MH&NG Investment Pty Ltd v Eatertainment Group Pty Ltd
[2004] VCC 1655
•24 October 2024
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised (Not) Restricted Suitable for Publication |
GENERAL LIST
Case No. CI-22-05206
| MH&NG INVESTMENT PTY LTD (ACN 657 121 447) as trustee of the MH&NG INVESTMENT UNIT TRUST | Plaintiff |
| v | |
| EATERTAINMENT GROUP PTY LTD and ORS | Defendants |
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JUDGE: | HIS HONOUR JUDGE MACNAMARA | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 10 and 11 September 2024 | |
DATE OF JUDGMENT: | 24 October 2024 | |
CASE MAY BE CITED AS: | MH&NG Investment Pty Ltd v Eatertainment Group Pty Ltd and Ors | |
MEDIUM NEUTRAL CITATION: | [2024] VCC 1655 | |
REASONS FOR JUDGMENT
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Subject:LOAN AGREEMENT, PENALTY
Catchwords: Loan agreement with provisions for advance of moneys by way of “round robin” leaving borrower with less than face value of facility amount – Whether interest to be calculated by reference to full face value of facility or lesser amount left with borrower as a result of “round robin” – Whether provisions as to the payment of interest constitute unenforceable penalties – Whether lender entitled to exercise an out-of-court power of sale under charge clause
Legislation Cited: Transfer of Land Act 1958 (Vic); Australian Securities and Investments Commission Act 2001 (Cth); Supreme Court Act 1986 (Vic); Consumer Credit (Victoria) Act 1995; National Consumer Credit Protection Act 2009 (Cth); Property Law Act 1958
Cases Cited:AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170
Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205
Aquamore Credit Equity Pty Ltd v Hung [2021] NSWSC 1681
Arab Bank Australia Ltd v Sayde Developments Pty Ltd (2016) 93 NSWLR 231
Avco Financial Services Ltd v White [1977] VR 561
B and G Properties Pty Limited v Fayad [2021] NSWSC 1382
Bay Bon Investments Pty Ltd v Selvarajah [2008] NSWSC 1251
Bellas v Powers [2023] NSWSC 1198
Bhundia v Sommers (No 4) [2021] NSWSC 455
David Securities Pty Ltd v Commonwealth Bank of Australia (1990) 93 ALR 271
Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd [1915] AC 79
Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471
Fayad v B & G Properties Pty Ltd [2022] NSWCA 129
Grossman v Gepp [2024] VCC 909
Integral Home Loans Pty Ltd v Interstar Wholesale Finance Pty Ltd [2007] NSWSC 406
Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd (2008) 257 ALR 292
Jasper Nominees Limited v Kairouz and Murdaca [2023] VSC 718
Keys Consulting Pty Ltd v CAT Enterprises Pty Ltd [2019] VSCA 136
Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525
Judgment: 1. Within 14 days the parties must bring in short minutes to give effect to these reasons.
2.Costs reserved.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr H McAvaney | Mills Oakley |
| For the Defendant | Ms A Storey | Madgwicks Solicitors |
HIS HONOUR:
Background
1Eatertainment Group Pty Ltd (the first defendant) entered into a lease of Lot S5, Aurora Melbourne Central, 236 La Trobe Street, Melbourne, for a term of 15 years. (Court Book (“CB”) 245) The landlord under this lease was UEM Sunrise (La Trobe Street) Pty Ltd as trustee for the UEM Sunrise (La Trobe Street) Unit Trust. The lease permitted the premises to be used as an “Entertainment and hospitality venue trading as ‘Paddle Battle’.” The tenant’s obligations under the lease were guaranteed by Ms Eleanor Barratt and Mr George Pezaros, who are the second and third defendants in this proceeding. The lease provided for Eatertainment to receive what the lease described as an “Incentive Amount” in the following terms:
“$5,850,000.00 plus GST in total value, in the form of:
(a) a Base Rent rent free period of 11 months from and commencing on the Commencement Date to the value of $1,170,000,00 plus GST; and
(b) a Fitout Contribution towards the cost of the Tenant’s Works to the value of $4,680,000,00 plus GST.” (CB 252)
2Covenant 6 of the lease dealt with the provision of this “Incentive Amount” as follows:
“6 Incentive Amount
6.1 Payment of Incentive Amount by Landlord
Subject to and conditional upon Special Provisions 6.4 and 6.5, the Landlord must provide to the Tenant the Incentive Amount as follows:
(a)in respect of any Base Rent free period in the manner set out in Item 23; and
(b)in respect of any fitout contribution comprised in the Incentive Amount:
(i)the initial 25% of the fitout contribution upon the execution of this lease and as soon as practicable after the Tenant provides the Bank Guarantee;
(ii)60% of the fitout contribution as the Tenant progressively completes the Tenant’s Works subject to the Tenant providing the Landlord with tax invoices and evidence of the progressive completion of the Tenant’s Works to the Landlord’s satisfaction;
(iii)10% of the fitout contribution when the Tenant’s Works have been completed to the Landlord’s satisfaction; and
(iv)the final 5% of the fitout contribution when the Tenant has completed all defects rectification works to the Tenant’s Works to the Landlord’s satisfaction.
*** ” (CB 297-298)
3Presumably for the purpose of obtaining supplementary funding for the cost of fitout, Eatertainment also entered into a loan facility agreement dated 14 February 2022 with MH&NG Investment Pty Ltd as trustee of the MH&NG Investment Unit Trust, which is the plaintiff in this proceeding. Ms Barratt and Mr Pezaros were named as guarantors of Eatertainment’s obligations under this agreement. (CB 141-213) Execution on behalf of Ms Barratt was witnessed by one “Bette Mitchell”. Mr Pezaros’s signature was witnessed by a Mr Jeremy Marmur, who apparently acted as broker.
4The loan was expressed to have a “Facility Amount” of $500,000 and required repayment “3 months from the Commencement Date”. It required payment of the “Principal Outstanding” “by paying the Lender [viz MH&NG] the whole of the Principal Outstanding and all other amounts owing under the Facility in full on the Expiry Date”. (CB 141)
5Clause 3 of the Agreement stated “The Borrower [viz Eatertainment] may only use the Facility for the Purpose or any other purpose the Lender agrees to in writing”. (CB 150) The Purpose was defined as follows:
“To provide the Borrower with funds to pay the Builder for the fit out of the premises located at Lot S5, Aurora Melbourne Central, 236 La Trobe Street, Melbourne VIC 3000”. (CB 142)
6Clause 1.2 of the Agreement defined the Builder as being “Artexe Interiors Pty Ltd ...”
