Shannon v Permanent Custodians Ltd [No 3]
[2022] WASCA 112
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
TITLE OF COURT : THE COURT OF APPEAL (WA)
CITATION: SHANNON -v- PERMANENT CUSTODIANS LTD [No 3] [2022] WASCA 112
CORAM: QUINLAN CJ
VAUGHAN JA
TOTTLE J
HEARD: 4 MARCH 2022
DELIVERED : 25 AUGUST 2022
FILE NO/S: CACV 98 of 2018
BETWEEN: ANITA LOUISE SHANNON
CHRISTOPHER CHARLES SHANNON
Appellants
AND
PERMANENT CUSTODIANS LTD
First Respondent
GEL CUSTODIANS PTY LTD
Second Respondent
AUSTRALIAN MORTGAGE SECURITIES PTY LTD
Third Respondent
AFIG WHOLESALE PTY LTD
Fourth Respondent
REGISTRAR OF TITLES
Fifth Respondent
PEPPER GROUP LTD
Sixth Respondent
ON APPEAL FROM:
Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA
Coram: LE MIERE J
Citation: PERMANENT CUSTODIANS LTD v SHANNON [NO 2] [2018] WASC 295
File Number : CIV 1174 of 2013
Catchwords:
Consumer protection - Loan agreement and mortgage - Loan agreement and mortgage declared to be unjust under s 76 of the National Credit Code - Claims for relief under s 77 of the National Credit Code - Whether the loan agreement and the mortgage should be set aside, revised or altered under s 77 of the National Credit Code - Consideration of the conduct of the parties - Consideration of what is required to remedy the relevant injustice - Mortgage set aside - Loan agreement revised to limit principal owing and to reduce interest rate - Ancillary order to sell the property to provide restitution to borrowers out of proceeds of sale before repayment of principal and revised interest to the lender
Legislation:
Contracts Review Act 1980 (NSW), s 7
National Consumer Credit Protection Act 2009 (Cth), s 47(1)
National Credit Code, s 76(2), s 76(5), s 77
Result:
The loan agreement be revised in the manner set out in the appendix of the reasons
The mortgage be set aside
The property be sold with vacant possession by 28 February 2023 and that the first respondent to have conduct of the sale
Category: A
Representation:
Counsel:
| Appellants | : | In person |
| First Respondent | : | G D Cobby SC |
| Second Respondent | : | G D Cobby SC |
| Third Respondent | : | G D Cobby SC |
| Fourth Respondent | : | G D Cobby SC |
| Fifth Respondent | : | No appearance |
| Sixth Respondent | : | G D Cobby SC |
Solicitors:
| Appellants | : | In person |
| First Respondent | : | Norton Rose Fulbright Australia |
| Second Respondent | : | Norton Rose Fulbright Australia |
| Third Respondent | : | Norton Rose Fulbright Australia |
| Fourth Respondent | : | Norton Rose Fulbright Australia |
| Fifth Respondent | : | No appearance |
| Sixth Respondent | : | Norton Rose Fulbright Australia |
Cases referred to in decision:
Alati v Kruger [1955] HCA 64; (1955) 94 CLR 216
Australian Securities and Investments Commission v Kobelt [2016] FCA 1327
Banque Commerciale SA (in liq) v Akhil Holdings Ltd [1990] HCA 11; (1990) 169 CLR 279
Draper v Official Trustee in Bankruptcy [2006] FCAFC 157; (2006) 156 FCR 53
Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413
Esanda Finance Corporation Ltd v Tong (1997) 41 NSWLR 482
First Mortgage Managed Investments Pty Ltd v Pittman [2014] NSWCA 110
Gunn v Meiners [2022] WASCA 95
Jams 2 Pty Ltd v Stubbings (No 4) [2019] VSC 482; (2019) 59 VR 1
Kakavas v Crown Melbourne Ltd [2013] HCA 25; (2013) 250 CLR 392
Kobelt v Australian Securities and Investments Commission [2018] FCAFC 18; (2018) 352 ALR 689
Maguire v Makaronis [1997] HCA 23; (1997) 188 CLR 449
Permanent Custodians Ltd v Shannon [No 2] [2018] WASC 295
Perpetual Trustees Victoria Ltd v Burns [2015] WASC 234
Shannon v Permanent Custodians Ltd [2020] WASCA 198
Shannon v Permanent Custodians Ltd [No 2] [2021] WASCA 119
Stubbings v Jams 2 Pty Ltd [2022] HCA 6
Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389; (2001) 15 BPR 29,699
Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389; (2011) 15 BPR 29,699
Vadasz v Pioneer Concrete (SA) Pty Ltd [1995] HCA 14; (1995) 184 CLR 102
West v AGC (Advances) Ltd (1986) 5 NSWLR 610
Table of Contents
QUINLAN CJ & TOTTLE J:
Overview
The statutory power to reopen unjust transactions
The circumstances that contributed to the unjust transaction finding
The Shannons' case
The pleaded case
Orders sought by the Shannons
Outline of the Shannons' principal contentions
Outline of the respondents' principal contentions
Factual issues
The evidence
A practical funding alternative
Did GEL Custodians refuse to consent to a sale of the Property
The amounts expended and additional liabilities incurred by the Shannons as a result of purchasing the Property with the loan
Shannons' personal injury and business loss claims
Shannons' claims regarding respondents' post‑transaction conduct
Analysis and disposition
Conclusion
VAUGHAN JA:
Introduction
Incorporation of other reasons
The applicable principles as to relief
Consideration and disposition
The relevant 'transaction'
The relevant 'unjustness'
Should the court reopen the transaction?
