Mag Financial and Investment Ventures Pty Ltd v El-Saafin
[2022] VSCA 286
•21 December 2022
| SUPREME COURT OF VICTORIA COURT OF APPEAL |
| S EAPCI 2021 0131 |
| MAG FINANCIAL AND INVESTMENT VENTURES PTY LTD (ACN 625 790 623) & ANOR (ACCORDING TO THE ATTACHED SCHEDULE) | Applicants |
| v | |
| HASSAN EL-SAAFIN & ORS (ACCORDING TO THE ATTACHED SCHEDULE) | Respondents |
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| JUDGES: | McLEISH, SIFRIS and WALKER JJA |
| WHERE HELD: | Melbourne |
| DATE OF HEARING: | 30 August 2022 |
| DATE OF JUDGMENT: | 21 December 2022 |
| MEDIUM NEUTRAL CITATION: | [2022] VSCA 286 |
| JUDGMENT APPEALED FROM: | [2021] VSC 489 (Riordan J) |
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CONSUMER CREDIT – Credit protection – Whether loan agreement unenforceable by reason of s 39 of Consumer Credit (Victoria) Act 1995 – Whether loan agreement a ‘credit contract’ for purposes of Act – Whether loan a provision of credit to which National Credit Code applies – Whether credit provided to purchase, renovate or improve residential property – Credit must be provided for immediate purpose of debtor purchasing, renovating or improving residential property – Insufficient that ultimate purpose the purchase, renovation or improvement of residential property by third party – Loan provided to debtor to on-lend to third party to improve property – Loan not credit to which Code applies – Loan not a ‘credit contract’ for purposes of Act – Leave to appeal granted – Appeal allowed.
MORTGAGES – Tender – Whether judge erred in finding amounts tendered sufficient to discharge indebtedness – Whether mortgagor able to secure sufficient funds to discharge mortgage – No error shown.
National Consumer Credit Protection Act 2009 (Cth) sch 1; Consumer Credit (Victoria) Act1995 ss 39, 40.
Lauvan Pty Ltd v Bega (2018) 330 FLR 1, Jonsson v Arkway Pty Ltd (2003) 58 NSWLR 451, Mango MediaPty Ltd v Comitogianni [2011] NSWSC 152, Provident Capital Ltd v Bortolin Papa [No 1] [2011] NSWSC 460, discussed.
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| Counsel | |||
| Applicants: | Mr N De Young KC with Ms V Bell | ||
| Respondents: | Mr I Upjohn KC with Mr B Mason | ||
Solicitors | |||
| Applicants: | NOH Legal | ||
| Respondents: | Hicks Oakley Chessell Williams | ||
MCLEISH JA
SIFRIS JA
WALKER JA:
Introduction
This appeal concerns two matters:
(a)the proper construction and application of s 5(1)(b)(ii) of the National Credit Code (‘the Code’),[1] the relevant effect of which is that the provision of credit ‘to purchase, renovate or improve residential property for investment purposes’ is regulated by the Consumer Credit (Victoria) Act 1995 (‘the Consumer Credit Act’); and
(b)whether a company had made an effective tender to a creditor for debts owed.
[1]The Code is sch 1 to the National Consumer Credit Protection Act 2009 (Cth). It contains definitions that are used in pt 5 of the Consumer Credit (Victoria) Act 1995.
The factual circumstances in which these issues arose are complex. In 2015, the third respondent, Saafin Constructions Pty Ltd (‘the Company’), commenced the development of a four storey building comprising 25 apartments and two commercial tenancies (‘the Development’) in Arden Street, North Melbourne (‘the Arden Street Property’). The Development was beset with difficulties and has not been completed. The Company is in liquidation.[2]
[2]The Company was put into liquidation on 12 November 2018.
Most of the difficulties related to the financing arrangements between the Company and various financiers and other creditors. In 2018, the first applicant, MAG Financial and Investment Ventures Pty Ltd (‘MAG Financial’), obtained assignments of various loans, securities and other creditors’ claims. As a result, it asserted that an amount in excess of $8 million was owing by the Company to it, secured by a mortgage over the Arden Street Property, and a general security agreement over the assets and undertaking of the Company.
One of the assigned loans MAG Financial relied upon was a loan by Balanced Securities Ltd (‘Balanced Securities’) in the sum of approximately $3 million (‘the Balanced Securities Debt’), secured by a first registered mortgage over the Arden Street Property (‘the Balanced Mortgage’). There was no dispute that this loan was owed by the Company to Balanced Securities, and no dispute that it was ultimately assigned to MAG Financial.
However, the Company disputed that various other loans that had been purportedly assigned to MAG Financial were in fact owing. In particular, it alleged that a loan made by Mr Mark Franek (‘Mr Franek’), the fifth respondent, was unenforceable by reason of provisions of the Consumer Credit Act. It also disputed certain other claimed loans. It thus asserted that the amount in fact owing to MAG Financial (as assignee) was much less than the approximately $8 million claimed. In June and July 2018, the Company tendered payment of the amount that it considered to be owing to MAG Financial. The tenders were effectively rejected.
In circumstances that were unconscionable, MAG Financial sold the Arden Street Property to the second applicant, AAGG Developments Pty Ltd (‘AAGG’), for $4.5 million plus GST. The purchase price was never paid.
The trial judge made various findings including, relevantly, the following:
(a)A loan agreement dated 15 January 2016 between Mr Wael El-Saafin (‘Wael’) and his wife, Ms Bayda El-Saafin (‘Bayda’),[3] as borrowers and Mr Franek as lender (‘the Second Franek Loan’) was unenforceable by reason of s 39 of the Consumer Credit Act.[4] MAG Financial, as assignee of the Second Franek Loan and the later general security agreement to which the Company was a party (‘the Franek GSA’), has appealed this finding (proposed ground 1). One consequence of this finding was that mortgages under the Franek GSA (‘the Franek GSA Mortgages’) were void in so far as they related to the Second Franek Loan.[5]
(b)The Company was not indebted to Mr Amr Mekkya (‘Mr Mekkya’), the tenth respondent, or Mr George Sacca (‘Mr Sacca’), the eleventh respondent. The amount alleged to be owing by the Company to Mr Mekkya was $982,848.22 (‘Mekkya Debt’) and the amount alleged to be owing by the Company to Mr Sacca was $1.9 million (‘Sacca Debt’). The purported assignment of these alleged debts to MAG Financial was thus ineffectual.[6] Accordingly, these are not and were not debts of the Company. There is no appeal against these findings.
(c)Mr Stephen Robert Dixon and Mr Ahmed Bise, the sixth and seventh respondents (collectively ‘the Receivers’), purportedly appointed by Mr Franek pursuant to the Franek GSA, had not been validly appointed. Nonetheless, they were not in breach of duty and were not liable to the Company.[7] There is no appeal against these findings.
(d)The tenders made by the Company to MAG Financial in June and July 2018 (‘the Tenders’) were valid tenders and MAG Financial had failed to accept them. The failure to accept the Tenders had consequences for the interest rate payable thereafter.[8] MAG Financial has appealed these findings (proposed ground 2).
(e)The sale of the Arden Street Property to AAGG was in breach of duty and unconscionable. It was thus to be set aside.[9] There is no appeal against these findings.
[3]Without any disrespect, first names are used at times throughout this judgment to distinguish between individuals who share a common surname.
