Provident Capital Ltd v Bortolin Papa (No 1)

[2011] NSWSC 460

Supreme Court

New South Wales

Medium Neutral Citation:	Provident Capital Ltd v Bortolin Papa (No 1) [2011] NSWSC 460
Hearing dates:	1-8 &11/02/2011
Decision date:	23 May 2011
Jurisdiction:	Common Law
Before:	Fullerton J
Decision:	Statement of claim dismissed. Defendant/Cross Claimant's cross claim against Plaintiff allowed. Defendant/Cross Claimant's cross claim against Second Cross Defendant dismissed.
Catchwords:	CONTRACTS - whether signing a Borrower's Declaration as to Purpose invoked s 11(2) of Consumer Credit Code when borrowed funds on-lent to borrower's son - whether credit provider should have issued default notices under s 80 of the Code - whether loan agreements were unjust contracts within meaning of s 7 of Contracts Review Act - whether the lending was asset lending - whether test of unfairness in s 9 of Contracts Review Act is made out - whether knowledge of a borrower's financial circumstances by a third party under an Introducer Agreement should be imputed to the credit provider according to the law of agency - whether breach of duty of care by a failing to advise as to the legal effect of a Borrower's Declaration as to Purpose and the loan agreements - whether failure by lawyer to refuse to act by reason of a conflict of interest - whether failure by lawyer to advise to seek independent legal advice when that conflict became manifest - whether causation established
Legislation Cited:	Australian Securities and Investments Commission Act 2001 (Cth) Consumer Credit (New South Wales) Code Contracts Review Act 1980 Real Property Act 1900
Cases Cited:	Bank of Queensland Ltd v Dutta [2010] NSWSC 574 Beneficial Finance Corp Ltd v Karavas (1991) 23 NSWLR 256 Esanda Finance Corporation Ltd v Tong (1997) 41 NSWLR 482 Fast Fix Loans Pty Ltd v Samarzic [2011] NSWSC 19 Fox v Percy [2003] HCA 22; 214 CLR 118 Goodrich Aerospace Pty Ltd v Arsic [2006] NSWCA 187 Hraiki v Beljon [2008] NSWSC 775 Kowalczuk v Accom Finance Pty Ltd [2008] NSWCA 343 Linkenholt Pty Ltd v Quirk [2000] VSC 166 Mango Media Pty Ltd v Comitogianni [2011] NSWSC 152 Micarone v Perpetual Trustees Australia [1999] SASC 265; 75 SASR 1 Michalopoulos v Perpetual Trustees Victoria Ltd [2010] NSWSC 1450 NMFM Property Pty Ltd v Citibank Ltd (No. 10) [2000] FCA 1558 Octapon Pty Ltd v Esanda Finance Corporation Ltd (SCNSW, 3 February 1989, unreported) Permanent Trustee Co Ltd v O'Donnell [2009] NSWSC 902 Perpetual Trustee Company Ltd v Khoshaba [2006] NSWCA 41 Perpetual Trustees Victoria Limited v Bianka Monas [2011] NSWSC 57 Smith v Elders Rural Finance Ltd (NSWSC, Bryson J, 25 November 1994 Spina v Permanent Custodians Ltd [2009] NSWCA 206
Category:	Principal judgment
Parties:	Provident Capital Ltd (Plaintiff/First Cross Defendant) Gina Giovanna Bortolin Papa (Defendant/Cross Claimant) George Caramanlis (Second Cross Defendant)
Representation:	Counsel BK Nolan (Provident Capital Ltd) G Segal (Bortolin Papa) G Curtin SC (Caramanlis) Solicitors Tiernan Lawyers (Provident Capital Ltd) Rhodes Legal (Bortolin Papa) Colin Biggers & Paisley (Caramanlis)
File Number(s):	2008/287567

Judgment

The pleadings

1. By statement of claim dated 3 October 2008, Provident Capital Ltd ("Provident") brings proceedings for an order for possession of a property in Leichhardt in which the defendant, Mrs Bortolin Papa, currently resides and from which she operates a modest business selling children's clothes. The statement of claim also seeks judgment in the amount of $841,257.56 plus costs. Of that sum $700,000 was advanced under a loan agreement dated 5 April 2007 ("the April loan agreement") and $125,000 advanced under a variation and extension to that loan agreement dated 3 April 2008 ("the loan variation agreement"), each of which was secured by a first mortgage over the Leichhardt property. The balance represents interest calculated at the penalty rate of 16.99% fixed under the April loan agreement and calculated from the date of default to the commencement of proceedings. As at 25 January 2011 the total amount claimed was $1,455,743.

1. Mrs Bortolin Papa filed a defence and cross claim. By way of defence she contends that Provident was not entitled to commence the proceedings because the credit advanced under the loan agreements was for personal purposes, namely to give to her son for his gymnasium business, and therefore regulated by the Consumer Credit (New South Wales) Code ("the Code"). Section 80 of the Code provides that default notices must be issued before recovery proceedings are commenced. It was common ground that Provident did not issue default notices before commencing the proceedings.

1. By way of cross claim she contends that the loan agreements (and the mortgage) are unjust contracts within the meaning of s 7 of the Contracts Review Act 1980, or in the alternative, that Provident's conduct as lender was unconscionable within the meaning of s 12CA-CC of the Australian Securities and Investments Commission Act 2001 (Cth). In either event, the relief sought is to be relieved of her contractual obligations other than in relation to an amount of $180,000 which was committed on settlement of the April 2007 advance to the discharge of an existing mortgage to Bendigo Bank and that upon payment of that amount Provident be ordered to provide an executed discharge of mortgage. She also submitted that interest should be calculated under the Supreme Court Rules and not under the loan agreement.

1. The cross claim against Provident particularises a number of circumstances which, collectively, are said to satisfy the test of unfairness in s 9 of the Contracts Review Act . They include her age, what is said to be her imperfect study of English and her limited education and commercial experience. It is also said that because of Provident's relationship with Community Mortgage Corporation Pty Ltd, a company through whom the finance was arranged under the terms of an Introducer Agreement, it should be taken to have known that the loans were for her son's gymnasium business, a business which was in dire financial stress and in which she had no interest or involvement and that she was otherwise not capable of servicing the loan. She also submitted that the loan was advanced in breach of Provident's lending policy.

1. Mrs Bortolin Papa also contends that Provident conducted itself as an asset lender in its dealings with her being indifferent to her capacity to service the loan but satisfied that the security in the form of the Leichhardt property was adequate to ensure recovery of the monies advanced in the event of default. She submitted that also provides grounds for setting the contracts aside under the Contracts Review Act .

1. Provident maintained an entitlement to bring the proceedings unregulated by the Code. It relied upon a document entitled "Borrower's Declaration as to Purpose" ("the Borrower's Declaration") which Mrs Bortolin Papa was required to execute as a precondition to contracting with her in both April 2007 and April 2008. Provident contends that by signing the Borrower's Declarations she represented that the credit was to be applied predominantly for business or investment purposes thereby affording it the benefit of the conclusive presumption under s 11(2) of the Code which displaces the regime under the Code for the regulation of consumer credit contracts.

1. In so far as the cross claim is concerned Provident contended that no case for relief under the Contracts Review Act or the Australian Securities and Investments Commission Act had been made out. It submitted that the loans were approved in strict conformity with its corporate policy and that it was entitled to rely on its security in the circumstances of default. Provident denied having any knowledge that the loan funds were on-lent or provided by way of a gift to Mrs Bortolin Papa's son and submitted that to the extent that CMC had knowledge that this was the case it should not be imputed with that knowledge since CMC was not its agent under the Introducer Agreement and agency should not be inferred as a matter of law.

1. Mrs Bortolin Papa filed a second cross claim against her solicitor, Mr Caramanlis (trading as Daniels Lawyers), for breach of contract or breach of the duty of care he owed to her, in each case constituted by his failure to advise her in relation to the loan agreements and her obligations as borrower under those agreements, and by his failure to advise her as to the legal effect of the Borrower's Declarations before she executed them. The Borrower's Declaration was one of the loan documents forwarded to Mr Caramanlis by Provident's solicitors at the time of the original advance in April 2007 and again in April 2008 when the deed of variation was entered into.

1. Mrs Bortolin Papa also contends that Mr Caramanlis acted in breach of his duty of care by accepting her instructions to provide legal advice on the loan documents when he should have refused to act by reason of a conflict of interest (or by continuing to act when that conflict became manifest) and/or by failing to advise her to seek independent legal advice before she executed the loan documents. The conflict of interest was said to arise from the fact that he had acted for Mrs Bortolin Papa's son, Peter Bortolin, (or Luxury Enterprises Pty Ltd, a company he controlled) and was aware of the parlous state of his (or its) finances as operators of a gymnasium business; that he knew that either Peter Bortolin or his company was the intended recipient of the loan monies and that the monthly instalments of interest would be paid by him (or the company) from the business without recourse to his mother.

1. Accepting that a failure to comply with s 80 of the Code does not necessarily invalidate the proceedings or render them a nullity, and proceeding on the working assumption that I have the power to authorise the plaintiff nunc pro tunc to bring the proceedings, and that I would exercise that power in the plaintiff's favour in this case (see the discussion in Bank of Queensland Ltd v Dutta [2010] NSWSC 574 at [154] - [159] and Mango Media Pty Ltd v Comitogianni [2011] NSWSC 152 at [202]), for all practical purposes the litigation involving Provident and Mrs Bortolin Papa will be resolved according to whether she has discharged the onus of establishing that the circumstances relating to the loan agreements, at the time they were entered into, render them unjust thereby entitling her to seek relief under the Contracts Review Act , or whether she has established unconscionability on Provident's part under the Australian Securities and Investments Commission Act . Viewed in this way, if the loan agreements (or either of them) are found to be unjust, and the discretion as to whether to grant relief is exercised in Mrs Bortolin Papa's favour in accordance with the two staged approach to relief mandated by Kowalczuk v Accom Finance Pty Ltd [2008] NSWCA 343, (or unconscionability is established), then the recovery proceedings brought by Provident will fail, irrespective of the procedural considerations that arise were I satisfied that the loans are regulated by the Code.

