Kingdrake P/L v Tarkington P/L
[1998] VSC 65
•10 September 1998
SUPREME COURT OF VICTORIA
CAUSES JURISDICTION
Not Restricted
No.4614 of 1995
BETWEEN
KINGDRAKE PTY LTD
Plaintiff
v
TARKINGTON PTY LTD &
NASHAAR PTY LTD
Defendants
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| JUDGE: | SMITH, J. |
| WHERE HELD | Melbourne |
| DATE OF HEARING: | 29 - 31 July and 13 August 1998 |
| DATE OF JUDGMENT: | 10 September 1998 |
| MEDIA NEUTRAL CITATION | [1998] VSC 65 |
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| Catchwords: | Loan - Interrelated Indenture & Mortgages - Interest - “principal sum” Mortgage - Duty of Mortgagee in realising security. |
| APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr. W. Wyles | Gadens Lawyers |
| For the Defendant | Mr. D. Baker | Dean & Co. |
HIS HONOUR:
The Proceedings
Kingdrake Pty Ltd (Kingdrake) has brought proceedings to recover an amount of $864,501.96 from Tarkington Pty Ltd (Tarkington) and Faouzi Nashaar (Nashaar), the first two defendants in these proceedings, being monies alleged to be payable under a loan agreement and associated securities. The proceedings, as commenced, involved other defendants but the proceedings against those defendants have been resolved. Tarkington and Nashaar have filed a counter claim seeking damages alleging the wrongful seizure of securities by the plaintiff, Kingdrake, and breach of duty by Kingdrake as mortgagee in realising the securities.
Background
On 4 August 1989 Tarkington and Nashaar entered into an Indenture with Holly Park Investments Pty Ltd (Holly Park) under which Holly Park agreed to lend and Tarkington and Nashaar agreed to borrow the sum of $400,000. The Indenture required, inter alia, that Tarkington and Nashaar would pay 60 monthly instalments of $11,681.98 commencing one month after the date of the advance. In accordance with the terms of the loan agreement, Tarkington and Nashaar gave security for the loan, on about 4 August 1989, in the form of a debenture over Tarkingtons asset’s and undertaking and mortgages of leases held by Tarkington and Nashaar over several properties namely:
(a) 688 Calder Highway Keilor (Keilor)
(b) Shop 7, 41 Plenty Road, Bundoora (Shop 7)
(c) Shop 8, 43 Plenty Road, Bundoora (Shop 8)
(d) 15 George Road, South Morang (South Morang)
Tarkington had entered into management agreements with a number of individuals under which they paid a fee to Tarkington and managed the businesses conducted on the above premises. In 1994 the fees comprised the following:
(a) Keilor, Galal Abdallah, weekly fee $1,100
(b) Shop 7, Mick Jackson, weekly fee $ 600
(c) Shop 8, Ibrahim Hassen, weekly fee $ 750 (plus rent and outgoings)
(d) South Morang, Maria Eder, weekly fee $1,100
The tenants of Shop 8 and South Morang also paid all outgoings while those of Shop 7 and Keilor paid the cost of power, insurance and telephone only. All paid rent.
A few days later, on about 9 August, 1989 Holly Park entered into a deed of assignment with Kingdrake whereby it assigned to Kingdrake all its right title and interest as creditor under the loan agreement and as mortgagee under the mortgages of the leases and the debenture. Kingdrake paid the sum of $422,970.15 as consideration for the assignment of the loan. Holly Park gave notice of the assignment to Tarkington on 9 August 1989 and, in August and September of 1989, Holly Park and Kingdrake gave notice of the assignment to the landlords of the above premises.
It is also relevant to note the history of the leases of the four premises.
(a)
In respect of the Keilor premises, the lease in existence at the time of the mortgage of leasehold ran from 1 March, 1988 to 1 March, 1992. It contained options to renew which Nashaar and Tarkington failed to exercise. They subsequently approached the landlord approximately two months after the lease had expired. A further four year lease was negotiated and executed on 10 August 1992. The commencement date set out in that lease was 1 March 1992
(b)
In relation to shop 7, Tarkington held a lease over those premises which expired in February or March 1990. It was not until 20 December 1990 that a further lease was executed commencing from 1 September 1990 for 5 years.
(c)
In relation to shop 8, Tarkington entered into a lease commencing 15 September 1984 (Ex. D3). As at November 1994, the formal lease arrangement had expired and Tarkington was a monthly tenant of those premises. Tarkington had attempted to obtain a new lease in August or September of that year but had had difficulty contacting the landlord who had sold the property.
(d)
In relation to the property at South Morang, a further lease had been entered into between Tarkington and the owners on 18 April 1990 for a period of 5 years. The lease was executed on 18 October 1990.