[4]Saafin Constructions Pty Ltd (in liq) v MAG Financial and Investment Ventures Pty Ltd [2021] VSC 489, [9(a)], [132] (‘Reasons’). Further, this loan was held by the judge not to be a liability of the Company: Reasons, [163].
[5]Reasons, [151]. This was by reason of s 40 of the Consumer Credit Act.
[6]Reasons, [477].
[7]Ibid [379].
[8]Ibid [358]–[360].
[9]Ibid [455].
The trial judge did not determine liability with respect to two other debts said to be owed by the Company — a debt to New Concept Design ($174,000) (‘New Concept Design Debt’) and a debt to New Concept Homes Pty Ltd (‘the Builder’) ($521,000) (‘Builder Debt’).[10] However, he held that if the Company was liable in relation to those debts, then they were assigned to MAG Financial on 20 June 2018. That assignment would have had the effect of securing them under the Franek GSA.[11] There is no appeal against these findings.
[10]The figures are approximate amounts.
[11]Reasons, [477].
Ultimately, the appeal is only concerned with two issues: first, the validity and enforceability of the Second Franek Loan (and the Franek GSA Mortgages), which turns on the construction of the Code; and second, the effectiveness of the Tenders. The grounds of appeal[12] are, in summary, as follows:
(a)Ground 1 is that the trial judge erred in concluding that ‘the First Franek Loan’ fell within the terms of s 5(1)(b)(ii) of the Code, properly construed. Thus, MAG Financial submitted, that loan was not regulated by the Consumer Credit Act. If that is so, then the Second Franek Loan (which refinanced the First Franek Loan) was also not regulated by the Consumer Credit Act and is enforceable, and the Franek GSA Mortgages are not void.
(b)Ground 2 is that the judge erred in concluding that the Company was ready, willing and able to perform the Tenders. MAG Financial submitted that the Company had failed to establish that it would have had available to it sufficient funds to discharge its indebtedness to MAG Financial. As a consequence, it submitted, the Tenders were not effective and it was not obliged to accept them. If that is so, it is entitled to interest on the assigned loans at the original rates provided in the relevant loan agreements.
[12]For convenience we will refer to the proposed grounds of appeal as grounds of appeal.
In our opinion, ground 1 is made out. The trial judge erred in concluding that the Consumer Credit Act applied to the First Franek Loan. As a consequence, it did not apply to the Second Franek Loan or the Franek GSA, and those agreements are enforceable. However, ground 2 is not made out. The trial judge did not err in concluding that the Tenders were effective. Our reasons for these conclusions are set out below.
The consequences are that the Company is indebted to MAG Financial in respect of the Balanced Securities Debt, which was assigned to MAG Financial, and the Second Franek Loan. However, the interest rate for each loan is adjusted as a result of MAG Financial’s failure to accept the Tenders. These amounts, together with the further amounts that are yet to be determined, are properly secured by the Balanced Mortgage and the Franek GSA in favour of MAG Financial as assignee.[13]
[13]Pursuant to orders made by the judge, the Company is now the registered proprietor of the Arden Street Property. The fate of the Company and the Arden Street Property remain to be determined by the liquidator and perhaps others. Whether the Arden Street Property is sold or there is yet another round of refinancing, the adjusted MAG Financial debt will need to be taken into account.
It is necessary to set out the facts in some greater detail before dealing with each ground.
Relevant background[14]
[14]The factual background is set out at Reasons, [10]–[86]. There is no appeal in relation to the judge’s factual findings, save as to the inference he drew that the Company was able to obtain the necessary funds to pay the amounts it tendered in June and July 2018.
On 13 July 2001, the Company was registered as a corporation with the Australian Securities and Investments Commission (‘ASIC’). As at registration, the directors relevantly included Mr Mohamed El-Saafin (‘Mohamed’) and Mr Hassan El-Saafin (‘Hassan’), both of whom were also shareholders (each holding 17 shares), with Wael, the other shareholder, holding 16 shares.
On 21 August 2008, Wael and Bayda were registered as proprietors of 1 Nairne Terrace, Greensborough (‘the Nairne Terrace Property’).
By loan agreement dated 13 December 2011 between Trustworthy Nominees Pty Ltd (‘Trustworthy Nominees’) as lender, the Company and Mr Fadl El-Saafin as borrowers and Mohamed, Hassan and Wael (collectively ‘the El-Saafin Brothers’) as guarantors, Trustworthy Nominees agreed to lend the Company and Mr Fadl El-Saafin the sum of $250,000, secured (among other things) by a second mortgage over the Arden Street Property.
On 20 December 2011, the Company was registered as proprietor of the Arden Street Property.
On 17 December 2013, the City of Melbourne issued a planning permit to New Concept Design, a trading name of Mr Mekkya, for the construction of the Development.
By an alleged email of 19 March 2014 to New Concept Design (copied to Wael), Mr El-Hissi of NOH Legal attached an allegedly signed investment loan agreement dated 1 March 2012 between the Company as developer and Mr Mekkya as investor (‘the Mekkya Loan Agreement’). The Mekkya Loan Agreement recorded that Mr Mekkya had agreed to lend the Company the sum of $750,000.
By investment loan agreement dated 8 August 2014 between the Company as developer and Dr Hegazy as investor, Dr Hegazy agreed to lend the Company the sum of $406,000 for a period of 18 months, at which time the Company would transfer to Dr Hegazy apartment 201 of the Development, as consideration.
By an undated investment loan agreement executed in or about August 2014, between the Company as developer and Dr Atalla as investor, Dr Atalla agreed to lend the Company the sum of $350,000 for a period of 18 months, at which time the Company would transfer to Dr Atalla apartment 202 of the Development, as consideration.
By loan agreement dated 15 April 2015 between Wael and Bayda as borrowers and Mr Franek as lender, being the First Franek Loan, Mr Franek agreed to lend Wael and Bayda the sum of $100,000 for a period of three months at an interest rate of $12,000 per month. The loan was to be repaid in full together with any outstanding interest by 12 July 2015. The loan was secured by a charge over the Nairne Terrace Property.
By loan agreement dated 17 September 2015 between Trustworthy Nominees as lender, the Company as first borrower and Wael, Bayda and Hassan as second, third and fourth borrowers (‘the Trustworthy Loan Agreement’), the borrowers agreed to provide additional security for the previous loan (referred to in paragraph [15] above), which included a charge over the Nairne Terrace Property.
By building contract dated 19 October 2015 between the Company as owner and the Builder as contractor (‘the Building Contract’), the Builder agreed to construct 25 dwellings and two commercial units at the Arden Street Property between 1 December 2015 and 1 June 2017 at a cost of $4.4 million. Mr Mekkya was the sole director and shareholder of the Builder.
On 28 October 2015, Trustworthy Nominees lodged a caveat over the Nairne Terrace Property on the basis of the Trustworthy Loan Agreement.
By a further loan agreement dated 15 January 2016 between Wael and Bayda as borrowers and Mr Franek as lender, being the Second Franek Loan, Mr Franek agreed to lend Wael and Bayda the sum of $311,000, secured by a charge over the Nairne Terrace Property. The terms of the loan did not state what the purpose of the loan was; however, as we explain later in these reasons, there was evidence from Wael and Mr Franek about the purpose of the loan and the conversations in which that purpose was discussed.
