Malavazos v Govcorp Finance Pty Ltd - [2022] SASC 44

SUPREME COURT OF SOUTH AUSTRALIA
(Appeal to a Single Judge)
MALAVAZOS v GOVCORP FINANCE PTY LTD
[2022] SASC 44
Judgment of the Honourable Justice Blue
6 May 2022
REAL PROPERTY - TORRENS TITLE - MORTGAGES, CHARGES AND ENCUMBRANCES - EQUITABLE MORTGAGES
REAL PROPERTY - TORRENS TITLE - MORTGAGES, CHARGES AND ENCUMBRANCES - RIGHTS, LIABILITIES AND REMEDIES OF MORTGAGOR
PROCEDURE - CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS - ENDING PROCEEDINGS EARLY - DEFAULT JUDGMENT - SETTING ASIDE
TRADE AND COMMERCE - COMPETITION, FAIR TRADING AND CONSUMER PROTECTION LEGISLATION - ENFORCEMENT AND REMEDIES - PENALTY - PROCEDURE AND EVIDENCE
APPEAL AND NEW TRIAL - APPEAL - GENERAL PRINCIPLES - ADMISSION OF FURTHER EVIDENCE
Appeal against a default judgment granted by a Master in favour of the respondent against the appellants.
The second appellant is the director of Professional Beauty and Mup Pty Ltd. In September 2019 the respondent agreed to lend $76,000 to Professional Beauty with a guarantee by the appellants secured by a mortgage over their residential property. The mortgage provided for a higher interest rate of 9 per cent per month and a lower interest rate of 4.5 per cent per month.
The respondent brought an action in the Supreme Court against the appellants, seeking a declaration that it has an equitable mortgage over the land; orders for sale and possession of the land; and judgment for $200,548.08.
The appellants did not file a defence within 28 days of service of the Claim and statement of claim. The respondent filed an interlocutory application seeking default judgment. The second appellant filed an affidavit to explain the delay in filing a defence and establish that the appellants had an arguable defence that the mortgage imposed an interest rate that comprised an unlawful penalty or was unconscionable.
A Master concluded that the appellants had not satisfactorily explained their delay or that they had an arguable defence and granted default judgment.
The appellants contend on appeal that the Master erred on both issues and also seek to argue that they have additional defences.
Held:
1The Master erred in finding that it was not reasonably arguable by the appellants that the provisions of the mortgage providing for payment of interest at the higher rate were invalid as an unlawful penalty (at [77]).
2The Master erred in finding that the appellants had not satisfactorily explained their delay in filing a defence (at [83]).
3The Master erred in refusing an extension of time to file a defence to the monetary claim and granting default judgment for the monetary claim (at [87]).
4The Master’s conclusion that the appellants had not established that they had a reasonably arguable case based on unconscionable conduct was correct (at [103]).
5Although not argued before the Master, it is reasonably arguable that the provisions of the mortgage providing for payment of interest at the higher rate are rendered void by section 12BG of the Australian Securities and Investment Commission Act 2001 (Cth) (at [120]).
6The appellants have not established that it is…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2022] SASC 44
Decision Date: 6 May 2022

CaseChat Overview and Summary

The case of Malavazos v Govcorp Finance Pty Ltd involves a dispute over a mortgage granted by the Malavazos over their property to Govcorp Finance Pty Ltd. The dispute centres on the enforceability of certain terms within the mortgage agreement and the validity of the mortgage itself. The case was heard in the Supreme Court of South Australia.

The primary legal issues the court was required to address included whether the terms of the mortgage providing for high interest rates constituted an unlawful penalty, whether the Malavazos had a reasonably arguable defence against the monetary judgment entered by default, and the validity of the equitable mortgage granted over the property. The Malavazos argued that the interest rates stipulated in the mortgage were penalties and thus unenforceable, and they sought to argue additional defences not previously raised before the Master. They also contended that the mortgage was invalid due to non-compliance with statutory requirements for deeds and registration.