7Clause 2.1 stated that provided no Event of Default or Potential Event of Default had occurred:
“The Lender is authorised to provide an advance directly to the Builder and any amount paid directly to the Builder is deemed to be an Advance to the Borrower under this agreement.” (CB 149)
8Clause 2.3 made a somewhat unusual provision as to the mode of drawdown of funds which could be described as a “round robin”. It stated:
“Provision of Advance
Any Advance provided from the Lender to the Borrower under this agreement will only be provided if the following conditions are met on the day of the Advance:
(a) The Lender, the Borrower and the Builder agree to meet in the same physical location on the day which the Advance is intended to be made; and
(b) Immediately after and in the same location as the Lender when the Lender makes available the Advance to the Borrower, the Builder makes available to the Lender the Remitted Sum via RTGS transfer.” (CB 149)
9Clause 1.2, the definitions sub-clause, defined the Remitted Sum as being “the amount of $350,000 in respect of each Advance”.
10Clause 2.4 once again made a somewhat unusual provision as to redrawings:
“Redrawings
The Borrower is entitled to redraw the Facility if:
(a) The whole of the Principal Outstanding (including all interest repayments) are repaid to the Lender;
(b) No Event of Default is subsisting; and
(c) The redrawn Advance is the whole of the Facility Limit.
The Borrower is entitled to redraw the Facility a maximum of 5 times prior to the Expiry Date in accordance with this clause 2.4. In the event the Facility is not redrawn the maximum times prior to the Expiry Date, the Lender will be entitled to, and the Borrower must pay to the Lender, the Minimum Return Amount on the Expiry Date.” (CB 149)
11Clause 2.5 provided that this was the only available redrawing entitlement for the borrower.
12The builder, Artexe, executed an undertaking addressed to MH&NG requiring it to remit the sum of $350,000 forthwith to MH&NG “via a RTGS transfer” upon each receipt by it of $500,000 from the lender, noting “there may be multiple instances of the same”. (CB 220) This regime established a closed process whereby any advance or redrawing of the $500,000 Facility Amount entailed its immediate remittance to Artexe and Artexe’s re-remittance of $350,000 to MH&NG as part of the “round robin” regime laid down by Clause 2.3.
13Once again the agreement made elaborate and, in my experience, unusual provisions as to the payment of interest, which was dealt with in Clause 4. Clause 4 provided as follows:
“4 Interest
4.1 Interest on Advance
(a)Subject to clause 4.2, interest accrues daily at the Higher Rate from the Commencement Date and is capitalised on the day which the Advance is made and payable on the date each Advance is repaid.
(b)If no Event of Default has occurred (other than an Event of Default which has been remedied to the entire satisfaction of the Lender) then the Lender will accept interest under clause 4.1(a) for that interest period at the Lower Rate instead of the Higher Rate. For the avoidance of doubt, should the conditions in this clause 4.1(b) be met, an amount of $24,000 shall be capitalised to the Principal Outstanding on the day an Advance is made.
4.2 Accrual and payment
(a)Interest accrues on each unpaid amount that is due and payable by a Transaction Party:
(i)daily up to the date of actual payment from (and including) the due date or, in the case of an amount payable by way of reimbursement or indemnity, the date of disbursement or loss, if earlier;
(ii)both before and after judgment (as a separate and independent obligation); and
(iii)at the Default Rate.
(b)The Transaction Party must pay interest accrued under clause 4.2 on demand by the Lender.” (CB 150)
14Item 4 of the schedule, CB 141, provided that the Lower Interest Rate was 4.80 per cent of the Facility Amount. The Higher Rate was stated as being 6.00 per cent of the Facility Amount, and Default Interest was stated to be 30.00 per cent per annum. It is to be noted that the first two interest rates are not stated as “per annum” or “per month” or “per diem”, but rather as flat percentages of the Facility Amount independent of any time period. Moreover, these rates are to be calculated by reference to the Facility Amount, viz $500,000, despite the fact that, by reason of the “round robin” regime, at no stage is more than 30 per cent of that amount, viz $150,000, to be available to Eatertainment to be applied to the Purpose stipulated in the loan agreement.
15Clause 5.1 entitled Eatertainment to make “voluntary prepayments” subject to giving “at least five Business Days prior notice to the Lender”.
16Clause 8.11 was a charge clause which provided, inter alia:
“Each Guarantor agrees that the Secured Money payable by it arising from or pursuant to this agreement shall form a charge on any land of which the Guarantor is a registered proprietor, including but not limited to the Croydon Property ... in favour of the Lender ...” (CB 155)
17Clause 1.2 defined the expression “Croydon Property” to mean “Unit 1, 17 Landale Avenue, Croydon”, with title particulars of Volume 11564 Folio 914. (CB 145)
18The agreement provided for “Collateral Security”, being the Guarantee to be given by the second and third defendants, the charge clause, and the “General Security Deed” granted by Eatertainment (CB 170-202) whereby Eatertainment charged the assets defined as Collateral, being all its present and future property. (CB 172‑3)
19In Clause 2 (CB 177), the charge was granted over the Collateral to secure the payment of the Secured Money, which was defined to include, inter alia:
“all money and amounts that the Grantor [viz Eatertainment] is or may become liable at any time (actually, prospectively or contingently, whether alone or not and in any capacity) to pay to the Secured Party [viz MH&NG] ...” (CB 175)
20Clause 5.3 of the Security Deed provided that:
“Immediately upon the happening of any Event of Default:
...
