Moran v Argonaut Equity Partners Pty Ltd
[2021] WASCA 45
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
TITLE OF COURT : THE COURT OF APPEAL (WA)
CITATION: MORAN -v- ARGONAUT EQUITY PARTNERS PTY LTD [2021] WASCA 45
CORAM: BUSS P
MURPHY JA
MITCHELL JA
HEARD: 2 DECEMBER 2020 & WRITTEN SUBMISSIONS 23 DECEMBER 2020 & 28 JANUARY 2021
DELIVERED : 19 MARCH 2021
FILE NO/S: CACV 21 of 2020
BETWEEN: RUSSELL HAROLD MORAN
Appellant
AND
ARGONAUT EQUITY PARTNERS PTY LTD
First Respondent
ARGONAUT CAPITAL LIMITED
Second Respondent
ARGONAUT SECURITIES PTY LTD
Third Respondent
ON APPEAL FROM:
Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA
Coram: ALLANSON J
Citation: ARGONAUT EQUITY PARTNERS PTY LTD -v- MORAN [2020] WASC 24
File Number : CIV 3185 of 2016
Catchwords:
Equity - Penalties - Where lenders advanced money to borrower pursuant to loan agreement - Where term of loan extended by two extension letters executed as deeds - Where extension letters stipulated a default rate of interest under the extension - Whether judge erred in failing to characterise interest under extension letters as constituting a penalty - Whether interest payable under extension letters was a primary or collateral stipulation
Legislation:
Nil
Result:
Appeal dismissed
Category: B
Representation:
Counsel:
| Appellant | : | M Howard SC & L A Warnick |
| First Respondent | : | R Young |
| Second Respondent | : | R Young |
| Third Respondent | : | R Young |
Solicitors:
| Appellant | : | Law One (WA) Pty Ltd |
| First Respondent | : | Ashurst Australia |
| Second Respondent | : | Ashurst Australia |
| Third Respondent | : | Ashurst Australia |
Case(s) referred to in decision(s):
Acron Pacific Ltd v Offshore Oil NL [1985] HCA 63; (1985) 157 CLR 514
Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30; (2012) 247 CLR 205
Arab Bank Australia Ltd v Sayde Developments Pty Ltd [2016] NSWCA 328; (2016) 93 NSWLR 231
Argonaut Equity Partners Pty Ltd v Moran [2020] WASC 24
Australian Competition and Consumer Commission (ACCC) v CG Berbatis Holdings Pty Ltd [2003] HCA 18; (2003) 214 CLR 51
Black Box Control Pty Ltd v TerraVision Pty Ltd [2016] WASCA 219
Cao v Baccello Pty Ltd [2020] WASCA 82
Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447
Commissioner of Taxation of the Commonwealth of Australia v Sara Lee Household and Body Care (Australia) Pty Ltd [2000] HCA 35; (2000) 201 CLR 520
Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40
Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471
George 218 Pty Ltd v Bank of Queensland Ltd [No 2] [2016] WASCA 182; (2016) 313 FLR 287
Kay v Playup Australia Pty Ltd [2020] NSWCA 33
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104
Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28; (2016) 258 CLR 525
JUDGMENT OF THE COURT:
The first respondent, Argonaut Equity Partners Pty Ltd (AEP), as facility agent for a syndicate of lenders (which included AEP), commenced proceedings against the appellant (Mr Moran) in debt. The lending was in connection with Mr Moran's interest in Atrum Coal NL (Atrum), a company established for the purpose of acquiring and developing a coal project in British Columbia, Canada. AEP is part of a group of companies in the business of providing corporate finance services. The group includes the second and third respondents (Argonaut Capital and Argonaut Securities, respectively).
The primary judge (Allanson J) upheld the lenders' claim in debt and dismissed Mr Moran's counterclaims against AEP, Argonaut Capital and Argonaut Securities (collectively, Argonaut): Argonaut Equity Partners Pty Ltd v Moran[1] (primary decision).
[1] Argonaut Equity Partners Pty Ltd v Moran [2020] WASC 24.
Mr Moran originally appealed the primary decision on two grounds. First, he alleged that the judge erred in failing to characterise the interest provisions under certain extensions of the original loan (described below as the First Extension Letter and the Second Extension Letter) as constituting a penalty. Secondly, Mr Moran alleged that the judge erred in refusing his application to amend his pleading, on the second day of the trial, to include additional claims against Argonaut. The second ground of appeal was abandoned at the hearing of the appeal. Accordingly, the appeal concerns only the first issue (Penalty Issue).
For the reasons which follow, the appeal should be dismissed.
Background
Mr Moran's investment in Atrum and his approach to Argonaut[2]
[2] Primary decision [21] - [40].
In 2011, Mr Moran incorporated and ultimately became a founding director and equal largest founding shareholder of Atrum. The other founding shareholders were Gino D'Anna and James Chisholm. Initially, Mr Moran and Mr D'Anna were issued with a combination of fully paid ordinary shares and partly paid ordinary shares.
Atrum was listed on the Australian Stock Exchange (ASX) in July 2012. At the time of listing, Mr Moran held 16,652,500 fully paid ordinary shares, and 16,652,500 partly paid shares.
Atrum was underfunded. In late October 2013, Atrum's financial situation was dire, with approximately $3 million in outstanding invoices and no cash in the bank.