On 20 April 2016, Mr Franek lodged a caveat over the Nairne Terrace Property on the basis of the Second Franek Loan.
By written acknowledgment dated 30 May 2016, the El-Saafin Brothers declared that they had received an amount of $1.9 million as a loan from Mr Sacca and that ‘we are liable to return it back to him within one year from the date of this statement with any cost related to it’ (‘the Sacca Loan Agreement’).
By facility agreement dated 28 October 2016 between Balanced Securities as lender, the Company as borrower and the El-Saafin Brothers and Ms Lobna El-Saafin (‘Lobna’) as guarantors (‘the Balanced Facility Agreement’), Balanced Securities agreed to provide finance to the Company to assist with the refinance of, and the construction at, the Arden Street Property (‘the Balanced Loan’), on the following terms:
(a)The facility limit was $6.2 million.
(b)The interest rate was 11.95 per cent per annum.
(c)The facility expired on or about 28 April 2018, being 18 months after the earlier of:
(a)seven days after the despatch of mortgage documents to the borrower; or
(b)the date of the initial drawdown.
(d)The securities relevantly included:
(a)a first registered mortgage over the Arden Street Property (the Balanced Mortgage);
(b)a second registered mortgage over 3 Ball Court, Bundoora (‘the Bundoora Property’); and
(c)a general security deed granted by the Company and the El-Saafin Brothers.
By the Balanced Mortgage, which was executed on 28 October 2016, the Company mortgaged the Arden Street Property to Balanced Securities to secure the Balanced Loan.
Wael and Bayda failed to repay the First Franek Loan and the Second Franek Loan, and on 18 May 2017, Mr Franek, Wael, Bayda and the Company entered into two related agreements, being:
(a)a deed of release and settlement (‘the Franek Settlement Deed’); and
(b)the Franek GSA.
By the Franek Settlement Deed, Wael, Bayda and the Company agreed to terms including the following:
(a)The Company would execute a standard form Law Institute of Victoria Contract of Sale of Real Estate and transfer to Mr Franek ‘Commercial/Office Space marked 002’ (‘Commercial Unit 002’) of the Development.
(b)Subject to Wael, Bayda and the Company complying with that obligation, Mr Franek would pay the sum of $50,000 on execution of the Franek Settlement Deed, and a further sum of $50,000 on completion of the transfer and registration of Commercial Unit 002 on title.
(c)Upon full compliance with the Franek Settlement Deed, Mr Franek, Wael, Bayda and the Company would mutually release and discharge each other from all matters relating to the Second Franek Loan.
(d)The amount lent under the Second Franek Loan is defined as the sum of $311,000 and interest is defined as the sum of $26,000 per month.
By the Franek GSA, Wael, Bayda and the Company agreed to encumber all of their real and personal property in favour of Mr Franek, in order to secure their obligations under the Franek Settlement Deed.
On 14 June 2017, AMGS Properties Pty Ltd (‘AMGS’) was registered as a corporation with ASIC, with Mr Sacca and Mr Mekkya as the sole directors and shareholders, each holding 50 shares.
On 15 June 2017, Trade On International Pty Ltd (‘Trade On’) was registered as a corporation with ASIC, with Mr Sacca and Mr Mekkya as the sole directors and shareholders, each holding 50 shares.
By letter dated 29 December 2017 to Wael and Bayda, Mr El-Hissi stated that, in breach of the Franek Settlement Deed, Wael had failed to procure the Company to execute a contract of sale for Commercial Unit 002. On behalf of Mr Franek, Mr El-Hissi claimed $883,000 (being $311,000, plus interest of $26,000 per month for 22 months) was payable as a result of the breach, plus a refund of the $50,000 paid under the Franek Settlement Deed.
On 26 February 2018, Mr Mekkya lodged a caveat over the Arden Street Property claiming an interest under the Mekkya Loan Agreement.
In or about March 2018, there was a meeting at the Greenvale Shopping Centre attended by Mr Mekkya, Mr Sacca, Dr Hegazy and Dr Atalla in which there was a discussion about how the participants would be able to recover the amounts they had invested in the Development.
By emailed letter dated 22 March 2018 to the Builder, the Company provided notice of various defaults and of its intention to terminate the Building Contract in the event that the defaults were not remedied within 14 days. The default notice was issued substantially on the basis of the Builder’s alleged failure to complete the Development.
On 28 March 2018, a quantity surveyor certified that, as at 28 February 2018, the gross value of works performed was $1,057,084 and the gross cost to complete was $3,462,493. Accordingly, the Development was approximately 25 per cent complete.
Between 29 January and 31 March 2018, there were a number of communications between Mr El-Hissi and the Receivers regarding their potential appointment as receivers and managers of the Company. The communications resulted in a meeting on 4 April 2018 between Mr El-Hissi, Mr Franek, the Receivers and the Receivers’ solicitor (Mr Koroneos of Capstone Koroneos Legal) regarding the potential appointment.
By email of 5 April 2018, Mr Nair of Hicks Oakley Chessell Williams (the Company’s solicitor) served a termination notice on the Builder.
On 5 April 2018, and pursuant to cl 22 of the Franek GSA, Mr Franek signed a deed of appointment of the Receivers as joint and several receivers of the Company.
By email of 6 April 2018 at 4:36 pm to Mr El-Hissi, Mr Koroneos stated that his clients, the Receivers, would execute the appointment documents subject to the sum of $50,000 being paid into his trust account. At 5:53 pm, Mr Mekkya and Mr Sacca’s company, Trade On, paid $50,000 into the trust account of Capstone Koroneos Legal.
On 6 April 2018, Sloss J adjourned an application by the Builder for an urgent interlocutory injunction against the Company, and relevantly noted the following agreement:
2.The Plaintiff agrees to allow the Defendant and its servants and agents to inspect the site at 65–67 Arden Street, North Melbourne (Site) on Wednesday, 11 April 2018 and Thursday, 12 April 2018, or at such other time reasonably notified to the Plaintiff’s solicitors in advance.
3. Until 23 April 2018 or further order:
(a)neither party will carry out any work at the Site, other than any emergency repairs;
(b)the Defendant agrees not to interfere with the Plaintiff’s works, plant, materials or equipment at the Site; and
(c)the Plaintiff shall maintain a supervisor at the Site between 7:30am and 4pm each day.
By email of 10 April 2018 to Mr Nair, Mr Koroneos attached various documents including an ASIC Form 504, which recorded that the Receivers were appointed on 9 April 2018 pursuant to the terms of the Franek GSA.
By emailed letter dated 17 April 2018 to Mr Nair, Mr El-Hissi set out the non-exhaustive list of the breaches relied upon by Mr Franek in appointing the Receivers, being:
(a)failure to provide an off-the-plan contract in accordance with the Franek GSA despite repeated requests from Mr Franek’s solicitors;
(b)material adverse change, being the Supreme Court proceeding between the Builder and the Company;
(c)material adverse change in the Company’s financial position, including the granting of security interests to Mr Mekkya and Mr Sacca; and
(d)failure to disclose the existence of the Balanced Loan.
By deed of assignment of debt and securities dated 18 April 2018 between Balanced Securities as assignor and Mr Franek and/or a nominee as assignee (‘the Balanced Assignment Deed’), Balanced Securities assigned its interests under the Balanced Facility Agreement and the Balanced Mortgage to Mr Franek for the sums of $300,000 payable on 18 April 2018 and $2,493,079.80 payable on 18 May 2018. The Balanced Assignment Deed recorded the amount owing by the Company to Balanced Securities under the Balanced Facility Agreement as at 18 May 2018 to be $2,998,649.30.
