Prime Capital Securities Pty Ltd v Laperecon Pty Ltd
[2012] NSWSC 386
•05 April 2012
Supreme Court
New South Wales
Medium Neutral Citation: Prime Capital Securities Pty Ltd v Laperecon Pty Ltd [2012] NSWSC 386 Hearing dates: 4 April 2012 Decision date: 05 April 2012 Before: McCallum J Decision: Plaintiff restrained until further order from selling security properties as mortgagee
Catchwords: MORTGAGES - claim for possession of land and for money sum - cross-claim against mortgagee for unconscionable conduct - application to restrain mortgagee sale of security properties pending determination of cross-claim - whether defendants have sufficiently apparent entitlement to justify order restraining sales - balance of convenience Legislation Cited: Australian Securities and Investments Commission Act 2001 (Cth) Cases Cited: A v Harden (No 1) (1984) 59 ALJR 1
American Cyanamid v Ethicon [1975] AC 396
Appleton Papers Inc v Tomasette Paper Pty Ltd [1983] 3 NSLR 208 at 216
Australian Broadcasting Corporation v Lenah Game Meats [2001] HCA 63
Beecham Group Limited v Bristol Laboratory Pty Limited (1968) 118 CLR 618
Farrar v Farrars Ltd (1888) 40 Ch D 395, CA,
Kolback Securities v Epoch Minity NL (1987) 8 NSWLR 533
Major v Ward (1847) 5 Hare 598Category: Interlocutory applications Parties: Prime Capital Securities Pty Ltd (plaintiff)
Laperecon Pty Ltd (defendant)Representation: Counsel:
M Young SC (plaintiff)
C Cassimatis (defendant)
Solicitors:
Bransgroves Pty Ltd (plaintiff)
Mitry Lawyers (defendant)
File Number(s): 2012/16942 Publication restriction: None
Judgment
These are proceedings for possession of three properties and for judgment in a money sum. The proceedings arise out of a loan agreement entered into between the plaintiff and the first to third defendants, as varied by an amended loan agreement dated 16 September 2011. The loan was made to the first defendant, Laperecon Pty Limited, and was guaranteed by the second and third defendants, Mr and Mrs Pereira. The three properties of which possession is sought were mortgaged to secure their obligations under the amended loan agreement.
The proceedings were commenced by statement of claim filed on 17 January 2012. On 16 February 2012, within the time allowed under the rules, a defence was filed together with a cross-claim against the plaintiff seeking relief under the Australian Securities and Investments Commission Act 2001 (Cth) on the grounds that the plaintiff has engaged in conduct that was unconscionable within the meaning of section 12CB of the Act. However, before the defence and cross-claim were filed, the plaintiff had already entered into contracts for the sale of two of the three security properties.
The proceeding before the Court is Mr and Mrs Pereira's application for interim relief to restrain those sales so as to preserve their cause of action on the cross-claim. The interim relief sought includes an order restraining the plaintiff from taking possession of the three properties. That order is not opposed, since the two contracts of sale that have been entered into by the plaintiff allow for sale without vacant possession.
The second order sought is:
"An order at law pursuant to section 12GD of the ASIC Act, pending further order, restraining the cross-defendant from taking any adverse steps against plaintiffs pursuant to the Loan Agreement and Mortgagees as described by the cross defendant in its statement of claim filed on 17 January 2012 ('Loan Agreement')."
At the hearing of the application it was acknowledged by Mr Cassimatis, who appears for the first to third defendants, that the order so framed is arguably unduly broad. In explaining why the relief was framed in such terms, Mr Cassimatis drew my attention to the equally broad terms of clause 9.1 of the loan agreement, which sets out the plaintiff's rights upon default. That clause provides:
Rights on Default:
Despite any other provision of this agreement, at any time after an Event of Default occurs how and when the Lender in its absolute discretion decides, the Lender may sign anything and do anything the Lender considers appropriate to recover the Debt and deal with the Security. The Lender may do this with or without taking possession of the Security, whether or not in conjunction with other property, despite any omission, neglect, delay, and without liability for loss, or need to account as mortgagee/chargee in possession. Without limitation the Lender may do any one or more of the following:
(A) Cancel the Facility.