In order to raise capital, Mr Moran and Mr D'Anna sought a solution to enable them to pay up the partly paid shares, to the extent permissible at law. Mr Moran had several discussions with Mr Chisholm, one of the other founding shareholders, about paying up the partly paid shares. Mr Moran approached Blackwood Capital, and some other people, attempting to find a lender. He also approached Argonaut by contacting Mr Selby, a director of corporate finance at Argonaut Capital.
On 9 April 2014, Argonaut provided a terms sheet to Mr Moran and, on 8 May 2014, Argonaut provided a draft loan agreement to Mr Moran. Mr Moran had the draft loan agreement reviewed by solicitors who acted for Atrum. Mr Moran also asked Mr Forster of MinterEllison to review the draft loan agreement.
On 27 May 2014, Mr Moran forwarded to Mr Selby an email from Mr Forster, suggesting amendments to the draft loan agreement.
On 28 May 2014, Mr Moran told Argonaut that he did not wish to proceed. Mr Selby telephoned him and urged him to reconsider his position. Mr Moran did not allege that Mr Selby pressured him in any way.
On 4 June 2014, both Mr Moran and Mr D'Anna confirmed to Argonaut that they wished to proceed with their loans.
At the time that he applied for and obtained the loan, Mr Moran had no capacity to repay it from his own financial resources or from property, other than his shares in Atrum and two other coal companies.
The Loan Agreement[3]
[3] See, relevantly, GB 355 - 402.
On or about 11 June 2014, Mr Moran as 'Borrower', AEP as 'Facility Agent', Argonaut Securities as 'Broker' and certain named lenders (Lenders) entered into an agreement (Loan Agreement).
By cl 2 of the Loan Agreement, the Lenders agreed, in effect, to provide a 'Loan' to Mr Moran during a specified period. The word 'Loan' was defined in cl 1.1 to mean, relevantly, 'the loan drawn … by [Mr Moran] under a Drawdown Notice or, as appropriate, the principal amount outstanding for the time being of that loan'. By cl 3, Mr Moran could ask for the Loan by delivering a Drawdown Notice to AEP.
By cl 3.3, the purpose of the funding was relevantly, in effect, to enable Mr Moran (1) to finance the conversion of Mr Moran's partly paid ordinary shares in Atrum into fully paid ordinary shares, (2) to finance the purchase of shares in two other coal companies, and (3) to finance the purchase of any other shares in Atrum. Clause 3.3 also provided that, for the avoidance of doubt, the Loan was not to be used for personal, domestic or residential property investment purposes.
Clause 4 provided:
4.INTEREST
4.1No Interest
The Loan does not accrue interest.
4.2Default Interest
(a)The Borrower must pay Interest on each amount that is not paid when due, from (and including) the day on which it falls due to (but excluding) the day on which it is paid in full at the rate calculated in accordance with clause 4.2(b). This Interest must be paid on demand.
(b)Interest on an unpaid amount accrues each day at the Default Rate and is capitalised (if not paid) on the last day of each calendar month.
(c)This subclause does not affect the Borrower's obligation to pay each amount under this document when it is due.
4.3Interest after judgment
If a liability of the Borrower becomes merged in a judgment or order, the Borrower, as an independent obligation, must pay Interest on the amount of that liability, from (and including) the date of the judgment or order until it is paid in full, at the higher rate that applies under the judgment or order and the rate calculated in accordance with clause 4.2.
4.4Accrual and calculation of Interest
Interest under this clause:
(a)accrues daily; and
(b)is calculated monthly on the basis of the actual number of days on which Interest has accrued and of a 365 day year. (emphasis added)
Clause 1.1 defined 'Default Rate' to mean '5% per month'.
Clause 5 also provided that Mr Moran was liable for the payment of certain fees, in addition to the other money payable by Mr Moran under the Loan Agreement.
Clause 6.1 relevantly provided, in effect, that Mr Moran must pay the 'Termination Payment' on a stipulated date. The Termination Payment comprised, in effect, (1) the Principal Outstanding,[4] (2) any accrued but unpaid default interest under cl 4, (3) all other amounts then outstanding but unpaid under the 'Transaction Documents',[5] and (4) the Premium (defined in cl 1.1 to mean $900,000).
[4] The term 'Principal Outstanding' was defined by cl 1.1 to mean, on any day, the aggregate of the total principal amount of the Loan outstanding on that day.
[5] The term 'Transaction Documents' was defined in cl 1.1 to include, relevantly, the 'Security Trust Deed', the 'Specific Security Deed' and the 'Deed of New Undertaking'.
The stipulated date for payment was the 'Termination Date', defined in cl 1.1 to mean 31 July 2014 or, if extended by Mr Moran in accordance with cl 6.2, the later of (1) 31 October 2014, or (2) six months from the Drawdown Date. Clause 6.2 contained a procedure for Mr Moran to extend the Termination Date, which was in effect subject to the conditions in sch 3 being satisfied - relevantly (1) Mr Moran entering into the 'Specific Security Deed' granting AEP as the 'Security Trustee' a first‑ranking security interest over 20 million shares in Atrum, and (2) there being no Event of Default or Potential Event of Default.
The Drawdown Notice - 11 June 2014
On or about 11 June 2014, Mr Moran issued a Drawdown Notice and borrowed $6 million from the Lenders. Mr Moran used only approximately $2.86 million for an approved purpose under cl 3.3 of the Loan Agreement.[6] AEP and the Lenders only became aware of that breach of the Loan Agreement by Mr Moran in early June 2015.[7]
Transaction Documents
[6] Primary decision [48].