(b) the Secured Money becomes immediately due and payable and the Secured Party may demand immediate payment by the Grantor of the Secured Money which includes any money contingently owing to the Secured Party by the Grantor”. (CB 184)
21The loan agreement contained an orthodox severability clause as Clause 22.16, which provided:
“A provision of a Transaction Document that is prohibited or unenforceable in any jurisdiction is ineffective in that jurisdiction to the extent of the prohibition or unenforceability. This does not invalidate the remaining provisions of that Transaction Document nor affect the validity or enforceability of that provision in any other jurisdiction.” (CB 166)
22Apparently under the signature of the second defendant, Ms Barratt, there was a document styled “Waiver of Independent Legal and Financial Advice”. (CB 214-216) Once again, Ms Barratt’s signature is shown as witnessed by “Bette Mitchell”. A similar document, apparently under the signature of the third defendant, Mr Pezaros, albeit undated, shows his signature witnessed by Mr Marmur. (CB 217-219)
23The $500,000 “Facility Amount” was advanced in accordance with the terms of the loan agreement, viz via the “round robin” procedure laid down by Clause 2.3. The whole amount was remitted to Artexe, which forthwith repaid $350,000 thereof to MH&NG. The only payment or repayment made by Eatertainment was the sum of $25,000, described as a “voluntary repayment”, on 2 September 2022. (Transcript (“T”) 99, Line/s (“L”) 9-11) MH&NG lodged a caveat under the Transfer of Land Act 1958 against the title of the Croydon Property. (T99, L21-28; CB 388)
The present proceeding
24On 6 September 2022, solicitors acting for MH&NG filed a writ commencing the present proceeding, seeking a raft of relief including the recovery of a liquidated sum of $334,024.24:
“The Outstanding Debt as at 5 December 2022, comprises:
Outstanding principal $300,000.00
Interest calculated at 30% from the Due Date and accruing $28,024.24
Legal costs to date incurred on a full indemnity basis $6,000.00”
(CB 6-13)
Statement of claim
25By its statement of claim, the plaintiff MH&NG alleged that it and the defendants entered into the loan agreement described above “on or about 14 February 2022”. The statement of claim recited detailed provisions of the loan agreement to similar effect as the summary and quotations given above, and alleged that the advance of $500,000 was made “on 14 and 15 February 2022”. According to the statement of claim, the defendants had “failed, neglected or otherwise refused to repay the balance of the Loan plus accrued interest by the Due Date”. It alleged continued default despite the making of a demand on 17 October 2022. As regards Ms Barratt, the prayer for relief sought “a declaration that [MH&NG] is entitled to possession and ownership of the Croydon Property”.
Defence and counterclaim
26I granted the defendants leave to file amended defences and counterclaims in accordance with drafts dated 9 September 2024 at the outset of the trial. These pleadings admitted the execution of the loan agreement by the parties, and recited at length the provisions thereof.
27The defences asserted that upon the true construction of the loan agreement “the Facility was actually $150,000 (Actual Advance) and not $500,000 or any other sum”. Accordingly, the interest entitlement of MH&NG ought to be calculated by reference to this smaller sum rather than the figure of $500,000.
28It was also said that Clause 2.4 of the loan agreement operated as a penalty and was accordingly unenforceable. It was said that it:
“provided for interest of an amount that was extravagant and unconscionable and out of all proportion to the legitimate commercial interests of the Lender and did not reflect a genuine pre-estimate of damages of the Lender”. (CB 24)
29Further, or alternatively, it was said that the Default Interest Rate of 30 per cent per annum under Clause 4.2 operated “as a penalty and [was] unenforceable at law”. This was said to be on the same basis alleged relative to Clause 2.4.
30The defendants admitted the payment of $500,000 to Artexe and the repayment of $350,000 forthwith to MH&NG.
31The pleadings also contained a counterclaim alleging that MH&NG had made certain representations to the defendants in trade and commerce, in connection with the provision of a financial product, which were misleading or deceptive and which entitled the defendants to relief under the Australian Securities and Investments Commission Act 2001 (Cth), with the result that the loan agreement was void ab initio, or alternatively the defendants were entitled to damages under the Australian Securities and Investments Commission Act or under the Australian Consumer Law.
Reply and defence to counterclaim
32MH&NG provided replies and defences to counterclaim relative to each defendant, in which it generally joined issue with the defence and counterclaim and made certain admissions and denials relative to the counterclaim. In particular, they said that:
“the defendants’ reliance upon the Australian Securities and Investment Commission Act 2001 (Cth) (‘ASIC Act’) is embarrassing by reason of the fact that section 12GJ of the ASIC Act prevents this Court from granting the relief sought pursuant to section 12GM of the ASIC Act.” (CB 79)
33The defendants filed replies to MH&NG’s defence to counterclaim.
Trial
34At trial, both parties were represented by counsel. The second defendant, Ms Barratt, was apparently in attendance remotely from Texas in the United States of America. The third defendant, Mr Pezaros, was neither physically present nor remotely in attendance.
35Ms Storey, counsel for the defendants, announced that the defendants would, as things stood, call no evidence. She sought an adjournment of the trial based upon the suggestion that Ms Barratt may have a distinct defence relative to the genuineness or validity of her signature on the loan agreement. For reasons which I then gave, I declined to grant leave for a further amendment to Ms Barratt’s defence and counterclaim to raise these matters and potentially to obtain separate representation from the other defendants or to grant an adjournment which would necessarily be entailed in granting leave for the amendment and change of representation.
36Ms Storey also suggested that the hearing might be “bifurcated”, whereby the court would initially consider the plaintiff’s claim and defer dealing with the defendants’ counterclaims. I declined to adopt this course because of a potential repugnancy between a determination for the plaintiff on its claim and a determination for the defendants on their counterclaims to the effect that the loan agreement was “void ab initio”.
37In the result, therefore, the trial proceeded based solely upon admissions in the pleadings and a consideration of the documents in the Court Book filed by the plaintiff. Ms Storey announced she would not be pressing the counterclaims. The defendants resisted the plaintiff’s claim based solely on their defences, which relied upon the doctrine of penalty.
Conclusions
“Facility Amount”
38In the forefront of her submissions on behalf of the defendants, Ms Storey contended that the expression “Facility Amount” as shown in Item 1 of the Schedule to the Loan Agreement (CB 141) should be treated as $150,000 rather than the nominated $500,000. This result flowed, she said, from Clause 2.3, which establishes a “round robin”, such that, whether under the initial drawdown or any redrawings pursuant to Clause 2.4, the maximum amount outlaid by MH&NG is $150,000 because of the obligation on the builder Artexe to remit $350,000 of the “Remitted Sum” to MH&NG. She advanced this argument as a matter of general principle and, as I understood it, in accordance with the well-known principle that legal matters in general, and the operation of the penalty doctrine in particular, required a consideration of the substance rather than mere forms.