On 26 April 2018, MAG Financial was registered as a corporation with ASIC, with Mr Franek as the sole director and shareholder, holding 12 shares.
By facsimile transmission dated 26 April 2018 to the Company, Balanced Securities provided notice of its intention to assign its debt and securities under the Balanced Facility Agreement and the Balanced Mortgage to MAG Financial, with the proposed assignment expected to take place on 4 May 2018.
By writ filed 27 April 2018 in County Court proceeding CI-18-01786, Mr Sacca claimed repayment of $1.9 million pursuant to the Sacca Loan Agreement.
By writ filed 27 April 2018 in County Court proceeding CI-18-01795 (‘the Mekkya Proceeding’), Mr Mekkya claimed repayment of $975,000 pursuant to the Mekkya Loan Agreement.
On 3 May 2018, Balanced Securities was paid $2,474,991.71 by a Commonwealth Bank of Australia bank cheque. This amount was funded by a transfer from the Commonwealth Bank of Australia bank account of AMGS.
By deed of assignment of contracts and securities dated 3 May 2018, Mr Franek assigned his rights under the Second Franek Loan, the Franek GSA and the Franek Settlement Deed to MAG Financial.
By notice of assignment of mortgages and security dated 4 May 2018 to the Company as borrower and the El-Saafin Brothers and Lobna as guarantors, MAG Financial provided notice of the assignment from Balanced Securities to MAG Financial pursuant to the Balanced Assignment Deed.
On 4 May 2018, Mr Franek instructed the Receivers to resign their appointment pursuant to the Franek GSA and, on behalf of MAG Financial, requested that they be appointed pursuant to the Balanced Facility Agreement.
On 7 May 2018, the Receivers resigned their appointment under the Franek GSA. On the same day, MAG Financial appointed the Receivers as joint and several receivers of the Company pursuant to the terms of the Balanced Facility Agreement.
By originating motion filed 8 May 2018 in Supreme Court proceeding S CI 2018 01685 (‘the Derivative Proceeding’), Hassan and Mohamed applied for an injunction restraining Mr Franek from appointing receivers and managers in respect of the Company and restraining the Receivers from acting as receivers of the Company.
By email of 8 May 2018 to Mr Nair, Mr Koroneos acknowledged receipt of the originating motion and stated that the Receivers had been appointed receivers and managers of the Company by:
(a)Mr Franek during the period of 9 April to 7 May 2018; and
(b)MAG Financial from 7 May 2018, as assignee of the Balanced Facility Agreement.
By five emails between 9 May and 25 June 2018 to Mr Koroneos and Mr El-Hissi, Mr Nair repeatedly requested the payout figure necessary to discharge the amount owing under, relevantly, the Balanced Facility Agreement and to terminate the appointment of the Receivers.
On 15 May 2018, Mr Mekkya entered judgment in default of appearance (‘the Default Judgment’) in the Mekkya Proceeding against the Company in the sum of $982,848.22, being $975,000 plus interest of $4,808.22 and costs of $3,040 pursuant to the Mekkya Loan Agreement.
On or about 27 May 2018, there was a meeting between Dr Atalla, Mr Sacca, Mr Mekkya and Dr Hegazy at Tullamarine with respect to the repayment of their amounts invested in the Development.
By email of 29 May 2018 to Dr Atalla, Mr Mekkya attached a copy of the Default Judgment and stated that he was appointing a liquidator soon.
By valuation report dated 6 June 2018, Rann Property AdVal, on the instructions of MAG Financial, valued the Arden Street Property at $4.4 million.
On 8 June 2018, Hassan made a report to Victoria Police alleging that the Default Judgment was based on a ‘forged contract’, being the Mekkya Loan Agreement.
On 14 June 2018, the sum of $1,310,628.08, apparently in respect of the Second Franek Loan, was paid out of the Commonwealth Bank of Australia bank account of Trade On with the transaction description ‘Wdl Branch Fountain Gate’. On the same day bank cheques in the sums of:
(a)$1,150,600 payable to Mr Franek; and
(b)$159,998 payable to Mr El-Hissi’s firm, NOH Legal, for Mr Franek’s legal fees,
were issued out of the Fountain Gate branch of the Commonwealth Bank of Australia.
By letter of approval dated 19 June 2018 to the Company, Mr Keith Blackney (‘Mr Blackney’), a mortgage broker at Black Arrow Mortgages, stated that Black Arrow Mortgages was prepared to provide a loan advance of $4 million to the Company subject to the conditions set out therein.
By four deeds of assignment, each dated 20 June 2018, it was agreed that the following debts would be assigned to MAG Financial on payment of the assignment consideration which, in each case, was the full amount of the debt, being:
(a)the debt owed by the Company to Mr Mekkya in the sum of $982,848.22, being the Mekkya Debt, pursuant to the Default Judgment;
(b)the debt owed by the Company to Mr Sacca in the sum of $1.9 million, being the Sacca Debt, pursuant to the Sacca Loan Agreement;
(c)the debt owed by the Company to Mr Mekkya trading as New Concept Design in the sum of $174,000, being the New Concept Design Debt, purportedly pursuant to attached invoices (but no invoices were attached to the tendered copy); and
(d)the debt owed by the Company to the Builder in the sum of $521,000, being the Builder Debt, pursuant to invoices issued under the Building Contract.
By four notices of assignment, each dated 25 June 2018, the Company was notified of each of the assignments to MAG Financial referred to in the preceding paragraph.
By correspondence of 25 and 26 June 2018 between Mr Nair and Mr Halse, Mr Halse provided the payout figure, being the sum of $8,250,990.83, together with a breakdown of such figure. Mr Nair contested the calculation of the payout figure, substantially on the basis that it incorrectly included amounts not owing.
By five letters to the Company, the El-Saafin Brothers and Lobna, each dated 26 June 2018, MAG Financial served default notices and demands pursuant to s 76 of the Transfer of Land Act 1958. MAG Financial demanded payment of $8,250,990.83, which it claimed was the amount due as at 25 June 2018 under the Balanced Facility Agreement and the Balanced Mortgage (with MAG Financial being the assignee of the rights of Balanced Securities). No reference was made to any debts or loan agreements other than the Balanced Loan.
By emailed letter dated 27 June 2018 to Mr Halse and Mr Koroneos, Mr Nair stated that he was instructed to tender the amount of $3,265,742.82 in satisfaction of the Company’s liabilities under the Balanced Facility Agreement in respect of which the Receivers had been appointed (‘the June Tender’). By email of the same day to Mr Nair (copied to Mr Koroneos), Mr Halse replied and stated that the amount of the security was $8,250,990.83 and accordingly, the proposed June Tender would not discharge such security.
On 27 June 2018, on the application of the plaintiffs in the Derivative Proceeding, Lyons J made interim orders restraining the Receivers and Mr Franek (including in his capacity as a director of MAG Financial) from taking steps to realise, sell or otherwise dispose of the ‘Securities’ (as defined in the Balanced Facility Agreement), and the guarantees granted under the Balanced Facility Agreement.