What orders should be made to relieve the identified unjustness?
The relief sought by the Shannons
The expenditure claimed by the Shannons
Consideration of the relief sought by the Shannons
The appropriate relief under s 77 of the National Credit Code
Conclusion and orders
QUINLAN CJ & TOTTLE J:
Overview
On 24 November 2020 this court declared that a loan agreement made between the appellants (the Shannons) and the second respondent (GEL Custodians) dated 13 June 2006 and a mortgage dated 19 June 2006 granted by the Shannons to GEL Custodians over their home at Bakers Hill, Western Australia (the Property) were each unjust within the meaning of, and for the purposes of, s 76 of the National Credit Code (the Code).[1] The declaration was made following the Shannons' successful appeal against the dismissal of their counterclaim in an action brought to obtain possession of the Property and recover the debt due under the loan agreement.[2]
[1] Shannon v Permanent Custodians Ltd [2020] WASCA 198 (Shannon [No 1]).
[2] Permanent Custodians Ltd v Shannon [No 2] [2018] WASC 295.
These reasons concern the Shannons' claims for relief under s 77 of the Code ‑ this court having decided to determine the issue of relief rather than remit it to the General Division of the court.[3] The reasons are to be read with the reasons for holding the loan agreement and mortgage were unjust (Shannon [No 1]).[4]
[3] Shannon v Permanent Custodians Ltd [No 2] [2021] WASCA 119.
[4] Shannon [No 1] - the abbreviations used in Shannon [No 1] will be adopted in these reasons.
The circumstances that combined to render the transactions unjust are set out in Shannon [No 1] and are summarised later. For present purposes it suffices to say the parties would not have entered the impugned transactions had there not been fraudulent and dishonest conduct on the part of a mortgage originator, Yes Home Loans Pty Ltd and that the loan approval processes adopted by GEL Custodians enabled the fraud to go undetected.
Yes Home Loans was one of a number of 'correspondents' that undertook the origination and management of loans under what was known as the ARMS III securitisation program of which GEL Custodians was the trustee and lender of record. GEL Custodians and the respondents related to it, Australian Mortgage Securities Ltd (AMS) and AFIG Wholesale Pty Ltd (AFIG) had constructive knowledge of Yes Home Loans fraudulent and dishonest conduct. The Shannons had no knowledge of it.
The Shannons seek orders setting aside the loan agreement and the mortgage. Further, the Shannons contend entry into the loan agreement and the grant of the mortgage caused them losses amounting to approximately $650,000. They contend these losses should be set‑off against any entitlement to recovery of the principal amount due under the loan agreement, which they contend should be discounted by 26%, leaving a net balance in their favour of approximately $300,000. The principal sum loaned to the Shannons was $452,000.
The practical effect of the relief sought by the Shannons is that they would retain the Property and would be free of any debt to the respondents.
The respondents contend no relief should be granted under s 77 of the Code.[5] They contend if the Shannons were granted the relief they seek it would confer an unwarranted benefit on them. In this respect, among other matters, the respondents emphasise the Shannons have lived in the Property for more than 15 years and have not made any payment in respect of the loan for more than 10 years.
[5] In these reasons a reference to the respondents is a reference to the first respondent, which is the current registered proprietor of the mortgage, the second respondent, GEL Custodians, the third respondent, AMS, the fourth respondent, AFIG and the sixth respondent, Pepper.
The practical effect of the position for which the respondents contend is substantially the same as the effect of the orders made by the learned trial judge, that is, there would be a money judgment in favour of the first respondent for the debt due under the loan agreement (it is not controversial that the debt currently exceeds $2.2 million) and an order for possession of the Property.
For the reasons given below the Shannons are entitled to relief under s 77 of the Code. The orders set out at the conclusion of these reasons will be made. The effect of those orders is as follows:
(a)The loan agreement will be revised to limit the amount owing by the Shannons to the principal of $452,000 and simple interest accruing at the Reserve Bank of Australia cash rate, the amount owing will be repayable without recourse to any claim against the Shannons personally, and the loan will be repayable on the sale of the Property.
(b)The mortgage will be set aside.
(c)The Property will be sold by 28 February 2023.
(d)The net proceeds of sale will be applied as follows: in paying the Shannons an amount equal to the sums expended (and additional liabilities incurred) by them as a consequence of purchasing the Property using the loan advanced to them by GEL Custodians and thereafter in repaying the amount owing under the revised loan agreement.
