Saafin Constructions Pty Ltd (in liq) v MAG Financial and Investment Ventures Pty Ltd
[2021] VSC 489
•13 August 2021
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
TECHNOLOGY, ENGINEERING & CONSTRUCTION LIST
S CI 2018 01685
| HASSAN EL-SAAFIN (and others according to the Schedule) | Plaintiffs |
| v | |
| MARK FRANEK (and others according to the Schedule) | Defendants |
COMMON LAW
PROPERTY LIST
S ECI 2018 02987
| TRUSTWORTHY NOMINEES PTY LTD (ACN 005 092 624) | Plaintiff |
| v | |
| WAEL ELSAAFIN (and others according to the Schedule) | Defendants |
COMMERCIAL COURT
COMMERCIAL LIST
S ECI 2019 03648
| MAG FINANCIAL AND INVESTMENT VENTURES PTY LTD (ACN 625 790 623) | Plaintiff |
| v | |
| WAEL ELSAAFIN (and others according to the Schedule) | Defendants |
S ECI 2021 00968
| AMR MEKKYA | Plaintiff |
| v | |
| SAAFIN CONSTRUCTIONS PTY LTD (ACN 097 500 751) | Defendant |
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JUDGE: | RIORDAN J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 3-4, 8-11, 15-17 February 2021 25 June 2021 |
DATE OF JUDGMENT: | 13 August 2021 |
CASE MAY BE CITED AS: | Saafin Constructions Pty Ltd (in liq) & Ors v MAG Financial and Investment Ventures Pty Ltd & Ors |
MEDIUM NEUTRAL CITATION: | [2021] VSC 489 |
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CREDIT LAW – Whether loan agreement unenforceable under s 39 of the Consumer Credit (Victoria) Act 1995 (Vic) – Whether loan agreement a ‘credit contract’ as defined in the National Credit Code – Whether credit provided to improve residential property – Principles for determining the purpose for which credit was provided – Whether credit provided in the course of or incidentally to business – Whether relevant purpose of the provision of credit was to on-lend to a company.
CREDIT LAW – Whether security void under s 40 of the Consumer Credit (Victoria) Act 1995 (Vic) – Whether security provided was a mortgage that related to the relevant credit contract – Whether later agreement superseded the relevant credit contract – Whether the meaning of mortgage in s 40 of the Consumer Credit (Victoria) Act 1995 (Vic) should be limited by the definition of mortgage in the National Credit Code.
LOAN AGREEMENTS – Whether company a party to loan agreement – Whether validity of purportedly executed loan agreement proved – Whether amount due under loan agreement had been repaid – Application of Clayton’s Case (1816) 1 Mer 529 considered.
UNCONSCIONABLE CONDUCT – Whether mortgagee’s conduct in effecting the mortgagee’s sale was unconscionable within the meaning of s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) – Principles of statutory unconscionability considered – Assessment of damage under s 12GF of the Australian Securities and Investments Commission Act 2001 (Cth).
MORTGAGES – Whether sale by mortgagee was in breach of its duty of good faith under s 77 of the Transfer of Land Act 1958 (Vic) and at common law – Whether mortgagor entitled to have sale set aside.
MORTGAGES – Whether mortgagor effectively tendered the amount due under the mortgage – Whether mortgagee’s conduct showed tender would not be accepted – Whether proffering of cash dispensed with – Whether mortgagor ready, willing and able to tender – Presumption against wrongdoers in assessing past hypotheticals – Whether equity of redemption extinguished by mortgagee entering into contract of sale – Principles of tender considered – Consequences of refusal of tender on mortgagee’s entitlement to continuing interest considered.
MORTGAGES – Whether proceeds of mortgagee’s sale had been allocated in accordance with s 77 of the Transfer of Land Act 1958 (Vic).
SECURITIES – Secured credit facility included an ‘all moneys’ clause – Whether unsecured debts assigned to creditor became secured under the secured credit facility – Principles in the interpretation of ‘all moneys’ clauses considered.
GUARANTEES – Whether guarantor discharged by creditor’s refusal to accept tenders.
RECEIVERS – Whether appointment was invalid – Whether it was necessary for opinion as to material adverse change to be formed prior to appointment – Whether trespass by receivers caused damage to the company – Whether the Court should grant relief to receivers under s 419 of the Corporations Act 2001 (Cth).
RECEIVERS – Duties of privately appointed receivers to subject company considered – Whether receivers breached fiduciary duties – Whether receivers liable to account for their fees received.
EQUITABLE INTERESTS – Priority between competing equitable interests – Whether earlier loan agreement had been superseded by subsequent security agreement – Principles of replacement contracts considered.
PRACTICE AND PROCEDURE – Whether default judgment should be set aside.
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APPEARANCES: | Counsel | Solicitors |
| S CI 2018 01685 | ||
| For the Plaintiffs | Mr I W Upjohn QC with Mr B G Mason | Hicks Oakley Chessell Williams |
| For the Second and Third Defendants | Mr J Kohn | Capstone Koroneos Legal |
| For the First, Fourth and Seventh to Tenth Defendants | Mr S B Rosewarne with Ms V Bell | Holding Redlich |
| S ECI 2018 02987 | ||
| For the Plaintiff | Mr J Tsalanidis with Mr L Virgona | Portfolio Law |
| For the First and Second Defendants | Mr I W Upjohn QC with Mr B Mason | Hicks Oakley Chessell Williams |
| For the Third Defendant | Mr S B Rosewarne with Ms V Bell | Holding Redlich |
| S ECI 2019 03648 | ||
| For the Plaintiff | Mr S B Rosewarne with Ms V Bell | Holding Redlich |
| For the First Defendant | Self-represented | |
| S ECI 2021 00968 | ||
| For the Plaintiff | Mr S B Rosewarne with Ms V Bell | NOH Legal |
| For the Defendant | Mr I W Upjohn QC with Mr B Mason | Hicks Oakley Chessell Williams |
TABLE OF CASES
| Amcor Ltd v Barnes [2016] VSC 707 |
| Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 |
| Australia & New Zealand Banking Group Ltd v Pan Foods Company Importers & Distributors Pty Ltd [1999] 1 VR 29 |
| Australian Competition and Consumer Commission v Quantum Housing Group Pty Ltd (2021) 288 ALR 577 |
| Australian Mid-Eastern Club Ltd v Yassim (1989) 1 ACSR 399 |
| Australian Securities and Investments Commission v AGM Markets Pty Ltd (in liq) (No 3) (2020) 275 FCR 57 |
| Australian Securities and Investments Commission v Kobelt (2019) 267 CLR 1 |
| AVS Property Pty Ltd v McMaster (2010) 79 ACSR 89 |
| Bahadori v Permanent Mortgages Pty Ltd (2008) 72 NSWLR 44 |
| Balanced Securities Ltd v Dumayne Property Group Pty Ltd (2017) 53 VR 14 |
| Bank of New South Wales v O’Connor (1889) 14 App Cas 273 |
| Bank of Queensland Ltd v Dutta [2010] NSWSC 574 |
| Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR 1 |
| Berry v CCL Secure Pty Ltd (2020) 381 ALR 427 |
| Blong Ume Nominees Pty Ltd v Semweb Nominees Pty Ltd (2019) 135 SASR 385 |
| Bowesco Pty Ltd v Cronin (2008) 223 FLR 21 |
| BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 |
| Canberra Advance Bank Ltd v Benny (1992) 38 FCR 427 |
| Carey v Korda (2012) 45 WAR 181 |
| Challenge Bank Ltd v Hodgekiss (1995) 7 BPR 14,399 |
| Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 |
| Commissioner of Australian Federal Police v Kalimuthu (No 2) (2018) 340 FLR 1 |
| Commissioner of Taxation (Cth) v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520 |
| Commonwealth Bank of Australia v Stephens [2017] VSC 385 |
| Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 |
| Conroy v Mason (1871) 2 W A’B & W Eq 93 |
| Coughlan v George (2003) 11 BPR 20,919 |
| Çukurova Finance International Ltd v Alfa Telecom Turkey Ltd (Nos 3 to 5) [2016] AC 923 |
| Curnow Consulting Pty Ltd v JPD Media and Design Pty Ltd [2017] NSWSC 1171 |
| Dale v Nichols Constructions Pty Ltd [2003] QDC 453 |
| Devaynes v Noble; Clayton’s Case (1816) 1 Mer 529; 35 ER 767 (Chancery) |
| Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544 |
| Edmondson v Copland [1911] 2 Ch 301 |
| Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 |
| El-Saafin v Franek (No 2) [2018] VSC 683 |
| El-Saafin v Franek (No 4) [2020] VSC 389 |
| Eureka Operations Pty Ltd v Viva Energy Australia Ltd [2016] VSCA 95 |
| Foran v Wight (1989) 168 CLR 385 |
| Forrest v Australian Securities Investments Commission (2012) 247 CLR 486 |
| Forsyth v Blundell (1973) 129 CLR 477 |
| Fountain v Bank of America National Trust and Savings Association (1992) 5 BPR 11,817 |
| Gardiner v Fitzgerald [1962] Qd R 29 |
| Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82 |
| Graham v Seal (1918) 88 LJ Ch 31 |
| Gyles v Hall (1726) 2 P Wms 378 |
| Haynes v St George Bank (2018) 130 SASR 551 |
| Hillam v Iacullo (2015) 90 NSWLR 422 |
| Hotel Terrigal Pty Ltd (in liq) v Latec Investments Ltd (No 3) [1969] 1 NSWR 687 |
| Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46 |
| Hyde v Sullivan (1956) SR (NSW) 113 |
| Iacullo v Hillam [2014] NSWSC 1021 |
| Jones v Barkley (1781) 99 ER 434 |
| Jonsson v Arkway Pty Ltd (2003) 58 NSWLR 451 |
| Katsikalis v Deutsche Bank (Asia) AG [1988] 2 Qd R 641 |
| Kennedy v de Trafford [1896] 1 Ch 762 |
| Kerford v Mondel (1859) 28 LJ Ex 303 |
| Kinnaird v Trollope (1889) 42 Ch D 610 |
| Kitson v Goodge (1997) 7 BPR 15,173 |
| Knowles v Victorian Mortgage Investments Ltd [2011] VSC 611 |
| Kupang Resources Ltd v International Litigation Partners Pte Ltd [2015] WASCA 89 |
| Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liq) (1965) 113 CLR 265 |
| Lauvan Pty Ltd v Bega (2018) 330 FLR 1 |
| Lauvan Pty Ltd v Bega (No 2) [2018] NSWSC 155 |
| Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681 |
| Linkenholt Pty Ltd v Quirk [2000] VSC 166 |
| LJP Investments Pty Ltd v Howard Chia Investments Pty Ltd (No 2) (1990) 24 NSWLR 499 |
| M Collins & Son Pty Ltd v Bankstown Municipal Council (1958) 3 LGRA 216 |
| Marshall & Brougham Pty Ltd v Commissioner of Taxation (1986) 45 SASR 571 |
| MBF Investments Pty Ltd v Nolan (2011) 37 VR 116 |
| McCartney v Orica Investments Pty Ltd [2011] NSWCA 337 |
| McKean v Maloney [1988] 1 Qd R 628 |
| McPherson v Summerville (1905) 6 SR (NSW) 1 |
| Mijac Investments Pty Ltd v Graham (No 2) (2009) 72 ACSR 684 |
| Morris v Baron & Co [1918] AC 1 |
| Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 |
| Murphy v Overton Investments Pty Ltd (2004) 216 CLR 388 |
| Olympic Holdings Pty Ltd v Windslow Corporation Pty Ltd (in liq) (2008) 36 WAR 342 |
| Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199 |
| Pan Foods Company Importers & Distributors Pty Ltd v Australia & New Zealand Banking Group Ltd (2000) 170 ALR 579 |
| Park Avenue Nominees Pty Ltd v Boon (2001) ASC 155-052 |
| Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235 |
| PGA Group Pty Ltd v Idameneo (No 789) Ltd (formerly Symbion Health Ltd); Gunn v Idameneo (No 789) Ltd [2011] VSC 382 |
| Pitcher Partners Consulting Pty Ltd v Neville’s Bus Service Pty Ltd (2019) 271 FCR 392 |
| PMT Partners Pty Ltd v Australian National Parks & Wildlife Service (1995) 184 CLR 301 |
| Project Research Pty Ltd v Permanent Trustee of Aust Ltd (1990) 5 BPR 11,225 |
| R v Registrar of Titles; Ex parte Watson [1952] VLR 470 |
| Rafiqi & Thomas v Wacal Investments Pty Ltd (1998) ASC 155-024 |
| Re Bankrupt Estate of Murphy, Donnelly v Commonwealth Bank of Australia Ltd (1996) 140 ALR 46 |
| Re Clark’s Refrigerated Transport Pty Ltd (in liq) [1982] VR 989 |
| Reardon Smith Line Ltd v Hansen-Tangen [1976] 3 All ER 570 |
| Rockett v Evans [2008] QSC 227 |
| Rosing v Ben Shemesh [1960] VR 173 |
| Rowe v National Australia Bank Ltd (2019) 56 WAR 1 |
| Royal Botanical Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45 |
| Saga Holidays Ltd v Commissioner of Taxation (2006) 156 FCR 256 |
| Scarfe v Morgan (1838) 150 ER 1430 |
| Schreuders v Grandiflora Nominees Pty Ltd [2016] VSCA 93 |
| Secured Income Real Estate (Aust) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 |
| Shakespeare Haney Securities Ltd v Crawford [2009] 2 Qd R 156 |
| Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85 |
| State Bank of New South Wales Ltd v Chia (2000) 50 NSWLR 587 |
| Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 |
| Taylor v Third Szable Holdings Pty Ltd (2001) ASC 155-050 |
| TCL Airconditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd, Re TCL Airconditioner (Zhongshan) Co Ltd (No 2) (2019) 369 ALR 192 |
| Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 |
| Tyco Australia Pty Ltd v Optus Networks Pty Ltd [2004] NSWCA 333 |
| Ultimate Property Group Pty Ltd v Lord (2004) 60 NSWLR 646 |
| Vella v Permanent Mortgages Pty Ltd (2008) 13 BPR 25,343 |
| Vision Telecommunications Pty Ltd v Australia and New Zealand Banking Group Ltd [2001] WASC 139 |
| World Medical Manufacturing Corporation v Phillips Ormonde & Fitzpatrick Lawyers (a firm) [2000] VSC 196 |
| Zhu v Treasurer of the State of New South Wales (2004) 218 CLR 530 |
| Zweck v Town of Gawler (2015) 124 SASR 319 |
CONTENTS
TABLE OF CASES
GLOSSARY
INTRODUCTION
SUMMARY
CHRONOLOGY
ISSUES FOR DETERMINATION
BREACH OF THE CONSUMER CREDIT ACT
Material facts
Legislative regime
Is the Second Franek Loan Agreement a ‘credit contract’, as defined in the National Credit Code?