Tarkington allegedly defaulted under the terms of the agreements assigned to Kingdrake. Kingdrake served Notices of Default dated 19 July 1994, alleging the total default of Tarkington was $160,185.17. The plaintiff Kingdrake, also purported to exercise its rights under its securities. It took possession of the leaseholds and businesses and attempted to realise the securities. It sold the businesses and leasehold interests in two of the properties to the persons who were operating the shops on those premises pursuant to the managements agreement with Tarkington. A third lease was assigned to an optometrist. These transactions realised the following amounts:
Shop 8 $45,000.00 Shop 7 $20,000.00 South Morang $100,000.00
It entered into negotiations with the manager of the Keilor property to sell the lease and business to him for $60,000.00. It ran into difficulties, however, when it emerged that the landlords, Mr and Mrs Koroneos were attempting to sell the property to Mr Ferguson, a brother-in-law of Mr Nashaar. The present proceedings were commenced by Kingdrake to protect the security held over that leasehold and that business.
The alleged debt, while reduced by the above amounts, remains unpaid and the plaintiff alleges that, as at 29 July 1998, an amount of $864,501.96 was owing under the terms of the loan agreement and related securities assigned to it.
The Debt - Issues
The plaintiff relies upon a certificate which complies with Clause 4 (c) of the Indenture as providing prima facie evidence that the amount owing by Tarkington and Nashaar as at 29 July 1998 was $864,501.96. The clause is broad in its effect and purports to provide that a certificate will be prima facie evidence of “the amount owing ... by the borrower to the mortgagee...”.
The defendants do not dispute that the certificate constitutes “prima facie” evidence but they attempt to meet the prima facie effect of the certificate by challenging the calculation of the amount. In particular they submit that the approach taken to the calculation of interest is incorrect. They make the following points.
(a) Interest was charged in advance. This, they argue, was not authorised. (b)
Interest was charged at the rate of 27.75% in advance from 4 October 1990 to 3 November 1990 and charged in respect of the amount of the advance then outstanding when it should have been, it is said, restricted to the instalment then in default under the agreement. I note also that the instalment was due on 4 October 1990 and was paid on 17 October 1990.
(c)
As from 4 December 1990 until 19 July 1994, the plaintiff has purported to charge interest at the rate of 27.75% on the full balance of the original loan (and other items). The defendants allege that its entitlement was restricted to interest at 24.75%, except in relation to any particular unpaid instalment that remained unpaid after seven days As to that, they argue that the entitlement to interest of 27.75% is restricted to the amount of unpaid instalment and the period for any calculation of that interest was confined to the period that the instalment was in arrears.
(d)
As from 19 July 1994, the plaintiff charged interest at the rate of 27.75%. The defendants submitted Kingdrake was limited to interest at the rate of 24.75%.
(e)
Kingdrake capitalised interest and thus charged interest on interest in circumstances where it is said, this was not authorised.
(f)
Kingdrake added insurance and legal expenses to the debt. It also charged interest on amounts paid by it for such items. The defendants argue that these actions were not authorised.
The plaintiff disputes these propositions. The following issues appear to arise:
(a) In what circumstances, if any, was the plaintiff
(i) entitled to charge interest at the rate of 27.75%. (ii) Charge interest in advance. (iv) Capitalise unpaid interest. (b) The plaintiff’s right to recover expenditure and interest on it.
Terms Of The Indenture And Mortgages
To resolve these issues it is necessary to examine the terms of the Indenture and mortgages and to determine the way in which they interact and complement each other. The following clauses appear to be of particular relevance.
Clause 1 provided as follows:
“NOW THIS INDENTURE WITNESSETH
That in consideration of the premises and of the Mortgagee advancing or agreeing to advance to the borrower the sum of FOUR HUNDRED THOUSAND DOLLARS ($400,000) (“the present advance”) and in pursuance of the agreement of the borrower to give this security the borrower COVENANTS AND AGREES with the Mortgagee as follows:
(a) to pay to the mortgagee the present advance together with interest thereon (subject to clause 2 hereof) by sixty regular consecutive monthly instalment of $11, 681.98 commencing on the day one month from the date of the first advance and thereafter monthly followed by an amount equal to the balance of the present advance remaining outstanding together with interest accrued thereon and remaining unpaid to be paid at the expiration of five (5) years from the date hereof;
(b) in the interpretation hereof interest at "the higher rate" shall mean and be deemed to mean interest at the notified rate and three (3) per centum per annum;
(c) the notified rate of interest payable hereunder shall be 24.75 per centum per annum. It is hereby agreed by the mortgagee herein that the notified rate of interest payable hereunder shall be fixed for the five (5) years of the term herein and thereafter shall be subject to the provisions of this Indenture.
(d) to pay interest to the mortgagee at the higher rate upon any sum which shall at any time be due under clause 1 (a) hereof but shall remain unpaid after 7 days and upon any judgment in which the covenants of clause 1(a) hereof may before merged.
