Sam Management Services (Aust) Pty Ltd v Bank of Western Australia Ltd
[2009] NSWCA 320
•7 October 2009
New South Wales
Court of Appeal
CITATION: Sam Management Services (Aust) Pty Ltd v Bank of Western Australia Ltd [2009] NSWCA 320 HEARING DATE(S): 10 September 2009
JUDGMENT DATE:
7 October 2009JUDGMENT OF: Hodgson JA at 1; Young JA at 71; Sackville AJA at 76 DECISION: Appeal dismissed with costs. CATCHWORDS: MORTGAGES – Facilities provided by Bank to mortgagor expiring at different times – Security over several properties securing totality of advances – Whether implied term requiring Bank to release some security when some facilities repaid – Whether Bank’s expressed unwillingness to do so was unreasonable or unfair and thus in breach of the Code of Banking Practice – Whether mortgage entitled to declaration of breach and/or injunction. CATEGORY: Principal judgment CASES CITED: BP Refinery (Westernport) Pty Limited v Shire of Hastings (1977) 180 CLR 266
Peter Turnbull & Co Pty Limited v Mundus Trading Co (Australasia) Pty Limited (1954) 90 CLR 235PARTIES: SAM MANAGEMENT (AUST) PTY LTD ACN 078 190 708 (Appellant)
BANK OF WESTERN AUSTRALIA LTD ABN 22 050 494 454 (Respondent)FILE NUMBER(S): CA 40237/09 COUNSEL: B W RAYMENT QC/ S BALAFOUTIS (Appellant)
R A DICK/ C WITHERS (Respondent)SOLICITORS: Lenehan & Co (Appellant)
Blake Dawson (Respondent)LOWER COURT JURISDICTION: Supreme Court - Equity Division LOWER COURT FILE NUMBER(S): SC 1686/09 LOWER COURT JUDICIAL OFFICER: Rein J LOWER COURT DATE OF DECISION: 17 July 2009, 17 July 2009 LOWER COURT MEDIUM NEUTRAL CITATION: Sam Management Services (Aust) Pty Ltd v Bank of Western Australia Ltd [2009] NSWSC 676; Sam Management Services (Aust) Pty Ltd v Bank of Western Australia Ltd [2009] NSWSC 702
CA 40237/09
SC 1686/097 OCTOBER 2009HODGSON JA
YOUNG JA
SACKVILLE AJA
1 HODGSON JA: On 17 July 2009, Rein J gave his decision in proceedings in which the appellant (SMS) claimed declarations and consequential relief against the respondent (the Bank) in relation to a loan facility given by the Bank to SMS. On that day, Rein J dismissed the proceedings and ordered SMS to pay the Bank’s costs; and he also refused leave to SMS to reopen its case.
2 SMS appeals from this decision. For the reasons I give below, in my opinion the appeal should be dismissed with costs.
Circumstances
3 I will set out the circumstances giving rise to the proceedings, so far as they are relevant to issues raised on appeal.
4 Uncontested background facts are set out as follows in the judgment of the primary judge:
[4] SMS is a company owned and controlled by Mr Usama Marzouk (“Mr Marzouk”). Mr Marzouk left most of the dealings between SMS and the Bank to Mr John Panagopoulos known as Mr Poulos. Mr Poulos is a finance broker operating as Lion Pacific Finance and he had introduced SMS to the Bank.
[6] The loan was subject to extensive terms and conditions but relevantly for present purposes are the following provisions:[5] The relevant officers of the Bank were a Mr Rod Baptist and his assistant Ms Matina Polly. The Bank initially lent SMS money in relation to only one of SMS’s investments but by 2007 SMS had a number of consolidated loans. By letter of 15 May 2007 the Bank offered, on terms contained in and accompanying the letter, to provide SMS with consolidated loan facilities totalling $24,742,000, which was accepted by SMS the same day.
- 1 INTRODUCTION
1.1 Facility Documents
(a) The terms and conditions upon which we enter into the Facilities with you and any Guarantor are contained in the Facility Documents.
(b) The Facility Documents comprise:
(i) the Agreement;
(ii) the Security;
(iii) any agreement relating to the priority of any
Security;
(iv) any Risk Management Agreement;
(v) any other document or agreement which we and you agree is a Facility Document; and
(vi) any agreement or instrument created under or contemplated by the above documents or agreements or which amends or varies any of them.
(c) The Facility Documents contain the entire agreement upon which the Facilities are offered to you and should be read together.
(d) The Agreement will, unless you and we otherwise agree, supersede all previous offers and arrangements between us, you and any Guarantor relating to the provision of the Facilities by us to you.
1.2 Facility Review
(a) We have the right to review the Facilities and the conditions of the Facilities including pricing and the security for the Facilities in accordance with this clause 1.2:
(i) annually;
(ii) if you have breached any undertaking to us;
(iii) an Event of Default or Potential Event of Default has occurred; or
(iv) at such other times as we determine,
(each a “Facility Review”).
(b) If, following a Facility Review, we determine in our absolute discretion, that there has been an adverse change in the Total Outstanding Amount, your creditworthiness, security position or the value of any Security Property, we may:
(i) give you written notice (“ Conditions Notice ”) informing you of the revised conditions which Will apply to the Facilities; or
(ii) give you written notice (“Security Notice”) requiring you to:
- (A) provide additional security to secure the Total Outstanding Amount, which may include depositing with us such amount that we may require;
(B) pay to us such amount to reduce the Total Outstanding Amount to the amount we specify; or
(C) do both (A) and (B); or
3 OVERDRAFT FACILITY
…
3.1 Drawings
Subject to the Facility Documents, we agree to permit utilisation of an Overdraft Facility by way of overdraft on receipt of your cheque drawn on the relevant Overdraft Account or in any other manner specified or agreed by us in relation to that Overdraft Account.
3.2 Interest
(a) Interest on an Overdraft Facility accrues each day on its end of day Outstanding Amount at the Interest Rate applicable to that Facility.
(b) You must pay to us all accrued interest monthly in arrears unless otherwise specified in the Facility Terms.
(c) If the Outstanding Amount under an Overdraft Facility exceeds the Facility Limit or its Sublimit, interest will accrue on the difference between the Outstanding Amount and the Facility Limit or Sublimit, as applicable, at the Excess Overdraft Rate.
…(d) Each debiting will be deemed to be a fresh utilisation of the relevant Overdraft Facility.
10 PAYMENTS
10.1 Manner of payments
All payments to us under the Facility Documents must be made:
(a) in immediately available funds (if AUD) or same day funds (if in another currency);
(b) in the same currency as the Drawing to which it relates or the AUD Equivalent of that amount,
c) not later than 10 am on the due date (or, if that is not a Business Day, on the next Business Day unless that day fails in the following month or after the relevant Facility Expiry Date, in which case, on the previous Business Day);
(d) to the account nominated by us to you or in such other manner as we direct from time to time; and
(e) in full without set off or counter claim and without any deduction in respect of Taxes unless prohibited by law.