[7] Primary decision [85].
By cl 1.1 of the Loan Agreement, the 'Transaction Documents' were defined to include, relevantly, the Loan Agreement, the Security Trust Deed, the Specific Security Deed, the Deed of Undertaking and 'any document or agreement that amends, supplements, replaces or novates any of the above'. Also by cl 1.1 of the Loan Agreement, the term 'Finance Parties' was defined to mean the Facility Agent (AEP), the Security Trustee (AEP) and each Lender.
On or about 29 July 2014:[8]
(a)Mr Moran and AEP (in its capacity as Security Trustee) entered into the 'Specific Security Deed';
(b)Mr Moran, the Lenders and AEP (in its capacity as Security Trustee) entered into the 'Security Trust Deed'; and
(c)Mr Moran, AEP (in its capacity as Security Trustee) and Argonaut Securities entered into the 'Deed of Undertaking'.
Extension of Termination Date - 29 July 2014
[8] Primary decision [49].
On or about 29 July 2014, Mr Moran exercised the option under the Loan Agreement to extend the Termination Date until 11 December 2014.[9]
Deed of Amendment and Transfer - 11 December 2014[10]
[9] Primary decision [50].
[10] See, relevantly, GB 257 - 272.
On or about 11 December 2014, Mr Moran, the Lenders, AEP (in its capacity as Facility Agent and Security Trustee) and Argonaut Securities (as Broker) entered into a Deed of Amendment and Transfer.[11] By cl 2.1 of the deed, the parties amended and restated the Loan Agreement in terms of Annexure A to the deed (Amended and Restated Loan Agreement), with effect on and from 11 December 2014.
Amended and Restated Loan Agreement - 11 December 2014[12]
[11] Primary decision [64].
[12] See, relevantly, GB 273 - 328.
Under the Amended and Restated Loan Agreement, the term 'Loan' was (again) relevantly defined in cl 1.1 to mean, 'the loan drawn … by [Mr Moran] under a Drawdown Notice or, as appropriate, the principal amount outstanding for the time being of that loan'. On or about 11 December 2014, the amount owed by Mr Moran under the Loan Agreement ($6,900,000) became the principal amount owing under the Amended and Restated Loan Agreement.[13]
[13] Primary decision [68].
Amendments to the Loan Agreement effected by the Amended and Restated Loan Agreement included:
1.The Termination Date was extended to 11 June 2015 (cl 1.1, cl 6.1).
2.Interest was payable on the Loan and was to accrue from and including 11 December 2014 to the day the Loan was repaid at the rate of (i) 25% per annum until 11 March 2015; and (ii) 30% per annum thereafter (cl 4.1).
Clauses 4.2, 4.3 and 4.4 of the Amended and Restated Loan Agreement were in the same terms as cl 4.2, cl 4.3 and cl 4.4 of the Loan Agreement (see [17] above). Thus, relevantly, interest was also payable on demand at the 'Default Rate' (as defined) on any amounts due but not paid under the Amended and Restated Loan Agreement, until repayment was made (cl 4.2).
Clause 6.1 of the Amended and Restated Loan Agreement relevantly provided, in effect, that on the Termination Date, Mr Moran must pay the 'Termination Payment', comprising the Principal Outstanding and any accrued but unpaid interest under cl 4, and all other amounts then outstanding but unpaid under each Transaction Document.
By cl 10.1(a) of the Amended and Restated Loan Agreement, it was an 'Event of Default' if Mr Moran failed to pay any amount due and payable under a Transaction Document (including the Amended and Restated Loan Agreement) within three business days of its due date.
Further, by cl 10.1(h) of the Amended and Restated Loan Agreement, it was an Event of Default if Atrum's shares ceased to be listed and traded on the ASX for more than 10 consecutive business days.
Clause 10.2 provided, amongst other things, that if an Event of Default occurred and was continuing, the Finance Parties could exercise their rights under any Security in accordance with the terms of such Security.
Amendment of Specific Security Deed - 11 December 2014
The Specific Security Deed was also amended on 11 December 2014 so that AEP (in its capacity as Security Trustee) had a fixed charge over 24 million ordinary shares in Atrum held by Mr Moran.[14]
Atrum trading halt - 4 June 2015
[14] Primary decision [66].
On 4 June 2015, Atrum announced to the ASX a voluntary trading halt in its shares. On 9 June 2015, Atrum's shares were suspended from trading on the ASX.[15]
Mr Moran's letter seeking an extension - 10 June 2015
[15] Primary decision [74].
By letter dated 10 June 2015, Mr Moran, through his solicitors, sought a seven‑day extension of the Loan Termination Date, from 11 June 2015 to 18 June 2015. The request was put on the basis that Mr Moran wished to enable other refinancing options with another party, FIIG Securities (FIIG), to be progressed 'without [Mr Moran] being in a position where the current loan becomes overdue'.[16]
First Extension Letter - 11 June 2015[17]
[16] Primary decision [79].
[17] GB 480 - 484.
