Karvelis v Papavasiliou
[2025] VCC 688
•2 June 2025
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
GENERAL LIST
Case No. CI-22-05135
| PETER KARVELIS | Plaintiff |
| v | |
| ANDREW PAPAVASILIOU | First defendant |
| and | |
| MARIA PIZANIAS | Second defendant |
| and | |
| NATIONAL AUSTRALIA BANK LIMITED (ACN 004 044 937) | Third defendant |
| and | |
| ANIDAN PTY LTD (ACN 006 518 903) | Fourth defendant |
| and | |
| ELLROD NOMINEES PTY LTD (ACN 005 121 362) | Fifth defendant |
| and | |
| TARODA NOMINEES PTY LTD (ACN 082 029 034) | Sixth defendant |
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JUDGE: | Her Honour Judge Burchell | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 18 February 2025, written submissions dated 3, 11, 14, 25 27 and 28 March 2025 | |
DATE OF JUDGMENT: | 2 June 2025 | |
CASE MAY BE CITED AS: | Karvelis v Papavasiliou & Ors | |
MEDIUM NEUTRAL CITATION: | [2025] VCC 688 | |
REASONS FOR JUDGMENT
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Subject:DEBT – CAVEAT – PENALTY
Catchwords: whether Special Condition F in the loan agreements are void as a penalty – quantum owed under the loan agreements at date of trial - whether the caveats on the second defendant’s property ought to be removed
Legislation Cited: Penalty Interest Rate Act 1983 (Vic), s2; County Court Civil Procedure Rules 2018 (Vic), rr13.11, 23.05, 55.02 and 55.04; Transfer of Land Act 1958, s90(3); County Court Act 1958 (Vic), s49; Supreme Court Act 1986 (Vic), s58
Cases Cited:Kairouz v Jasper Nominees Pty Ltd [2025] VSCA 16; Arab Bank Australia Ltd v Sayde Developments Pty Ltd [2016] 93 NSWLR 231; Lordsvale Finance Plc v Bank of Zambia [1996] QB 752; Jones v Dunkel (1959) 101 CLR 298; Titles Strata Management Pty Ltd v Frank Nirta [2015] VSC 187; Robophone Facilities Ltd v Blank [1996] 1 WLR 1428; Elberg v Fraval [2012] VSC 342; Jasper Nominees Ltd v Kairouz and Murdaca [2023] VSC 718; Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd 1915] AC 79; NJ Capital Pty Ltd v AMKI Property Holdings Pty Ltd [2021] NSWSC 1462; Ronstan International Pty Ltd v Thomson [2002] VSCA 75; Beil v Mansell (No 2) (2006) 2 QdR 499; Devaynes v Noble (1816) 35 ER 767; Airservices Australia v Ferrier [1996] HCA 54; Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525; Kellas-Sharpe v PSAL Ltd [2012] QCA 371; O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359; Acron Pacific Ltd v Offshore Oil (1985) 157 CLR 514; AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170; Esanda Finance Corporation Ltd v Plessnig (1989) 166 CLR 131; Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656; Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; Lopes v Taranto[2017] VCC 1613; Bellas v Powers [2023] NSWSC 1198; Bay Bon Investments Pty Ltd v Selvarajah [2008] NSWSC 1251; Brett v Barr Smith [1919] 26 CLR 87; Jowett Motor Group Pty Ltd v Pentana Solutions Pty Ltd [2023] VCC 1916; Piroshenko v Grojsman & Ors (2010) 27 VR 489; Lehrmann v Network Ten Pty Limited (Cross-Claims) [2024] FCA 102; Cappelleri v Cappelleri [2024] VSCA 173
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | S Chizik | Coopers Lawyers |
| For the First and Second Defendants | S Prendergast | Darrer Muir Fleiter Lawyers |
HER HONOUR:
Introduction
1In this proceeding, the plaintiff, Mr Peter Karvelis, alleges that the first defendant, Mr Andrew Papavasiliou, and the second defendant, Mr Papavasiliou’s wife, Ms Maria Pizianas, owe him the sum of $870,963.76, pursuant to two loan agreements (“the September Loan Agreements”). Mr Karvelis also alleges that this amount is secured by an equitable charge over 25 Chaucer Crescent, Canterbury (“the Canterbury property”).
2Mr Papavasiliou and Ms Pizianas contend that they have repaid the full amount owed under the September Loan Agreements, totalling $295,000.00, but for a compounding default fee charged by Mr Karvelis pursuant to Special Condition F (“SC F”) which Mr Papavasiliou and Ms Pizianas claim is an unenforceable penalty.
3Mr Papavasiliou and Ms Pizianas make a counterclaim against Mr Karvelis for the removal of his caveat over the Canterbury property and declarations to the effect that:
(a) SC F is an unenforceable penalty; and
(b) Mr Karvelis does not hold an equitable charge over the Canterbury property.
4The total amount owed by Mr Papavasiliou and Ms Pizianas under the September Loan Agreements was $295,400.00, being $60,000.00 pursuant to seventh loan and $235,400.00 under eighth loan. Prior to trial, the parties disputed the total amount of payments made in relation to those agreements. Mr Papavasiliou and Ms Pizianas contended that they had repaid a total of $312,981.24, whereas Mr Karvelis maintained that only $289,981.24 had been repaid – a discrepancy of $23,000.00.
5During the trial, Mr Papavasiliou and Ms Pizianas conceded that the $23,000.00 in dispute had been paid towards another loan not directly relevant to the proceeding. As a result, they acknowledged a remaining balance of $5,418.76 under the September Loan Agreements. Mr Papavasiliou and Ms Pizianas further undertook to pay this amount to Mr Karvelis by close of business on the first day of the trial, bringing the total repaid under those agreements to $295,400.00. The sum of $5,418.76 was paid by the defendants to Mr Karvelis on 19 February 2025 and the judgment sum must be adjusted accordingly.
6In my judgment, at the date of trial, Mr Papavasiliou and Ms Pizianas owed Mr Karvelis the sum of $5,418.76 (plus penalty interest pursuant to s2 of the Penalty Interest Rate Act 1983 (Vic) from 5 January 2020 to 19 February 2025 in the sum of $61,898.16 pursuant to Annexure A) and they have otherwise made out their grounds of defence and counterclaim. My reasons in respect of each ground are set out below.
7Accordingly, I order that there is judgment for the plaintiff in the sum of $5,418.76, together with penalty interest rate from 5 January 2020 to 19 February 2025 in the sum of $61,898.16, minus the $5,418.76 already paid, that there be judgment for the defendants on the counterclaim and that upon payment of the sum of $61,898.16, the Caveat AU120184W, registered on 5 September 2019 and recorded on the Certificate of Title Volume 8064 Folio 227 (“the Caveat”) be removed. In accordance with r23.05 of the County Court Civil Procedure Rules 2018 (Vic) (“the Rules”), I declare that SC F in the seventh and eighth loan agreements dated 5 September 2019, imposing a 3% monthly compound fee, are unenforceable as penalties.
8I propose to order that each party bear their own costs of an incidental to the proceeding, unless either party has a basis for seeking a different order as to costs. I will invite the parties to prepare draft orders to give effect to these reasons and will determine any issue concerning costs on the papers.
Background Facts
9Mr Karvelis and Mr Papavasiliou are distant cousins and have known one another since childhood but did not associate socially until early 2019, when they were reacquainted while visiting a sick relative in hospital. During March and April 2019, Mr Karvelis and Mr Papavasiliou grew closer after meeting on several occasions.
10During this time, Mr Karvelis shared with Mr Papavasiliou that, in 2015, he left his position as a Finance Manager for Garry & Warren Smith Mazda to become a stay-at-home dad for his two daughters and, in 2020, he was planning on commencing construction for a house on a vacant block of land in Hawthorn before selling it for a profit – for which he had already obtained the relevant permits.
11Mr Papavasiliou further shared with Mr Karvelis that, in 2015, he left his executive role at Toll Holdings after it had been acquired by a Japanese company and went into business with a partner to create a speciality food wholesaler business named Alpha Logistic Services Pty Ltd (“Alpha Logistic”). At the time, Alpha Logistic had an annual turnover of more than $300,000.00 and was continuing to grow rapidly, owing to the business’ high margins and low overheads. Mr Papavasiliou was responsible for the deliveries while Ms Pizianas looked after the orders and bookkeeping.
12Mr Papavasiliou also discussed the value of his properties, telling Mr Karvelis that his Canterbury property was allegedly worth $6 million, with an outstanding mortgage of about $2 million. He further stated that he owned two apartments, being Unit 710 Riversdale Road, Hawthorn East and Unit 229 Toorak Road, South Yarra (“the apartments”), and each was worth around $500,000.00, with $300,000.00 owed on each. Mr Papavasiliou further claimed that he had plenty of equity.
13In early May 2019, Mr Papavasiliou requested a loan of $50,000.00 from Mr Karvelis to purchase stock for Alpha Logistic, given its rapid growth. Mr Papavasiliou stated he would repay Mr Karvelis the sum of the loan in addition to a 20% establishment fee, totalling $60,000.00, in three monthly instalments. Mr Papavasiliou offered that the apartments would be put up as security for the loan. Upon request, Mr Papavasiliou sent Mr Karvelis documentation including his driver’s license, council rate certificates for the apartments and Alpha Logistic’s certificate of incorporation.
14Mr Karvelis drafted the first loan agreement, which was signed by both parties on 15 May 2019 (“the first loan agreement”). This agreement, along with all subsequent loan agreements relevant to the current proceeding, were prepared without legal assistance. Following execution, the funds were transferred into Alpha Logistic’s bank account. Mr Papavasiliou foreshadowed that he would require additional funds in the coming months.
15In late May 2019, Mr Papavasiliou requested a second loan of $20,000.00 from Mr Karvelis to purchase stock for Alpha Logistic. The parties agreed that, by 29 August 2019, Mr Papavasiliou would repay Mr Karvelis the sum of the loan in addition to a 20% establishment fee, totalling $24,000.00, in three monthly instalments. Mr Karvelis drafted the second loan agreement. and it was signed by both parties on 29 May 2019 (“the second loan agreement”). Following execution, the funds were transferred into Alpha Logistic’s bank account.
16In mid-June 2019, Mr Papavasiliou requested a third loan of $20,000.00 from Mr Karvelis to, again, purchase stock for Alpha Logistic. Mr Karvelis asked Mr Papavasiliou if the purpose of the third loan was to meet the first monthly repayment under the first loan agreement, due on 16 June 2019. Mr Papavasiliou denied this and alleged that he would be unable to make the first monthly repayment as he was awaiting payment from his customers – but simultaneously gave assurances that he would be able to discharge his obligations under the first loan agreement.
17Mr Papavasiliou agreed that, by 14 September 2019, he would repay Mr Karvelis the sum of the loan in addition to a 20% establishment fee, totalling $24,000.00, in three monthly instalments. Mr Karvelis drafted the third loan agreement, and it was signed by both parties on 14 June 2019 (“the third loan agreement”). Following execution, the funds were transferred into Alpha Logistic’s bank account.
18In late June 2019, Mr Papavasiliou requested a fourth loan of $35,000.00 from Mr Karvelis to purchase stock for Alpha Logistic. The parties agreed that, by 1 November 2019, Mr Papavasiliou would repay Mr Karvelis the sum of the loan in addition to a 20% establishment fee, totalling $42,000.00, in four monthly instalments. Mr Karvelis drafted the fourth loan agreement and it was signed by both parties on 1 July 2019 (“the fourth loan agreement”). Following execution, the funds were transferred into Alpha Logistic’s bank account.
19Approximately a week later, Mr Papavasiliou requested a fifth loan of $35,000.00 from Mr Karvelis to pay for his daughters’ school fees. Given that this loan was not for business purposes, Mr Papavasiliou asked Mr Karvelis whether the establishment fee could be reduced from 20% to 10%. Mr Karvelis proposed an establishment fee of $5,000.00 instead (approximately 14%), which both agreed upon.
20Mr Papavasiliou agreed that, by 31 October 2019, he would repay Mr Karvelis the sum of the loan in addition to a $5,000.00 establishment fee, totalling $40,000.00, in full. Mr Karvelis drafted the fifth loan agreement, and it was signed by both parties on 9 July 2019 (“the fifth loan agreement”). Following execution, the funds were transferred into Mr Karvelis’ personal bank account.