10.2 Amounts payable on demand
…If any amount payable under a Facility Document is not expressed to be payable on a specified date, that amount is payable by you on demand by us.
…11 INTEREST AND FEES
11.2 Obligation to pay interest
(a) If you do not pay any amount under the Agreement (including any principal, interest, fees and Costs) on the due date for payment, interest accrues at the Overdue Rate on the unpaid amount from and including its due date for payment to but excluding the date on which the unpaid amount is paid in full.
(b) You must pay to us all accrued interest under this clause 11.2 on demand by us. We may debit any of these amounts to any account you hold with us before asking you to pay.
11.3 Capitalisation
(a) Amounts payable under clause 11.2 which are not paid when due for payment may be added to the overdue amount by us at intervals we determine from time to time, or, if no determination is made, monthly.
…(b) Interest is payable on the increased overdue amount at the rate and in the manner set out in clause 11.2.
…14 UNDERTAKINGS
14.2 Information Undertakings
You must:
(a) give to us all information specified in the Facility Terms;
(b) provide to us as soon as practicable (and in any event not later than 120 days) after the end of each financial year copies of the consolidated and unconsolidated accounts (audited, if required by us) (including statements of financial performance and financial position) of you and each Guarantor;
(c) if requested by us, provide to us as soon as practicable (and in any event not later than 90 days) after the end of each financial half year copies of the consolidated and unconsolidated unaudited accounts (including statements of financial performance and financial position) of you and each Guarantor;
(d) if requested by us, provide to us monthly cashflow projections for the period requested by us;
(e) if requested by us, provide to us actual to projected cashflow analysis, aged creditors and debtors list and management accounts within 30 days after the end of each quarter;
(f) give us on demand the information and documents which we request from time to time in connection with:
(i) the Facilities and the Facility Documents; and
(ii) your business, property or financial condition and your Related Entities (including copies of tax returns);
…
16 EVENTS OF DEFAULT
16.1 Events
An Event of Default occurs, whether or not it is in your power to prevent it, if:
(a) you do not pay on time any amount payable by you under any Facility Document in the manner required under it;
(b) at any time the Outstanding Amount in relation to a Facility exceeds its Facility Limit or applicable Sublimit;
(c) you do not comply with any other obligation under a Facility Document and if that non compliance is capable of rectification it is not rectified within 7 Business Days (or any other longer period agreed by us) of its occurrence;
…(d) any present or future monetary obligation of you to any person is not satisfied on time (or at the end of any applicable period of grace) or becomes prematurely payable or can be rendered prematurely payable, by the giving of notice, lapse of time or fulfilment of a condition;
16.2 Consequences
If an Event of Default has occurred we may at any time give you notice:
(a) specifying a new Final Repayment Date or a new Facility Expiry Date for a Facility, which may be the day we give the notice to you or any other later day;
(b) declaring the Total Outstanding Amount is either:
(i) payable on demand; or
(ii) immediately due for payment;
…
16.3 Consequences: interest
In addition to any other consequences under the Facility Documents, if:
(a) an Event of Default under clause 16.1(a) or 16.1(b) has occurred; or
(b) any other Event of Default has occurred and we have notified you of its occurrence and the default has not been remedied within 7 Business Days of the notice,
…then you must pay interest on the Total Outstanding Amount calculated at the Overdue Rate from the date of the occurrence of the relevant Event of Default in the case of clause 16.3(a) and from the date of the notification given by us in the case of clause 16.3(b). This interest shall accrue and be capitalised in the manner specified in clause 11.3.
18 MISCELLANEOUS
18.1 Debiting of accounts
…We are irrevocably authorised by you, at our discretion, to debit any amounts including interest, fees and Costs due to us actually or contingently to any of your accounts with us, regardless of whether the account balance is put in debit and regardless of whether a Facility Limit or a Sublimit is exceeded.
20 CODE OF BANKING PRACTICE
20.1 Application
If the Code of Banking Practice applies to the Agreement, then this clause 20 applies but not otherwise, and:
(a) shall have effect notwithstanding any other provision of the Agreement or a Facility Document, but
…(b) shall only affect the Agreement and Facility Documents to the extent the Code of Banking Practice applies and not otherwise.
21 DEFINITIONS
21.1 General definitions
Agreement means the agreement constituted by the acceptance by you on the Offer Letter.
Facility Terms means the document attached to the Offer Letter headed “Facility Terms”.
Overdraft Account means an account established with us for the purpose of an Overdraft Facility.
Overdraft Facility means any overdraft facility specified in the Facility Terms.
Security Property means the property the subject of any Security.
[7] The Code of Banking Practice (referred to in cl 20) includes, relevantly, the following provision:
- 2.2 we will act fairly and reasonably towards you in a consistent and ethical manner. In so doing we will consider your conduct, our conduct and the contract before us.
[8] As at May 2007 SMS had the following facilities forming part of the consolidated loan with the Bank:
(1) a limited fixed interest rate facility (“ the Concord facility “);
(2) a commercial advance facility with redraw capacity in the amount of $2 million (“the Restructure facility”);
(3) a commercial advance facility in the amount of $1 million relating to a block of land at Chuwar, Queensland (“the vacant block facility”);
(4) a commercial advance facility for $1.45 million agreed to expire on or about 20 October 2007 (“the Bassett Lane facility”);
(5) a similar facility agreed to expire on or about 17 October 2007 for $2.63 million (“the Ingleburn facility”);
(6) a $4.66 million facility (“the Claremont Meadows facility”)
(7) an interest rate management facility (“the Risk Management facility”).
[10] In August 2007 the Bank agreed to provide a further facility in respect of land at Thagoona for $1 million but SMS did not in fact utilise the facility.
[9] Although two of the facilities were to expire in October 2007 and a third to expire in March this year, some have as long as 2012 to run.
5 It was common ground that, because SMS had less than 20 employees, the Code of Banking Practice did apply to the agreement between SMS and the Bank.
6 It was accepted in cross-examination by Mr Baptist (Black 217-218) that the relationship between the parties started in 2004 with a $2 million facility; that the Bank asked Mr Marzouk to bring it more of his business; that in the result the amount that came to be owed was $25 million; that the Bank had security considerably in excess of $40 million according to valuations current in 2008; and that Mr Baptist believed that in May 2007, according to valuations that the Bank had, there was about $46 million worth of security (Black 273).
7 The relevant offer letter dated 15 May 2007 (Blue 14-25) set out particulars of the facilities referred to above, showing:
- (1) the Concord facility was for $13 million, expiring on 12 December 2012, with interest paid monthly in arrears.