39I referred the parties to the decision of the High Court of Australia in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471. In that case, partners of a national law firm, undertaking what were intended to be “tax effective” transactions toward the end of a financial year, were parties to a series of transactions which were evidenced by book entries made by a number of corporations debiting and crediting various accounts. When Equuscorp, as provider of finance, sought to enforce loan and guarantee transactions, the defendants contended that they ought to be regarded as under no liability because there was no “real money” involved in the transactions: they were mere book entries. This argument succeeded in the Supreme Court of Queensland and its Court of Appeal. Equuscorp appealed to the High Court, which allowed the appeal. In a joint judgment, Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ said at [46]:
“Each of these transactions was legally effective. None of the transactions that took place on 30 June 1989 could be said to be a sham. The primary judge was wrong to characterise them, as he did by his references to “artifice”, “façade” and “charade”, as shams. “Sham” is an expression which has a well‑understood legal meaning. It refers to steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences. In this case, debts were created and satisfied at all points in the chain until, at its end, Rural Finance owed JFM and FJA certain sums, and the respondents owed Rural Finance certain sums. And of most particular relevance to the present matters, in accordance with its obligations under the written loan agreements, Rural Finance had applied the money it lent in payment of the application moneys due from the respondents for the units being bought.” ((2004) 218 CLR 471, 486-7)
40Mr McAvaney, for the plaintiff, said that this case was a fortiori not a sham, because there were actual movements of money rather than the making of mere book entries. I accept this contention. Whatever might be the case in a dispute where there were pleaded allegations of unconscionability whether statutory or under the unwritten law, in the present context there was nothing to suggest that the parties did not intend that the “round robin” steps should not have the legal effect which they purported to have. In the absence of any special statutory provision as to how interest rates or “true interest rates” or advertised rates are to be calculated, there is no bar upon the parties agreeing to the arrangements including the “round robin”.
Interest charges
41I commence this portion of the judgment with some general observations. Section 57 of the Supreme Court Act 1986 provides, inter alia:
“(1)Subject to the Consumer Credit (Victoria) Act 1995 and the National Credit Code within the meaning of the National Consumer Credit Protection Act 2009 of the Commonwealth, there is no limit to the interest which a person may lawfully contract to pay.
*** ”
42Since the borrower in this instance is a corporation the National Credit Code does not apply, and there is no other consumer credit legislation which would control or limit the interest rates upon which MH&NG and Eatertainment might agree.
43Traditionally, the issue of penalty relative to interest rates arose when a mortgage or other loan arrangement provided, or purported to provide, that in the absence of default the advertised or lower rate of interest was payable, but, should the borrower default, interest was payable at a higher or default rate. For centuries it was established that in substance the same outcome could be achieved by the mortgage or loan agreement’s establishing a primary obligation on the borrower to pay interest at the higher rate with a provision to the effect that interest at the lower rate would be accepted instead in the absence of default. In David Securities Pty Ltd v Commonwealth Bank of Australia (1990) 93 ALR 271, the Full Court of the Federal Court of Australia, Lockhart, Beaumont and Gummow JJ, said at [110]-[112]:
“However anomalous, the distinction between an increase in the rate of interest (which attracts the doctrine concerning penalties), and a covenant offering an incentive by reduction of the rate upon prompt payment (which does not attract the doctrine) is well established ...
What is the efficacy of a provision in a mortgage providing for the capitalisation of arrears of interest? It was formerly considered, as a general rule, that, in equity, covenants converting interest into principal from time to time as the interest became due, but was not paid, conflicted with the usury laws and consequently could not be supported ... But in modern times, with the repeal of the usury laws, it is well settled that a stipulation entered into at the time of a loan for payment of compound interest is valid and does not attract the doctrine concerning penalties ...
But what of a provision whereby the increase in the interest rate operates only from the date of default in payment, so that it does not extend back over the period in respect of which there accrued the primary interest which was not paid when it (and the principal) was due for payment? There is a long line of authority which indicates that the additional interest will not be considered as a penalty, but rather as a liquidated satisfaction fixed and agreed on by the parties as compensation for the lender being kept from his money. It will be recalled that equity would only relieve against a penalty where compensation could be made for the actual damage suffered by the party seeking to recover the penalty, and that the actual damage suffered by the party would be assessed in an action at common law”. ((1990) 93 ALR 271, 299)
44Consequently, a common provision in mortgages and loan agreements which adopt the convention of providing for payment of interest at the higher rate, albeit that interest at the lower or acceptable rate may be paid in the absence of default, frequently includes provision along the lines of “to pay interest at the Higher Rate on all moneys due but unpaid ...” Since such a provision operates prospectively only, and entails no retrospective increase in the interest charged, it is regarded as standing outside the rules as to penalty, subject to the issue to which I now turn.
Clause 2.4
45Ms Storey, on behalf of the defendants, contended that this clause was unenforceable as a penalty. The modern law on penalties and their unenforceability derives from the decision of the House of Lords in Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd [1915] AC 79; in particular the speech of Lord Dunedin. In that case, Dunlop’s dealer agreement, to which New Garage was a party, included a variety of obligations, including obligations to observe retail price maintenance, not to supply a person whose supply Dunlop had suspended, not to tamper with trademarks, etc. The contract provided for a payment by way of liquidated damages of five shillings for every such breach. The House determined that the clause was a valid liquidated damages clause and not an unenforceable penalty. Lord Dunedin gave the leading speech, in which his Lordship stated a number of principles which have been quoted and applied, to some extent modified, in subsequent cases. According to his Lordship:
“The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage ...” ([1915] AC 79, 86)
He said:
“It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach. ...
It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid ...
There is a presumption (but no more) that it is penalty when ‘a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage’ ...” ([1915] AC 79, 87)
46Based on this formulation, the penalty doctrine by its very nature could not apply in any circumstance which did not entail a breach of contract. A provision requiring a party to pay an extravagant sum upon the occurrence of an event not being a breach of contract would be outside the penalty doctrine.
47In the new millennium, the High Court of Australia has revisited that proposition. In Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 the Court considered the penalty doctrine as part of a class action against the bank brought on behalf of some 30,000 of its customers seeking declarations that certain fees charged by the bank to its customers for honour, dishonour, and non-payment, and with respect to credit card accounts, were void and unenforceable as penalties. Gordon J (then a judge of the Federal Court of Australia) had determined that these fees, except in so far as they entailed a late payment fee, could not be penalties because they were not charged upon the occasion or on the basis of breaches of contract ((2011) 288 ALR 611). Her Honour had followed a decision of the New South Wales Court of Appeal, Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd (2008) 257 ALR 292. The High Court reversed her Honour’s decision. In their joint judgment, French CJ, Gummow, Crennan, Kiefel and Bell JJ said:
“Mason and Deane JJ observed in Legione v Hateley that, as the term suggests, a penalty is in the nature of a punishment for non-observance of a contractual stipulation and consists, upon breach, of the imposition of an additional or different liability.