The court examined the nature of the penalty clause within the mortgage and considered whether it constituted an unlawful penalty under equity principles. It found that the clause did not amount to a penalty because it did not contravene the established rule that higher interest rates are enforceable if stipulated within the mortgage itself. However, the court noted that the clause might be considered unconscionable under the Australian Securities and Investments Commission Act, though this did not render it invalid. The court further determined that the Malavazos had not provided a satisfactory explanation for their delay in filing a defence, but granted an extension of time for them to file a defence against the monetary claim. The court also addressed the contention that the mortgage was not a valid equitable mortgage due to non-compliance with statutory requirements, finding that the Mortgage was valid despite not being created by deed or registered.

Ultimately, the court found that the Master had erred in several respects, particularly in failing to consider that the penalty clause might be unconscionable under the ASIC Act and in granting default judgment without adequately considering the Malavazos's request for an extension of time to file a defence. The court set aside the default monetary judgment and granted an extension of time for the Malavazos to file a defence. The appeal was allowed to the extent of setting aside the monetary judgment, but other orders made by the Master were to remain in place pending potential variation.

Orders

Orders of the court

Held:

1 The Master erred in finding that it was not reasonably arguable by the appellants that the provisions of the mortgage providing for payment of interest at the higher rate were invalid as an unlawful penalty (at [77]).

2 The Master erred in finding that the appellants had not satisfactorily explained their delay in filing a defence (at [83]).

3 The Master erred in refusing an extension of time to file a defence to the monetary claim and granting default judgment for the monetary claim (at [87]).

4 The Master’s conclusion that the appellants had not established that they had a reasonably arguable case based on unconscionable conduct was correct (at [103]).

5 Although not argued before the Master, it is reasonably arguable that the provisions of the mortgage providing for payment of interest at the higher rate are rendered void by section 12BG of the Australian Securities and Investment Commission Act 2001 (Cth) (at [120]).

6 The appellants have not established that it is reasonably arguable that the respondent engaged in misleading conduct in respect of the provisions of the mortgage providing for payment of interest at the higher rate in breach of section 12DB(g) of the ASIC Act (at [130]).

7 The appellants have not established that it is reasonably arguable that the respondent:

(a) was required to hold an Australian financial services licence under the Corporations Act 2001 (Cth) (at [165]); or

(b) engaged in unconscionable conduct under section 12CB of the ASIC Act in lending to them (at [172]).

8 The appellants have not established that it is reasonably arguable that the Mortgage was not a valid equitable mortgage:

(a) because it was not created by deed by reason of subsection 28(1) of the Law of Property Act 1936 (at [184]); or

(b) because it was not registered by reason of section 67 of the Real Property Act 1886 (at [192]).

9 The appellants have not established that it is reasonably arguable that the respondent cannot enforce repayment of the loan by selling the land:

(a) because it did not meet the requirements of section 192(b) of the Real Property Act 1886 (at [206]); or

(b) because it did not serve a valid notice as required by section 55A of the Law of Property Act 1936 (at [233]).

10 Leave to appeal and to amend the notice of appeal granted. Appeal allowed. Order by the Master refusing an extension of time to file and serve a defence insofar as the appellants sought to defend the monetary claim set aside. Order granting an extension of time to the appellants to file and serve a defence to the monetary claim. Default judgment set aside insofar as judgment was granted that the respondent recover from the appellants a monetary judgment but otherwise not set aside (subject to potential variation) (at [239]).