Submissions
MAG Parties’ submissions
Plaintiffs’ submissions
Consideration
Was the credit provided for the Residential Loan Purpose?
Was the credit provided for the purpose of Wael and Bayda on-lending it to the Company?
Did Mr Franek provide the credit in the course of a business of providing credit?
Did Mr Franek provide the credit as part of or incidentally to any other business?
Conclusion
Are the Franek GSA Mortgages void pursuant to s 40 of the Consumer Credit Act?
Submissions
MAG Parties’ submissions
Plaintiffs’ submissions
Conclusion
The Franek Settlement Deed did not supplant the Second Franek Loan Agreement
The meaning of mortgage in s 40 of the Consumer Credit Act should not be limited by the meaning of mortgage in the Code
Is the Franek Settlement Deed Mortgage void pursuant to s 40 of the Consumer Credit Act?
Are Wael and Bayda indebted to MAG Financial as assignee of the Franek GSA for the amount due under the Second Franek Loan Agreement?
Is the Company indebted as guarantor under the Franek Settlement Deed to MAG Financial for the amount due under the Second Franek Loan Agreement?
Submissions
MAG Parties’ submissions
Plaintiffs’ submissions
Relevant provisions of the Franek Settlement Deed
Conclusion
COMPANY DEBTS
Is the Company liable for the Sacca Debt?
Material facts
Submissions
Plaintiffs’ submissions
MAG Parties’ submissions
Conclusion
Is the Company liable for the Mekkya Debt?
Did the Company enter into the Mekkya Loan Agreement?
Mr Mekkya’s evidence
Evidence of communications between the parties
Conclusion
Has the Company repaid the Mekkya Debt?
Submissions
Conclusion
Should the Default Judgment relating to the Mekkya Debt be set aside?
Material facts
Submissions
Principles
Conclusion
CLAIMS AGAINST THE RECEIVERS
Validity of the appointment of the Receivers on 9 April 2018 under the Franek GSA
Was the appointment of the Receivers on 9 April 2018 valid on the basis of a failure by the Company to execute a contract of sale in default of the Franek Settlement Deed?
Material facts
Submissions
MAG Parties’ submissions
Receivers’ submissions
Plaintiffs’ submissions
Conclusion
Was the appointment of the Receivers on 9 April 2018 valid on the basis of a misrepresentation as to the value of Commercial Unit 002?
Material facts
Submissions
MAG Parties’ submissions
Receivers’ submissions
Plaintiffs’ submissions
Conclusion
Was the appointment of the Receivers on 9 April 2018 valid on the basis of the termination of the Building Contract as a material adverse change under the Franek GSA?
Material facts
Submissions
MAG Parties’ submissions
Receivers’ submissions
Plaintiffs’ submissions
Conclusion
Did the appointment of the Receivers deprive the Company of the use and enjoyment of the Arden Street Property and cause the Company to lose the interest expenses incurred?
Material facts
Submissions
Plaintiffs’ submissions
MAG Parties’ submissions
Receivers’ submissions
Conclusion
Should the Court exercise its discretion pursuant to s 419 of the Corporations Act?
Submissions
Receivers’ submissions
Plaintiffs’ submissions
Conclusion
TENDER
By the June Tender, did the Company effectively tender the repayment of the amount due under the Balanced Facility Agreement?
Material facts
Submissions
MAG Parties’ submissions
Plaintiffs’ submissions
Receivers’ submissions
Principles
Conclusion
By the July Tender, did the Company effectively tender the repayment of the amounts due under the Balanced Facility Agreement and the Second Franek Loan Agreement?
Material facts
Submissions
Plaintiffs’ submissions
MAG Parties’ submissions
Receivers’ submissions
Conclusion
Does interest stop accruing on the Balanced Mortgage from the date of tender?
Submissions
Plaintiffs’ submissions
MAG Parties’ submissions
Principles
Conclusion
Does interest stop accruing on the amount due under the Second Franek Loan Agreement?
Are the El Saafin Brothers discharged of their obligations as guarantors under the Balanced Facility Agreement?
Submissions
Plaintiffs’ submissions
MAG Parties’ submissions
Conclusion
Did the Receivers owe the Company fiduciary duties and if so, did they breach such duties?
Submissions
Plaintiffs’ submissions
Receivers’ submissions
Duties of a privately appointed receiver
Conclusion
SALE OF THE ARDEN STREET PROPERTY
Material facts
Conclusion
Was MAG Financial in breach of its duty under s 77 of the Transfer of Land Act and at common law to exercise the power of sale in good faith?
Was MAG Financial in breach of its duty under s 420A of the Corporations Act?
Was MAG Financial’s conduct unconscionable under s 12CB of the ASIC Act?
Legislative provisions
Submissions
Plaintiffs’ submissions
MAG Parties’ submissions
Principles
Conclusion
Was the Transfer of Land executed prior to service of the s 76 notices?
Material facts
Submissions
Plaintiffs’ submissions
MAG Parties’ submissions
Conclusion
Is the Company prima facie entitled to have the sale of the Arden Street Property set aside and reconveyed to the Company?
Are there any discretionary reasons for the Court to decline that relief?
ASSIGNMENT OF DEBTS TO MAG FINANCIAL
Did the assignment of each of the Debts have the effect of securing such Debts under cl 8.1.7 of the Franek GSA?
Material Facts
Submissions
MAG Parties’ submissions
Plaintiffs’ submissions
Principles of construction of ‘all moneys’ clauses
Conclusion
Did MAG Financial allocate the proceeds of sale from the Arden Street Property in accordance with s 77 of the Transfer of Land Act?
TRUSTWORTHY PROCEEDING
Material facts
Does the equitable interest in the Nairne Street Property under the First Franek Loan Agreement have priority over the equitable interest under the Trustworthy Loan Agreement?
Submissions
Trustworthy Nominees’ submissions
MAG Parties’ submissions
Principles
Conclusion
Was the First Franek Loan Agreement assigned to MAG Financial?
Are Wael and Bayda entitled to set aside any security interest over the Nairne Street Property under the Franek GSA?
ORDERS
GLOSSARY
The following abbreviations are used in these reasons:
| AAGG | AAGG Developments Pty Ltd, being the seventh defendant in proceeding S CI 2018 01685 |
| Administrators | Collectively, Mr Ian Glavas and Mr Matthew Kucianski, being the fifth and sixth defendants in proceeding S CI 2018 01685 |
| AMGS | AMGS Properties Pty Ltd |
| Arden Street Property | 65-67 Arden Street, North Melbourne, being the land described in Certificate of Title Volume 8614 Folio 340 |
| ASIC | Australian Securities and Investments Commission |
| ASIC Act | Australian Securities and Investments Commission Act 2001 (Cth) |
| Balanced Assignment Deed | Deed of Assignment of Debt and Securities dated 18 April 2018 |
| Balanced Facility Agreement | Facility Agreement dated 28 October 2016 |
| Balanced Mortgage | Mortgage executed on 28 October 2016 |
| Balanced Securities | Balanced Securities Ltd |
| Banner Capital | Banner Capital Management Ltd |
| Builder | New Concept Homes Pty Ltd, being the tenth defendant in proceeding S CI 2018 01685 |
| Building Contract | Building contract dated 19 October 2015 |
| Bundoora Property | 3 Ball Court, Bundoora, being the land described in Certificate of Title Volume 10885 Folio 322 |
| Code | Schedule 1 to the National Consumer Credit Protection Act 2009 (Cth) |
| Company | Saafin Constructions Pty Ltd, being the third plaintiff in proceeding S CI 2018 01685 |
| Consumer Credit Act | Consumer Credit (Victoria) Act 1995 (Vic) |
| Default Judgment | Judgment in default of appearance entered on 15 May 2018 in County Court proceeding CI-18-01795 |
| Derivative Proceeding | Supreme Court proceeding S CI 2018 01685 |
| Development | The construction of a four storey building containing 25 dwellings and two commercial tenancies at 65-67 Arden Street, North Melbourne, being the land described in Certificate of Title Volume 8614 Folio 340 |
| El Saafin Brothers | Collectively, Mr Mohamed, Mr Hassan and Mr Wael El Saafin, being the first, second and fourth plaintiffs in proceeding S CI 2018 01685 |
| First Franek Loan Agreement | Loan Agreement dated 15 April 2015 |
| Franek GSA | General Security Agreement dated 18 May 2017 |
| Franek GSA Mortgages | Mortgages pursuant to cls 3.1 and 16.1 of the General Security Agreement dated 18 May 2017 |
| Franek Settlement Deed | Deed of Release and Settlement dated 18 May 2017 |
| Franek Settlement Deed Mortgage | Mortgage pursuant to cl 3.1 of the Deed of Release and Settlement dated 18 May 2017 |
| Lower Plenty Property | 2 Lynwood Crescent, Lower Plenty, being the land described in Certificate of Title Volume 8519 Folio 915 |
| MAG Financial | MAG Financial and Investment Ventures Pty Ltd, being the fourth defendant in proceeding S CI 2018 01685, the third defendant in proceeding S ECI 2018 02987, and the plaintiff in proceeding S ECI 2019 03648 |
| MAG Parties | Collectively, Mr Mark Franek, MAG Financial and Investment Ventures Pty Ltd, AAGG Developments Pty Ltd, Mr Amr Mekkya, Mr George Sacca, and New Concept Homes Pty Ltd, being the first, fourth and seventh to tenth defendants in proceeding S CI 2018 01685 |
| MAG Proceeding | Supreme Court proceeding S ECI 2019 03648 |
| Mekkya Loan Agreement | Investment Loan Agreement dated 1 March 2012 |
| Mekkya Proceeding | Formerly, County Court proceeding CI-18-01795 and later, Supreme Court proceeding S ECI 2021 00968 |
| Nairne Terrace Property | 1 Nairne Terrace, Greensborough, being the land described in Certificate of Title Volume 09671 Folio 924 |
| Plaintiffs | Collectively, Mr Mohamed, Mr Hassan and Mr Wael El Saafin and Saafin Constructions Pty Ltd, being the first to fourth plaintiffs in proceeding S CI 2018 01685 |
| Receivers | Collectively, Mr Stephen Robert Dixon and Mr Ahmed Bise, being the second and third defendants proceeding S CI 2018 01685 |
| Sacca Loan Agreement | Loan of $1.9 million from Mr George Sacca to Mr Mohamed, Mr Hassan and Mr Wael El Saafin |
| Sacca Proceeding | County Court proceeding CI-18-01786 |
| Second Franek Loan Agreement | Loan Agreement dated 15 January 2016 |
| Trade On | Trade On International Pty Ltd |
| Transfer of Land | Transfer of land dated 22 June 2018 |
| Trustworthy Loan Agreement | Loan Agreement dated 17 September 2015 |
| Trustworthy Nominees | Trustworthy Nominees Pty Ltd, being the plaintiff in proceeding S ECI 2018 02987 |
| Trustworthy Proceeding | Supreme Court proceeding S ECI 2018 02987 |
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HIS HONOUR:
INTRODUCTION
These four proceedings arise out of the partly completed development of a four storey building containing 25 dwellings and two commercial tenancies (‘the Development’) at 65-67 Arden Street, North Melbourne, being the land described in Certificate of Title Volume 8614 Folio 340 (‘the Arden Street Property’) by Saafin Constructions Pty Ltd (‘the Company’), and the financial arrangements relating to the Development.
