Langworth P/L v Metway Bank Ltd

[1992] FCA 587

Re: LANGWORTH PTY LIMITED and LINDSAY JAMES THOMPSON
And: METWAY BANK LIMITED
No. Q G114 of 1992
FED No. 587
Mortgages - Injuction

COURT

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Neaves J.(1)

CATCHWORDS

Mortgages - Exercise of mortgagee's powers - Claims by mortgagor against mortgagee - Claims sounding only in damages - Application for interlocutory injunction restraining exercise of mortgagee's power of sale pending trial of claims - Whether payment into court required.

Injunction - Application for interlocutory injunction to restrain exercise of mortgagee's power of sale pending trial of proceeding for unliquidated damages - Whether payment into court required.

Inglis v. Commonwealth Trading Bank of Australia (1972) 126 CLR 161

Cunningham v. National Australia Bank Ltd (1987) 15 FCR 495

Graham v. Commonwealth Bank of Australia (1988) ATPR 40-908

Harvey v. McWatters (1948) 49 SR (N.S.W.) 173

Hickson v. Darlow (1883) 23 Ch D 690

HEARING

CANBERRA

#DATE 14:8:1992

Counsel for the applicants: Mr R.R. Douglas QC and Mr K.B. Varley

Solicitors for the applicants: Kenny and Loel

Counsel for the respondent: Mr S. Couper

Solicitors for the respondent: Gadens Ridgeway

ORDER

THE COURT ORDERS THAT:

1. The motion notice of which was given on 31 July 1992 be dismissed.

2. The applicants pay the respondent's costs of the motion.

THE COURT DIRECTS THAT -

1. The respondent file and serve a defence and cross-claim not later than 28 August 1992.

2. The respondent file and serve any affidavits on which it intends to rely not later than 4 September 1992.

3. The applicants file and serve any reply to the defence and a defence to cross-claim not later than 11 September 1992.

4. The applicants file and serve any affidavits in reply not later than 11 September 1992.

5. The respondent file and serve any reply to the defence to the cross-claim not later than 18 September 1992.

6. An affidavit of documents be filed and served by each party not later than 25 September 1992.

7. Mutual inspection of documents take place not later than 9 October 1992.

8. The application be listed for further directions at 9.30 a.m. on 16 October 1992 or on such other date as may be notified to the parties by or on behalf of the District Registrar of the Court.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

On 31 July 1992, Langworth Pty Limited ("the first applicant") and Lindsay James Thompson ("the second applicant"), a director of the first applicant, commenced a proceeding in this Court against Metway Bank Limited ("the respondent") by filing an application accompanied by a statement of claim. In that proceeding, the first applicant claims damages alleged to have been suffered by reason of the contravention by the respondent of s.52 of the Trade Practices Act 1974 (Cth), damages for negligence, breach of contract and misrepresentation, orders pursuant to s.87 of the Trade Practices Act, and an injunction restraining the respondent from exercising its power of sale as mortgagee over certain land of which the first applicant is the registered proprietor. The second applicant claims damages alleged to have been suffered by reason of the contravention by the respondent of s.52 of the Trade Practices Act, damages for negligence, breach of contract and misrepresentation, an injunction restraining the respondent from taking any action or proceeding to enforce a purported demand made by the respondent on 16 April 1992 requiring the second applicant to pay to the respondent the sum of $788,521.18 said to be due under a certain guarantee and indemnity dated 25 February 1991 and a declaration that that deed is void, unenforceable, invalid and of no effect against the second applicant.

1. By notice of motion also filed on 31 July 1992, the first and second applicants seek interlocutory relief against the respondent pending the hearing and determination of the substantive application. In support of the motion, the applicants rely upon the several affidavits of the second applicant, Brian Boland and Christopher John Derrick all filed on 31 July 1992. An affidavit of John Ronald Allen sworn on 7 August 1992 is relied on by the respondent. The deponents were not cross-examined.

2. In order to understand the issues that arise on the hearing of the motion, it is necessary to refer in some detail to the history of the relations between the parties.