On 11 June 2015, AEP (in its capacity as Facility Agent) wrote a letter to Mr Moran (First Extension Letter). Paragraph 1 of the First Extension Letter stated, in effect, that under the Amended and Restated Loan Agreement, the Principal Outstanding on 11 June 2015 was $6.9 million, and that the accrued but unpaid interest under cl 4.1 was $947,095.38. It was accepted (correctly) by the parties in this appeal that this reference to interest was a reference to cl 4.1 interest under the Amended and Restated Loan Agreement (referred to at [28(2)] above), and not a reference to Default Rate interest under cl 4.2.[18]
[18] Appeal ts 2 - 3, 11.
These sums (totalling approximately $7.8 million) were together referred to as the 'Payment Obligation'. Paragraph 1 also stated that Mr Moran had indicated that he was unable to satisfy the 'Payment Obligation' on the Termination Date of 11 June 2015 and had requested a seven‑day extension of time.
Paragraph 2 of the First Extension Letter stated that the Lenders agreed to extend the date for satisfaction of the Payment Obligation from 11 June 2015 to 18 June 2015, subject to the terms of the letter.
By par 3.1 of the First Extension Letter, the terms of this extension included:
1.an acknowledgement by Mr Moran that the Payment Obligation was a debt owing to the Finance Parties, which, but for the extension, would be due and payable on 11 June 2015;
2.a requirement that Mr Moran satisfy the Payment Obligation in full on the Extended Date (ie, 18 June 2015);
3.an agreement by Mr Moran that a failure to satisfy the Payment Obligation in full would constitute an immediate Event of Default, entitling the Finance Parties to enforce the security and any other rights under the Transaction Documents without notice; and
4.an acknowledgment that the above terms applied despite any other term of a Transaction Document, including 10.1(a) of the Amended and Restated Loan Agreement.
Paragraph 3.2 of the First Extension Letter provided:
3.2Interest rate
[Mr Moran] agrees that [he] will be liable for interest at the Default Rate on the Payment Obligation (to the extent it remains unpaid) from and including 11 June 2015 to the date it is paid (and otherwise in accordance with clause 4.2 of the Loan Agreement). This paragraph applies despite the extension under paragraph 2, or any other term of a Finance Document to the contrary.
The term 'Default Rate' was again defined to mean '5% per month'.[19]
[19] See par 2 of the First Extension Letter and the definition of 'Default Rate' in cl 1.1 of the Amended and Restated Loan Agreement.
Paragraph 3.3 provided, in effect, that (1) Mr Moran would provide the Finance Parties with regular updates regarding the refinancing being sought by Mr Moran from another financier, FIIG, (2) Mr Moran would promptly provide any information requested by any Finance Party in connection with that refinancing, and (3) any Finance Party could discuss the refinancing with FIIG and could provide information requested by FIIG in connection with the refinancing.
By par 4.1(b) and (c) of the First Extension Letter, it was agreed, in effect, that save to the extent otherwise provided in the First Extension Letter, the Transaction Documents (including the Amended and Restated Loan Agreement) continued to have full force and effect in accordance with their terms. By par 4.1(e), if an Event of Default arose (other than that which would have arisen but for the extension of time under par 2), the Finance Parties could immediately exercise their rights in respect of that Event of Default.
The First Extension Letter was executed as a deed.[20]
Mr Moran's request for a further extension - 17 June 2015
[20] Primary decision [84].
On 17 or 18 June 2015, Argonaut was advised by FIIG that it would not proceed with the refinancing of Mr Moran's Loan.[21]
[21] Primary decision [87].
On 17 June 2015, Mr Moran's solicitors wrote to Argonaut to request a further extension of the Termination Date to 30 June 2015, to enable Mr Moran to finalise the proposed refinancing without being in a position where the current loan became overdue.[22]
Second Extension Letter - 18 June 2015[23]
[22] Primary decision [88].
[23] GB 343 - 348.
On 18 June 2015, AEP replied by way of letter (Second Extension Letter), offering Mr Moran a further extension to 17 July 2015.
Paragraph 1 of the Second Extension Letter recorded, in effect, that:
1.under the Amended and Restated Loan Agreement, Mr Moran was required to pay the Payment Obligation by 11 June 2015;
2.under the First Extension Letter, the date for payment of the Payment Obligation was extended from 11 June 2015 to 18 June 2015;
3.by par 3.2 of the First Extension Letter, interest on the Payment Obligation accrued at the Default Rate;
4.as at 18 June 2015, the interest due under par 3.2 of the First Extension Letter was $88,956; and
5.Mr Moran had indicated that he was unable to satisfy the Payment Obligation and accrued interest on 18 June 2015, and had requested a further extension to 17 July 2015.
Paragraph 1 of the letter also stated, in effect, that Mr Moran had informed AEP that:
1.he was proposing to sell sufficient shares in Atrum to pay all amounts owing by the Extended Date (sell down);
2.at or about the same time as the sell down, Atrum was proposing to undertake a capital raising;
3.the shares in Atrum were suspended pending the completion of the capital raising; and
4.he was requesting a waiver of the Event of Default that would arise under cl 10.1(h) of the Amended and Restated Loan Agreement in respect of the period until and including the Extended Date.
By par 2 of the Second Extension Letter, the Lenders agreed, subject to and conditional on the other terms in the letter to (1) extend the date for satisfaction of the Payment Obligation and the accrued interest under par 3.2 of the First Extension Letter from 18 June 2015 to 17 July 2015 (Extended Date) and (2) waive an Event of Default that would arise under cl 10.1(h) of the Amended and Restated Loan Agreement if the ordinary shares of Atrum remained suspended from trading on the ASX until and including the Extended Date.