1. I have already noted that Mrs Bortolin Papa acknowledges her obligation to repay Provident the $180,000 committed to discharge the existing mortgage to Bendigo Bank at the time of the settlement of the April 2007 loan. If the dispute between Provident and Mrs Bortolin Papa is otherwise resolved in her favour, it was the agreed position that her cross claim for damages against her solicitor should be dismissed.

1. That does not mean, however, that when considering her claim for relief against Provident under the Contracts Review Act that the evidence she relies upon in bringing the cross claim against her solicitor, and his evidence in meeting that claim, is irrelevant. To the contrary. The circumstances that existed at the time the loan agreements were entered into involved both Provident as lender and Mr Caramanlis as the solicitor who had the obligation of advising her as to legal obligations under the loan agreements. Mrs Bortolin Papa's actual purpose in seeking finance, namely to enable her son to invest in his gymnasium business (whether that was what she told her solicitor or whether it was something he knew from other sources, or whether she told him something quite different), and the quality of the legal advice she was given before executing the loan documents, have a bearing on the question of unjustness under the Contracts Review Act .

1. In meeting the claim that the contracts should be set aside as unjust Provident relied on what it submitted was the sound and comprehensive independent legal advice Mrs Bortolin Papa received as borrower and what she is alleged to have told her solicitor (and others) as to her interest in her son's business.

1. For this reason alone, resolving the stark conflict between Mr Caramanlis' evidence and that of his paralegal, Ms Voulgaris, on the one hand and Mrs Bortolin Papa and her son on the other, both as to what she represented to them was her purpose in seeking loan funds and the nature of the advice she was given concerning the loan agreements, cannot be avoided. Even if that conflict is resolved in Mrs Bortolin Papa's favour, it will not be determinative of the success of her cross claim against Provident given the range of issues that must be considered in determining whether relief under the Contracts Review Act should be granted.

1. In the event that her cross claim against Provident fails, resolving the conflict concerning the adequacy of the legal advice she was given is essential to the disposition of her cross claim for damages against her solicitor. It was conceded by Mr Curtin SC, counsel for Mr Caramanlis, that were I satisfied that Mrs Bortolin Papa was not given any, or any adequate legal advice before she entered into the loan agreements, breach of duty of care would be made out. The question then arises as to whether she has discharged the onus of establishing that the breach of duty was causative of any loss. It was submitted by Mr Curtin that the weight of the evidence compels a finding that because she was motivated by an overwhelming desire to assist her son in the belief that he would not put her only asset at risk, she would have borrowed against the Leichhardt property irrespective of the detail or quality of the legal advice she received prior to contract.

The loan transactions in summary

1. The April 2007 loan agreement provided for monthly instalments of interest calculated at 16.99% per annum reducing to 10.99% for each payment received by the due date. This resulted in monthly instalments at the reduced rate of $6500 (or $78,000 per annum) for a term of five years at the expiration of which Mrs Bortolin Papa was obliged to repay the principal of $700,000 in full.

1. After the deduction of fees and charges due to Provident (and what was styled as a brokerage fee due to Community Mortgage Corporation Pty Ltd), and after discharging the mortgage to Bendigo Bank, the balance of the loan funds were either drawn in favour of Pyrmont Health and Fitness, the gymnasium business operated by Peter Bortolin through Luxury Enterprises Pty Ltd from rented premises at Pyrmont, or its creditors. Luxury Enterprises was a trustee company controlled by Peter Bortolin until it was declared insolvent in April 2010.

1. In November 2006 Luxury Enterprises entered into an agreement with an administrator to acquire the gymnasium business. Luxury Enterprises was a shareholder of the company that had owned and operated the business before the administrator was appointed. It required approximately $500,000 to complete the purchase, to acquire the necessary equipment, and to provide working capital to meet the demands of the lessor for a security bond. Neither Luxury Enterprises nor Peter Bortolin had access to assets or other security against which the necessary finance could be raised other than by Peter Bortolin persuading his mother to enter into loan agreements with Provident on the terms provided for in the April loan agreement and the variation to that agreement twelve months later.

1. Between April 2007 and April 2008 monthly instalments of varying amounts ranging between $6,112.25 and $7,527.39 were drawn from an account with the National Australia Bank in the name of Pyrmont Health and Fitness Club, the details of which were given to Mr Caramanlis at the time the loan documents were executed in March 2007.

1. On 4 April 2008 Mrs Bortolin Papa entered into a deed of variation with Provident under which a further $125,000 was advanced also secured against the Leichhardt property. The deed was executed in conference with Mr Caramanlis and witnessed by him. The variation to the April 2007 loan agreement increased the monthly interest instalments to $7500 (or $90,000 per annum) and the amount owing at the expiration of the five year term to $875,000.

1. Mrs Bortolin Papa also made these further funds available to her son. He gave evidence that he used the funds to meet Luxury Enterprises' financial obligations to Perpetual Limited under a loan agreement and guarantee it entered into in March 2006 secured against heavily mortgaged properties at Camperdown and East Gosford, and to supplement the operating costs of the gymnasium at Pyrmont which included meeting the monthly repayments to Provident. At the date of Mrs Bortolin Papa's application to vary the loan agreement, Luxury Enterprises was in default under the credit arrangement with Perpetual, and default notices under s 57(2)(b) of the Real Property Act 1900 had issued.

1. By August 2008 the loan to Provident was also in default. By letter dated 9 September 2008 Provident required payment of $841,257.56, being the total amount then owing under the loan agreements, and attached a notice of default under s 57(2)(b) of the Real Property Act .

1. On 3 October 2008 Provident instituted recovery proceedings.

A summary of the issues in dispute

1. It was not in dispute that from late 2006 both Peter Bortolin and Luxury Enterprises were in extremely straightened financial circumstances which progressively worsened up to and including September 2008 when Provident commenced recovery proceedings.

1. It was not in dispute that Mrs Bortolin Papa entered into the loan agreements with Provident in April 2007 and April 2008 on the understanding that the loan funds would be used by her son in the gymnasium business; that he would pay the monthly interest instalments and that he would discharge the debt to Provident at the expiration of the five year term. It was also common ground that Mrs Bortolin Papa had no personal capacity to meet her legal obligations as borrower whether from the income she generated selling children's clothes from her home or from any other source. What was in dispute was whether she falsely represented that she was acquiring an interest in the gymnasium business in her dealings with Mr Hilellis who, on behalf of Community Mortgage Corporation Pty Ltd ("CMC"), introduced her to Provident as a borrower and who submitted the application for loan finance in February 2007 on her behalf; whether she repeated that assertion when the loan agreement was executed in Mr Caramanlis' office in March 2007 and whether she represented that she had acquired that interest when executing the loan variation agreement in his office the following year. A related issue was whether from Provident's perspective she should be taken to have intended to represent that she was applying the loan funds for the business or investment purposes associated with her son's gymnasium by executing the Borrower's Declarations which accompanied both the initial application for loan finance and the loan variation.

1. Mrs Bortolin Papa gave evidence that she did not tell anyone that she either was acquiring an interest in her son's business or had acquired an interest in that business. She said that she did not understand the effect of the Borrower's Declaration and that it was not explained to her. She claimed that she executed those documents, as with all other documents relating to the loan arrangements in April 2007 and April 2008, at her son's insistence and at Mr Caramanlis' invitation without any advice from him as to their legal effect.

1. If I am satisfied that the false representations allegedly made by Mrs Bortolin Papa both orally and in writing as to the purpose of the loan were made in order to secure finance for her son's business in the knowledge that he was unable to attract finance on his own behalf, then her claim for relief under the Contracts Review Act must fail. An adverse credit finding against her on this issue might also result in the cross claim being determined in her solicitor's favour.

Mrs Bortolin Papa's personal circumstances and her financial position in 2007/2008

1. At the time that Mrs Bortolin Papa entered into the loan agreement with Provident in April 2007 the Leichhardt property was valued by Provident at $1.5 million. At the time of the loan variation in April 2008 it attracted a valuation of $1.1 million.

1. She was 61 at the time of the first advance from Provident and 62 at the time of the second advance. She was born in Sicily, emigrating to Australia with her parents when she was 7 years of age. She left school at age 15 and worked as a cashier for ten years leading up to her marriage in 1966 at age 21.

1. During the course of her marriage she and her former husband owned another property in Leichhardt as their matrimonial home. This was purchased soon after their marriage. They also purchased an investment property in Fairfield in 1974. She said that her husband took care of all the paperwork to do with the property transactions and that she just signed the documentation as required by the institutions that advanced the loan finance.

1. The marriage failed as a result of what she claimed to be her husband's poor management of the family's financial affairs and what she experienced as his failure to provide for her and her young family over many years. She has two children, a daughter who was born in 1967 and her son, Peter Bortolin, who was born in 1972. Her first husband was ultimately declared bankrupt.

1. During the course of the marriage she rented premises in Five Dock from which she sold ladies' and children's clothing and manchester products. She also worked selling Avon cosmetics from time to time in order to keep up the mortgage payments on the family home and to provide for her family. The Leichhardt property was purchased by Mrs Bortolin Papa in 1980 for $80,000 after she divorced her first husband the previous year. After discharging accumulated debts of the marriage she secured mortgage finance in an unspecified sum from the Commonwealth Bank in order to complete the purchase. She transferred the children's clothing business from Five Dock after purchasing the Leichhardt property, utilising the front room in the downstairs part of the property to sell the clothing whilst residing in premises at the rear of the shop and upstairs.

1. The mortgage to the Commonwealth Bank was fully discharged in 2001.

1. She remarried in 1990. She resided with her second husband in the Leichhardt property until his death in February 2004. She maintained the front room of the premises as a retail outlet for children's clothes throughout that period. She continues to operate the business from those premises and to reside in the rear and upstairs of the property as her home. The business returns a modest income. In the financial year ending 30 June 2005 the business made a net profit of $5,912 whilst the following year it incurred a loss of $14,866. Taxation records for more recent years were either incomplete on not tendered. She is currently aged 65. She gave evidence that she wishes to keep working as long as she is able.

1. In 1990 she was appointed as a Justice of the Peace by the Attorney General's Department, a position she holds to the present day.

Mrs Bortolin Papa's relationship with her son

1. In 2004, following the death of her second husband, Mrs Bortolin Papa travelled to Port Douglas with her son where they viewed several properties. He told her that he wanted to purchase a block of land in the area as an investment and asked to use the Leichhardt property as security to obtain finance.