(2) the Restructure facility was for $2 million, expiring 12 December 2012, with interest paid monthly in arrears.
(3) the vacant block facility was for $1 million, expiring 16 March 2009, with interest payable monthly in arrears.
(4) the Bassett Lane facility was $1.45 million expiring 20 October 2007, with interest capitalised monthly in arrears within the facility limit and then payable monthly in arrears.
(5) the Ingleburn facility was for $2.63 million expiring 17 October 2007, with interest capitalised monthly in arrears within the facility limit and then payable monthly in arrears.
(6) the Claremont Meadows facility was for $4.66 million expiring five years after draw-down date (that is, in 2012), with interest capitalised monthly in arrears within the facility limit and then payable monthly in arrears.
8 The facility letter also stated the following requirements:
- 6.5 Financial Undertakings
You must ensure that you satisfy the requirements for each of the following financial undertakings each time it is measured. See clause 21.1 of the General Terms for the meaning of the terms used.
| Financial Undertaking | How measured | Requirement | When measured/Period |
| Interest cover ratio (ICR) | EBITDA Interest Expense | ICR > 1.18 times and increasing to 1.25 times by 1 March 2008 | Annually for previous 12 month period |
| Loan to value ratio (LVR) | Facility Limits Security Value | LVR < 61% and reducing to 60% by 31 August 2007 | Annually |
9 The Ingleburn facility was a mortgage SMS had purchased from the Bank in 2006/2007, it having been a mortgage originally given to the Bank by SMS’s accountant or entities associated with him. According to evidence of Mr Marzouk which was not challenged, this accountant had disappeared in 2006 having destroyed SMS’s business records, and having defrauded SMS of large sums of money.
10 The time for repayment of the Basset Lane facility and the Ingleburn facility passed with no demand for repayment being made by the Bank. An email to Mr Poulos on 15 November 2007 from Lucy Hadfield of the Bank (Blue 1021) stated:
- A couple of facilities have reached their term but I understand from discussion with [Mr Baptist] that renegotiation of facilities is possibly available with provision of financials and in conjunction with the annual review which I am advised will be at the end of the year.
11 Although cl 14.2 of the facility agreement provided that copies of SMS’s accounts be provided to the Bank by 120 days from the end of the financial year, the requirement stated in par 7 of the facility letter allowed 180 days; and the parties appear to have acted on that basis. Thus, the accounts for the 2006/2007 year should have been provided by about the end of December 2007. SMS could not comply with this because of the loss of records through the accountant’s fraud, and on 12 December 2007 Mr Poulos emailed Ms Polly advising that 2007 financials should be ready by March 2008 (Blue 433).
12 On 18 December 2007, Vicky Ye of the Bank emailed Mr Poulos saying “we understand the 2007 financials will not be available until Mar 08. However, our review is due by the end of this month, we can use the 2006 financials together with the tenancy schedule to perform this review.” (Blue 434). A tenancy schedule was provided on 8 January 2008 (Blue 1027).
13 In about April 2008 Mr Baptist had a conversation with Mr Poulos in which he asked when Mr Marzouk intended selling properties as per their previous discussions and asserted that Mr Poulos had been telling him for months that Mr Marzouk was going to sell properties, to which Mr Poulos replied Mr Marzouk had to get relevant approvals (Judgment par [60]).
14 On 11 April 2008, Mr Baptist wrote the following letter to Mr Marzouk:
Further to my recent discussions with John Poulos of Lion Pacific Finance, I wish to advise that Sam Management Services (Aust) Pty Ltd is in breach of its undertakings with respect to provision of the above information which was required to be to hand by 31st March, 2008. As non receipt of this information denies the Bank the opportunity of assessing the historic performance of the Borrower, and whether you have complied with the Interest Coverage Ratio (ICR) requirement attendant to the facilities, we were relying on the deposit funds lodged with the Bank to provide comfort. The recent transfer of $250,000 of this amount to your operating account means that we have a significantly reduced level of comfort around this aspect of performance.
Additionally, two property transactions that you had previously advised were to transact and repay Bank debt, thereby impacting the ICR coverage ratio, were not concluded, and at this stage we can not see where debt reduction is to be achieved in relation to the group borrowings without the advance of further funds.
It is unfortunate that an ongoing relationship between the parties cannot be sustained, however we require a degree of certainty from our clients in regards to their commitments and undertakings, and despite the tolerance of your specific circumstances shown by the Bank, we feel that you have not shown us a similar level of care and consideration.As such, we advise that the Bank believes it would be in the best interests of both parties that you seek refinance of the total facilities currently conducted with BankWest. We are prepared to provide sufficient time for this to be achieved in a structured fashion, and request that within 30 days of the date of this advice you provide evidence of refinance approval from another institution, with settlement to be undertaken within a reasonable time frame after this date. Failure to provide evidence of refinance will result in the margin attendant to all of the facilities being increased by an amount of 1% per annum, with subsequent additional re-pricing considered monthly in light of any further delays.
15 By an email on 28 April 2008, Mr Poulos responded on behalf of SMS, as follows:
On the 11 April 2008 you wrote to Mr Marzouk advising of the Bank's position regarding the non provision of information, default status, (ICR) and refinance request.
We have been instructed by Mr Marzouk the Director of Sam Management Services (Aust) Pty Limited to respond to the Banks letter as follows:-
Mr Marzouk is fully aware of his undertakings with respect to provision of information to the bank.
The Bank is fully aware that, the provision of information as required by the Bank is currently outstanding not due to Mr Marzouk unwillingness but due to extenuating circumstances that are beyond Mr Marzouk’s control.
Early 2007 the Bank was advised that Mr Marzouk's accountant after misappropriating and fraudulently extracting money from him destroyed all records and absconded.
In June 2007 the Bank was made aware that long delays are expected for the preparation of San Management Services (Aust) Pty Limited accounts due to his previous accountant's fraudulent conduct.
In December 2007 tenancy schedule and other documents were provided to the bank and the bank was again made aware of the situation regarding our client's position.
Mr Marzouk's new accountant advised that due to time needed for the reconstruction and reconciliation of the client's financial accounts for previous years the 2007 financials will not be available before March 2008. This was also communicated to the bank.
During March 2008, as requested, we followed up the client's accountant in several occasions.
On the 28 of March 2008 the accountant advised that the 31 March 2008 deadline, imposed by the bank, could not be met due to work load.
This was again communicated to the bank.
Mr Marzouk strongly feels that the bank is now using this justifiable
delay, which is beyond his control, to prematurely establish a facility default.
His (ICR) can only be determined as soon as his accounts are given to the bank.
If the (ICR) is proven to be lower that required, the client does not rectify with in reasonable time and the bank considers appropriate, a non performing account default may then be applied.
Mr Marzouk is also surprised to learn that the bank was relying on the deposit funds lodged with the Bank to provide comfort.