By par 3.1 of the Second Extension Letter, the terms of this extension included:
1.an acknowledgement by Mr Moran that the Payment Obligation and accrued interest at the Default Rate under par 3.2 of the First Extension Letter were debts owing to the Finance Parties, which, but for the extension under par 2 of the Second Extension Letter, (1) would be due and payable on 18 June 2015, and (2) non‑payment of these debts on or before 18 June 2015 would constitute an Event of Default;
2.a requirement that Mr Moran satisfy the Payment Obligation and accrued interest at the Default Rate under par 3.2 of the Second Extension Letter in full on the Extended Date (ie, 17 July 2015);
3.an agreement by Mr Moran that a failure to satisfy the Payment Obligation and accrued interest at the Default Rate under par 3.2 of the Second Extension Letter in full would constitute an immediate Event of Default, entitling the Finance Parties to enforce the security and any other rights under the Transaction Documents without notice;
4.an agreement by Mr Moran that, in addition to those set out in cl 10(1) of the Amended and Restated Loan Agreement, an immediate Event of Default would also occur where (1) if, after 18 June 2015 and prior to Mr Moran satisfying all amounts owing under the Transaction Documents, Atrum's ordinary shares ceased to be suspended from trading on the ASX and the share price subsequently fell below $1.00 per share, or (2) if AEP (in its capacity as Facility Agent) considered that the sell down and (if applicable) refinancing was either not being diligently pursued, or was unlikely to raise sufficient funds to allow Mr Moran to pay all amounts owing under the Transaction Documents by the Extended Date; and
5.an acknowledgement that the above terms applied despite any other term of a Transaction Document, including cl 10.1(a) and cl 10.2 of the Amended and Restated Loan Agreement.
Paragraph 3.2 of the Second Extension Letter provided:[24]
3.2Interest rate
[Mr Moran] agrees that [he] will be liable for interest at the Default Rate on the Payment Obligation (to the extent it remains unpaid) from and including 11 June 2015 to the date it is paid (and otherwise in accordance with clause 4.2 of the Loan Agreement). This paragraph applies despite the extension under paragraph 2, or any other term of a Finance Document to the contrary.
[24] Primary decision [91].
Again, the 'Default Rate' was defined to mean '5% per month'.[25]
[25] See par 2 of the Second Extension Letter and the definition of 'Default Rate' in cl 1.1 of the Amended and Restated Loan Agreement.
The Second Extension Letter also contained, in par 4.1, a term to the effect that, save to the extent otherwise provided in the Second Extension Letter, the Transaction Documents (including the Amended and Restated Loan Agreement) continued to have full force and effect in accordance with their terms.
On 18 June 2015, Mr Moran executed the Second Extension Letter as a deed.[26]
Event of Default - 18 July 2015[27]
[26] Primary decision [92].
[27] Primary decision [101] - [102].
On or about 18 July 2015, Mr Moran committed an Event of Default by failing to pay the Payment Obligation due and payable under the Second Extension Letter by 17 July 2015.
On or about 18 July 2015, AEP sent a notice of default.
Continuing default and enforcement of Security Interest - 2016[28]
[28] Primary decision [108] - [118].
On 6 May 2016, AEP sent a notice of ongoing default to Mr Moran and demanded that he provide additional security to ensure that the Loan to Value Ratio was 58% or less.[29] Mr Moran told AEP that additional security would not be forthcoming.
[29] Both cl 6.6 of the Loan Agreement and cl 6.6 of the Amended and Restated Loan Agreement provided, in effect, that if the Loan to Value Ratio is greater than 58%, Mr Moran must provide additional security or prepay sufficient part of the Loan to bring the ratio back to 58% or less: GB 290, 369.
In September and November 2016, AEP sent to Mr Moran notices of ongoing default which were disputed by Mr Moran's solicitors.
On 9 December 2016, the Lenders gave instructions to enforce the security over Mr Moran's shares. On or about 16 December 2016, AEP enforced its security interest by selling 24 million shares in Atrum through a block sell down executed on the ASX.
The judge's findings on the Penalty Issue
AEP did not contend at trial that the doctrine of penalties was not 'engaged' by cl 4.2 of the Loan Agreement or the Amended and Restated Loan Agreement, and the judge made no findings on that topic. AEP contended that it was not seeking repayment under either of those instruments, but, rather, was seeking repayment under the Extension Letters. Accordingly, AEP conducted its case at trial on the basis that it was unnecessary for the judge to determine whether the provision for Default Rate interest under cl 4.2 of the Loan Agreement or the Amended and Restated Loan Agreement was a penalty.[30]
[30] Argonaut Parties' Outline of Opening Submissions, par 68, BB 136 - 137; appeal ts 24, 36.
In this context, the judge dealt with the Penalty Issue as follows: [31]
[31] Primary decision [139] - [148].
The plaintiff's submissions
The primary submission on behalf of AEP was that it was entitled to recover interest at the rate specified in the Extension Letters. AEP submitted that although it was described as the Default Rate, interest at 5% per month was not payable upon failure of to meet the primary obligation, but was part of the primary obligation. It does not come within the penalties doctrine.
