Lis v Bertram

[2018] SADC 34

District Court of South Australia

(Civil)

LIS & ORS v BERTRAM & ORS

[2018] SADC 34

Judgment of His Honour Judge Slattery (ex tempore)

4 April 2018

CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS - PENALTIES AND LIQUIDATED DAMAGES

The first defendant was a property developer and the sole director of the second to fifth defendants. The first defendant sought loans from the first, second, third and fifth plaintiffs in relation to a development on Sturt Street called The Mayfair Apartments. Prior to the first defendant’s involvement, the development had collapsed and receivers were appointed. The first defendant sought to purchase the development asset from the receivers. The first, second, third and fifth plaintiffs severally claimed as lenders to the second to fifth defendants disparate amounts allegedly due and owing to them as lenders.

The second to fifth defendants entered into a deed of agreement with the fifth plaintiff. The deed of agreement, under clause 4.6 of the deed of agreement stipulated that interest, when due and payable, shall be capitalised at the rate of 15% - whether the capitalised interest constituted a penalty – whether clause 4 of the deed of agreement was operational if clause 4.6 of the deed of agreement was not given effect.

The first defendant executed deeds of agreement and deeds poll with the first, second, third and fifth plaintiffs for and on behalf of the second to fifth defendants - whether the documents were duly executed by the companies. 

The claim against the first defendant was not pursued as, at the time of trial, he was bankrupt.

Held:

1.       The first, second, third and fifth plaintiffs were severally entitled to recover the unrepaid loans from the second to fifth defendants as they were due and owing under the deed of agreement.

2.       The first, second, third and fifth plaintiffs were entitled to interest on the amount claimed against the second to fifth defendants.

3.       The capitalised interest pursuant to clause 4.6 of the deed of agreement made with the fifth plaintiff constituted a penalty and was unenforceable.

4.       The obligation under clauses 4.1 to 4.4 and 4.8 of the deed of agreement with the fifth defendant operate independently of clause 4.6.

5. The first defendant, as the sole director and sole company secretary of the second to fifth defendants, duly executed the deed of agreement and deeds poll for and on behalf of the second to fifth defendants in accordance with s 127 of the Corporations Act 2001 (Cth) and those agreements thereby bound those defendants.

Bankruptcy Act 1966 (Cth); Corporations Act 2001 (Cth) ss 206B(3), 127, 128, 129; District Court Act 1991 (SA) ss 42, 39; District Court Rules 2006 (SA) rr 263, 264; District Court Civil Supplementary Rules 2014 (SA) r 208, referred to.
Dobbs v National Bank of Australasia Limited (1935) 53 CLR 643; AMEV-UDC Finance Limited v Austin (1986) 162 CLR 170; Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656; Andrews v Australia and New Zealand Banking Group Limited (2012) 247 CLR 205; Paciocco v Australia and New Zealand Banking Group Limited (2016) 333 ALR 569; Pigram v Attorney-General [1975] 132 CLR 216, applied.
Jobson v Johnson [1989] 1 WLR 1026, discussed.
Dunlop Pneumatic Tyre Co Limited v New Garage & Motor Co Limited [1915] AC 79; Cavendish Square Holding BV v Makdessi [2016] AC 1172, considered.

LIS & ORS v BERTRAM & ORS
[2018] SADC 34

Summary of Action

1. In this action there are five identified plaintiffs: Athena Lis (Lis), Peter D'Alfonso (D'Alfonso), Surrinder Kumar (Kumar), Katrina Kapuranis (Kapuranis) and Frank Borg (Borg). I was informed from the outset that no claim is pressed on behalf of the fourth named plaintiff Kapuranis.

2. There are five named defendants: David Morton Bertram (Bertram), Octane Holdings Pty Ltd, Octane Property Pty Ltd, Octane Investments Pty Ltd and Colvid Homes Pty Ltd. For ease of reference the companies will hereafter be referred to as ‘Holdings’, ‘Property’, ‘Investments’ and ‘Colvid Homes’.

3. The claims of these plaintiffs in the action may be grouped as claims made first by Lis and D'Alfonso, second by Kumar and third by Borg. In the statement of claim Lis and D'Alfonso make their claim for a debt due to them under the terms of a document described as a deed poll dated 5 June 2017.[1] They make a claim for the sum of $500,000 plus interest and costs. Kumar makes a claim for a debt due to him under the terms of a deed poll dated 8 November 2016[2]; he makes a claim for $101,492 plus interest and costs. Mr Borg makes a claim for a debt due to him under the terms of a document described as a deed of agreement dated 26 April 2016[3] in the sum of $350,000 and he claims for interest and costs. Each of the relevant plaintiffs in the statement of claim seeks judgment in their favour plus orders for payment of interest and costs on an indemnity basis. Each of them claim that no inquiry is to be made about the provenance of the debts claimed. This is because, generally, the indebtedness for the claimed amount is described and recorded by agreement as having fallen due for payment under the documents that I have above described.

   [1] Exhibit P1 tab 7.

   [2] Exhibit P1 tab 2.

   [3] Exhibit P1 tab 1.