21In mid-July 2019, Mr Papavasiliou requested a sixth loan of $20,000.00 from Mr Karvelis to, again, purchase stock for Alpha Logistic. The parties agreed that, by 23 October 2019, Mr Papavasiliou would repay Mr Karvelis the sum of the loan in addition to a 20% establishment fee, totalling $24,000.00, in three monthly instalments. Mr Karvelis drafted the sixth loan agreement, and it was signed by both parties on 26 July 2019 (“the sixth loan agreement”). Following execution, the funds were transferred into Alpha Logistic’s bank account.
22In late August 2019, Mr Papavasiliou requested a seventh loan of $50,000.00 from Mr Karvelis to purchase stock for Alpha Logistic, pay his daughters’ private school fees and address other personal expenses. Under the seventh loan, by 5 January 2020, Mr Papavasiliou would repay Mr Karvelis the sum of the loan in addition to a 20% establishment fee, totalling $60,000.00, in three monthly instalments.
23At the time of requesting a seventh loan, Mr Papavasiliou had not yet made a single repayment under the first, second, three, fourth, fifth, or sixth loan agreements (“the initial six agreements”). Mr Karvelis reflected on the repayment situation and, upon doing so, informed Mr Papavasiliou that he would grant the seventh loan with a 20% establishment fee, on the condition that the initial six agreements were consolidated into an eighth loan of $214,000.00, equal to Mr Papavasiliou’s outstanding repayments.
24Under the terms of the eighth loan, Mr Papavasiliou and Ms Pizianas would be joint borrowers, with the Canterbury property provided as additional security (in effect, discharging their obligations under the initial six agreements). Further, the establishment fee of the eighth loan would be 10% instead of the usual 20%, totalling $235,400.00, payable in full by 5 January 2020.
25Upon request, Mr Papavasiliou sent Mr Karvelis key documentation including Ms Pizianas’ driver’s license, the council rates notice for the Canterbury property and their most recent bank statement for the Canterbury property (“the Canterbury Bank Statement”). Mr Karvelis drafted the seventh loan agreement, and it was signed by both parties on 5 September 2019 (“the seventh loan agreement”). The funds were transferred into Alpha Logistic’s bank account. Mr Karvelis also drafted the eighth loan agreement and it was signed by both parties on the same day (“the eighth loan agreement”). Collectively, the seventh and eighth loan agreements are referred to as the September Loan Agreements.
26The September Loan Agreements both contained SC F, taking effect upon default, imposing a 3% monthly compound fee calculated based on the outstanding amount left unpaid on 5 January 2020 and the balance outstanding on the fifth day of every subsequent month.
27On 13 September 2019, Mr Karvelis made a ninth loan of $5,000.00 to Mr Papavasiliou so that he could support his brother who was in need of short-term financial assistance (“the ninth loan agreement”). Mr Papavasiliou agreed to repay the sum of the loan, in addition to a 10% establishment fee, totalling $5,500.00, by 27 September 2019. Mr Papavasiliou repaid the ninth loan through a bank transfer of $5,000.00, dated 2 October 2019, and a $500.00 cash payment.
28On 2 October 2019, Mr Papavasiliou requested a tenth loan of $18,000.00 to purchase airline tickets for his family’s travel to the United States of America (“US”) to visit Ms Pizianas’ ill mother. The parties agreed that Mr Papavasiliou would repay the loan along with an establishment fee of $2,000.00, totalling $20,000.00, by 1 November 2019 (“the tenth loan agreement”).
29On 17 December 2019, Mr Papavasiliou repaid the tenth loan by transferring $43,000.00 via bank transfer. Of this amount, $23,000.00 was allocated towards the cost of the airline tickets – an increased sum that Mr Papavasiliou agreed to repay due to his delay – and the remaining $20,000.00 was credited against the seventh loan agreement.
30As at 5 January 2020, the amount outstanding under the September Loan Agreements was $275,400.00, which began accruing interest from that date in accordance with SC F. Between 5 January 2020 and 19 February 2025, Mr Papavasiliou and Ms Pizianas made payments totalling $275,400.00, equivalent to the combined principal and establishment fees under the September Loan Agreements.
31Mr Karvelis contends that Mr Papavasiliou and Ms Pizianas have not discharged their obligations under the September Loan Agreements and that an outstanding balance of $870,963.76 remains due, arising from the 3% monthly compound interest imposed pursuant to SC F. Mr Karvelis also seeks a declaration that he holds an equitable charge over the Canterbury property. In response, Mr Papavasiliou and Ms Pizianas counterclaim that SC F is unenforceable as a penalty clause and deny that Mr Karvelis holds any equitable charge over the Canterbury property.
Procedural matters
32On 30 August 2022, the proceeding was commenced in the Supreme Court of Victoria, with Mr Karvelis claiming against six co-defendants. On 20 November 2022, the proceeding was transferred to the County Court of Victoria. In the orders made by Judicial Registrar Muller on 3 February 2025, it was noted in “Other Matters” that the proceeding only remained live between the plaintiff and the first and second defendants, being Mr Papavasiliou and Ms Pizianas.
33On 11 March 2025, Mr Karvelis sought to adduce into evidence a historical title search of the Canterbury property dated 11 March 2021 (the “11 March 2021 Title Search”). He submitted this was necessary as Mr Papavasiliou and Ms Pizianas had not pleaded the argument that Mr Karvelis was adequately secured under the September Loan Agreements yet raised it for the first time in their closing submissions. The Court granted leave for Mr Karvelis to re-open the proceeding and admit the historical title search into evidence, notwithstanding that the hearing had already concluded.
34On 17 March 2025, Mr Karvelis sought leave to make further submissions regarding Kairouz v Jasper Nominees Pty Ltd,[1] on the basis that he had been unaware of the Court of Appeal’s decision at the time of preparing his closing submissions. The authority had been raised for the first time in the defendants’ Reply Submissions. The Court granted leave for Mr Karvelis to provide a brief written note addressing Kairouz, limited to responding to the points raised in the Reply Submissions.
[1] [2025] VSCA 16 (“Kairouz”).
Issues
35Pursuant to the Statement of Issues for Determination and amended pleadings submitted by the parties, there are eight issues as follows:
(a) Do each of the September Loan Agreements create an equitable charge over the Canterbury property as security for the moneys owed by the plaintiff to the defendants?
(b) Are SC F in each of September Loan Agreements void as penalties?
(c) How much money is owed by the defendants to the plaintiff under the September Loan Agreements as at the date of trial?
(d) Should an order for judicial sale be made in respect of the Canterbury property?
(e) If an order for judicial sale is to be made:
(i)What notice should be given to the other registered mortgagees of the Canterbury property?; and
(ii)What directions or orders should be made for judicial sale, including possession, under rr55.02 and 55.04 of the Rules?
(f) Should an order be made for the removal of the plaintiff’s caveat on the Canterbury property?
(g) Should a declaration be made to the effect that the plaintiff holds an equitable charge over the Canterbury Property for any judgment sum?
(h) Should declarations be made to the effect that:
(i)SC F is an unenforceable penalty; and
(ii)Mr Karvelis does not hold an equitable charge over the Canterbury property?
36Under Issue (c), I note that the plaintiff submits in his closing submissions that, should SC F be found unenforceable, the question for Court’s determination is what damages Mr Karvelis would otherwise be entitled to as a result of the defendants’ breach of the loan agreement.
37In their submissions in reply, the defendants reject this and suggest that Mr Karvelis has failed to plead any entitlement to damages or adduce any evidence in support of his claim.
38Pursuant to the plaintiff’s Amended Statement of Claim dated 18 February 2025, the plaintiff has not pleaded an entitlement to damages. As such, I agree with the defendants’ submission that the scope of the current proceeding is limited to the amount owed by the defendants under the September Loan Agreements as at the date of trial.
39The plaintiff did not press the question of whether the reference to the security in the loan agreements creates an equitable charge (Issue (a)) and the consequential Issue (g). The parties also agreed at the start of the trial that submissions in relation to Issues (d) and (e) ought to be deferred until after the determination on the primary judgment as they would only be engaged if there was a sum of money that was owed by the defendants.
40The issues for determination in the primary judgment are whether SC F is an unenforceable penalty, as articulated by Issue (b), how much money is owed by the defendants to the plaintiff under each of the September Loan Agreements, being Issue (c), whether the caveat on the Canterbury property should be removed, pursuant to Issue (f) and what, if any, declarations flow from the Court’s determination of Issues (b) and (c), comprising Issues and (h)(i) and (ii).
41It was common ground between the parties that the main issue in this case was whether SC F in each of the September Loan Agreements are void as penalties.
Submissions
The plaintiff’s submissions
42Mr Karvelis claims the sum of $870,963.76 in accordance with the 3% monthly compound fee imposed by SC F under the seventh and eighth loan agreements entered. The sum due under the September Loan Agreements totalled $275,400.00 as at 5 January 2020.
43Mr Karvelis further claims that it is not disputed between the parties that the defendants defaulted on their obligation to repay the sum of $275,400.00 by the due date of 5 January 2020, triggering the imposition of SC F.
44It was submitted that Mr Papavasiliou informed Mr Karvelis that, after he left Toll Holdings, he went into business for himself supplying food products and operated the business from home. Further, it was submitted that Mr Papavasiliou told Mr Karvelis that the business was doing extremely well – in a two-year period, the customer base had grown from 10 to 20 customers, to over 70 customers and was experiencing a rapidly increasing turnover.
45Mr Karvelis was further informed that Mr Papavasiliou and Ms Pizianas owned apartments in South Yarra and Hawthorn East, each approximately worth $500,000.00.
46Prior to entering into the first loan agreement, Mr Karvelis told Mr Papavasiliou that he owned a vacant block of land in Hawthorn that he intended to construct a house on before selling for a profit. Mr Karvelis also said that the drawings were already prepared, that he had spoken to builders and that he was in the process of obtaining permits.
47Mr Karvelis was informed by Mr Papavasiliou that he had purchased the Canterbury property four years prior for either $2.9 or $3 million, as well as spending over $1 million in renovations. Mr Karvelis noted that the Canterbury property was lovely and its finishes were of great quality. He also noted that the defendants drove expensive cars.
48At the time of entering into the first loan agreement, Mr Karvelis submits that Mr Papavasiliou represented that his business was thriving and that the purpose of the loan was to pay for additional stock to deal with growing customer demand. Mr Papavasiliou said that he wanted the loan period to be three to four months and offered a 20% establishment fee as consideration for the loan. Mr Papavasiliou further said that he had hoped Mr Karvelis could be an ongoing source of funding as seeking private funding would be onerous, cumbersome and expensive.
49Mr Karvelis suggested that the parties should consult a solicitor to prepare the loan agreement, but Mr Papavasiliou replied that there was no need in order to save money, especially given that the agreement was simple. The parties agreed that the amount repayable by Mr Papavasiliou under the first loan agreement, totalling $60,000.00, would be repaid by three monthly instalments.
50The fifth loan of $35,000.00 was for the purpose of Mr Papavasiliou paying his daughters’ private school fees.
51The seventh loan, which Mr Papavasiliou requested near the end of 2019, was for the purpose of paying Mr Papavasiliou’s daughters’ private school fees, purchasing further stock for his business and paying private bills.
52Before entering the seventh and eighth loan agreements, Mr Karvelis asked Mr Papavasiliou for his most recent bank statement for the Canterbury property. A screenshot was subsequently sent to Mr Karvelis, highlighting the amount due on the property to be $1,973,300.00, with a loan end date of 17 November 2044.
53On 13 September 2019, Mr Papavasiliou asked Mr Karvelis for a seven to ten-day loan of $5,000.00 to give his brother, who required financial assistance. The parties agreed that the total amount to be repaid would be $5,500.00.
54On 4 October 2019, Mr Papavasiliou asked Mr Karvelis for a loan of $18,000.00 to pay for flight tickets for Ms Pizianas and their daughters to visit Ms Pizianas’ ill mother living in the US.
55Until January 2020, when Mr Papavasiliou started working at Berringa Honey, no repayments were made by the defendants under the initial six agreements.