1. On 10 February 2005 Mrs Bortolin Papa refinanced an existing loan and borrowed $180,000 from Bendigo Bank, secured against the Leichhardt property, to assist her son to purchase the Port Douglas property. The Port Douglas property was purchased in the name of Luxury Enterprises.

1. She gave evidence that in borrowing $180,000 for her son to invest in the Port Douglas property she knew she was under a legal obligation to make the loan repayments. In particular, she acknowledged knowing that one of the consequences of default could be the seizure of her home by the lender. She agreed that Mr Van Cooney, the solicitor who acted on the conveyance, reiterated the importance of her appreciating the risk entailed in borrowing against her home for her son's investment purposes. She did not seek or receive financial advice from her accountant concerning the transaction.

1. Mrs Bortolin Papa gave evidence that because of her experience as a Justice of the Peace she knew the importance of reading and understanding documents before signing them. Despite this, she said that she did not read any documents relating to the Port Douglas mortgage before signing them. She said that her son assured her he would make the repayments and sell the property to enable the mortgage to be discharged when the investment matured and return the title deeds to her. She said she made no inquiries as to his financial capacity to make the repayments, in part because she found it difficult to talk to him and because he rebuffed her inquiries concerning his business affairs. She gave evidence that after her second husband's death she depended on her son for emotional support and that she went along with whatever he asked of her. She said that she trusted her son to the extent that she was willing to sign any document that he asked her to sign without reading the document first.

1. Evidence in the proceedings revealed that prior to entering into the Port Douglas mortgage, various other loan applications were lodged with lending institutions in Mrs Bortolin Papa's name. It also appeared, and I accept, that Mrs Bortolin Papa was not aware of that fact until she was cross-examined in the proceedings. Peter Bortolin gave evidence that prior to his mother entering into the Port Douglas mortgage he had used her name to make inquiries about the availability of obtaining finance with potential lenders without her knowledge. None of these applications were pursued.

1. The mortgage to the Bendigo Bank was discharged at the time of settlement enabling Provident to take a first mortgage over the Leichhardt property. Mrs Bortolin Papa gave evidence that she believed that the mortgage to the Bendigo Bank had been discharged in late 2006 when her son told her that the Port Douglas property had been sold. She also gave evidence that she believed that her son had collected the title deeds at that time and retained them in his possession. I accept that her son lied to his mother concerning the sale of the Port Douglas property.

1. Peter Bortolin said that his mother did not ask whether he had the capacity to repay the loans to Provident. He said that he always reassured his mother of the financial prosperity of his business even when this was untrue. He said that he did not inform his mother of the appointment of administrators to the gymnasium business in 2006 or of the defaults in rental payments due to the lessor. Neither did he inform her of his ongoing obligations as guarantor in respect of a loan for $50,000 attracting monthly interest of 8% entered into early in 2006 in order to discharge the personal debts of the directors of the company that operated the gymnasium business at that time and to provide some injection of capital to the business before the administrators were appointed. This was referred to in the proceedings as the Hock-A-Car loan. It was common ground that Mr Caramanlis acted for the lender in that transaction, that he met Peter Bortolin in that connection and that he was aware of some aspects of the financial affairs of the gymnasium business at that time, in particular that the directors were being pressured to repay their debts by unscrupulous lenders.

The application for finance and the loan approval process in February - April 2007

1. Peter Bortolin said that the unsuccessful attempts to secure finance to acquire the gymnasium business throughout 2006 using the Leichhardt property without his mother's knowledge were undertaken with the assistance of Mr Hilellis from CMC, before Provident was ultimately approached by Mr Hilellis on his behalf as a lender of last resort. He said Mr Hilellis was well aware of his precarious financial situation and that of Luxury Enterprises.

1. On 25 July 2006 CMC applied to Provident to become an "Introducer" under the signature of Ignatius Hilellis, (aka Mr George Hilellis). On 3 August 2006 CMC entered into an Introducer Agreement with Provident in which they agreed to provide the following services:

- To seek out and introduce new prospective commercial clients for Provident;

- To provide information about these clients to Provident to enable Provident to assess a commercial loan arrangement with those clients;

- To provide a point of contact between Provident and those clients to facilitate communications, execution of documents the provision of information and other client liaison services associated with the ongoing management of any loan arrangement between Provident and the client, as required by problem from time to time ("continuing services").

1. Under the agreement Provident made available to CMC a variety of pro forma Applications for Finance to be completed by prospective borrowers and forwarded to Provident by CMC in accordance with its obligations as the Introducer.

1. Peter Bortolin gave evidence of the following conversation with Mr Hill, Mr Hilellis' father:

I consulted with Mr Charlie Hill of Community Mortgage Corporation on a few occasions, although I do not recall the exact number of meetings we had.

In those meetings, I gave Mr Hill details of my financial situation, the reasons why I needed the money and the background to the gymnasium business.

Mr Hill said words to the effect "Do you have any other properties to give as security". I replied words to the effect "No, but my mum has a property at Leichhardt where her shop is and where she lives. We could use that".

After listening to my background and all of the information I gave him, Mr Hill said to me words to the effect "The only way you can get this money is to use your mother's property. You can't support an application for that amount of money using your financials or using the gym".

Subsequent to those initial meetings, Mr Hill then referred me to his son, who worked for him, and advised me that his son would take care of the application. Mr Hill's son was known to me as Mr George Hilellis.

Initially Mr Hilellis made an application to the National Australia Bank ("NAB") in my mother's name at my request. This application was conditionally approved initially, however was subsequently withdrawn by NAB because the nature of the zoning of my mother's property did not fall within NAB's lending guidelines.

I subsequently met with Mr Hill again. During that meeting I recall Mr Hill saying to me words to the effect

The only lender that will do this loan is Provident Capital. I know the CEO Michael Sullivan very well and he can get it through. We can get it done.

In approaching my mother, I said to her words to the effect,

Mum, I need some money for the gym and I want to use the deeds to your property to raise some money. It will be alright and it won't be long before it's all cleared.

My mother said, "Ok" or words to that effect.

...

I recall a conversation I had with Mr Hilellis on the telephone. I do not recall the precise date that occurred, but having reviewed the loan document dated 31 January 2007, I can say it would have been on or near that date. The conversation was to the following effect:

Mr Hilellis: We need to get the application form signed by your mum.

PAB: I'm busy at work today. I can't leave.

Mr Hilellis: I can take them to her. If you let her know I am will come past I will go there and get her to sign.

PAB: Ok. I'll call mum and let her know.

I subsequently rang mum and said to her words to the effect, "My friend is going to come around and give you some documents to sign. I can't come, I'm very busy. Just sign the document he gives you. It's all ok".

1. Mrs Bortolin Papa gave evidence that the first time she signed any document with respect to the Provident loan was in February 2007 when her son organised for a man to come to her house with a loan application for her to sign. The evidence compels the conclusion that this man was either Mr Hilellis or his son. Mrs Bortolin Papa gave uncontradicted evidence that she signed the loan application in blank and gave it to the man.

1. I accept that the application for loan finance dated 31 January 2007 ( styled as an application for " Light and Easy Residential Mortgage Finance") was the document signed in blank by Mrs Bortolin Papa and that it was completed by Mr Hilellis with information supplied by her son before Mr Hilellis submitted it to Provident.

1. Notably, this application calls for no information of any kind as to the capacity of the borrower to service the loan in the stated amount of $700,000. Mrs Bortolin Papa's financial circumstances are limited to details of her assets and liabilities. These were nominated by Mr Hilellis as a car valued at $25,000 and the Leichhardt property. The purpose of the loan was specified on the application as "refinance of $180,000 and $520,000 for business use".

1. The application was forwarded to Provident under cover of a letter signed by Mr Hilellis and dated 1 February 2007. It was addressed to an officer of Provident with the initials KJ. That person was not otherwise identified in the evidence. The letter also attached 100 points of identification, rates notices confirming that the Leichhardt property was zoned residential and six months of bank statements relating to the borrowing from Bendigo Bank. The letter then states:

Please note the total loan amount is $700,000.00

$180,000 is to pay out the existing mortgage.

$520,000 is to be used to further invest in their business.

(emphasis added)

1. The letter produced in evidence by Provident also bears a handwritten note in the following terms:

Loan Purpose

$180,000 Refinance Sonhurst ? Trustees mtge

$320,000 Purchase gym equipment for gym located at 15 Harris St, Pyrmont.

$120,000 (6 months rental bond)

$80,000 Working capital

$700,000

1. Since Provident did not deal directly with Mrs Bortolin Papa in the loan approval process, an officer of Provident must have made the handwritten note after additional information was sought from Mr Hilellis about the purpose of the loan and after he obtained the information from Peter Bortolin, if he were not already aware of it. I note that Provident's Credit Manual provides that any queries or requests for further information or clarifications concerning an application for finance are to be directed by the loans manager to the Introducer if the borrower did not approach Provident directly.

1. Mr Hilellis did not give evidence. The basis upon which he described the business into which the funds were to be invested (albeit inferentially) as a joint business venture was not the subject of evidence from any other source. Ms Nolan, counsel for Provident, did not suggest that Peter Bortolin told Mr Hilellis that his mother was involved in the business with him (or that his mother was investing in the business). She did not put to Mrs Bortolin Papa that she represented that to be the case in any dealings she may have had with Mr Hilellis. The only evidence bearing upon the issue emerged, somewhat tangentially, in the evidence of Ms Voulgaris, Mr Caramanlis' paralegal, in the following context:

On or about 10 January 2007, I received a call from George Hilellis, a mortgage broker from Community Mortgage Pty Ltd, which is located within the same building as Daniels Lawyers. Mr Hilellis and I had a conversation as follows:

Mr Hilellis: Hi Stella, it's George from Community Mortgage. I've got a client here who is obtaining a loan advance from NAB and needs independent legal advice on the mortgage documents. She would like to make an appointment to see George. Her name is Gina Papa. Her son, Peter Bortolin, has previously had some dealings with you through a loan he obtained from Hock-A-Car.

Ms Voulgaris: Hi George. Yes I remember Peter.

Mr Hilellis: Are you able to come downstairs for a moment to meet Ms Papa and discuss what's required.

Ms Voulgaris: No problem, I'll be down in a minute.