Proceeding S CI 2018 01685 (‘the Derivative Proceeding’) is a claim brought on behalf of the third plaintiff (the Company) by the Company’s directors, being the first plaintiff (‘Hassan’)[1] and the second plaintiff (‘Mohamed’), pursuant to leave granted by Lyons J on 28 July 2020.[2] The fourth plaintiff (‘Wael’), a shareholder of the Company, was joined to the proceeding pursuant to the same order. Mohamed, Hassan and Wael (collectively, ‘the El Saafin Brothers’),[3] together with the Company (hereafter referred to collectively as ‘the Plaintiffs’) seek relief principally relating to:
[1]With no disrespect intended, I will refer to members of the El Saafin family by their first names.
[2]See El-Saafin v Franek (No 4) [2020] VSC 389.
[3]In the documents tendered in this trial, the spelling of the family name ‘El Saafin’ was also spelt ‘El-Saafin’ and ‘Elsaafin’. I have adopted the spelling used by members of the El Saafin family in their witness statements.
(a)the appointment of the second and third defendants (‘the Receivers’) as receivers of the Company;
(b)the sale of the Arden Street Property to the seventh defendant (‘AAGG’) by the fourth defendant (‘MAG Financial’) as assignee of a mortgage executed by the Company in favour of Balanced Securities Ltd (‘Balanced Securities’) on 28 October 2016 (‘the Balanced Mortgage’);
(c)debts and security interests claimed against the Company by:
(i)the first defendant (‘Mr Franek’);
(ii)MAG Financial;
(iii)the eighth defendant (‘Mr Mekkya’);
(iv)the ninth defendant (‘Mr Sacca’); and
(v)the tenth defendant (‘the Builder’),
(together with AAGG, hereafter referred to collectively as ‘the MAG Parties’).
By counterclaim, the Receivers seek relief principally by way of declarations relating to their rights to indemnity, remuneration and expenses claimed against the Company and Wael.
By counterclaim, MAG Financial, AAGG and the Builder seek relief principally by way of enforcement of debts and security interests claimed against:
(a)the El Saafin Brothers (the first to third defendants by counterclaim);
(b)the fourth defendant by counterclaim (‘Lobna’) and the fifth defendant by counterclaim (‘Bayda’), being two further members of the El Saafin family; and
(c)the Company (the sixth defendant by counterclaim).
Proceeding S ECI 2019 03648 (‘the MAG Proceeding’) is a claim brought by MAG Financial for relief against Wael and Bayda by way of enforcement of an equitable charge over 1 Nairne Terrace, Greensborough, being the land described in Certificate of Title Volume 09671 Folio 924 (‘the Nairne Terrace Property’).
Proceeding S ECI 2018 02987 (‘the Trustworthy Proceeding’) is a claim brought by the plaintiff (‘Trustworthy Nominees’) for relief against Wael and Bayda by way of enforcement of a security interest over the Nairne Terrace Property, and a declaration of priority over the equitable interest claimed by MAG Financial.
By counterclaim, Wael and Bayda seek relief principally by way of declarations that MAG Financial’s loan agreements are unenforceable and security interests are void insofar as they relate to the Nairne Terrace Property.
Proeeding S ECI 2021 00968 (‘the Mekkya Proceeding’) was a claim originally brought by Mr Mekkya in the County Court for relief against the Company by way of enforcement of an agreement between the parties. Judgment was entered in default of appearance in favour of Mr Mekkya on 18 May 2018. Relevantly, the Company seeks to have that default judgment set aside.
SUMMARY
Generally, the above proceedings arise out of disputes between the Company, being the developer of the Arden Street Property, and its financiers. In summary, (adopting the abbreviations in the Glossary), I have decided as follows:
(a)The Second Franek Loan Agreement is unenforceable under s 39 of the Consumer Credit Act.
(b)The Franek GSA Mortgages and the Franek Settlement Deed Mortgage are void under s 40 of the Consumer Credit Act insofar as each relates to the Second Franek Loan Agreement.
(c)As a result of the findings in sub-paras (a) and (b) above, the appointment of the Receivers under the Franek GSA was invalid.
(d)The Company was not a party to the Sacca Loan Agreement.
(e)The Company did not enter into the Mekkya Loan Agreement; and even if it did, the Mekkya Debt was repaid in any event.
(f)The MAG Parties entered into an arrangement pursuant to which:
(i)entities related to Mr Sacca and Mr Mekkya paid for the assignment of the Balanced Facility Agreement, the Franek GSA and the Franek Settlement Deed to MAG Financial; and in consideration
(ii)MAG Financial transferred the Arden Street Property, under the assigned Balanced Mortgage, to AAGG, an entity related to Mr Sacca and Mr Mekkya, for illusory consideration.
(g)Principally, as a result of circumstances surrounding the arrangement, the sale of the Arden Street Property should be set aside because it was:
(i)in breach of MAG Financial’s duty as mortgagee under s 77 of the Transfer of Land Act1958 (Vic); and
(ii)unconscionable under s 12CB of the ASIC Act.
(h)Prior to the transfer of the Arden Street Property, MAG Financial refused to accept proposed tenders of the amounts due under the Balanced Facility Agreement and the Second Franek Loan Agreement from the Company.
(i)As a result of the refusal of the proposed tenders:
(i)the Company’s obligation to pay interest under the Balanced Facility Agreement is limited;
(ii)the El Saafin Brothers are discharged from liability as guarantors under the Balanced Facility Agreement; and
(iii)the Company is discharged from liability as guarantor under the Franek Settlement Deed.
(j)The equitable interest of Trustworthy Nominees in the Nairne Street Property has priority over the equitable interest of MAG Financial as assignee of the Second Franek Loan Agreement.
CHRONOLOGY
Facts material to particular issues are set out below, prior to consideration of those issues. The facts generally material to the surrounding circumstances are as follows.
On 13 July 2001, the Company was registered as a corporation with the Australian Securities and Investments Commission (‘ASIC’). As at registration, the directors relevantly included Mohamed and Hassan, both of whom were also shareholders (each holding 17 shares), with Wael, the other shareholder, holding 16 shares.
On 21 August 2008, Wael and his wife Bayda, were registered as proprietors of the Nairne Terrace Property.
By Loan Agreement dated 13 December 2011 between Trustworthy Nominees as lender, the Company and Mr Fadl El Saafin as borrowers, and the El Saafin Brothers as guarantors, Trustworthy Nominees agreed to loan the Company and Mr Fadl El Saafin the sum of $250,000, secured (among other things) by a second mortgage over the Arden Street Property.
On 20 December 2011, the Company was registered as proprietor of the Arden Street Property.
On 17 December 2013, the City of Melbourne issued Planning Permit No TP-2012-176 to New Concept Design, a trading name of Mr Mekkya, for the construction of the Development.
By an alleged email of 19 March 2014 to New Concept Design (copied to Wael), Mr El-Hissi of NOH Legal attached an allegedly signed Investment Loan Agreement dated 1 March 2012 between the Company as developer, and Mr Mekkya as investor (‘the Mekkya Loan Agreement’). The Mekkya Loan Agreement recorded that Mr Mekkya had agreed to loan the Company the sum of $750,000.[4]
[4]The circumstances surrounding the Mekkya Loan Agreement, including its execution and the sending of this email, are the subject of dispute in these proceedings.
By Investment Loan Agreement dated 8 August 2014 between the Company as developer, and Dr Hegazy as investor, Dr Hegazy agreed to loan the Company the sum of $406,000 for a period of 18 months, at which time the Company would transfer to Dr Hegazy apartment 201 of the Development as consideration.
By an undated Investment Loan Agreement executed in or about August 2014 between the Company as developer, and Dr Atalla as investor, Dr Atalla agreed to loan the Company the sum of $350,000 for a period of 18 months, at which time the Company would transfer to Dr Atalla apartment 202 of the Development as consideration.
By Loan Agreement dated 15 April 2015 between Wael and Bayda as borrowers, and Mr Franek as lender (‘the First Franek Loan Agreement’), Mr Franek agreed to loan Wael and Bayda the sum of $100,000, secured by a charge over the Nairne Terrace Property.
By Loan Agreement dated 17 September 2015 between Trustworthy Nominees as lender, the Company as first borrower, and Wael, Bayda and Hassan as second, third and fourth borrowers (‘the Trustworthy Loan Agreement’), the borrowers agreed to provide additional security for the previous loan (referred to in paragraph 13 above), which included a charge over the Nairne Terrace Property.
By building contract dated 19 October 2015 between the Company as proprietor, and the Builder as contractor (‘the Building Contract’), the Builder agreed to construct 25 dwellings and two commercial units at the Arden Street Property between 1 December 2015 and 1 June 2017 for a price of $4.4 million. Mr Mekkya was the sole director and shareholder of the Builder.
On 28 October 2015, Trustworthy Nominees lodged a caveat over the Nairne Terrace Property on the basis of the Trustworthy Loan Agreement.
By Loan Agreement dated 15 January 2016 between Wael and Bayda as borrowers, and Mr Franek as lender (‘the Second Franek Loan Agreement’), Mr Franek agreed to loan Wael and Bayda the sum of $311,000, secured by a charge over the Nairne Terrace Property.
On 20 April 2016, Mr Franek lodged a caveat over the Nairne Terrace Property on the basis of the Second Franek Loan Agreement.
By written acknowledgment signed 30 May 2016, the El Saafin Brothers declared that they had received an amount of $1.9 million as a loan from Mr Sacca and that ‘we are liable to return it back to him within one year from the date of this statement with any cost related to it’ (‘the Sacca Loan Agreement’).
By Facility Agreement dated 28 October 2016 between Balanced Securities as lender, the Company as borrower, and the El Saafin Brothers and Lobna as guarantors (‘the Balanced Facility Agreement’), Balanced Securities agreed to provide finance to the Company to assist with the refinance of, and the construction at the Arden Street Property, on the following terms:
(a)The facility limit was $6.2 million.
(b)The interest rate was 11.95% per annum.
(c)The facility expired on or about 28 April 2018, being 18 months after the earlier of:
(i)seven days after the despatch of mortgage documents to the borrower; or
(ii)the date of the initial drawdown.
(d)The securities relevantly included:
(i)a first registered mortgage over the Arden Street Property;
(ii)a second registered mortgage over 3 Ball Court, Bundoora, being the land described in Certificate of Title Volume 10885 Folio 322 (‘the Bundoora Property’); and
(iii)a general security deed granted by the Company and the El Saafin Brothers.
By the Balanced Mortgage executed on the same day as the Balanced Facility Agreement, the Company mortgaged the Arden Street Property to Balanced Securities to secure the Balanced Facility Agreement.
On 18 May 2017, Mr Franek, Wael, Bayda and the Company entered into two related agreements, being:
(a)a General Security Agreement dated 18 May 2017 (‘the Franek GSA’); and
(b)a Deed of Release and Settlement dated 18 May 2017 (‘the Franek Settlement Deed’).
By the Franek GSA, Wael, Bayda and the Company agreed to grant certain securities to Mr Franek, as set out at paragraph 92 below, to secure obligations under the Franek Settlement Deed.
By the Franek Settlement Deed, Wael, Bayda and the Company agreed to terms including the following:
(a)The Company would execute a standard form LIV Contract of Sale of Real Estate and transfer to Mr Franek ‘Commercial/Office Space marked 002’ (‘Commercial Unit 002’) of the Development.
(b)Subject to Wael, Bayda and the Company complying with that obligation, Mr Franek would pay the sum of $50,000 on execution of the Franek Settlement Deed, and a further sum of $50,000 on completion of the transfer and registration on the title.
(c)Upon full compliance with the Franek Settlement Deed, Mr Franek, Wael, Bayda and the Company would mutually release and discharge to each other matters relating to the Second Franek Loan Agreement. The Franek Settlement Deed is described in greater detail at paragraphs 93 to 95 below.
On 14 June 2017, AMGS Properties Pty Ltd (‘AMGS’) was registered as a corporation with ASIC, with Mr Sacca and Mr Mekkya as the sole directors and shareholders, each holding 50 shares.
On 15 June 2017, Trade On International Pty Ltd (‘Trade On’) was registered as a corporation with ASIC, with Mr Sacca and Mr Mekkya as the sole directors and shareholders, each holding 50 shares.
By letter dated 29 December 2017 to Wael and Bayda, Mr El-Hissi stated that, in breach of the Franek Settlement Deed, Wael had failed to procure the Company to execute a contract of sale for Commercial Unit 002. On behalf of Mr Franek, Mr El-Hissi claimed $883,000 (being $311,000, plus interest of $26,000 per month for 22 months) as compensation for the breach, plus a refund of the $50,000 paid under the Franek Settlement Deed.
On 26 February 2018, Mr Mekkya lodged a caveat over the Arden Street Property claiming an interest under the Mekkya Loan Agreement.
In or about March 2018, there was a meeting at the Greenvale Shopping Centre that was attended by Mr Mekkya, Mr Sacca, Dr Hegazy and Dr Atalla in which there was a discussion about how the participants would be able to recover the amounts that they had invested in the Development.
By emailed letter dated 22 March 2018 to the Builder, the Company provided notice of various contractor’s defaults and of its intention to terminate the Building Contract in the event that the defaults were not remedied within 14 days. The default notice was issued substantially on the basis of the Builder’s alleged failure to complete the Development.
On 28 March 2018, a quantity surveyor certified that, as at 28 February 2018, the gross value of works performed was $1,057,084 and the gross cost to complete was $3,462,493. Accordingly, the Development was approximately 25% complete.
