National Australia Bank v Lekakis and Anor No. Scciv-03-772

NATIONAL AUSTRALIA BANK v LEKAKIS & ANOR
[2003] SASC 360

JUDGE BURLEY. The plaintiff claims to be entitled to an order for possession of a property belonging to the defendants, which is the subject of mortgages to the plaintiff given by the defendants to secure a loan made by the plaintiff to the defendants. The claim is based on a breach of the terms of the mortgages, namely, failure to repay the mortgage debt.
The plaintiff has brought the application pursuant to Part XVII of the Real Property Act. Proceedings brought pursuant to Part XVII are summary in nature and are only capable of being resorted to when the matters in dispute between the parties are capable of determination in a summary way. The application proceeds by way of affidavit rather than by pleadings. If a defendant contends that the plaintiff is not entitled to an order for possession and raises matters which are only capable of determination by a trial as opposed to a summary hearing, the Court normally gives a direction that the action continue on pleadings: cf Corporation of the Town of Moonta v Rodgers (1980) 26 SASR 143 at 160. Before that can occur, the Court must be satisfied that the nature of the dispute between the parties is such that it cannot be determined in a summary way.
In this matter, the defendants have filed a pleading referred to as a defence, set-off and counterclaim without first having obtained the Court’s permission to do so. The pleading is, in reality, a counterclaim because the defendants have not sought to plead that the mortgages were not executed or that the mortgage debt has been repaid. Instead, the defendants say that the mortgages are void. Nor has an adequate set-off been pleaded.
Prior to the filing of the counterclaim, no argument was presented by the defendants justifying a resort to pleadings. However, the plaintiff has taken no point about the filing of the pleading without leave. Rather, the plaintiff has argued that the counterclaim does not raise any issues which preclude the plaintiff from obtaining an order for possession pursuant to its security.
It is not in dispute that the defendants are in arrears in respect of the various loans made to them, nor has it been argued that there is any technical defect in relation to the summary proceedings brought by the plaintiff, such as a failure to comply with, for example, Section 55A of the Law of Property Act, compliance with which is a necessary precursor to the bringing of an application under Part XVII of the Real Property Act. Consequently, at the hearing before me on 11 and 12 August 2003, argument was directed to whether or not the counterclaim raised arguable matters which, if made out by the defendants, would preclude the plaintiff from obtaining an order for possession. The argument advanced by the plaintiff in support of its claim was the same as the argument which a litigant may put when it is considered that the pleading of the opposing party discloses no arguable basis of defence and set-off or, in the case of a counterclaim, no arguable cause of action. It was for this reason that the plaintiff accepted, merely for the purposes of the hearing before me, that the factual assertions made in the counterclaim were correct. Mr Williams, counsel for the plaintiff, also accepted that, if the defendants were able, by reference to the factual assertions referred to in the pleading, to establish that triable issues arose which were not capable of summary determination, the action would have to proceed to trial on pleadings.
It is convenient at this stage to summarise the content of the counterclaim. As at January 1999, the defendants were the registered proprietors of four Crown Lease properties, a property referred to as “Section 730 land”, and land referred to as “the Loxton land”. Three of the Crown Lease blocks of land are referred to in the pleadings as “fruit blocks”.
As at October 1997, two of the Crown Lease properties were valued respectively at $210,000 and $267,000. As at December 1998, it appears from paragraph 8 of the pleading, although it is not clear, that other properties had a combined value of $640,000.
Prior to 25 January 1999, the defendants had obtained all of their banking finance from Westpac Banking Corporation. On 25 January 1999, the plaintiff lent to the defendants $500,000. Two properties were mortgaged to the bank as security for that loan. The loan agreement provided for annual repayments of $60,000, the first of which was due on 30 November 1999. In July 1999, the plaintiff agreed to defer that repayment to 31 March 2000.
In paragraph 13 of the pleading, the defendants assert that in April 2000 the plaintiff was aware that the defendants could not make the $60,000 repayment due on 31 March 2000, and agreed to provide a short-term interest only loan of $60,000 to cover that repayment.