I subsequently went downstairs to Community Mortgage and was introduced to Ms Papa. Mr Bortolin was also present. Mr Hilellis and I had a conversation as follows:

Mr Hilellis: Ms Papa is refinancing her property to invest in a gym at Pyrmont with her son . She would like to make an appointment to see George to get some independent legal advice on the mortgage documents. (emphasis added)

Ms Voulgaris: That shouldn't be a problem, but I'll need to check with George. I'll get back to you later today.

1. Both Mrs Bortolin Papa and her son gave evidence that they did not attend any meeting with Mr Hilellis together. Mrs Bortolin Papa also gave evidence that she did not attend his office to discuss the loan with him or for him to arrange legal advice. Despite the significance of Ms Voulgaris' evidence to the case Provident mounted in defence of the cross claim, and Ms Nolan's reliance upon her evidence in final submissions, she did not put to either Mrs Bortolin Papa or her son that they were mistaken about attending a meeting with Mr Hilellis or that their evidence was untrue when they effectively denied the conversation Ms Voulgaris attributed to them. In addition, she did not put to either of them that they had conspired to mislead Mr Hilellis, and then later Mr Caramanlis, as to the extent of Mrs Bortolin Papa's interest in the gymnasium business in order to secure the loan finance from Provident. Although I was not invited by Mrs Bortolin Papa's counsel to invoke the rule in Browne v Dunn , the failure to explore the issue in cross-examination is productive of a lacuna in the evidence which does not operate to Provident's advantage.

1. Consistent with the findings expressed later in this judgment when dealing with the conflict in the evidence of Mrs Bortolin Papa and her son and Mr Caramanlis and Ms Voulgaris, and the absence of any evidence from Mr Hilellis (or an explanation for his absence) I am not persuaded that Ms Voulgaris' evidence of her meeting with Mr Hilellis and Mrs Bortolin Papa is evidence upon which I can rely.

1. On 6 February 2007 Mr Hilellis faxed a single page pro forma "Self-Certified Income Declaration" issued by Provident ("the Income Declaration") to Mrs Bortolin Papa which she then signed and faxed back to him that day under her son's instructions.

1. She initially gave evidence that the handwritten figures of $700,000 (in the field for the amount borrowed) and $6500 (in the field for the monthly instalments) apparently in her son's handwriting were definitely not on the document when she signed it. During cross-examination she said that she did not know, or could not remember whether the dollar amounts were written on the document when she signed it. It would appear that these figures are in her son's handwriting.

1. The I ncome Declaration made no provision for Mrs Bortolin Papa to declare or certify her income or even the sources of her income. It simply certifies that she is aware that she is applying for a loan in the stated amount of $700,000 and that monthly loan repayments are in the amount of $6500; that she is of the opinion that she is able to repay the loan without hardship; that she is unaware of any factors that may adversely affect her ability to make the repayments, or which may cause her hardship, and that she is aware that Provident is relying on her certification in agreeing to offer loan finance.

1. The Income Declaration was forwarded by Mr Hilellis to Provident on 22 February 2007, accompanied at this time by a separate loan application styled as an "Application for Mortgage Finance", purportedly signed by Mrs Bortolin Papa.

1. The purpose of the loan funds in this further application was elaborated upon as:

$180,000 refinance, $120,000 rental bond, $380,000 purchase equipment and $20,000 working capital.

(I note that this appears to be generally consistent with the handwritten notation on CMC's letter of 1 February.)

1. Unlike the first application, the second application makes provision for an applicant to supply employment details, their accountant's details and a statement of income and expenses/assets and liabilities. The information concerning Mrs Bortolin Papa's assets and liabilities in the second application was broadly consistent with the information supplied in the first application, namely a motor vehicle and the Leichhardt property (subject to mortgage), but the second application also included furniture and personal effects valued at $60,000 and a superannuation fund at $18,000. Her employment details were nominated as "self" and her occupation "baby products". The name of her accountant and his firm were also supplied.

1. I am satisfied that Mrs Bortolin Papa did not complete the second application and she did not sign it. Peter Bortolin gave evidence that he did not forge his mother's signature on this or on any documents submitted to Provident. He said that although he did not see Mr Hilellis sign the second application, he assumed he did so because Mr Hilellis was responsible for submitting the application on his (or his mother's) behalf.

1. The reason a second application was submitted, and why Mr Hilellis forged Mrs Bortolin Papa's signature, is not obvious given her apparent willingness to sign any documents she was asked to sign to secure the loan for her son. The most cursory comparison between the first and second loan applications does however reveal that the signature on the second application differs markedly from the signature on the first. In addition, the second application is undated. Mr O'Sullivan gave evidence that both applications were considered by him in the loan approval process without questioning their form or adequacy. This may do nothing more than expose a lack of diligence on the part of the officers of Provident who dealt with the loan and a perfunctory assessment of the application by Mr O'Sullivan. However, in the circumstances of this loan, I am satisfied the attitude of Mr O'Sullivan (and other loans officers) extends further exposing a failure on Provident's part to ensure that the loan was approved in accordance with the credit policy and procedures specified in its Credit Manual.

1. I am left in no doubt that Mr Hilellis was well aware that the applications for finance he submitted to Provident were for Peter Bortolin's benefit and of no commercial advantage to his mother. In the absence of any evidence to the contrary, I also accept Peter Bortolin's evidence that Mr Hilellis was well aware that his mother was borrowing a very significant sum of money secured against her home unaware of his (and Luxury Enterprises') parlous financial circumstances, the limited prospects of the gymnasium business generating an income sufficient to meet the monthly interest repayments and to discharge the capital debt after five years and the associated risk that there would be default under the loan agreements. I am further satisfied that his son, Mr Hill (who the evidence revealed is also associated with CMC), advised Peter Bortolin that Provident should be approached as a lender of last resort and, by inference, that information bearing upon the gymnasium business should be kept from Provident. No doubt this was because CMC was aware that were Provident to have actual knowledge of the true position it would not have advanced the loan to Mrs Bortolin Papa. The question that arises is whether CMC's knowledge of Mrs Bortolin Papa's financial situation, and that the real purpose of the loan was to on-lend to her son, is to be imputed to Provident as principal according to the law of agency. I will return to consider that question later in this judgment.

1. Despite having a limit in her mind as to how much she was prepared to borrow for her son's business, Mrs Bortolin Papa said her son did not tell her how much money he wanted or needed and she did not ask. She gave evidence that she did not learn she was in fact borrowing $700,000 from any documents she signed in support of the April 2007 advance (or the further $125,000 in April 2008), whether at the time she executed the loan documents in the solicitor's office or from the correspondence that he forwarded after settlement purporting to confirm the advice he had given in conference. She said that she would not have entered into the loan agreements were she aware that she was borrowing a total of $825,000 secured against her home. She said her son was insistent that she sign the various loan documents relating to both advances but that she did not see any reference to any dollar amounts on any documents either because they were signed by her in blank, or because she did not read them, or both.

1. Peter Bortolin gave evidence that he did not ask his mother to be the borrower per se, preferring to give her the impression that she was just providing the Leichhardt property as "a safeguard" if the business did not generate income sufficient to support the monthly interest payments. He said that he deliberately withheld information from her about the amount of money she was borrowing conscious that if he told her the amount he needed and the state of his finances, she would not sign the loan documents. Whether, and if so when she learnt of the amount of the borrowings before Provident instituted recovery proceedings in October 2008 is a question intrinsically bound up with her credibility as a witness more generally. I will also return to consider that question later.

Provident's lending policy and procedures and the issues to which they give rise in the proceedings

1. Provident Capital Ltd is a corporation that attracts investors by the issue of debentures. It then lends investor funds to borrowers at varying rates of interest, and over varying terms, secured by a first mortgage over real property in Australia. Unsurprisingly, the company's principal objective is stated in its Credit Policy and Procedure Manual ("the Credit Manual") to be the safeguarding of investor funds and the generation of profit. The Credit Manual, current at the date of the April 2007 loan, was tendered in the proceedings together with the Credit Manual current as at 31 March 2008, that is after the loan variation had been approved but prior to the deed of variation being executed. On any reading of the manuals, the articulation of company policy, the type of products the company offers and the way loans are processed and structured specifies those commercial objectives as primary considerations in the decision whether to lend.

1. The Credit Manual stipulates that Provident's lending activity is directed at a borrower who either chooses not to deal with traditional lenders or who does not conform to the lending criteria of those lenders. Typical borrowers are identified as business owners, the self-employed, property investors raising funds to purchase other property, the credit impaired and borrowers wishing to consolidate debt.

1. The Credit Manual also provides (so far as is relevant to these proceedings) as follows:

PCL's lending philosophy is that we will only lend to borrowers where:

- The borrower has demonstrated a capacity, either through flow analysis, independent certification (ie an accountant's letter) or history via another lender that they can afford the level of credit sought, or

- it is apparent that the level of credit sought will not create financial hardship for the borrower.

1. It also provides that the borrower's capacity to service a loan without creating undue hardship is a prime consideration when loan applications are being assessed in the loan approval process.

1. While recognising that its lending rates are such that it would not be regarded within the industry as a "tier one lender", Provident does not regard itself as a "lender of last resort". To this end the Credit Manual provides that finance will not be extended to a borrower of last resort lest, in the event of default, there be no option other than to sell a secured property with the associated risks and attendant costs of a mortgage sale.

The loan approval process provided for in the Credit Manual

1. The Credit Manual provides that after processing an application for finance in an approved form the managing director is the sole source of authority for credit approval. Mr O'Sullivan, the managing director and effective owner of the company, confirmed in his evidence that although various officers of Provident (including the loan manager and head of credit) dealt with Mrs Bortolin Papa's application for finance at various stages in the loan approval process, both preliminary to the first loan advance in April 2007 and preliminary to the further advance in April 2008, he gave the final credit approval on both occasions. He also instructed Provident's solicitors to prepare the loan documentation in respect of both advances and to forward that documentation to the borrower's solicitor for execution.

1. None of the officers of Provident who dealt with Mrs Bortolin Papa's application in the loan approval process, or who had the conduct of her account thereafter, gave evidence. I have already noted that Mr Hilellis did not give evidence. This remained the position despite Mr O'Sullivan's evidence that he was only in a position to address what occurred in the loan approval process in general terms, and principally on the basis of what he assumed to be the consideration given by Provident's employees to information received from the borrower (via CMC) relating to the purpose to which the loan monies was to be put and her capacity to service the loan, and from other documents in Provident's file.