56During cross-examination, Mr Karvelis stated that:
(a) he and Papavasiliou became very close friends between April and May 2019;
(b) he was not in the business of lending money;
(c) the parties did not seek legal advice in drafting the loan agreements, at Mr Papavasiliou’s request, but nonetheless still reviewed the agreements line by line to ensure they reflected what was discussed between the parties;
(d) he believed the Canterbury property was worth over $5 million, which he considered in assessing the risk of lending money to the defendants;
(e) he believed that the defendants’ equity in the Canterbury property was approximately $3 million given the defendants had only disclosed the existence of a single mortgage over the Canterbury property with the National Australia Bank (“NAB”) and had rejected that there were any further mortgages or securities against it; and
(f) when the September Loan Agreements were entered into, Mr Karvelis’ ability to recover the loaned money against the Canterbury property and both apartments was one consideration, but he also took into account factors such as character, relationship, equity, work and income.
57From 15 May to 25 July 2019, the parties entered into six separate loan agreements, for values ranging between $20,000.00 and $50,000.00. The initial six agreements:
(a) were of a short-term, from three to four months in length;
(b) were for the purpose of purchasing stock for Alpha Logistic, with the exception of the fifth loan agreement, which was used to pay the private school fees for the defendants’ daughters;
(c) included a 20% establishment fee initially offered by Mr Papavasiliou and being the only consideration received by Mr Karvelis, with the exception of the fifth loan agreement, where the parties agreed on a lesser establishment fee of $5,000.00 given it was for a private purpose;
(d) were repayable by equal monthly instalments, with the exception of the fifth loan agreement, which was repayable in full at the end of the term of the loan (114 days);
(e) were secured by an equitable charge over both apartments owned by Mr Papavasiliou;
(f) contained Special Condition D, which deemed that the loans were in default if the monthly repayments were not made; and
(g) did not contain a liquidated damages clause operative upon default.
58Prior to entering the first loan agreement, Mr Papavasiliou shared with Mr Karvelis his driver’s license, council rate notices for both apartments and a copy of the certificate of registration for Alpha Logistic.
59Mr Karvelis accepts the defendants’ submission that the determination of whether a clause is an unenforceable penalty must be made at the time the agreement was entered into, taking into consideration the surrounding circumstances, and not at the time of the breach.[2]
[2] Arab Bank Australia Ltd v Sayde Developments Pty Ltd [2016] 93 NSWLR 231 at [74] (“Arab Bank”).
60Before parties entered into the first loan agreement, Mr Papavasiliou informed Mr Karvelis about Alpha Logistic and how well it was doing, as well as about his personal assets and what they were worth. In light of their pre-existing familial relationship and his observations regarding the defendants, Mr Karvelis submits that there was no reason for him to think Mr Papavasiliou would default on any loan agreements between the parties.
61Mr Karvelis was not in the business of loaning money. Mr Papavasiliou did not offer to provide and Mr Karvelis did not request financial documents such as balance sheets and income statements. Mr Karvelis submits that Mr Papavasiliou had proposed a 20% establishment fee and was induced into entering the initial six agreements, given the consideration offered by Mr Papavasiliou, the information Mr Papavasiliou provided about Alpha Logistic and his real estate assets and liabilities, as well as their familial relationship and close friendship. Mr Karvelis explains that SC F was not included in the initial six agreements because he had believed the loans would be duly repaid.
62Mr Karvelis submits that when Mr Papavasiliou requested a seventh loan of $50,000.00 in August 2019, Mr Karvelis needed time to think about it given Mr Papavasiliou had breach the terms of the initial six agreements by failing to make a single repayment. Mr Karvelis told Mr Papavasiliou that he would only grant the seventh loan if:
(a) it was signed by both defendants;
(b) the Canterbury property was included as additional security, on top of both apartments;
(c) the initial six agreements were consolidated into a new loan – the eighth loan agreement; and
(d) the consolidated loan would also include the Canterbury property as additional security.
63Prior to entering into the seventh and eight loan agreements, Mr Karvelis requested from Mr Papavasiliou a bank statement in respect to the Canterbury property. The Canterbury Bank Statement stated that the balance owing on the Canterbury property was $1,973,300.00, that the amount of interest charged in the previous financial year was $93,729.54 and that the amount of interest charged in the current financial year (at that time) was $16,033.92.
64Mr Karvelis submits that the Canterbury Bank Statement is questionable as it is undated and does not indicate which financial years are referred to in it, with no proof that it was current at the time the parties entered into the September Loan Agreements. Further, Mr Karvelis claims that the document has been derived online, does not display the NAB brand logo and only refers to the NAB in the text of the document in contrast to the NAB bank statement for the Hawthorn East apartment, dated 29 November 2019.
65Mr Karvelis suggests that SC F was included in the September Loan Agreements because of the increased risk that the loans would not be repaid by their due dates, a risk that he had not originally thought existed. In particular, this was because Mr Papavasiliou had defaulted on the initial six agreements.
66Mr Karvelis further suggests that SC F was intended to compensate him for the loss of the use of funds if repayments were not made by the defendants.
67Mr Karvelis submits that Mr Papavasiliou’s inability to make a single repayment under the initial six agreement – repayments as small as $8,000.00 – and the defendants’ inability to pay for expenses such as private school fees, private bills and emergency flight tickets, or to provide aid to relatives, such as Mr Papavasiliou’s brother who required financial assistance, indicate that the defendants were not of a sound credit risk.
68Mr Karvelis understood that Alpha Logistic, the defendants’ business, was growing rapidly and thriving, with low overheads, high margins and no employees other than the defendants. However, given the defendants’ inability to make the aforementioned repayments or meet reasonable expenses without having to borrow money, Mr Karvelis claims that the defendants had no regular source of income, or that their income was committed elsewhere, and therefore lacked the means to repay their loans, given repayments only started to be made when Mr Papavasiliou began working at Berringa Honey in January 2020.
69Further, Mr Karvelis states that, given several loans were made for the purpose of allowing Mr Papavasiliou to purchase stock for Alpha Logistic, loan repayments were to be made upon their customers paying their accounts – yet the income from those sales were used for other purposes.
70In addition, pursuant to the Hawthorn East Bank Statement, the amount owed was $426,000.00. However, Mr Karvelis states that, just six months prior, Mr Papavasiliou claimed that he only owed $300,000.00 on both apartments – and therefore the amount owed on the Hawthorn East apartment had increased by $126,000.00 in six months.
71Mr Karvelis submits that these circumstances collectively demonstrate that the defendants were not in a sound financial position at the time the parties entered into the seventh and eighth loan agreements.
72Mr Karvelis submits that SC F is not an unenforceable penalty because the fee it imposes is comparable to the establishment fees under the September Loan Agreements.
73Mr Karvelis states that the establishment fees of the seventh and eighth loans – 20% and 10% over four months, respectively – are equivalent to average monthly fees of 5% and 2.5%, greater than or approximately equivalent to the 3% monthly compound fee imposed by SC F. Mr Karvelis, therefore, suggests that the fees imposed by SC F are commensurate with the establishment fees over an equivalent four-month term, citing Lordsvale Finance Plc v Bank of Zambia, where Colman J held that an interest rate increase of 1% was found not to be a penalty as it was modest, commercially justifiable and consistent with the increased credit risk posed by a borrower in default.[3]
[3] Lordsvale Finance Plc v Bank of Zambia [1996] QB 752 at 763 (“Lordsvale Finance”).
74Because the fees are commensurate, Mr Karvelis claims that, objectively, the purpose of SC F was not to compel performance of the September Loan Agreements – but rather, to appropriately compensate him for the length of time the loans would be in default. Mr Karvelis further claims that, by not including a provision like SC F under the initial six agreements, it meant that he did not receive appropriate compensation when Mr Papavasiliou was in previously in default.
75Mr Karvelis submits that the lengthy period of default does not make SC F penal.
76Mr Karvelis states that, as the party asserting that SC F is an unenforceable penalty, the defendants bear the evidentiary and persuasive onus of proving so, in accordance with McDougall J in Arab Bank.[4]
[4] Arab Bank at [75], citing Paciocco v Australia and New Zealand Banking Group Limited 258 CLR 525 (“Paciocco”) at [167] as per Gageler J.
77Mr Karvelis submits that the September Loan Agreements were objectively not of a low risk given the defendants did not adduce any evidence and provided no discovery regarding their financial position. In particular, Mr Karvelis states that the defendants did not prove that the sum outstanding to the NAB over the Canterbury property was $2 million at the time the September Loan Agreements were entered into.
78Given this, Mr Karvelis submits that Jones v Dunkel[5] inferences should be drawn against the defendants. Mr Karvelis states that the defendants’ assertions that the September Loan Agreements were of low risk is undermined, given Mr Papavasiliou’s defaults under the initial six agreements, the private purposes for the loans and the lack of evidence surrounding the defendants’ financial position.
[5] (1959) 101 CLR 298 (“Jones v Dunkel”).
79Mr Karvelis claims that before the parties entered into the September Loan Agreements, when had he asked the defendants, they represented that there were no other mortgages encumbering the Canterbury property other than with the NAB.
80However, pursuant to a historical title search of the Canterbury property dated 29 November 2021 (“the 29 November 2021 Title Search”), there was an additional undisclosed mortgage registered on 25 February 2020 and a caveat lodged on 28 January 2021. Mr Karvelis admits that these interests were only registered after the parties entered into the September Loan Agreements, but that they still indicate that the agreements were not of a low risk.
81Mr Karvelis claims that the financial position of the defendants is exclusively within their own knowledge and, therefore, the defendants’ failure to adduce evidence allows for adverse inferences to be drawn against them, including in relation to the risk carried by the agreements.
82Further, Mr Karvelis suggests that the September Loan Agreements were not of low risk given the property security interests that the defendants provided were low-ranking equitable charges of questionable value. Mr Karvelis refers to the 29 November 2021 Title Search and the two existing registered mortgages and additional charge over the Canterbury property. As a holder of an equitable charge, Mr Karvelis states that competing property interests may arise should he seek to enforce the security.
83Mr Karvelis submits that the Canterbury property provided him with additional security for the September Loan Agreements and that the intention of the default fee imposed by SC F was to compensate him for the loss of the use of funds should the defendants default on their repayments.
84The 3% monthly compound fee imposed by SC F, Mr Karvelis states, cannot be said to be excessive when compared to the establishment fees of the September Loan Agreements.
85Mr Karvelis rejects the defendants’ submissions that the current proceeding is comparable to Titles Strata Management Pty Ltd v Frank Nirta,[6] where Daly AsJ found that an 8% monthly default rate was “sufficient to give rise to an inference that [the provision] is not a genuine estimate of the damage likely to be suffered but is a penalty”.[7]
[6] [2015] VSC 187 (“Titles Strata Management”).
[7] Titles Strata Management at [139], citing Robophone Facilities Ltd v Blank [1996] 1 WLR 1428 (“Robophone”).
86Mr Karvelis distinguishes the loan in Titles Strata Management, imposing a 8% monthly default rate and secured by a first mortgage with a loan value ratio of 60%,[8] with the 3% monthly compound fee imposed by SC F and secured by low-ranking charges of limited quality.
[8] Titles Strata Management at [4] and [141].
87Similarly, Mr Karvelis distinguishes Elberg v Fraval,[9] as referred to in the defendants’ submissions, where Habersberger J found that an increase in interest of 143% upon default was a penalty on its face. This increase was “exceptionally large”, unlike the rate imposed by SC F, Mr Karvelis submits.[10]
[9] [2012] VSC 342 (“Elberg”).
[10] Elberg at [107].
88Mr Karvelis agrees with the defendants’ submissions, that SC F does not take advantage of a distinction that provisions that charge a lower interest rate upon timely repayments, with a higher interest rate otherwise applicable, cannot be considered unenforceable penalties. Mr Karvelis states that this is because the September Loan Agreements do not charge interest – instead, consideration for the loans were fixed establishment fees.
89Mr Karvelis claims that the defendants have failed to provide case law in support of the proposition that a loan agreement with a fixed fee, with an interest rate payable upon default, is a penalty by that fact alone. Mr Karvelis refers to the loan agreements in Jasper Nominees Ltd v Kairouz and Murdaca, structured similarly to SC F, with a fixed sum payable as consideration and an interest rate applicable upon default of repayment, where the Supreme Court found that “undoubtedly high” default fees were still found to be enforceable.[11]
[11] [2023] VSC 718 at [363] (“Jasper Nominees”).
90Mr Karvelis, in responding to the defendants’ submissions that SC F is an unenforceable penalty due to the significant consideration being paid for the September Loan Agreements, states that this is not a relevant factor given the loans represent a private agreement that the parties entered into, which the Court has no power to alter in the absence of vitiating circumstances.