The statutory power to reopen unjust transactions
The power to reopen an unjust transaction is found in s 77 of the Code. It provides:
77 Orders on reopening of transactions
The court may, if it reopens a transaction under this Division, do any one or more of the following, despite any settlement of accounts or any agreement purporting to close previous dealings and create a new obligation:
(a)reopen an account already taken between the parties to the transaction;
(b)relieve the debtor and any guarantor from payment of any amount in excess of such amount as the court, having regard to the risk involved and all other circumstances, considers to be reasonably payable;
(c)set aside either wholly or in part or revise or alter an agreement made or mortgage given in connection with the transaction;
(d)order that the mortgagee takes such steps as are necessary to discharge the mortgage;
(e)give judgment for or make an order in favour of a party to the transaction of such amount as, having regard to the relief (if any) which the court thinks fit to grant, is justly due to that party under the contract, mortgage or guarantee;
(f)give judgment or make an order against a person for delivery of goods to which the contract, mortgage or guarantee relates and which are in the possession of that person;
(g)make ancillary or consequential orders.
Section 77 must be read with s 76(5) which provides:
Conduct
(5)In determining whether to grant relief in respect of a credit contract, mortgage or guarantee that it finds to be unjust, the court may have regard to the conduct of the parties to the proceedings in relation to the contract, mortgage or guarantee since it was entered into or changed.
Save for the observations in Shannon [No 1],[6] there appears to have been no judicial consideration of the powers conferred by s 77 of the Code. The following observations may be made.
[6] Shannon [No 1] [332] - [334] (Quinlan CJ & Tottle J).
First, the Code was enacted by the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act) and its general purpose may be described as the protection of those consumers who enter transactions regulated by its provisions. Section 77 of the Code is intended to ensure consumers are protected from the consequences flowing from the nature of unjust transactions entered by them. In the light of this beneficial purpose, the provisions of s 77 are to be construed broadly and applied flexibly.[7]
[7] Australian Securities and Investments Commission v Kobelt [2016] FCA 1327 [191] (White J); Kobelt v Australian Securities and Investments Commission [2018] FCAFC 18; (2018) 352 ALR 689 [202] (Besanko & Gilmour JJ).
In particular, the s 77 powers are not constrained by the principles governing the exercise of the discretion to grant the equitable remedy of rescission or by the principles governing the grant of relief under the Contracts Review Act 1980 (NSW) and other statutory analogues. As demonstrated by the observations that follow, those principles may inform and guide, but do not dictate, the exercise of the powers under s 77.
Secondly, the powers conferred by s 77 are remedial in nature. The observations of Handley JA in respect of s 7 of the Contracts Review Act 1980 (NSW) in Esanda Finance Corporation Ltd v Tong,[8] are apposite:
Section 7 gives the Court powers to grant civil remedies to remove injustice. These powers are neither penal nor disciplinary, and should not be exercised for such purposes. Once injustice to the weaker party has been remedied, the Court should not further interfere with the rights of the parties. Interference beyond that point will cause injustice to the other party, and is not authorised by the section. This question was considered in S H Lock (Australia) Ltd v Kennedy (1988) 12 NSWLR 482 at 487, where Samuels JA said:
'If the Court were now to vary the contract of guarantee by reducing the amount of the respondent's liability it would not be relieving the respondent from the consequences of injustice, but punishing the appellant for having brought about an injustice … I do not consider that this would be an authorised use of the powers which the Act provides: see the opening words of s 7(1).'
Similarly, Priestley JA said (at 492, 493‑494):
'… Once the Court finds a contract unjust … it is faced with the next and quite separate task, for which the Act provides less guidance: the relief the court is empowered to give is, if it considers it just to do so, to make appropriate orders 'for the purpose of avoiding as far as practicable an unjust consequence or result'. As I understand s 7(1), wide though the [court's] powers are to find a contract unjust, the remedies it may grant in respect of such injustice are strictly limited to avoiding an unjust consequence or result of the unjust contract …'
[8] Esanda Finance Corporation Ltd v Tong (1997) 41 NSWLR 482, 489 (Handley JA), 493 (Santow AJA), 493 (Simos AJA).
Thirdly, when determining how the powers conferred by s 77 should be exercised, the court should consider the injustice that led the court to find that the transaction was an unjust transaction and the circumstances in which the injustice occurred, that is, 'the competing matters bearing upon the conclusion of injustice and the content of that injustice'.[9] This will include 'the degree and extent to which the parties can be seen to have responsibility for what happened and the extent to which it is just that such responsibility should be reflected in the extent of remedial relief'.[10]
[9] Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389; (2011) 15 BPR 29,699[267] (Allsop P), [1] (Bathurst CJ), [303] (Campbell JA).
[10] Tonto Home LoansAustralia Pty Ltd v Tavares [276] (Allsop P), [1] (Bathurst CJ), [303] (Campbell JA).