(e) that in this Indenture “principal sum” includes the present advance and all advances made or to be made by the mortgagee to the borrower and each and all sums of money and damages in which the borrower may now or hereafter be indebted or liable or contingently indebted or liable to the mortgagee on any account whatever excluding only any account relating to any present or future hire purchase agreement between the mortgagee as owner on the one hand and the borrower as hirer on the other hand;
(f) notwithstanding anything hereinbefore contained the borrower shall have the right to repay the present advance on any monthly date provided for payment of the principal and interest together with interest to the date of such repayment and on such repayment shall be entitled to discharge of the present advance PROVIDED THAT in the event that the repayment of principal and interest is made within the first half of the term provided for repayment of the present advance herein the borrower shall pay an additional two calendar months’ interest from the date of repayment and furthermore should a discharge be requested in the second half of the term provided for repayment of the present advance herein the borrower shall pay an additional one calendar month interest.”
Checking the arithmetic of 60 instalments of $11,681.98, it becomes clear that the agreed monthly payments included an amount for accrued interest as well as an amount in reduction of principal.
It is also to be noted that the Indenture distinguishes between the “present advance” and the concept “principal sum “(clause 1 (e)). “Principal sum” appears to be designed to extend to other advances and other liabilities that may be incurred by the borrower in its future dealings with the mortgagee but does not expressly extend to amounts outstanding for interest. The concept of “principal sum” is picked up in clause 2(a) which provides as follows
“2. THE borrower Covenants with the mortgagee:
(a)
Notwithstanding anything contained elsewhere in these presents the principal sum and interest thereon or so much as shall remain unpaid shall immediately become payable and this security shall become immediately enforceable at the option of the mortgagee on the happening of any one or more of the following events without necessity for any notice or demand:
i
if default be made by the borrower in the due and punctual payment of the present advance or any instalment of any interest thereon and such default continues for seven days or more;
ii
if default be made by the borrower of any other obligation on the part of him her it or them (sic) contained in this Indenture or any mortgage guarantee agreement or transaction on any account between the mortgagee on the one hand and the borrower on the other hand;...
I note that the reference to “principal sum and interest thereon” suggests that the term “principal sum” was assumed not to include interest and that interest was payable on “the principal sum”. Under the Indenture the “notified rate” presumably applied.
A degree of primacy is also given to the Indenture over the Mortages by cl.2(b) which provides:
“(b) No demand shall be made by the mortgagee under the provisions of the first covenants of the securities referred to in sub-clauses 3 (a), (b), (c), (d), (e) and (f) hereof unless this security shall have become enforceable at the option of the mortgagee (whether actually enforced or not).”
Clause 3 of the Indenture identifies the security given for the advance. It opens as follows:
“3. THE borrower COVENANTS with the mortgagee that the covenants and obligations of the borrower and the payment of the principal sum will be secured by:
(a) these presents;...”
The clause then goes on to refer to the debenture charge and the mortgages of the four leases. There then follow a clause imposing an obligation on the borrower to pay costs and expenses of the stamping, registration and enforcement of the Indenture and securities, a clause dealing with service of notices to the parties, the prima facie evidence certificate clause and other matters.
The last two provisions of the Indenture are of particular relevance and they are as follows:
“5.
NOTWITHSTANDING anything contained in clause 2 or elsewhere in these presents, if the Mortgagee elects to call up the principal sum pursuant to clause 2, interest at the notified rate on the whole of the principal sum outstanding and upon any judgment in which the covenants in clause 2 may become merged shall thereafter accrue from day to day and be payable on demand.
The reference to accrual “from day to day” would appear to distinguish the situation to which clause 5 applied from that where the borrower was paying the monthly instalments. In that situation the interest was accruing from month to month on the monthly balances.
The remaining provision to which reference should be made gives primacy to the Indenture.
6. NOTWITHSTANDING anything contained in any document whether by security or otherwise collateral with and additional to this agreement the parties hereto COVENANT AND AGREE that the covenants terms and conditions contained herein shall take primary effect irrespective of and notwithstanding any contradiction that may be contained in any such document.“
Turning to the mortgages, each mortgage contained a covenant on the part of the mortgagor:
“1. TO pay to the Mortgagee on demand by the Mortgagee all advances made or to be made by the Mortgagee and each and all sums of money in which the Mortgagor whether in its own capacity or in its capacity as trustee of any trust may now or hereafter be indebted or liable or contingently indebted or liable to the Mortgagee on any account whatever excluding only any account relating to any present or future hire purchase agreement between the Mortgagee as owner on the one hand and the Mortgagor as hirer on the other hand (all of which sums of money and damages excluding only interest unless capitalised by agreement by the parties are hereinafter collectively called ‘the principal sum’).”