4. As a result it is necessary to closely examine these documents, these terms and their efficacy. In the usual course a court would not look behind the formation and operation of a document that apparently records a genuine agreement between the parties to it: there is a presumption of regularity and enforceability of such an agreement.

5. This action was commenced on 17 August 2017. A defence was filed on 3 October 2017; the defence may be described as pithy in nature. It admits paras 1, 2 and 3 of the statement of claim and then either does not admit or specifically denies the balance of the statement of claim. There are some denials that require discussion. The defence denies para 7 of the statement of claim which refers to the Borg deed of agreement dated 26 April 2016 under which Borg allegedly advanced to the first to fifth defendants an amount of $350,000. For reasons which I set out later that denial is correct in that Borg did not make an advance to the first to fifth defendants, but only to Holdings, Investments and Colvid Homes. Paragraphs 9 and 11 of the statement of claim are similarly denied and for the same reasons; these denials are factually correct.

6. The issue of the form of the defence was raised by the plaintiffs at trial but only in a perfunctory way. On my reading of the defence in the trial book there are a number of pleadings that the defendants do not admit particular paragraphs of the statement of claim. This is not a proper pleading under the 2006 rules. However, rather than engage in an examination of the operation of and proper approach to those rules or of the effectiveness or otherwise of the pleadings, I decided that the better approach was to treat the plaintiffs as having been formally put to proof. This was in the absence of any attendance by or on behalf of any of the defendants. The plaintiffs were content to proceed to prove their case in this fashion.

7. This is the approach that I have used in the preparation of this judgment. I will treat each of the pleadings of the plaintiffs as having been formally denied and that the plaintiffs have the onus of proving their case in relation to their claims.

   Result

8. The plaintiffs are entitled to orders that they seek. There are some minor adjustments to be made that are largely immaterial. I will set out the final orders separately in favour of each of the plaintiffs as I have identified in groups at the conclusion of this judgment.

   Discussion

9. In this action the plaintiffs severally claim as lenders to the defendants disparate amounts allegedly due and owing to them. The loans are associated with what was described to me as a second attempt to develop a very large property on Sturt Street in the Adelaide CBD by some or all of the defendants. That site is called the Mayfield site and from the information in the evidentiary material before me it apparently remains undeveloped to this day. My understanding is that the first attempt at development by a number of corporations failed. Receivers were appointed by the secured creditors of those corporations and those receivers remain in control of the site.

10. The first defendant David Morton Bertram (Bertram) is an undischarged bankrupt and the Federal Court appointed trustees to his bankrupt estate on 16 December 2017 (refer Exhibit P3). Prior to that time Bertram was the sole director of the second to fifth defendants (refer Exhibit P2). I have reviewed Exhibit P2. There are a number of identified shareholders of the second to fifth defendants; some are individuals and some are corporate. Although I have no clear evidence on the topic before me, an inference arises that as the sole director of those companies, Bertram was one of or the controller of any corporate shareholder of the companies. That is a matter for the trustees of the bankrupt estate of Bertram.

11. A number of consequences follow under the operation of the Bankruptcy Act 1966 (Cth). No claims against Bertram may be commenced or continued without the formal permission of a Court; under that Act there is a stay of all actions against Bertram, including this action. Another consequence of this position and the content of Exhibit 2 is that the second to fifth defendants are without an officer as the guiding hand and mind of those companies because, for s 206B(3) Corporations Act 2001 (CA), Bertram cannot be a director or officer of a body corporate. No replacement has been appointed.

12. As I have already identified, the plaintiffs are in different positions although they all claim that the corporate defendants are jointly and severally liable to them in the amounts of their claims. The evidence before the court discloses that, perhaps unusually, even when there was a real doubt about the substance of the borrowers and the collectability of further loans, some of the plaintiffs made further loan funds available to the borrowers that were sourced through the plaintiff, Mr Borg. Those lenders borrowed funds from Mr Borg and on-lent them to the defendants. Irrespective of the questionable wisdom of this conduct this is not a matter upon which I need to express any particular view and I put it to one side.

13. I deal with each of the claims of the plaintiffs in the order in which they were dealt with by counsel. There is an anomaly that must be dealt with first. The fifth plaintiff, Mr Borg, claims repayment of the sum of $350,000 plus interest. The evidence discloses that Mr Borg entered into an agreement with a number of defendants in writing for a drawdown in the sum of $350,000 on 26 April 2016.

14. The terms of the loan agreement are set out in the deed of agreement (Exhibit P1, tab 1). There is a schedule to that agreement. It identifies the borrowers. Those borrowers are Holdings, Investments, Colvid Homes, Bertram and Katrina Kapuranis. Counsel for the plaintiff Mr Borg, informs me that no claim is pressed against Katrina Kapuranis and none can be pressed against Bertram.

15. The terms of the deed identifies that each of the borrowers are jointly and severally liable. It follows that no claim is made against the corporate entity Property by Mr Borg. Under clause 6 of the same schedule, the borrowers, being the entities that I have now identified, irrevocably authorised Mr Borg to disburse the advance to them as to the amount of $200,000 to an entity called Sturt Land Pty Ltd (SLPL), the amount of $10,000 to the Charlton Rowley Law Practice Trust Account and the amount of $80,000 to the benefit of Kapuranis in order to discharge a number of debts of Kapuranis, and the amount of $60,000 in favour of Bertram personally.