The deposit was placed with the bank in December 2007 and was put there to accommodate future acquisitions and or other costs.
The Bank's choice to rely on the deposit funds to provide comfort was never communicated to Mr Marzouk and he only learned this on the 11 th of April 2008.
If the bank required these funds as additional comfort until the completion of the 2007 financial accounts, Mr Marzouk would have been happy to accommodate if this was made known to him in advance.
Mr Marzouk is doing business with the Bank for the last five years and during this period all his accounts were kept in a most satisfactory manner.
Mr Marzouk will entertain the Bank's proposal to seek refinance of the total facilities currently conducted with Bank.
A refinance of $25.000m facility requires reasonable time to be arranged as financial accounts and valuations of security properties are needed.
The Bank's request for the refinance to be completed within 30 days from receipt of your letter cannot be agreed upon as it is considered unreasonable.
The approximate time of eight (8) weeks is considered more appropriate.
In the meantime we will forward to the Bank the 2007 financial account as soon as completed.Your acknowledgment and agreement of the above is anticipated.
16 Mr Baptist responded on the same day by an email to Mr Poulos, as follows:
Should you require any further clarification I please do not hesitate to contact me to discuss.Thank you for your advice. As per the letter requesting refinance of the Sam Management connection, the Bank requires confirmation of refinance by 31st May, 2008, as we are not prepared to allow this to drag on, as has been the case in the past. In the letter you refer to, we request confirmation of refinance subject to valuation, and state that we will then allow a reasonable time for the physical change over after this date. We are mindful that obtaining valuations of the various properties will potentially take some time. Having said this, please ensure you arrange matters in accordance with this time table, as at present the account is not formally default, however if at the next report date scheduled for 31st May, Credit are advised that nothing has progressed, they may decide to issue formal notification, which will have implications for commission payments after this date, together with other considerations. '
17 The 2007 financial accounts for SMS were provided to the Bank on 15 May 2008, and there was no suggestion that they showed any breach of the ratios required by the facility.
18 There was considerable evidence before the primary judge concerning conversations between Mr Marzouk and Mr Poulos for SMS, and Mr Baptist and Ms Polly for the Bank. The primary judge found Mr Marzouk and Mr Poulos to be unreliable witnesses, but had confidence in the reliability of Ms Polly as a witness. He had doubts about Mr Baptist’s evidence in one respect, but otherwise accepted his evidence where it was in conflict with Mr Poulos and Mr Marzouk. There is no challenge on appeal to that assessment of the witnesses.
19 One finding that was made by the primary judge, and that is relied on in the appeal, is a finding that in August 2008 Mr Marzouk asked Mr Baptist about partial re-financing, meaning repayment of the loans that had become due for repayment in return for release of some relevant securities, to which Mr Baptist responded by words to the effect “not unless the partial refinancing is part of a programme of full re-financing”.
20 In the event, no particular proposal was put to the Bank for partial refinancing, and full refinancing was not arranged. Further, the primary judge found that SMS did agree to undertake full refinancing, and that it did not at any relevant time inform the Bank that it could not do this (Judgment par [83(c)]).
21 In September and October 2008, there were defaults by SMS in repayment of a temporary overdraft account and payment of interest, and SMS was advised that interest was payable at default rates on some of the facilities.
22 On 21 November 2008, Mr Baptist wrote to Mr Marzouk agreeing to extend SMS’s facilities to 31 December 2008, and advising that default rates would apply to all facilities in the event that refinance did not occur then (Blue 1093).
23 On 4 January 2009, the Bank ceased rolling over the expired facilities.
24 By a letter dated 13 February 2009 from the Bank’s solicitors to Mr Marzouk, the Bank notified SMS that all of its facilities were in default and that to put them back in order payment of $553,129 was required.
25 These proceedings were commenced on 26 February 2009.
Pleadings
26 In its summons filed on 26 February 2009, SMS claimed a number of declarations, including a declaration that its loan agreement with the Bank contained an implied term to the effect that, in the event that the Bank required repayment of any of the facilities due in 2007, the Bank would discharge mortgages over real property secured by the loan agreement, to the extent reasonably required by SMS to refinance these facilities, subject to SMS maintaining the loan value ratio specified in cl 6.5 of the loan agreement; and also claimed orders restraining the Bank from acting inconsistently with that obligation.
27 An amended statement of claim dated 3 June 2009 sought in addition a declaration that the Bank had breached the loan agreement by advising SMS that it would not, for the purpose of SMS repaying any of the facilities due in 2007, discharge any of the mortgages unless SMS refinanced all of the facilities under the loan agreement.
28 The amended statement of claim alleged that, in accordance with the Code of Banking Practice, it was a term of the loan agreement that the Bank would act fairly and reasonably towards SMS in a consistent and ethical manner; and that the advice referred to in the previous paragraph was a breach of this term.
29 In its defence to the amended statement of claim, in addition to denials and non-admissions, the Bank relied on the following matters:
34 Further and in the alternative, there have been other Events of Default under the terms of the Loan Facility of which the Plaintiff has been informed by the Defendant and which are continuing.33 At all material times from at least the provision of the 11 April 2008 Notice to the Plaintiff the Defendant was entitled to require repayment of all of the Total Outstanding Amount under the Loan Facility and to retain its security interest over all of the Secured Properties until such time as the Plaintiff refinanced of the Loan Facility.
Affidavit of Matina Marie Polly, dated 31 March 2009 [11]-[46]
Affidavit of Karen Louise Ford, dated 1 June 2009
35 To the extent the Loan Agreement contained the implied term contended for by the Plaintiff in paragraphs 7-10 of the Amended Statement of Claim (which is denied), such implied term could not operate because:Letter dated 13 February 2009 from the Defendant's solicitors to the Plaintiff.
a. the Plaintiff was in default of its obligations under the Loan Agreement from at least October 2007;
c. in the alternative, the Plaintiff was in default of its obligations under the Loan Agreement when it failed to pay interest and fees due and payable under the terms of the Loan Agreement from at least 8 October 2008.b. in the alternative, the Plaintiff was in default of its obligations under the Loan Agreement when it failed to repay a temporary overdraft to the Defendant on 19 September 2008;
- The Defendant repeats the particulars to paragraph 34 above.
Decision of primary judge
30 Having made findings of fact, the primary judge gave the following reasons for rejecting SMS’s claim based on the Code of Banking Practice:
[72] The critical point which SMS’s case seems to ignore is that by November 2007 SMS had failed to repay the expired facilities and the fact that the Bank did not press for immediate repayment was an indulgence. It does not really matter whether the repayments were to come from the sale of these properties or other properties owned by SMS or Mr Marzouk (or by way of refinance, if Mr Marzouk had wanted that in late 2007 which he said he did not want), nor does it matter in this context whether Mr Marzouk promised to sell other properties or not — what is important is that from November 2007 to April 2008, SMS had not put itself in a position to repay the two facilities and by April the Bank was not prepared to allow that situation to continue. Mr Marzouk’s letter of 6 February 2009 (see Ex A1: TB281) in which he asserted that SMS was under no obligation to reduce the debt and referring to SMS’s “willingness to help” the Bank proceeds on a convenient but erroneous view of the position, which seems to have been maintained by him and Mr Poulos in the case.