(B) Demand and require immediate payment of the Debt and recover the Debt from the Borrower and/or the Guarantor.
(C) Exercise any right, power, or privilege conferred by law, equity, this agreement, the Security, the Guarantee, and/or any other collateral document or security.
(D) Perform any one or more of the Borrower's obligations under this agreement or the Security.
In a letter dated 28 March 2012 to the plaintiff's solicitor (exhibit 1) the defendant's solicitor sought to narrow the relief sought as follows:
(1) To not take any further steps in relation to the sale of any of the properties the subject of the present proceedings.
(2) To not take any further action, other than the maintenance of the present proceedings, to enforce the debt claimed in the statement of claim.
Mr Young SC, who appeared for the plaintiff, did not seek to be heard as to the relief so narrowed.
For the reasons that follow, I am satisfied that it is appropriate to grant relief in the terms sought by the defendant's solicitor. First, I am satisfied that the defendants have a sufficiently apparent entitlement to justify the orders sought being made on an interim basis. The principles governing the Court's approach to that question are well known. The starting point in an application for interlocutory relief is to identify the legal rights which are to be determined at trial and in respect of which final relief is sought: see Australian Broadcasting Corporation v Lenah Game Meats [2001] HCA 63 at 91.
The second requirement for the grant of relief is that the defendants must establish a prima facie case in the sense in which that expression is used in Beecham Group Limited v Bristol Laboratory Pty Limited (1968) 118 CLR 618 at 622-623, that is, the defendants must establish that if the evidence remains as it is, there is a probability at the time of the action that the defendants will be held entitled to relief. As noted in Beecham, the required strength of the probability depends on the nature of the rights asserted and the practical consequences likely to flow from the orders sought: at 622.7.
In ABC v O'Neill [2006] HCA 46, the High Court confirmed that, to the extent that there is any difference between the Beecham test and the well-known formulation "serious question to be tried" in American Cyanamid v Ethicon [1975] AC 396, the Beecham test is applicable in Australia. It is established that the expression "probability", used by the High Court in Beecham, does not refer to a prediction as to the ultimate result, or even to a requirement to establish a better than even chance of ultimate success. The degree of probability or likelihood of success required to be established is simply that which the Court thinks sufficient in the particular case to warrant preserving the status quo.
I should also note that the present case raises a question of law, namely, the content of the requirement to show unconscionability for the purposes of the ASIC Act. Where an application for interlocutory relief turns in part on questions of law, it is appropriate for the Court to have regard to the principles stated by McLelland J in Kolback Securities v Epoch Minity NL (1987) 8 NSWLR 533 where his Honour said (at 535C):
As I see it, the position is as follows. Where a plaintiff's entitlement to ultimate relief is uncertain, the court, in deciding to grant or refuse an interlocutory injection, must consider what course is best calculated to achieve justice between the parties in the circumstances of the particular case, pending the resolution of the uncertainty, bearing in mind the consequences to the defendant of the grant of an injunction in support of relief to which the plaintiff may ultimately be held not to be entitled, and the consequences to the plaintiff of the refusal of an injunction in support of relief to which the plaintiff may ultimately be held to e entitled: see, eg. Appleton Papers Inc v Tomasette Paper Pty Ltd [1983] 3 NSLR 208 at 216; A v Harden (No 1) (1984) 59 ALJR 1 at 4-5; 56 ALR 73 at 79.
McLelland J noted that, where the uncertainty depends on a contested question of fact, it is not ordinarily appropriate for the Court to decide that question on an interlocutory basis. To the extent that the uncertainty depends on a contested question of law, the appropriateness of the Court deciding that question depends on the circumstances, including the novelty or difficulty of the legal question. The contested legal questions in the present case will of course rest heavily on the facts.
The loan agreement in the present case initially extended to a loan of $650,000 to the first defendant: see page 50 of the exhibit to the affidavit of Paul Scanlon sworn 28 March 2012 (PS1) at page 78.