3. On 10 January 1991, the first applicant purchased certain vacant land situated at Machinery Drive, Darra in the State of Queensland on which it proposed to construct commercial premises for lease. The proposed building was to contain two separate areas available for leasing. It approached the respondent for financial assistance to enable it to proceed with the construction of the proposed building. The first applicant had also entered into an agreement with Lucas Industries Australia Ltd that upon completion of construction that company would lease one of the separate areas of the building.

4. The application to the respondent for approval of a loan was made in early January 1991. The amount sought was $620,000.00. In late January 1991 the first applicant was informed by an officer of the respondent, one Graeme Brown, described as the Brisbane Real Estate Manager of the respondent, that the respondent proposed to offer a loan on various terms and subject to certain conditions. The applicants assert that Mr Brown said to the second applicant that the interest rate would be 21.5% per annum reducible to 18.5% if repayments were made within 7 days of the due date and that "after the construction was completed, the respondent would vary the interest rate to the then commercial rate as published for non-specialist developments".

5. By letter dated 18 February 1991, the respondent informed the first applicant that financial accommodation had been approved subject to the terms and conditions set out in the letter. The principal sum was said to be $620,000.00. The terms and conditions included the following:
   

"TERM OF THE

LOAN : The Debtor will repay the Principal Sum on the expiration of twelve (12) months from the date of the first advance of the Principal Sum. MANNER OF

REPAYMENT : (A) Interest Only

Interest is payable by the Debtor to The Lender monthly in arrears, and the first of such payments is to be made on the last day of the month following the date of the first advance.

For each next succeeding eleven months, payable on the last day of each month.

INTEREST : The Debtor will pay interest on the Principal Sum at the rate of twenty one.5 per centum (21.5%) per annum reducible to eighteen.5 per centum (18.5%) per annum provided that the payments mentioned above are made within seven (7) days of the due date.

Interest is to be calculated on daily balances and charged monthly in arrears. The Lender retains the express right to vary these rates of interest during the currency of the Loan should the general rate of interest charged by The Lender on like accounts vary during the currency of the Loan, on giving fourteen (14) days notice.

....

METHOD OF

FUNDING : (a) Prior to accommodation being made available for construction costs, it will be necessary for the Borrower to expend not less than $16,000.00 of the Borrower's own funds in construction costs on the project. The value of these works is to be disregarded in calculating the amount of accommodation to be made available to meet construction costs.

(b) Loan funds for construction and associated costs are to be made available according to the value of completed construction works (not including materials on site) and will only be released against independent architects' certificates or other satisfactory evidence of expenditure, or inspection reports by our approved valuers (at your expense) and/or The Lender's staff, as The Lender may require. Each inspection required by you by the Lenders staff for the purpose of advancing funds progressively incurs a $50.00 inspection fee which is paid by deduction from funds due to you.

(c) At all times sufficient loan moneys will be retained to cover our estimate of the cost to complete the project."

The letter also contained a provision that the respondent "will not be bound in any way by any verbal communication by its officers in relation to this transaction" and that all matters pertaining to the transaction had to be in writing from the respondent. The letter contained no provision for the reduction of the rate of interest after construction was completed.

1. The first applicant apparently agreed to the terms and conditions proposed by the respondent and on 25 February 1991 a bill of mortgage was executed by the first applicant and the respondent. The bill of mortgage recorded that the principal sum was $620,000.00, that it was to expire 12 months from the date of the first advance and that interest payments were to be made monthly in arrears, the first of such payments to be made on the last day of the month following the date of the first advance, subsequent payments to be made for each of the next succeeding 11 months on the same day of each month.

2. In the meantime, on 22 February 1991, a building contract was entered into between the first applicant and one Garth Donnelly. Under the terms of that agreement (clause 3 in the special conditions) the respondent (which was not, of course, a party to the agreement) was to approve all progress claims, such claims to be processed directly between the respondent and Mr Donnelly with a copy of such claims being provided to the first applicant. According to the second applicant, the applicants had informed the respondent that they "would be taking no part in any of the progress payments or draw-downs apart from progress payment number 1" and that they "were happy for the Respondent to undertake the function of valuing progress works and paying the builder direct, given that they were providing the construction funds, so long as copies of the claims were forwarded to the First Applicant as and when they were produced or paid".