By letter dated 25 June 2018 to Wael,[15] Black Arrow Mortgages stated that it ‘envisaged’ that the sum of $5 million would be available on or before 7 July 2018. The letter was in the following terms:
We are awaiting confirmation that you have arranged the removal of all caveats on the properties.
As discussed during our last meeting please forward to us requested details in relation to the residential properties.
We envisage that the funds of: $5,000,000.00 (Five Million Dollars) will be available on or before Tuesday 7th August 2018.
Thank you in anticipation.
[15]The letter is mistakenly dated 25 July 2018.
By letter of approval dated 28 June 2018 to the Company (‘the Third Black Arrow Letter’), Black Arrow Mortgages confirmed that it was prepared to provide finance in the sum of $5 million to ‘80% [loan to value ratio (‘LVR’)] only of valuation’. This letter and the June Tender are considered in greater detail below.
On 3 July 2018, in the Derivative Proceeding, Kennedy J dissolved the interim orders of Lyons J upon the Receivers giving an undertaking not to sell the ‘Securities’.
On 5 July 2018, AAGG was registered as a corporation with ASIC, with Mr Mekkya as the sole director, and Mr Mekkya and Mr Sacca as the only shareholders, each holding six shares.
By contract of sale of real estate signed by Mr Mekkya on behalf of AAGG on 5 July 2018, and by Mr Franek on behalf of MAG Financial on 9 July 2018, MAG Financial sold the Arden Street Property to AAGG for $4.5 million plus GST.
By emails of 9 July 2018 to Black Arrow Mortgages, Wael offered the Nairne Street Property, the Bundoora Property, 2 Lynwood Crescent, Lower Plenty (‘the Lower Plenty Property’) and the Arden Street Property as security in support of the application for a loan.
By letters dated 16 and 19 July 2018 to Mr Halse, Mr Nair stated that the Company was ready, willing and able to tender the amount of $4,406,742.82 in satisfaction of what he described as the ‘Franek Debt’ and the ‘Balanced Securities Debt’ (‘the July Tender’). Mr Halse did not reply until 25 July 2018, after the settlement of the sale of the Arden Street Property.
On 17 July 2018, in the Derivative Proceeding, the Receivers undertook to the Court not to sell the Arden Street Property or the Lower Plenty Property.
By memorandum dated 18 July 2018, provided to the Court in accordance with the orders of Kennedy J made on 17 July 2018 in the Derivative Proceeding, counsel and the solicitor for Mr Franek and MAG Financial identified the precise basis on which the Receivers were entitled to sell the Arden Street Property and the Lower Plenty Property. The memorandum did not disclose that MAG Financial had entered into a contract on 9 July 2018 to sell the Arden Street Property to AAGG.
According to an adjustment statement, on 20 July 2018, the sale of the Arden Street Property was settled by the following documents:
(a)a transfer of land dated 22 June 2018 from MAG Financial as mortgagee, to AAGG as transferee, for consideration of $4.95 million; and
(b)an adjustment statement which included the following settlement statement:
SETTLEMENT STATEMENT
Purchase Price
$4,500,000.00
Less Deposit Paid
$1,000.00
$4,499,000.00
Plus Adjustments
$15,708.42
$4,514,708.42
CHEQUES
City of Melbourne
$14,391.80
City West Water
$3,770.62
State Revenue Office
$42,813.91
Vendor
$4,453,732.09
Total
$4,514,708.42
Cheques
City of Melbourne
$14,392.80
City West Water
$3,770.62
State Revenue Office
$42,813.91
Stamp Duty
$247,500.00
LTO – transfer fee
$3,606.00
LTO – Discharge of Mortgage fee
$116.00
$312,199.13
The date of the settlement is unclear because:
(a)by email of 23 July 2018 at 4:38 pm to Mr Koroneos, Mr Halse stated that his client had ‘today’ completed the sale of the Arden Street Property; and
(b)the settlement was not effected by a cheque to the vendor of $4,453,732.09, as referred to in the settlement statement, but by a mortgage dated 23 July 2018 from AAGG to MAG Financial over the Arden Street Property securing an ‘Advance’ of $4.5 million.
By email of 23 July 2018 at 6:31 pm to counsel and Mr Koroneos, Mr Bise stated that MAG Financial had allegedly sold the Arden Street Property ‘behind the receivers’ backs’.
By email of 24 July 2018 to Mr Nair, Mr Koroneos stated that the Receivers had no knowledge of, and were not involved in, the sale of the Arden Street Property.
On or about 27 July 2018, Mr Franek resigned as a director of MAG Financial and was replaced by Mr Mekkya. Mr Franek also transferred all of the shares in MAG Financial to Mr Mekkya.
By email of 3 August 2018 to Mr Nair, Mr Halse confirmed that Mr Ian Glavis and Mr Matthew Kucianski, the fifth and sixth defendants (‘the Administrators’), had been appointed as joint and several administrators of the Company. Accordingly, on the basis of his contention that the legal proceeding could not proceed without the written consent of the Administrators or leave of the Court, he invited the plaintiffs to discontinue the Derivative Proceeding.
The proceedings and the issues
The trial of this matter involved the hearing of four separate proceedings together.
First, the Derivative Proceeding is a claim brought on behalf of the Company by the Company’s directors, being Hassan and Mohamed, against Franek, MAG Financial, the Receivers and others.[16] Wael was joined to the proceeding. The El-Saafin Brothers, together with the Company, sought relief principally relating to:
(a)the appointment of the Receivers as receivers of the Company;
(b)the sale of the Arden Street Property to AAGG by MAG Financial as assignee of a mortgage executed by the Company in favour of Balanced Securities on 28 October 2016 (the Balanced Mortgage);
(c)debts and security interests claimed against the Company by:
(i) Mr Franek;
(ii) MAG Financial;
(iii) Mr Mekkya;
(iv) Mr Sacca; and
(v) the Builder.
[16]Leave was granted by Lyons J on 28 July 2020: El-Saafin v Franek [No 4] [2020] VSC 389.
By counterclaim in the Derivative Proceeding, the Receivers sought relief principally by way of declarations relating to their rights to indemnity, remuneration and expenses claimed against the Company and Wael.
Also by counterclaim in the Derivative Proceeding, MAG Financial, AAGG and the Builder sought relief principally by way of enforcement of debts and security interests claimed against:
(a)the El-Saafin Brothers;
(b)Lobna and Bayda; and
(c)the Company.
Secondly, by originating process filed 21 December 2018 in Supreme Court proceeding S ECI 2018 02987 by Trustworthy Nominees against Wael, Bayda, MAG Financial and others (‘the Trustworthy Proceeding’), Trustworthy Nominees relevantly sought orders that:
(a)Wael and Bayda take all reasonable steps and execute all appropriate documents, including a mortgage between Wael and Bayda as mortgagors and Trustworthy Nominees as mortgagee over the Nairne Terrace Property; and
(b)MAG Financial not proceed with the registration of mortgage AR674060A over the Nairne Terrace Property until after the registration of Trustworthy Nominee’s mortgage.