In general terms, a stipulation prima facie imposes a penalty on a party (the first party) if, as a matter of substance, it is collateral (or accessory) to a primary stipulation in favour of a second party and this collateral stipulation, upon the failure of the primary stipulation, imposes upon the first party an additional detriment, the penalty, to the benefit of the second party. In that sense, the collateral or accessory stipulation is described as being in the nature of a security for and in terrorem of the satisfaction of the primary stipulation. If compensation can be made to the second party for the prejudice suffered by failure of the primary stipulation, the collateral stipulation and the penalty are enforced only to the extent of that compensation. The first party is relieved to that degree from liability to satisfy the collateral stipulation.” ((2012) 247 CLR 205, 216-7 [9]-[10])
48According to the joint judgment:
“The primary judge [Gordon J] erred in concluding, in effect, that in the absence of contractual breach or an obligation or responsibility on the customer to avoid the occurrence of an event upon which the relevant fees were charged, no question arose as to whether the fees were capable of characterisation as penalties.” ((2012) 247 CLR 205, 236 [79])
49The essence of their Honours’ reasoning in reaching that conclusion seems to be an approval of what was said by Brereton J in his decision at first instance in the Interstar litigation; namely, that:
“relief may be granted in cases of penalties for non-performance of a condition, although there is no express contractual promise to perform the condition – apparently on the basis that despite the absence of such an express promise, a penalty conditioned on failure of a condition is for these purposes in substance equivalent to a promise that the condition will be satisfied.” ((2012) 247 CLR 205, 234 [67])
50According to Ms Storey, that statement of principle by Brereton J, adopted in the joint judgment in the High Court in Andrews’ case, was engaged on the present facts in Clause 2.4. Mr McAvaney referred back to the formulation at paragraphs [9]-[10] in the joint judgment quoted above, contending that since there was no obligation placed upon Eatertainment to redraw, the obligation upon it to pay a minimum return ought not to be regarded as penal, because there was no “non-observance of a contractual stipulation”. The conclusion reached by the High Court in Andrews’ case is clear as to the matters before it. No doubt as a commentary on my own inadequacies, I find the reasoning of the joint judgment opaque. Uninstructed by Andrews’ case, I would have thought the phrase “non-observance of a contractual stipulation” is merely a verbose description of a breach of contract. In context, however, it seems that their Honours employed that phrase with a different meaning.
51Relevantly for present purposes, the Interstar litigation raised the question as to whether the doctrine of penalties could apply to the termination of a contract upon an “event of default” which is not a breach of contract. The contract in question was described as a loan origination and management agreement between Interstar Wholesale Finance Pty Ltd and Integral Home Loans Pty Ltd whereby Integral fulfilled the role of “originator”, presumably signing-out loan business on behalf of Interstar. As previously noted, the High Court in Andrews’ case approved the reasoning and conclusions as to this matter, and preferred them to the opposite opinion of the New South Wales Court of Appeal. The judgment of Brereton J is to be found at [2007] NSWSC 406. His Honour undertook a lengthy analysis of a range of predominantly English cases dealing with payment contracted to be made on the early termination of hire-purchase agreements or chattel leases, quoting extensively from the judgments. His Honour identified a line of authority which he said:
“reinforce[s] the view that in a case ... where termination, accompanied by a liability to pay an agreed sum, is authorised for an “event of default” but there is no express promise that the event will not occur – nonetheless the position may be seen as, in substance, akin to termination for breach.” ([2007] NSWSC 406, [62])
52His Honour referred, as did the joint judgment in the High Court in Andrews’ case, to:
“equity’s clearly established jurisdiction to grant relief in the case of penal bonds, for non-performance of conditions notwithstanding the absence of any express contractual promise to perform the condition”. ([2007] NSWSC 406, [73])
53He therefore concluded, at [74]:
“Accordingly, I would hold that a penalty is a contractual liability to pay or forfeit or suffer the retention of a sum of money or property which is agreed in advance to be payable (or forfeited or retainable), by one party to the other, upon or in default of the occurrence of an event which can be seen, as a matter of substance, to have been treated by the parties as lying within the area of obligation of the first party, in the sense that it is his or her responsibility to see that the specified event does or does not occur, and where the stipulated payment is out of all proportion or unrelated to the damage which might be sustained by the other party by reason of the particular occurrence or default.” ([2007] NSWSC 406, [74])
The unenforceable penalty found by Brereton J was the purported cancellation of Integral’s entitlement to “trailing commissions” which his Honour found had become accrued rights of Integral before termination of the loan origination and management agreement.
54The “events of default” of which his Honour spoke would seem to be events such as the filing of a winding-up application against a hirer or other transaction party, the appointment of a receiver, or receiver and manager, over its assets, etc. According to this reasoning, I should review Clause 2.4. Plainly the power to determine whether there should be any, and if so how many “redraws” in accordance with its terms, lies with Eatertainment. The penalty doctrine may apply to this provision, subject to its being shown that “the stipulated payment is out of all proportion or unrelated to the damage which might be sustained by the other party by reason of the particular occurrence or default.” In the present instance it is a case of non-occurrence, because, upon the undisputed facts, there were no “redraws” under the relevant clause.
55If we ask what “damage” has MH&NG suffered as a result of the non-occurrence of five redraws, or perhaps a “default” on Eatertainment’s part through not having effected five redraws, we are faced with a paradox. In his written outline, Mr McAvaney said:
“The minimum interest payable during the term would have been $120,000 (i.e. had five redraws been made and the Lower Rate of interest applied). This represents 24% of the Facility Amount. On an annualised basis, this represents 96% interest per annum. The maximum interest payable during the term would have been $240,000, (i.e. had four redraws been made, the Higher Rate of interest applied and the Minimum Repayment Amount triggered). This represents 48% of the Facility Amount. On an annualised basis, this represents 192% interest per annum.” (Outline, paragraph 30)
56According to Mr McAvaney (Outline, paragraph 34):
“The crux of the Defendants’ complaint is that clause 2.4 ... imposed a high rate of interest and it is therefore a penalty. However, that is of no moment. Parties can agree on high rates of interest without that resulting in an unenforceable penalty.”
57Needless to say, these calculations would show far higher rates, were one to accept the defendant’s contention that they should be calculated by reference to a Facility Amount of $150,000 only.
58I was struck by the fact that Clause 2.4 levies the same fee whether the borrower effects one, two, three or four redraws, or no redraws at all. Does this attract a presumption that the provision is penal, applying in a variety of different circumstances without distinction as to amount?
59Mr McAvaney submitted that this “presumption” was either inapplicable or lacking in weight in these circumstances. In so far as it could be regarded as deriving from or having been endorsed by the Dunlop case, he stressed that in that instance the five shillings damages became payable for breach of any one of a miscellany of different obligations which are summarised in the headnote to the House’s decision. He also referred me to Lord Dunedin’s explanation of this point where his Lordship said:
“I think Elphinstone’s Case, or rather the dicta in it, do go this length, that if there are various breaches to which one indiscriminate sum to be paid in breach is applied, then the strength of the chain must be taken at its weakest link. If you can clearly see that the loss on one particular breach could never amount to the stipulated sum, then you may come to the conclusion that the sum is penalty. But further than this it does not go; so, for the reasons already stated, I do not think the present case forms an instance of what I have just expressed.” ([1915] AC 79, 89)
60This, he said, was an instance where there could be a variety of different events relative to the same matter; namely, redraws under Clause 2.4 which might attract the payment. This, he said, differed from a situation where the payment might be triggered by breach of a miscellany of different obligations.