Fourthly, in determining how the powers conferred by s 77 should be exercised the court will have regard to the extent to which the party seeking relief has benefitted from the transaction and the extent to which such a benefit might be unwarranted or might constitute a 'windfall gain'.[11] This approach reflects both the principle applicable to equitable rescission ‑ a person seeking equity must do equity[12] ‑ and the limits on the statutory power, that is, the relief must be limited to what is required to avoid the unjust consequences of the transaction.[13]
[11] Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413 [80] - [85] (Beazley JA), [87], [98] - [107] (Santow JA), [112] (Campbell AJA).
[12] Maguire v Makaronis [1997] HCA 23; (1997) 188 CLR 449, 474 - 475 (Brennan CJ, Gaudron, McHugh & Gummow JJ).
[13] First Mortgage Managed Investments Pty Ltd v Pittman [2014] NSWCA 110 [172] - [174] (Sackville AJA), [1] (Beazley P), [2] (Gleason JA).
Fifthly, when fashioning appropriate relief having found a transaction to be unjust, as in equity, the court will aim to restore the parties to the position they were in before they entered the transaction. Precise restoration will often not be possible and in such circumstances the court will do what is practically just between the parties.[14]
[14] Vadasz v Pioneer Concrete (SA) Pty Ltd [1995] HCA 14; (1995) 184 CLR 102, 112 - 113 (Deane, Dawson, Toothey, Gaudron & McHugh JJ); Alati v Kruger [1955] HCA 64; (1955) 94 CLR 216, 223 - 224 (Dixon CJ, Webb, Kitto & Taylor JJ).
Sixthly, the question of what relief is appropriate is necessarily fact sensitive. Previous decisions may provide useful illustrations of how the powers may be exercised but each case must be determined by reference to its own facts.[15]
[15] Shannon [No 1] [404] (Vaughan JA).
Stubbings v Jams 2 Pty Ltd (Stubbings)[16] is a decision of the High Court in which the judgments were delivered on 16 March 2022, that is, after the hearing in this matter. At the Shannons' request the parties were given leave to file supplementary submissions addressing the significance of the decision.[17]
[16] Stubbings v Jams 2 Pty Ltd [2022] HCA 6.
[17] The Shannons' supplementary submissions filed on 22 June 2022 addressed matters other than the decision in Stubbings and to the extent to which the submissions exceeded the leave they have not been considered.
Stubbings illustrates the flexibility with which courts have approached the grant of equitable relief following findings of unconscionable conduct in connection with loan transactions. The discretion conferred by s 77 of the Code should be exercised no less flexibly.
In Stubbings the High Court allowed an appeal from the decision of the Victorian Court of Appeal which had overturned the primary judge's finding that the respondents had engaged in unconscionable conduct contrary to both equitable principle and s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth).[18]
[18] Stubbings [3] (Kiefel CJ, Keane & Gleeson JJ).
The form of the relief structured by the primary judge, and restored by the High Court's orders, in Stubbings is instructive. Some reference to the essential facts is required to explain the relief. The appellant was the guarantor of loans made by the respondents to a company owned and controlled by him. The appellant's obligations as guarantor were secured by mortgages given over two parcels of land owned by him (in which he had net equity of $530,000) and by a mortgage over a third property (the Fingal property) acquired by him with the loans. The company had no assets and had never traded. The appellant had no income or other means to meet his obligations to the respondents. There were defaults in making repayments under the loans. The two properties originally owned by the appellant were the subject of mortgagee sales effected by the respondents. The respondents commenced possession proceedings in respect of the Fingal property.
In their joint judgment, Kiefel CJ, Keane and Gleeson JJ summarised the respective positions of the parties as follows:[19]
The appellant's lack of commercial understanding coupled with his inability to repay the loans from his own income or other assets meant that default in repayment, and the consequent loss by the appellant of his equity in his properties by way of interest payments to the respondents, were inevitable as a matter of objective fact. The respondents, through their agent, sufficiently appreciated that reality that the exercise of their rights under the mortgages to turn the appellant's disadvantages to their own profit was unconscionable. Equitable intervention was justified in this case 'not merely to relieve the [appellant] from the consequences of his own foolishness … [but] to prevent his victimisation.'
[19] Stubbings v Jams 2 Pty Ltd [5] (Kiefel CJ, Keane & Gleeson JJ).
The primary judge in Stubbings ordered the mortgages be discharged and declared the loan agreement was invalid and unenforceable and set it aside.[20] The primary judge noted that the two properties that had been owned by the appellant when the impugned transactions were entered into had been sold to third parties for value and thus even if the appellant was able to hand back the principal and interest otherwise due, the respondents were unable to return him to the position in which he was in prior to the transaction.[21]
[20] Jams 2 Pty Ltd v Stubbings (No 4) [2019] VSC 482; (2019) 59 VR 1 [46] (Robson J).
[21] Jams 2 Pty Ltd v Stubbings (No 4) [15] (Robson J).