Between 29 January and 31 March 2018, there were a number of communications between Mr El-Hissi and the Receivers regarding their potential appointment as receivers and managers of the Company. The communications resulted in a meeting on 4 April 2018 between Mr El-Hissi, Mr Franek, the Receivers and their solicitor (Mr Koroneos of Capstone Koroneos Legal) regarding the potential appointment.
By email of 5 April 2018, Mr Nair of Hicks Oakley Chessell Williams (the Company’s solicitor) served a termination notice on the Builder.
On 5 April 2018, Mr Franek signed a deed of appointment of the Receivers as joint and several receivers of the Company.
By email of 6 April 2018 at 4:36 pm to Mr El-Hissi, Mr Koroneos stated that his clients, the Receivers, would execute the appointment documents subject to the sum of $50,000 being paid into his trust account. At 5:53 pm, Mr Mekkya and Mr Sacca’s company, Trade On, paid $50,000 into the trust account of Capstone Koroneos Legal.
On 6 April 2018, Sloss J adjourned an application by the Builder for an urgent interlocutory injunction against the Company, and relevantly noted the following agreement:
2.The Plaintiff agrees to allow the Defendant and its servants and agents to inspect the site at 65-67 Arden Street, North Melbourne (Site) on Wednesday, 11 April 2018 and Thursday, 12 April 2018, or at such other time reasonably notified to the Plaintiff’s solicitors in advance.
3. Until 23 April 2018 or further order:
(a)neither party will carry out any work at the Site, other than any emergency repairs;
(b)the Defendant agrees not to interfere with the Plaintiff’s works, plant, materials or equipment at the Site; and
(c)the Plaintiff shall maintain a supervisor at the Site between 7:30am and 4pm each day.
(hereafter referred to as the ‘Standstill Agreement’).
By email of 10 April 2018 to Mr Nair, Mr Koroneos attached various documents including an ASIC Form 504, which recorded that the Receivers were appointed on 9 April 2018 pursuant to the terms of the Franek GSA.
By emailed letter dated 17 April 2018 to Mr Nair, Mr El-Hissi set out the non-exhaustive list of the breaches relied upon by Mr Franek in appointing the Receivers, being:
(a)failure to provide an off-the-plan contract in accordance with the Franek GSA despite repeated requests from Mr Franek’s solicitors;
(b)material adverse change, being the Supreme Court proceeding between the Builder and the Company;
(c)material adverse change in the Company’s financial position, including the granting of security interests to Mr Mekkya and Mr Sacca; and
(d)failure to disclose the existence of the Balanced Securities loan.
By Deed of Assignment of Debt and Securities dated 18 April 2018 between Balanced Securities as assignor, and Mr Franek and/or nominee as assignee (‘Balanced Assignment Deed’), Balanced Securities assigned its interests under the Balanced Facility Agreement and the Balanced Mortgage to Mr Franek for the sums of $300,000 payable on 18 April 2018 and $2,493,079.80 payable on 18 May 2018. The Balanced Assignment Deed recorded the amount owing by the Company to Balanced Securities under the Balanced Facility Agreement as at 18 May 2018 to be $2,998,649.30.
On 26 April 2018, MAG Financial was registered as a corporation with ASIC, with Mr Franek as the sole director and shareholder, holding 12 shares.
By facsimile transmission dated 26 April 2018 to the Company, Balanced Securities provided notice of its intention to assign its debt and securities under the Balanced Facility Agreement and the Balanced Mortgage to MAG Financial, with the proposed assignment expected to take place on 4 May 2018.
By writ filed 27 April 2018 in County Court proceeding CI-18-01786 (‘the Sacca Proceeding’), Mr Sacca claimed repayment of $1.9 million pursuant to the Sacca Loan Agreement.
By writ filed 27 April 2018 in County Court proceeding CI-18-01795 (‘the Mekkya Proceeding’), Mr Mekkya claimed repayment of $975,000 pursuant to the Mekkya Loan Agreement.
On 3 May 2018, Balanced Securities was paid $2,474,991.71 by a Commonwealth Bank of Australia bank cheque. This amount was funded by a transfer from the Commonwealth Bank of Australia bank account of AMGS.
By Deed of Assignment of Contracts and Securities dated 3 May 2018, Mr Franek assigned his rights under the Second Franek Loan Agreement, the Franek GSA and the Franek Settlement Deed to MAG Financial.
By Notice of Assignment of Mortgages and Security dated 4 May 2018 to the Company as borrower, and the El Saafin Brothers and Lobna as guarantors, MAG Financial provided notice of the assignment from Balanced Securities to MAG Financial pursuant to the Balanced Assignment Deed.
On 4 May 2018, Mr Franek instructed the Receivers to resign their appointment pursuant to the Franek GSA and, on behalf of MAG Financial, requested that they be appointed pursuant to the Balanced Facility Agreement.
On 7 May 2018, the Receivers resigned their appointment under the Franek GSA. On the same day, MAG Financial appointed the Receivers as joint and several receivers of the Company pursuant to the terms of the Balanced Facility Agreement.
By originating motion filed 8 May 2018 in what became the Derivative Proceeding, Hassan and Mohamed applied for an injunction restraining Mr Franek from appointing receivers and managers in respect of the Company and restraining the Receivers from acting as receivers of the Company.
By email of 8 May 2018 to Mr Nair, Mr Koroneos acknowledged receipt of the originating motion and stated that the Receivers had been appointed receivers and managers of the Company by:
(a)Mr Franek during the period of 9 April to 7 May 2018; and
(b)MAG Financial from 7 May 2018, as assignee of the Balanced Facility Agreement.
By five emails from 9 May to 25 June 2018 to Mr Koroneos and Mr El-Hissi, Mr Nair repeatedly requested the payout figure necessary to discharge the amount owing under, relevantly, the Balanced Facility Agreement and to terminate the appointment of the Receivers. These emails are set out at paragraphs 303 to 313 below.
On 15 May 2018, Mr Mekkya entered judgment in default of appearance (‘the Default Judgment’) in the Mekkya Proceeding against the Company in the sum of $982,848.22, being $975,000 plus interest of $4,808.22 and costs of $3,040 pursuant to the Mekkya Loan Agreement.
On or about 27 May 2018, there was a meeting between Dr Atalla, Mr Sacca, Mr Mekkya and Dr Hegazy at Tullamarine with respect to the repayment of their amounts invested in the Development.
By email of 29 May 2018 to Dr Atalla, Mr Mekkya attached a copy of the Default Judgment and stated that he was appointing a liquidator soon.
By Valuation Report dated 6 June 2018, Rann Property AdVal, on the instructions of MAG Financial, valued the Arden Street Property at $4.4 million.
On 8 June 2018, Hassan made a report to Victoria Police alleging that the Default Judgment was based on a ‘forged contract’, being the Mekkya Loan Agreement.
On 14 June 2018, the sum of $1,310,628.08 was paid out of the Commonwealth Bank of Australia bank account of Trade On with the transaction description ‘Wdl Branch Fountain Gate’. On the same day bank cheques in the sums of:
(a)$1,150,600 payable to Mr Franek; and
(b)$159,998 payable to Mr El-Hissi’s firm, NOH Legal, for Mr Franek’s legal fees,
were issued out of the Fountain Gate branch of the Commonwealth Bank of Australia.
By letter of approval dated 19 June 2018 to the Company, Mr Keith Blackney stated that Black Arrow Mortgages was prepared to provide a loan advance of $4 million to the Company subject to the conditions set out therein.
By four deeds of assignment, each dated 20 June 2018, it was agreed that the following debts would be assigned to MAG Financial on payment of the assignment price which, in each case, was the full amount of the debt, being:
(a)debt owed by the Company to Mr Mekkya in the sum of $982,848.22 (‘the Mekkya Debt’) pursuant to the Default Judgment;
(b)debt owed to Mr Sacca in the sum of $1.9 million (‘the Sacca Debt’) pursuant to the Sacca Loan Agreement;
(c)debt owed by the Company to Mr Mekkya trading as New Concept Design in the sum of $174,907.59 (‘the New Concept Design Debt’) purportedly pursuant to attached invoices (but no invoices were attached to the tendered copy); and
(d)debt owed by the Company to the Builder in the sum of $521,349.22 (‘the Builder Debt’) pursuant to invoices issued under the Building Contract.
By four notices of assignment, each dated 25 June 2018, the Company was notified of each of the assignments to MAG Financial referred to in the preceding paragraph.
By correspondence of 25 and 26 June 2018 between Mr Nair and Mr Halse, Mr Halse provided the payout figure, being the sum of $8,250,990.83, together with a breakdown of such figure. Mr Nair contested the calculation of the payout figure, substantially on the basis that it incorrectly included amounts not owing. This correspondence is set out at paragraphs 314 to 316 below.
By five letters to the Company, the El Saafin Brothers and Lobna, each dated 26 June 2018, MAG Financial served default notices and demands pursuant to s 76 of the Transfer of Land Act 1958 (Vic) (‘Transfer of Land Act’). MAG Financial demanded payment of $8,250,990.83, being the amount due as at 25 June 2018 under the Balanced Facility Agreement and the Balanced Mortgage (with MAG Financial being the assignee of the rights of Balanced Securities).
By emailed letter dated 27 June 2018 to Mr Halse and Mr Koroneos, Mr Nair stated that he was instructed to tender the amount of $3,265,742.82 in satisfaction of the Company’s liabilities under the Balanced Facility Agreement in respect of which the Receivers had been appointed (‘the June Tender’). By email of the same day to Mr Nair (copied to Mr Koroneos), Mr Halse replied and stated that the amount of the security was $8,250,990.83 and accordingly, the proposed June Tender would not discharge such security. This correspondence is set out at paragraphs 317 and 318 below.
On 27 June 2018, on the application of the plaintiffs in the Derivative Proceeding, Lyons J made interim orders restraining the Receivers and Mr Franek (including in his capacity as a director of MAG Financial) from taking steps to realise, sell or otherwise dispose of the ‘Securities’ (as defined in the Balanced Facility Agreement), and the guarantees granted under the Balanced Facility Agreement.
By letter of approval dated 28 June 2018 to the Company, Black Arrow Mortgages confirmed that it was prepared to provide finance in the sum of $5 million to ‘80% LVR only of valuation’.
On 3 July 2018, in the Derivative Proceeding, Kennedy J dissolved the interim orders of Lyons J on the Receivers giving an undertaking not to sell the ‘Securities’.
On 5 July 2018, AAGG was registered as a corporation with ASIC, with Mr Mekkya as the sole director, and Mr Mekkya and Mr Sacca as the only shareholders, each holding six shares.
By Contract of Sale of Real Estate purportedly signed by Mr Mekkya on behalf of AAGG on 5 July 2018, and Mr Franek on behalf of MAG Financial on 9 July 2018, MAG Financial agreed to sell the Arden Street Property to AAGG for $4.5 million plus GST.
By emails of 9 July 2018 to Black Arrow Mortgages, Wael offered the Nairne Street Property, the Bundoora Property, 2 Lynwood Crescent, Lower Plenty, being the land described in Certificate of Title Volume 8519 Folio 915 (‘the Lower Plenty Property’) and the Arden Street Property as security in support of the application for a loan.
By letters dated 16 and 19 July 2018 to Mr Halse, Mr Nair stated that the Company was ready, willing and able to tender the amount of $4,406,742.82 in satisfaction of what he described as the ‘Franek Debt’ and ‘the Balanced Securities Debt’ (‘the July Tender’). Mr Halse did not reply until 25 July 2018, after the settlement of the sale of the Arden Street Property (as set out below). This correspondence is set out at paragraphs 333 to 336 below.
On 17 July 2018, in the Derivative Proceeding, the Receivers undertook to the Court not to sell the Arden Street Property or the Lower Plenty Property.
By memorandum dated 18 July 2018 and provided to the Court in accordance with the orders of Kennedy J made 17 July 2018 in the Derivative Proceeding, counsel and the solicitor for Mr Franek and MAG Financial identified the precise basis on which the Receivers were entitled to sell the Arden Street Property and the Lower Plenty Property. The memorandum did not disclose that MAG Financial had entered into a contract on 9 July 2018 to sell the Arden Street Property to AAGG.
According to an adjustment statement, on 20 July 2018, the sale of the Arden Street Property was settled by the following documents:
(a)a transfer of land dated 22 June 2018 from MAG Financial as mortgagee, to AAGG as transferee, for consideration of $4.95 million (‘the Transfer of Land’); and
(b)an adjustment statement which included the following settlement statement:
SETTLEMENT STATEMENT
Purchase Price
$4,500,000.00
Less Deposit Paid
$1,000.00
$4,499,000.00
Plus Adjustments
$15,708.42
$4,514,708.42
CHEQUES
City of Melbourne
$14,391.80
City West Water
$3,770.62
State Revenue Office
$42,813.91
Vendor
$4,453,732.09
Total
$4,514,708.42
Cheques
City of Melbourne
$14,392.80
City West Water
$3,770.62
State Revenue Office
$42,813.91
Stamp Duty
$247,500.00
LTO – transfer fee
$3,606.00
LTO – Discharge of Mortgage fee
$116.00
$312,199.13
The date of the settlement is unclear because:
(a)by email of 23 July 2018 at 4:38 pm to Mr Koroneos, Mr Halse stated that his client had ‘today’ completed the sale of the Arden Street Property; and
(b)the settlement was not effected by a cheque to the vendor of $4,453,732.09, as referred to in the settlement statement, but purportedly by a mortgage dated 23 July 2018 from AAGG to MAG Financial over the Arden Street Property securing an ‘Advance’ of $4.5 million.