61In any event, in Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525, the High Court returned to the issue of the application or otherwise of the penalty doctrine to bank fees. Keane J referred to this presumption as “a weak one”. ((2016) 258 CLR 525, 610 [265]) I accept Mr McAvaney’s contention on this point.
62The question then resolves itself to a consideration in accordance with the analysis of Brereton J in Interstar, whether “the stipulated payment is out of all proportion or unrelated to the damage which might be sustained” by MH&NG by reason of Eatertainment’s not having effected five redraws under Clause 2.4 of the Facility Agreement, which, as Mr McAvaney’s analysis quoted above, would have generated additional interest payments. If that is the appropriate analysis, and one regards, in accordance with the reasons of Brereton J endorsed by the High Court in Andrews, Eatertainment as having been obliged to effect five redraws, there is no extravagance: merely a compensation for the interest that would otherwise have been earned. If, however, one focuses on the form of Clause 2.4 imposing no obligation on Eatertainment to redraw on one, two, or any other number of occasions, there is no loss, and the stipulated minimum amount is, by definition, extravagant. Mr McAvaney necessarily stressed the lack of obligation imposed on Eatertainment to effect any one or more redraws, and, for the purposes of considering what loss or damage MH&NG had suffered, appealed to the “market”. He said:
“If it’s the case that this agreement wasn’t redrawn five times, it should be – I don’t want to say it should be, but it ought to be obvious that a lender would suffer loss because there is loss in the nature of an ability to lend the money on a more profitable venture because if this is a lender who is in the business of lending money to people, they could simply lend the money to – the money is deployed in the relevant sense, it has been given to the borrower for their uses.” (T124, L1-10)
63I pointed out that the requirement for a series of round robins rendered this facility a “closed system”:
“So in that respect there has been no loss of any ability to go out into the wider market because if the redraw facility were exercised, the money would still be retained and recirculated.” (Ibid, L17-20)
64Mr McAvaney said:
“we’re talking about not when the money is within the closed circuit, we’re talking about before the money is advanced.” (Ibid, L21-24)
65I respectfully reject that view. The issue of Eatertainment’s redrawing or not redrawing, and, if so, how many times, arises by definition only post initial draw-down. The rate at which the money recirculates as part of the redraw round-robin regime after draw-down is relevant only to the interest charges which MH&NG may levy on Eatertainment and the other defendants as its guarantors, not to what it might or might not have recovered in the wider market. If one accepts the application in these circumstances of the reasoning of Brereton J in Interstar and the High Court in Andrews’ case that this charge is made responsively to a type of implied obligation on the part of Eatertainment, then what it recovers by way of the liquidated sum is in no way extravagant when related to what it could have recovered had Eatertainment performed its “obligation” to redraw five times. With great hesitation, I conclude that this is the appropriate comparison to be made. Were the comparison to be with what might otherwise have been earned on the market in dealings with other lenders, the amount charged would plainly be extravagant, because, by definition, no redeployment to the market would have been possible.
66The situation here stands in contrast to the situation which has typically arisen relative to entitlements on termination of chattel leases: for instance in the High Court’s decision in AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170, where the equipment lessor terminated the equipment lease based on breaches by the lessee falling short of a repudiation. A provision requiring payment by the lessee of all lease instalments accruing due after the date of termination, and the residual value of the chattels, was held penal by the majority of the Court – Gibbs CJ, Mason and Wilson JJ (Deane and Dawson JJ dissenting) – on the basis that the inability of the lessor to recover these instalments and its indemnity for the residual value in the ordinary course resulted from its decision to terminate the lease. In the present instance it was Eatertainment’s decision not to undertake five redraws under Clause 2.4.
Clause 4.2
67Ms Storey, contending that Clause 4.2 was also an invalid penalty, said:
“Interest under clause 4.2 accrues after the Expiry Date by reason of it becoming due and payable on each unpaid amount. [Emphasis in the original] In substance, clause 4.2 operates as a default interest clause – a proposition supported by the term “Default Rate” used in that clause.” (Written submissions, paragraph 19)
68She said that this was:
“a classic collateral stipulation which applies only if Eatertainment defaults on its primary obligation to repay the amounts outstanding by the Expiry Date in accordance with Clause 6. The Default Rate is a penalty as it is extravagant”. (Ibid, paragraph 20)
69As is apparent, Clause 4.2, in so far as it requires payment of a differential interest rate, operates only prospectively. It is consistent with the principles stated by the Full Court of the Federal Court in David Securities as prima facie avoiding the operation of the penalty doctrine. Nevertheless, a line of later authority indicates that such arrangements which modify interest rates prospectively may nevertheless be held penal in the event that they represent too sharp a step up from the initial non-default rate. In my experience in decades gone by, a differential of 2 per cent per annum between the higher and the lower or acceptable (non-default) rate was customary. Mr McAvaney correctly noted that the cost to a lender of financing an account in default, at least with respect to lenders that rely on a money market, is greater than the cost of financing loans which are in good standing and not in default. He referred me to the remarks of Keane J in Paciocco’s case in this respect, where his Honour said:
“Secondly, as Mason CJ and Wilson J observed in Hungerfords v Walker, “legal and economic thinking about the remoteness of financial and economic loss have developed markedly in recent times.” This observation has much force. It was only in that case, decided in 1989, that Australian jurisprudence finally accepted the (now obvious) economic reality that to be kept out of money due is to suffer real economic loss so that damages should be recoverable in tort for loss of the use of money. More recent decisions have recognised the nature of the consequences for a lender of a default by a borrower in a payment obligation, and that these consequences extend beyond the mere fact of non‑payment of the sum due on the due date. In Lordsvale Finance Plc v Bank of Zambia, Colman J observed that:
“the borrower in default is not the same credit risk as the prospective borrower with whom the loan agreement was first negotiated. … [M]oney is more expensive for a less good credit risk than for a good credit risk”.”