3. The second applicant asserts that in his discussions with Mr Brown in early January 1991, he had informed Mr Brown that the first applicant had received two quotations for the construction work, one being from Mr Donnelly, and that Mr Brown had said words to the effect that Mr Donnelly had been or was banking with the respondent and that Mr Donnelly, in his view and in the view of the respondent, "was a competent builder and the Respondent would be more than happy with Donnelly being the First Applicant's builder" (see the affidavit of the second applicant, par.13 and the affidavit of Brian Boland, par.16). The second applicant further asserts that, as a consequence of Mr Brown's statements regarding Mr Donnelly, he "decided on behalf of the First Applicant to formally contract with Donnelly and did so on or about 22 February 1991".

4. Also, on 25 February 1991, the second applicant executed a guarantee and indemnity in favour of the respondent guaranteeing repayment of the moneys advanced or to be advanced by the respondent and interest thereon.

5. It is common ground that the first draw-down of the loan funds occurred on 10 April 1991.

6. The building work did not proceed satisfactorily and, on 23 July 1991, the second applicant was informed by Mr Donnelly at a meeting at which Mr Brown was present that he, Donnelly, was in severe financial difficulty and would be unable to complete the works. It appears that on or about 18 July 1991 a progress payment of $56,989.08 had been paid by the respondent to Mr Donnelly. On 29 July 1991 Mr Donnelly became a bankrupt consequent upon his filing of a debtor's petition.

7. According to Mr Boland (see his affidavit, par.25), at a meeting on 5 August 1991 the second applicant asked Mr Brown whether the respondent would make some concessions and reduce the interest rates being paid by the first applicant at that time rather than subsequent to completion, since the extended completion date was, in the view of the second applicant, the fault of the respondent. According to Mr Boland, Mr Brown said only that, at the completion of the building, he would reduce the interest rates in accordance with his earlier agreement.

8. By notice dated 6 August 1991, Mr Donnelly's employment as the builder was terminated. Mr Christopher Derrick was subsequently engaged to complete the works. Prior to Mr Derrick being so engaged, however, an oral application was made by the second applicant to the respondent "for an increase in the loan facility in order to complete the construction". That request was confirmed by a letter dated 3 October 1991 addressed to the respondent by the second applicant. The letter included the following paragraph:
   

"Further to our meeting, we confirm that an extension of the original loan facility is requested so as to ensure the cost overuns for Tenancy 1 and Tenancy 2 are amalgamated in the total facility."

1. By letter dated 23 October 1991, the respondent informed the first applicant that approval had been given to increase the loan amount by $140,000.00 to $760,000.00. The letter contained the following:
   

"TERM OF THE

LOAN : The Debtor will repay the Principal Sum on the expiration of twelve (12) months from the 11th April, 1991.

MANNER OF

REPAYMENT : (A) Interest Only

Interest is payable by the Debtor to The Lender monthly in arrears, and the first of such payments is to be made on the last day of the month following the date of the first advance.

For each next succeeding eleven months, payable on the last day of each month.

INTEREST : The Debtor will pay interest on the Principal Sum at the rate of nineteen per centum (19%) per annum reducible to sixteen per centum (16%) per annum provided that the payments mentioned above are made within seven (7) days of the due date.

Interest is to be calculated on daily balances and charged monthly in arrears. The Lender retains the express right to vary these rates of interest during the currency of the Loan should the general rate of interest charged by The Lender on like accounts vary during the currency of the Loan, on giving fourteen (14) days notice."

What appeared in the letter under the headings "Manner of Repayment" and "Interest" was in identical terms to what appeared under those headings in the letter dated 18 February 1991 to which reference has been made with the exception of the rates of interest set out in the first sub-paragraph under the heading "Interest", those rates being less than those referred to in the earlier letter.

1. On or about 18 October 1991 construction was sufficiently completed to allow Lucas Industries Australia Ltd to occupy the portion of the building the subject of the lease agreement to which reference has already been made. It is apparent from the affidavit of the second applicant that the remaining construction work has not as yet been completed, it being stated that, in order to complete the works, a further sum of $38,000.00 will be required.