[73] The Bank did not in its correspondence formally assert that SMS was in default prior to October 2008 and it did not claim entitlement to terminate the relationship based on the failure of SMS to repay the two expired facilities (or failure to pay the valuation fee or the failure to provide accounting information) as at April 2008. It is likely that this latitude was given by reason of a perception on the part of the Bank’s officers that if they took the steps that the Bank was entitled to take, this would have made it less likely that a new financier would be found willing to take over the SMS debt (see Ms Polly at T364.5–.10 and T367.30–.35 and T348.30). I am not persuaded that the Bank, which for its own reasons studiously avoided treating its customer as in default of the loan agreement until the end of 2008 (it did not end rolling over the expired facilities until 4 January 2009), can now assert that SMS was in default as at April 2008. That does not mean, however, that the Bank would have been acting unreasonably in not permitting a partial refinance in August 2008. It is also relevant that SMS led the Bank to believe that it was able to effect a full refinance and it never told the Bank that it could not achieve such. Nor has SMS credibly demonstrated that it was or is unable to obtain a full refinance on terms, and could not do so now.
[74] By its submissions SMS asserts that it was unfair and unreasonable of the Bank to refuse to release securities because it required SMS to refinance the expired facilities but would not make the underlying securities available to support the refinance and that it was not reasonably necessary for the Bank’s own protection to keep all securities because the Bank’s valuation ratio was well beyond its required 60%.
[75] On SMS’s own case it did not seek agreement to a partial refinance at any time before May 2008 and on my finding did not do so before August 2008. In the period October 2007 to April 2008 the Bank was requesting SMS to repay the debt on the expired facilities (as SMS was obliged to do) and there is no question of any refusal of the Bank to agree to a partial refinance — none was in contemplation: T93.21–.50.
[76] In my view, as at August 2008, there was nothing unreasonable in the Bank requiring SMS to refinance all of its debt with another institution, and by December 2008 this was even more obviously so because on 19 September 2008 SMS failed to pay the deferred interest in the overdraft account as agreed, and again in late October 2008 it did not repay the additional deferred interest. It has not repaid the full amount at any time since. It has not paid back the money due on the expired facilities in October 2007 or since 4 January 2009. It has not repaid the amount due in respect of the facility which expired in March this year. I do not need to determine how much SMS owes on all the facilities, but Ms Ford by her evidence demonstrated that with default rates it exceeded $1 million as at 1 June 2009.
[78] SMS has not at any time either before or during the case articulated a proposal for partial refinancing. Leaving all the other matters aside, without a proposal as to which properties are sought to be released, the court is unable to say whether the Bank would, in refusing to accede to the proposal, be acting in breach of the duty to act reasonably. It follows in my view that even were I to have regarded the Bank’s requirement that SMS refinance all of its debt as potentially unreasonable, in the absence of a specific proposal from SMS there would have been no utility in the court making any declaration: see the discussion in Meagher, Gummow and Lehane’s Equity Doctrines & Remedies , 4th ed (2002), LexisNexis Butterworths at [19–130] and the cases there cited, including Neeta (Epping) Pty Ltd v Philips (1974) 131 CLR 286. Such a declaration has no context and provides no guidance to either party as to whether the Bank is justified or not justified in refusing to accede to the request.[77] I agree with the submission on behalf of SMS (see para 43 of the plaintiff’s written submissions dated 1 July 2009) that whether the Bank was acting unfairly and/or unreasonably must be assessed by reference to all the facts and circumstances. I reject the submission that the expired facilities had not been repaid because of the Bank’s failure to act fairly and reasonably. Nothing the Bank did between October 2007 and August 2008 caused or contributed to the expired facilities not being repaid, on the contrary the Bank granted SMS indulgence until April and then further indulgence as SMS set about, so far as the Bank was informed, endeavouring to obtain a full refinance.
31 He then gave reasons for rejecting a claim based on the doctrine of clog on the equity of redemption; and he stated the following conclusions:
- [83] I conclude:
(1) SMS established that as at August 2008 the Bank was not prepared to consider a plan for partial refinancing that was not part of a full refinancing.
(2) Accepting that the Bank made known its position to SMS, SMS did not make any request for partial refinancing that identified which securities it was seeking release of in return for what refinancing arrangement.
(4) In my view the Bank has not acted unreasonably. On the contrary, it has given SMS more latitude than could be expected. My conclusion in this regard is founded on the following findings:(3) I am not satisfied that as at August 2008 there was any partial refinancing option available to SMS from any lender that it was considering or seeking to pursue.
(a) SMS’s failure to repay the expired facilities meant that the Bank was entitled to require repayment of those facilities whenever it wished.
(b) SMS promised to reduce its debt by sale of properties but it has not done so.
(c) SMS agreed to refinance the whole of the facility. It has not yet done so but it has not established why it has not been able to do so and it did not at any relevant time inform the Bank that it could not do so.
(e) I find that in circumstances where the Bank was promised reduction of the debt in December 2007 and in which it was told that SMS was in the process of refinancing of the whole of the debt from May to December 2008, neither of which has occurred, the Bank has acted reasonably towards SMS, in not at any time prior to the end of 2008 demanding repayment of all of the facilities.(d) SMS sought in September 2008 (by Mr Poulos) a deferral of interest of effectively $155,000 and the Bank acceded to that request. That amount was repayable on 19 September. SMS sought a further extension in relation to October interest. SMS’s total indebtedness on that overdraft account was $186,370.20 as at January 2009. SMS was required to repay that money. As at 29 May 2009 the amount owing had reduced to $106,886.05: see Ex KF8 to Ms Ford’s affidavit.
[84] Even had I come to the view that the Bank would not have been justified in refusing to agree to a partial refinance there would be no utility in a declaration in the terms sought by SMS without a clear proposal as to the amount of the proposed refinancing and the securities in respect of which a release was being sought.
32 On the day that he gave his reserved judgment, the primary judge dealt with an application by SMS to reopen the matter to give evidence of an offer of finance of $6 million on the security of properties at Bassett lane and Claremont, which were subject to mortgages to the Bank, which would enable SMS to repay the expired facilities if the Bank released those securities. The purpose of the evidence was to show that the declaration sought by SMS would have utility. The primary judge refused leave, on the basis that the evidence would not affect the result.