1. An integral part of the administrative framework by which loans are approved is the production of a document known as a "Loan Summary". The Credit Manual provides that this document is to be prepared for submission to the managing director for credit approval in the following way:

Attached to the Loan Summary will be original information received from or on behalf of the borrower such as financial statements, cash flows, budgets, valuation reports or any other information which may give insight into the credit decision.. All information submitted is to be verified by the Loans Manager prior to the Loan Summary being submitted to the MD for approval. This includes verifying income, property ownership, completing ASIC searches, obtaining bank statements and the like. Any queries or requests for further information or clarifications are to be directed by the Loans Manager to the Introducer if the Borrower did not approach us directly. (emphasis added)

1. Mr O'Sullivan was unable to explain why the Loan Summary, intended to reflect his consideration of Mrs Bortolin Papa's application for loan finance before the loan was approved in April 2007, was not able to be produced as part of the documentation in the client file that was produced in the proceedings. In these circumstances, and in the absence of any evidence from officers of Provident who dealt with the loan application before Mr O'Sullivan approved it, I am compelled to a finding that a Loan Summary was not created for the purposes of approving the initial advance. That said, because it emerged in evidence that the only evidence of Mrs Bortolin Papa's capacity to service the loans considered by Mr O'Sullivan before the loan was approved was the one page pro forma document entitled "Self-Certified Income Declaration", her applications for finance would not include any of the detail which should have been included in the Loan Summary in any event. Mr O'Sullivan accepted that no inquiries were made of Mrs Bortolin Papa, or anyone else, to verify her income or her capacity to meet her obligations as borrower. I have already noted that the Income Declaration makes no provision at all for Mrs Bortolin Papa to supply, certify or declare any details of her income. It simply provides for her to certify an awareness of her obligations to make the monthly loan repayments, to repay the loan in accordance with its terms and that this can be done without causing her any hardship. Mr O'Sullivan also agreed that Provident sought no information as to the financial viability of the gymnasium business, nominated as the business to which the loan funds were to be committed, and no information as to the financial status of any company operating that business. He gave evidence that it was not incumbent on Provident to make these inquiries. Even accepting that to be the case, in circumstances where Provident was aware that the borrower was a self-employed woman of 61 whose only source of income was from the sale of baby clothing from her home, and where Mr O'Sullivan confirmed that independent of the Income Declaration Provident sought no information as to her capacity to service the loan, I am of the view that the Income Declaration was of no practical utility at all in satisfying Provident of the issue of serviceability.

1. Mr O'Sullivan also confirmed that Provident had no direct dealings with Mrs Bortolin Papa as borrower in regards to the April 2007 loan and that all correspondence was with Mr Hilellis. I have already noted that despite having her accountant's contact details, and despite what I regard as the most rudimentary information about her financial situation in the handwritten application forms forwarded by Mr Hilellis (apparently supplemented by some additional information supplied by him at Provident's request) Provident made no independent inquiry of her capacity to service a loan of $700,000. Rather, it either simply assumed she had a sufficient income stream, or it was indifferent to that fact. Furthermore, given Mr O'Sullivan's evidence that he had little if any actual memory of approving the loans to Mrs Bortolin Papa, coupled with the fact that a Loan Summary was not produced (and, as I have found on the probabilities, not prepared before Mr O'Sullivan approved the loans), there is no other conclusion open but that approval was given without Mrs Bortolin Papa signing the second application and with only the barest of details in the first application. In addition, Provident made no inquiry as to the profitability of the gymnasium business before extending further finance a year later. The loan was simply approved on the basis that it had been adequately serviced in the intervening twelve months.

1. Mr O'Sullivan was cross-examined at length as to how Provident could have been satisfied of Mrs Bortolin Papa's capacity to service the loan in these circumstances. He emphasised that the particular lending product under which finance was advanced to Mrs Bortolin Papa in April 2007, styled as a "Light and Easy Residential Loan", one of a number of products offered by Provident in 2007 and 2008 known generically as "Low Doc Loans". Low Doc Loans are identified in the Credit Manual as a particular lending product where credit is provided to borrowers who cannot provide evidence of loan serviceability, and where the loans are offered at what is described as "healthy interest rates" to ensure against Provident taking any undue risk with investor funds.

1. The product guide that accompanies the "Light and Easy Residential Loans" cites the key features as follows:

• Self-certification (noted to be the minimum a borrower is required to complete to address the issue of serviceability)
• loan to value ratios up 85%
• loans up to $5 million
• loan terms up to five years
• fixed rate/interest only loans.

1. Mr O'Sullivan gave the following evidence with respect to the company's practices in assessing an application for a Light and Easy Residential Loan on the basis of a Self-Certified Income Declaration:

HER HONOUR

Q. The Light and Easy product guide specifies on the issue of serviceability that borrowers are required to complete a selfcertified income declaration as a minimum requirement. That rather assumes, doesn't it, that the loan manager or the person ultimately approving the loan looking at all of the information bearing upon the decision whether to advance the loan or not, would make an assessment as to whether, in the particular circumstances, a selfcertified income declaration was sufficient or whether something more was required. Is that right?

A. Your Honour... what the loans officer does is require that we at least get a selfcertified declaration.

Q. That's as a bare minimum?

A. Yes.

Q. But as a minimum does not mean in all circumstances that it will be sufficient ...

A. Yep, that's correct.

Q. So that requires the exercise of some prudent judgment on the part of the loan assessor and ultimately the loan manager who signs off on the loan that in the particular circumstances, the selfcertified income declaration is sufficient to address the issue of serviceability given that the prime consideration in the company's practices is to ensure that the borrower is not going to suffer unjust hardship by reason of the obligations into which they are entering, correct?

A. Yes, correct.

Q. And what, in your view, would excite a loans officer to look for something beyond the selfcertification document which is in pro forma form where all of the questions are likely to be answered "yes", I would have thought, otherwise the person is not going to advance their prospects of getting the money that they are seeking; what is it that would excite a prudent loan officer to ask for something more?

A. Other information that may become evident such as inconsistency in the application as to the story that we are being told as to what the funds would be used for.

Q. Inconsistency. What about lack of substance in the purpose to which the loan is put in the context of who the applicant is and the likely business objectives to which that applicant might be directing very substantial funds; would that, in your judgment, excite a loan officer to press for a little more information?

A. The loans officer wouldn't be concerned with the you know, the likelihood of success that somebody that a borrower was entering a business activity or an investment that the borrower was actually entering into. You know, they would be assuming that that business or investment, that they have done their own appropriate research into that.

Q. This application, with all respect to the defendant, Ms Papa, was an application with the barest of detail, written in a not very sophisticated hand, if I can put it that way, and really with nothing more to it than the paper upon which it was written, agreed?

A. I agree.

Q. I am struggling to understand for my own part why that would not excite some additional inquiry on the part of the loan officer, or even passing through that person, if that person is keen to advance the loan process, why it wouldn't excite your attention as the person who ultimately signed off on the loan. Can you assist me with that?

A. Well, your Honour, we are not a commercial bank. We are not there to assess, you know, the individual applications and and the businesses. We are there to assess what we what is put in front of us and, you know, the story that was presented to us by Ms Papa or her representatives was

Q. When you refer to a story, what I see is a woman who wants what seems to me a lot of money to invest in gym equipment?

A. Well, in

Q. Now, is that the story that you are talking about?

A. Yes...

Q. Without knowing who is going to own the gym equipment, where the gym equipment is going to be housed and to what profitable purpose it is going to be put. The story is simply that she wants 500 odd thousand dollars to invest in gym equipment?

A. Well, in a gym.

1. Despite Mr O'Sullivan's evidence, I am of the view that there was no adequate basis upon which Provident could have had any confidence that Mrs Bortolin Papa had any capacity to service either the original advance or the further advance. The briefest of telephone calls to her accountant would have confirmed that to be the case. In considering whether I should regard Provident's business as that of an asset lender I regard Provident's failure to make any adequate inquiries of her capacity to service the loan as critical.

1. Mr O'Sullivan referred repeatedly in his evidence to Provident being told "a story" about the use to which the borrowed funds which he maintained grounded his belief that the borrower was investing in a gymnasium in which she had an interest despite the fact that the application did not refer to that fact:

Q. But if you thought in 2007 that Mrs Papa was acquiring a gymnasium, given that she didn't state as an asset that she owned one, or shares in a company which owned one, surely you would have expected her to say in this document that she owned a gymnasium or shares in a company which did, isn't that right?

A. Well, certainly one would have expected her to put it in the document but based upon our knowledge of what we were told the first time, included in the fact that the cheques at settlement went to that purpose, I don't think that we would have raised it in our minds any higher than that. The story that we had, the usage of the funds, the application of the funds was consistent with the story that we were told.

HER HONOUR

Q. And what was that story do you say that you were told?

A. Business use which was, when you go back to those original cheque directions sorry, the original application form, which I don't have in front of me, but 180,000 was for the repayment of the existing mortgage, three hundred and something for gym equipment, rental bond which I presume was for the gym and working capital of $20,000 and the cheques that we cut at settlement, the bank cheques, cheque directions that we received from the borrower's solicitor were consistent with that, or largely consistent with that usage.

Q. If you had known that the borrower was proposing to onlend the funds to a family member in order that his financial difficulties might be able to be met where otherwise they might not be able to be met, would you have regarded that as a personal purpose to which the funds were to be put?

A. More than likely, your Honour. In some circumstances, although limited, where there are proper loan agreements and and the like in place between the parties, there may be an exception but in the main

Q. That is a personal purpose?

A. Personal purpose, correct.

SEGAL

Q. Do you tell her Honour that you have a recollection of thinking at the time one way or another, that is at the time of the original loan approval, final approval of $700,000, as to whether or not the loan was for a gymnasium to be acquired by Mrs Bortolin or perhaps for some other person, do you remember having a thought about it at that time?

A. Look, the process would have been one of the person the lending manager or head of credit coming to me and saying, "This is a security, it's a business use declaration, it's for investment in a gym or for a business", and that would have been the extent of it as far as my involvement personally.

