Liquidity Financial Services Pty Ltd v Prime Capital Securities Pty Ltd
[2012] NSWSC 1185
•08 October 2012
Supreme Court
New South Wales
Medium Neutral Citation: Liquidity Financial Services Pty Ltd v Prime Capital Securities Pty Ltd [2012] NSWSC 1185 Hearing dates: 24 September 2012 Decision date: 08 October 2012 Jurisdiction: Equity Division - Commercial List Before: Stevenson J Decision: Summons dismissed, verdict and judgment for defendant/cross-claimant
Catchwords: EQUITY - loan agreement - specific performance Cases Cited: Australian Hardwoods Pty Ltd v Commissioner for Railways [1961] 1 All ER 737
Georges v Wieland [2009] NSWSC 733
Wight v Haberdan Pty Ltd [1984] 2 NSWLR 280Texts Cited: Meagher, Gummow and Lehane, Equity Doctrines and Remedies, 4th ed (2002) Category: Principal judgment Parties: Liquidity Financial Services Pty Ltd (first plaintiff)
David Kenny (second plaintiff)
Patricia Kenny (third plaintiff)
Prime Capital Securities Pty Ltd (defendant)Representation: Counsel:
J D Catlin (plaintiffs)
P T Newton (defendant)
Solicitors:
Oliver Lane Lawyers (plaintiffs)
Kemp Strang (defendant)
File Number(s): SC 2012/216158 Publication restriction: Nil
Judgment
Introduction
These proceedings concern a Loan Agreement made on 21 October 2011 between: -
(a) the defendant, Prime Capital Securities Pty Ltd ("Prime") as lender;
(b) the first plaintiff, Liquidity Financial Services Pty Ltd ("Liquidity") as borrower; and
(c) the second and third plaintiffs, Mr David Kenny and Mrs Patricia Kenny, as guarantors.
Mr and Mrs Kenny are directors of Liquidity, and husband and wife.
Mr and Mrs Kenny are the registered proprietors of a property at Knockrow ("the Property"). Erected on the Property is a residence known as "Le Paradis" which overlooks Byron Bay and Lennox Head.
Since on or about 12 December 2008, ING Bank (Australia) Limited ("ING") has held a first registered mortgage over the Property.
The Loan Agreement
The "Limit" of the Loan Agreement was $500,000.
The interest under the loan was, assuming prompt payment, 2.5 per cent per month (30 per cent per annum).
In the event of default the interest rate was 5 per cent per month (60 per cent per annum).
Clause 2 of the Loan Agreement provided: -
"Subject to the terms of this agreement, the Lender agrees to make available to the Borrower a cash advance facility as follows:
(a)an Initial Advance at $100,000; and
(b)subject to no Event of Default occurring, the balance of the Limit at the request of the Borrower (such request to be made within 2 months of the date of the Initial Advance)."
Clause 3.2 of the Loan Agreement provided: -
"The Lender may in its absolute discretion decide not to make any Advance and may do so notwithstanding, any other clause in this agreement...or any verbal or written communication between the parties to the contrary".
Clause 4.1 of the Loan Agreement provided that Liquidity was obliged to pay all advances on the "Termination Date", which term is defined to mean 12 months from the time of the Initial Advance (that is 10 November 2011) at the latest.
By clause 7.1(f) of the Loan Agreement, Liquidity warranted that: -
"The facility is used for business purposes and for no other purpose."
Clause 7.5(b)(i) of the Loan Agreement obliged Liquidity to provide Prime:-
"Promptly...with all information regarding the business and affairs of the Borrower or any Guarantor as the Lender from time to time requires".
The Loan Agreement provided that an event of default occurred if, amongst other things: -
(a) there was a default by Liquidity in the performance of any term, agreement or condition contained in or implied in the Loan Agreement;
(b) any indebtedness or obligation of Liquidity to any person including Prime was not met when due;
(c) Liquidity or any person "on behalf of" Liquidity breached any undertaking at any time given to Prime;
(d) any representation or warranty became untrue, false or misleading;
(e) any of the funds advanced were used for a purpose other than that for which it was provided;
(f) Liquidity failed to respond to Prime's satisfaction to any request for information made by it (clause 8(a), (b), (j), (p), (w) and (x).
Securities
On 21 October 2011, Mr and Mrs Kenny also executed guarantees in relation to the proposed advance, and a fixed and floating charge by Liquidity in favour of Prime. Included in the charge was a Business Purpose Declaration in which both Mr and Mrs Kenny stated: -
"We declare that the credit to be provided to us by the credit provider is to be applied wholly or predominately for business or investment purposes (or for both purposes)."