2. By correspondence addressed to the respondent by the applicants' solicitor the respondent was requested to reduce the interest rate on the loan. The respondent has declined to do so. It is to be noted that the request was made on the basis that the building had been completed, a statement at odds with the position as deposed to by the second applicant.

3. On 6 April 1992, pursuant to s.84 of the Property Law Act 1974 (Qld) as amended, a notice of exercise of power of sale addressed to the first applicant was signed on behalf of the respondent. There is a dispute whether the notice was served on the first applicant following upon its execution. It is clear, however, that the first applicant received a copy of the notice on or about 15 June 1992. The notice states that the first applicant is in default under the mortgage in that "(p)ayment of interest at the true rate of $11,450.43 then due and owing 29th February 1992 was not paid and payment of interest at the true rate of $12,240.12 then due and owing 31st March 1992 was not paid; total $23,690.55". The notice further states that the respondent, having exercised the option under clause 9.1 of the mortgage to require the whole of the moneys secured by the mortgage to become due and payable forthwith, demands payment of the sum of $784,646.75 together with interest accruing at the rate of $407.17 per day from 7 April 1992. The notice also states that, unless the default is remedied within 30 days of service of the notice, the respondent may proceed to sell the land and exercise all or any of the other powers conferred by the mortgage and the Property Law Act. The respondent's position is that, independently of the acceleration of the date of payment of the principal sum of $760,000.00 by reason of the exercise of the option referred to, that sum became payable on 10 or 11 April 1992 by reason of the express terms of the arrangements between the parties (see the terms of the mortgage and the letters dated 18 February 1991 and 23 October 1991 to which reference has already been made). There is evidence before the Court that no payment has been made by the first applicant since 25 February 1992.

1. As has previously been mentioned, on or about 16 April 1992, the respondent served on the second applicant a demand for payment of the sum of $788,521.18 payable under the guarantee and indemnity executed by him in favour of the respondent.

2. Mr Allen, the State Manager-Queensland of the respondent, has deposed (see his affidavit, pars 7 and 8) that, as at 6 August 1992, the amount due and owing to the respondent is $840,293.58 comprising $758,513.15 principal and $81,780.43 being unpaid arrears of interest, costs and charges and that interest is accruing at the rate of $394.84 per day from 7 August 1992. The evidence suggests that the property has a value of approximately $1,000,000.00.

3. It is well established that, as a general rule, an injunction restraining the exercise of a mortgagee of powers given by a mortgage and, in particular, the exercise of a power of sale will not be granted unless the amount of the mortgage debt as claimed by the mortgagee is paid into court. The circumstance that the mortgagor claims to be entitled as against the mortgagee to set off against the amount due under the mortgage damages, including damages for a contravention of s.52 of the Trade Practices Act, is not sufficient to displace the general rule: Inglis v. Commonwealth Trading Bank of Australia (1972) 126 CLR 161 at pp 164-5, 169: Cunningham v. National Australia Bank Ltd (1987) 15 FCR 495: Graham v. Commonwealth Bank of Australia (1988) ATPR 40-908. The rule is, however, not an inflexible one and the court has a discretion to depart from the full stringency of the rule and to mould its order so as to require payment into court of so much only as will suffice to give adequate protection to the mortgagee: Harvey v. McWatters (1948) 49 SR (N.S.W.) 173. The ordinary rule will more readily be departed from where the amount claimed by the mortgagee is obviously wrong (Hickson v. Darlow (1883) 23 Ch D 690), where there is a serious question whether the mortgagee's power has become exercisable at all (Harvey v. McWatters (supra)), or where the mortgagor seeks to impugn the validity of the mortgage transaction itself.