16. As I have indicated, the company Property is not a party to this transaction. However, it appears to be a party to the other transactions which are the subject of this claim. This also means that the claims of Mr Borg need to be dealt with separately for that reason and I will deal later with the claims of Mr Borg.

17. At the commencement of the action, there was no appearance by any defendant. An all courts call was made, but there was no response. I proceeded to hear the action in the absence of a contradictor. The plaintiffs tendered nine exhibits in evidence and also called Mr Borg for viva voce evidence. Exhibit P4 is an affidavit sworn by Lis on 2 April 2018. Exhibit P5 is an affidavit sworn by D'Alfonso on 2 April 2018. Exhibit P6 is an affidavit sworn by Mr Borg on 3 April 2018.

18. The plaintiffs applied for and I granted an abridgement of time under the rules of court for the use of such affidavits and I excused the plaintiffs from the requirement to serve the affidavits prior to the commencement of the hearing of this action. I did so because I considered that there was no utility in making any order requiring prior service and I was satisfied that no prejudice would be suffered by any party as a result. I also considered that in the administration of justice and taking into account the interests of all parties, such orders and such an approach were appropriate in the exercise of my discretion.

19. I have earlier described the Mayfield development on Sturt Street, Adelaide. The loan agreements that are the subject of this action concerned further attempts at refinancing made by Bertram. He sought and obtained from the plaintiffs finance associated with what he described as his further attempt to purchase the development site from the receivers of the companies that were owners of that site.

20. I understand from the evidence that Bertram needed further funding associated with this attempt. He and the corporate defendants jointly and severally borrowed that money from the plaintiffs and this action concerns the claims of the plaintiffs as lenders for repayment of those funds.

21. The claims of Lis and D'Alfonso are based upon the terms of an agreement made 5 June 2017 (Exhibit P1 tab 7). The affidavit evidence satisfies me of the execution of and therefore the efficacy of this document.  It is described as a deed of agreement, but the document in evidence is only signed by Bertram on behalf of the companies and on his own behalf. None of these signatures are witnessed and as a consequence that document is not in the form of a deed. Recital A to this agreement refers to a number of deeds poll in favour of Lis, D'Alfonso and another person and entities dated 6 December 2016, under which the corporate defendants and Bertram gave certain acknowledgments, warranties and agreements in their favour. The second recital is that Lis and D'Alfonso have the authority of all of the named lenders to agree to the discharge of the obligations of the borrowers set out in the deed. It follows that the deed is made by Lis and D'Alfonso on their behalf and on behalf of all of the other named lenders under the loans. The relevant deeds poll are in evidence and I refer to Exhibit P1 tabs 4 and 5.

22. Exhibit 2 discloses that Bertram was, at the relevant time of the execution of all documents, the sole director of the corporate defendants. The constitutions of the corporate defendants are not in evidence before the Court. The defence of the defendant did not raise any issue concerning the execution of the agreements by the corporations. In that background, it remains necessary to identify the assumptions that may be made by the plaintiffs when dealing with these corporations. Under s 128(1) CA a person, which includes a body corporate, is entitled to make the assumptions in s 129 CA in relation to dealings with a company. That company is not entitled to assert in proceedings concerning those dealings that any of the assumptions are incorrect. Under s 128(4) CA, a person, including a body corporate, is not entitled to make an assumption in s 129 CA if, at the relevant time of the dealings, the person knew or suspected that the assumption was incorrect. There was no evidence before me of any nature about any information possessed by any of the plaintiffs concerning the corporate defendants.

23. Section 129 CA provides that the following assumptions may be made under s 128 CA:

    a)That the company’s constitution has been complied with.

    b)That anyone who appears from information available to the public from ASIC records to be a director of the company has been duly appointed and has authority to exercise the powers and perform the duties customarily exercised or performed by a director of the company.

    c)That a person held out to be an officer of the company has authority to exercise the powers and to perform the duties customarily exercised or performed by that director and has properly performed those duties to the company.

    d)That the officers and agents of a company perform their duties to the company properly.

    e)That person may assume that a document has been duly executed by the company if it appears to have been signed in accordance with s 127(1) CA.

24. Section 127 CA provides that a company may execute a document without using a common seal if the document is signed by the sole director of a proprietary company who is also the sole company secretary. I have reviewed the content of Exhibit P2 and I am satisfied that Bertram was the sole director and sole company secretary of each of the corporate defendants. It follows that for s 129(5) CA the documents signed by Bertram for and on behalf of the company are duly executed by the company, he being the sole director and sole company secretary of each of those companies.[4]

    [4] Sections 127(1), 128(1), (2), (3) and 129(1), (2), (3), (4) and (5) Corporations Act 2001.