On 9 November 2011, Mr and Mrs Kenny executed a second mortgage over the Property in favour of Prime.
Drawdowns under the Loan Agreement
Prime made the Initial Advance of $100,000 to Liquidity on 10 November 2011.
At the request of Liquidity, Prime made further advances, each of $50,000, on 8 December 2011, 12 January 2012 and 28 February 2012.
Thus, the total amount advanced by Prime to Liquidity was $250,000.
Liquidity did not request that the balance of the facility limit be made available "within 2 months of the Initial Advance", namely by 10 January 2012.
The relief sought by the plaintiffs
Liquidity and Mr and Mrs Kenny allege that Prime has, in breach of the Loan Agreement, refused to provide drawdowns beyond the $250,000 already provided and contend that they "stand ready to perform the Loan Agreement".
Liquidity and Mr and Mrs Kenny claim the following relief: -
(1) a declaration that Liquidity is not in breach of the Loan Agreement;
(2) a "mandatory injunction" ordering Prime to "perform the Loan Agreement by transferring $250,000" to Liquidity.
Background
The "MAID" agreement
On 22 April 2011, Liquidity and Mr Kenny signed an "Executive and Administrative Services Agreement" with Mining Accommodation and Infrastructure Development Pty Limited. The parties refer to the later company as "MAID" and to the agreement of 22 April 2011 as the "MAID Agreement".
Mr Kenny described the MAID Agreement as a "sweat equity" agreement, by which he meant an agreement whereby services were provided by Liquidity (through Mr Kenny) to MAID on the basis that the reward for those services would not be cash, but rather equity in MAID.
Thus clause 4 of the MAID agreement provided: -
"4.Consultant's Remuneration
4.1[Liquidity] shall be paid by way of remuneration a base fee of twenty five per cent (25%) of the total share capital of [MAID] (Fee).
4.2In the event that [MAID] issues any share capital during the Appointment [defined to be five years from 22 April 2011], the Fee shall be adjusted at the completion of each share capital transaction such that [Liquidity] maintains a shareholding proportional to the Fee."
Loan application
On 5 October 2011, Mr and Mrs Kenny signed an "Application Form for Business and Investment Finance".
In that document: -
(a) Mr Kenny stated that his "forward annual income" from Liquidity was $380,000;
(b) Mrs Kenny described her "forward annual income" from Liquidity as $360,000;
(c) Mr and Mrs Kenny answered the question "why have you utilised Short Term Funding in preference to long term funding?" as follows: -
"Most expedient & cost efficient given future earnings and investments".
(d) Mr and Mrs Kenny declared that: -
"The credit to be provided...by the credit provider will be applied wholly or predominantly for business or investment purposes."
(e) Mr and Mrs Kenny stated that the "loan purpose" was:-
"Equity/share investments in a company in which we hold an interest."
(f) Mr and Mrs Kenny also stated that the proposed loan amount was $500,000, the funding was required "ASAP" and that the "loan purpose" was: -
"Equity/shareholder investments".
Mr Paul Scanlon, the director of Prime, sought further particulars of the proposed use of the funds.
On 19 October 2011, Mr Kenny, on MAID letterhead, wrote to his finance broker, Auswide Finance Pty Ltd ("Auswide") as follows: -
"Please accept this letter as confirmation of our intention that the $500k loan being provided by Auswide Finance will be drawn down progressively and injected into [MAID] commensurate with our 25% shareholding of the company.
These funds will be utilised to meet ongoing costs associated with significant tenders that are being undertaken by MAID for the design, supplier and installation of large scale mining accommodation and associated infrastructure projects to top tier engineering and construction companies in Australia."
That letter was provided to Mr Scanlon at Prime on or about 19 October 2011. There was no suggestion in the evidence that the letter was not provided by Auswide to Prime otherwise than with Mr Kenny's authority.
A few days earlier, on 10 October 2011, Mr and Mrs Kenny signed a letter addressed to Auswide headed "Application for short term mortgage finance" in which they stated that the "Loan Purpose" was: -
"To fund the 25% Share buy into [MAID]".
Mr Scanlon said in cross-examination that he was "very confident" that he had not seen that document. Its terms, so far as concerns the proposed "Loan Purpose" were, however, consistent with the letter of 19 October 2011 to which I have referred.