Thirdly, by originating motion filed 8 August 2019 in Supreme Court proceeding S ECI 2019 03648, by MAG Financial against Wael and Bayda, MAG Financial relevantly sought the following orders and declarations:
(a)a declaration that MAG Financial has an equitable charge over the Nairne Terrace Property;
(b)an order pursuant to s 81 of the Property Law Act 1958, or in the Court’s equitable jurisdiction, that the Court direct a sale of the Nairne Terrace Property; and
(c)a declaration that MAG Financial is entitled to all monies owed to it by Wael and Bayda, together with its costs of and incidental to the proceeding and of the sale of the Nairne Terrace Property, from the proceeds of the sale of the Nairne Terrace Property, after satisfaction of the claims of the Westpac Banking Corporation pursuant to its registered mortgage AK741904L.
Fourthly, the Mekkya Proceeding, being Supreme Court proceeding S ECI 2021 00968, was the claim originally brought by Mr Mekkya in the County Court for relief against the Company by way of enforcement of an agreement between him and the Company in respect of which the Default Judgment was entered. Relevantly, the Company sought to have the Default Judgment set aside.
The parties agreed a list of issues for determination by the judge arising out of the four proceedings. The trial judge divided the issues into the following broad categories:
(a)the breach of the Consumer Credit Act;
(b)the Company debts;
(c)the claims against the Receivers;
(d)the Tenders;
(e)the sale of the Arden Street Property;
(f)the assignment of debts to MAG Financial; and
(g)the Trustworthy Proceeding.
As already noted, the trial judge relevantly held that each of the First Franek Loan and the Second Franek Loan fell within the scope of s 5(1)(b) of the Code. As a consequence, the judge held that the Second Franek Loan was unenforceable by reason of s 39 of the Consumer Credit Act, and the Franek GSA Mortgages were void under s 40 of that Act in so far as they related to the Second Franek Loan. His Honour further held that the Company had effectively tendered the repayment of the amount due under the Balanced Facility Agreement in both June and July 2018, that MAG Financial had refused to accept the proposed tenders and that the refusal limited the interest payable pursuant to the Balanced Facility Agreement.
In the result, the judge relevantly declared that the Balanced Mortgage secured principal as at 27 June 2018 of $3,265,742.82 plus interest of $585,000, and declared that the Second Franek Loan was unenforceable and that the Franek GSA Mortgages were void in so far as they related to the Second Franek Loan.
Grounds of appeal
The grounds of appeal relate to the first and fourth of the agreed issues set out above, and are, in summary, as follows:
(a)The trial judge erred in finding that:
(i)the intention of the parties to the First Franek Loan was for the credit provided under that agreement to be applied towards the Development, such that it was credit provided to purchase, renovate or improve residential property for investment purposes, within s 5(1)(b)(ii) of the Code; and
(ii)as a consequence, the credit provided under the Second Franek Loan was provided wholly or predominantly to refinance credit that had been provided wholly or predominantly to purchase, renovate or improve residential property for investment purposes, and was thus credit to which s 5(1)(b)(iii) of the Code applied.
(b)The trial judge erred by finding that the Company was ready, willing and able to perform the June Tender or the July Tender, such that it constituted an effective tender of the secured debt.
Ground 1: The Consumer Credit Act and the Code
The Consumer Credit Act regulates the provision of credit to consumers in Victoria.[17] In summary:
(a)s 39 provides that a credit contract is unenforceable if the annual interest rate exceeds 48 per cent; and
(b)s 40 provides that a mortgage relating to a credit contract in respect of which the annual interest rate exceeds 30 per cent is void in so far as it relates to that contract.
[17]Consumer credit is also regulated by the National Consumer Credit Protection Act 2009 (Cth), but that Act did not apply in the present circumstances.
A ‘credit contract’ is defined to have the same meaning as in the Code.
Section 4 of the Code provides that a credit contract ‘is a contract under which credit is or may be provided, being the provision of credit to which this Code applies’.
Section 5 of the Code is entitled ‘Provision of credit to which this Code applies’ and is in the following terms:
(1)This Code applies to the provision of credit (and to the credit contract and related matters) if when the credit contract is entered into or (in the case of precontractual obligations) is proposed to be entered into:
(a)the debtor is a natural person or a strata corporation; and
(b)the credit is provided or intended to be provided wholly or predominantly:
(i) for personal, domestic or household purposes; or
(ii)to purchase, renovate or improve residential property for investment purposes; or
(iii)to refinance credit that has been provided wholly or predominantly to purchase, renovate or improve residential property for investment purposes; and
(c)a charge is or may be made for providing the credit; and
(d)the credit provider provides the credit in the course of a business of providing credit carried on in this jurisdiction or as part of or incidentally to any other business of the credit provider carried on in this jurisdiction.
…
(3)For the purposes of this section, investment by the debtor is not a personal, domestic or household purpose.
(4)For the purposes of this section, the predominant purpose for which credit is provided is:
(a)the purpose for which more than half of the credit is intended to be used; or
(b)if the credit is intended to be used to obtain goods or services for use for different purposes, the purpose for which the goods or services are intended to be most used.[18]
[18]Emphasis added.
103‘Residential property’ is defined in s 204 of the Code to mean, relevantly:
(a)land on which a dwelling is or will be affixed predominantly for residential purposes; or
…
(d) a share that:
(i)is in a company that is the legal owner of the land on which a dwelling is or will be affixed predominantly for residential purposes; and
(ii)gives the person who legally owns the share a right to occupy the dwelling; …
The judge’s reasons
After setting out the material facts, the legislative regime and the issues that were not in dispute,[19] the judge regarded it as necessary to decide two issues under s 5(1) of the Code, as follows:
(a)whether the credit was provided to purchase, renovate or improve residential property for investment purposes, or to refinance credit that had been provided predominantly for such purposes, as required by sub-s 5(1)(b) of the Code (‘the Residential Loan Purpose’); and
(b)whether Mr Franek provided the credit:
(i)in the course of a business of providing credit; or
(ii)as part of or incidentally to any other business,
as required by sub-s 5(1)(d) of the Code.[20]
[19]That the borrowers were natural persons (s 5(1)(a) of the Code); a charge was made for the credit (s 5(1)(c) of the Code); that the relevant interest rates exceeded 48 per cent (s 39 of the Consumer Credit Act) and that the credit was to be used principally for the Development.
[20]Reasons, [103].
The judge found that the second matter ((b) above) was satisfied. There is no appeal from this finding.
The judge found that the first matter ((a) above) was also satisfied. MAG Financial appeals this finding. The judge said:
Accordingly, I find that the parties’ intention was for the credit under the First Franek Loan Agreement to be applied for the Residential Loan Purpose (being the Development), and for the Second Franek Loan Agreement to refinance the credit for the same purpose.
…
In determining the purpose of the provision of credit, ‘it is important to consider the substance of the transaction’ and ‘it is appropriate to consider what the money was used for’. All parties to the Second Franek Loan Agreement intended that most of the money would be used for the Development and most of the money was in fact applied for that purpose.
Although there was no evidence on this question, it might be assumed that the loan monies applied to the Development would be shown, for accounting purposes, as loaned by Wael and Bayda to the Company. However, there is an air of unreality about finding that the purpose of the loan was limited to on-lending to the Company, particularly in circumstances where the parties’ accepted intention was that the money should be applied to the Development, and it was so applied.
The substance of the transaction, which was known to all parties, was predominately to provide credit for the Development. To find that this ultimate purpose was diverted by the fact that the credit was channelled through the natural persons behind the related corporation would not be consistent with the broad and liberal interpretation of the Code as a piece of beneficial legislation.