Issues on appeal
33 SMS relies on the following grounds of appeal:
1. His Honour erred in construing the loan agreement between the plaintiff and the defendant ( Loan Agreement ) by failing to hold that the overdraft was not an Overdraft Facility within the terms of the Loan Agreement.
2 His Honour erred by failing to hold that the respondent failed to comply with the Code of Banking Practice.
3 His Honour erred by failing to hold that the respondent had committed an anticipatory breach of contract by the respondent refusing to allow partial discharge of its securities in order to enable repayment of short-term facilities granted to the appellant.
4 His Honour erred in failing to hold that the requirement of the respondent for repayment of all the facilities if any securities were to be discharged was not open to the respondent having regard to the Code of Banking Practice.
6 His Honour erred in failing to grant the relief claimed.5 His Honour erred in failing to hold that the said refusal amounted to a clog on equity of redemption.
34 The Bank relied on the following grounds in its Notice of Contention:
1 The Respondent never waived any of its rights under the Loan Agreement in respect of the Appellant's failure to provide the accounting information required under the terms of the Loan Agreement in accordance with the time prescribed in the Facility Documents: cl. 18.21 General Terms of Business Lending (cf Judgment at [65], [66]). The Respondent's demand, dated 11 April 2008 that the Appellant refinance the entire Loan Facility was a proper exercise of the Respondent's rights under the Loan Agreement, which was acknowledged and agreed by the Appellant at the time.
3 The Appellant never sought the Respondent's agreement to allow the Appellant to partially refinance the amount owing under the Loan Agreement in return for a partial discharge of security and therefore the Respondent could not have breached any alleged implied term of the Loan Agreement or any alleged obligation to act fairly and reasonably towards the Appellant.2 The Appellant's failure to repay the Total Outstanding Amount under the Loan Agreement following the Respondent's demand that it do so was a breach of the terms of Loan Agreement which precluded the Appellant from obtaining any of the relief sought in the Amended Statement of Claim.
35 At the hearing of the appeal on 10 September 2009, SMS sought to lead evidence to similar effect to that proffered to the primary judge on 17 July 2009. SMS’s application to lead that evidence was opposed by the Bank, which on that application tendered a letter from the Bank to SMS dated 20 July 2009 requiring payment of the whole of the amount due, stated to be just over $27 million; and also a letter from the Bank’s solicitors to SMS’s solicitors seeking further information in relation to a request for release of the Claremont and Bassett Lane properties.
36 At the hearing of the appeal, SMS also sought leave to amend the notice of appeal to seek the following additional orders:
3. An order that the proceedings be remitted to the Equity Division for the making of such further directions and orders as may be necessary to resolve the matters in dispute between the parties in light of the reasons for judgment of the Court of Appeal.2. A declaration that it was not consistent with the loan agreement as incorporating clause 2.2 of the Code of Banking Practice for the respondent to refuse to consider discharging part of the securities held by the respondent in order to enable the appellant to make partial repayment of the loans made by the respondent to the appellant including the facilities specified in paragraphs 3(c), (d) and (e) of the Amended Statement of Claim.
37 This application was also opposed.
38 I will consider in turn the following issues:
- (1) The pleading issue: Can the Bank rely on SMS’s breaches in opposition to claims other than claims based on an implied term?
(2) The implied term issue: Did the agreement include the implied term alleged by SMS? (appeal ground 3)
(3) Pre-August 2008 breaches: Were there such breaches on which the Bank could rely? (appeal grounds 2 and 4, notice of contention ground 1)
(4) Code of Banking Practice: Did the Bank breach the Code of Banking Practice in August 2008? (appeal grounds 2 and 4, notice of contention ground 2)
(5) Clog on the equity of redemption: Would refusal of partial refinancing be a clog on the equity of redemption? (appeal ground 5)
(6) Post-August 2008 breaches: Were there such breaches on which the Bank could rely? (appeal ground 1)
The pleading issue(7) Discretion to grand relief: If a breach of the Code of Banking Practice was established, should a declaration and/or an injunction be granted? (appeal ground 6, notice of contention ground 2)
39 Mr Rayment QC for SMS submitted that, because par 35 of the defence raised breaches only in answer to SMS’s case based on an implied term, such breaches could not be relied on in answer to SMS’s case based on a breach of the Code of Banking Practice.
40 I do not accept this submission.
41 In relation to alleged pre-August 2008 breaches, namely failure to repay the expired facilities and failure to provide financial information, these were relied on in the Bank’s defence to support reasonableness of the Bank’s conduct in and after April 2008: see pars 21, 22 and 33. In any event, the onus lay on SMS to prove a breach of the Code of Banking Practice, and the circumstances surrounding the Bank’s conduct including the terms of the facilities, the non-repayment of the expired facilities, and the matters referred to in the Bank’s letter of 21 April 2008, were plainly circumstances to be taken into account in SMS’s case alleging unfair and/or unreasonable conduct.
42 As regards post-August 2008 breaches, par 34 of the defence to the amended statement of claim pleaded them without limiting their relevance to the implied term, albeit not spelling out on what basis they could be an answer to SMS’s case.
43 However, in relation to the breach of the Code of Banking Practice, SMS was seeking relief by way of declaration and injunction arising out of a conversation in August 2008, in proceedings commenced in February 2009. In such a case, a plaintiff has a considerable onus to demonstrate to the Court that there would be utility in making a declaration about a breach occurring so long before commencement of the proceedings, and that the circumstances justified the granting of an injunction. Indeed, for the relief to SMS to be effective, it was necessary to identify conduct of the Bank against which protection was needed. What SMS needed was an injunction that had the effect of preventing the Bank from calling up the totality of the loan on the basis, inter alia, of post-August 2008 breaches. Accordingly, identification of post-August 2008 breaches, from the effect of which SMS was to be protected, on its case, was part of SMS’s case.
44 In my opinion, although it would have been preferable for the Bank’s pleading to specify that the Bank relied on post-August 2008 breaches to show that the declaration would have no utility and to show that injunctive relief should not be granted, the absence of such pleading does not preclude this course. The post-August 2008 breaches relate to matters in respect of which the onus was squarely on SMS, and the reference to the post-August 2008 breaches in the pleading was sufficient to avoid surprise.
Implied term
45 Mr Rayment submitted that the rules governing the implication of implied terms to give business efficacy, stated by the Privy Council in BP Refinery (Westernport) Pty Limited v Shire of Hastings (1977) 180 CLR 266 at 283, were satisfied. He contended that the implied term sought in the declaration set out in the summons was reasonable and equitable, was necessary to give business efficacy to the contract, was so obvious that it went without saying, was capable of clear expression and did not contradict any express term of the contract.