Q. So your involvement wouldn't have involved turning your head to whether or not this might be for a gymnasium purpose of Mrs Papa or otherwise. You wouldn't have turned your head to it is what I am saying, am I right?

A. Well, what I am saying is if I was the credit manager on this file, the story is consistent from day one so I have already indicated that we wouldn't have turned our mind to the commercial viability of that decision whether she was making a good decision or a bad decision, but the file is consistent with that story and I would be satisfied with that story.

Q. It is also consistent, isn't it, with a lady borrowing money on a house, where she had a little shop at the front of her ground floor, for the purpose of some other person having the benefit of that funds for a gymnasium?

A. Are you asking me if that is a possibility?

Q. Yes?

A. Well, it's a possibility.

Q. And I suggest to you that was a possibility you ought to have considered?

A. Why?

Q. Do you agree or disagree?

A. I well, as I have said, on the information that we had in front of us, the declarations made by the borrower, the application, cheque directions, that that is a plausible and consistent story.

Q. The cheque directions were equally consistent with the gym equipment being for the purpose of another person?

A. Well, maybe if she had drawn the cheque to her son and then he'd have purchased the equipment, yes. Look, we are not here to be, you know, private investigators. She has told us what she wants to use the money for and the story is consistent from that point. The fact that she is 61 and, you know, a selfemployed entrepreneur, I don't see any, you know, inability on us to lend to people. In fact, we have got people in the office assessing these applications that are that age.

Q. I don't want to focus too much on people being 61 or older, for more reasons than one, but the fact of the matter is, given the profile of the person, I would suggest to you that it would be reasonable to at least ponder the possibility, is this person buying a gymnasium?

A. Well, I disagree. I mean, I think her profile is one of somebody who has worked for themselves for a number of years, has gone out in business for themselves for a number of years, operates a business and would know all the trials and tribulations of being selfemployed and, you know, the merits or otherwise of those types of decisions. She owns a property that is worth over a million dollars which is lowly geared so somewhere along the line she must have done something right. Her conduct on the account was sound, her original account with Sandhurst. Her conduct with us was sound. Her declarations throughout are consistent.

1. Later he gave the following evidence:

Q. Just finally, Mr O'Sullivan, just returning to this point in time in February 2007, taking all these things, treating them collectively rather than individually, that is the lady's age, the security was her home and the shop from which she generated income and her age and the amount of money, and taking into account repayments were to be $78,000 per annum, would you have regarded it as prudent or wise of a lender in your market place not to make a single independent inquiry as to serviceability, that is independent of the selfcertification?

A. With the knowledge that we have got now?

Q. No, the knowledge you had in February 2007. Do you think it was a wise thing to do not to seek a single independent piece of information regarding serviceability?

A. Wise, no.

...

Do you think that was prudent?

A. No.

...

Q. That practice of only relying upon selfcertification and not seeking any other independent information as to serviceability, would you regard that practice as prudent in February 2007?

A. No.

Q. Would you regard it as wise?

A. No.

Q. In other words, you regard that practice in 2007 of only relying upon a selfcertification and not seeking any independent information as to serviceability as imprudent and unwise, correct?

A. You know, in in the context of

Q. Correct?

A. In the context of the question, yes.

Q. And your company which had that practice in 2007 engaging in this imprudent, unwise practice, was of course comforted because you could always sell this lady's house if there was a default, correct?

A. Comforted by the security and the other knowledge that we had.

The application for a variation and extension to the loan agreement in February - April 2008

1. Despite what appears to be Peter Bortolin's genuine efforts to promote or improve the financial viability of the gymnasium business with the funds his mother had borrowed from Provident in April 2007, it did not generate a profit sufficient to meet Luxury Enterprises' ongoing obligations to Perpetual as mortgagee of the premises at Gosford and Camperdown or to enable him to make the monthly interest repayments due to Provident.

1. On 8 August 2007 (at what I accept was at her son's insistence), Mrs Bortolin Papa sent a letter to Provident authorising him to discuss any account matters on her behalf. The letter was addressed to Andrew Walker as Assistant Lending Manager and appears to have been sent as part of his deliberate strategy that his mother should have no direct contact with Provident as he attempted to juggle his financial affairs and those of Luxury Enterprises.

1. Although the interest payments to Provident were made at successive monthly intervals between February 2007 and February 2008 without default, correspondence under Mr Walker's hand in November 2007 addressed to Mrs Bortolin Papa, identified what was said to be Provident's inability to debit her account with the previous month's payment. I accept that she did not read this letter either because it was intercepted by her son or given to him at his insistence unopened. It would appear that thereafter Peter Bortolin dealt with Mr Walker concerning the account in his mother's name.

1. On 30 November 2007 Mr Walker sent an email to Peter Bortolin at the gymnasium's email address confirming an earlier phone conversation concerning what he described as "the early repayment fee on your mother's loan facility". He advised the cost of retiring the loan within the five year term would total $64,108.33, additional to the repayment of the principal. There was no evidence as to why Peter Bortolin sought this information, although the inference is that it is an early indication of the deepening financial problems he was facing and what I regard as his desperate but fanciful hope he could sell the business, repay Provident and walk away debt free. On the other hand, it also indicates that Provident was aware, to some extent, of the degree of involvement of Peter Bortolin in the operation of the loan account held in his mother's name.

1. On 17 December 2007 Perpetual Trustees Ltd issued default notices to Luxury Enterprises in the amount of $15,879 and on 21 February 2008 and commenced proceedings against Luxury Enterprises (and Peter Bortolin, as guarantor) seeking an order for possession of both properties and judgment debt in the amount of $516,891. The statement of claim was served on Daniels Lawyers on 14 April 2008. They accepted service on Peter Bortolin's and/or Luxury Enterprises' behalf.

1. It is against this background that in January 2008 Peter Bortolin approached Mr Hilellis for advice as to whether it was possible to seek additional finance from Provident against the security of the Leichhardt property. Mr Hilellis advised that he contact Provident directly. There was no evidence that Mr Hilellis had any involvement in the negotiations with Provident which culminated in Mrs Bortolin Papa entering into the loan variation agreement in April 2008.

1. On 23 January 2008 Peter Bortolin made telephone contact with Andrew Walker. He gave unchallenged evidence of a conversation to the following effect:

Peter Bortolin: I need to borrow more money on my mum's house. Is it possible?"

Andrew Walker: We may be willing to do so. I will have to get back to you.

(emphasis added)

1. Peter Bortolin was unable to recall whether Mr Walker asked any questions about the purpose of the loan or what interest he had in obtaining an extension to the loan that was secured against his mother's house. In an email sent later the same day Mr Walker indicated that Provident would be prepared to consider an increase in the loan subject to the Leichhardt property being revalued. He invited Peter Bortolin to have his mother send written confirmation of her desire to proceed with the fresh valuation with a view to increasing the facility based on that valuation.

1. There is no evidence that Provident had any further communication with Peter Bortolin before it issued a letter of offer on 5 February 2008. The letter was signed by Mr Walker and countersigned by Ms O'Hare, Head of Credit and Lending. It was addressed to Mrs Bortolin Papa at the Leichhardt property. The offer provided for an extension to the loan in the varied amount of $825,000 on terms that the loan would be fully paid by 4 April 2012 and that interest would be calculated on the same terms as the advance of $700,000 in April 2007. In the letter the purpose of the loan is identified as "an increase on existing loan facility". The letter specifies that Provident's solicitors will require an executed Business Declaration on settlement, and that the offer is made subject to Provident receiving a satisfactorily completed loan application and a Self-Certified Income Declaration.

1. Mr Walker's involvement in the variation to the loan was said to be further evidence of the fact that Provident knew, or should be taken to have known that Peter Bortolin was not only the intended recipient of the further advance of loan funds but was the de facto borrower of those monies secured against his mother's house. Mr Walker did not give evidence. Accordingly, whether the evidence supports an inference of this kind must be determined by reference to the available evidence.

1. On 15 February 2008 Mrs Bortolin Papa signed and dated a document entitled "Application for Mortgage Finance". I accept that it was otherwise completed by her son . She said she signed the letter of offer on the same date. She said her son handed her the documents to sign some time after he had requested more money for the gymnasium from her. In her affidavit she said:

He said, "Mum, just sign this". I did not inquire as to what they were. I do not recall whether when I signed the documents the words and figures appearing thereon were already present. I knew that the documents had something to do with borrowing more money for the gym business but I trusted my son and did not ask anything else about the documents.

Peter said to me words, which he would say to me on several occasions, "Don't worry Mum. It will be alright. It will all get sorted out soon".

1. The application nominated the purpose of the loan as "investment". Her assets were listed as the Leichhardt property and a motor vehicle valued at $20,000. In conformity with the application for loan finance submitted to Provident in February 2007, the 2008 application also included a "Business or Investment Purposes Declaration" (in the form provided for under the Consumer Credit Code) and a declaration and certification that she was aware of the likely monthly loan repayments (on this occasion specified to be $7000); that she was not aware of any factors affecting her ability to make those repayments and that she could repay the loan in accordance with its terms without causing hardship.

1. Mr O'Sullivan gave evidence that Provident had no direct dealings with Mrs Bortolin Papa as the applicant for an extension and variation to the loan agreement and that all correspondence was with her son. He gave the following evidence:

Q. And in 2008, would you regard it as a wise thing for lenders in your market place in assessing Ms Papa's application for an increase to not make a single inquiry as to whether this business had generated any income or profit?

A. Well, the the business wasn't a party to her loan.

Q. But in 2007, you assumed it would generate income to repay the loan?

A. And to service the loan.

Q. Yes?

A. And it did.

Q. And in 2008, did you think that this business would generate or potentially generate income to service your loan?

A. Well it did.

Q. Well, it paid but did it generate any income?

A. Well, it serviced the loan, yes.

Q. Do you think it was wise not to ask for any financial statements, cash flows, tax returns, some independent document?

A. The business the business wasn't a party to her loan so I have no problems with the fact that we didn't seek independent verifications on a party that wasn't party to our loan, particularly with the knowledge that we had on serviceability.

Q. Perhaps I am not asking the questions clearly enough but in February 2007, I think your evidence was you made an assumption

A. Yes.

Q. that the investment disclosed in Ms Papa's application would generate income for her to service the loan?

A. Correct.

Q. An assumption based on not a single independent fact, correct?

A. Correct.

Q. And of course you only knew in February 2007 that she generated income from selling baby's clothes at the shop, correct?