The approach of identifying the parties’ intention by reference to the ultimate purpose of loan money, despite such loan money being directed through related parties, is consistent with the authorities that have touched on this issue.
…
This is not a case where the loan money was provided to natural persons to do with as they choose; and they simply chose to on-lend it to a company. I do not consider the fact that the relevant residential property was owned by the Company affects the fact that the credit advanced under the Second Franek Loan Agreement was to refinance a loan applied for the Residential Loan Purpose. Accordingly, in my opinion, the requirement under sub-s 5(1)(b) of the Code was satisfied.[21]
The parties’ submissions on the Consumer Credit Act and the Code
[21]Ibid [114], [116]–[119], [123] (citations omitted).
MAG Financial submitted that the critical focus under s 5(1)(b)(ii) was the provision of credit to the borrower (in this case, Wael and Bayda) and the necessary or required use of the funds by the borrower. MAG Financial accepted that the test as to purpose was objective. It also accepted that in the present case the funds advanced by Mr Franek were used for the Development. However, it submitted that that fact was not sufficient to bring the provision of credit within s 5(1)(b)(ii). It made the following submissions:
(a)The trial judge erred in concluding that s 5(1)(b)(ii) of the Code applied because the parties intended that most of the money under the first loan would ‘be used for the Development’, ‘be applied to the Development’ or ‘to provide credit for the Development’ being carried on by the Company, with such monies being ‘channelled through’ or ‘directed through’ the borrowers.
(b)The trial judge did not properly consider or identify the ‘investment’ purposes of the loan to the borrowers, as required by s 5(1)(b)(ii). The Company was making the investment in the Development. But for the purposes of s 5(1)(b)(ii), the Company’s investment in the Development cannot be conflated with the ‘investment’ purposes of the loan by the credit provider (Mr Franek) to the borrowers (Wael and Bayda).
(c)As the trial judge indicated at paragraph [117], there was no evidence of any arrangement or agreement between Wael and Bayda and the Company with respect to the loan funds, let alone evidence that the purpose of the loan to Wael and Bayda was for their ‘investment’ in the Development. The trial judge’s findings elided this essential question.
(d)It might have been possible for the loan to Wael and Bayda to have had an ‘investment’ purpose in the Development; for example, if they were investing the loan funds in the Development as partners with the Company. However, contrary to the trial judge’s findings, the loan cannot have had a relevant ‘investment’ purpose under s 5(1)(b)(ii) where the purpose was merely for Wael and Bayda to make the loan funds available to the Company to enable the Company to progress the Development.
(e)If the trial judge’s findings stand, it follows that any loan to natural persons for the purposes of those natural persons making the funds available to a company or trust which carries on residential property development would be covered by s 5(1)(b)(ii) — including all investments by natural persons in property trusts and companies listed on the ASX.
The gravamen of the oral submissions by MAG Financial was that there must be a connection between the debtor and the activity referred to in s 5(1)(b)(ii). In other words, it is the position of the debtor who obtained the credit that must be examined in order to ascertain whether the credit was provided for the purpose of the debtor, and not some third party, improving residential property for investment purposes.
In contrast, the Company submitted that the judge was correct in his approach to the construction of the Consumer Credit Act as beneficial legislation, and that the critical issue was the use to which the credit is put. It submitted that it was not necessary that the natural person borrowers themselves use the credit for development of residential property; it was sufficient that such use was effected by parties other than the borrowers. In other words, the borrowers were not required to directly improve the residential property for investment purposes themselves, so long as this was done, albeit by others. The Company submitted that the purpose attached to the credit, rather than the borrower: if the debtors were natural persons, and the ultimate destination of the funds was for the development, albeit through the Company, that was sufficient to bring the provision of credit within s 5(1)(b). It submitted that the Court ought to consider the ‘substance and reality of the transaction’, and that the particular legal structure adopted to achieve the purpose of investment in residential property — whether it be a partnership, a company, or a trust — was not relevant or disqualifying.
The Company accepted that there was a line to be drawn, such that borrowing money to buy shares in an ASX listed company that invests in residential property and develops it would not fall within s 5(1)(b) — that would be investing in the company, not in property. In contrast, it submitted that where a natural person borrower invested in their own company, by on-lending the money without interest, that fell within s 5(1)(b).
The Company relied on a number of authorities in support of the proposition that the use of an intermediary or alter ego, as in this case, did not render the section inapplicable.[22] MAG Financial submitted that the authorities relied on by the Company were distinguishable. The authorities are discussed in greater detail below.
Analysis
[22]Linkenholt Pty Ltd v Quirk [2000] VSC 166 (‘Linkenholt’); Lauvan Pty Ltd v Bega (2018) 330 FLR 1; [2018] NSWSC 154 (‘Lauvan’); Jonsson v Arkway Pty Ltd (2003) 58 NSWLR 451; [2003] NSWSC 815 (‘Jonsson’).
The text of s 5(1)(b)(ii) of the Code requires attention to the use to which the credit is to be put: the credit must be provided ‘to purchase, renovate or improve’ residential property, ‘for investment purposes’. The word ‘to’ shows that this sub-paragraph turns on the immediate purpose for which the credit is provided. We accept that the section does not in terms identify, restrict or place any limitation on who ultimately makes use of the funds for the identified purpose. However, in our opinion, when read as a whole the section is inextricably tied to the debtor — that is, it is directed to the provision of credit to the debtor (as identified in paragraph (a)) and it is implicit in paragraph (b)(ii) that the credit is provided for use by the debtor to purchase, renovate or improve residential property for investment purposes.
It is important to note that s 5(1)(b)(ii) does not turn on whether the credit is provided ‘for the purpose’ of purchasing, renovating or improving residential property, but whether it is provided ‘to purchase, renovate or improve’ residential property (emphasis added). The language suggests a direct and immediate connection between the provision of the credit and the act of purchasing, renovating or improving the property. The credit is itself to be used, necessarily by the debtor, to do the purchasing, renovating or improving. In contrast, s 5(1)(b)(i) is expressed in the language of ultimate purpose only.
Similarly, the credit is to be provided to purchase, renovate or improve the property ‘for investment purposes’. The investment purposes are evidently those of the person to whom the credit is provided, not a third party. The consumer protection object of the Code strongly points to that conclusion: it is the recipient of the credit, and not some other entity, whose investment purposes are to be protected. That indicates, again, that it is the consumer who is to do the purchasing, renovating or improving of the property, for those purposes.
Accordingly, in our opinion, it is not sufficient that the ultimate use of the funds, in the hands of someone other than the debtor, involves the improvement of residential property. Rather, it is necessary to focus on the purpose of the loan as between the borrower and the lender.
We accept that, as beneficial legislation, the Consumer Credit Act is to be construed broadly.[23] But it is also important to observe that the Act is not directed to any and all provision of credit. It is designed to protect a limited class of persons (natural persons and strata corporations) and limited classes of credit provided to those persons (namely those set out in s 5(1)(b) of the Code). A beneficial construction of s 5(1)(b)(ii) would go too far if it were to displace the limitation on the class of persons on whom protection is conferred (natural persons and strata corporations), by extending protection to a corporation outside that class which channels funds for its investment purposes through a natural person.
[23]Jonsson (2003) 58 NSWLR 451, 455–6 [27]–[28] (Shaw J); [2003] NSWSC 815; Khoury v Government Insurance Office (NSW) (1984) 165 CLR 622, 638 (Mason, Brennan, Deane and Dawson JJ); [1984] HCA 55.