91Mr Karvelis agreed that he had entered the initial six agreements without SC F as he had expected Mr Papavasiliou to repay the loans when due, but that the provision was inserted into the September Loan Agreements in light of Mr Papavasiliou’s defaults.
92Mr Karvelis submits that SC F was not intended to punish the defendants but instead compensate him for the loss of use of his money should the defendants default on their repayments, especially given the establishment fees were the only consideration Mr Karvelis would be receiving.
93In response to the defendants’ submissions that SC F is a penalty because it is extravagant, out of all proportion or unreasonable, pursuant to the four-step test established by Lord Dunedin in Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd,[12] Mr Karvelis submits that the defendants have not pleaded this.
[12] [1915] AC 79 at page 87 (“Dunlop”).
94Further, in response to the defendants’ submissions that SC F is a penalty on its face, citing the lack of special circumstances that warrant the charging of such a high monthly default fee, Mr Karvelis refers NJ Capital Pty Ltd v AMKI Property Holdings Pty Ltd, where Fagan J found that the defendants could not discharge their burden of demonstrating that the default interest rate of 4% per month was an unenforceable penalty without pleading and proving facts concerning the circumstances of the loan and lender’s business.[13]
[13] [2021] NSWSC 1462 at [12] (“NJ Capital”).
95Mr Karvelis submits that he has adduced evidence to support his claim that SC F is justified – but, in contrast, the defendants have not adduced evidence supporting their claim that SC F is unwarranted.
96In addition, in response to the defendants’ characterisation of the default fee imposed by SC F, increasing from 0% to 3%, being excessive and punitive, Mr Karvelis submits that SC F must be viewed in the context of the fixed establishment fees, which, when converted to percentages, are approximately the same as the default fee imposed by SC F. Therefore, Mr Karvelis claims that SC F cannot be said to be extravagant, out of proportion or unconscionable with the damage expected to arise from default.
97While the default compound fee imposed by SC F increases month-on-month depending on how long the September Loan Agreements are in default and the outstanding sum to be repaid each month, Mr Karvelis suggests that a monthly compound fee is a genuine method of determining damage – even if a loan has been in default for a lengthy period of time and subsequently accrued a large fee – and therefore cannot be said to be an unenforceable penalty for this reason. Mr Karvelis states that the defendants have not made direct submissions regarding this and further refer to Jasper Nominees, where the Supreme Court accepted that there is nothing per se penal about compounding interest.[14]
[14] Jasper Nominees at [367].
98In response to the defendants’ submissions analogising the current proceeding with the default rates charged in Ronstan International Pty Ltd v Thomson,[15] Beil v Mansell (No 2),[16] Elberg and Titles Strata Management, Mr Karvelis submits that the default fees in each of the aforementioned cases was substantially higher than the 3% monthly compound fee imposed by SC F. Mr Karvelis further distinguishes Beil, as the increased interest rate applying upon default in that case was unjustified because there was no increased risk beyond that which was foreseen when the parties originally entered into the loan agreement.[17]
[15] [2002] VSCA 75 (“Ronstan International”).
[16] (2006) 2 QdR 499 (“Beil”).
[17] Beil at [27].
99Mr Karvelis submits that the defendants have described the fee imposed by SC F as “high”, but that this is below the standard required – that, for a provision to be an unenforceable penalty, it must impose a fee that is extravagant, out of all proportion or unconscionable in comparison to the maximum amount of foreseeable damage that may arise upon default.
100Mr Karvelis claims that there was no ongoing business relationship or running account between the parties and therefore, that the “first-in, first-out” rule from Devaynes v Noble, otherwise known as Clayton’s Case, does not apply in the current proceeding.[18] Mr Karvelis cites Airservices Australia v Ferrier for the definition of “running account”.[19]
[18] (1816) 35 ER 767 at page 781.
[19] [1996] HCA 54 at [14]-[15].
101Mr Karvelis agrees that the total repayments made by the defendants after 5 January 2020 totals $275,000.00 but rejects the defendants’ submission that the principal sum and establishment fees have been fully repaid – instead claiming that the repayments were applied to the balance outstanding at the date of receipt. Mr Karvelis submits that, from between 6 February to 5 March 2025, the balance outstanding on the seventh and eighth loan agreements totalled $870,963.76.
102In the plaintiff’s Supplementary Closing Submissions, Mr Karvelis sought to reject the defendants’ submissions, that the fee imposed by SC F was disproportionate compared to the objectively low risk posed by the September Loan Agreements, especially given Mr Karvelis understood that there was approximately $3 million equity in the Canterbury property alone.
103Mr Karvelis referred to a historical title search of the Canterbury property dated 11 March 2021 to demonstrate that, at the time the September Loan Agreements were entered into, the Canterbury property was encumbered by two mortgages.
104When Mr Karvelis had asked the defendants what mortgages they had over the Canterbury property, he claims that they only disclosed the mortgage to the NAB, with approximately $2 million owing. Mr Karvelis contends that he asked whether any additional mortgages existed, which the defendants rejected.
105Mr Karvelis refers to the 11 March 2021 Title Search showing that the Canterbury property was, in fact, encumbered by a second mortgage to a private lender, Grant Andrew Nicol – a fact that the defendants failed to give evidence about or inform him of. Mr Karvelis suggests that the defendants did not inform him of this additional mortgage because they feared he would not loan them the money if he had known.
106Mr Karvelis submits that, given this was a mortgage of unknown value, the defendants were in a worse financial position than they had represented and the default fees were therefore not excessive because the September Loan Agreements were not as low risk as had been submitted by the defendants.
107Mr Karvelis also submits that, in any event, the defendants failed to lead evidence that SC F imposed excessive default rates.
108Mr Karvelis rejects the defendants’ claim that he had understood that there was $3 million equity in the Canterbury property at the time of the agreements, because the defendants had knowledge of their financial position – including the existence of a second mortgage.
109In the plaintiff’s written note on the Court of Appeal authority of Kairouz, Mr Karvelis sought to reject the defendants’ submissions, distinguishing it with the material facts in the current proceeding.
110First, Mr Karvelis submits that while the respondent, a trustee for certain financiers, did not adduce evidence as to the loss the financiers faced if loaned monies were not repaid by the due date, neither did the borrowers adduce evidence that the rate of interest was exorbitant or unconscionable by reference to other market information or alternative borrowing opportunities available.
111Second, Mr Karvelis notes that the defendants’ submissions in reply suggest that they had approached other lenders for funding and states that the defendants likely preferred the terms of the September Loan Agreements as it was not as onerous, cumbersome or expensive as private funding.
112Third, Mr Karvelis claims that the defendants have not addressed the Court of Appeal’s recognition in Kairouz that “it would be extraordinary, given the significant amount paid for the [loan]… if the parties intended not to impose any such cost after the [due date]”.[20]
[20] Kairouz at [140].
113Fourth, Mr Karvelis clarifies a proposition made by the Court of Appeal, that a lump sum payment as consideration for a loan can relevantly be translated into an interest rate and compared with an open-ended rate applicable upon default, but there is also doubt as to whether a comparison of rates over several weeks as against several months or years offers a complete picture of the operation of the alleged penalty.
The defendants’ submissions
114The defendants acknowledge that Mr Karvelis claims an outstanding amount of $870,963.76 pursuant to the September Loan Agreements, and that Mr Karvelis claims that these amounts were secured by equitable charges over two apartments and the Canterbury property – noting that the two apartments have been sold.
115The defendants submit that all the sums payable under the September Loan Agreements have been fully repaid. The defendants further submit that the amount claimed by Mr Karvelis in the current proceeding, totalling $870,963.76, exclusively comprises of the default fee charged pursuant to SC F, which is an unenforceable penalty.
116It is submitted that Mr Papavasiliou and Mr Karvelis are related by marriage and had known one another for their whole lives, with their families growing up together. While they were estranged between their 20s to 40s, they reconnected in early 2019 when visiting a sick relative in hospital and began catching up socially. From March 2019 onwards, they saw each other frequently.
117Mr Papavasiliou, the first defendant, and Ms Pizianas, the second defendant, are married.
118The defendants note that Mr Karvelis has accepted that the opportunity for him to loan money arose from the personal relationship between the parties – not a business relationship, given Mr Karvelis was not in the business of loaning money.
119The defendants further note Mr Karvelis’ evidence that, before entering into any loan agreement, Mr Papavasiliou had informed Mr Karvelis that:
(a) the defendants had purchased the Canterbury property either four or nine years prior for approximately $3 million;
(b) the defendants had spent $1 million renovating the Canterbury property;
(c) the Canterbury property was worth between $5 million to over $6 million;
(d) there was $2 million owed on the Canterbury property;
(e) the defendants also owned two apartments – one in South Yarra, another in Hawthorn East; and
(f) the defendants owed approximately $300,000.00 on each apartment and they were worth $500,000.00 each.
120The defendants submit that Mr Karvelis had said that the Canterbury property was “a lovely property” and that the defendants had “done a great job” with the “superb renovation”. Further, having seen the finishes inside the Canterbury property, the defendants state that Mr Karvelis concluded that the defendants had spent over $1 million on renovations and accepted the value of the Canterbury property was as detailed by Mr Papavasiliou. This, the defendants submit, was supported by Mr Karvelis’ familiarity with property values in inner east Melbourne and his individual online research. The defendants state that Mr Karvelis therefore understood that the value of the Canterbury property was in excess of $5 million.
121It is submitted that the first loan between the parties was on or about 15 May 2019 and had the following features:
(a) it was between Mr Karvelis and Mr Papavasiliou;
(b) it was for the principal sum of $50,000.00;
(c) it was for the purpose of purchasing stock and product for Alpha Logistic;
(d) it required Mr Papavasiliou to pay a further $10,000.00 as consideration, totalling $60,000.00, to be repaid through monthly repayments;
(e) it was for a period of approximately three months, with the final repayment date on 16 August 2019;
(f) both apartments were provided as security; and
(g) it did not require the payment of interest, even if Mr Papavasiliou were to default on the loan.
122Prior to entering the first loan agreement, the defendants submit that they provided Mr Karvelis with council rate notices for the Hawthorn East and South Yarra apartments, indicating that the capital improved value for each of them was $450,000.00 and $420,000.00, respectively.
123Regarding the $10,000.00 establishment fee, the defendants concur that Mr Papavasiliou had offered to pay this amount as consideration for the first loan agreement, based on it being 20% of the amount loaned, with both parties had agreeing upon it.
124The defendants state that the first loan agreement was prepared entirely by Mr Karvelis, relying upon his existing understanding of finance through his past role as a Finance Manager at Garry & Warren Smith Mazda supplemented by internet searches to understand the formatting of a loan agreement. No lawyers were advised throughout the initial six loan agreements.
125Between the first loan agreement being entered into and 23 July 2019, the parties entered into six further loan agreements on substantially the same terms, but with varying loan amounts and repayment dates. The defendants submit that these agreements were drafted using the first loan agreement as a template and that Mr Papavasiliou did not request any changes to the agreement.
126The defendants state that, pursuant to the initial six agreements, Mr Papavasiliou was required to pay establishment fees – for five of the loans, the establishment fee was 20% of the loaned amount, while for one, the establishment fee was reduced as it was for school fees. Further, the initial six loan agreements did not require the payment of interest before or after their due dates.
127The total amount owed pursuant to the initial six loan agreements (principal loan amount plus establishment fees) was $214,000.00 and the defendants accept that they did not make any repayments as required prior to 5 September 2019.
128In late August 2019, Mr Papavasiliou requested a seventh loan of $50,000.00 to pay for the defendants’ daughters’ private school fees, purchase further stock for Alpha Logistic and pay private bills. The defendants submit that it took Mr Karvelis time to consider this request given they had not provided any instalments as required under the initial six agreements and eventually had agreed to provide a further loan but on the following terms:
(a) it was signed by both defendants;
(b) the Canterbury property was included as additional security, on top of both apartments;
(c) the initial six agreements were consolidated into a new loan – the eighth loan agreement; and
(d) the consolidated loan would also include the Canterbury property as additional security.
129The defendants submit that, upon Mr Papavasiliou checking with Ms Pizianas, they were happy to proceed with the terms provided by Mr Karvelis and provided, at Mr Karvelis’ request:
(a) a council rate notice for the Canterbury property showing that its capital improved value was $3,255,000.00; and
(b) the Canterbury Bank Statement, stating that the balance owed on the Canterbury property was $1,973,300.00.