The mortgages also contained a term dealing with interest as follows:
“2.
TO pay to the Mortgagee interest on the principal sum at such rates and times as may be agreed between the Mortgagor and the Mortgagee and in default of agreement at the rate of 27.75 per centum per annum (hereinafter called “the higher rate”) reducible to 24.75 per centum per annum in the event that payments are made on the due date to accrue from day to day and be payable on demand by the Mortgages.”
Plaintiff’s Entitlement To Interest At 27.75%
Counsel for the plaintiff submits, firstly, that the plaintiff was entitled to rely upon clause 2 of the Mortgages to claim the higher rate of interest. Counsel submits that the mortgagee is entitled to take the benefit of the clause most favourable to it in the documents executed by the parties.
I have some difficulty with the plaintiff’s argument. Firstly, clause 2 of the mortgages itself gives priority to any other agreement made by the mortgagee and mortgagor in that the rates it prescribes are to apply “in default of agreement”. Plainly, under the Indenture, the parties had reached agreement at least as to the interest regime in respect of arrears of instalments and an interest regime in respect of other monies payable under the indenture. To remove any further doubt, the Indenture also included clause 6 (above) which gives primacy to the Indenture. When the case was refixed for further argument, on this and other issues counsel accepted that the Indenture took precedence generally, but argued that it did not where the borrower was in default.
Counsel for the plaintiff submits that the documents complement each other and that where there is a default, it is the mortgage which protects the plaintiff’s position. He argues that the Indenture may spell out the rights and obligations between the parties. He submits, however, that once the borrower is in default one then looks to the mortgage. He relies on cl.15 of the mortgage which is in the following terms:
“15. IT IS EXPRESSLY COVENANTED AND AGREED that this security shall become immediately enforceable and the principal sum together with interest thereon or so much as shall remain outstanding at the higher rate shall immediately become payable at the option of the Mortgagee on the happening of any or more of the following events without the necessity for any notice or demand -
(i) if default be made by the Mortgagor in the due and punctual payment of the principal sum or any interest thereon;
(ii) if default be made by the Mortgagor in the observance or performance of any other obligation on the part of the Mortgagor contained in this Mortgage or in any contract, agreement or transaction on any account between the Mortgagee and Mortgagor; or
(iii) if any other security given by the Mortgagor to the Mortgagee shall be or become enforceable (sic) at the option of the Mortgagee according to its terms;
and that if the Mortgagee elects to enforce this security the
Mortgagee may...”Clause 15 goes on to set out the various powers that may be exercised. Counsel submits that this clause conferred an entitlement on the Mortgagee to charge interest at the higher rate on the principal sum and interest then outstanding when a default occurs. He submits that “principal sum” is given wider meaning than the equivalent expression in the loan agreement. He accepts that the Indenture, because it provides for interest arrangements, prevents cl.2 of the mortgage operating because the Indenture satisfies the phrase “in default of agreement” in cl.2 of the Mortgage. He argues that so long as there is no default under the loan agreement interest is payable at 24.75%. He argues, however, that once a default has occurred on the part of the borrower the interest becomes payable at 27.75% pursuant to cl.15 of the Mortgage upon the principal sum as defined in the Mortgage. He also argues, in the alternative, that, if the Indenture applies, 27.75% interest is payable once a default occurs on the "principal sum" as defined in the Indenture by virtue of cl.1(d) of that agreement.
Assuming that Clause 15 does have the effect of imposing the higher rate in the event of default, clauses 2 and 5 of the Indenture also provide for what is to happen in the event of a default and also deal with interest rates in such situations. It seems to me that the effect of cl.6 of the Indenture is that the terms of the other securities, such as the mortgages, can operate only if they can do so without contradicting the Indenture and it is to the Indenture that one must look in the event that there is any contradiction. It is necessary, therefore, to establish what parameters are set by the Indenture so far as the payment of interest is concerned and to compare the parameters set by the provisions in the mortgages relied upon by the plaintiff..
As noted above, the plaintiff submits that the effect of clause 1(d) of the Indenture is to impose the higher rate of interest on the whole of the principal sum. It argues that the expression “sum... due under clause 1(a)” of the Indenture refers to all the obligations imposed upon the borrower by cl.1(a). He argues that several obligations are imposed:
(a) to repay the “present advance together with interest thereon”,
(b) to repay the present advance and interest by 60 monthly payments of $11,681.98 commencing on 4 August 1989, and
(c) to pay an amount equal to the balance of the “present advance” remaining outstanding together with interest accrued thereon and remaining unpaid to be paid at the expiration of five years from the date of the Indenture.
Counsel for the plaintiff argues that when a default occurs, the principal sum and interest become immediately payable under cl.2 of the Indenture and thus the “present advance” referred to at 1(a) will become immediately payable.