25. Paragraph 4 of the document (P1 tab 7 p 57) recites that the borrowers who are identified as Holdings, Investments, Property, Colvid Homes and Bertram acknowledge and agree that in consideration of the discharge of their obligations under the deeds poll and in further consideration for the further payment by the lenders to the borrowers of the amount of $10,000 they, the borrowers, are jointly and severally liable to the lenders for the amount of $500,000 and that this outstanding amount as defined in clause 4.1.1 of this deed poll is due and payable by the borrowers to the lenders. Those borrowers are also liable to indemnify the lenders for any and all enforcement expenses incurred by the lenders and those borrowers charge in favour of the lenders any interest they may have in any personal or real property. The borrowers also warrant the correctness of the information contained in the deed. These documents are all drawn in generally the same form: the loan amount is acknowledged as is the joint and several liability.

26. The earlier reference to the sum of $10,000 is explained in the affidavit of D'Alfonso (Exhibit P5) and the affidavit of Lis (Exhibit P4), both of which have been read in evidence. In her affidavit Lis informs the Court about meeting Bertram, his interest in seeking a refinance to complete the Mayfield development on Sturt Street, the information given by Bertram to Lis and his attempts to obtain finance.

27. Lis deposes that she approached Mr Borg to obtain funds to on-lend to Bertram as well as providing funding to Bertram from the personal cashflow of herself and D'Alfonso. She was the person who introduced Bertram to Mr Borg and she was aware of security arrangements required by Mr Borg.

28. She deposes that she encouraged other lenders to provide security for advances to be made by Mr Borg to Bertram, the further lending by Mr Borg to Bertram and thereafter Mr Bertram seeking to secure further funding to tide over the development until such time as other funding in the amount of $150 million could be obtained. It was in late 2016 that Lis became concerned about the question of liability for the loans made to Bertram, some of which she had borrowed from Mr Borg. It was in those circumstances that she and D'Alfonso caused Bertram to make deeds poll in favour of herself and D'Alfonso. Those deeds poll form part of the background of the claims in these proceedings. Those deeds poll are at tabs 4 and 5 of the tender book Exhibit P1.

1. Following the execution of those documents in June 2017, Bertram executed a further deed of agreement which is to be found at Exhibit P1 tab 7. The document was executed in favour of Lis and D'Alfonso for and on behalf of the other lenders, as I have already set out above.

2. At para 12 of Exhibit P4 Lis deposes to the fact of the payment of the $10,000. She identifies particular exhibits to her affidavit, especially Exhibit AL1. In that exhibit there is a reference to the provision by Bertram of a BSB account number at 3:59 pm on 5 June 2017. The second is a record of payment through the National Australia Bank Limited into that same account of Bertram under the same BSB number showing the receipt at 4:08 pm on the same day of the sum of $10,000.

3. I accept this evidence and I find that the requirement in relation to the payment of the $10,000 as essentially a condition precedent has been satisfied. As I have said, the plaintiffs concede and I accept that the document at Exhibit P1 tab 7 is described as a deed but the signatory of Bertram is not witnessed and is not therefore to be treated as a deed but only as an agreement. However, I am satisfied that it has full enforceability as an agreement and I repeat my earlier comments concerning the execution of the document by the corporations through the sole director and secretary.

4. In any event, on my reading of the documents and on the evidence before me, there is no question about, for example, the absence of consideration or the like that may have significance in relation to the use of the deed and would require a document in the form of a deed. Therefore in my judgment there is nothing that affects or changes the legal position by the use of this method of execution. The evidence is that Bertram was away overseas quite often and the method of the execution of the documents reflected his unavailability at a number of relevant times. That detail is reflected in paras 10, 11 and 12 of Exhibit P4, which I accept.

5. I am therefore satisfied on the evidence and I find that the sum of $10,000 has been paid as required under clause 4 of Exhibit P1 tab 7 and that the result is that the companies are jointly and severally liable to Lis and D’Alfonso in the sum of $500,000.

6. I have already referred to the content of clause 4.1 of Exhibit P1 tab 7. That clause reflects the requirement to pay the $10,000, the acknowledgment of the liability of $500,000, the acknowledgment of the liability by the borrowers (including the corporate defendants) to make the payments and the liability of those borrowers to indemnify the lenders for any and all enforcement expenses.

7. That said, there are at least two things that require further attention. The first is that in the agreement dated 5 June 2017 (P1 tab 7) made by Lis and D'Alfonso there is no term or provision prescribing the rate of interest payable in relation to the debt, albeit that the liability to pay interest is referred to in the context of the agreement. It would follow that insofar as there is an applicable rate of interest prior to judgment it would be the court rate which must prevail.

8. The second is that, having regard to the recitation of facts that I have just set out, the efficacy of the operation of the deed depends in large part upon the position of Mr Borg to whom I have earlier referred. I have earlier also made reference to Exhibit P1 tab 1, the deed of agreement made between Mr Borg and the entities that I have earlier described. It is sufficient to identify that the defendant Property is not a party to that deed (see Exhibit P1, tab 1, schedule item 2).

9. In his affidavit before the court (Exhibit P6) Mr Borg deposed that it was pursuant to the agreement dated 26 April 2016 (P1 tab 1) that he agreed to and did advance loan moneys to those particular defendants. He identifies the agreement and informs the Court that in order to source these funds he borrowed $350,000 from an associate. The documents relating to the transaction of the borrowing by Mr Borg of those funds is set out in exhibit FB1to his affidavit.