Mr Scanlon's suspicions that loan advance not being used for business purposes
During February 2012 Mr Scanlon noticed that Liquidity was making what he described as "relatively small $50,000 drawdowns" under the facility. He said he became suspicious that the advances were not in fact being used for investment in MAID, but rather "being taken by the Kennys and used personally to pay their monthly expenses".
On 17 February 2012 Mr Scanlon sent an email to Mr Kenny: -
"Can you please send us some bank statements for the last 3 months for:
(a)Liquidity Financial Services: showing receipt of prior draw downs; and
(b)Your home loan (the first mortgage): to confirm repayments up to date".
The bank statements requested were provided. Mr Scanlon noticed that there appeared to be transfers to another account.
Accordingly, on 20 February 2012 Mr Scanlon emailed Mr Kenny: -
"There's a lot of transfers out of the account, which appear to be to the same account, are you able to send us bank statements for that account as well please?"
The following email exchange then took place: -
20 February 2012 Mr Kenny to Mr Scanlon
"Paul, I am somewhat nonplussed by your request, what is the relevance/your motivation?
So far as I am concerned, there is no requirement whatsoever for me to provide anything else to you. I have met all your loan requirements/conditions and could have readily drawn down the whole amount at the outset without any further disclosures; that's why I am paying such a high rate of interest!
All of my repayments are up to date and the conduct of the loan is exemplary. Please effect the draw down ASAP."
20 February 2012 Mr Scanlon to Mr Kenny
"We are regulated business, and have rules we have to follow. Apologies if that is frustrating.
Please provide the info requested. We are able to request same under the terms of your Loan Agreement."
21 February 2012 Mr Kenny to Mr Scanlon
"Paul, I have nothing to hide here, however, there is a matter of principle and consistency as to what disclosures I am actually required to make, especially since I am paying a substantial premium of 25.0% which supposedly provides recompense for any lack of transparency/financials etc. I note you were more than happy to enter the funding arrangement on this basis.
Arrangements provided for me to simply complete a draw down request on each occasion and there has never been any communication of suggestion either verbally or written suggesting otherwise or that there would be any other "compliance" requirements. As you know, I have paid the interest well ahead of the schedule date on each occasion and also provided evidence that the funds have been directed to the account of Liquidity Financial Services.
Suddenly, and without justification, I am now being asked to provide copies of my first mortgage loan statements (with which I have complied) showing that my loan is being serviced in an exemplary fashion and without any justifiable reason, you have also sought by business statements, which again I have provided.
You seem to be making this up as you go along and I am now given to wonder whether this is a stalling tactic to delay draw down due to lack of funds or, alternately, some predatory lending tactic aimed at contriving an unjustified default.
Naturally, I appreciate that you are a regulated business which requires you as a lender to act in good faith and without negligence. I believe all of the information I have provided, combined with the exemplary conduct of my loans, satisfies those requirements and accordingly request that you effect draw down of the loan forthwith.
If you have a legitimate reason for doing so, please advise and also provide documentary evidence of same so that I can refer the matter to my own legal counsel."
21 February 2012 Mr Scanlon to Mr Kenny
"There has hardly been any delay in responding.
To avoid any further delays, please provide complete transparency in terms of bank statements for accounts showing:
1. use of the funds we have provided you; and
2. source of the funds to make your home loan repayments
You know exactly why we are seeking this."
23 February 2012 Mr Kenny to Mr Scanlon
"Hi there Paul, your response to my question is unprofessional and completely unsatisfactory. In the interest of ensuring our relationship is not soured by your initial response, I'll ask you the question again: On what basis are you requesting further documents?
It is self-evident that I have complied with my financial obligations under the Transaction Documents and have not breached any covenants, obligations, conditions, etc. I am concerned that you have not honoured the drawdown notice issued on 22 February 2012. I am entitled to expect the funds to be made available within a reasonable time after the notice has been issued. Accordingly, any further unjustified requests to provide financial records that are not directly related to my obligations under the loan can only be interpreted as a repudiation of the agreement by the lender.
I have instructed my lawyer to request Deborah Bean at Gadens Lawyers to provide executed copies of the Transaction Documents. This was necessary because you have failed to supply these executed documents in accordance with general lending practices. I trust it will not be necessary to involve the lawyers beyond this.
The representation that you are 'regulated' with respect to this loan is blatantly misleading. If I were a cynic, I'd suggest that you are attempting to avoid the reach of the Consumer Credit Code as it applies to facilities of this nature." (emphasis in original)
23 February 2012 Mr Scanlon to Mr Kenny
"Please find attached copies of various documents signed by you and Patricia.