Mr Stegmeyer was the manager of the relevant branch of the National Bank. Through the first defendant, he circulated amongst farmers in the area business cards and brochures which were entitled “Preferential finance packages for farmers” and “Professional farm financing in flexible packages”. In the middle of the year 2000, Mr Stegmeyer told the first defendant that he was keen to take over the Westpac loans which the defendants had with that bank. He also said that the plaintiff would lend further moneys to the defendants.
By paragraph 20 of the pleading, the defendants assert as follows:
“In or about June 2000, Stegmeyer said to the defendants Bill Lekakis and Julie Lekakis at a meeting at the defendants’ offices that the plaintiff was an expert in horticultural business, that it would prepare a business plan for the defendants, that it would guide the defendants through their business and help them manage their business, including preparing cashflows, reviewing expenditure on the defendants’ farming businesses and would help them solve any problems that might arise (‘the representation’).”
In about September 2000, the first defendant gave Mr Stegmeyer a copy of the valuations obtained in October 1997 and referred to earlier in this narration.
In about October 2000, Mr Stegmeyer requested the first defendant to prepare an income projection for the defendants’ farming business. This request was made in the context of the plaintiff taking over the loans that the defendants had with Westpac. The first defendant prepared an income projection in about November 2000 and provided it to Mr Stegmeyer. The defendants assert that Mr Stegmeyer “then used the income projection … to prepare the plaintiff’s own cashflows dated 27th November 2000 to enable the defendants and the plaintiff to assess whether the defendants had the ability to repay borrowings from the plaintiff of $1.72 million …”.
In about October or November 2000, Mr Stegmeyer informed the defendants that two of the Crown Lease properties were worth $500,000 and $600,000 respectively. The defendants say that these valuations were too high and formed part of the process which led them to take on too much debt.
Paragraph 25 of the pleading is as follows:
“25In December 2000 the plaintiff offered to the defendants and to Dayrise Pty Ltd to provide the following loans:-
25.1to pay out the Westpac Balfour Ogilvie Loan;
25.2 to pay out the Westpac overdraft to Dayrise Pty Ltd and increase it to $380,000.00 which indebtedness was to be and was guaranteed by the defendants;
25.3 provide a new loan of $225,000.00 to purchase section 729 at Kingsbury Road Loxton;
25.4 continue to provide the NAB first loan of $500,000.00 which had been converted to an interest only loan;
25.5 a home loan of $225,000.00;
25.6 a loan of $250,000.00 to buy a new harvester;
25.7 a Federation Visa Credit Card with a credit limit of $20,000.00;
25.8 continue the existing $60,000.00 short term loan.”
The defendants then plead that Mr Stegmeyer, in preparing the cashflow (which was based on the income projection prepared by the first defendant) and by making the valuations of two of the Crown Lease properties at $500,000 and $600,000 respectively and by virtue of the offers set out in paragraph 25, “by implication represented to the defendants that they had the ability to repay loans of $1.72 million (‘the implied representation’)”.
The defendants assert that, in the circumstances leading up to the making of the implied representation, the plaintiff owed a duty of care to the defendants to ensure that the representation of the cashflow prepared by Mr Stegmeyer and the valuations given by him were true and correct and a duty “to properly investigate and ensure that the defendants had the capacity to repay the loans which were offered by the plaintiff and in particular had the ability to increase their loans by $357,000.00”.
The defendants plead that they relied upon the representations pleaded in paragraph 20 and the implied representation (among other things) when they gave the mortgages upon which the plaintiff now relies to secure the various loans made by the plaintiff to the defendants as set out in paragraph 25 of the pleading.
The defendants say that Mr Stegmeyer made the representations and the implied representation, prepared the cashflow and made valuations in order to induce the defendants to enter into the loan agreements and grant the mortgages. They say that the plaintiff knew or should have known that the defendants did not have the ability to repay the loans because the income projection of the defendants was overly optimistic, because the defendants had been unable to repay the first instalment of $60,000 referred to earlier in these reasons, and because the valuations of two of the Crown Lease blocks at $500,000 and $600,000 respectively were not fair and reasonable. They assert that the plaintiff breached its duty of care by failing to take reasonable care in making representations including the implied representation, by preparing the cashflow, by making the valuations and by offering loans to the defendants when it knew or ought to have known that they did not have the capacity to repay the same. They also assert that the plaintiff did not, contrary to the representation set out in paragraph 20, assist in the proper management of the defendants’ business and, in particular, that the plaintiff failed to manage the defendants’ debt and interest repayments.