4. The applicants' case has a number of limbs. First, it is said that the respondent, through Mr Brown, represented that, after the construction was completed, the respondent would vary the interest rate to the commercial rate as published for non-specialist developments. There is considerable doubt, on the evidence presently before the Court, that, even if the representation is made out, the occasion for the reduction of the interest rate has arisen as it seems clear, as already mentioned, that construction of the building has not as yet been completed. In any event, however, the claim, even if successful, would sound only in damages or, at best from the first applicant's point of view, in a reduction in the interest rate payable under the mortgage from the date established as the date of completion of the construction of the building. The mortgage transaction itself would not be impeached. Indeed, there is no claim for an order under s.87 of the Trade Practices Act in respect of the transaction of 25 February 1991. The only claim for an order under that section is in relation to the transaction of 23 October 1991 when approval was given to an increase of $140,000.00 in the principal sum.

5. Secondly, it is said that the respondent, again through Mr Brown, represented that Mr Donnelly was a competent builder and that the respondent would be more than happy with him being the first applicant's builder. It is to be noted that, although the statement of claim alleges that what Mr Brown said amounted to a representation that Mr Donnelly was financially sound, there is no evidence to support such an allegation. There is, in fact, no evidence to suggest that the respondent was aware of any financial difficulty affecting Mr Donnelly at the time the representation is alleged to have been made, namely early January 1991. In any event, even if made out, the claim would sound in damages only. The evidence does not suggest that the representations induced the first applicant to enter into the mortgage transaction (which had, it seems, been agreed, at least in principle, before the making of the representations concerning Mr Donnelly). What is said is that the representations caused the first applicant to enter into a building contract with Mr Donnelly.

6. Thirdly, it is said that the arrangement between the respondent and the first applicant was that the respondent would assume responsibility for assessing the quality and performance of the works for the purpose of making progress payments to the builder and would forward to the first applicant copies of each progress claim paid. It is further said that the respondent, through Mr Brown, represented that Mr Bruce Lang, an employee of the respondent, would value the works before each progress payment was made. There is no evidence before the Court to suggest that this representation was false or that the valuations were not made. What the evidence does suggest, perhaps even strongly, is that the valuations were done negligently, that too much money was accordingly paid to Mr Donnelly by way of progress payments and that the respondent failed to forward to the first applicant copies of each progress claim paid. If those allegations are made out, the first applicant will be entitled to damages against the respondent but, again, the claim, even if successful, will not result in the mortgage transaction being impeached.

7. Fourthly, it is said that the principal sum does not become payable until 23 October 1992, being a date twelve months after the letter approving the increase in the principal sum from $620,000.00 to $760,000.00.

8. As has already been said, each of the limbs of the applicants' case, other than the fourth limb, would not result in the mortgage transaction being impeached in any respect. The fourth limb would, if made out, provide a ground for contending that the power of sale has not yet arisen. There are, however, two answers to this. In the first place, I am satisfied that there is no serious question to be tried concerning the date upon which the principal sum became payable. The documents clearly establish that that date was 10 or 11 April 1992, 12 months after the date of the first advance of loan moneys. The statement in the second applicant's affidavit (par.28), even if accepted, that Mr Brown had said in October 1991 that "the repayment date of the facility would be in October 1992" could not alter the plain meaning of the document. In any event, there has been no payment of interest by the first applicant since 29 February 1992 and that circumstance entitled the respondent to call up the whole of the principal sum, as it has in fact done.

9. The circumstances outlined above are such that the first applicant is entitled to interlocutory relief only if it brings into court the amount claimed by the respondent to be due and payable under the mortgage. This the first applicant has not offered, and clearly is not in a position, to do. In those circumstances, the interlocutory relief sought by the first applicant is refused.

10. It remains to consider the claim of the second applicant. He seeks to restrain the respondent from taking any steps to recover the amount claimed to be due under the guarantee and indemnity dated 25 February 1991.

11. In his affidavit, the second applicant does not suggest that he was induced to enter into the guarantee and indemnity on the faith of any representation made to him by the respondent, either through Mr Brown or otherwise. In my opinion, no basis has been made out to grant the relief sought. Any defences available to the second applicant can be raised in any legal proceedings brought against him by the respondent to enforce its claim.

12. For these reasons, the motion, notice of which was given on 31 July 1992, is dismissed. The applicants must pay the respondent's costs of the motion.