The major difficulty facing this argument is that cl.1(d), upon which the plaintiff must rely, in terms refers to any sum which shall
“at any time be due under cl.(a) hereof but shall remain unpaid after seven
days”.
While it might be argued that the principal sum and interest become payable in the events set out in cl.2 of the Indenture they become “due” by virtue of cl.2 and not by virtue of cl.1(a). The sums which “at any time” becomes “due” under cl.1(a) are the monthly payment of $11,681.97 and the final payment outstanding at the conclusion of the five year period. It seems reasonably clear to me that the higher rate of interest becomes payable under cl.1(d) in respect only of unpaid instalments (which themselves will include payment of interest) which remain unpaid after seven days and on “any judgement in which the covenants in cl.1(a) may become merged”.
Reading the various clauses of the Indenture it seems to me that the effect of them, so far as interest is concerned is the following:
(a) except where the borrower was in default under Clause 1 (a) interest was payable at 24.75% on the” present advance” and the “principal sum”
(b) interest on “the present advance” was to be paid monthly commencing one month from the date of the first advance and payment of that interest would be covered by the monthly payment of $11,681.98 leaving an amount to be used in reduction of the advance each month;
(c) if the borrower defaulted in paying the monthly payment or the final payment, interest at 27.75% would be payable in respect of such payment;
(d) once the lender elected under clause 2 to call up the principal sum as defined in the Indenture, interest would be payable at the rate of 24.75% on the whole of the principal sum outstanding and upon any judgement in which the covenants in cl.2 might become merged and further that interest would accrue at that rate “from day to day”.
Returning to the argument advanced for the Mortgagee it will be seen that what is advanced as the proper construction of cl.15 of the mortgage involves a result that is at odds with that spelt out in the Indenture. In my view the parties intended that in that situation the Indenture would prevail - it was to “take primary effect irrespective of and not withstanding any contradiction [in other security documents]”.
Thus it seems to me that the interest rate chargeable in respect of instalment defaults was 27.75 per cent. That charge however, could not be levied on the “present advance’ or “the principal sum” but only on the instalment that was then outstanding and while it remained outstanding. Secondly, there was an obligation to pay interest at 24.75 per cent on other advances or sums of money to which the borrowers became indebted to the mortgagee. This, on one view, creates an unusual result in that the lender apparently did not require a higher interest rate in the event of all defaults. An explanation for that may lie in the very high “notified rate” of 24.75% per annum. At first sight it might also seem strange that the lender went to the trouble of including Clause 15 in the Mortgages imposing an obligation to pay interest “at the higher rate” in the circumstances there set out. A possible explanation is that it was a standard clause in the precedents used and it was the Indenture document that was used to record the detail of the agreement. In any event, Clause 15 of the Mortgage appears to me to be in direct conflict with Clause 5 of the Indenture in circumstances where the mortgagee elects to call up the principal sum and thus cannot operate in those circumstances.
Counsel for the plaintiff also submits that the notice of default of 19 July 1994 was given under the mortgage and there was no exercise of the powers under the deed and, therefore, no conflict. It is put that there is, therefore, no operative contradiction between the mortgage and the Indenture document. Thus it is put that in the circumstances that occurred one looks at the mortgage without it being effected by the Indenture.
The evidence reveals that a notice was in fact given under clause 2 of the Indenture. In addition, the argument put involves the proposition that notwithstanding the fact that the parties had entered into an agreement which is recorded in interrelating and interconnected documents, if the plaintiff chose to exercise its rights under one of the documents, the rights between the parties would not be determined by examination of the agreement between them as a whole but by an examination of a part of the agreement selected by the plaintiff and sought to be relied upon by the plaintiff. I am unable to point to any term in any of the documents which would confer that power upon the plaintiff. In the circumstances that occurred, the plaintiff elected to call up the debt and all outstanding amounts when it served notices on 19 July 1994 and that was effective for the purpose of the Indenture as well as the mortgages.
Counsel for the plaintiff also submits that to the extent that his argument depended upon the exercise of an option in the Mortgagee to enforce the Indenture or the mortgages, that election was to be found in the document supplied showing the occasions when the Mortgagee elected to charge 27.75% interest.