The defendants rely upon Section 7 of the Misrepresentation Act 1976.
At paragraph 35 of the counterclaim, the defendants assert that the plaintiff’s conduct constituted misleading and deceptive conduct in trade and commerce and that it was in breach of Section 52 of the Trade Practices Act 1974 (Cth).
At paragraph 37, the defendants seek an order under Section 87 of the Trade Practices Act, setting aside the loan transactions and the mortgages, although in paragraph 1 of the prayer for relief, an order is sought pursuant to Section 87(2) of the Act, declaring the loans and mortgages to be void.
By paragraph 38, the defendants seek damages pursuant to Section 82 of the Act and set-off any damages awarded to it against any liability to the plaintiff that they might otherwise have.
The defendants may plead such defences as are available to them. If defences are not sufficiently pleaded, then the pleading is subject to being struck out in accordance with ordinary principles. Nothing in these reasons should be taken as precluding the defendants from pleading a defence, set-off and counterclaim as is available to them.
The defendants rely upon Sections 51AA, 51AB and 51AC of the Trade Practices Act, alleging that the conduct of the plaintiff in making the loans to the defendants and obtaining mortgage security in respect of constituted unconscionable conduct, they assert:
“40.1the plaintiff knew or ought reasonably to have known that the defendants did not have the capacity to repay those loans or pay the interest instalments and in particular did not have the ability to repay the liabilities of $360,000.00 in the circumstances of the defendants being unable to repay the instalments on the First NAB loan;
40.2one of the plaintiff’s reasons in making the NAB loans was that NAB had an excess of monies to lend and accordingly had a conflict of interest in making the loans, the representation, the valuations and the NAB cashflow.”
The defendants also rely upon alleged breach of fiduciary duty.
In deciding whether or not the defendants have an arguable basis for opposing the plaintiff’s claim for possession, it is necessary to bear in mind that the plaintiff’s application is one for enforcement of the mortgage as opposed to an action whereby the plaintiff seeks to recover the mortgage debt. If such an action is to be successfully resisted by the defendants, they must either show that the mortgages are unenforceable or that, in the circumstances of this case, by reason of set-off, that no amount has, at any material time, been due and owing by the defendants to the plaintiff in respect of the loans the repayment of which is secured by the mortgages. In my view, the counterclaim only raises the former because no adequate set-off has been pleaded. No attempt has been made in the counterclaim to particularise (and therefore quantify) the amount of the damages which the defendants say that they are entitled to. In the absence of such detail, it is impossible to say one way or the other whether there was no amount owing under the mortgages such that the plaintiff was not entitled to apply under Part XVII of the Real Property Act for an order for possession.
It follows from this reasoning that the only question for determination which arises is whether or not the defendants have an arguable case that the mortgages are unenforceable. Given the relief sought in the prayer for relief, this question becomes one of whether or not it is arguable, on the facts pleaded in the counterclaim, that the defendants are entitled to an order under Section 87(2) of the Trade Practices Act 1974 (Cth), declaring that the loans and the mortgages were void ab initio. The other orders sought are claims for damages and a claim for an injunction restraining the plaintiff from seeking to enforce the mortgages. The latter order is not necessary if a declaration under Section 87(2) is made.
It also follows that, to the extent that the defendants rely on a breach of duty of care, such a contention is not material to the question to be decided on this application because such reliance consists of a claim for damages, which does not have a bearing on the enforceability of the mortgage, in circumstances where no set-off has been pleaded in respect of those damages.