This is reinforced by the inclusion of paragraph (d) in the definition of ‘residential property’ in s 204 of the Code: a share in a company that owns the land on which a dwelling is or will be affixed that gives the owner of the share a right to occupy the dwelling. That is, the Code contemplates that where credit is provided to purchase a share of that kind in a company, that will fall within s 5(1)(b)(ii). That is a deliberately limited provision that brings within s 5(1)(b)(ii) only some investments in a company, namely those that involve the debtor obtaining a right to occupy the dwelling. It would circumvent that express provision if a person could borrow money, advance that money to a company for the company to improve residential property for investment purposes in circumstances where the debtor obtains no right to occupy the dwelling, and yet fall within s 5(1)(b)(ii) and gain the protection of the Consumer Credit Act. Such a broad construction of s 5(1)(b)(ii) would sit uncomfortably with that express provision in s 204.
The parties submitted, and we accept, that s 5(1)(b) requires consideration of the substance of the transaction[24] and requires an objective assessment of whether the provision of credit has the relevant immediate purpose.[25] The bulk of the authorities to which we were referred, and which were discussed by the trial judge, adopted that objective approach.
[24]See, eg, Linkenholt [2000] VSC 166, [121] (Gillard J).
[25]See, eg, Haynes v St George Bank (2018) 130 SASR 551, 562–3 [44] (Kourakis CJ, Blue J agreeing at 577 [93], Doyle J agreeing at 577 [94]); [2018] SASCFC 51; Shakespeare Haney Securities Ltd v Crawford [2009] 2 Qd R 156, 166 [31]–[32] (Muir JA, Mullins J agreeing at 170 [54], Douglas J agreeing at 170 [55]); [2009] QCA 85; Bahadori v Permanent Mortgages Pty Ltd (2008) 72 NSWLR 44, 81 [184] (Tobias JA, Giles JA agreeing at 47 [7], Campbell JA agreeing at 84 [198]); [2000] NSWCA 150.
Considered objectively, we consider that in the present case the credit provided to Wael and Bayda by Mr Franek pursuant to the First Franek Loan was not provided for them to improve the Arden Street Property.[26] Rather, it was provided for them to advance funds to the Company,[27] and for the Company to improve the Arden Street Property. In that regard, we reject the submission that the trial judge erred in concluding, as a matter of fact, that the parties to the First Franek Loan intended the monies advanced to be used by the Company for the purposes of improving the Arden Street Property. That finding was supported by Mr Franek’s evidence and by Wael’s evidence. Thus it was open to the judge to reach that conclusion, having seen and heard the witnesses give evidence; it was not ‘glaringly improbable’ or contrary to compelling inferences.[28] The fact that the terms of the First Franek Loan did not require Wael and Bayda to use the money for that purpose does not alter that conclusion.
[26]We note, for completeness, that we would reach no different view even if a subjective assessment were to be undertaken.
[27]While it was agreed before us that Wael and Bayda advanced loaned funds to the Company, there was no evidence about the basis on which the funds were advanced, whether by way of loan, capital investment or otherwise.
[28]Robinson Helicopter Co Inc v McDermott(2016) 90 ALJR 679, 686–7 [43] (French CJ, Bell, Keane, Nettle and Gordon JJ); [2016] HCA 22; Lee v Lee(2019) 266 CLR 129, 148–9 [55] (Bell, Gageler, Nettle and Edelman JJ); [2019] HCA 28.
Accepting that the purpose of the First Franek Loan was to provide money that was ultimately to be put towards the improvement of the Arden Street Property does not mean, however, that that loan fell within the terms of s 5(1)(b)(ii) of the Code. In our opinion, the purpose of the loan was not for Wael and Bayda to improve residential property for investment purposes. Rather, the immediate purpose was for them to provide funds to the Company, to be deployed by the Company to improve the Arden Street Property, of which it was the registered proprietor, for investment purposes.
In relation to the July Tender, the parties, for the most part, repeated their submissions made in relation to the June Tender. Neither the judge nor the parties addressed the amount we have found to be owing under the Second Franek Loan as part of the July Tender.
As noted above, the July Tender was directed to the discharge of both the Balanced Mortgage and the Franek Debt (and attached security including the Franek GSA). The Receivers were originally appointed under the Franek GSA and a month later reappointed under the Balanced Mortgage.
The critical question on the appeal is whether the Company was able to obtain sufficient funds to discharge both the Balanced Mortgage and the Franek Debt. Again there is no question that the Company was ready and willing to do so.
The amount tendered by the July Tender was $4,406,742.82, rather than the excessive $8 million figure unreasonably demanded and required by MAG Financial. $4,406,742.82 was said to be the amount payable in relation to both the Balanced Mortgage and the Franek Debt, which was consistent with MAG Financial’s breakdown of the total amount owing set out in its solicitor’s letter dated 26 June 2018. MAG Financial did not argue that the amount of the July Tender was insufficient. The only question on the appeal was whether the Company could obtain funds to that amount. In our opinion, for the reasons given in relation to the June Tender, the Company was able to raise the amount tendered in order to discharge the Balanced Mortgage and the Franek Debt. It would have done so but for the unconscionable conduct of MAG Financial and others. Thus for substantially the reasons set out above in relation to the June Tender, we are of the opinion that it was open to the judge to make the findings that his Honour did. We agree with those findings. Again, the documentary evidence and the oral evidence of Mr Blackney is convincing, uncontradicted and conclusive.
In our opinion, the Company was able to perform the July Tender, but was prevented from doing so by the conduct of MAG Financial. That conduct included, by this point in time, the sale of the Arden Street Property in unconscionable circumstances, which sale has now been set aside by the judge, and the failure to properly and timeously engage with the Company in relation to its continuous and bona fide attempt to discharge the amounts properly owing under the Balanced Mortgage and the Franek Debt.
It follows that, notwithstanding success on ground 1, the failure to accept the July Tender has a consequent effect on the interest rate payable under the Franek GSA. The same adjustment as that undertaken in relation to the Balanced Mortgage will need to be undertaken.
Disposition
We will grant leave to appeal on ground 1 and allow the appeal on that ground.
We will grant leave to appeal on ground 2 but dismiss the appeal on that ground.
We will hear from the parties in relation to the appropriate form of order, costs and the further disposition of the proceedings.
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SCHEDULE OF PARTIES
MAG FINANCIAL AND INVESTMENT VENTURES PTY LTD (ACN 625 790 623) First applicant AAGG DEVELOPMENTS PTY LTD (ACN 627 341 128) Second applicant and HASSAN EL-SAAFIN First respondent MOHAMED EL-SAAFIN Second respondent SAAFIN CONSTRUCTIONS PTY LTD (ACN 097 500 751) (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) Third respondent WAEL EL-SAAFIN Fourth respondent MARK FRANEK Fifth respondent STEPHEN ROBERT DIXON Sixth respondent AHMED BISE Seventh respondent IAN GLAVIS Eighth respondent MATTHEW KUCIANSKI Ninth respondent AMR MEKKYA Tenth respondent GEORGE SACCA Eleventh respondent NEW CONCEPT HOMES PTY LTD (ACN 602 265 298) Twelfth respondent LOBNA EL-SAAFIN Thirteenth respondent BAYDA EL-SAAFIN Fourteenth respondent
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