[Mr Moran's] submissions
[Mr Moran's] defence focused on the rate of interest being described as the 'Default Rate' and calculating as an annualised interest rate of 79.58%. The defence submitted that it is not a genuine pre-estimate of the loss from default on the loan, or of the cost to the Lenders of being kept out of the money loaned. The defence further submitted that there was no evidence as to how the rate was calculated and, the rate being prima facie a penalty, there was an evidential onus on AEP (on behalf of the Lenders) to prove it was a genuine pre-estimate of their loss.
The defence further submitted that the First Extension Letter and Second Extension Letter were not new agreements, but extensions of the Loan Agreement, so that the 'default' interest rate was not in fact a primary obligation.
Determination
The essence of a penalty is that it is a collateral stipulation, a detriment imposed on a contracting party in the event that it does not observe the principal stipulation.
In Andrews v ANZ Banking Group Ltd the Court 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 an 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.'
Whether a sum or rate stipulated is a penalty is a question of construction 'to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach'.
I have earlier set out the material terms of the Extension Letters. In substance, the obligation on Mr Moran to pay the principal sum and accrued interest was extended to the Extended Date. In consideration of that extension he acknowledged and agreed that the Payment Obligation and accrued interest to date was a debt owed and, but for the extension, would be due and payable; and he agreed to satisfy that debt on the Extended Date. Interest was payable at the 'Default Rate' from the date of the first Extension Letter to the date the Payment Obligation was paid, despite the extension.
Each Extension Letter was a new and separate agreement. As a matter of construction, the payment of interest at the rate of 5% per month was a primary stipulation in the agreement, payable independently of the obligation to observe any other contractual obligation.
Had the agreements in each Extension Letter not been made, interest at that rate would have been payable in default under the Loan Agreement. That does not, however, alter the character of the interest obligation in each of the fresh agreements made by each Extension Letter.
For that reason, the question of a penalty does not arise.
The ground of appeal
By his ground of appeal, Mr Moran alleges:[32]
1.The primary judge erred in law in holding that the penalty doctrine was not engaged because the interest payment provisions in the Extension Letters were primary stipulations and not collateral stipulations. The primary judge should have held that these provisions were in substance collateral stipulations arising upon breach of the Loan Agreement, and proceeded to determine whether the provisions were penal in nature.
[32] WB 5.
Parties' submissions
The parties approached the appeal on the basis that Mr Moran's invocation of the penalty doctrine in defence of the Lenders' claim in debt encompassed two stages - first, whether the penalty doctrine was capable of being 'engaged' (the first question) and, secondly, if so, whether the obligation to pay the Default Rate interest was 'punitive' in nature (the second question). It was common ground that this appeal only raised the first question and not the second question and that, if the appeal were allowed, the matter would need to be remitted for a trial on the second question as to whether the Default Rate interest was 'punitive'.[33] Moreover, AEP did not contend that the provision for Default Rate interest under cl 4.2 of the Amended and Restated Loan Agreement did not 'engage' the penalty doctrine. Rather, AEP invited the court (without prejudice to its contention that the rate was not 'punitive') to assume that, even if cl 4.2 of the Amended and Restated Loan Agreement were 'engaged', the obligation to pay Default Rate interest under par 3.2 of the Extension Letters did not engage the penalty doctrine.[34]
Mr Moran's submissions
[33] Appeal ts 4, 6 - 7, 21, 23, 25, 37.
[34] Respondents' further written submissions filed 28 January 2021, pars 2 - 4, 7 - 8, 26 - 27; appeal ts 36.
Mr Moran submitted that whether a stipulation engages the penalty doctrine involves consideration of the substantive effect of the
stipulation, not just its immediate form and context. A stipulation prima facie imposes a penalty on one party (the first party) if, as a matter of substance, it is collateral (or accessory) to the primary stipulation in favour of the second party, and this collateral stipulation, upon the failure of the primary stipulation, imposes upon the first party an additional detriment (ie, the penalty) to the benefit of the second party.[35]
[35] Appellant's written submissions, pars 2 - 4; WB 6 - 7. Reference was made to Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104 [46] - [47]; Acron Pacific Ltd v Offshore Oil NL [1985] HCA 63; (1985) 157 CLR 514, 520 cited in Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30; (2012) 247 CLR 205.
Mr Moran submitted that the judge's finding at [146] of the primary decision that each Extension Letter was a new and separate agreement adopts 'an artificial and excessively narrow view' of the substance and effect of the Extension Letters.[36]
[36] Appellant's written submissions, par 7; WB 8.
Mr Moran contended that the Extension Letters were incremental to the Loan Agreement and formed part of a single contractual arrangement consisting of the Loan Agreement as varied by the Extension Letters. The Extension Letters extended the date for meeting the Payment Obligation which had the effect of not enforcing the original breach. He submitted that the Extension Letters 'preserved and continued the collateral obligation (to pay [Default Interest]) arising upon the breach of the primary obligation (failure to satisfy the Payment Obligation when it originally fell due), while agreeing to "extend" the date for meeting the Payment Obligation'. He submitted:[37]
In substance, the agreement to 'extend' was an agreement not to enforce the original breach; but the collateral [Default Interest] stipulation, which had come into effect upon the original breach, remained in full force and effect.
[37] Appellant's written submissions, pars 6 - 8; WB 7 - 8.
Mr Moran also submitted that the Extension Letters 'carry into effect', or 'bring into effect' or 'implement', as a matter of substance, cl 4.2 of the Amended and Restated Loan Agreement.[38]
[38] Appeal ts 14, 18, 39.