As already noted, the loan agreement was amended on 16 September 2011 with the consent of the second and third defendants as guarantors (exhibit PS1 at page 168). The amended loan varied the loan amount to $725,000 and imposed an obligation on the borrower to repay the amount of $75,000 within 14 days of the initial advance.
It is common ground that the defendants received the benefit of legal advice during the course of negotiation of the loan. Indeed, one of the documents signed in the suite of documents that comprised the original loan agreement is a Certificate of Independent Legal Advice. However, in an affidavit sworn in support of the present application, the second defendant, Joaquim Pereira, has stated (without disclosing the full content of his privileged and confidential communications with the solicitor in question) that it was his understanding, after receiving advice prior to signing the first loan agreement, that no interest payments would need to be made to the plaintiff until the date on which the principal was due to be repaid. Mr Pereira understood that all interest payable under the loan agreement had been included in the amount that would be advanced, so that there would be no further interest charges. He has deposed to the fact that he did not know that if payments were not made, interest would be charged at a higher rate, and that he only became aware that payments would need to be made to the plaintiff prior to the date on which the principal was due after he received a warning from the plaintiff in November 2011.
On the date on which the initial loan agreements were executed, 27 July 2011, the defendants promised to provide evidence to the plaintiff that the security properties were insured under policies which identified the plaintiff as a person with an interest in the policy (see exhibit PS1 at page 81). Mr Scanlon's affidavit further asserts that, on the same date, the defendants promised to provide evidence that the land rates for each security property had been paid. However, I have been unable (in the limited time available) to locate any evidence within his affidavit of that promise, and that reference has not been able to be identified by the legal representatives appearing at the hearing.
The amount of $725,000 was advanced to the borrower, the corporate defendant, on 28 October 2011. On that date, the plaintiff reminded the borrower of the insurance undertaking, which required production of the evidence within five days.
The loan agreement relevantly included the following terms:
(a) The borrower was obliged to pay interest at 4 per cent per month, but if no event of default subsisted, the lender agreed to accept interest at the rate of 1.5 per cent per month (see clause 5.1 at page 54 of PS1);
(b) secondly, the borrower was obliged to pay on or before the first advance date the establishment fee (see clause 6.1 on page 54 of PS1). The establishment fee was defined in the definitions clause (clause 13) as an amount equal to 50 per cent of the limit of the facility (page 70 of PS1). However, if no event of default subsisted, the lender agreed to accept the "discount establishment fee", which was defined in a separate part of the agreement to be 2 per cent of the limit (see item 5 of the schedule on page 73 of PS1);
(c) there was a fee payable for an event of default: clause 6.4. The fee was the greater of 2 per cent of the limit of the facility and two times the base fee unit in item 6 of the schedule. The base fee unit was specified to be $5,000;
(d) events of default under clause 8 of the agreement on page 58 of PS1 included non payment of any amount due and breach of any undertaking given by the lender.
Mr Scanlon's affidavit exhibits "a copy of the plaintiff's loan statement as at 16 January 2012" (at page 176 of PS1). For reasons I will endeavour to explain, it is clear that that document has been prepared as a retrospective document. It does not record a contemporaneous statement of debits and accruals as they occurred. Even understanding that qualification, it is difficult to reconcile that statement precisely with the events that have occurred according to the evidence before me. According to Mr Scanlon's affidavit, the plaintiff relies upon the following defaults by the defendants:
(a) failure to provide evidence as to insurance of the security properties within five days of the date of drawdown on 28 October 2011;
(b) failure to provide evidence of the payment of land rates;
(c) failure to pay the capital reduction amount of $75,000 within the required 14 day period after drawdown;
(d) failure to pay interest on 1 November 2011 and on each due date thereafter (evidently the first day of each month).
The first interest payment was due on 1 November 2011. In accordance with clause 5.1 of the loan agreement, the lender was obliged to accept interest on that date at the rate of 1.5 per cent, giving an amount due of $10,875. The statement of account annexed to Mr Scanlon's affidavit reveals a payment received before that date, namely on 28 October 2011, the date of drawdown, in the sum of $23,468.55. However, on 3 November 2011, the lender wrote to the borrower noting "with disappointment" that the borrower had failed to pay interest on 1 November 2011 and that this represented an event of default under the facility.