((2016) 258 CLR 525, 609-10 [263])
70All formulations of the penalty doctrine include the proposition that it is for he or she who contends that an obligation is penal to make good the proposition that it provides for an excessive or extravagant payment in excess of the damage which might reasonably have been in contemplation as possible relative to a particular breach when the contract was made. Mr McAvaney said that typically such evidence would be provided from a suitably-qualified expert. He referred to the dictum of Sackville AJA as a member of the Court of Appeal in Arab Bank Australia Ltd v Sayde Developments Pty Ltd (2016) 93 NSWLR 231, 234 [8], where his Honour said:
“In recent times, cases involving the penalty doctrine have been conducted by reference to extensive expert evidence designed to enable the court to determine whether or not there was a justifiable commercial rationale for the imposition of the detriment alleged to be a penalty. It is therefore not surprising that in the present case the parties considered it necessary to rely on expert reports to support their respective contentions.”
71His Honour’s judgment footnoted references to Andrews’ case and Paciocco. Ms Storey correctly observed that these two cases were relatively elaborately-mounted class-action proceedings. Mr McAvaney later conceded that there were several recent decisions on the penalty doctrine not mounted on the relatively-elaborate scale of Andrews and Paciocco in which the party contending that provisions were penal simply drew attention to the rates in question. He referred me to the approach taken by M Osborne J in the case Jasper Nominees Limited v Kairouz and Murdaca [2023] VSC 718 where his Honour said at paragraph [326]:
“It is not necessary to consider the unconscionable conduct claim, as the conduct relied upon is the making of the representations. If they were not made or not relied upon that claim too fails.”
72In adopting that approach, M Osborne J applied a dictum of White J of the Supreme Court of New South Wales in Bay Bon Investments Pty Ltd v Selvarajah [2008] NSWSC 1251 [51], where his Honour said:
“Whilst I accept that the onus is on the defendant to show that the provision is a penalty, it appears to me that once some evidence is adduced which may be sufficient to satisfy that onus, there is an evidentiary onus on the plaintiff to explain the nature of its business, the rates at which it is able to lend, and how, when the contracts were entered into, it would have been anticipated that the moneys would be re-deployed on repayment of the loans. This information was entirely in the plaintiff’s camp. Evidence is to be weighed according to the power of a party to produce it. Where facts are peculiar within the knowledge of one party, comparatively slight evidence may be sufficient to discharge the onus of proof lying on the opposite party ...”
73Accordingly, as in Jasper Nominees’ case and the Bay Bon case, it is appropriate to consider the contention of Clause 4.2’s being penal by reference to the provisions of the loan agreement itself and the structure of the interest charges, even in the absence of any expert opinion.
74Adopting this approach, counsel provided me with two “aide-mémoire” notes surveying the gap or uplift considered in recent cases and determined to be penal or not, as the case may be. The plaintiff’s table was as follows:
Case Pre-default interest rate Post-default interest rate Percentage increase in in interest rate post-default Penalty or not a penalty B&G properties v Fayad [2021] NSWSC 1382, [32], approved on appeal in Fayad v B & G Properties Pty Ltd [2022] NSWCA 129
25% per annum
30% per annum
20%
Not a penalty
Bhundia v Sommers (No 4) [2021] NSWSC 455
0% per annum
30% per annum compounding monthly
N/A
Not a penalty
Jasper Nominees Limited v Kairouz and Murdaca [2023] VSC 718, [338].
0.00%
60% compounding monthly
N/A
Not a penalty
75.11% effective annualised rate
79.58% effective annualised rate
4.47%
0.00%
120% compounding monthly
N/A
Not a penalty
240% effective annualised simple interest rate
213.84% effective annualised rate
-26.16%
Bay Bon Investments v Selvarajah [2008] NSWSC 1251, [27], [55].
60% per annum
240% per annum
400%
Penalty
100.2% per annum
360% per annum
359%
Penalty
Grossman v Gepp [2024] VCC 909
5% per annum
20% per annum
400%
Not a penalty
Bellas v Powers [2023] NSWSC 1198
1.75% per
30 days9.75% per
30 days557.14%
Penalty
75The defendant’s table included one additional case, as follows:
Case
Pre-default interest rate
Per monthPre-default interest rate
Per annumPost- default interest rate
Per monthPost-default interest rate
Per annumPercentage increase in interest rate post default
Comparative difference
Penalty or not a penalty
Aquamore Credit Equity Pty Ltd v Hung [2021] NSWSC 1681 (cited in Jasper [330])
2% p/m
24% p/a
5% p/m
60% p/a
36%
250%
Yes, penal
76The comparison here is 30 per cent as the default rate and 24 per cent as the lower or acceptable rate. This represents a margin of 6 per cent per annum, or 25 per cent more interest, which is close to, though materially higher than, the uplift margin held to be non-penal by Ball J and the New South Wales Court of Appeal in B and G Properties Pty Limited v Fayad [2021] NSWSC 1382 [32] and the Court of Appeal in Fayad v B & G Properties Pty Ltd [2022] NSWCA 129. In my view this consideration, allied with the fact that the modification in rates operates prospectively only, in accordance with the David Securities principle, renders Clause 4.2 non-penal. Mr McAvaney stressed that such an analysis was, from the plaintiff’s point of view, only a “fallback” position. (T256, L14-19) Mr McAvaney went on to say: “That is the lowest our case can be put.” (Ibid, L20) Mr McAvaney’s primary submission appeared at paragraph 30 of his written outline, stating:
“The interest payable post-default (30% simple interest) under clause 4.2 represents a decrease on the interest payable during the term. The minimum interest payable during the term would have been $120,000 (i.e. had five redraws been made and the Lower Rate of interest applied). This represents 24% of the Facility Amount. On an annualised basis, this represents 96% interest per annum. The maximum interest payable during the term would have been $240,000, (i.e. had four redraws been made, the Higher Rate of interest applied and the Minimum Repayment Amount triggered). This represents 48% of the Facility Amount. On an annualised basis, this represents 192% interest per annum. Self-evidently, a 30% annual simple interest rate payable on default is ... dwarphed [sic] by those rates of interest charged during the term.”
77Mr McAvaney said that this represented a reduction of 66 per cent or 152 per cent as against the primary interest entitlement.
78I accept Mr McAvaney’s contentions whether put at their highest or their lowest. Clause 4.2 is not a penalty.
79On behalf of the defendant, Ms Storey filed a document dated 24 September 2024 – that is, almost a fortnight after the conclusion of the trial – styled “Aide-mémoire - Defendants’ calculations, the true default interest rate”. According to her calculations, the higher or default rate should be charged only on what is referred to as Adjusted Outstanding Debt of $195,000 which, she said, indicated a vast difference between the base rate and the default rate. Ms Storey’s calculations depend upon a scaling down of the effective facility amount in light of the “round robin” transaction. They therefore depend upon a premise which I have already rejected. [38]-[40]
Clause 4.1
80The issues relevant to Clause 4.1 pertain to the issue of capitalisation. Ms Storey contended (written outline, paragraph 8) that:
“Clause 4.1 operates as a fixed interest charge which accrues daily at the Higher or Lower Rate from the Commencement Date and is capitalised on the day on which the Advance is made, and payable on the date each advance is repaid. The capitalised accrued and unpaid interest is added to the principal upfront, the repayment of which is deferred until “each advance is repaid”.”