Background

Background to the litigation

The Malavazos contend on appeal that the Master erred on both issues and also seek to argue that they have additional defences.Background Govcorp carries on business as a commercial private lender. Nikola Vujasin is a director of Govcorp. Summer Lawyers act as solicitors for Govcorp. In July 2017 Summer Lawyers lodged at the Lands Titles Registration Office for registration Standard Terms and Conditions of Mortgage entitled Summer Lawyers 2017 Memorandum, which was deposited by the Registrar-General as Registered Number TC 12758935 (the Standard Terms). As at 2019, the Malavazos had granted a registered mortgage in favour of the ANZ Bank over the Land. Professional Beauty carries on business operating a beauty salon or salons in Adelaide. In 2019 it sought loan funding in order to pay for fitout and stock. Professional Beauty applied via a finance broker to Govcorp to borrow money. Professional Beauty retained a solicitor, Mark Sander, to act for it in relation to the potential borrowing transaction. No evidence was adduced of any dealings between Professional Beauty, the broker, Mr Sander or Govcorp before 25 September 2019. On 25 September 2019 Mr Vujasin sent an email to Mrs Malavazos saying “Your loan has been approved” (the Loan) and attaching a letter of offer (the letter of offer). The letter of offer showed Professional Beauty as borrower and the Malavazos as guarantors. It referred to a principal of $50,000, with six months capitalised interest, and a term of six months with an option to extend at the lender’s discretion and subject to loan conduct. It referred to a higher interest rate of nine per cent per month and a lower interest rate of 4.5 per cent per month. It referred to security by way of personal and unlimited guarantees from the directors, and a first registered mortgage over the Land. It set out the fees as an establishment fee of $2,200, legal fees of $2,200, an introducer fee of $1,000 and a valuation fee. The letter of offer contained provision for execution by Professional Beauty and the guarantors. However, no version executed by them was tendered and there is no evidence that the letter of offer was executed (although no submission was made that it was not executed). Summer Lawyers on behalf of Govcorp prepared a suite of documents for execution by Professional Beauty, the Malavazos and their solicitor. I infer that Summer Lawyers or Govcorp sent the documents to Mr Sander or the Malavazos for execution. On 26 and 27 September 2019, the Malavazos executed a mortgage of the Land in favour of Govcorp in the presence of Mr Sander (the Mortgage). It contained provision for execution by Govcorp. A version executed by Govcorp was not tendered (although no submission was made that it was not executed). It contained a clause mortgaging the Malavazos’ estate in the Land on the terms and conditions set out in the Standard Terms and on the additional terms and conditions set out in the Mortgage. The terms and conditions set out in the Mortgage included that:·the Final Repayment Date was six months after the Commencement Date; ·the Principal Amount was $76,000; ·the Lower Rate of Interest was 4.5 per cent per month and the Higher Rate of Interest was nine per cent per month;·the Date for the Payment of Interest was on the same day of each month as the Commencement Date;·the Specified Interest Regime was Regime A (clause 5.11); and·Retained Interest was $20,520 being non-refundable interest retained by the lender and deducted from the Principal Amount to pay towards interest owed under the mortgage.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