10. Mr Borg also identifies that the advance was disbursed in accordance with the authority contained in special condition No 6 of that agreement. At para 7 of his affidavit Mr Borg deposes to the details in relation to those matters. In particular Mr Borg identifies that the amount of $75,241.67 was paid to the benefit of Kapuranis, the fourth plaintiff, to ensure that Borg had a first mortgage security over property owned by her as security for the repayment of the advance. He did not charge interest on the amount of $50,000 of this advance. Mr Borg confirms that the advance was, as is described in the document itself, always contemplated as being for a short term, namely two months (see item 9 of the schedule to Exhibit P1 tab 1). This was because Bertram had represented that he had another long-term source of funding and that the funding would be available soon.

11. Mr Borg in his affidavit and in his viva voce evidence confirmed that the promises and suggestions made by Bertram never came to pass. He deposes at para 11 that the proposed source of funding was a sham and that he has been misled by Bertram. He also deposes that he made a loan to Kumar; he refers to the affidavit of Lis of 2 April 2018 and confirms that he made advances to Kumar on 1 April 2016 and 19 April 2016 of $60,000 and $65,000 respectively.

12. Mr Borg also provided a document entitled “Certificate”. It was admitted into evidence as Exhibit P7. It is a certificate given pursuant to the terms of the deed of agreement (Exhibit P1 tab 1). Under the relevant authorities that bind me, (Dobbs v National Bank of Australasia Limited (1935) 53 CLR 643 at 651 and 654 per the plurality) such a certificate has contractual force. It is not necessary that I set out the detail of the certificate. It records the loans made, the interest agreement, the failure to make payment and the calculation of the debt due (in paras 11 and 12) on a compound interest basis and a simple interest basis. Clause 21.6 of Exhibit P1 tab 1 is the contractual basis upon which the certificate by the lender may be given. It follows that the efficacy and contractual force of the clause and therefore the certificate Exhibit P7 cannot be contentious. That document is to be given full contractual effect.

13. I required Mr Borg to give oral evidence of a particular document that he prepared. It has now been received as Exhibit P8. That document shows the loans made by him to Mr Surrinder Kumar, the third plaintiff. That document about which Mr Borg gave oral evidence, which I accept, discloses that on 1 April 2016 and 19 April 2016 loans were made to Mr Kumar and that in the period between 1 April 2016 and 7 April 2017 those loans were, with the exception of the amount of $52,794.27, paid in full apart from a rollover of the indebtedness in the amount of $19,000. Therefore, by one means or another, the total indebtedness in the period in the amount of $337,894.27 has been discharged.

14. The important feature is that the loans were made and that the loans have been discharged. This Court is not on inquiry as to how particular loans may have been discharged or particular indebtedness may have been satisfied as between Mr Surrinder Kumar and Mr Borg.

15. The relevant loans as they related to Mr Borg were dealt with together and the evidence discloses that Mr Borg made funding available to a number of borrowers, including the first three plaintiffs, who on-loaned funds to Bertram. Importantly from the position of Kumar, he has received advances from Mr Borg and has repaid them. These facts as I find are important in relation to the claim of Kumar.

16. I have already decided that the debt of $350,000 claimed by Mr Borg is due and payable under the terms of the agreement P1 tab 1.

17. I turn then to the documentation relating to Mr Kumar. The documents relating to the plaintiff Mr Kumar and his loans to the defendants are to be found at Exhibit P1 tab 2. This is a deed poll of the type that formerly governed the position of Lis and D'Alfonso and as is referred to in their affidavits. That document contains a recital L in the preamble entitled “Background”. Recital L reads as follows:

    The Lender [who is identified as Mr Kumar, the third plaintiff] is only due to be paid by the Borrowers [and the borrowers are Holdings, Investments, Colvid Homes and Bertram] the Amount Owing if the Borg debt is paid by the Lender. If the Borrowers repay the Borg debt the debt to the Lender is full extinguished and no further claims can be made against the Borrowers.

18. There are two things to be noted. There is no evidence that the borrowers repaid the Borg debt. In his oral evidence concerning Exhibit P8 Mr Borg identified that the loans of $60,000 and $65,000 as well as the balance of the other loans made by Mr Borg to Mr Kumar, the third plaintiff, have been discharged. It therefore follows that the first sentence of background recital L has been satisfied. That also identifies the matters in para 2.4 of the operative part of the deed referring to the Borg debt being the moneys advanced by Mr Borg in the amount of $101,492. On the evidence it is only necessary to identify that the first two loans identified on Exhibit P8 were in the amount of $125,000 and that there was a further sum of $60,000 in loans made by Mr Borg to Mr Kumar, all of which have been discharged.

19. It also follows therefore that the acknowledgment by the borrowers in clause 4.1 of the Exhibit (P1 tab 2) is that the amount of $101,492 is due and owing. That amount was calculated as the principal $30,000 and interest $71,492.60. There is a schedule A to the deed poll but it does not set out a rate of interest. My reading of the document does not disclose what rate of interest has been applied.

20. Under clause 4.1.2 of the deed poll the outstanding amount is due and payable by the borrowers; the borrowers under clause 4.1.3 are liable to indemnify the lender for any and all enforcement expenses including legal fees on the basis of an indemnity and fees, costs and charges. It follows that I accept that the corporate defendants are indebted to Mr Kumar in the amount of $101,492 plus interest.