By email of 23 July 2018 at 6:31 pm to counsel and Mr Koroneos, Mr Bise stated that MAG Financial had allegedly sold the Arden Street Property ‘behind the receivers’ backs’.
By email of 24 July 2018 to Mr Nair, Mr Koroneos stated that the Receivers had no knowledge of, and were not involved in, the sale of the Arden Street Property.
On or about 27 July 2018, Mr Franek resigned as a director of MAG Financial and was replaced by Mr Mekkya. Mr Franek also transferred all of the shares in MAG Financial to Mr Mekkya.
By email of 3 August 2018 to Mr Nair, Mr Halse confirmed that the fifth and sixth defendants in the Derivative Proceeding (‘the Administrators’) had been appointed as joint and several administrators of the Company. Accordingly, on the basis of his contention that the legal proceeding could not proceed without the written consent of the Administrators or leave of the Court, he invited the Plaintiffs to discontinue the Derivative Proceeding.
By originating process filed 21 December 2018 in the Trustworthy Proceeding, Trustworthy Nominees relevantly sought the following orders:
(a)Wael and Bayda take all reasonable steps and execute all appropriate documents, including a mortgage between Wael and Bayda as mortgagors and Trustworthy Nominees as mortgagee over the Nairne Terrace Property.
(b)MAG Financial not proceed with the registration of mortgage AR674060A over the Nairne Terrace Property until after the registration of Trustworthy Nominee’s mortgage.
By originating motion between parties filed 8 August 2019 in the MAG Proceeding, MAG Financial relevantly sought the following orders and declarations:
(a)A declaration that MAG Financial has an equitable charge over the Nairne Terrace Property.
(b)An order pursuant to s 81 of the Property Law Act 1958 (Vic), or in the Court’s equitable jurisdiction, that the Court direct a sale of the Nairne Terrace Property.
(c)A declaration that MAG Financial is entitled to all monies owed to it by Wael and Bayda, together with its costs of an incidental to the proceeding and of the sale of the Nairne Terrace Property, from the proceeds of the sale of the Nairne Terrace Property, after satisfaction of the claims of the Westpac Banking Corporation pursuant to its registered mortgage AK741904L.
ISSUES FOR DETERMINATION
The issues for determination arise from the pleadings in each of the four proceedings and, at the conclusion of the evidence, the parties agreed to a list of issues, which is annexed to these reasons. On 3 July 2021 and 12 July 2021, the MAG Parties and the Plaintiffs each filed an addendum to their respective pleadings in the Derivative Proceeding for the purpose of including issues, which had been the subject of argument but not pleadings.
The issues for determination fall broadly within the following headings:
(a)Breach of the Consumer Credit Act.
(b)Company debts.
(c)Claims against the Receivers.
(d)Tender.
(e)Sale of the Arden Street Property.
(f)Assignment of debts to MAG Financial.
(g)Trustworthy Proceeding.
BREACH OF THE CONSUMER CREDIT ACT
Material facts
The material facts in relation to this issue are not in dispute. The relevant contracts are summarised as follows.
By the First Franek Loan Agreement dated 15 April 2015, Mr Franek agreed to lend $100,000 to Wael and Bayda for a term of three months, subject to interest of $12,000 per month payable in arrears, secured by a charge over the Nairne Terrace Property.
After the loan was not repaid, by the Second Franek Loan Agreement dated 15 January 2016, Mr Franek agreed to lend $311,000 to Wael and Bayda for a term of three months, subject to interest of $26,000 per month payable in arrears, secured by a charge over the Nairne Terrace Property.
After the loan was not repaid, and to secure obligations under the Franek Settlement Deed, by the Franek GSA dated 18 May 2017, Wael, Bayda and the Company as the grantors:
(a)acknowledged that, pursuant to the Second Franek Loan Agreement, Mr Franek had advanced to Wael, Bayda and the Company ‘(or either of them)’ the loaned amount, being the aggregate of $311,000 plus interest accumulated since 16 February 2016 and Mr Franek’s legal costs; and
(b)agreed to grant to Mr Franek as the secured party:
(i)a registered second mortgage over the Lower Plenty Property; and
(ii)a charge over all of their real and personal property.
By the Franek Settlement Deed dated 18 May 2017, between Mr Franek as the releasing party, Wael and Bayda as the released party, and the Company as the guarantor/released party, it was recited as follows:
A.[Mr Franek] as lender and Wael as borrower have entered into the Loan Agreement whereby [Mr Franek], at the request of Wael, agreed to lend and Wael agreed to borrow the Loaned Amount.
B. Pursuant to the Loan Agreement, amongst others, Wael agreed to:
i. pay the Interest on the Loaned Amount; and
ii. repay the Loaned Amount together with Interest within three (3) months of the date of the Loan Agreement.
C. In breach of the Loan Agreement, Wael has failed, refused and/or neglected to repay the Loaned Amount together with Interest on the due date for repayment or at all.
D.At all material times Wael is and was a director and shareholder of [the Company].
E. [The Company] is undertaking the Project.
F. In consideration of [Mr Franek] entering into this Deed, Wael and [the Company] have agreed to the Settlement.
G.In consideration of [Mr Franek], at the request of [the Company], agreeing to enter into this Deed, [the Company] has agreed to guarantee the due and punctual performance of Wael of the Terms and Conditions in accordance with this Deed and has otherwise to the Settlement.
In summary, the parties agreed to the following:
(a)Upon full compliance with the provisions of the Franek Settlement Deed, the parties would mutually release and discharge each other from all claims relating to the Second Franek Loan Agreement.
(b)Wael, Bayda and the Company would enter into a standard form LIV Contract of Sale of Real Estate and transfer to Mr Franek Commercial Unit 002 of the Development, and fit out the property in accordance with the fit-out specifications.
(c)Subject to Wael, Bayda and the Company complying with the obligation in sub-para (b) above, Mr Franek would:
(i)pay the sum of $50,000 on execution of the Franek Settlement Deed;
(ii)pay a further sum of $50,000 on completion of the transfer of Commercial Unit 002 and registration on the title; and
(iii)release Wael and Bayda from liability under the Second Franek Loan Agreement.
(d)In the event that Wael, Bayda or the Company defaulted in taking any step necessary to effect the settlement, Mr Franek had the right to issue legal proceedings and obtain judgment for the loaned amount of $311,000 plus interest of $26,000 per month commencing from 16 February 2016.
The Franek Settlement Deed contains the following further relevant clauses:
4.1.1In the event Wael and/or [the Company] fail to take any steps necessary to effect the Settlement (or any part thereof) in accordance with this Deed, then [Mr Franek] shall have the right to immediately issue legal proceedings in any Court of competent jurisdiction and produce this Deed as to Wael’s and [the Company’s] consent (at [Mr Franek’s] option):
(a) obtain judgment for the Loaned Amount together with the Interest (accrued and calculated as at the date of issuing the proceeding); or
(b) a judgment for damages to be assessed; or
(c) an order for specific performance to enforce the Settlement against Wael and/or [the Company], and
5.1Upon full compliance with the provisions set forth in this Deed, the parties hereby mutually release and forever discharge each other, their heirs, executors, administrators, assigns, servants and agents from all Claims, suits, actions, expenses of any description whatsoever and demands whatsoever or howsoever arising from or touching upon the subject matter of the Loan Agreement which the party may have or may have had but for this Deed against any other party in respect of any expenses or loss of any kind suffered or incurred by them or any of them otherwise for or by reason of, arising out of or in any way connected with any of the facts and circumstances giving rise to the Loan Agreement including but not limited to all Claims for damages, costs charges and expenses which may hereinafter arise out of or in respect of the alleged cause or causes of action the subject of, and/or in any way connected to, the Loan Agreement
Legislative regime
Sections 39 and 40 of the Consumer Credit (Victoria) Act 1995 (Vic) (‘the Consumer Credit Act’) provide as follows:
39 Contract unenforceable if rate exceeds 48 per cent
(1)A credit contract (and any mortgage given to a credit provider in relation to that contract) is unenforceable where the annual percentage rate in respect of the contract exceeds 48.
(2)Nothing in this section affects or limits the powers of the Court under section 70 of the Consumer Credit (Victoria) Code or of a court under section 76 of the National Credit Code if the Court or court is satisfied that the annual percentage rate in respect of a credit contract although not exceeding, in the case of a credit contract in relation to which there is a mortgage, 30, and in the case of any other contract, 48, is excessive or that the transaction is unjust within the meaning of that section 70 or section 76, as the case requires, or is such that a court of equity would give relief.
(3)A credit provider must not enter into a credit contract where the annual percentage rate in respect of the contract exceeds 48.
Penalty applying to this subsection: 10 penalty units.
40 Mortgage void if rate under credit contract exceeds 30 per cent
A mortgage relating to a credit contract in respect of which the annual percentage rate exceeds 30 is void in so far as it relates to that contract.
Pursuant to s 38AA of the Consumer Credit Act, the words ‘credit contract’ and ‘credit provider’ in the above sections have the same meanings as in the National Credit Code contained in sch 1 to the National Consumer Credit Protection Act 2009 (Cth) (‘the Code’).
Section 4 of the Code provides that a credit contract is ‘a contract under which credit is or may be provided, being the provision of credit to which this Code applies’.
Section 5 of the Code provides as follows:
(1)This Code applies to the provision of credit (and to the credit contract and related matters) if when the credit contract is entered into or (in the case of precontractual obligations) is proposed to be entered into:
(a) the debtor is a natural person or a strata corporation; and
(b)the credit is provided or intended to be provided wholly or predominantly:
(i) for personal, domestic or household purposes; or
(ii)to purchase, renovate or improve residential property for investment purposes; or
(iii)to refinance credit that has been provided wholly or predominantly to purchase, renovate or improve residential property for investment purposes; and
(c) a charge is or may be made for providing the credit; and
(d)the credit provider provides the credit in the course of a business of providing credit carried on in this jurisdiction or as part of or incidentally to any other business of the credit provider carried on in this jurisdiction.
…
(3)For the purposes of this section, investment by the debtor is not a personal, domestic or household purpose.
(4)For the purposes of this section, the predominant purpose for which credit is provided is:
(a)the purpose for which more than half of the credit is intended to be used; or
(b)if the credit is intended to be used to obtain goods or services for use for different purposes, the purpose for which the goods or services are intended to be most used.
Section 7 of the Code provides as follows:
(1)This Code applies to a mortgage if:
(a)it secures obligations under a credit contract or a related guarantee; and
(b) the mortgagor is a natural person or a strata corporation.
(2)If any such mortgage also secures other obligations, this Code applies to the mortgage to the extent only that it secures obligations under the credit contract or related guarantee.
(3)The regulations may exclude, from the application of all or any provisions of this Code, a mortgage of a class specified in the regulations.
With respect to presumptions under the Code, s 13 provides as follows:
(1)In any proceedings (whether brought under this Code or not) in which a party claims that a credit contract, mortgage or guarantee is one to which this Code applies, it is presumed to be such unless the contrary is established.
(2) It is presumed for the purposes of this Code that credit is not provided or intended to be provided under a contract wholly or predominantly for any or all of the following purposes (a Code purpose):
(a) for personal, domestic or household purposes;
(b) to purchase, renovate or improve residential property for investment purposes;
(c) to refinance credit that has been provided wholly or predominantly to purchase, renovate or improve residential property for investment purposes;
if the debtor declares, before entering the contract, that the credit is to be applied wholly or predominantly for a purpose that is not a Code purpose, unless the contrary is established.
(3) However, the declaration is ineffective if, when the declaration was made, the credit provider or a person (the prescribed person) of a kind prescribed by the regulations:
(a) knew, or had reason to believe; or
(b) would have known, or had reason to believe, if the credit provider or prescribed person had made reasonable inquiries about the purpose for which the credit was provided, or intended to be provided, under the contract;
that the credit was in fact to be applied wholly or predominantly for a Code purpose.
Is the Second Franek Loan Agreement a ‘credit contract’, as defined in the National Credit Code?
There is no dispute that:
(a)the borrowers, being Wael and Bayda, are natural persons, satisfying the requirement of sub-s 5(1)(a) of the Code;
(b)a charge was made for the credit, satisfying the requirement of sub-s 5(1)(c) of the Code;
(c)the interest rates under the First Franek Loan Agreement and the Second Franek Loan Agreement exceeded 48%, as proscribed by s 39 of the Consumer Credit Act; and
(d)the credit advanced under the First Franek Loan Agreement and the Second Franek Loan Agreement was intended to be used, and was in fact used, principally for the Development.
Accordingly, it is necessary to decide the following:
(a)whether the credit was provided to purchase, renovate or improve residential property for investment purposes, or to refinance credit that had been provided predominantly for such purposes, as required by sub-s 5(1)(b) of the Code (‘the Residential Loan Purpose’); and
(b)whether Mr Franek provided the credit:
(i)in the course of a business of providing credit; or
(ii)as part of or incidentally to any other business,
as required by sub-s 5(1)(d) of the Code.