Accordingly, the judge should have found that the interest payment provisions in the Extension Letters were collateral stipulations and that the penalty doctrine was engaged.[39]
[39] Appellant's written submissions, pars 9 - 10; WB 8.
Mr Moran did not contend that par 3.2 of the Extension Letters, by itself, engaged the doctrine of penalties; rather, he submitted it did so only insofar as it imposed, or restated the imposition of, cl 4.2 of the Amended and Restated Loan Agreement.[40]
AEP's submissions
[40] Appellant's further written submissions filed 23 December 2020, pars 12, 23; appeal ts 38 - 39.
AEP submitted, in effect, that the judge correctly found that, as a matter of substance, the interest provisions contained in par 3.2 of each Extension Letter were primary stipulations because:[41]
1.Paragraph 3.2 was consideration for the extension of the Loan Agreement. Unlike the (original) Loan Agreement which allowed for an extension of the termination date if certain conditions precedent were met by Mr Moran, the Amended and Restated Loan Agreement and the First Extension Letter did not oblige the Lenders to extend the repayment date.[42]
2.Paragraph 3.2 had the effect that interest was not payable upon default of the payment obligation or any other obligation under the Loan Agreement. Instead, it was a primary obligation that was payable by force of the interest provision alone and from the date of the First Extension Letter.[43]
[41] Respondents' written submissions, par 33; WB 26 - 27.
[42] Respondents' written submissions, pars 43 - 46; WB 28.
[43] Respondents' written submissions, pars 47 - 51; WB 29 - 30.
AEP also submitted that, contrary to Mr Moran's written submissions, the collateral 'Default Interest' stipulation had not come into effect at all. That was because the Extension Letters had the effect of extending the date of default such that, prior to 17 July 2015, Mr Moran was not in default.[44] Further, the reference in par 3.2 of the Extension Letters to interest at the 'Default Rate' is of no significance when the substance of the interest provisions is considered.[45] Therefore, the interest provisions were primary stipulations and the judge correctly found that the penalties doctrine could not be engaged.[46]
[44] Respondents' written submissions, par 50; WB 29.
[45] Respondents' written submissions, par 51; WB 29 - 30.
[46] Respondents' written submissions, par 52; WB 30.
Disposition
These reasons will deal with the disposition of the appeal consistently with the parties' approach to the resolution of the appeal (see [65] above). Accordingly, these reasons will proceed on the basis (without deciding) that cl 4.2 of the Amended and Restated Loan Agreement 'engaged' the doctrine of penalties, but without assuming that cl 4.2 is 'punitive'.
For ease of exposition, and in accordance with the above assumptions, the notion that cl 4.2 of the Amended and Restated Loan Agreement 'engaged' the doctrine of penalties will be referred to in these reasons as the 'prima facie penalty obligation under cl 4.2' of the Amended and Restated Loan Agreement. Success for Mr Moran in this appeal depends on the acceptance of his contention that, as a matter of substance, the First and Second Extension Letters gave effect to, brought into effect, or implemented, the prima facie penalty obligation under cl 4.2 of the Amended and Restated Loan Agreement, thereby indelibly stamping the interest provisions in the Extension Letters as prima facie penalty obligations.
Principles
In Andrews v Australia and New Zealand Banking Group Ltd,[47] the High Court said:[48]
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.
[47] Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30; (2012) 247 CLR 205 [10].
[48] Andrews [10].
In Paciocco v Australia and New Zealand Banking Group Ltd,[49] Kiefel J (as her Honour then was) (French CJ agreeing) observed that threats and punishment were regarded as the essential characteristics of a penalty. A sum stipulated to be paid on default, 'which amounted to a threat to the person obliged to pay if the principal obligation was not performed, bore the character of a penalty, as did a sum stipulated to be paid which could not be accounted for other than as a punishment for default'.[50] Her Honour also said that a sum may not be stipulated for payment on default if it is stipulated 'as a threat over the person obliged to perform', or where the 'purpose and effect of requiring payment is to punish the defaulting party'.[51]
[49] Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28; (2016) 258 CLR 525.
[50] Paciocco [17].
[51] Paciocco [32]. See also Paciocco [158] ‑ [160] (Gageler J), [253] (Keane J).
The essence of a penalty, in circumstances such as those in this case, is that it is a collateral stipulation, the purpose of which (or at least, a predominant purpose of which) is to punish the borrower for breach, and thus to compel performance.[52]
[52] Arab Bank Australia Ltd v Sayde Developments Pty Ltd [2016] NSWCA 328; (2016) 93 NSWLR 231 [74]; Kay v Playup Australia Pty Ltd [2020] NSWCA 33 [94].
The question of whether the provisions of an agreement impose a penalty must be determined as a matter of substance, rather than mere form.[53]
Analysis
[53] Acron Pacific (520); Andrews [10].
Money had originally been advanced by the Lenders under the Loan Agreement on 11 June 2014. Money under the Loan Agreement was repayable on the Termination Date, 31 July 2014, unless extended by Mr Moran in accordance with cl 6.2 of the Loan Agreement. An extension was dependent upon (relevantly) the provision of security over 20 million shares in Atrum. Following Mr Moran's extension under cl 6.2 of the Loan Agreement, the Termination Date was extended to 11 December 2014.