46 In my opinion, it is clear that such an implied term is not necessary to give business efficacy to the contract or so obvious that it would go without saying. Specification of a loan to value ratio of 60% does not, in my opinion, impliedly commit the Bank to releasing securities to enable repayment of particular loans that fall due, just so long as this ratio is maintained. The ratio is a minimum and not a maximum, and there may be very valid reasons for the Bank wishing to maintain something in excess of this minimum. It certainly does not go without saying that the only source for repayment of facilities that fall due in advance of other facilities will be loans obtained on the security of properties already mortgaged to the Bank; and business efficacy does not require a term to be implied that could only be based on that assumption.
47 It is not necessary to consider the other requirements; and in my opinion it is clear that there is no implied term as contended for by SMS.
Pre-August 2008 breaches
48 Mr Rayment submitted that the primary judge was correct to find that the Bank excused late submission of financial accounts and could not rely on this as a breach justifying calling up the loan (Judgment par [66]). He submitted that the terms as to interest contained in the facilities expiring in 2007 showed that it was contemplated they would be extended and that the primary judge was wrong to find to the effect that it was an indulgence by the Bank not to press for immediate repayment of those facilities (Judgment par [72]); albeit he was correct to find that the Bank did not treat SMS as in default as at April 2008 (Judgment par [73]). Also, he submitted, the primary judge was wrong to find that from October 2007 to April 2008 the Bank was requesting SMS to pay the expired facilities (Judgment par [75]).
49 Mr Dick for the Bank submitted that the Bank could rely on failure to repay the expired facilities and late provision of financial information as breaches justifying its requirement to repay the total amount, because cl 18.21(b) of the general terms of the facility provided that the granting of time or other indulgence to SMS did not affect the Bank’s rights and SMS’s liabilities under the agreement; and the Bank relied on failure to provide financial information when it gave notice on 14 April 2008 that SMS needed to refinance the entire facility.
50 In my opinion, the primary judge was correct to hold that the Bank had not, prior to August 2008, treated SMS as in default: it expressly said so in its communication of 24 April 2008. Also, I accept Mr Rayment’s submission that the primary judge was wrong to hold that between October 2007 and April 2008 the Bank was positively requesting SMS to repay the expired facilities. However, in my opinion, the failure to repay the expired facilities on the due date was a breach of the agreement, unless there was a prior agreement by the Bank to extend the term: the provision as to interest beyond capitalised interest would apply during the term of the loan, once the facility limit was reached, and did not conflict with the clear requirement to repay on the expiration date. The evidence did not establish a prior agreement to extend the term, although it did establish that, until January 2009, the Bank did treat the expired facilities as “rolled over”; and this indulgence could mean that the Bank could not rely on non-payment of the facilities as a breach justifying a demand for repayment of the total facility without giving reasonable notice and a reasonable opportunity to rectify the breach.
51 In my opinion, the failure to repay the expired facilities and the late provision of financial information were breaches on which the Bank could, as at 21 April 2008, have relied to demand repayment of the whole facility, subject to the giving of reasonable notice that previous indulgences were not being continued; and that is a matter that can be taken into account in assessing the reasonableness of the Bank’s conduct in April 2008 in informally requiring repayment (that is, requiring repayment without asserting breach and demanding repayment) and in August 2008 in asserting that a proposal for partial refinancing had to be part of a programme for full refinancing.
Code of Banking Practice
52 Mr Rayment submitted that, because the Bank had not treated SMS as in default and had not on that basis demanded repayment of the entire facility, it had no right in August 2008 to require repayment of the entire facility; and its Code of Banking Practice obligation to act fairly and reasonably towards SMS in a consistent and ethical manner obliged the Bank to give proper consideration to proposals for repayment of expired facilities that SMS might make. Accordingly, he submitted, Mr Baptist’s assertion to the effect that the Bank would not participate in partial refinancing unless it was part of a programme of full refinancing was a breach of the Code of Banking Practice obligations; and this breach made it pointless for SMS to put to the Bank any particular proposal for partial refinancing that was not part of a programme of full refinancing: see Peter Turnbull & Co Pty Limited v Mundus Trading Co (Australasia) Pty Limited (1954) 90 CLR 235.
53 Mr Dick submitted that the conduct of the Bank should be assessed in circumstances where there were breaches available to the Bank to call up the whole of the loan, and where, on the findings of the primary judge, SMS was acceding to the Bank’s request for full refinancing and never suggested to the Bank that it could not do this.
54 In my opinion, it is appropriate to assess the Bank’s conduct in the light of the circumstance that the Bank was holding back from demanding full repayment on the basis of default, as it might have done, at least in relation to the expired facilities after the financial information had been provided in May 2008, and perhaps subject to some further notice; and in the light of the circumstance that SMS was not insisting on its right, in the absence of the Bank taking that step, to maintain its non-expired facilities until 2012, but rather was giving the appearance of moving towards total refinancing.
55 In those circumstances, in my opinion, the bare verbal exchange found by the primary judge did not amount to conduct in breach of an obligation to act fairly and reasonably towards SMS in a consistent and ethical manner.
56 It might have been otherwise if SMS had conveyed to the Bank an intention to maintain its non-expired facilities to their termination date, thereby giving the Bank notice that, if the Bank was to maintain its requirement for full refinancing, it would need to demand repayment on the basis of default. In the absence of that indication from SMS, in my opinion, it was not unreasonable or unfair for the Bank to maintain its informal requirement for full refinancing.
57 Also, it might have been otherwise if SMS had actually put to the Bank a clear formulated proposal for partial refinancing: fair and reasonable conduct may then have required that such a proposal be considered. I accept that Turnbull is authority for the proposition that a party to a contract is excused from fulfilling a condition that the other party has conveyed would be useful to fulfil; but here, I think, in the context of the dealings between the parties, more was required of SMS to trigger any obligation on the Bank to give consideration to a proposal for partial refinancing than the mere floating of the possibility.
58 Accordingly, I am not satisfied the primary judge was wrong to find no breach of the Code of Banking Practice.
Clog on the equity of redemption
59 Mr Rayment submitted that, in the absence of an implied term such as alleged by SMS, the agreement would effectively extinguish the essential right of a mortgagor to redeem mortgaged property by paying the secured monies.
60 Such a submission could possibly succeed only if it could be found to be unconscionable or unconscientious for the Bank to refuse release of some of its security in return for payment of the expired facilities, thereby giving SMS the possibility of redemption of its security only by repaying the whole of the facility. In my opinion, in the light of the previous discussion, no error is shown in the primary judge’s view that the Bank’s requirements were not unconscionable or unconscientious; and in those circumstances the claim based on an alleged clog on the equity of redemption could not succeed.
Post-August 2008 breaches
61 Since I have found no breach by the Bank, it is not necessary for me to resolve the remaining issues. However, I will briefly consider them.
62 Mr Rayment submitted that the primary juge was wrong in holding that there were breaches occurring after August 2008 on which the Bank could rely to call up the facility.