81In paragraph 9 of her outline she repeated her contention that the advance should be treated as $150,000, and not $500,000. I have already explained why I do not accept that contention. This is confirmed by the final words of the subclause. The interest rate nominated in the schedule is a flat 4.5 per cent of the Facility Amount, $500,000. $24,000 is 4.8 per cent of that figure. Ms Storey said:
“Capitalising interest on the Facility Limit of $500,000 is commercial nonsense. Eatertainment never owed $500,000 to MH&NG ...” (Outline of submissions, paragraph 10)
82Nonsensical or otherwise, in my view capitalising $24,000 is the result of the clear words of the agreement.
83As to the provisions for accrual of interest in Clause 4.2, Ms Storey contended that simple interest only should be charged. Mr McAvaney contended that the interest should be compounded on daily rest. He said:
“Daily is what we say in accordance with the proper interpretation of 4.2, save that if Your Honour’s against us it will be a simple interest rate accruing daily.” (T185, L25-28)
84In support of this proposition, Mr McAvaney took me to the document constituting a charge over the assets and undertaking of Eatertainment styled “General Security Agreement”, which provided:
“5.3Immediately upon the happening of any Event of Default:
...
(b)the Secured Money becomes immediately due and payable and the Secured Party [viz MH&NG] may demand immediate payment by the Grantor [viz Eatertainment] of the Secured Money which includes any money contingently owing to the Secured Party by the Grantor”. (CB 184)
85“Secured Money” is elaborately defined in the definition section of the charge (CB 175) in terms general enough to include interest. Clause 8.2, being the guarantee by the second and third defendants, entails them guaranteeing to MH&NG punctual performance of Eatertainment’s obligations under the Transaction Document (CB 152) which, via relatively elaborate definitions of “Transaction Documents” and “Securities” at CB 147, the definition Clause 1.2 of the loan agreement, extends to the general security charge. The effect of all this, in my view, is to effect a capitalisation of interest accrued as at the occurrence of an event of default. Interest thereafter accrues from day to day, but I am unpersuaded that the further compounding on daily rest is required by these documents.
86Provisions for compound interest are not to be regarded as per se penal or unconscionable: Jasper Nominees Limited v Kairouz and Murdaca [2023] VSC 718 [367]. Without expressing any view as to whether a regime of compounding on daily rests as contended for by Mr McAvaney would be penal, the compounding regime that I have sustained(?) would be neither penal nor unconscionable. (Though as previously noted, there has been no defence asserted by way of unconscionability.)
Indemnity costs
87Some $6,000 by way of indemnity costs has been claimed in the plaintiff’s statement of claim. There was no evidence put before me as to what those costs were, how they were incurred, or whether they properly fall within the legal concept of “indemnity costs”. When I asked Mr McAvaney what proof there was as to this item, he said, first, that the loan agreement included a certificate clause, and I could treat the letter of demand from the plaintiff’s solicitors as a “certificate”; and secondly, if that were wrong, upon publication of my rulings as upon the substantive matters in the proceeding, he would tender a certificate under the terms of the loan agreement.
88Turning first to the letter of demand, it is to be found at CB 381-386. There are separate demand letters to each of the defendants. The one to the first defendant, Eatertainment, is addressed to “The Directors”. Unsurprisingly, the letter is in the same format as the others. The letters are, as their description would suggest, demands, and not certificates. They contain neither the noun certificate nor any of the parts of the verb to certify. In so far as it is contended that these letters can be treated as certificates, I reject such contention. Likewise, I reject Mr McAvaney’s proposal to put in evidence after publication of my reasons, which ought properly to have been put in at trial, that failure to put on proper proof of a head of damage or liquidated sum sought to be recovered results in the failure of the claim: Keys Consulting Pty Ltd v CAT Enterprises Pty Ltd [2019] VSCA 136 [69]-[70] per Maxwell ACJ, Niall JA and Macaulay AJA, as he then was.
The charge clause
89Clause 8.11 of the loan facility agreement (see [16] above) constituted a charge on guarantors’ property, in particular the Croydon property (see [17] above). Mr McAvaney said as to this clause, “We seek an order for possession of the property.” (T88, L27-28) I responded, “Now, possession doesn’t normally go with a charge simplicita [sic, scil simpliciter].” (Ibid, L29-30) The remedy available to the holder of an equitable charge over real estate is judicial sale: Avco Financial Services Ltd v White [1977] VR 561, 567. The charge clause gives no right to possession. The guarantors did not, as they might have done, express their charge to be granted “as beneficial owners” so as to imply by virtue of s76 of the Property Law Act 1958 the implied covenant to be found in Part III of the Fourth Schedule to the Act as being implied into a “Conveyance by way of Mortgage by a Person who Conveys and is expressed to Convey as Beneficial Owner”. These include a right of possession for the mortgagee on default. The definitions in s18 of the Act provide that “conveyance includes a mortgage, charge, lease ...”, and the word “mortgage” is defined to include “any charge or lien on any property for securing money or money’s worth”.
90Since the charge is not a registered mortgage instrument under the Transfer of Land Act, the powers bestowed on mortgagees under the Transfer of Land Act 1958 have no application. The loan agreement is said to have been “executed as a deed ...” (CB 168) Accordingly, it may be that the power of sale provided for in s101 of the Property Law Act 1958 is implied. It is not clear, however, how this power of sale could be exercised out of court. The provisions as to sale in the Transfer of Land Act do not apply, because the charge is not a registered instrument of mortgage. Assuming, without deciding, that any power of sale implied by the Property Law Act would authorise the execution of a conveyance or transfer by MH&NG, such conveyance or transfer would not be registrable under the Transfer of Land Act 1958. Nor is there a power of attorney included in the loan agreement whereby MH&NG is appointed the chargors’ attorney either to execute a transfer to give effect to a mortgagee’s or chargee’s sale or to execute an instrument of mortgage over the Croydon property in a registrable form for the purposes of the Transfer of Land Act. It would seem, therefore, that the only remedy available to MH&NG, absent cooperation by the chargor or chargors, is by way of judicial sale.
Disposition
91I will direct the parties to bring in short minutes to give effect to these reasons.
Costs
92I have heard no submissions on the question of costs and so I will reserve them.
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