21. As a result of those matters, I am satisfied of the efficacy of the documents being the deed of agreement between Mr Borg and the borrowers identified on the schedule item 2, namely Holdings, Investments and Colvid Homes, for a loan in the amount of $350,000 plus interest which is now repayable. I am satisfied that Holdings, Property, Investments and Colvid Homes are indebted to Lis and D’Alfonso in the sum of $500,000 plus interest. I am further satisfied that in relation to Mr Borg he is entitled to the payment of the corpus of his claim of $350,000 under the terms of the agreement P1 tab 1 and I will address the question of interest under that clause, which is referred to at para 4 on p 5 and at item 6 of the schedule.

22. The question for my further consideration is the calculation of the total debt including interest owed to Mr Borg. I have earlier referred to the content of clause 4 of Exhibit P1 tab 1, the Borg deed of agreement. Interest is required to be paid under clause 4.1 during the term of the agreement. This agreement was anticipated to be only two months in duration. The calculation of interest is set out at clause 4.2 and 4.3. The operative features are set out in clause 4.4 and 4.5. Clause 4.6 is a capitalisation of interest provision. Under it, the borrowers acknowledge that any interest from time to time payable under the deed which is not paid when due shall be capitalised by being added to the loan and the borrowers must pay interest upon the increased loan balance in accordance with the deed.

23. Also under clause 4.8 post-judgment interest is agreed to be paid at the higher rate. That higher rate is set out in item 6 of the schedule; it is in the amount of 15 per cent per month. The lower rate is 10 per cent per month and the agreement is that interest could only be charged on the amount of $300,000. Clauses 4.1-4.4 operate so that if interest is paid on time the lower rate is applicable. If there is a default the higher rate is applicable.

24. Before considering the question of calculation further, it is necessary to consider whether such an interest rate, that is 15 per cent per month on a compounding basis, under clause 4.6 of that agreement is a penalty and, to the extent of it being a penalty, whether any aspect of it is unenforceable.

25. The law in relation to penalties in Australia is now to be considered having regard to the trilogy of decisions of the High Court in AMEV-UDC Finance Limited v Austin (1986) 162 CLR 170, Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 and finally the decision of the High Court in Andrews v Australia and New Zealand Banking Group Limited (2012) 247 CLR 205 followed by Paciocco v Australia and New Zealand Banking Group Limited (2016) 333 ALR 569.

26. These decisions make clear that the strictness of the rule enunciated by Lord Dunedin in Dunlop Pneumatic Tyre Co Limited v New Garage & Motor Co Limited [1915] AC 79 no longer reflects the law of Australia, although as the High Court has said the relevant considerations discussed in that case are matters that should be kept in mind in any decision on this topic. I will do so.

27. In the AMEV-UDC decision and particularly the decisions of Mason J and Wilson J, the High Court emphasised that courts should take a broad approach and that an agreed sum should only be characterised as a penalty if it is out of all proportion to the damage likely to be suffered as a result of the breach.

28. Ringrow concerned whether or not, on a repurchase under a default term of an agreement made by BP, the term of the agreement not requiring BP to pay for goodwill on such a repurchase constituted a penalty. The court held that any difference in those amounts in the particular circumstances of that case needed to be extravagant and unconscionable. They must suggest a degree of disproportion sufficient to point to oppression and at 667 the plurality said as follows:

    The principles of law relating to penalties require only that the money stipulated to be paid on breach or the property stipulated to be transferred on breach will produce for the payee or transferee advantages significantly greater than the advantages which would flow from a genuine pre-estimate of damage.

29. It is not necessary to decide whether the expression “genuine pre-estimate” is to be assimilated to a payment being out of all proportion to damage likely to be suffered.

30. The question of whether a contractual loan operated as a penalty was considered afresh in the Andrews v Australia and New Zealand Banking Group case. That case concerned late payment fees payable in the event that account holders with the ANZ Bank did not make their minimum monthly repayments on credit card accounts by the due date. The Paciocco decision was the finalisation of the bank fees class action which had commenced in Andrews. That action was to recover amounts paid on the basis of the standard form contracts of the ANZ were penalties; that action failed.

31. At [43-155] the learned author of JW Carter, Carter on Contract (LexisNexis Butterworths) has summarised the relevant legal principles as follows:

    [T]he majority applied the ‘out of all proportion’ criterion stated by Mason and Wilson JJ in AMEV-UDC Finance v Austin[5] by reference to ANZ's performance interests. The majority reasoning makes a number of points the effect of which is to narrow considerably the practical impact of the penalties doctrine under Australian law.[6] These may be summarised as follows.

    [5] AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 at 190; 68 ALR 185 per Mason and Wilson JJ. See [43-120].

    [6] See also Cavendish Square Holding BV v Makdessi [2016] AC 1172; [2015] UKSC 67. See Lord David Hope, ‘The Law on Penalties – A Wasted Opportunity?’ (2016) 33 JCL 93.