A. Correct.

Q. But as to how much she made, you had no idea?

A. Correct.

Q. And so in 2008 when you approved the variation, again there is the question of serviceability, correct?

A. Correct.

Q. And is it correct to assume that as to her ability to service the loan, the only two potential sources of income of which you were aware was the shop above which she lived and the business in which she had invested?

A. Correct.

...

Q. And is it correct to say that in 2008, you made no independent inquiry of any nature whatsoever, that is independent of Ms Papa, as to those two sources of income?

A. And our own knowledge, yes.

Q. I am sorry?

A. And our own knowledge.

Q. What do you mean your own knowledge?

A. Well, we had a relationship with her then. I mean if if you if it was with another bank, that would be independent verification but you are saying because it is with us it is not independent, but it is still evidence of

Q. You are talking about the repayments?

A. Yes.

Q. Just put that aside. I am talking about tax returns, cash flows, bank statements, that is other than yours, letters from accountants, anything of that sort?

A. None of the ones you mentioned, no.

...

Q. Would you regard the failure to make any independent inquiry from an accountant, from tax returns, financial statements, et cetera, as prudent?

A. I don't accept it's a failure so therefore I can't accept it is prudent.

Q. Okay, well, the absence of. Would you regard the absence of making those inquiries as prudent?

A. No.

Q. In 2008. For a lender in your market place?

A. Well, we get back to what is the practice of what a lender in my market place does so if you want to make the assumption that everybody in this market place, banks, nonbanks, bank subsidiaries are imprudent because they don't seek that, then the answer to your question is yes. If you accept that this is the product and the nature of the product and what goes with it, then that is the standard commercial practice for noncode regulated, nonconforming lending.

The departure from approval mechanisms in Provident's Credit Manual

1. Despite Mr O'Sullivan's evidence that he complied strictly with Provident's Credit Manual procedures before approving the loans to Mrs Bortolin Papa in April 2007 and April 2008, where the only evidence of serviceability was the provision of a Self-Certified Income Declaration, his approach to and the granting of credit approval constituted a marked departure from a number of provisions in the Credit Manual stipulated by the company to be essential to the loan approval process.

1. The Credit Manual also provides that it is a complete record of the company's credit and lending policy and the procedures for granting credit approval; that any departure from the credit policy provided for in the Credit Manual must be approved by the Board of Directors at a duly convened and constituted meeting and that any changes to the credit policy must be inserted in the Credit Manual. There was no evidence, independent of Mr O'Sullivan, that the Board of Provident (whether on legal advice or otherwise) approved a departure from the serviceability requirements in the Credit Manual when it issued the product guide associated with the Low Doc Loans, or that loans officers were directed that compliance with the Low Doc Products guide displaced or overrode the mandatory requirements in the Credit Manual governing serviceability.

1. As Hoeben J observed in Fast Fix Loans Pty Ltd v Samarzic [2011] NSWSC 19 asset lending also raises public interest considerations. His Honour then said:

[80] The current position under the CRA in relation to asset lending was summarised by Campbell JA in Kowalczuk as follows:

"96 It can be accepted that pure asset lending - described by Basten JA in Khoshaba at [128] as being "to lend money without regard to the ability of the borrower to repay by instalments under the contract, in the knowledge that adequate security is available in the event of default" - is in at least some circumstances unjust within the meaning of the Contracts Review Act, or unconscionable: Elkofairi v Perpetual Trustee Co Ltd [2002] NSWCA 413; (2003) 11 BPR 20,841 at [57]-[59], [79] per Beazley JA (with whom Santow JA and MW Campbell AJA agreed); Khoshaba at [92] per Spigelman CJ (with whom Handley JA agreed on this point), [128] per Basten JA. However whether lending on the basis that the loan can adequately be repaid from the security, is in the circumstances of any particular case unconscionable or unjust, depends on other matters as well. Thus, in Elkofairi the facts that neither the applicant nor her husband had any income, the loan in question was for five years, and the security was over the applicant's only asset (involving the proposition that the applicant had no other resources from which to service the loan) and that the secured property was the applicant's home, were all relevant matters in reaching the conclusion that the transaction was both unconscionable and unjust. In Khoshaba , other factors relevant to the conclusion of injustice were that the applicants were a husband and wife, one of whom earned $43,000 pa and the other of whom was a pensioner, the lender had no information at all about the purpose for which the loan was being sought, and the security was over their home."

[81] Campbell JA, however, qualified that approach:

"99 I would accept that in some circumstances knowledge of a high degree of risk that there might be a default in payment of interest or principal so that a mortgagee sale would result, could be unjust lending, even though it could not be said that the lender knows that there will be default. However I do not accept that a lender is always bound to carry out a detailed investigation of the practicality of an intending borrower actually being able to carry through the plan the borrower says he or she has for repayment of the loan. In the present case, Kowalczuk stated to Accom that he proposed to pay the Berowra loan out through bank refinance, and the Haberfield loan through refinancing with FirstLoan (the same brokers through whom Kowalczuk was able successfully to refinance the Berowra loan) and there was no occasion for Accom to doubt that he would be able to do so. Thus, even if Mr Conti is right in saying that there can be pure asset lending if the lender knew that there was a high risk that the intended means of repayment might fail, in the present case Accom did not have knowledge of that type."

1. Hoeben J went on to observe in Fast Fix Loans that the fact that a lender (Provident in this case) made only the most cursory inquiries of Mrs Bortolin Papa's actual financial circumstances, and no assessment at all of her capacity to service the loans, ought not put it in a better position than a lender who makes these inquires and who becomes aware in that process that the borrower has a very limited (or even no capacity) to repay the loan. Had Provident spoken to Mrs Bortolin Papa directly, or insisted that further inquiries be made of her accountant to confirm the underlying purpose of the loan application and her capacity to meet the loan repayments, it would have learnt that the borrowing was for a highly speculative business endeavour of her son, the details of which she was utterly unaware and in which she had no interest or involvement of any kind.

1. While Provident's conduct and knowledge is of importance in determining the application of the Contracts Review Act , it is not the only consideration. In Perpetual Trustee Company Ltd v Khoshaba [2006] NSWCA 41 at [76] Spigelman CJ said:

Plainly, the conduct, whether by act or omission, of the party resisting a finding of unjustness under the Act is highly relevant, and will often be determinative. However, the scope of relevant circumstances is not confined to what the person resisting an order under s7(1) did or did not do and knew or ought to have known. The critical phrase in s7(1) - "the circumstances relating to the contract at the time it was made"- cannot be so limited. Section 9(1) provides that when determining unjustness "the Court shall have regard to the public interest and to all the circumstances of the case". Furthermore, s9(2)(l) includes, as I have noted, amongst the relevant circumstances "the commercial or other setting, purpose and effect of the contract".

1. The Chief Justice also observed at [119] that the power to grant relief under the Contracts Review Act may be engaged in circumstances where the unjustness of a contract is shown to be as a result of factors of which the lender was ignorant. That is of particular significance in this case where despite the attribution of CMC's knowledge of Peter Bortolin's affairs to Provident at the time of contract, and despite the suggestion in Mr Walker's dealings with Peter Bortolin that Provident was aware he was the de facto borrower, it had no direct knowledge that Peter Bortolin had exercised extremely poor business judgment in using his mother's home to finance the acquisition of a struggling gymnasium business at very significant cost. Again, this was because it made no inquiries of a kind as would have revealed the highly speculative nature of the investment as evidenced by the total collapse of that business with substantial accumulated debt within the space of less than two years of the original advance and within months of the further advance.

1. An examination of the s 9(2) considerations reinforces my conclusion as to the unjustness of the loan agreeemnts.

(a) Whether or not there was any material inequality in bargaining power between the parties to the contract

(e) Whether or not any party to the contract was not reasonably able to protect his or her interests

(f) The relative economic circumstances, educational background and literacy of the parties to the contract

1. Although Mrs Bortolin Papa was only schooled to age 15 after emigrating to Australia at age 7, I am satisfied that she had a sound working command of English which equipped her to operate a modestly successful retail outlet over many years and to discharge her responsibilties as a Justice of the Peace with the necessary skill and ability. There is no suggestion that she was other than conscientious in dealing with the affairs of others in her official capacity. However, I do not regard her business as a retailer of children's clothing as providing her with any sophisticated knowledge of commercial matters. The evidence also established that although she has had personal experience with financial transactions, both in her marriage and in the Port Douglas transaction, the latter within a short time of contracting with Provident, she deferred to her husband and then her son to negotiate and settle the contractual terms of the loans and mortgages. This does not, however, disqualify her from having the capacity to exercise a level of judgment commensurate with the need for her to take responsibility for her own financial affairs in her dealings with prospective lenders. I do not regard her age as a disqualifying factor.

1. I do accept, however, that she was subordinate to both her husband in the management of their matrimonial financial affairs during the course of the marriage and then subordinate to her son because of her dependence on him after her second husband died. It is clear beyond question that her son's determination to put his own needs above those of his mother, and to apply both subtle emotional pressure and at times overt pressure on a "do not ask me any questions - trust me I am your son" basis to achieve his own selfish ends was the only reason she entered into the loan agreements with Provident.

1. It is equally clear that she gained no finanacial or other material benefit under the loan agreements. Self evidently, were I to have found that she deliberately used unfair tactics to mislead CMC, Provident and her own lawyer into a mistaken belief that she was involved in her son's business in order to secure the loan finance, her claim to have contracted under a material disadvantage would fail. I am however satisfied to the contrary. She was, in a practical sense, a silent and compliant dupe.

1. The question is whether the combination of these circumstances render it unjust to enforce her contractual obligations against her with the inevitable loss of her home and retail outlet were she bound by them. In Esanda Finance Corporation Ltd v Tong (1997) 41 NSWLR 482 at 491, Handley JA said:

"... a contract is not unjust merely because it is not in someone's interest to enter into it, or because a person is unable to pay the debt when called upon to do so, or because its enforcement will lead to the loss of a home."

