employed and informing its opinion as to Mr Haynes’ ability to repay the extended facility.
[184]By way of summary, the following matters support these conclusions.
(i)    The financial analysis showed the transaction to be, at worst, marginal. It was not far off, if at all, the Bank’s guideline policies.
(ii)     The nature of Mr Haynes’ business activities was such that it would always be extremely difficult to predict with any accuracy his financial position at future points in time. A flexible approach was called for if he was to be able to maintain his activities. What was clear is that Mr Haynes had a very successful track record over many years and had produced substantial amounts of income resulting from real estate agency commissions, property development activities, the holding of rental properties and other individual projects such as, for example, the Strathalbyn consultancy. In short, Mr Haynes was entrepreneurial and successfully so with a proven capacity to identify new sources of income.
(iii)     Mr Haynes had a lengthy history as a good customer of both the NAB and the Bank; a customer who had managed to service, over a number of years, portfolio loan accounts with limits equal to and, in the case of the NAB, in excess of that presently under consideration ($1,700,000).
(iv)    The maximum proposed borrowing was expected to be very short term. The transaction, whilst of the nature and subject to the conditions of a portfolio loan, was in reality bridging finance. The loan was drawn down in late October 2009. The overwhelming inference from the evidence of Mr Haynes and Mr Pole is that, given the circumstances at the time the loan was approved in early October, both parties would have expected Mr Haynes to be “retired” in Longwood and St Peters sold by around the middle of the following year. If so, the period of time that the maximum loan amount would need to have been serviced would have been about eight months, requiring payment in the order of $64,000 interest as opposed to $32,000 interest had the Longwood increase not been drawn down. In Mr Haynes’ overall scheme of things and meaning no disrespect, this difference of $32,000 could only be considered as “noise” in Mr Haynes’ budget.
(v)     Even if St Peters were to sell for less than the anticipated $1,600,000, provided it sold relatively promptly, Mr Haynes would have been no worse off from a serviceability perspective. Even if Mr Haynes “gave” the property away for say $1,000,000 within 12 months after the Longwood purchase, he would have remained the owner of Longwood with a mortgage of approximately $790,000. However, prior to the draw down Mr Haynes was obliged to service a loan of approximately $872,000, albeit as owner of St Peters with a value which Mr Haynes believed (although incorrectly) to be in the order of $1,600,000. Mr Haynes would have been left having made a poor decision in buying Longwood and may have had to put his retirement plans on hold. However, the point to be made is that, given the real (bridging) nature of the loan transaction, there was never really any doubt about serviceability provided Mr Haynes sold St Peters expeditiously. Importantly, it was not the Bank’s obligation to ensure the prudence of Mr Haynes’ overall arrangements concerning the Longwood purchase or to ensure that his retirement plans would come to fruition. The Bank did not assume any responsibility towards Mr Haynes for the value of St Peters or as to the price ultimately obtained when it came to be sold.
(vi)    Mr Haynes was a very experienced and knowledgeable businessman. I am satisfied that he, at all times, had a complete understanding of his financial position and fully understood and accepted the obvious risks. The Bank was entitled to treat him as a sophisticated investor who did not need to be advised as to the prudence or otherwise of his proposal.
(footnotes omitted)
The Judge’s conclusions are plainly right. I would dismiss the appeal.
BLUE J: I agree with the Chief Justice.
DOYLE J: I agree with the reasons of the Chief Justice. I would dismiss the appeal.