Separately, two letters dated 6 November 2011 complained of further events of default consisting in the failure to provide evidence of insurance and the failure to provide satisfactory evidence that the rates for the security properties were paid up to date, in each case within five days after settlement (see pages 178 and 179 of PS1 respectively).
In the circumstances, it is difficult to understand the basis on which interest at the higher rate was debited on 1 November 2011. It is not clear what event of default was relied upon so as to require the payment at the higher rate so shortly after drawdown. Further, the receipt of the sum of $23,468.55 on the date of drawdown suggests prepayment of interest, as understood by Mr Pereira.
On 6 November 2011 (a Sunday), according to the statement annexed to Mr Scanlon's affidavit, the history of the loan within nine days after the date of drawdown revealed an establishment fee of $362,500 debited on the date of drawdown, the repayment to which I have already referred (received that date), interest accrued at the high rate on 1 November 2011 and three covenant breach fees in the sum of $10,000. I note that the covenant breach fees appear to have been calculated at the lesser of the two options in clause 6.4, namely at two times the base fee unit, rather than at 2 per cent of the limit of the facility.
Further, the interest debited on 1 November 2011, on my calculation, reflects interest at the higher rate on the sum of the drawdown figure of $725,000 and the establishment fee of $362,500. Again, I am confused as to what amount of interest the plaintiff alleges was properly due as at 1 November 2011, since it is not clear to me when the establishment fee was debited. As I have already noted, it appears that the approach the plaintiff has taken is to undertake a hindsight analysis of the loan agreement by reference to later breaches. It may be that that is permissible in accordance with the terms of the loan agreement, but plainly it is a relevant factor in the defendant's cross-claim.
On 14 November 2011, the defendants failed to make the capital repayment of $75,000. It is common ground that that represented an event of default under the loan agreement. However, it is also common ground that that amount was paid within the period of 31 days allowed under the section 57(2)(b) notices later served.
On 23 November 2011, well before the section 57(2)(b) notices had been served, the plaintiff debited the termination fee. It may be inferred that, so far as the plaintiff was concerned, it had terminated the agreement on that date. Separately, three further covenant breach fees were debited, each in the sum of $10,000, for the late payment of the capital amount of $75,000 and for two subsequent failures to pay interest when due.
As to the other defaults referred to in Mr Scanlon's affidavit, the land tax was in fact up to date as at 31 May 2011. Mr Pereira's affidavit states that council rates and water rates were paid, and that evidence of that fact was provided by him to the solicitor in early August 2011. Whether or not the solicitor remitted that evidence to the plaintiff is not revealed in the evidence.
Insurance policies on the security properties were up to date and amended policies were obtained in November 2011. According to Mr Scanlon's affidavit, the evidence of the insurance was not provided to the plaintiff until 30 January 2012, but that was within the period of grace allowed under the section 57(2)(b) notices.
Those events probably explain the circumstance that, at the hearing of the application before me, Mr Young indicated that the only breach relied upon for present purposes - that is to say for the purposes of this application - was the alleged failure to pay interest when due. However, for the reasons I have already explained, I am unable to identify from the material before me what amount is alleged to have been due on 1 November 2011, and indeed how it is suggested that the defendants ought to have known, if interest at the higher rate was due, why that was so.
As already noted, Mr Pereira's position is that although he obtained legal advice in respect of the agreement, he did not know about the higher interest rate, and there does not appear to have been any letter sent to him before 1 November 2011 to put him on notice that the plaintiff took the view that interest could be debited at the higher rate for that period.
It is common ground that the properties were advertised for sale on 25 December 2011. I accept, as submitted on behalf of the plaintiff, that a lender is entitled to take steps towards sale of a property before the time when a power of sale has accrued: Farrar v Farrars Ltd (1888) 40 Ch D 395, CA; Major v Ward (1847) 5 Hare 598. Nonetheless, the fact that within less than two months after drawdown, and before section 57(2)(b) notices had been served, the plaintiff had taken steps to sell the security properties is plainly a relevant factor when considering the manner in which the contract was administered, which is a relevant consideration under section 12CC of the ASICAct.