1. Tong was referred to with approval by Basten JA in Khoshaba at [128] where his Honour said with respect to the question of the public policy that while there is a public interest in treating pure asset lending as unjust, when the asset in question is the borrower's sole residential property something more is required than that the borrower has been "foolish, gullible or greedy" before the contract, or part of it, will be set aside. In this case, in addition to Mrs Bortolin Papa's foolishness and gullibility, the involvement of Mr Hilellis and the steps he took to ensure the loan was processed in effect without reference to her are factors which support a finding that she was in an unequal bargaining position and not able in the particular circumstances to protect own interests.

(c) Whether or not it was reasonably practicable for the parties seeking relief under the Act to negotiate for the alteration of or to reject any of the provisions of the contract

1. While it must be said that Mrs Bortolin Papa had time and opportunity, at least in the theoretical sense, to negotiate the terms of the loan agreements with Provident, because she was being pressured by her son to sign the loan applications and associated documents prior to the conference with Mr Caramanlis where the formal loan documents were signed, and because her son had actively encouraged her not to read the documents beforehand, she could not have negotiated for the alteration or rejection of any of the provisions of the loan agreements even were Provident minded to negotiate its terms, something I very much doubt.

(d) Whether or not any provision of the contract imposed conditions which were unreasonably difficult to comply with or not reasonably necessary for the protection of the legitimate interests of any party to the contract

1. Although the obligation was to repay the principal loan of $ 825,000 at the expiration of five years with interest calculated at 10.99%, and in the event of default at 16.99%, I am not able to come to the view that this was particularly onerous in the absence of any evidence or submissions directed to the question.

(h) Whether or not and when independent legal and other expert advice was obtained by the party seeking relief under the Act

(i) The extent (if any) to which the provisions of the contract and their legal and practical effect were accurately explained by any person to the party seeking relief under this Act, and whether or not that party understood the provisions and their effect

1. Although Mrs Bortolin Papa understood her legal obligations under the loan agreements, she did not seek independent financial advice about her son's capacity (or his company's) to make successive and substantial monthly interest repayments or to repay the loan of $825,000 in full at the expiration of five years. In signing the loan documents she relied entirely upon the trust and affection for her son and did not appreciate the extent of the risk she was taking as a borrower of very substantial funds which she committed entirely into her son's hands. I am satisfied that the extent of her knowledge of her son's need for finance was limited to her unquestioning acceptance that he wanted to improve the prospects of a viable gymnasium business which could generate a net monthly income of at least $7800 to enable the interest repayments to be made while the business developed. Clearly enough she had no appreciation of the actual lack of commerciality in the arrangement since Luxury Enterprises' capacity to pay off the loan was wholly contingent upon a gymnasium business (formerly under adminstration) being successful enough in the short term to carry the debt and to generally improve its capital worth to ensure a sale or refinance at the expiration of five years.

1. In addition, while I accept that Mr Caramanlis explained in general terms the nature and effect of the loan agreement and the mortgage, and while I am satisfied she understood the amount of the interest repayments and that Provident could sell her house if the loan was not repaid, because I am persauded that Mr Caramanlis allowed Peter Bortolin to be present during the course of the conference when the loan documents were executed and advice given about them (such as it was), I consider that on the probabilities the standard of independent legal advice fell short of what was warranted in the circumstances. In particular, Mr Caramanlis failed to ensure that she take pause and reflect upon the extent to which entering into the loan agreements at her son's insistence, and on interest only terms, exposed her to the real risk of losing her home and her only asset. By contrast, Provident was an experienced lender which sought and obtained legal advice and the provision of legal services essential to achieve its commercial objectives. I am satisfied that there was material inequality in bargaining power between Mrs Bortolin Papa and Provident for these reasons.

(j) Whether any undue influence, unfair pressure or unfair tactics were exerted on or used against the party seeking relief under the Act

1. Although I am not prepared to find that the Mrs Bortolin Papa was subject to undue influence by her son, as that term is understood under the general law, she was certainly exposed to pressure from him at various stages in the precontractual period. The fact that he deliberately kept vital information from her is indicative of the extent of his manipulation of her, a strategy which Mr Hilellis employed on her son's behalf and apparently approved of. On the other hand, it was her trust and dependence on her son which totally overwhelmed her judgment.

1. For the reasons set out in detail above, I have concluded that the loan agreements were unjust at the time they were entered into, in the sense in which that term is used in s7(1) of the Contracts Review Act .

1. This does not end the matter. I must come to the positive view that relief should be provided to Mrs Bortolin Papa under the Contracts Review Act and the nature of that relief.

1. While, as I have sought to emphasise, it is true that Provident did not have actual knowledge of Mrs Bortolin Papa's financial circumstances or that the borrowed funds were to be committed to a business venture in which she had no interest and over which she exercised no control, that was not because it was misled by her in some way. It was because it made no inquiry as to why a 61 year old retailer of children's clothing would choose to invest her only asset and her home in a gymansium. I am satisfied that it made no inquiry because it was not concerned about her ability to meet her obligations under the loan agreement should there be default by the company because it had the Leichhardt property as security.

1. In the circumstances of this case as between Provident and Mrs Bortolin Papa, it is appropriate that the loss of the monies advanced pursuant to the loan agreement should be borne by Provident and not by Mrs Bortolin Papa, save to the extent of her admitted benefit in the discharge of the loan to Bendigo Bank.

1. I have concluded that Mrs Bortolin Papa is entitled to relief under the Contracts Review Act . The balancing of her position against that of Provident by reference to the criteria set out in s 9 of the Act favours a finding in her favour. When Provident entered into the loan agreements there was already a body of case law which identified the dangers for lenders where monies are advanced without regard to the ability of those who put forward security to meet what are often onerous repayment obligations. The strict serviceability requirements and the importance given to the issue in Provident's own Credit Manual was in this case either ignored or treated by Mr O'Sullivan as a consideration he was at liberty to dispense with.

1. Having determined that the plaintiff is entitled to relief under the Contracts Review Act it is only necessary to refer briefly to the alternate case for relief under the Australian Securities Investment Commission Act.

1. The applicable authorities identify the matters which need to be established if an unconscionable transaction is to be set aside. In this case that would necessitate Mrs Bortolin Papa discharging the burden of establishing that she was under a relevant disability (whether that be weakness, ignorance or necessity) such that she was unable to assess for herself whether to enter into the impugned transaction. It would also require her to establish that Provident was aware of that fact and that it was unfair or unconscientious for them to have executed the loan agreements (and to seek to enforce them). I am not persuaded that in making or varying the loan Provident unconscientiously took advantage of Mrs Bortolin Papa much less that she was acting under any relevant disability. For that reason her claim for relief under the Act is rejected (see generally Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 and in particular the analysis of McDougall J in Perpetual Trustees Victoria Ltd v Longobardi [2009] NSWSC 654).

The cross claim against Mr Caramanlis

1. In final submissions counsel for Mrs Bortolin Papa advised that he was abandoning that part of the cross claim that alleged a breach of duty by Mr Caramanlis' failure to provide financial advice before she entered into the loan agreements. With that concession both parties addressed the question of breach of duty referable to whether he provided her with adequate or appropriate legal advice concerning her legal obligations under the loan agreements and/or whether, given what is said to be his knowledge of various financial matters relating to the viability of the gymnasium business operated by her son, he should have informed her of those matters or advised her to obtain independent financial advice or ceased to act for her altogether.

1. In the context of the adequacy of the provision of legal advice, a related question was whether, in the event that I was satisfied that Mrs Bortolin Papa did not in fact represent she was an investor in her son's gymnasium business and that the true position was that at all times her solicitor was of the understanding that she was borrowing the money to give to her son for him to invest or commit to that business, Mr Caramanlis failed to advise her that the Borrower's Declaration could not be executed by her as a true declaration.

1. At paragraph [179] above, and for the reasons there set out, I found myself unable to come to any settled view about the adequacy of the legal advice Mrs Bortolin Papa was given in conference with her solicitor in either March 2007 or March 2008. For that reason, and despite the fact that I rejected Mr Caramanlis' evidence concerning the advice he gave in regards to the Borrower's Declaration, largely because I was not persuaded that he was being truthful as to his own understanding of the legal effect of the Declarations at the time they were executed, Mrs Bortolin Papa has not discharged the onus of establishing that such advice as he did provide her fell so far short of the standard of care required of a solicitor retained to act on a mortgage as to constitute a breach of the solicitor's duty of care in this case.

1. After considering Peter Bortolin's evidence concerning the extent of his dealings with Mr Caramanlis before advising his mother on the loan agreements (including the circumstances in which he claimed that his mother was introduced as a client) and again despite some misgivings as to whether Mr Caramanlis has been entirely truthful in claiming he knew nothing at all of the financial circumstances of the gymnasium business at any relevant time, I am not persuaded that Mrs Bortolin Papa's claim for damages based on breach in this context has been made out. As I have been at pains to make clear, Peter Bortolin is not only a person who has been prepared to lie to his mother to advance his own interests at the expense of his mother but he is also a person whose credibility generally is in question. While there was every indication in the evidence of a relationship between Mr Caramanlis and Peter Bortolin of solicitor and client which would have imposed obligations on Mr Caramanlis when dealing with Peter Bortolin's mother of the kind of which she complains, the true extent of that relationship was not proved to the extent necessary to constitute a breach of duty.

1. Even assuming breach, Mrs Bortolin Papa failed to discharge the onus of proving facts, either directly or by inference, upon which a finding of causation could be made in her favour such as to ground a claim in damages. For that reason alone her cross claim against the solicitor would fail.

Conclusions

1. Mrs Bortolin Papa has been successful in resisting Provident's claim to possession of the Leichhardt property and an order for payment of interest. As I noted at the outset the relief she sought in the cross claim against Provident did however acknowledge her need to account for the amount of $180,000 committed to the discharge of an existing mortgage at the time of settlement of the initial advance. To that end she sought a period of 90 days from today to make the necessary arrangements to seek or obtain finance. In the course of final submission the parties also raised the question of how I should deal with the question of interest under the loan agreement in the event that the cross claim was successful without developing their submissions. With a view to the making of final orders, counsel for Provident and Mrs Bortolin Papa are encouraged to draft short minutes to enable those orders to be made by consent. They should also deal with the question of costs. In the event that agreement cannot be reached the matter will need to be relisted for further argument.

1. The cross claim against Mr Caramanlis is dismissed. I will hear the parties further on the question of the costs.

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Decision last updated: 03 November 2011