    First, freedom of contract remains an important feature of the Australian law and only in extreme cases should provisions be struck down as penalties.[7]

    [7] See (2016) 333 ALR 569 at 584 per Kiefel J, 603 per Gageler J, 615 per Keane J; [2016] HCA 28 at [54], [156], [220].

    Second, whether a provision is a penalty and therefore operates by way of punishment remains a question of construction.

    In emphasising that the doctrine is a narrow one, Gageler J[8] and Keane J[9] placed more stress than Kiefel J[10] (with whom French CJ agreed) on identifying punishment as the purpose of a provision alleged to be a penalty.

    [8] See, eg (2016) 333 ALR 569 at 603, 607; [2016] HCA 28 at [158], [176] per Gageler J.

    [9] See, eg (2016) 333 ALR 569 at 616; [2016] HCA 28 at [221] per Keane J.

    [10] Cf (2016) 333 ALR 569 at 580; [2016] HCA 28 at [32] per Kiefel J (‘purpose and effect’).

    Third, the late payment of fee protected ANZ's interest to meet operational costs, loss provisioning and regulatory capital.[11]

    [11] See (2016) 333 ALR 569 at 585 per Kiefel J, 607 per Gageler J, 620, 631 per Keane J; [2016] HCA 28 at [58], [176], [240], [281].

    However, Gageler J also relied on ‘avoidance or minimisation of common costs and fixed costs associated with ... collection activities’.[12] And Keane J took an extremely broad view, describing[13] ANZ's interest as ‘multi-faceted’.

    Fourth, the tests set out by Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd[14] are not as reliable today as they were in the past.

    Accordingly, although the late payment fee looked to be a penalty under Lord Dunedin's greater money sum test,[15] that test was given a narrow interpretation. If a customer's total account balance was greater than $1000, so that the minimum monthly repayment would be $20, the fact that the customer's liability was doubled for failure to pay did not mean that the late payment fee was a penalty.

    Fifth, the comparison required by Paciocco v Australia and New Zealand Banking Group Ltd relates to the promisee's performance interest, rather than the loss likely to be suffered on breach of the provision to which the alleged penalty applies.

    The orthodox inquiry and penalties analysis is whether the sum at issue is out of all proportion to the loss likely to be suffered.[16] It remains a sufficient justification that a money sum is a genuine pre-estimate of loss. However, the fact that a sum is not a genuine pre-estimate of loss is not conclusive.

    [12] (2016) 333 ALR 569 at 607; [2016] HCA 28 at [174] per Gageler J.

    [13] (2016) 333 ALR 569 at 629; [2016] HCA 28 at [271] per Keane J.

    [14] Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 per Lord Dunedin. See [43-130].

    [15] See [43-130].

    [16] See [43-120].

32. I respectfully agree with this summary of the law by the learned author. There are a number of features about the transactions in the case at bar that require discussion in light of the High Court authorities that bind me.

33. The first is that factually the Borg transaction was a loan for two months. It was secured by a mortgage over real estate but there is no evidence before me about the recoveries under those mortgages. It is difficult to understand how no recovery could be made under a first mortgage security given to Borg over a property at 29 Carroll Crescent, Mill Park, Victoria. In making this comment I take into account the operation of schedule clause 3.19 and clause 6 of the Borg agreement (P1 tab 1).

34. Second, as I have said, there were two interest rates: a lower rate of 10 per cent per month and the higher rate default rate. If the interest was paid on time there would be no application of the higher rate or any occasion to capitalise the higher rate into the borrowing amount upon which interest is calculated.

35. Third, the schedule to the agreements contains a number of warranties given by the corporate borrowers, all of which are false and could never have been reasonably given. There is an appearance of misleading conduct in these dealings.

36. Fourth, many lending institutions require terms leading to a capitalisation of unpaid interest. The reasons are obvious enough and they keep the borrowers' obligations firmly in the borrowers' minds. That said, it is apparent that such commercial arrangements generally sit in a different sphere of commercial lending in a competitive environment that is very different to the case at bar. It is well understood that banks have several sources of loan funds but now mainly in the international money market paying LIBOR or similar on the cost of money. Deposits and long-term bonds play a much reduced role in banks gathering funds for use in loans. The rates at which banks borrow funds will be the determinant of the cost to the banks of the use of their resources in the competitive banking environment.

1. Fifth, in this case the evidence is that Mr Borg borrowed funds to on-lend using a group of known lenders. Commercially it may be assumed that this group of lenders set their borrowing rates according to the risks and so their rate of cost of funds would be much higher than bank rates. That is typical in this type of lending market, accepting, as was the case, that this was only intended to be a two month loan.

2. In that background, I turn to consider Exhibit P9 which is in two parts. Both disclose that no interest payments on the Borg loan have been made since the date of the loan advance. On a compounding basis, the debt owing by the borrowing companies to Mr Borg is in the sum of $6,835,627.78.

3. Following the decisions of the High Court in AMEV-UDC, Ringrow, Andrews and Paciocco I consider that calculation to be an extreme case because it has no connection to the loan arrangements except that, in a punitive way, it is calculated under the terms of the contract itself. There is no evidence before the Court that it is in any way connected to meeting operating costs and loss provisioning even though the source of the funds gathered by Mr Borg is in evidence. But there are no details in relation to his lenders, the agreements with those lenders, default rates and the like.