The primary judge's starting point for the purposes of doing practical justice between the parties was that the appellant should be restored to the position he had been in before the unconscionable transactions, that is, a position in which he owned a property, free of obligation of possession and forced sale, and in which he had an equity of approximately $530,000. Recognising it was likely that the appellant would need to sell the Fingal property to repay the respondents and to meet his liability to a second mortgagee, the primary judge fixed the amount the appellant was required to repay the respondents by assuming (in the absence of valuation evidence) that the Fingal property would be sold for $820,000. The primary judge made an allowance of $583,699 from the anticipated proceeds of sale ($583,699 being the amount the primary judge calculated was required to enable the appellant to purchase a new home to the value of $530,000) and made further allowances for selling expenses and the amount he considered would be found due to the second mortgagee. His Honour fixed the amount the appellant was required to pay the respondents by reference to his estimate of the balance of the proceeds of sale after deduction of the allowances made by him. His Honour did not order the appellant to pay interest on the amount due to the respondents and he did not order that the obligation to pay was to be secured over the Fingal property.[22]
[22] Jams 2 Pty Ltd v Stubbings (No 4) [42] (Robson J).
The circumstances that contributed to the unjust transaction finding
Before turning to the parties' contentions as to the appropriate relief in the present case, it is helpful to refer to the circumstances that contributed to the conclusion the loan agreement and the mortgage were unjust. The circumstances may be summarised as follows:
(a)The Shannons could not afford the loan and could not make the loan repayments without substantial hardship.[23]
[23] Shannon [No 1] [303] (Quinlan CJ & Tottle J), [428] - [430] (Vaughan JA).
(b)The Shannons entered into the loan agreement and the mortgage genuinely believing that they could afford the loan.[24] They were not under any special disability or disadvantage but lacked experience in financial matters.[25]
(c)The loan agreement and mortgage were procured by the fraud committed by Yes Home Loans.[26] In the absence of that fraudulent conduct GEL Custodians would not have entered into the loan agreement and the mortgage.[27]
(d)GEL Custodians, AMS, and AFIG had constructive knowledge that the Shannons had provided no information about their financial circumstances and that the information about the Shannons' financial circumstances contained in the application for lenders' mortgage insurance was false. [28] No prudent lender with that knowledge would have entered into the loan agreement and mortgage.[29]
(e)Yes Home Loans was not a stranger to the second, third and fourth respondents. It had a direct commercial relationship with them and was engaged by AMS and AFIG expressly for the purpose of an anticipated introduction of business and had a financial interest, in the form of remuneration in generating work.[30] The Shannons were innocent of Yes Home Loans' fraudulent conduct and their friendship with Mr Lock of Yes Home Loans was a neutral matter.[31]
(f)AFIG cast onto Yes Home Loans the sole responsibility for carrying out the credit analysis of borrowers and for being satisfied that a borrower would be able to meet the obligations imposed by any loan contract without substantial hardship. AFIG and GEL Custodians entirely abdicated that responsibility by requiring no information about a borrower's capacity to meet the obligations imposed by a prospective loan agreement.[32]
(g)It was within the power of GEL Custodians, AMS and AFIG to supervise and control Yes Home Loans' activities.[33]
(h)That AFIG and therefore GEL Custodians did not require Yes Home Loans to provide it with any information about a borrower's financial circumstances for loans of less than $500,000 supported the inference that, in relation to such loans, they were prepared to take the risk that the loans could not be serviced on the basis of the security available and the lenders mortgage insurance.[34]
(i)The structural arrangements for which GEL Custodians, AMS and AFIG were responsible involved the creation of risk and the heightening of risk that Yes Home Loans could engage in imprudent and even fraudulent conduct without detection and they took no steps to address that heightened risk.[35]
(j)GEL Custodians and AFIG did not observe the requirements of the Operations Manual and this supported the conclusion that GEL Custodians and AFIG were prepared to lend in circumstances where their own guidelines were not applied with appropriate commercial vigour.[36] This displayed a lack of concern about the suitability of the Shannons as borrowers and with serviceability.[37]
(k)While it is in the public interest that persons should be kept to their freely entered bargains and should not be relieved of their bargains in a manner giving rise to a windfall gain, it is also in the public interest to promote suitable lending and borrowing and to safeguard members of the public against conduct that can produce injustice. Confidence in the free and fair operation of the financial markets is undermined by practices that lead to disadvantage to ordinary consumers as well as conduct that affects persons under a special disadvantage.[38]
[24] Shannon [No 1] [304] (Quinlan CJ & Tottle J).
[25] Shannon [No 1] [304] (Quinlan CJ & Tottle J), [458] (Vaughan JA).
[26] Shannon [No 1] [305] (Quinlan CJ & Tottle J), [428] (Vaughan JA).
[27] Shannon [No 1] [305] (Quinlan CJ & Tottle J).
[28] Shannon [No 1] [306], [365] - [369] (Quinlan CJ & Tottle J), [442] (Vaughan JA).
[29] Shannon [No 1] [306] (Quinlan CJ & Tottle J).