We draw your attention to clause 7.5(b)(iv) of the Loan Agreement under which we may request information.
We also draw your attention [to] clause 8(x) which confirms that failure to respond to information requests is an Event of Default.
Your facility was requested for business purposes and we are simply seeking to clarify this.
For clarity we are not seeking to unnecessarily delay your business activities, and stand ready to provide the further drawdown once the relevant bank statements are satisfactorily provided."
On 28 February 2012 Mr Scanlon put the matter on a more formal basis and wrote to Liquidity as follows: -
"We refer to your signed Loan Agreement and security documentation received by us.
Pursuant to those documents you have an obligation to provide us with any information we request regarding the business and affairs of the Borrower and Guarantors. We note to date you have refused to supply us with certain bank statement information.
We hereby request that you provide us with the following information by close of business 1 March 2012:
Bank statements for all ING Loans, for the period including 10 November 2011 to today's date;
Bank statements for Liquidity Financial Services Pty Ltd account [xxxxx xxxxxxxx], for the period including 10 November 2011 to today's date;
Bank statements for any related party accounts which have transfers to or from the above accounts during the same period.
Please note failure to respond to our satisfaction with any request for information in the timeframe outlined in that request, is any event of default under the facility.
We hereby reserve all rights arising out of these matters. Failure to act at this time or any time in the future, shall not be deemed to be a waiver of any of our rights under the Facility Agreement or any security held by us, all such rights continue to be expressly reserved."
Ultimately Mr Kenny provided Mr Scanlon with copies of Mr and Mrs Kenny's joint bank account statements with the National Australia Bank Limited ("NAB").
Matters revealed by the bank statements
The bank statements revealed the following matters.
The drawdowns from the Prime facility were deposited into Liquidity's bank account with the NAB.
Transfers were made from Liquidity's account to Mr and Mrs Kenny's joint account with the NAB (for example $5000 on 27 January 2012, $6000 on 30 January 2012, $15,000 on 1 February 2012, $1000 on 3 February 2012 and $1500 on 8 February 2012).
Those transfers were used to fund private expenses.
For example: -
23 January 2012
$100.50
Payment for Mr and Mrs Kenny's Austar subscription
27 January 2012
$500
Origin Energy (electricity account for the Property)
30 January 2012
$62
Byron Bay Gym
31 January 2012
$604.17
Car insurance for Mr Kenny's motor vehicle
3 February 2012
$459
Payment to the Roads and Traffic Authority
8 February 2012
$1551
Citibank (for Mr Kenny's credit card)
13 February 2012
$62
Byron Bay Gym
16 February 2012
$39
Donation to Save the Children
24 February 2012
$129.25
Payment for Mr and Mrs Kenny's Austar subscription
27 February 2012
$500
Payment in respect of Mr and Mrs Kenny's Coles Mastercard
27 February 2012
$62
Byron Bay Gym
Mr Scanlon gave evidence: -
"I read these documents and based on what I read I formed the view that the loan advances were not being used wholly for business purposes as stated but were being used for a personal nature."
In my opinion, Mr Scanlon was correct in coming to this conclusion.
This was a breach of the representations and warranties that Liquidity had made to Prime, and constituted an event of default under the Loan Agreement (see clause 8(j)).
Monetary defaults
On 1 May 2012 and 1 June 2012 Liquidity failed to pay interest when due. Prime made demand for the outstanding payments. On 27 June 2012 the arrears due on 1 May 2012 and 1 June 2012 were paid.
Liquidity has failed to meet interest payments due on 1 July 2012, 1 August 2012 and 1 September 2012.
Further requests for information
On 24 July 2012 Prime sent Liquidity two letters.
In the first letter, Prime requested a "detailed explanation of how any Financial Accommodation provided by us to you has been used" and "copies of source documents to support this explanation".
Prime requested that this information be provided by 31 July 2012.
In the second letter, Prime sought copies of bank statements in relation to all ING loans, bank statements for Liquidity's account at the NAB for the period since those provided earlier in the year, bank statements "for any related party accounts which have transfers to or from the above accounts during the same period", and copies of any default notices issued by ING.
That information was sought by 31 July 2012.
That information was not provided. That was also a breach of Liquidity's obligations under the Loan Agreement.
Access to the Property
Mr Scanlon gave the following evidence: -
"As at 24 July 2012 I formed the view that Liquidity was in financial difficulty due to its failure to pay interest on time and its failure to pay the instalment of interest due on 1 July 2012. I also formed the view that Liquidity had used the loan moneys for non business purposes and contrary to [the] purpose stated in the letter from MAID dated 19 October 2011 [referred to at [28] above]. I was aware ING had priority and I wanted to obtain access to the Property for the purpose of obtaining and [sic] up to date market valuation. I was concerned with deteriorating conditions in the property market."