Submissions
MAG Parties’ submissions
The MAG Parties submitted that the Second Franek Loan Agreement is not a credit contract within the meaning of the Code, for the following reasons:
(a)The credit was not provided to Wael and Bayda as borrowers predominantly for the Residential Loan Purpose. The relevant purchase, renovation and improvements were made by the Company, rather than Wael and Bayda. The most that could be said was that Wael and Bayda on-lent the money to the Company.
(b)Mr Franek did not provide the credit in the course of a business of providing credit. Counsel relied upon the following:
(i)Whilst Mr Franek operated a finance broking business, that business did not have a licence to loan money.
(ii)Mr Franek’s evidence was that these loans were made in his personal capacity to Wael and Bayda.
(iii)Mr Franek had personally provided loans to people on maybe 10 to 12 occasions prior to the making of the First Franek Loan Agreement, which could not constitute a ‘business’.
(c)Mr Franek did not provide the credit incidentally to his other business, being his mortgage broking business ‘212 Degrees’, which was a distinct legal entity.
Plaintiffs’ submissions
The Plaintiffs submitted that the Second Franek Loan Agreement is a credit contract within the meaning of the Code, for the following reasons:
(a)The credit was provided for the Residential Loan Purpose, being the Development. Mr Franek’s evidence was that the sole purpose of the loan related to the Development.
(b)The loan was provided in the course of Mr Franek’s business of providing credit, or incidentally to his other business as a finance broker, for the following reasons:
(i)As at April 2015, Mr Franek was operating a brokerage business in which he provided corporate-style debt or construction debt to builders and developers.
(ii)He had advanced loans in his personal capacity ‘maybe 10 or 12 times’ before the First Franek Loan Agreement.
(c)Mr Franek accepted that he would be liable to pay tax on interest received under the Second Franek Loan Agreement.
Consideration
Was the credit provided for the Residential Loan Purpose?
Courts have expressed divergent views about whether, in determining the purpose for which credit was ‘provided or intended to be provided’, the Court should have regard to the purposes of the creditor or debtor, subjectively or objectively assessed, or by a combination.[5]
[5]Vella v Permanent Mortgages Pty Ltd (2008) 13 BPR 25,343, 25,381 [342] (Young CJ in Eq); Bank of Queensland Ltd v Dutta [2010] NSWSC 574, [117]-[118] (Davies J); Commonwealth Bank of Australia v Stephens [2017] VSC 385, [454]-[459] (Sloss J); Knowles v Victorian Mortgage Investments Ltd [2011] VSC 611, [38]-[47] (Croft J).
In Commonwealth Bank of Australia v Stephens, Sloss J observed that the initial approach focused on the relevant purpose being determined by reference to the intention of the credit provider.[6]
[6][2017] VSC 385, [455], citing Knowles v Victorian Mortgage Investments Ltd [2011] VSC 611, [38]-[47] (Croft J). See also Rafiqi & Thomas v Wacal Investments Pty Ltd (1998) ASC 155-024, [148] (Brabazon DCJ); Park Avenue Nominees Pty Ltd v Boon (2001) ASC 155-052, [38] (Harrison M); Taylor v Third Szable Holdings Pty Ltd (2001) ASC 155-050, [59]-[60] (McKenzie DP).
In Knowles v Victorian Mortgage Investments Ltd,[7] Croft J adopted the approach of Davies J in Bank of Queensland Ltd v Dutta,[8] that the relevant intention was that of the borrower.[9] Croft J stated:
If the credit provider does not obtain a signed declaration in the required form from the borrower then the credit provider is not afforded the protection of the presumption provided under s 11(2) of the CCC, and thereby invites the difficulty of proving that the loan was not intended to be used wholly or predominantly for personal, domestic or household purposes.[10]
[7][2011] VSC 611, [47].
[8][2010] NSWSC 574, [123]-[124].
[9]Ibid, adopting Dale v Nichols Constructions Pty Ltd [2003] QDC 453, [28] (McGill DCJ).
[10]Knowles v Victorian Mortgage Investments Ltd [2011] VSC 611, [47].
In the following cases, intermediate courts of appeal have favoured an approach that the relevant purpose should be assessed objectively, having regard to the substance of the transaction and the surrounding circumstances.
In Bahadori v Permanent Mortgages Pty Ltd, in assessing whether the credit provider had rebutted the presumption that the Code applied to the credit contract, Tobias JA (with whom Giles and Campbell JJA agreed) applied the objective approach (on the basis that it was the most favourable to the credit provider), stating:
I accept for the purposes of this exercise that the test most favourable to [the credit provider] is an objective one based upon what a reasonable person would, in all the circumstances, consider to be the purpose for which the loans were intended to be provided. Such a person would be entitled to take into account all the objective circumstances which would otherwise fall for consideration under s 11(3).[11]
[11](2008) 72 NSWLR 44, 81 [184].
In Shakespeare Haney Securities Ltd v Crawford, Muir JA stated that the provisions gave rise to difficulties of construction which it was not necessary to resolve on the appeal.[12] However, he considered that the ‘preferable’ approach was objective, and stated:
An approach to the construction of s 6(1)(b) which considers the substance of the subject transaction and requires an objective assessment would, in my view, be preferable to one which looks to the actual intention of either the borrower or the lender. Plainly, ‘the purpose’ for which credit is provided or intended to be provided has nothing to do with the lender’s general commercial purposes: the reference is to the use to which the credit is to be put. In the great majority of transactions there would be no difficulty in determining the relevant purpose by reference to the terms of the application for credit and of the approval. If the borrower requests credit for a stated purpose and the lender approves the request and makes the loan, there should be no difficulty in concluding that the purpose for which the loan was made was the purpose for which it was requested.
The focus of s 6(1)(b) is on the provision of credit rather than on the obtaining of credit. That is inconsistent with a construction which looks to the debtor’s state of mind. Also, one would think that if the legislature had in mind that, in determining the purpose for which credit was provided, the debtor’s intention was the governing consideration, s 6(1)(b) would have been worded along these lines:
“The debtor intended to apply the credit wholly or predominantly for personal, domestic or household purposes”.[13]
[12][2009] 2 Qd R 156, 167 [37] (‘Shakespeare’).
[13]Ibid 166 [31]-[32] (with whom Mullins and Douglas JJ agreed).
In Haynes v St George Bank, Kourakis CJ specifically held that the test for assessing the relevant purpose of the provision of credit was objective.[14] He concluded that the intention of a debtor was not determinative and that the Court must consider ‘the substance of the transaction in the context of its performance’.[15]
[14](2018) 130 SASR 551, 562-3 [44], quoting and adopting the approach referred to by Muir JA in Shakespeare [2009] 2 Qd R 156, 166 [31]-[32]: at 563 [46].
[15]Haynes v St George Bank (2018) 130 SASR 551, 563 [45], quoting Linkenholt Pty Ltd v Quirk [2000] VSC 166, [98] (Gillard J).
I would adopt the objective test, as held by Kourakis CJ, although in this case I do not consider that the result would be affected by adopting the other suggested tests. To apply the words of Muir JA, as set out at paragraph 111 above, to the circumstances of the case before me, because ‘the borrower request[ed] credit for a stated purpose and the lender approv[ed] the request and [made] the loan, there should be no difficulty in concluding that the purpose for which the loan was made was the purpose for which it was requested’.[16]
[16]Shakespeare [2009] 2 Qd R 156, 166.
Accordingly, I find that the parties’ intention was for the credit under the First Franek Loan Agreement to be applied for the Residential Loan Purpose (being the Development), and for the Second Franek Loan Agreement to refinance the credit for the same purpose.
Was the credit provided for the purpose of Wael and Bayda on-lending it to the Company?
Despite that general intention, the residual question for determination is, in relation to s 5(1) of the Code, whether the parties’ intention was for the credit to be provided for the purpose of Wael and Bayda on-lending it to the Company (i.e. not for the Residential Loan Purpose)?
In determining the purpose of the provision of credit, ‘it is important to consider the substance of the transaction’ and ‘it is appropriate to consider what the money was used for’.[17] All parties to the Second Franek Loan Agreement intended that most of the money would be used for the Development and most of the money was in fact applied for that purpose.
[17]Linkenholt Pty Ltd v Quirk [2000] VSC 166, [98] (Gillard J).
Although there was no evidence on this question, it might be assumed that the loan monies applied to the Development would be shown, for accounting purposes, as loaned by Wael and Bayda to the Company. However, there is an air of unreality about finding that the purpose of the loan was limited to on-lending to the Company, particularly in circumstances where the parties’ accepted intention was that the money should be applied to the Development, and it was so applied.
The substance of the transaction, which was known to all parties, was predominately to provide credit for the Development. To find that this ultimate purpose was diverted by the fact that the credit was channeled through the natural persons behind the related corporation would not be consistent with the broad and liberal interpretation of the Code as a piece of beneficial legislation.[18]
[18]Jonsson v Arkway Pty Ltd (2003) 58 NSWLR 451, 456 [28] (Shaw J); Bank of Queensland Ltd v Dutta [2010] NSWSC 574, [124] (Davies J); Knowles v Victorian Mortgage Investments Ltd [2011] VSC 611, [41]–[47] (Croft J).
The approach of identifying the parties’ intention by reference to the ultimate purpose of loan money, despite such loan money being directed through related parties, is consistent with the authorities that have touched on this issue.
In Linkenholt Pty Ltd v Quirk, Gillard J considered the application of the Code in the following circumstances:
(a)The defendant, a natural person, was the guarantor of an original loan taken out by a related company for business purposes.
(b)After the related company was wound up, the defendant entered into a credit agreement with the creditor to satisfy his obligations as guarantor.
(c)The defendant argued that the later loan was regulated by the Code because the defendant and the related company were ‘completely different entities’, and a loan to the defendant to enable him to discharge a personal guarantee was not a loan to any business or a loan for business purposes.[19]
[19]Linkenholt Pty Ltd v Quirk [2000] VSC 166, [120].
Gillard J rejected the defendant’s argument and stated that, in determining the purpose of the loan, ‘the court must consider the substance and reality of the transaction’.[20] He found that the Code did not apply because, although the credit was provided to the natural person under the later loan, that did not change the nature and character of the original loan to the related company, which had applied the credit funds for business purposes.[21]
[20]Ibid [121].
[21]Ibid [132].
In Jonsson v Arkway Pty Ltd, Shaw J found that the term ‘personal’ purpose should not be given a narrow construction limiting it to the debtor’s personal, domestic or household purposes. He found that a more expansive or liberal reading of the text should be adopted so that the Code covered credit provided to finance a home for the benefit of the borrower’s parents, despite the loan money being channeled through a trust.[22]
[22](2003) 58 NSWLR 451, 453 [10], 455-6 [27].
This is not a case where the loan money was provided to natural persons to do with as they choose; and they simply chose to on-lend it to a company. I do not consider the fact that the relevant residential property was owned by the Company affects the fact that the credit advanced under the Second Franek Loan Agreement was to refinance a loan applied for the Residential Loan Purpose. Accordingly, in my opinion, the requirement under sub-s 5(1)(b) of the Code was satisfied.
Did Mr Franek provide the credit in the course of a business of providing credit?
Mr Franek gave the following evidence with respect to his business as a finance broker and his loan to Wael and Bayda:
(a)Since 2008, he had operated a finance brokerage business under the name of ‘212 Degrees’. In relation to his business, Mr Franek stated:
We specialise in structuring and securing business lending for commercial clients in various industries under an Australian Credit License issued by the Australian Securities and Investments Commission for the purposes of the brokerage business.
(b)Prior to April 2015, he had ‘loaned money to Wael a number of times’. He stated that those loans were ‘all advanced on the same basis, that is, structured to be short term loans with higher rate of interest given the risk associated with the loan’.
(c)The First Franek Loan Agreement and the Second Franek Loan Agreement were both made in his ‘personal capacity’.
(d)In the five years prior to the First Franek Loan Agreement, he had made loans in his ‘personal capacity’ to clients. As to the frequency, he said that ‘it probably would have only been maybe 10 or 12 times’.
The expression ‘in the course of a business carried on’ should be given a similar meaning to the commonly used expression ‘carrying on a business’.[23] In the context of the statutory provisions, for conduct to be in the course of business or in carrying on a business, the conduct must form part of a ‘commercial enterprise, systematically and regularly, with a view to profit, and implicit in this idea are the features of continuity and system’.[24] Halsbury’s Laws of Australia states that an activity that constitutes a business will normally display one or more of the following characteristics:
(1)System and organisation Businesses are commercial enterprises and as such are usually run in a systematic and organised fashion, although the level of organisation and system expected may vary depending on the taxpayer’s abilities and the nature of the enterprise. The fact that an enterprise is run in an inefficient manner by a taxpayer with poor business acumen will not preclude the activity from being a business. On the other hand, where an enterprise is entirely a vehicle for the pursuit of pleasure, the mere fact that it is systemic or organised will not transform it into a business.
(2)Scale of activity If an organisation and a system are in place, the scale of the enterprise may be a less important factor. However, the smaller the enterprise, the more important system and organisation becomes, because the smaller the scale of the enterprise, the stronger the inference will be that the activity is for pleasure rather than a commercial pursuit.
(3)Commercial character In a business, it would ordinarily be expected that the transactions the enterprise undertakes would be at arm’s length, that is, the enterprise is willing to trade on the open market on the usual terms or conditions operative in that market. A business may be carried on through an agent.