130The defendants refer to Mr Karvelis’ evidence, that he took the capital improved value “with a grain salt” as it was “very, very common for the true values to far exceed that by multiple of 30 percent or more” and that it was still worthwhile to lend money to the defendants in light of the amount of equity in the Canterbury property.
131The defendants further emphasise that the Mr Karvelis understood that there was around $3 million of equity in the Canterbury property prior to entering into the September Loan Agreements and, taking this into account when assessing the risk of providing a further loan to the defendants, was comfortable that he had all he needed to ensure that the loaned monies could be recovered against both apartments and the Canterbury property.
132The defendants submit that the September Loan Agreements were prepared by Mr Karvelis, wholly in writing and substantively on the same terms, as follows:
(a) the defendants were required to pay significant establishment fees ($10,000.00 for the seventh loan agreement and $21,400.00 for the eighth loan agreement);
(b) the loans were for a short-term period, due in four months, with a repayment date of 5 January 2020;
(c) no interest was charged on the loaned money if it was repaid on time;
(d) the loans contained SC F, which imposed a 3% monthly compound fee upon default, calculated based on the balance remaining on 5 January 2020 and the fifth of each subsequent month; and
(e) the loans were secured against the Canterbury property and both apartments.
133The defendants state that, pursuant to the seventh loan agreement, a total of $50,0000.00 was advanced to them on 30 August 2019 and 5 September 2019 from Mr Karvelis.
134The loaned money and establishment fees under the September Loan Agreements sum to $295,400.00. The defendants accept that, as at 5 January 2020, they had only repaid $20,000.00 towards the September Loan Agreements. The defendants further accept that, as at 14 February 2023, they had paid all but $5,418.76.
135As already stated above at the start of trial, Mr Papavasiliou conceded that the defendants had erroneously allocated repayments under a different loan, not the subject of the current proceeding, to the September Loan Agreements. As such, the defendants submit that $5,418.76 was paid to Mr Karvelis on 19 February 2025.
136The defendants cite the following legal propositions from the majority judgment in Paciocco v Australia and New Zealand Banking Group Ltd:[21]
(a) the purpose of a penalty is to punish a borrower for contractual breach and compel performance;
(b) a stipulation is penal if it is extravagant, out of all proportion or unconscionable compared to the maximum amount of damage that might follow from a contractual breach;
(c) “damage” is distinct to “damages” and included losses caused by the impairment of other legitimate commercial interests;
(d) the analysis of whether a contractual stipulation is a penalty occurs at the time the agreement was entered into (ex ante);
(e) a stipulation is not penal if it is merely disproportionate with the damage that could possibly be suffered; and
(f) whether a stipulation is a penalty should be assessed objectively.
[21] Paciocco.
137The defendants note that case law recognises that contractual clauses that impose a lower rate of interest for timely payment and a higher rate of interest otherwise are generally not unenforceable penalties.[22] The defendants provide several illustrative cases to demonstrate that if a stipulation provides for an increased interest rate that is “other than modest”, it will be considered an unenforceable penalty.[23]
[22] Kellas-Sharpe v PSAL Ltd [2012] QCA 371 at [32]-[38].
[23] Robophone; Ronstan International; Beil; Elberg; Titles Strata Management.
138The defendants submit that SC F is a penalty because the September Loan Agreements were objectively of a low risk, given:
(a) they were secured against three different properties;
(b) the parties understood that there was approximately $3 million in the Canterbury property;
(c) Mr Karvelis was only advancing a further $50,000.00 to the defendants under the seventh loan agreement; and
(d) The eighth loan agreement was a consolidation of the initial six agreements, meaning Mr Karvelis already bore the risk of non-recovery. Further, the defendants argue that risk of non-recovery under the September Loan Agreements was in fact reduced, given Ms Pizianas was an additional party to the agreement as well as the additional security of the Canterbury property.
139Therefore, the 3% monthly compound fee imposed by SC F, the defendants suggest, is excessive and not commensurate with the relatively low-risk nature of the September Loan Agreements.
140In particular, the defendants analogise Titles Strata Management, where Daly AsJ found that a provision providing for an increase from a 3% to 8% monthly interest rate was a penalty, on its face.[24] The defendants draw particular attention to the absence of evidence adduced by the plaintiff to demonstrate that the increased interest rate was in accordance with an estimate of loss, especially as the loan was already secured.
[24] Titles Strata Management at [123].
141Further, the defendants suggest that the wording of SC F does not take advantage of the aforementioned distinction – that loans that charge a lower interest rate if repayments are made on time, and with higher rates otherwise applicable, are not considered as unenforceable penalties. Instead, the defendants submit that the September Loan Agreements are not interest-bearing loans but charge a “fee” upon default. The word “fee”, the defendants submit, indicates that the SC F charge was not intended to be regarded as an interest rate.
142Additionally, the defendants submit that the high establishment fees of the September Loan Agreements, amounting to 20% of $50,000.00, as per the seventh loan agreement, and 10% of $214,000.00, as per the eighth loan agreement, is significant consideration. The September Loan Agreements were also otherwise secured against the Canterbury property and by both apartments.
143Given Mr Karvelis’ willingness to loan money prior to the September Loan Agreements without interest payable upon default, as noted by the initial six loan agreements, the defendants describe that Mr Karvelis was prepared to loan money for only the establishment fees as consideration.
144The defendants submit that Mr Karvelis provided evidence to the effect that he was satisfied that the loaned money was recoverable against the three properties provided as security.
145The defendants further state that if the purpose of the establishment fees was to provide consideration for Mr Karvelis and the purpose of the securities was to ensure recovery of outstanding loans, then it follows that the purpose of SC F is to punish the defendants if they were to breach their repayment obligations and thus to compel performance.[25]
[25] Paciocco.
146Finally, the defendants suggest that, because Mr Karvelis failed to adduce evidence regarding the loss that he expected to suffer should the defendants default on their loan obligation, it must be said that SC F is extravagant, out of all proportion or unconscionable compared to the maximum amount of damage that would follow from default, in accordance with the test from Paciocco.[26]
[26] Ronstan International; Beil; Elberg; Titles Strata Management.
147The Court should, therefore, find, according to the defendants, that SC F is a penalty on its face – as it has done so in Ronstan International, Beil, Elberg, and Titles Strata Management – given the 3% monthly compound fee is greater than default rates previously found by the Court to be unenforceable penalties.
148The defendants submit that they have fully repaid the principal loan moneys and establishment fees, and that, if the Court were to find that SC F is an unenforceable penalty, the defendants would not be owing money under the September Loan Agreements.
149If so, the defendants seeks that the Court exercise its discretion pursuant to s 90(3) of the Transfer of Land Act 1958 (Vic) (“the TLA”) to order the removal of Mr Karvelis’ caveat over the Canterbury property, given the loans have been fully repaid by the defendants.
150The defendants further seek declarations that:
(a) SC F in the September Loan Agreements are unenforceable penalties; and
(b) Mr Karvelis does not hold an equitable charge over the Canterbury property.
151In granting declaratory relief, the defendants establish the key principles that apply:
(a) the power to grant declaratory relief, when exercised by a Court, is statutory;
(b) as the party seeking declaratory relief, the defendant need not have a subsisting cause of action; and
(c) the power to grant declaratory relief is discretionary and must be determined in accordance with whether the person seeking the relief has a real interest in it.
152The defendants submit that the Court should dismiss Mr Karvelis’ claim, make an order for the removal of the caveat from the Canterbury property and make the aforementioned declarations sought by the defendants.
153In the defendants’ Reply Submissions, they highlight that Mr Karvelis’ submissions undermining the reliability of the Canterbury Bank Statement are irrelevant.
154First, the defendants submit that Mr Karvelis has not brought a claim that he was wrongly induced into entering the September Loan Agreements due to incomplete, false or misleading information provided by the defendants – nor did he adduce evidence to that effect and of his reliance upon such information.
155Second, the defendants suggest that their financial position is irrelevant in the current proceeding, as the objective question to be answered is whether SC F is extravagant, out of all proportion to or unconscionable in comparison with the maximum amount of damage anticipated to result from a default on the agreements.
156The defendants claim that the plaintiff has not adduced evidence in support of their claims that:
(a) SC F reflects the greater risk carried by the September Loan Agreements, in comparison to the initial six agreements; and
(b) the September Loan Agreements were intended to compensate Mr Karvelis for the opportunity loss he would suffer should the defendants default on repayment;
and, based on the available evidence, the Court should objectively find that the purpose of SC F is more likely to punish and compel performance as opposed to compensate.
157Further, the defendants reject that events after entry into the September Loan Agreements, such as the circumstances surrounding the ninth and tenth loan agreements, should be taken into consideration, as the Court must consider the damage that might be anticipated to follow from the breach of the agreements.
158The defendants reject the plaintiff’s submissions that the establishment fees can be converted to an interest rate and compared with SC F, referring to the lack of evidence adduced by Mr Karvelis that it was intended to represent a price per month for the loan, and because the amount of the establishment fee varied according to the purpose of the loan and whether it was intended for business or personal use. The defendants also cite that the Court of Appeal has rejected that a useful comparison can be drawn between lump sum consideration for a loan and default rates.[27] This is considered in more detail below.
[27] Kairouz at [138].
159The defendants submits that while Mr Karvelis contends that the intention of SC F was to appropriately compensate him for the opportunity cost of default for the length of time the September Loan Agreements were in default, Mr Karvelis failed to adduce evidence to this effect. The claim that Mr Karvelis “needed [the] funds returned by that date”, the defendants analogise, is similar to the evidence given by the lender in Titles Strata Management, that they wanted to “encourage prompt repayment” from the borrowers.[28]
[28] Titles Strata Management at [11].
160Further, the defendants state that Mr Karvelis did not adduce evidence regarding the loss he would suffer should the defendants default on the September Loan Agreement and, as an extension, that the 3% monthly compound fee imposed by SC F is comparable with such a loss. The defendants argue that, objectively, the purpose of SC F was not to compensate – nor did it reflect the loss Mr Karvelis expected to arise from the defendants defaulting on the September Loan Agreements.
161Regarding Mr Karvelis’ analogy to Lordsvale Finance in their submissions, the defendants distinguish the case by noting that the 1% interest rate increase upon default is three times less than the 3% monthly compound rate in the current proceeding, as well as the fact that the defendants in the current proceeding did not pose a greater credit risk given the initial six agreements were already in default at the time of the September Loan Agreements.[29]
[29] Lordsvale Finance.
162The defendants further submit that Mr Karvelis would be entitled to claim damages for breach of contract if SC F were not included.
163Responding to Mr Karvelis’ submissions that his interest in the Canterbury property and both apartments were “low ranking equitable charges”, the defendants mention that Mr Karvelis was of the understanding that there was $3 million equity in the Canterbury property alone – considerably more than the sum of the September Loan Agreements.
164The defendants challenge Mr Karvelis’ submissions that distinguish Titles Strata Management by stating that, while the Court found a 5% interest rate increase upon default to be a penalty on its face, nothing on the facts demonstrates that the Court would have decided differently if the increase was instead 3%, as imposed by SC F.[30]
[30] Titles Strata Management.
165Responding to Mr Karvelis’ submissions that the defendants did not provide case law demonstrating that an interest rate operating upon default, in addition to a fixed fee, may be an unenforceable penalty, the defendants explain that the question to be determined is whether or not SC F is proportionate, or at least not out of all proportion, to the loss Mr Karvelis would suffer due to the defendants’ default.
166The defendants refer to the case Jasper Nominees, where provisions imposing 60% and 120% per annum fees were found by the Supreme Court (and upheld by the Court of Appeal in Kairouz) not to be penalties, as “unusual”.[31] In doing so, they distinguish the facts of Jasper Nominees as:
(a) the parties “perceived [the loans as] extremely high risk”, unlike the September Loan Agreements;[32]
(b) the borrower was in the business of lending money, whereas Mr Karvelis was not;[33]
(c) parties were of considerable commercial sophistication and had no shortage of legal advice, unlike the agreement in the current proceeding, arising from a familial relationship and drafted without solicitors;[34]
(d) the debtor had received the best available terms, unlike the defendants in the current proceeding;[35]
(e) the loan agreement included other clauses operative upon default that had other burdensome clauses, whereas SC F operated alone in the current proceeding;[36] and
(f) a significant amount was paid for the loan facility (a loan of $36.5 million with $41.25 million to be repaid, and a loan of $2 million with $2.4 million to be repaid), as opposed to the small loans in the current proceeding.[37]
[31] Jasper Nominees; Kairouz.