63 The primary judge found two such breaches: failure to repay an overdraft facility granted to pay interest in September 2008, and a failure to pay interest in and after October 2008.
64 As regards the former, Mr Rayment submitted this was not a breach of the loan agreement, which comprised the seven facilities set out in the offer letter of 15 May 2007 and did not include the overdraft facility; and as regards the latter, he submitted that the evidence of Ms Ford supporting such breaches was unreliable, by reason of particular mistakes that he identified.
65 On the former matter, in my opinion, even if Mr Rayment is correct in his submission based on definitions of Overdraft Facility and Facility Terms, failure to repay the overdraft plainly fell within cl 16.1(d), and thus was an event of default. It could be said that reliance on that clause in relation to a trivial obligation to some other person would be contrary to the Code of Banking Practice; but in my opinion it could not be said that reliance on that clause in relation to breach of a substantial obligation to the Bank itself was contrary to the Code of Banking Practice.
66 As regards the latter breach, the particular errors suggested by Mr Rayment do not discredit the evidence of Ms Ford to the extent of making it of no weight; and the finding of the primary judge that there was some breach in respect of payment of interest in and after October 2010 is not shown to be erroneous.
Discretion
67 On appeal, SMS did not seek a finding that its post-August 2008 breaches were caused by the Bank’s refusal to entertain any proposal for partial refinancing; and in my opinion such a finding could not properly be made on the evidence.
68 In those circumstances, I do not see any basis on which any breach by the Bank in August 2008 (if contrary to my view, such breach occurred) could prevent the Bank relying on the post-August 2008 breaches to call up the facility, or could possibly justify an injunction restraining the Bank from relying on those breaches; and there could not therefore, in my opinion, be any utility in making a declaration that a breach had occurred. For those reasons, even if I had found a breach in August 2008, I would not have been prepared to make the declaration and order sought in the proposed amended notice of appeal. I would allow the amendment to the notice of appeal, but I would refuse the relief sought.
69 As regards the additional evidence sought to be advanced on appeal, this evidence if admitted could possibly go some way towards overcoming the impediment recognised by the primary judge in par [83(3)] of his judgment, by showing that at least now there is a possible partial refinancing option; but this would not overcome my finding that there was no breach by the Bank or my finding that, even if there were a breach, as a matter of discretion relief should be refused. This was evidence of a kind that could and should have been available at the hearing; and particularly in circumstances where it could not affect the result of the appeal, I would not admit the evidence.
Conclusion
70 For those reasons, I propose the following order: Appeal dismissed with costs.
71 YOUNG JA: I agree with Hodgson JA, but I wish to add a few comments on one aspect of the appeal.
72 This appeal has been made viable because of the inclusion in the contract between the parties of the Code of Banking Practice, a document which was probably never prepared by its drafters to form part of a legal document. It is drafted as a lay person’s document to be understood in a quick reading by a person considering dealing with the bank. It thus lacks the precision that one would expect in a term to be included in a contract dealing with megadollars.
73 The relevant clause in the Code of Practice is 2.2 which provides:-
“we will act fairly and reasonably towards you in a consistent and ethical manner. In so doing we will consider your conduct, our conduct and the contract before us.”
74 The clause in a legal document is so fraught with ambiguity. Its exact meaning was not canvassed before us so that it would be unwise to attempt to be definitive in its construction. Assuming it must be given some meaning in a commercial document, it probably does not operate to beyond requiring the bank to act in good faith towards the customer.
75 However, the principal purpose of these remarks is to suggest to bankers that the cross reference in legal documents to their promotional material is likely to lead to complications in litigation.
76 SACKVILLE AJA: I agree with the orders proposed by Hodgson JA and, subject to what appears below, with his Honour’s reasons. I wish only to add some observations on SMS's contention that the primary Judge erred in failing to find that the Bank failed to comply with cl 2.2 of the Code of Banking Practice (set out in [4] above, sub-par [7]).
77 SMS's contention rests on the content of the conversation between Mr Marzouk and Mr Baptist that took place in August 2008. Hodgson JA has referred to the primary Judge’s findings in relation to that conversation (at [18] – [20] above). SMS submits that in this conversation, Mr Baptist, on behalf of the Bank, rejected outright any suggestion that it would consider any proposal from SMS to re-finance the two short term loans (the “Expired Loans”) enabling it to obtain a discharge of the mortgages in respect of these loans, while leaving the long term loans from the Bank in force. According to SMS, this constituted a breach of the Bank’s obligation under cl 2.2 of the Code of Banking Practice to “act fairly and reasonably towards [SMS] in a consistent and ethical manner”.
78 In my opinion, it is necessary to place the conversation in context. The primary Judge did not accept the version of the conversation given either by Mr Baptist (of the Bank) or Mr Marzouk (of SMS). His Honour considered that it was difficult to assess what had occurred, but he “proceeded on the basis that Mr Marzouk asked about partial refinancing”. Mr Baptist replied, so his Honour found, with words to the effect:
- “Not unless the partial refinancing is part of a program of full refinancing”.
79 By the time this apparently brief conversation occurred, SMS had not paid the amounts due under the Expired Loans. According to SMS, even though the Expired Loans had not been repaid, it was not in breach of the facility agreements because the Bank had agreed to roll over the loans. Even if that is correct, the Bank had agreed to roll over the Expired Loans (as his Honour found) because of repeated assurances made to the Bank by Mr Marzouk or Mr Poulis on behalf of SMS. The assurances were to the effect that the amounts due to the Bank under the Expired Loans would be paid out from the sale of the properties concerned. The assurances had not been met and Mr Baptist was obviously (and reasonably) dissatisfied with the failure of SMS to comply with the assurances given on its behalf.
80 Within this context, all that happened in August 2008 was a single conversation in which Mr Marzouk floated a general idea about refinancing and was met by a response that clearly reflected Mr Baptist’s dissatisfaction with SMS’s conduct. Mr Marzouk put no specific proposal for refinancing to the Bank in this conversation, let alone a detailed written proposal. The first indication of such a proposal came in the form of evidence SMS sought unsuccessfully to adduce before the primary Judge on the day his Honour delivered judgment.
81 It is arguable that, had SMS put a detailed refinancing proposal to the Bank, cl 2.2 of the Code of Banking Practice would have obliged the Bank to give good faith consideration to the proposal. But any such obligation (assuming it to have existed) was never enlivened in the present case.
82 In my opinion, SMS has not shown that Mr Baptist or the Bank acted otherwise than “fairly and reasonably towards [SMS]” in the conversation of August 2008. It is to be remembered that cl 2.2 of the Code of Banking Practice expressly entitled the Bank, in discharging its obligation to act reasonably, to take into account SMS’s conduct preceding the conversation. Accordingly, SMS has not demonstrated any error in the primary Judge’s conclusion that the Bank did not breach cl 2.2 of the Code of Banking Practice.
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