[30] Shannon [No 1] [307] (Quinlan CJ & Tottle J), [432] (Vaughan JA).
[31] Shannon [No 1] [307] (Quinlan CJ & Tottle J), [426] - [427] (Vaughan JA).
[32] Shannon [No 1] [308] (Quinlan CJ & Tottle J), [432] - [435] (Vaughan JA).
[33] Shannon [No 1] [309] (Quinlan CJ & Tottle J).
[34] Shannon [No 1] [311] (Quinlan CJ & Tottle J), [432] - [433], [461] - [462], [466] (Vaughan JA).
[35] Shannon [No 1] [312] (Quinlan CJ & Tottle J), [451] (Vaughan JA).
[36] Shannon [No 1] [313] - [318] (Quinlan CJ & Tottle J), [438] - [439], [451] (Vaughan JA).
[37] Shannon [No 1] [313] - [318] (Quinlan CJ & Tottle J), [438] - [439], [451] - [452] (Vaughan JA).
[38] Shannon [No 1] [319] - [321] (Quinlan CJ & Tottle J), [458] (Vaughan JA).
In addition, Shannon [No 1] identified a number of aspects of the Shannons' conduct that must be considered in determining the appropriate relief. They were as follows:
(a)The Shannons were imprudent in their own assessment of their capacity to repay the loan without substantial hardship.[39]
(b)The Shannons signed the original loan application without it having been properly completed and provided it to Yes Home Loans uncompleted, albeit that by doing so it cannot be said that the Shannons facilitated the fraud by Yes Home Loans.[40]
(c)The Shannons were not misled as to the actual terms of the loan or mortgage. The documents themselves were clear and intelligible.[41]
(d)The Shannons did not obtain independent legal or other expert advice even though a recommendation that they should do so was included in the materials provided to them.[42]
(e)The Shannons were not subjected to unfair pressure to sign and return the loan agreement and the mortgage.[43]
[39] Shannon [No 1] [294] (Quinlan CJ & Tottle J), [415] - [417] (Vaughan JA).
[40] Shannon [No 1] [295] (Quinlan CJ & Tottle J), [418] - [420] (Vaughan JA).
[41] Shannon [No 1] [299] (Quinlan CJ & Tottle J), [413] (Vaughan JA).
[42] Shannon [No 1] [300] (Quinlan CJ & Tottle J), [413] (Vaughan JA).
[43] Shannon [No 1] [301] (Quinlan CJ & Tottle J), [413] (Vaughan JA).
The following further matters addressed in Shannon [No 1] are also relevant to the issue of relief:
(a)In assessing whether the transactions were unjust it was relevant to consider the counterfactual that had the respondents conducted themselves differently, GEL Custodians would not have entered into the loan agreement and the mortgage because it should and would have concluded that the Shannons could not afford to repay the loan.[44]
(b)While they would never have entered into the loan agreement and the mortgage without Yes Home Loans' fraudulent conduct, between the parties, the respondents were far better placed to address the risks that such conduct would occur and to prevent loans being made to people who were unable to afford them.[45] And the procedures put in place by the respondents, heightened the risk of loans being made to those who could not afford them.[46]
(c)GEL Custodians had constructive knowledge that the information used to obtain lenders mortgage insurance and thus facilitate the making of the loan was false and there was no evidence supporting the appellant's capacity to pay.[47]
(d)While the Shannons did bear some responsibility for the transaction, which may be relevant to the question of relief, that responsibility did not detract from the conclusion that procedural injustice resulted from the circumstances in which the loan agreement and the mortgage were made.[48]
(e)The Shannons were not involved in Yes Home Loans' dishonest and fraudulent conduct.[49]
[44] Shannon [No 1] [283] (Quinlan CJ & Tottle J).
[45] Shannon [No 1] [323] (Quinlan CJ & Tottle J), [464] (Vaughan JA).
[46] Shannon [No 1] [324] (Quinlan CJ & Tottle J), [432(1)] - [433] (Vaughan JA).
[47] Shannon [No 1] [325] (Quinlan CJ & Tottle J), [442] (Vaughan JA).
[48] Shannon [No 1] [328] (Quinlan CJ & Tottle J).
[49] Shannon [No 1] [307] (Quinlan CJ & Tottle J), [430(3)] - [431] (Vaughan JA).
The Shannons' case
The pleaded case
In the primary proceedings the Shannons represented themselves until June 2017 when, following the grant of financial assistance from the Commonwealth Attorney‑General's Department, they instructed lawyers to act on their behalf. The Shannons' trial counsel signed the amended substituted defence and counterclaim filed on 17 November 2017 which comprised the Shannons' pleaded case at trial.[50]
[50] BAB 101 - 135 - Amended substituted defence and counterclaim filed on 17 November 2017.