While the Notices of Default given on 19 July 1994 purported to be given in exercise of the rights under Cl. 2 of the Indenture and the Mortgages, there is no direct evidence of a decision being made by the plaintiff to elect to exercise such rights prior to 19 July 1994. There is evidence that Kingdrake chose to charge 27.75% on the total amount of the advance then outstanding together with any fees and interest allegedly outstanding. The first occasion was on 4 October 1990 when 27.75% interest was charged (in advance) for the month from 14 October 1990 to 3 November 1990 on a total amount allegedly owing of $360,242.85. Subsequently, on 4 December 1990 and thereafter, Kingdrake charged 27.75% on the 4th of each month (in advance) on what it maintained was then the total amount of the loan then outstanding to which it added fees and other matters including any outstanding interest. In each of the instances, the document setting out the plaintiffs calculations reveals that the plaintiff was following a system which had been in place for about 12 months prior to the first charging of interest of 27.75%. It had adopted the approach of taking the capital sum advanced, calculating interest on it for the next month, adding the two amounts together and then subtracting the payment of the borrower from the combined amount to produce a net amount. It would then charge the next month’s interest to that balance of principal and interest and do so prior to deducting the next payment even if that payment was on time. In imposing the interest rate at 27.75% it merely substituted the higher interest figures in the proforma system. The evidence is, therefore, at best for the plaintiff, equivocal as to whether the Mortgagee was electing to treat the principal sum as due and payable at that point. For the purposes of the calculations it has always treated the principal sum as due and payable whatever interest rate was charged. This argument must also fail.
Entitlement To Charge Interest In Advance
The foregoing also highlights the fact that, throughout the transaction, the plaintiff has charged interest in advance. It has deducted the payments made, even when made on the due date, from an amount which is calculated by adding interest treated as payable in advance to the running balance. I am unable to identify any clause in any of the relevant documents which would justify the charging of interest in advance. Clauses 1(a) and (f) assume or indicate the contrary. I turn then to the question of capitalisation of interest.
Capitalisation Of Interest
Another important issue is the question of capitalisation of interest. It is necessary for the plaintiff to identify an express or implied term entitling it to capitalise or compound the interest. (As to compounding interest see Domaschenz v. Standfield Properties (1977) 17 SASR 56).
Counsel for the plaintiff concedes that there is no provision which expressly states that upon default the Mortgagee may capitalise the interest (or compound it) and that, thereafter, interest at the higher rate will be payable on capitalised interest. He submits, however, the “principal sum” is defined very broadly in both the Indenture (cl.1(e))and Mortages (cl.1) and includes all sums owing. He submits that interest is therefore payable upon interest to the extent that the agreements provide that interest is to be paid. He relies again upon cl.2 of the mortgage quoted above which imposes an obligation to pay interest on the “principal sum at such rates and times as may be agreed between the Mortgagor and the Mortgagee...”.
Again, it appears to me that the issue is to be resolved by identifying, first, what obligation is imposed under the Indenture. Under the Indenture, “principal sum” is defined very broadly and includes all sums of money “in which the borrower may now or hereafter be indebted or liable or continues to be indebted or liable to the Mortgagee on any account whatever”. Interest obligations are expressly defined by cl.1(a), (b) (c) (d) and cl.5 and clause 2. In clause 2, however, interest is treated as something independent of and outside “the principal sum”. Further, counsel did not refer me to any clause which set out an agreed time frame for rests or other techniques for capitalising or compounding interest. The drafter was alive to the issues, however, because clause 1(d) expressly imposed interest on an amount which included arrears of interest.
The effect of the clauses in the Indenture appears to me to be that the base rate of interest payable under the Indenture was 24.75% on “the present advance”. Interest was to be paid as part of the consecutive monthly payments of $11,681.98 and there was to be a higher rate of interest paid of 27.75% in respect of any overdue instalment or any overdue final payment. Thus, in that instance. and that instance only, the parties agreed expressly that interest would be paid upon outstanding interest. In the event that the plaintiff called up the principal sum pursuant to cl.2, the principal sum outstanding would then crystallise and interest would then be payable accruing from day to day at the notified rate of 24.75% (cl.5). Thus, it seems to me that up and until 19 July 1994 when notice of default was served the base rate of 24.75% continued to run in respect of the advance of $400,000 and interest was also payable at the rate of 27.75% in respect of any instalment that was due and unpaid after the prescribed seven day period. The latter, however, presumably, ceased to apply as soon as that instalment was paid. Once the notice of default was served, cl.5 was intended to come into operation and from that point onwards, interest would run at 24.75% accruing from day to day. Nowhere does it appear to me that the Indenture has provided for the capitalisation of interest or for the compounding of interest.
Turning to the Mortgages, consistently with the Indenture, a distinction appears to be drawn between “principal sum” and “interest” in clauses 1,2,15 and 17. Clause 1 makes it clear that “principal sum” does not include interest “unless capitalised by agreement between the parties”. Counsel could not direct me to a clause in the mortgages under which interest was capitalised. Again there is no mechanism expressly provided, such as rests, which could be used to capitalise or compound the interest. Thus there is no contradiction between Indenture and mortgager.
In light of the above, the plaintiff has failed to identify any express or implied right to capitalise or compound interest. Alternatively, the Indenture and mortgages at best from the plaintiff’s point of view, are uncertain or ambiguous and should be construed contra proferentem.