4. Finally, I consider that the loss in relation to a loan of $350,000, converting to a debt of some $6.8 million in such a short time, is out of all proportion to the loss likely to be suffered in repaying the source of the funds by Mr Borg.

5. For these reasons, I would not allow the plaintiff Mr Borg to make his claim against these defendants on the capitalisation of interest basis under clause 4.6 of the agreement P1 tab 1. I find that it is a penalty and is unenforceable.

6. The existence of clause 4.6 of the agreement does not affect the balance of the operational clause 4. I am conscious that the most recent pronouncements by the High Court (Pigram v Attorney-General [1975] 132 CLR 216 at 221) and AMEV-UDC at 192-3 per Mason and Wilson JJ and at 201-203 per Deane J is that the clause is enforceable to the extent of its validity. Authority to the contrary (Jobson v Johnson [1989] 1 WLR 1026) is that a penalty clause is a dead letter and there is no other operation and compensation must be sought and proved in accordance with contractual principles.

7. I do not consider that any issue of unenforceability arises here. It is unclear to me whether and if so what influence the discussion in Jobson has had on the development of Australian law in the area. The clauses governing the interest payment obligation and so the schedule are clauses 4.1 to 4.4 and 4.8. Clause 4.6 sits completely separately from them and is an acknowledgment by the borrowers in the usual fashion of an agreed damages clause. The significant feature here and the point of distinction is that the obligation under clauses 4.1 to 4.4 and 4.8 operate quite independently of clause 4.6. If for example clause 4.6 was severed from the agreement the balance of clause 4 would operate efficaciously. I therefore allow the calculation of interest on the agreed rate on a simple interest basis.

8. Mr Borg is entitled to judgment in his favour in the amount of $1,353,500 in accordance with the second calculation contained in Exhibit P9.

9. I have received some proposed orders. In accordance with an invitation that I made, those orders specify a figure for costs. Attached to the document that I have received is a schedule of costs. It contains as much if not more detail as would be found in a short form bill of costs. I have examined it for its reasonableness and I am satisfied that it is reasonable.

10. The costs claim should be allowed. The plaintiffs have asked for a division of costs of the total amount of costs of $31,690.37 in accordance with the interests of each of those individual plaintiffs in the grouping to which I have earlier referred namely Lis/D’Alfonso, Kumar and Borg. I am content to divide costs in the way that the plaintiffs have requested, at the proportion of 25 per cent being attributable to each person.

11. I further consider that under the operation of s 42 District Court Act 2006 (SA) and District Court Rules 2006 (SA) 263 and 264. I have an unfettered discretion on the following matters: to whom costs may be awarded; by whom costs are required to be paid and the basis upon which I may award costs. In general costs are to be awarded on a party/party basis referrable to the scale of costs. Parties are at liberty to make an agreement contractually to pay a higher rate of costs. Each of the agreements upon which the three claims are based requires the payment of costs on an indemnity basis. This is a contractual obligation and no enquiry is necessary about the basis upon which such a level of costs may be claimed. Even so, the costs claimed must be in a reasonable amount and be reasonably incurred.

12. I consider that in the exercise of my discretion in the particular circumstances of this case, I am in as good a position as a taxing Master to assess costs, informed as I am by the certificate prepared by the plaintiffs’ solicitors. I am prepared to exercise my discretion in favour of the plaintiffs both as to the fact of costs, and the amount payable for such costs.

13. I have also received a calculation of pre-judgment interest. In relation to Lis and D’Alfonso and in relation to Kumar that calculation is made at the usual rate of the cash rate plus 4 per cent which would usually be allowed for pre-judgment interest. Earlier I referred to the fact that there is no specified interest rate in the deeds poll for the agreement relating to Lis and D’Alfonso and Kumar. The rate of interest claimed is appropriate in light of the usual approach to the calculation of pre-judgment interest.

14. I make the following orders:

    1.Judgment against the second to fifth defendants in favour of the first and second plaintiff in the amount of $500,000.

    2.An order that the second to fifth defendants pay interest to the first and second plaintiffs calculated pursuant to s 39 of the District Court Act 1991 (SA) and District Court Civil Supplementary Rules 2014 (SA) 208 in the amount of $17,328.77.

    3.An order that the second to fifth defendants pay the costs of and incidental to these proceedings to the first and second plaintiffs calculated in the amount of $12,676.15.

    4.Judgment against the second to fifth defendants in favour of the third plaintiff in the amount of $101,492.

    5.An order that the second to fifth defendants pay interest to the third plaintiff calculated pursuant to s 39 of the District Court Act 1991 (SA) and District Court Civil Supplementary Rules 2014 (SA) 208 in the amount of $3,517.46.

    6.Order that the second to fifth defendants pay the costs of and incidental to these proceedings to the third plaintiff fixed in the sum of $6,338.07.

    7.Judgment against the second, fourth and fifth defendants in favour of the fifth plaintiff in the amount of $1,353,500 inclusive of interest to date of judgment.

    8.An order that the second, fourth and fifth defendants pay the costs of and incidental to these proceedings to the fifth plaintiff calculated in the amount of $6,338.07.