Mr Moran did not pay the Termination Payment under the Loan Agreement by that date. Rather, Mr Moran sought and obtained an extension of time for repayment, for which provision was made under the Amended and Restated Loan Agreement. The terms of the Amended and Restated Loan Agreement included an extension to 11 June 2015 and a requirement to pay interest during the extended period at the rates specified in cl 4.1 of the Amended and Restated Loan Agreement.
On 11 June 2015, Mr Moran sought and obtained a further extension of time for repayment on the terms of the First Extension Letter. He was not contractually entitled to any further extension at this stage. The First Extension Letter constituted a variation to the Amended and Restated Loan Agreement. It was a further contract between the parties.[54] It imposed additional and different rights and obligations from those in the Amended and Restated Loan Agreement. It was executed as a deed, but was not a deed unsupported by consideration which merely acknowledged and restated the obligation under the Amended and Restated Loan Agreement to pay cl 4.2 interest upon default under that agreement.
[54] Commissioner of Taxation of the Commonwealth of Australia v Sara Lee Household and Body Care (Australia) Pty Ltd [2000] HCA 35; (2000) 201 CLR 520 [22].
The First Extension Letter extended the date for satisfaction of the Payment Obligation from 11 June 2015 (the Termination Date under the Amended and Restated Loan Agreement) to 18 June 2015. The result was that there was relevantly, on 11 June 2015, (1) no amount 'not paid when due' within the meaning of cl 4.2 of the Amended and Restated Loan Agreement, and (2) no failure to pay an amount 'due and payable' for the purposes of cl 10.1 and cl 10.2 of the Amended and Restated Loan Agreement, in respect of Events of Default and the enforcement of Security.
By par 3.2 of the First Extension Letter, the parties agreed that interest would accrue on the acknowledged debt at the 'Default Rate' until payment in full. Whilst the rate agreed was referred to as the 'Default Rate', this was a term defined to mean '5% per month', which was to be read into the operative provision in par 3.2 of the First Extension Letter.[55]
[55] Black Box Control Pty Ltd v TerraVision Pty Ltd [2016] WASCA 219 [42(11)]; George 218 Pty Ltd v Bank of Queensland Ltd [No 2] [2016] WASCA 182; (2016) 313 FLR 287 [82]; Cao v Baccello Pty Ltd [2020] WASCA 82 [73].
The interest chargeable on the Payment Obligation under par 3.2 of the First Extension Letter was a separate obligation, which was payable on the capital amount designated as the Payment Obligation under par 1(a) of the First Extension Letter. The interest obligation under par 3.2 of the First Extension Letter did not arise on default of payment of the Payment Obligation, and was not an 'additional'[56] detriment to Mr Moran imposed on him upon his failure to pay the Payment Obligation by 18 June 2015. The payment of interest under par 3.2 did not result in the avoidance of liability for the payment of the Payment Obligation.
[56] Andrews [10].
The interest provision in par 3.2 of the First Extension Letter was not, in substance, a 'security for' or 'in terrorem of'[57] the stipulation to pay the Payment Obligation by 18 June 2015.
[57] Andrews [10]; Paciocco [158].
The Second Extension Letter, under which AEP's claim in debt was ultimately made, was a variation of the Amended and Restated Loan Agreement as amended by the First Extension Letter. It, too, was a further contract between the parties, imposing different and additional obligations and rights from those imposed by the earlier contractual iterations between the parties. It provided for a further and lengthier extension for repayment - until 17 July 2015, subject to specified conditions. The substance of the observations in [83] ‑ [87] above apply equally to the terms of the Second Extension Letter.
As a matter of substance, the First and Second Extension Letters provided for the grant of new rights, additional to and different from those provided for in the Amended and Restated Loan Agreement. The First and Second Extension Letters provided for extensions of the time at which Mr Moran's payment obligation arose, which AEP was not obliged to grant. The price for AEP to do so was Mr Moran's agreement to pay interest at 5% per month from 11 June 2015. The price may be regarded as high. The prospect of an impending default under the Amended and Restated Loan Agreement, and the impact which such a default might have on Mr Moran's refinancing attempts, doubtlessly placed Mr Moran under commercial pressure to obtain the extensions. However, Mr Moran, through his solicitors, had requested the extensions. It was a matter for Mr Moran's commercial judgment as to whether the price for obtaining the extensions was too high. It was not suggested that the Extension Letters were shams. There was no claim that the Extension Letters were void or ought to be avoided on the grounds of economic duress[58] or unconscionable conduct.[59] Having executed the Extension Letters, Mr Moran was bound by them unless and until they were set aside.[60] The important point for present purposes is then that, as a matter of substance, Mr Moran's obligation to pay 5% interest per month was the contractual price for obtaining new rights conferred by the First and Second Extension Letters, rather than a consequence of any breach of the terms on which those rights were conferred.
[58] See, eg, Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40.
[59] See, eg, Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447; cf Australian Competition and Consumer Commission (ACCC) v CG Berbatis Holdings Pty Ltd [2003] HCA 18; (2003) 214 CLR 51.
[60] Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471 [32] - [33].
Whilst it is correct that the question of whether the provisions imposed a penalty must be determined as a matter of substance rather than mere form, Mr Moran's submissions, in purporting to look beyond form, have, in our opinion, overlooked the substance of the variation contracts constituted by the Extension Letters. Mr Moran's submissions involve not characterising, but disregarding, the contractual relationship between the parties.
Conclusion
The appeal should be dismissed.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
DM
Associate to the Honourable Justice Murphy
19 MARCH 2021
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