[32] Kairouz at [107].
[33] Kairouz at [1].
[34] Kairouz at [107].
[35] Kairouz at [107].
[36] Kairouz at [106].
[37] Kairouz at [140].
167The defendants further submit that the Court of Appeal rejected that a comparison could be drawn between a lump sum payment and a default rate, given a default rate is “open-ended” and has “rapidly escalating operation”.[38]
[38] Kairouz at [138].
168The defendants respond to Mr Karvelis’ submissions that the defendants had not pleaded matters relating to the test set out in Lord Dunedin in Dunlop by stating that such a test was reasonably expected given the long-standing principles against the enforceability of penalties.[39]
[39] Dunlop.
169In the defendants’ Supplementary Submissions, they respond to Mr Karvelis’ Supplementary Closing Submissions and, in particular, reject the relevance of the 11 March 2021 Title Search, emphasising that the actual financial position of the defendants is irrelevant and that the Court should only consider whether the parties objectively believe that the September Loan Agreements were of a high or low risk.
170In particular, the defendants state that parties had understood there to be approximately $3 million of equity in the Canterbury property – regardless of the actual position of the parties.
171The defendants further analogise examples of case law where Courts have emphasised the importance of the lender’s understanding at the time of agreement, as opposed to parties’ actual financial positions:
(a) Chesterman J, in Beil, found that a provision imposing an increase from 16% to 25% per annum was a penalty because it was “not underwritten by any increase in risk beyond that which was foreseen when the agreement was made” (emphasis added);[40]
(b) Daly AsJ, in Title Strata Management, found that a provision imposing an increase from 3% to 8% per month was a penalty as “Title Strata held (or at least it thought it held) ample security for the money advanced, being mortgages over the pizza shop and the home, with a loan to valuation ration of approximately 60 per cent” (emphasis added); and
(c) Chesterman J, in Jasper Nominees, found that the two relevant loan agreements “were perceived as extremely high-risk loans” (emphasis added), therefore, concluding that provisions imposing 60% and 120% per annum fees were not penalties.
[40] Beil at [27].
172The defendants submit that even if the Court were to find that the 11 March 2021 Title Search was relevant, the September Loan Agreements were still objectively low-risk at the time the parties entered into it given the limited evidence adduced by Mr Karvelis does not allow the conclusion to be drawn that the defendants’ failure to disclose the second mortgage on the Canterbury property meant they were in a worse financial position than they had represented, and that they feared that disclosing their financial position would result in them not receiving the loan.
The witness
173Mr Karvelis was the only witness called during the trial and gave evidence for the plaintiff.
174Mr Karvelis generally presented as a careful, considered witness who was ready to make appropriate concessions. There certainly were gaps in his recollection – however, his memory lapses were generally explicable by the extensive effluxion of time involved with the current proceeding.
175Mr Karvelis is currently a personal investor in the share market. Prior to this, he was a Finance and Business Manager at Garry & Warren Smith Mazda between 2000 and 2015 and worked in finance for the General Motors Acceptance Corporation between 1988 or 1989 and 2000.
176Mr Karvelis and Mr Papavasiliou are distant cousins related by marriage. They grew up together due to the close relationship between their families and have known each other their entire lives. However, between their 20s to 40s, the two men became estranged and got on with their own personal lives.
177In February or March 2019, Mr Karvelis reconnected with Mr Papavasiliou when, as a coincidence, they visited their mutual second cousin’s wife in hospital at the same time, who was gravely ill. The two men communicated like lost friends and spoke to one another a few times a week, attempting to reacquaint themselves. During this period, Ms Pizianas was only present for some of the conversations between Mr Papavasiliou and Mr Karvelis. As they continued to catch up, they would visit each other’s homes and “break bread”.
178Mr Papavasiliou told Mr Karvelis that he had previously been employed as a middle or senior executive at Toll Holdings. In this role, Mr Papavasiliou was earning about $300,000.00 annually. In 2015 or 2016, Mr Papavasiliou left Toll Holdings with a severance package after it was taken over by a Japanese company that brought in its own staff. Shortly thereafter, Mr Papavasiliou got into the business of supplying food products. Mr Papavasiliou previously had a business partner who he worked with for several years, but by early 2019, he no longer had the business partner. Mr Karvelis also shared that he had been working in the finance industry.
179At the time of reconnecting with Mr Karvelis, Mr Papavasiliou operated his business – Alpha Logistic – with his wife, Ms Pizianas. He supplied bio-cheese products that did not contain milk in the manufacturing process, olives from Greece, oils and bottled water. Bio-cheese stock was kept in a cold storage facility in Narre Warren and delivered by Mr Papavasiliou to customers, who were generally health food stores. Surplus stock and stock that did not require refrigeration, including olives and oil products, was stored at his home. It was Mr Karvelis’ understanding that Mr Papavasiliou did not have a separate business premise to operate Alpha Logistic.
180Mr Papavasiliou told Mr Karvelis that the business was doing very well, turning over approximately $300,000.00, with his customer base growing from 10 or 20 to 70 customers within two years. Mr Papavasiliou stated that his margins were high, and his overheads remained low as he would personally deliver the products, while Ms Pizianas played an administrative role, managing customer orders and preparing invoices.
181During their discussions, Mr Papavasiliou told Mr Karvelis that he had purchased the Canterbury property approximately four years earlier and had spent over $1 million renovating it. Mr Karvelis believed this, given the high quality of the finishes – including marble, woodwork, and plaster. Mr Papavasiliou also informed Mr Karvelis that he had purchased the property for between $2.9 million and $3 million, suggesting it was now worth between $5 million and $6 million. Mr Papavasiliou further stated that he owed just under $2 million on the Canterbury property. Mr Karvelis had no reason to doubt any of these assertions.
[63] Paciocco at [166].
249Following this, in response to Mr Karvelis’ submissions, while it may be true that the defendants have not cited case law demonstrating that a loan agreement with a fixed fee and interest rate payable upon default has been deemed an unenforceable penalty, this is irrelevant to my assessment of whether SC F is a penalty, which will depend on the specific terms and circumstances of the current proceeding.
250I do, however, accept Mr Karvelis’ submission that SC F is not penal solely because it enforces a compound fee calculated as a percentage of the outstanding debt owed. As recognised in Jasper Nominees, “there is nothing per se penal about compounding interest” – the question is whether SC F is out of all proportion to the interests of Mr Karvelis, to be determined on the specific terms and circumstances of the current proceeding.[64]
[64] Jasper Nominees at [367].
Onus of proof
251Mr Karvelis submits that the defendants bear the evidentiary and persuasive onus of establishing that SC F is an unenforceable penalty, an onus that, he alleges, they have failed to discharge by adducing no evidence and providing no discovery demonstrating the penal character of SC F. The defendants, while acknowledging that they bear this onus, submit that it has been appropriately discharged given it is a relatively low bar to clear.
252On the question of whether the defendants have discharged their evidentiary and persuasive onus, White J observed in Bay Bon Investments Pty Ltd v Selvarajah[65] that:
“Whilst I accept that the onus is on the defendant to show that the provision is a penalty, it appears to me that once some evidence is adduced which may be sufficient to satisfy that onus, there is an evidentiary onus on the plaintiff to explain the nature of its business, the rates at which it is able to lend, and how, when the contracts were entered into, it would have been anticipated that the moneys would be re-deployed on repayment of the loans. This information was entirely in the plaintiff’s camp. Evidence is to be weighed according to the power of a party to produce it. Where facts are peculiar within the knowledge of one party, comparatively slight evidence may be sufficient to discharge the onus of proof lying on the opposite party.” (emphasis added)
[65] [2008] NSWSC 1251 at [51].
253In Bellas,[66] Robb J, in accordance with the principles laid down by Diplock LJ in Robophone,[67] discussed whether the difference in the parties’ respective abilities to adduce evidence in support of their case results in the onus of proof shifting:
“Consequently, although the burden of proving that a contractual provision is a penalty always remains on the party who makes that claim, which in the context of a loan agreement will generally be the borrower, the lender will need to tender the contract to prove the debt claimed, and the terms of the contract will constitute evidence that may cause an evidentiary onus to shift to the creditor. As the interests that the challenged provision is intended to protect will be the interests of the creditor, and as the information relevant to the need for the creditor to be able to rely upon the provision to protect those interests may be solely within the creditor’s province, the failure of the creditor to lead evidence beyond the contract may have the effect that the presumption operates, notwithstanding its weakness.” (emphasis added)
[66] Bellas at [67].
[67] Robophone at 1447.
254Justice Habersberger, in Elberg, found that a nearly 143% increase on a pre-existing default rate was “exceptionally large” and a penalty on its face.[68] Justice Chesterman, in Beil, found that a 9% increase in interest upon default was “on its face, exorbitant” and therefore a penalty.[69] Associate Justice Daly, in Titles Strata Management, found that a 5% increase in interest upon default was “on its face, ‘extravagant, exorbitant or unconscionable’”.[70]
[68] Elberg at [107].
[69] Beil at [27].
[70] Titles Strata Management at [123], citing Dunlop at 87.
255SC F imposes a 3% compound penalty fee – far less than the penalty rates described in the cases above. Therefore, in the absence of considering other evidence, I cannot make the same conclusions, prima facie, in this particular factual scenario, that SC F is so exceptionally large that it is a penalty.
256However, I do agree that the onus the defendants bear is not a heavy one for the reasons below.
257First, there is sufficient relevant evidence before the Court “concerning the circumstances of the loan” agreements.[71] I note that the relevant evidence the defendants have sought to adduce includes the context of the familial relationship between the parties, dating back to early 2019, the detailed circumstances of the initial six loan agreements entered into between 15 May 2019 and 5 September 2019, the terms of the September Loan Agreements, including SC F.
[71] NJ Capital at [12].
258Second, as submitted by Mr Karvelis, while it may be true that the defendants have not adduced evidence comparing the rate offered by Mr Karvelis to existing market rates or rates otherwise available to them, I find this to be unnecessary for the purpose of this issue given my rejection of the “favourable terms” submissions as detailed above. I also note that market rates are irrelevant given the loan agreements, as admitted by Mr Karvelis during cross-examination, arose not out of a commercial relationship, but instead, from a pre-existing familial relationship.
259Third, and in contrast to the defendants in NJ Capital, the defendants are not in the position to plead or prove facts that “address the cost of funds to the plaintiff” given Mr Karvelis has provided that he is not in the business of loaning money to others.[72] Relevant evidence of damage incurred, such as a potential rate of return that Mr Karvelis would otherwise receive, is solely in the power of the plaintiff to produce. The only relevant information available to the defendants is limited to the returns that a reasonable investor may expect to receive in an ordinary year, far below the 3% monthly compounding fee imposed by SC F.
[72] NJ Capital at [13].
Construction
260Both parties agree that the September Loan Agreements are not constructed as loans imposing a lower rate of interest for timely payment, with a higher rate otherwise applicable – an arrangement which has typically been found not to be a penalty.[73] However, both parties disagree on how the 3% monthly compound fee under SC F should be construed in light of the establishment fees.
[73] Brett v Barr Smith [1919] 26 CLR 87 at pages 94-95; Titles Strata Management at [135]; Kellas-Sharpe v PSAL Ltd [2012] QCA 371 at [25]-[49]; O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 at [5]; Acron Pacific Ltd v Offshore Oil NL (1985) 157 CLR 514 at [6].
261Mr Karvelis equates the 20% establishment fee in the seventh loan agreement to an average monthly fee of approximately 5% over the four-month loan, and the 10% establishment fee in the eighth loan agreement to an average monthly fee of approximately 2.5% over the four-month loan, submitting that the 3% monthly compound fee imposed by SC F is, respectively, less than or only a small increase in comparison to the rate set by the establishment fees. Such a minor increase, Mr Karvelis argues, cannot be said to be extravagant and unconscionable.
262The defendants, on the other hand, submit that the 3% monthly compound fee imposed by SC F should not be compared to the establishment fees, but must instead be assessed alone. They argue that, unlike SC F, the establishment fees incorporated an element of “good will” based on the purpose of the loan. Further, the defendants submit that the Court of Appeal in Kairouz rejected the proposition that any useful comparison could be drawn between a lump sum payment for the use of money over an initial loan period with a particular rate that would operate upon default.[74]
[74] Kairouz at [138].