Plaintiff’s Right To Recover Expenditure And Interest On It
The amounts claimed by the plaintiff also include amounts paid by way of insurance premiums. The defendants were obliged under the mortgages to insure buildings, fixtures and improvements (clause 8 (a)). Under clause 11 of the mortgages they were obliged to reimburse the mortgagee, on demand, for all costs, charges and expenses incurred or paid by the mortgagee in
“doing or performing any act, matter or thing which the
mortgagee is empowered by this mortgage to do.”
Clause 10 of the mortgages empowered the mortgagee to perform any of the mortgagor’s obligations including the making of payments. Thus the mortgagee had the authority to make insurance payments and if he did so, such payments would under the mortgages (clause 1)and the Indenture (clause 1(e)) become part of the “principal sum”. I am satisfied on the evidence that what was done was reasonably done and, accordingly, the plaintiff properly added such amounts to the principal sum.
The plaintiff has also included legal costs incurred by it. Clause 11 of the mortgages required the mortgagor to pay the legal costs of the mortgagee in relation to enforcement or attempted enforcement of rights provided by the security. I am satisfied that the legal costs claimed in this case (see exhibit P12) relate to attempts to enforce the securities. Assuming that the plaintiff was entitled to enforce the securities, the defendants are obliged to reimburse the plaintiff (cf.
Sandtara Pty Ltd and Others, The Australian and European Finance Corporation
Ltd and Others (1990) 20 NSWLR 82).
Clause 11 of the mortgages provided that all such “payments, costs charges and expenses”:
“shall from the time of payment of the same respectively bear interest at the higher rate payable on demand and shall be part of the principal sum and secured together with such interest by this mortgage.”
In my view that provision does not render the sums paid for legal costs or insurance liable for interest at the higher rate. That result would be inconsistent with the operation of the terms of the Indenture. Those amounts form part of the “principal sum” for the purposes of the Indenture (Clause 1 (e)). Interest under the Indenture is payable at the rate of 24.75 per cent. Clause 5 of the Indenture provides that interest is to be payable at the notified rate on the “principal sum” outstanding when the mortgagee elects to call up the debt and clause 6 gives primary effect to the terms of the indenture “notwithstanding any contradiction that may be contained in [other security documents]”. I note that Mortgage clauses 3 and 10 appear to render the borrower liable to reimburse the plaintiff for rates paid by it as do clauses 7(a) and 10 in relation to rent.
The Debt - Conclusion
In light of the forgoing, the prima facie conclusion deriving from the certificate is plainly rebutted and the parties will need to recalculate the amount of the alleged debt.
I turn to the arguments raised by the defendants about the plaintiff’s enforcement of its securities.
The Power To Re-Enter And Sell
The defendants argue, first, that if the amounts are calculated correctly, the plaintiff was not entitled to re-enter the premises. Because the amounts will have to be recalculated in light of my above analysis, it is not possible to rule finally on this submission. I will entertain further submissions to determine that question. Other relevant issues were raised and can be resolved.
Counsel for the defendants submits that the plaintiffs did not have the power to take possession of the leaseholds and sell them because the leaseholds were not caught by the terms of the mortgages. Counsel relies upon the fact that in each instance the mortgages gave security by a clause in the following terms (cl.17).
“AND FOR BETTER SECURING the payment in manner aforesaid of the principal sum interest and other monies payable hereunder the Mortgagor as beneficial owner HEREBY GRANTS AND CONVEYS all the Mortgagors estate and interest in the land and the Lease to the Mortgagee absolutely subject only to the proviso for redemption hereinafter contained ....”
Counsel refers to the definition clauses in each mortgage which amongst other things defined “the lease” as follows
“The Lease’ includes any renewal or extension or variation of the lease and any other lease or tenancy relating to the land between the mortgagor and lessor.”
The defendants submit firstly that in three instances there was no renewal, extension or variation but a new lease was entered into, being the lease which was the lease that was current at the time when the plaintiff purported to re-enter the premises.
It seems to me that the argument must fail because the definition of lease includes “any other lease ... relating to the land between the mortgagor and the lessor”. In each case the land in question being the land, the subject of the lease, was the subject of an “other lease” between the same parties - the mortgagor and lessor.
In one instance there was no formal lease in place (shop 8). As to that counsel for the defendants submits that, therefore, there was no lease the subject of the mortgage. It is clear on the evidence, however, that Tarkington had a monthly tenancy as overholding tenant. The parties were the same and the definition of lease in the mortgage includes “any other... tenancy relating to the land”. Thus I am satisfied that in that instance also the mortgagee was entitled to exercise the security over that property.
I turn to consider another aspect of the case - whether, if the plaintiff was entitled to exercise its powers as Mortgagee, it breached its duties to the defendants in doing so.