One of the matters relied on by the Shannons both at trial and before this court was that, had they not made an application for a loan to Yes Home Loans and, had that application not resulted in the loan agreement, they would have borrowed the funds required to complete the purchase of the Property from Mr Shannon's mother, Mrs Bernice Shannon.[51] The pleadings to that effect were made in the context of the Shannons' pleaded case that they had entered into the loan agreement and the mortgage as a result of misrepresentations by Yes Home Loans defined in the pleading as the First Misrepresentation and the Second Misrepresentation.[52]
[51] Transcript of primary court dated 5 December 2017, 380; ts 272 - 273; appellant's submissions filed on 14 September 2021 [22] - [25], [29].
[52] Shannon [No 1] [116] (Quinlan CJ & Tottle J).
In that context, the Shannons pleaded:[53]
[53] BAB 119 - Amended substituted defence and counterclaim filed on 17 November 2017 [23] - [24].
Effect of the First and Second Misrepresentations
23.The First and Second Misrepresentations were, for the reasons set out in paragraphs 11 ‑ 16 above, materially untrue and false.
24.(a) If the Defendants had known the true state of affairs, they would not have made the loan application to Yes Home Loans and would not have entered into the Loan Agreement and the Mortgage with GEL;
(b)At all relevant times the Defendants had an offer available from the Second Defendant's mother to loan them an amount which would have been used to purchase and settle upon the Land;
Particulars
The offer was made orally between 23 March 2006 and 24 April 2006 by the Second Defendant's mother to the Defendants.
The material terms of the offer were that the Second Defendant's mother would lend the Defendants the money to purchase the Land interest free to be repaid within 10 years, however in reality there was no legitimate expectation for repayment while the Defendants remained primary care givers.
(c)Further, if the Defendants had known that the true lenders (i.e. AFIG and/or GEL) formed part of the multi‑national GE Group of Companies (which they did not know), they would not have entered into the Loan or the Mortgage with that multi‑national group.
The Shannons pleaded they suffered losses as follows:[54]
[54] BAB 131 - Amended substituted defence and counterclaim filed on 17 November 2017 [58].
In further answer to the whole of the Statement of Claim the [Shannons], induced by the First and Second Misrepresentations and in faith of the receipt of the Loan, irreversibly changed their position or suffered loss by:
(a)Entering the Loan Agreement and Mortgage;
(b)Settling on the purchase of the [Property];
(c)Paying:
(i)a total of $132,688 which was money borrowed from the Second Defendant's mother towards the purchase of the Property.
(ii)$13,429 to establish the Loan and Mortgage and settle on the [Property];
(iii)$166,105.71 in interest and/or principal to the former Plaintiff under the Loan Agreement;
(iv)$142,817 in repairs and improvements to the Property.
Being a total of $455,039.71.
Relevantly, the relief sought by the Shannons in their counterclaim included the following:[55]
(a)an order setting aside the loan agreement and the mortgage;
(b)an order relieving them of payment of either a sum equal to the loss and damage suffered by them or such amount as the court considers reasonable; and
(c)damages as pleaded to the extent to which the damages had not otherwise been mitigated by other orders.
Orders sought by the Shannons
[55] BAB 132 - 134 - Amended substituted defence and counterclaim filed on 17 November 2017 [64] - [66].
Before this court the Shannons sought the following orders:[56]
[56] Appellants' Orders Sought filed on 14 September 2021.
1.An order under S.77 (a) of the [Code] that the Court reopen an account between the Appellants and the First named Respondent.
2.An order under S.77 (b) of the [Code] that the Appellants be relieved of any amount, whether intrinsic or extrinsic to the loan and mortgage, perceivably owing to the First named Respondent, and,
1.A declaration that, in direct relation to the Property with respect to having entered into the unjust loan and mortgage, the Appellants have suffered financial loss and damage in the amount of $642,759.02 (or any amount the Court decides considering the evidence) by entering into an unjust loan and mortgage.
2.An order that the amount sought by the First named Respondent be limited to the principal amount of $452,000, less the discount it was provided by the Second named Respondent (26%), leaving $334,480.
3.An order that the first named Respondent (or alternatively) the Second to Fourth Respondents owe $642,759.02 to the Appellants to be set off against the $334,480 owing to the First named Respondent.
4.An order that the First named Respondent or alternatively the Second to Fourth Respondents owe $308,279.02 to the Appellants at interest at the Supreme Court rate until paid. The purpose of this order sought is, in part, to allow the Appellants to restore the now deteriorated property, as far as possible, to its original condition.
3.An order under S.77 (c) of the [Code] that the Court set aside the loan agreement and mortgage and declare them both to have been void ab initio.
4.Alternatively to Order 2, an order from the Court that places the Appellants substantially into a financial position they would have been in but for the unjust loan and mortgage after considering the Appellants evidence including their financial loss and damage.
5.An order that the Second to Fourth named Respondents are to indemnify the First named Respondent for its losses pursuant to the Pepper Purchase Deed.
6.The Court order that the First named Respondent provide the Appellants with a 'Discharge of Mortgage' in registerable form.