263I accept the defendants’ submissions. In assessing whether SC F is an unenforceable penalty, I am unwilling to compare the establishment fees of the September Loan Agreements with the 3% monthly compound fee imposed by SC F, given their distinct operation. In particular:
(a) First, while the parties may have informally discussed the establishment fee as a percentage of the loan monies, the express terms of the seventh and eighth loan agreements treat the establishment fees as single lump sum payments of $10,000.00 and $21,400.00, respectively. This is as opposed to the ongoing 3% monthly compound fee imposed by SC F, that varies and is calculated as a percentage of the balance remaining on the fifth of each subsequent month;
(b) Second, in Mr Karvelis submissions, he states that the establishment fees are consideration for loaning money to the defendants – distinct to the purpose of SC F, which Mr Karvelis submits is to recoup for the possible opportunity cost he would suffer should the defendants default on their loan repayments; and
(c) Third, the 3% monthly compound fee imposed by SC F is “open-ended” with a “rapidly escalating operation”, in comparison to the one-off, short-term establishment fees in the September Loan Agreements – and therefore, a comparison of establishment fees over a four-month period, as against SC F applying for several years, does not offer a “complete picture of the operation of the impugned provision.”[75]
[75] Kairouz at [138].
264Therefore, in my analysis of whether SC F is an unenforceable penalty, I determine that SC F imposes a standalone 3% monthly compound fee that would otherwise not exist if there were timely repayment of the loans. In other words, I will not consider the establishment fee as a base interest rate and instead view SC F in isolation – as per the accepted submissions of the defendants, following Kairouz. It is not useful to compare the establishment fee with SC F, a monthly compound fee.
Ex ante
265Mr Karvelis argues that SC F is not out of all proportion and was included to protect his interests in light of the risk that the defendants would be in default of their obligations under the September Loan Agreements. Mr Karvelis suggests that the September Loan Agreements were not of a low risk, as submitted by the defendants, given:
(a) the defendants did not provide evidence of their financial position at the time of the September Loan Agreements. Further, the Canterbury Bank Statement provided, showing that the amount owing on the Canterbury property was $1,973,300.00, was of questionable accuracy;
(b) the 29 November 2021 Title Search shows that an additional mortgage and caveat were lodged over the Canterbury property on 25 February 2020 and 28 January 2021 respectively, after the parties entered into the September Loan Agreements;
(c) the 11 March 2021 Title Search shows that the Canterbury property was encumbered by a second mortgage at the time of the September Loan Agreements which the defendants did not inform Mr Karvelis about, even when asked;
(d) the security provided by the defendants to Mr Karvelis were low-ranking equitable charges of questionable value;
(e) Mr Papavasiliou required loans from Mr Karvelis to pay for living expenses, such as private school fees, private bills, emergency flight tickets, or to provide financial assistance to his brother; and
(f) Mr Papavasiliou had defaulted on the initial six loan agreements and was unable to make a single repayment as scheduled – even for as little as $8,000.00.
266Whether SC F is an unenforceable penalty is an ex ante assessment – that is, conducting an assessment at the time the contract was entered into.[76]
[76] Paciocco at [62] and [169].
267I do not accept Mr Karvelis’ submissions that the Court should draw adverse inferences (pursuant to Jones v Dunkel)[77] against the defendants, given the lack of evidence they adduced surrounding their financial position at the time of entering into the September Loan Agreements.
[77] Jones v Dunkel.
268Prior to 5 September 2019, Mr Karvelis requested additional documentation from the defendants which they provided, including Ms Pizianas’ driver’s license, the council rates notice for the Canterbury property and the Canterbury Bank Statement. At the time, if Mr Karvelis was concerned that such information provided was insufficient and he wanted a better understanding of the defendants’ financial position, he was able to request further documentation prior to entering the September Loan Agreement.
269Further, while it may be true that, in retrospect, the Canterbury Bank Statement was of questionable accuracy, at the time of entering into the September Loan Agreements, I find that Mr Karvelis was of the understanding that there was only a single mortgage over the Canterbury property worth approximately $2 million, due to representations made by the defendants. I do not find that the lack of evidence surrounding the defendants’ financial position – nor the questionable accuracy Canterbury Bank Statement – are relevant in assessing the risk of the September Loan Agreements for the reasons above.
270Regarding the submissions Mr Karvelis has made regarding the existence of undisclosed mortgages and interests in the Canterbury property, based on the 29 November 2021 and 11 March 2021 Title Searches, I acknowledge that while the defendants’ alleged failure to disclosure the existence of other interests in the Canterbury property may be frustrating, this proceeding does not concern whether Mr Karvelis was misled into entering the September Loan Agreements.
271For the Court’s determination in the current proceeding, it is irrelevant that the Canterbury property was encumbered by an additional mortgage or caveat, as a matter of fact, at the time of the agreement – it is only relevant that Mr Karvelis was not of the understanding that it was. I note the defendants’ submissions of relevant case law supporting this proposition:
(a) Justice Chesterman, in Beil, found that a provision imposing an increase from 16% to 25% per annum was a penalty because it was “not underwritten by any increase in risk beyond that which was foreseen when the agreement was made” (emphasis added);[78]
(b) Associate Justice Daly, in Title Strata Management, found that a provision imposing an increase from 3% to 8% per month was a penalty as “Title Strata held (or at least it thought it held) ample security for the money advanced, being mortgages over the pizza shop and the home, with a loan to valuation ration of approximately 60 per cent” (emphasis added);[79] and
(c) Justice M Osborne, in Jasper Nominees, found that the two relevant loan agreements “were perceived as extremely high-risk loans” (emphasis added), therefore concluding that provisions imposing 60% and 120% per annum default fees were not unenforceable penalties.[80]
[78] Beil at [27].
[79] Titles Strata Management at [141].
[80] Jasper Nominees at [363].
272Referring to the alleged low-ranking equitable charges of questionable value provided to Mr Karvelis, I will not consider this as heightening the risk of the September Loan Agreements. This is for two reasons:
(a) First, as admitted by Mr Karvelis during examination in chief, Mr Karvelis accepted that obtaining a high-ranking charge over the Canterbury property, such as a caveat, would result in the defendants experiencing greater difficulty in organising refinancing to repay the September Loan Agreements. I find that Mr Karvelis considered this to be against his self-interest, explaining why he did not press the matter further at the time; and
(b) Second, and as addressed above, Mr Karvelis had no reason to believe that his security interest in the Canterbury property would be contested. He operated with the understanding that the only other interest in the Canterbury property was a mortgage owed to the NAB worth $2 million, with over $3 million equity remaining, making the September Loan Agreements still worth his while. In light of the considerations above, I find that Mr Karvelis did not perceive his security interest in the Canterbury property to be of a low rank at the time he entered into the September Loan Agreements.
273Additionally, I do not accept Mr Karvelis’ submissions that Mr Papavasiliou’s inability to pay for expenses such as private school fees, private bills, emergency flight tickets, or to provide financial assistance to his brother without obtaining a loan is relevant to assessing the risk of the September Loan Agreements. This is for two reasons:
(a) First, the ninth and tenth loan agreements – for the purpose of financially assisting Mr Papavasiliou’s brother and purchasing flight tickets, respectively – occurred after the September Loan Agreement was entered into and therefore cannot be considered in retrospect; and
(b) Second, I find that Mr Karvelis, at the time of entering into the September Loan Agreements, did not consider the purpose of the loans to be unusual given the familial relationship between the parties.
274Finally, in terms of Mr Papavasiliou’s default on the initial six agreements, I do accept that Mr Papavasiliou posed an increased credit risk at the time of entering into the September Loan Agreements. The law recognises “risky credit [to be] more expensive credit”[81] and, as per Daly AsJ in Titles Strata Management,[82] the assessment of whether a clause is an unenforceable penalty should take into consideration the debtor’s history of unpaid loans
[81] Paciocco at [264].
[82] Titles Strata Management at [141].
275However, I also note that – in essence – only a further $50,000.00 was being advanced under the seventh loan agreement, with the eighth loan agreement of $214,000.00 consolidating the debt already owed pursuant to the initial six agreements.
276Further, the terms of September Loan Agreements differed from the initial loan agreements, as both Mr Papavasiliou and Ms Pizianas were included as borrowers, with the Canterbury property provided as additional security. The increased credit risk posed by Mr Papavasiliou must, therefore, be considered alongside these factors in the section below, to determine whether SC F was out of all proportion with Mr Karvelis’ interests.
Objective test
277In answering whether SC F is an unenforceable penalty, I must determine whether SC F is out of all proportion with the Mr Karvelis’ opportunity loss of being denied money due and the increased cost of risky credit.
278I note that Mr Karvelis submits that SC F was included to compensate him for the opportunity cost he would suffer should the defendants default on the September Loan Agreements. Mr Karvelis is not in the business of loaning money, and it is not immediately apparent what loss he would suffer, other than the opportunity to invest the loaned monies into other profit-making ventures. It is, however, unusual that any ordinary investment could be expected to deliver a 3% monthly return, equivalent to almost a 43% annual rate. Therefore, Mr Karvelis must demonstrate that SC F was included to secure against “special circumstances outside ‘the ordinary course of things’ [where] a breach in those special circumstances would be liable to cause [the lender] a greater loss of which the stipulated sum does represent a genuine estimate” – and that such special circumstances were within the contemplation of the defendants.[83]
[83] Robophone.
279The evidence presented by Mr Karvelis, however, is limited, being his submissions regarding his intention to start his own business venture and intention to build a large double-storey home, for resale at a profit, on a vacant, cleared block of land in Hawthorn that he owned. No corroborative documentary evidence was adduced by Mr Karvelis.
280Further, and as per the facts of Ronstan International, Buchanan, Chernov and Eames JJA reaffirmed the trial judge’s finding that a contractual term allowing the respondent to charge interest at a non-compounding monthly rate of 5% was an unenforceable penalty, given the previous four years’ worth of accounts of the respondent’s business disclosed that its rate of return was substantially less than 5% per month.[84] Similarly, in my view, the evidence that has been adduced by Mr Karvelis is not substantial enough, nor does it indicate a loss of opportunity to justify the imposition of a 3% monthly compound fee as per SC F.
[84] Ronstan International at [27].
281Regarding the increased credit risk posed by Mr Karvelis, I note that in comparable “risky credit” cases, the opportunity cost is in the form of profit that could otherwise have been made had the loaned monies been redirected. For example, in Paciocco, Gageler J found that, as a result of the credit risk posed by an individual who was in default of their credit card repayments, the Australian and New Zealand Banking Group suffered from the “real outgoing” of having to provide additional regulatory capital that could otherwise be loaned to other clients for a return.[85] Likewise, if Mr Karvelis were in the business of providing high-interest loans, the opportunity cost would have equivalent to the rate of the establishment fees he was charging to other borrowers. Mr Karvelis, however, is not in the business of loaning money.
[85] Paciocco at [172].
282In the current proceeding, I find that the increased credit risk posed by Mr Papavasiliou does not warrant the imposition of SC F.
283I make this finding acknowledging that at the time of the September Loan Agreements, Mr Karvelis was of the belief that there was a significant amount of equity ($3 million) in the Canterbury property (approximately ten times the value of the loaned amount). This was a factor in his decision to enter into the September Loan Agreements, as stated by Mr Karvelis during cross-examination. Mr Karvelis must, therefore, have been of the belief that his financial interests would have been protected – regardless of whether or not SC F was included in the September Loan Agreement – given the interest he held in the valuable Canterbury property.
284I note that in the recent case of Kairouz, the Court of Appeal found that high interest rates applying upon default were not unenforceable penalties. In Kairouz, there were two agreements – the first agreement provided for an advance of $36.5 million, with $41.25 million to be repaid nine weeks after the date of the agreement, and the second agreement provided for an advance of $2 million, with $2.4 million required to be repaid one month after the date of the agreement.[86]
[86] Kairouz at [2].