(4)Regularity and frequency Another characteristic of a business is that its transactions would normally be frequent and regular over a reasonable period. The lack of sustained activity may lead to a conclusion that no business is being conducted. Irregular activity may be less significant if there is the willingness to enter into transactions but the market for the service or product fluctuates.
(5)Profit The desire to make a profit in an enterprise generally forms an important element of a business. It is not necessary to show that there is the likelihood of profit in the short to medium term, but there should be at least the likelihood of the enterprise making a profit in the long run. However, the existence of a profit motive alone will not make a venture a business, for example, where the enterprise is primarily a vehicle for pleasure or speculation. The fact that the taxpayer is compelled to undertake the activity does not mean that there is not a profit motive.
(6)Other characteristics Other factors which have been important in determining a business include the type and quantity of goods traded and the vehicle used to conduct the activity. The fact that the activity is illegal, is conducted part-time or is conducted on the taxpayer’s behalf will not prevent a business being found. Conversely, the fact that the activity is the sole source of a taxpayer’s ‘income’ does not make it a business activity.[25]
[23]Lauvan Pty Ltd v Bega (No 2) [2018] NSWSC 155, [262] (Gleeson JA).
[24]Hyde v Sullivan (1956) 56 SR (NSW) 113, 119 (Street CJ, Roper CJ in Eq and Herron J), cited with approval in Shakespeare [2009] 2 Qd R 156, 168 [43] (Muir JA, with whom Mullins and Douglas JJ agreed); Lauvan Pty Ltd v Bega (2018) 330 FLR 1, 51 [263] (Gleeson JA); TCL Airconditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd, Re TCL Airconditioner (Zhongshan) Co Ltd (No 2) (2019) 369 ALR 192, 196 [19] (McKerracher J).
[25]LexisNexis, Halsbury’s Laws of Australia (online at 31 May 2021) 405 – Taxation and Revenue, II Income and assessable Income ‘(5) Income from Businesses’ (last update 19 August 2013) [405-2575] (citations omitted).
Does the equitable interest in the Nairne Street Property under the First Franek Loan Agreement have priority over the equitable interest under the Trustworthy Loan Agreement?
It was common ground that the order in which the equitable interests were created were as follows:
(a)first, under the First Franek Loan Agreement;
(b)second, under the Trustworthy Loan Agreement; and
(c)third, under the Second Franek Loan Agreement.
Neither party contended that, if the other was found to be the prior equitable interest holder, it had acted in such a way that it would be unconscionable for its interests to prevail.[148] Accordingly, it was common ground between the parties that the priority between the competing equitable interests held by Trustworthy Nominees and Mr Franek respectively should be determined by reference to the interest created first in time. Accordingly, priority was dependent upon whether the Second Franek Loan Agreement had supplanted the First Franek Loan Agreement, or as stated by the MAG Parties:
[T]he relevant inquiry is whether the equitable security granted under the First Franek Loan Agreement was discharged or released by virtue of the parties entering into the Second Franek Loan Agreement.
Submissions
[148]See Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liq) (1965) 113 CLR 265, 276.
Trustworthy Nominees’ submissions
Trustworthy Nominees submitted that the Second Franek Loan Agreement superseded the First Franek Loan Agreement for the following reasons:
(a)The Second Franek Loan Agreement makes no reference to the First Franek Loan Agreement.
(b)The Second Franek Loan Agreement was dated 15 January 2016 and provided as follows:
(i)The loan sum was $311,000.
(ii)The loan sum was calculated by rounding up the amount due under the First Franek Loan Agreement ($285,000) and adding one month’s interest at the new rate of $26,000 per month.
(iii)Interest was $26,000 per month payable in arrears, rather than the $12,000 per month plus default interest of $3,500 per month (totalling $15,500 per month) which applied under the First Franek Loan Agreement.
(c)By cl 5, Wael acknowledged that the ‘Loan in full’, being the full $311,000 was to commence on 15 January 2016.
(d)By cl 7, Wael acknowledged that Mr Franek was entitled to enforce the loan and recover the full amount and any outstanding interests or costs. Such a clause was not included in the First Franek Loan Agreement.
(e)The caveat lodged by Mr Franek over the Nairne Terrace Property on 20 April 2018 purported to be pursuant to the Second Franek Loan Agreement only.
MAG Parties’ submissions
The MAG Parties submitted that the Second Franek Loan Agreement demonstrated no intention to discharge the security provided by the First Franek Loan Agreement, for the following reasons:
(a)The fact that the First Franek Loan Agreement contained a fresh charge over the Nairne Terrace Property does not provide any evidence of the necessary intent to discharge the equitable charge under the First Franek Loan Agreement. Rather, it demonstrates that at all relevant times, the parties intended for Mr Franek to have an equitable charge over the Nairne Terrace Property.
(b)The purpose of the Second Franek Loan Agreement was to formalise the existing loan which had not been repaid, and equity should not release a grantor of an equitable interest from its obligations merely because the terms of the loan were restated.
Principles
In Commissioner of Taxation (Cth) v Sara Lee Household & Body Care (Australia) Pty Ltd, the High Court considered the distinction between:
(a)a variation of a contract; and
(b)the replacement of a contract by a new contract without a change of parties.
Gleeson CJ, Gaudron, McHugh and Hayne JJ said:
When the parties to an existing contract enter into a further contract by which they vary the original contract, then, by hypothesis, they have made two contracts. For one reason or another, it may be material to determine whether the effect of the second contract is to bring an end to the first contract and replace it with the second, or whether the effect is to leave the first contract standing, subject to the alteration. For example, something may turn upon the place, or the time, or the form, of the contract, and it may therefore be necessary to decide whether the original contract subsists. [149]
[149](2000) 201 CLR 520, 533 [22].
In Hillam v Iacullo, the New South Wales Court of Appeal considered whether the lenders could enforce the second of three loan agreements which they had entered into with a borrower.[150] At first instance, Ball J held that:
(a)the lenders could not insist upon a payment due under the third loan agreement because they had failed to perform their obligations under that agreement;[151] but
(b)the lenders could enforce the second loan agreement because it had remained on foot.[152]
[150](2015) 90 NSWLR 422 (‘Hillam’) (Basten, Ward and Leeming JJA).
[151]Iacullo v Hillam [2014] NSWSC 1021, [33]-[34].
[152]Ibid [38]-[40].
On appeal, Leeming JA said that the question of whether the lenders could enforce their rights under the second loan agreement depended on ‘discerning the (objective) intention of the parties’.[153] His Honour noted the difference in the provisions made under the third loan agreement and concluded that it fell within the following description given by Lord Dunedin in Morris v Baron & Co:
[T]he first contract is got rid of … because, the second dealing with the same subject-matter as the first but in a different way, it is impossible that the two should be both performed.[154]
[153]Hillam (2015) 90 NSWLR 422, 434 [57] (with whom Basten and Ward JJA agreed).
[154]Ibid 435 [62], quoting Morris v Baron & Co [1918] AC 1, 26.
Leeming JA concluded that the ultimate analysis was:
[W]hether the legal rights generated by the second loan agreement were inconsistent with those resulting from the third. The third loan agreement, being a more recent, formally executed distillation of the parties’ rights and obligations, which was inconsistent with those arising under the second loan agreement, brought the second loan agreement to an end.[155]
[155]Hillam (2015) 90 NSWLR 422, 437 [73].
In Schreuders v Grandiflora Nominees Pty Ltd, the Court of Appeal said that:
Where the parties enter into an agreement and then enter into a second agreement which varies the first agreement, it may be necessary for the court to determine whether the second agreement brings an end to the first agreement and replaces it with the second, or whether the effect is that the first agreement remains, subject to the variation.
The question whether an amending agreement supersedes rather than varies the principal agreement depends on the objective intention of the parties to the amending agreement as disclosed by the wording of that agreement.[156]
[156][2016] VSCA 93, [18]-[19] (Kyrou, Ferguson and McLeish JJA) (citations omitted).
As the Court of Appeal observed in Balanced Securities Ltd v Dumayne Property Group Pty Ltd:
The critical factor in determining that issue in Hillam v Iacullo was the fact that the third loan agreement expressly dealt with the very same advances for which provision had been made in the second loan agreement. The second loan agreement had to be treated as being discharged because the third agreement dealt with the same subject matter but in a different way and it was impossible that both should be performed. This conclusion was reached by consideration of the terms of the two agreements.[157]
[157](2017) 53 VR 14, 30 [71] (Whelan and Ferguson JJA and Cameron AJA) (citations omitted).
After reviewing the relevant authorities, the Court of Appeal set out the relevant principles as follows:
(1)The relevant issue is whether the subsequent agreement amends the earlier agreement or brings it to an end and replaces it.
(2)The earlier agreement may be brought to an end either expressly or by implication.
(3) The issue is to be resolved by ascertaining the manifest intention of the parties.
(4)The manifest intention of the parties is to be ascertained objectively by the construction of the subsequent agreement, having regard to the relevant context of that agreement where it is permissible to do so in accordance with the ordinary principles of contractual construction.
(5)A potentially critical factor militating in favour of a conclusion that the manifest intention of the parties, objectively ascertained, was to bring the earlier agreement to an end and replace it, is where the terms of the two relevant agreements deal with the same subject matter in different and inconsistent ways.[158]
[158]Ibid 31-2 [78] (citations omitted).
In summary, I consider the above authorities to stand for the proposition that, if two relevant agreements deal with the same subject matter in inconsistent ways, such that it would be impossible for both be performed, it should be inferred that the latter was intended to supersede the former.
Conclusion
In my opinion, a review of the First Franek Loan Agreement and the Second Franek Loan Agreement demonstrates that the latter agreement was intended to be a comprehensive agreement which would supersede and replace the former agreement. It would not have been possible for both agreements to have been performed. In particular:
(a)the amount of the loan under the Second Franek Loan Agreement was calculated by rounding up the amount due under the First Franek Loan Agreement and adding a month’s interest at the new higher rate; and
(b)the interest payable under the Second Franek Loan Agreement was significantly higher than that payable under the First Franek Loan Agreement.
The inference is also supported by the fact that the Second Franek Loan Agreement is expressly said to commence on 16 January 2016.
The objective intention was plainly that the borrowers were required to comply with the obligations under the Second Franek Loan Agreement, and the obligation to perform the First Franek Loan Agreement was discharged.
In contrast, in the Franek GSA and the Franek Settlement Deed:
(a)it is specifically agreed that the Second Franek Loan Agreement does not merge with the Franek GSA and the Franek Settlement Deed; and
(b)specifically contemplates Mr Franek being entitled to enforce his rights under the Second Franek Loan Agreement if there is a default under the Franek GSA and/or the Franek Settlement Deed.
Accordingly, I find that the equitable interest of Trustworthy Nominees was created first in time and has priority over Mr Franek’s charge under the Second Franek Loan Agreement.
Was the First Franek Loan Agreement assigned to MAG Financial?
Trustworthy Nominees submitted that if any of Mr Franek’s rights under the First Franek Loan Agreement survived the execution of the Second Franek Loan Agreement, such rights were not assigned to MAG Financial. In view of my finding that Trustworthy Nominee’s charge has priority over Mr Franek’s charge, it is not necessary for me to decide this question.
However, in case I am wrong in this finding, I would accept Trustworthy Nominees’ submission, for the following reasons:
(a)Under the terms of the Deed of Assignment of Contracts and Securities dated 3 May 2018, Mr Franek assigned to MAG Financial the ‘Contracts’, which was defined to mean:
(a) Deed of Settlement and Release;
(b) Loan Agreement;
(c) General Security Deed; and
(d)Any document referred to as a transaction document in any of the above.
(b)Under the Franek Settlement Deed, ‘Loan Agreement’ was defined as:
[T]he document titled ‘Loan Agreement’ and dated 15 January 2016 between [Mr Franek] as lender and Wael as borrower a copy of which appears as Annexure A to this Deed.
Clause 1.1.24 of the Franek GSA adopts the same meaning of ‘Loan Agreement’ as in the Franek Settlement Deed.
(c)The First Franek Loan Agreement is not referred to in any of the Franek GSA, the Franek Settlement Deed or the Second Franek Loan Agreement.
Are Wael and Bayda entitled to set aside any security interest over the Nairne Street Property under the Franek GSA?
By their counterclaim in the Trustworthy Proceeding, Wael and Bayda allege that:
(a)Mr Franek’s solicitor falsely represented that the Franek Settlement Deed, which was sent to Wael for execution on 18 May 2017, was a full release of all alleged loans and only granted a mortgage over the Lower Plenty Property;
(b)the representation arose from emails of 15 and 16 May 2017 from Mr Franek’s solicitor setting out the terms of the settlement; but
(c)in fact, the Franek Settlement Deed was a conditional release of all alleged loans and granted a mortgage over the Nairne Terrace Property in addition to a second mortgage over the Lower Plenty Property.
The MAG Parties submitted that Wael and Bayda’s claims must fail for the following reasons:
(a)Wael and Bayda have failed to prove that the settlement did not in fact set out the agreement reached between Wael and Mr Franek.
(b)In respect of the claim under the Australian Consumer Law contained in sch 2 to the Competition and Consumer Act 2010 (Cth) (‘ACL’), ss 18 and 21 of the ACL do not apply to conduct relating to credit contracts.