In opposing an order that this matter proceed on pleadings, Mr Williams put a number of arguments to the effect that the defendants have not raised by their pleading any maintainable ground of opposition to the plaintiff’s claim for an order for possession. He submitted that the defendants’ case is based on the contention that the plaintiff should not have lent money to the defendants because they could not repay it. He argued that if that were a proper ground of defence, it would make the plaintiff responsible to the defendants for the business decisions made by the defendants in accepting the loans and embarking upon the ventures and acquisition of property, which the defendants alone decided to undertake. Put as simply as that, there is much to be said for the plaintiff’s contention that no arguable ground of defence has been disclosed in the pleading.
The defendants contended that, as a result of the loans obtained from the plaintiff, they ended up owing $357,000 more than they owed prior to placing all their bank finance with the plaintiff. That fact is conceded by the plaintiff. Indeed, Mr Williams said that his calculations indicated that the additional amount owing might be closer to $500,000. Be that as it may, he submitted that the moneys were borrowed by the defendants to increase their business capital or to acquire other assets. In an indirect way, this raises the question of restitution by the defendants if they are to obtain an order avoiding the mortgages.
Mr Williams put a quite detailed submission based on the authorities to the effect that, in the circumstances referred to by the defendants in their pleading, it could not be said as a matter of law that a duty of care as alleged by the defendants arose. It is not necessary for me to deal with this submission because it could only give rise to a defence based on a set-off (assuming that damages for negligence can be set-off for a claim for repayment of a loan) and no such set-off has been claimed. Similarly, for the reasons referred to above about the lack of a proper set-off being pleaded by the defendants, it is not necessary for me to determine on this application whether a claim for damages of whatever nature made by the defendants might preclude the plaintiff from obtaining an order for possession.
Mr Williams also raised arguments relating to the question of whether or not it could be said that the facts set out in the pleading could give rise to an arguable case that the plaintiff had been guilty of misleading or deceptive conduct and if so whether or not the defendants relied upon such conduct. He submitted that the engaging in such conduct on the part of the plaintiff and reliance by the defendants upon such conduct were not made out in the pleading. I disagree. Although the plaintiff, at trial, may have a strong case to support its case, the current pleading is sufficient to establish that the defendants have an arguable case in relation to both the question of engaging in misleading and deceptive conduct and the question of reliance. It may be a weak case, but even if so, that is sufficient to give rise to a triable issue. The same may be said about the defendants’ reliance on the unconscionable conduct provisions in the Trade Practices Act.
Notwithstanding these conclusions, I do not consider that a triable issue arises on the counterclaim. This is because the defendants have failed to deal with the question of restitution in either the counterclaim or the submissions submitted in support of the counterclaim. The pleading does not disclose whether any set-off relied upon (if one is available) exceeds the mortgage debt. If it does not, there has been no offer to repay the difference between the amount of the mortgage debt and the amount of the set-off.
Restitution must be considered when an order for possession based on the Misrepresentation Act has been sought. It is not necessarily essential, in its fullest sense, when a declaration that a transaction was void ab initio is sought pursuant to Section 87(2) of the Trade Practices Act: Squibb & Sons Pty Ltd v Tully Corporation Pty Ltd and Anor (1986) ATPR 40-691. Nevertheless, the court will consider equitable principles concerning rescission when invoking the powers conferred by Section 87 of the Trade Practices Act. For these reasons, the failure on the part of the defendants to address this aspect of their claim is fatal to their contention that a triable issue exists, namely a right to rescind or have declared void the loan and mortgage transactions.
For these reasons, I consider that the defendants have failed to make out in the pleading matters which constitute triable issues that might lead to an order being made under Section 87(2) of the Trade Practices Act that the loan transaction and the mortgages are void.
Although I have concluded that the current pleading does not disclose relevant triable issues, it is possible that the defects in the counterclaim may be remedied by amendment. If they cannot be, the plaintiff is entitled to an order for possession. In all the circumstances, I consider that the defendants should be permitted a further (but final) opportunity to articulate their position. I therefore propose to give leave to the defendants to apply within 21 days for leave to file an amended defence, set-off and counterclaim. A copy of the proposed amended pleading should be exhibited to the affidavit supporting the application.

[2003] SASC 360

17 October 2003