The section 57(2)(b) notices sent to the defendants were dated 9 January 2012 and alleged failure to pay the capital reduction, failure to pay interest, failure to provide evidence that the rates were up to date and failure to provide evidence of insurance. The undisputed evidence is that by 9 February 2012, within the period allowed under those notices, Mr Pereira had paid the amounts which he believed he was liable to have paid, namely the capital sum of $75,000 and interest at the lower rate.
The fact that the defendants received legal advice before entering into the loan agreement is plainly a factor militating against the relief sought, and in particular a finding of unconscionable conduct. However, as submitted by Mr Cassimatis, having regard to the terms of section 12CC of the ASIC Act, I cannot conclude that that is an insurmountable hurdle to the relief sought.
Separately, as submitted by Mr Cassimatis, I note that it is relevant to have regard to the manner in which the contract has been administered on behalf of the plaintiff. The current cross-claim complains only about the higher interest rate. Mr Young made a point of noting that no complaint is presently made about the staggering establishment fee of fifty percent of the limit of the facility and the independent covenant breach fees to which I have referred. The explanation for that, however, lies in the fact (concededly stated from the bar table by Mr Cassimatis) that certainly as to the establishment fee the defendants only became aware that that fee had been debited to the account after the cross-claim had been prepared and filed. Undoubtedly, consideration will be given to amending the cross-claim having regard to those further matters.
I am satisfied that as to the second and third defendants, they being the registered proprietors of the security property, a sufficient apparent entitlement to justify restraint of the two proposed sales is established on an interim basis. Since the only default relied upon is the failure to pay interest at the higher rate, it seems clear enough in my view that the defendants have established the existence of a probability that at the time of the action they will be entitled to relief under the ASIC Act of the kind sought in the first cross-claim, namely an order varying the interest rate.
In particular, I have regard to the fact that, with the debiting of the establishment fee and the several covenant breach fees, it may well be argued that also to debit interest at the higher rate in the circumstances I have explained amounts to unconscionable conduct in contravention of the Act.
As I have made plain, it does not follow in accordance with that finding that I am suggesting the prospects of success are more probable than not. It is simply that in my view there is a sufficient likelihood of success to warrant preserving the status quo.
The application raises the unusual situation, which I do not think commonly occurs in the Possession List in this Court, where the sale of the security property is proposed and indeed where contracts for sale were exchanged even before the filing of a defence. The fact that the potential buyers have entered into agreements for sale is plainly a consideration to be taken into account in the next stage of the Court's consideration, namely the balance of convenience. I am of course mindful of the fact that two buyers have exchanged contracts for the sale of the land.
Against that I note the following. First, in each case the contract was subject to satisfactory inspection of the property by the purchaser. Specifically, the conditions of each contract note that the vendor has commenced proceedings in the Supreme Court for possession of the property and provision is made for the extension of the term of the contract and, ultimately, the termination of the contract in the event that the Court makes an order of the kind now sought.
In those circumstances, first, it may be seen that the buyers are on notice of the present proceedings and, secondly, it may be seen that the contracts can be terminated without detriment to those buyers.
Against that I have regard to the fact that, so far as the defendants are concerned, the commercial property which is the subject of a contract for sale is said by Mr Perera to be essential to the conduct of his business and hence his ability to continue to service the loan.
Further, the second property the subject of a contract for sale is the second and third defendants' home. Plainly in my view the balance of convenience favours preserving the status quo to enable the cause of action on the cross-claim to be determined.
For those reasons I am satisfied that it is appropriate to grant the relief sought as articulated at the outset of this judgment.
Orders:
(1) That the plaintiff be restrained, until further order, from taking any further steps in relation to the sale of any of the properties the subject of the present proceedings; and from taking any further action, other than the maintenance of the present proceedings, to enforce the debt claimed in the statement of claim.
(2) Costs reserved.
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Decision last updated: 16 May 2012
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