Unreasonable Exercise Of Power
It is common ground between the parties that a mortgagee in exercising its powers must act in good faith and in the interest of the mortgagor. In the event of a sale it must take reasonable steps to secure the best result. Argument focused on the latter aspect. Reference was made to Goldcel Nominees Pty Ltd v. Network Finance Ltd & Ors [1983] 2 V.R. 257, Forsyth v. Blundell (1973) `129 CLR 477 & Deputy Commisssioner of Taxation (Vic) v. General Credits & Ors (1987) 82 ALR 101. The defendants submit that the plaintiff breached its duty. They point to the following matters
(a) The evidence that the management fees paid by tenants were reduced and thus the losses increased. I accept the evidence of Mr Kellar that the managers were in financial difficulty. The amounts they were required to pay are referred to above and one could understand that the managers would have found it difficult to make the payments. In the situation confronting the mortgagee it was not unreasonable to modify the fees to ensure that the managers would remain and might then consider purchasing the business.
(b) It is said that the mortgagees sold the businesses and leaseholds with unseemly haste to incumbent tenants without advertising for other purchases. I am satisfied on the evidence that it was reasonable to sell the leaseholds and businesses to the incumbent managers. While the matter proceeded expeditiously I am not satisfied that there was any unseemly haste in the matter.
It also seems to me reasonable that the mortgagee, seeking to realise the security, would take the approach that it would simply attempt to sell the business and the leasehold. In a forced sale situation it would have been difficult, in my view, to negotiate effectively a sale of the businesses, management agreements and leaseholds to a third party for whom the managers would then manage the milk bars. It was reasonable in my view to attempt to sell the businesses and leaseholds and the best opportunity would have been to sell them to the existing operators. It is interesting then to note what amounts were realised for the businesses and leaseholds and to compare those prices with the valuations obtained by the mortgagee in 1994. The following emerges
Properties Valuation 1994 Sale Price Shop 7 $35,000 $20,000 South Merang $95,000 $100,000 Shop 8 $35,000 $45,000 Keilor $65,000 Not Sold It will be noted that the prices obtained reflected the overall valuations. The only problem was the Keilor property. I accept Mr Kellar’s evidence that the manager there was prepared to pay $60,000 for that business and leasehold but that that sale fell through because of the problems that emerged, leading to these proceedings and, in the end, the mortgagee had to cut its losses by settling the dispute with Mr and Mrs Koroneos and Mr Ferguson after incurring substantial costs.
(c) The defendants submit that the businesses and leaseholds should have realised the amounts at which they were valued in 1989 when the loans were first made. At that time the following valuations were given -
Shop 7 $75,000 Shop 8 $150,000 Keilor $185,000
South Morang ` $210,000
The defendants submit that the 1994 valuations significantly undervalued the properties and did so in particular by not including a management fee as an income stream for the purpose of valuation. It is said that the plaintiff acted unreasonably in relying on such valuations.
The attack on the 1994 valuations concerns the alleged failure to include the management fee. Otherwise the valuations were accepted. Counsel also submitted that turnover was understated but did not advance any satisfactory evidence which demonstrated that that was so.
The argument of the plaintiff is not made out. I note firstly, that each of the 1994 valuations contained comments that would warrant reduced valuations. Further, the 1989 valuations did not take the management fees into account. They were referred to in connection with two of the leases and businesses but did not affect the valuations. Thus the alleged failure to include management fees does not explain the difference. A more likely explanation is changed economic times.
(d) In relation to the abandonment of the Keilor lease and business, the defendants submit that the mortgagee failed to exercise due care in the handling of that matter. In my view the mortgagee on the evidence did all it reasonably could to try to protect that security but was defeated by the passage of time and the incurring of costs to the point that it was reasonable for it to abandon its attempts to enforce that security. I also note that in paragraph 36 of the amended statement of claim the plaintiff alleged that as at 1 December 1994 Tarkington was not in breach of its obligation under the 1992 lease of the Keilor property. In paragraph 37 the plaintiff pleaded that Koroneos purported to accept a repudiation of the lease by Tarkington and did so wrongfully. The defendants in their defence denied paragraph 36 of the statement of claim and went on to plead that Tarkington failed to pay to Koroneos the rental for the month of November 1994 in accordance with the 1992 lease and that Koroneos accepted the failure to pay the rent as a repudiation as a result of which the lease was terminated. That pleading has not been amended or deleted. If that be so then it is difficult for the defendants to now argue that there was anything that the plaintiff could have done to protect that security.
Manner Of Exercise Of Power - Conclusion
The defendants have not demonstrated that the plaintiff breached its duties in exercising its rights as mortgagee. The counter-claim of the defendants cannot be finally determined, however, until the debt is re-calculated and a conclusion reached about whether the plaintiff was entitled to enforce the securities. Should it emerge that the plaintiff was not, I intend to invite further submissions on the consequences for the parties.
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