I have also decided to grant leave to appeal. For clarity, I address the substantive issues arising on appeal first before addressing leave to appeal.Monetary judgment The first issues on appeal relate to the default monetary judgment entered by the Master. The Master granted judgment for $200,548.08 plus interest at nine per cent per month from 9 February 2021 compounding each month.The penalty doctrine The Malavazos contend that the Master erred in not finding that they had a reasonably arguable defence to the monetary claim, namely that the claim for interest at nine per cent per month comprised an unlawful penalty, that they had provided a satisfactory explanation for failing to file a defence within the time required by the Rules, and that an extension of time should be granted for them to file a defence. They contend that the Master erred consequentially in granting the default monetary judgment.Reasonably arguable? In PSAL Ltd v Kellas-Sharpe[3] the loan agreement provided that interest was payable at the rate of 7.5 per cent per month “but while the Borrower is not in default under the Facility, the Lender will accept interest at a concessional rate of 4% per month”. Applegarth J held that this clause did not provide for a penalty, referring to “a longstanding rule that effectively avoids the jurisdiction to relieve against a penalty if, instead of providing for a higher rate of interest in default of punctual payment, the mortgagee stipulates that the higher rate is payable under the mortgage and provides for its reduction in case of punctual payment”.[4] However, Applegarth J did hold that the clause was unconscionable under section 12CB of the ASIC Act: this aspect of the decision is addressed below.[3] [2012] QSC 31.[4] At [56]. The borrowers appealed against the rejection of the contention that the penalty doctrine applied. In Kellas-Sharpe v PSAL Ltd[5] the Queensland Court of Appeal dismissed the appeal. Gotterson JA (with whom Margaret McMurdo P and Fryberg J agreed) referred amongst others to decisions of intermediate courts of appeal that had recognised the “rule” identified by Applegarth J (albeit the point did not directly arise in those cases).[6] Gotterson JA referred to the obligation to follow decisions of other intermediate courts of appeal unless convinced that they are plainly wrong and said that he was not convinced that those decisions were plainly wrong.[5] [2013] 2 Qd R 233.[6] David Securities Pty Ltd v Commonwealth Bank of Australia (1990) 23 FCR 1; Kowalczuk v Accom Finance Pty Ltd [2008] NSWCA 343, (2008) 77 NSWLR 205; Summer Hill Business Estate Pty Ltd v Equititrust Ltd [2011] NSWCA 149.. The members of the Court referred to equity’s preference for substance over form and to criticism of the “rule” on the basis that it is a triumph of form over substance. However, the Court held that the “rule” is too well-established to be overturned at intermediate appellate court level and effectively that it is a matter for the High Court.

Ratio Decidendi

Legal Principle Established

This contention is not reasonably arguable.Declaration of equitable mortgage Before the Master, the Malavazos did not dispute that they had granted an equitable mortgage over the Land in favour of Govcorp. The Master made a declaration that Govcorp has an equitable mortgage in the form of the Mortgage document dated 27 September 2019 over the Land. On appeal, the Malavazos contend that the Mortgage was not a valid equitable mortgage because it was not created by deed, which they contend is required by subsection 28(1) of the Property Act, or because it was not registered, which they contend is required by section 67 of the Real Property Act. They seek leave to amend their notice of appeal to include these contentions. They accept that they did not make these contentions before the Master and seek to make them for the first time on appeal. Govcorp opposes leave to amend the notice of appeal and further opposes the Malavazos being entitled to argue on appeal a point not raised before the Master. However, given that the grant of the monetary judgment by the Master was erroneous and must be set aside, the consequences of that setting aside on the other relief granted by the Master necessarily arise. Further, these points were fully argued on appeal. In the circumstances, it is appropriate to grant leave to amend and to entertain these contentions on their merits.Property Act section 28 The Malavazos contend that the Mortgage was not a valid equitable mortgage because it was not created by deed, which they contend is required by subsection 28(1) of the Property Act. Section 28 of the Property Act provides:28—Conveyances to be by deed(1)All conveyances of land or of any interest therein shall be void for the purpose of conveying or creating a legal estate unless made by deed.(2) This section shall not apply to—(a) assents by a personal representative:(b) disclaimers made in accordance with the provisions of any law relating to bankruptcy or not required to be evidenced in writing:(c) surrenders by operation of law, including surrenders which may, by law, be effected without writing:(d) leases or tenancies or other assurances not required by law to be made in writing:(e) receipts not required by law to be under seal:(f) vesting orders of the court or other competent authority:(g) conveyances taking effect by operation of law. The term “conveyance” is defined by section 7 as follows:conveyance includes a mortgage, charge, lease, assent, vesting declaration, disclaimer, release, surrender, extinguishment and every other assurance of property or of an interest therein by any instrument, except a will; Starting with the text of subsection 28(1), it only renders void a conveyance for the purpose of conveying or creating a “legal estate”. The word “estate” is used in the law to connote a legal interest, that is an interest recognised by the common law. It is not used to connote an equitable interest, that is an interest recognised by equity but not by the common law. The word “legal”, although protean, is often used to connote the common law in contradistinction to equity. When used in conjunction, the phrase “legal estate” clearly connotes an interest in property recognised by the common law and does not connote an equitable interest.