Mr Scanlon said that for those reasons he sent a further letter on 24 July 2012 requesting access to the Property.
Neither Liquidity nor Mr and Mrs Kenny have agreed to provide such access.
Clause 2.8 of the Memorandum to the Mortgage obliged Mr and Mrs Kenny, on reasonable notice, to allow Prime to inspect the Property.
Mr and Mrs Kenny's failure to permit inspection of the Property as required by clause 2.8 of the Mortgage, was a breach of the Loan Agreement (see clause 8(a)).
Default?
In these circumstances, Prime submits that Liquidity is, and continues to be, in breach of the Loan Agreement.
I accept that submission.
On behalf of Liquidity it was submitted that Prime had created "faux" defaults, and relied on "confected, pedantic and incorrect interpretation of the business purpose...to declare the Loan Agreement in breach".
It was also submitted on behalf of Liquidity that: -
"...in order to generate a basis for non-performance [Prime] has subjected [Liquidity] to something akin to oppressive discovery. This has been directed at post facto engineering of a legitimate basis for non-performance but [Prime] had already evinced an intention not to be bound on one ground - that the application of loan funds was a surprise to it. The request for information serve no real purpose other than to explore the 'non-business purpose' alleged by [Prime]. The house inspection, for example was based on no new information about the house or about changes to the house. It was designed to oppress and annoy."
In my opinion, there was no basis for those submissions. I reject them.
Entitlement to specific performance
It is common ground that, usually, a contract to lend money cannot be specifically enforced: Meagher, Gummow and Lehane, Equity Doctrines and Remedies, 4th ed (2002) at [20-050]. The reason for that is that, usually, damages will be an adequate remedy: e.g. Wight v Haberdan Pty Ltd [1984] 2 NSWLR 280 at [289] per Kearney J and Georges v Wieland [2009] NSWSC 733 at [37] per Brereton J.
Liquidity submits that, nonetheless, an order for specific performance should be made because of the difficulty and expense of proving what damage it has suffered as a result of the further $250,000 not being advanced by Prime.
However in this case, an antecedent issue arises, namely that the plaintiffs have not demonstrated that they have any legal right that has been infringed.
Clause 2 of the Loan Agreement (see [8] above) obliged Prime to make the initial advance of $100,000. This was done on 11 November 2011. Prime was only obliged to advance further funds if there was not an event of default, and if the balance of the limit was requested by the borrower within two months of the date of the initial advance, that is by 11 January 2012.
There have been events of default. Liquidity did not request the balance of the advance now sought by 11 January 2012.
In any event, clause 3.2 of the Loan Agreement (see [9] above) provided that Prime might, in its absolute discretion, decide to make no advance notwithstanding verbal or written communication between the parties.
Further, as a matter of discretion, the Court can refuse to make a decree for specific performance if the applicant for relief is in breach of its obligations under the contract: Australian Hardwoods Pty Ltd v Commissioner for Railways [1961] 1 All ER 737 at 742 per Lord Radcliffe. That is this case.
Further, a decree for specific performance will not normally be granted unless the applicant can show that he, she or it is ready, willing and able to perform the contract.
The plaintiffs have failed to show that they are able to perform the Loan Agreement. Indeed they are currently in breach of their obligations to make interest payments under it.
For all of those reasons, specific performance is not available to the plaintiffs in these proceedings.
Declaration that Liquidity not in breach of the Loan Agreement?
The plaintiffs seek a declaration that Liquidity is not in breach of the Loan Agreement.
I find to the contrary; Liquidity is in breach of the Loan Agreement.
Cross Summons
By its Cross Summons, Prime seeks judgment against Liquidity (as borrower) and Mr and Mrs Kenny (as guarantors) in respect of the amount outstanding by Liquidity under the Loan Agreement.
There is no dispute that that amount is $37,500, nor that Mr and Mrs Kenny are liable as guarantors for that amount.
I propose to enter judgment for that amount.
Orders
I make the following orders: -
(1) The Summons is dismissed.
(2) Verdict and judgment for the cross-claimant against each of the first, second and third cross-defendants for $37,500.
(3) The plaintiffs and cross-defendants pay the defendants' and cross-claimants' costs of the proceedings.
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Decision last updated: 08 October 2012
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