(c)Wael and Bayda were not under a special disadvantage which would compromise their capacity to protect their own interests. A mere failure to obtain legal advice is entirely insufficient to give rise to a special disadvantage. In fact, Wael and Bayda were expressly directed by Mr Franek’s solicitor to seek independent legal advice, but apparently elected not to do so.
(d)In respect of the claim under s 12CB of the ASIC Act, the taking of security cannot be said to be so against conscience that a court would intervene.
(e)None of the factors enumerated in s 12CC of the ASIC Act operate on the facts of this case to indicate a presence of unconscionability.
No submissions were made on behalf of Wael and Bayda in support of these claims, and I accept the submissions of the MAG Parties. I also note that neither Wael nor Bayda gave evidence that they relied on the alleged misrepresentations in entering into the Franek GSA and the Franek Settlement Deed. Further, there was no evidence or submission as to the counter factual position of Wael and Bayda, if they had not entered into those agreements.
I will dismiss these counterclaims of Wael and Bayda based on allegations of misrepresentation and unconscionability.
ORDERS
I will hear the parties with respect to the appropriate orders consequent of these reasons.
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SCHEDULE OF PARTIES
S CI 2018 01685
BETWEEN:
| HASSAN EL-SAAFIN | First Plaintiff |
| MOHAMAD EL-SAAFIN | Second Plaintiff |
| SAAFIN CONSTRUCTIONS PTY LTD (ACN 097 500 751) (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) | Third Plaintiff |
| WAEL EL-SAAFIN | Fourth Plaintiff |
| - and - | |
| MARK FRANEK | First Defendant |
| STEPHEN ROBERT DIXON | Second Defendant |
| AHMED BISE | Third Defendant |
| MAG FINANCIAL AND INVESTMENT VENTURES PTY LTD (ACN 625 790 623) | Fourth Defendant |
| IAN GLAVIS | Fifth Defendant |
| MATTHEW KUCIANSKI | Sixth Defendant |
| AAGG DEVELOPMENTS PTY LTD (ACN 627 341 128) | Seventh Defendant |
| AMR MEKKYA | Eighth Defendant |
| GEORGE SACCA | Ninth Defendant |
| NEW CONCEPT HOMES PTY LTD (ACN 602 265 298) | Tenth Defendant |
| AND BETWEEN | |
| First Plaintiff by First Counterclaim | |
| STEPHEN ROBERT DIXON | |
| Second Plaintiff by First Counterclaim | |
| AHMED BISE | |
| - and - | |
| SAAFIN CONSTRUCTIONS PTY LTD (ACN 097 500 751) (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) | First Defendant by First Counterclaim |
| WAEL EL-SAAFIN | Second Defendant by First Counterclaim |
| AND BETWEEN | |
| MAG FINANCIAL AND INVESTMENT VENTURES PTY LTD (ACN 625 790 623) | First Plaintiff by Second Counterclaim |
| AAGG DEVELOPMENTS PTY LTD (ACN 627 341 128) | Second Plaintiff by Second Counterclaim |
| NEW CONCEPT HOMES PTY LTD (ACN 602 265 298) | Third Plaintiff by Second Counterclaim |
| - and - | |
| HASSAN EL-SAAFIN | First Defendant by Second Counterclaim |
| MOHAMAD EL-SAAFIN | Second Defendant by Second Counterclaim |
| WAEL EL-SAAFIN | Third Defendant by Second Counterclaim |
| LOBNA EL-SAAFIN | Fourth Defendant by Second Counterclaim |
| BAYDA EL-SAAFIN | Fifth Defendant by Second Counterclaim |
| SAAFIN CONSTRUCTIONS PTY LTD (ACN 097 500 751) (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) | Sixth Defendant by Second Counterclaim |
S ECI 2018 02987
BETWEEN:
| TRUSTWORTHY NOMINEES PTY LTD (ACN 005 092 624) | Plaintiff |
| - and - | |
| WAEL ELSAAFIN | First Defendant |
| BAYDA ELSAAFIN | Second Defendant |
| MAG FINANCIAL AND INVESTMENT VENTURES PTY LTD (ACN 625 790 623) | Third Defendant |
| REGISTRAR OF TITLES | Fourth Defendant |
| AND BETWEEN | |
| WAEL ELSAAFIN | First Plaintiff by Counterclaim |
| BAYDA ELSAAFIN | Second Plaintiff by Counterclaim |
| - and - | |
| TRUSTWORTHY NOMINEES PTY LTD (ACN 005 092 624) | First Defendant by Counterclaim |
| MAG FINANCIAL AND INVESTMENT VENTURES PTY LTD (ACN 625 790 623) | Second Defendant by Counterclaim |
| REGISTRAR OF TITLES | Third Defendant by Counterclaim |
S ECI 2019 03648
| MAG FINANCIAL AND INVESTMENT VENTURES PTY LTD (ACN 625 790 623) | Plaintiff |
| - and - | |
| WAEL ELSAAFIN | First Defendant |
| BAYDA ELSAAFIN | Second Defendant |
| WESTPAC BANKING CORPORATION (ACN 007 457 141) | Third Defendant |
ANNEXURE – LIST OF AGREED ISSUES
Trespass claim
Was the appointment of the Receivers on 9 April 2018 valid on the basis of:
(a)a failure by the Company to execute a contract of sale in default of the Franek Settlement Deed;
(b)a misrepresentation as to the value of the relevant apartment;
(c)termination of the building contract as a Material Adverse Change under the Franek Settlement Deed; or
(d)by reason of the other grounds detailed in the notice of default dated 17 April 2018?
If no to question 1, did the appointment of the Receivers deprive the Company of the use and enjoyment of the Arden Street property?
If yes to question 2, did such deprivation cause the Company to lose the interest expense particularised in paragraph 36 of the further amended statement of claim (‘FASC’)?
If yes to question 3, should the Court exercise its discretion pursuant to s 419 of the Corporations Act 2001 to relieve the Receivers in whole or in part of a liability that they have incurred but would not have incurred if the Receivers had been so properly appointed?
If no to questions 1 to 4,
(a)Is the Company and Wael liable to indemnify the Receivers against all liabilities, losses and costs incurred pursuant to clause 18.2.1 of the Franek GSA?
(b)Is the Company and Wael responsible for the Receivers’ remuneration pursuant to clause 22.5 of the Franek GSA?
(c)Are the Receivers liable for any loss causes by the non-exercise or exercise or attempted exercise of their powers pursuant to clause 40.1 of the Franek GSA?
Company debts
Is the Company liable for the Sacca Debt?
(a)Was the Sacca Loan Agreement entered into with the Company or was the Sacca Debt an obligation of the Company? Alternatively, was the Sacca Debt a personal obligation of Mohamed, Hassan and Wael?
(b)Is the Sacca Debt subrogated to the secured rights of Banner Capital Management Ltd?
(c)Was the Sacca Loan Agreement terminated and novated by the Investment Loan Agreements and associated Contracts of Sale for Units 307, 306, 206 and 207?
Is the Company liable for the Mekkya Debt?
(a)Did the Company and Mekkya enter into the Loan Investment Agreement dated 1 March 2012?
(b)If so, has the Mekkya Debt been repaid?
Is the Company liable for the New Concepts Design Debt?
- Referred to special referee.
Is the Company liable for the Builder Debt?
- Referred to special referee.
Assignment of debts to MAG
If yes to questions 4, 5 or 6, did the assignment of each of:
(a)the Sacca Debt;
(b)the Mekkya Debt;
(c)the Builder Debt; and
(d)the New Concepts Design Debt,
have the effect of securing the debt under cl 8.1.7 of the Franek GSA?
Tender
On or about 27 June 2018, did the Company validly tender the repayment of the Balanced Securities Debt (‘the June Tender’) to:
(a)MAG; and
(b)the Receivers?
Did the Receivers have an obligation or were they compelled at law to accept the June Tender?
If yes to question 11, was the June Tender refused by:
(a)MAG; and
(b)the Receivers?
On or about 25 July 2018, did the Company validly tender the repayment of the Balanced Securities Debt and/or the Franek Debt (‘the July Tender’) to:
(a)MAG; and
(b)the Receivers?
Did the Receivers have an obligation or were they compelled at law to accept the July Tender
If yes to question 15, was the July Tender refused by:
(a)MAG; and
(b)the Receivers?
If yes to questions 13 or 16:
(a)Are Hassan, Mohamed and Wael discharged of their obligations under the Balanced Securities Facility guarantees?
(b)Does interest stop accruing on:
(i)the Balanced Securities Debt; or
(ii)the Franek Debt?
(c)Did the Receivers improperly remain in possession from the relevant tender until 23 July 2018?
(d)If yes to part (c) above:
(i)Are Franek, the Receivers and/or MAG liable to account to the Company for the amounts particularised in paragraph 52(c) of the FASC?
(ii)Did the improper possession cause the damage particularised in paragraph 52(d) of the FASC?
(iii)Are the Receivers liable by reason of them entering into possession of the Security Property pursuant to clause 17.2 of the Balanced Securities GSA?
(iv)Are the Receivers entitled to be indemnified by the Company, and out of the Secured Property, in respect of all liability and expenses incurred by them pursuant to clause 18 of the Balanced Securities GSA?
Sale of the Arden Street property
Was the sale of the Arden Street property:
(a)in breach of MAG’s duty under s 420A of the Corporations Act 2001 (Cth) to take all reasonable care to sell the property for:
(i)not less than its market value; or, otherwise,
(ii)the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold;
(b)in breach of MAG’s duty under s 77 of the Transfer of Land Act 1958 (Vic) and at common law to exercise the power of sale in good faith; or
(c)unconscionable at common law, or under ss 20 or 21 of the ACL or ss 12CA or 12CB of the ASIC Act?
Was the Transfer of Land executed prior to service of the s 76 Notice?
If yes to question TBA [sic], is the Company prima facie entitled to have the sale of the Arden Street property set aside and reconveyed to the Company or does AAGG hold the property on a constructive trust for the Company?
If yes to question 10, are there any discretionary reasons for the Court to decline that relief?
Breach of fiduciary duties
Did the Receivers owe the Company fiduciary duties:
(a)not to profit from their appointment as Receivers; and
(b)not to put themselves in a position of a conflict of interests?
If yes to question 22, did the Receivers breach their duties by:
(a)failing to appoint a time to receive the tender; and
(b)resigning as receivers?
If yes to question 23, are the Receivers liable to account for the amounts particularised in paragraph 88 of the FASC?
Misallocation of the proceeds of sale
Did MAG allocate the proceeds of sale as follows:
(a)the amount of $1,487,419.76 to pay down the Balanced Securities Debt;
(b)the amount of $1,900,000 to Sacca in respect of the Sacca Debt;
(c)the amount of $521,349.22 to the Builder in respect of the Builder Debt;
(d)the amount of $174,907,59 to Mekkya in respect of the New Concept Designs Debt; and
(e)the amount of $371,055.52 in respect of enforcement costs?
If yes to paragraph 25, was the allocation in breach of:
(a)the Balanced Securities Facility Agreement;
(b)the Balanced Securities Facility Mortgage;
(c)the GSA; and/or
(d)section 77 of the Transfer of Land Act 1958 (Vic)?
If yes to question 26, did the breach:
(a)cause the damage particularised in paragraph 97 of the FASC; or
(b)mean that the payment of $1,203,957.79 is held by MAG as money had and received or constructive trust?
Breach of Consumer Credit Act
Was the 2016 Franek Loan Agreement a ‘credit contract’ as defined in Schedule 1 of the National Credit Code and, in particular:
(a)were the debtors natural persons;
(b)was the credit provided predominately to purchase, renovate or improve residential property for investment purposes, or to refinance credit that had been provided predominantly to purchase, renovate or improve residential property for investment purposes; and
(c)did Franek provide the credit in the course of business or incidentally to his other business?
If yes to question 28:
(a)is the Franek mortgage void; and
(b)is the 2016 Franek Loan Agreement unenforceable?
If yes to question 28, what does this means for the rights assigned to MAG pursuant to the notice of assignment found at TB1123?
Does s 80 of the National Credit Code apply to the relief sought by the Company?
If yes to question 31, was the claim brought more than 2 years after the relevant credit contract is rescinded or discharged or otherwise comes to an end?
Trustworthy proceeding
With respect to the Nairne Street property, was the equitable interest of Trustworthy under the loan agreement dated 17 September 2015 created prior to any security interest of Franek?
Was the security interest of Franek under the 2015 Franek Loan Agreement superseded by the 2016 Franek Loan Agreement?
Are Wael and Bayda El Saafin entitled to set aside any security interest on the Nairne Street property under the Franek GSA on the basis of:
(a)misleading and deceptive conduct; or
(b)unconscionable conduct at common law, or under ss 20 or 21 of the ACL or ss 12CA or 12CB of the ASIC Act?
MAG proceeding
Are Wael and Bayda El Saafin, as guarantors of the Balanced Securities Facility, indebted to MAG as assignee for any and what amount due under the Balanced Securities Facility?
Are Wael and Bayda El Saafin indebted to MAG as assignee of the Franek GSA for any and what amount?
Is MAG entitled to orders for a judicial sale under the terms of the Franek GSA?
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