285While I note the similarities in how the seventh and eighth loan agreements were structured, I ultimately find that the circumstances surrounding the loan agreements in Kairouz were materially different and, therefore, accept Mr Papavasiliou and Ms Pizianas’ submissions distinguishing Kairouz given:
(a) the loans were of such an “extremely high risk” to justify the high default interest rates, unlike the seventh and eighth loan agreements in the current proceeding;[87]
(b) the plaintiff was in the business of loaning money, unlike Mr Karvelis, and would have otherwise lost the opportunity to receive consideration from other debtors should the defendants be in default;[88]
(c) parties had available to them comprehensive legal advice, unlike the parties in the current proceeding – who choose not to engage lawyers until the drafting of the irrevocable order;[89]
(d) the loans reflected the “best terms that could be obtained”, but the same cannot be said about the seventh and eighth loan agreements in the current proceeding given the lack of evidence surrounding market rates and the lack of evidence that Mr Papavasiliou and Ms Pizianas approached other lenders for the money;[90]
(e) multiple clauses became operative upon default with “significant consequences”, as opposed to SC F, which operated alone upon default;[91] and
(f) the loan facilities were for considerably greater amounts of $36.5 million and $2 million, in comparison to the additional $50,000.00 Mr Papavasiliou and Ms Pizianas sought to borrow under the seventh loan agreement, as the eighth loan agreement was a consolidation of prior outstanding loans.[92]
[87] Kairouz at [107], citing Jasper Nominees at [363] as per M Osborne J.
[88] Kairouz at [1].
[89] Kairouz at [107], citing Jasper Nominees at [364] as per M Osborne J.
[90] Kairouz at [109].
[91] Kairouz at [106].
[92] Kairouz at [140].
286In light of the above considerations, I find that SC F is all out of proportion with the interests of Mr Karvelis. Further, in assessing the “parties’ intention viewed objectively”, I find that SC F is so excessive that it holds no purpose other than to compel repayment of the September Loan Agreements, particularly in light of Mr Papavasiliou’s delayed repayment under the initial six loan agreements, the payment of establishment fees and the securities provided – and otherwise to punish the defendants should they not make timely repayments.[93]
[93] Jowett Motor Group Pty Ltd v Pentana Solutions Pty Ltd [2023] VCC 1916 at [441].
287Accordingly, I find that SC F of the September Loan Agreements is an unenforceable penalty. Accounting for the payments that have been made by Mr Papavasiliou and Ms Pizianas, totalling $295,000.00 as at 19 February 2025, after the first day of trial, I find that the principal and establishment fees under the September Loan Agreements have been fully repaid.
Issue 2: How much money is owed by the defendants to the plaintiff under the September Loans as at the date of trial?
288After accounting for the payments which had been made by the defendants and set out in the Statement of Agreed Facts relating to payments dated 18 February 2025, a document handed up on the first day of trial, the defendants conceded that the sum of $5,418.76 remained outstanding. This was paid by the defendants to the plaintiff on 19 February 2025. Thereafter, the defendants asserted that all of the principal loan money and establishment fees had been fully repaid. In circumstances where the Court has found that SC F is a penalty, the defendants urge the Court to conclude that there is no money owing under the September Loan Agreements.
289Mr Karvelis, in his prayer for relief, claims fees compounding at the rate of 3% per month, or alternatively, interest pursuant to statute. Given my anterior finding that SC F is a penalty, I consider the merit of the alternate claim for interest at the statutory rate.
290I rely on the observations of Daly AsJ in Titles Strata Management as follows:[94]
“…Titles Strata urged me to apply a rate of 3 per cent per month in the event that I found that the default rate of 8 per cent per month was an unenforceable penalty. That still leaves a very high rate of 48 per cent per annum, for a well secured loan, and I decline to do so. However, I can infer that Titles Strata has suffered damage by way of the loss of use of the funds advanced, and would order interest at the statutory rate from the date of the demand.”
[94] Titles Strata Management at [142].
291I accept Mr Karvelis’ submission that the establishment fee is consideration given by the defendants for the entry into the loan agreements. This is separate and independent of Mr Karvelis being deprived of access to funds. There was no evidence advanced by Mr Karvelis as to his anticipated amount of damages that might follow from the breach or a genuine pre-estimate of damage or a relevant market rate or Reserve Bank of Australia cash rate at the time.
292The Court may, however, strike down a disproportionate interest rate and otherwise award the plaintiff the statutory interest rate to compensate a plaintiff for the loss of use of the funds not paid by the due date.
293Applying Titles Strata Management, I accept that Mr Karvelis has suffered damage by way of loss of the funds advanced and not repaid by the due date as he lost the opportunity to invest the funds elsewhere and would order interest pursuant to the penalty interest rate from the time the debt was payable to compensate for that loss. My calculations are set out in the table at Annexure A to these reasons.
Issue 3: Should the caveat on the Canterbury property be removed?
Removal of caveat
294Section 90(3) of the TLA permits any person adversely affected by a caveat lodged under s89 of the Act to “bring proceedings in a court against the caveator for the removal of the caveat”. Section 90(3) of the TLA empowers a court dealing with such an application to “make such order as the court thinks fit”.
295The relevant principles with respect to an application under s90(3) of the Act were summarised by Warren CJ in Piroshenko v Grojsman & Ors[95] as follows:
“Caveats under the Torrens system are treated by the courts as analogous to applications for interlocutory injunctive relief. In so far as their registration is an administrative act, it is when application is made for their removal that the onus falls on the caveator to satisfy the two-stage test used by the court when deciding whether to exercise its discretion to grant injunctive relief.
…
[95] (2010) 27 VR 489 at [7] (“Piroshenko”).
This two-stage approach requires the caveator to establish that there is a serious question to be tried that they have the estate or interest which they claim in the land in question, and having done so, to establish that the balance of convenience favours the maintenance of the caveat on the Register of Titles until trial.”
296In order to establish the first limb, the caveator must establish “a prima facie case with sufficient likelihood of success to justify the maintenance of the caveat.”[96]
[96] Piroshenko at [22].
297As to balance of convenience, Warren CJ applied the approach described in Bradto Pty Ltd v State of Victoria[97] – that the Court should take the course which appears to carry the lowest risk of injustice.[98]
[97] [2006] VSCA 89 at [35].
[98] Piroshenko at [38]-[39].
298Given my anterior finding that SC F is an unenforceable penalty and that the defendants owe Mr Karvelis the outstanding sum of $60,769.57 under the September Loan Agreements pursuant to statute, the defendants are not entitled to an order for removal of the plaintiff’s caveat until after the amount outstanding has been paid.
299As such, I order that caveat number AU120184W recorded on Certificate of Title Volume 8064 Folio 227 be removed upon payment of the sum of $60,769.57, under s90(3) of the TLA.
Declaratory relief
300Pursuant to s49 of the County Court Act 1958 (Vic), the Court has the same power to grant any relief or remedy as the Supreme Court. Declaratory relief is discretionary and must be directed towards resolving legal controversies between parties with a real interest in the matter. In accordance with the decision in Lehrmann v Network Ten Pty Limited (Cross-Claims),[99] declaratory relief must be attached to specific facts and not merely hypothetical.
[99] [2024] FCA 102 at [45]-[46].
301The Court of Appeal has recently provided the basic principles surrounding the provision of declaratory relief in Cappelleri v Cappelleri:[100]
“First, the power to grant declaratory relief is no longer exclusively equitable. When exercised by a court of law, it is a statutory power.
Secondly, the party applying for declaratory relief need not have a subsisting cause of action or a right to some other relief.
Thirdly, the power to grant declaratory relief is discretionary. While it is not possible or desirable to fetter the manner of its exercise by the application of rules, the power is nonetheless ‘confined by the considerations which mark out the boundaries of judicial power’. Accordingly, and relevantly to the present case, the relief must be directed to the determination of a legal controversy, the person seeking it must have a real interest in the relief, and the relief may be refused if it will not produce any foreseeable consequence for the parties.”
[100] [2024] VSCA 173 at [62]-[64].
302In the present case, the declaratory relief sought by the defendants does not relate to a hypothetical matter, but to a specific claim that SC F is an unenforceable penalty. It is grounded in concrete facts as found above.
303The defendants did not contest that the September Loan Agreements gave Mr Karvelis an equitable charge over the Canterbury Property as security for moneys owed by the defendants. The defendants did, however, continue to deny that there were amounts owing by them the subject of an equitable charge. However, I have found that penalty interest does apply to the September Loan Agreements and there is in fact the sum of $61,898.16 owing by the defendants which would be subject to the equitable charge. Therefore, I will decline to make a declaration that the plaintiff does not hold an equitable charge over the Canterbury Property.
304In accordance with r23.05 of the Rules, I make the declaration that SC F in the seventh and eighth loan agreements dated 5 September 2019, imposing a 3% monthly compound fee, are unenforceable as penalties.
Conclusion
305Accordingly, for the foregoing reasons, I make the following orders:
(a) there is judgment for the plaintiff on the claim;
(b) the defendants pay the plaintiff the sum of $5,418.76, together with penalty interest rate from 5 January 2020 to 19 February 2025, in the sum of $61,898.16, minus the $5,418.76 already paid, being the sum of $61,898.16;
(c) there is judgment for the defendants on the counterclaim;
(d) there is a declaration for the defendants that SC F in the seventh and eighth loan agreements dated 5 September 2019, imposing a 3% monthly compound fee, are unenforceable as penalties;
(e) caveat number AU120184W recorded on Certificate of Title Volume 8064 Folio 227 be removed upon payment of the sum of $61,898.16; and
(f) that each party bear their own costs of and incidental to the proceeding.
- - -
Certificate
I certify that these 80 pages are a true copy of the judgment of Her Honour Judge Burchell delivered on 2 June 2025.
Dated: 2 June 2025
Gavin Choong
Associate to Her Honour Judge Burchell
ANNEXURE A
| Start Date[101] | End Date103 | Amount Repaid ($)103 | Residual Amount Owing ($)103 | Interest Period (annum)[102] | Interest PIR ($)[103] |
| 05/09/2019 | 0 | 295,400.00 | |||
| 17/12/2019 | 20,000.00 | 275,400.00 | |||
| 05/01/2020 | 30/01/2020 | 0 | 275,400.00 | 0.03 | 1,881.15 |
| 30/01/2020 | 8/02/2020 | 5,000.00 | 270,400.00 | 0.02 | 664.92 |
| 8/02/2020 | 21/02/2020 | 5,000.00 | 265,400.00 | 0.04 | 942.68 |
| 21/02/2020 | 11/03/2020 | 5,000.00 | 260,400.00 | 0.05 | 1,351.80 |
| 11/03/2020 | 18/03/2020 | 5,000.00 | 255,400.00 | 0.02 | 488.47 |
| 18/03/2020 | 9/04/2020 | 5,000.00 | 250,400.00 | 0.06 | 1,505.14 |
| 9/04/2020 | 17/04/2020 | 5,000.00 | 245,400.00 | 0.02 | 536.39 |
| 17/04/2020 | 7/05/2020 | 5,000.00 | 240,400.00. | 0.05 | 1,313.66 |
| 7/05/2020 | 26/05/2020 | 5,000.00 | 235,400.00 | 0.05 | 1,222.02 |
| 26/05/2020 | 22/06/2020 | 7,000.00 | 228,400.00 | 0.07 | 1,684.92 |
| 22/06/2020 | 10/07/2020 | 8,000.00 | 220,400.00. | 0.05 | 1,083.93 |
| 10/07/2020 | 31/07/2020 | 5,000.00 | 215,400.00 | 0.06 | 1,235.90 |
| 31/07/2020 | 22/08/2020 | 5,000.00 | 210,400.00 | 0.06 | 1,264.70 |
| 22/08/2020 | 6/10/2020 | 5,000.00 | 205,400.00 | 0.12 | 2,525.41 |
| 6/10/2020 | 30/10/2020 | 5,000.00 | 200,400.00 | 0.07 | 1,314.10 |
| 30/10/2020 | 12/11/2020 | 10,000.00 | 190,400.00 | 0.04 | 676.28 |
| 12/11/2020 | 23/12/2020 | 5,000.00 | 185,400.00 | 0.11 | 2,076.89 |
| 23/12/2020 | 2/02/2021 | 2,000.00 | 183,400.00 | 0.11 | 2,060.11 |
| 2/02/2021 | 14/02/2023 | 1,500.00 | 181,900.00 | 2.03 | 36,978.03 |
| 14/02/2023 | 19/02/2025 | 176,481.24 | 5,418.76 | 2.01 | 1,091.66 |
| 19/02/2025 | 02/06/2025 | 5,418.76 | 0 | 0.27 | 0.00 |
| 61,898.16 |
[101] CB 162-163.
[102] Calculation of the time that has elapsed between the Start and End Dates as a proportion of a full year.
[103] The current penalty rate interest is 10.0%, as fixed by the Attorney-General pursuant to s2 of the Penalty Interest Rate Act 1983 (Vic).
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