7.If this court decides there is any amount justly due and payable by the Appellants to the First named Respondent (the possibility of which is denied), the Court make an order that the amount due and payable in not secured by the property and an order prohibiting the First named Respondent from issuing or applying for a 'Property Sale and Seizure' order.
8.That this honourable Court does provide to the Australian Securities and Investment Commission (ASIC) its findings regarding the conduct of the Sixth named Respondent under the provisions of S.47 of the NCCP Act.
9.…[57]
10.Any further ancillary and consequential orders this court would need to make to effect its judgment.
11.Costs and interest.
[57] The appellants sought orders to the effect that the respondents' lawyers be referred to their professional associations on the basis that they had engaged in misconduct. No such orders may be made under s 77 of the Code and there is no basis for making any such referral.
The losses claimed by the Shannons were set out in tabular form in their submissions and that table is reproduced below:[58]
[58] Appellants' submissions filed on 14 September 2021 [32].
Amount Description $132,688[59] Money borrowed from Mrs Shannon Snr, used by the Appellants as a 20% deposit (equity in the property) and stamp duty. $14,003[60] To establish the loan and mortgage $166,106 Payments made by the Appellants to the Second Named Respondent from July 2006 – August 2011 $142,817 Property repairs and improvements to the property $2,430 Court Costs [CIV 1174 of 2013] and [CACV 98 of 2018] (Filing fees and transcript fees) $10,000 (est) Disbursements (including parking / printing costs / stationery etc) $1,000 Discovery (copying documents) $150,297[61] Legal Costs $20,009[62] Rates – Paid – Shire of Northam $1,350 Hot Water System (27/06/2019) $21,163 House Insurance $3,800[63] Fire breaks (15 years x $300) Property Valuation – (to be undertaken) Total $665,663[64] [59] All figures in the schedule and in the balance of these reasons have been rounded to the nearest dollar.
[60] At the hearing this figure was increased from $13,429 to $14,003 and includes $7,000 referrable to the First Home Buyers Grant obtained by the Shannons.
[61] At the hearing this figure was increased from 146,297 to $150,296.
[62] This figure was increased from $19,409 to $20,009 - see affidavit of Anita Shannon sworn 14 September 2021 [6.1], 22: annexure J.
[63] This figure was reduced from $4,500 to $3,800 - see affidavit of Anita Shannon sworn 14 September 2021 [12].
[64] The total has been adjusted to reflect the changes referred to in the preceding footnotes.
Outline of the Shannons' principal contentions
The Shannons' principal contentions may be outlined as follows.
The Shannons rely on the 11 findings summarised at [27] and contend that GEL Custodians, AMS and AFIG had actual as well as constructive knowledge of the matters that made the loan agreement and mortgage unjust.[65] The Shannons contend that the respondents must take total responsibility not significant responsibility for the fraud of Yes Home Loans.[66] In oral submissions Mrs Shannon relied on the principle that no person can take advantage of the fraud of their agent.[67] The Shannons contend the only way to cure the injustice created by the unjust transaction is to ensure they do not lose their home or any money.[68]
[65] Appellants' submissions filed on 14 September 2021 [6].
[66] Appellants' submissions filed on 14 September 2021 [15].
[67] ts 263 - 264.
[68] Appellants' submissions filed on 14 September 2021 [18].
The Shannons pointed out that s 77 does not 'include proportionate liability' and the respondents did not plead any reliance on proportionate liability.[69]
[69] Appellants' submissions filed on 14 September 2021 [9].
As noted earlier, the Shannons contend that had they not entered the loan agreement and granted the mortgage to GEL Custodians they would have purchased the Property using funds borrowed from Mrs Bernice Shannon.[70]
[70] Appellants' submissions filed on 14 September 2021 [20] - [30].
In anticipation of an argument that if relief was fashioned in a manner that permitted them to keep the Property it would confer an 'unwarranted benefit' on them, the Shannons contend their losses 'equate to more than the value of the Property and more than the principal amount loaned by [GEL Custodians]'.[71] On that basis the Shannons contend an order that permitted them to retain the Property with nothing owing to the respondents would not leave them with an unwarranted benefit. The Shannons believe the Property is worth between $550,000 and $600,000.[72] This belief appears to be founded on appraisals by real estate agents made in 2017.[73] The Shannons maintain they do not have the resources to pay for a valuation and the valuers they had approached could not assist them because of conflicts of interest.[74]
[71] Appellants' submissions filed on 14 September 2021 [35].
[72] Appellants' submissions filed on 14 September 2021 [34].
[73] TB 1778 - 1803; GAB 37 - Witness statement of Anita Louise Shannon filed on 28 November 2017 [210].
[74] Appellants' submissions filed on 14 September 2021 [33] - [34].
The Shannons developed extensive submissions about their conduct and that of the respondents following the making of the loan agreement. The Shannons' contentions as to their conduct are to the following effect:[75]
(a)They prioritised the monthly repayments due under the loan but the loan was unaffordable from the outset.
(b)They used the proceeds of an insurance claim for the loss of personal property to meet some repayments rather than replacing their damaged possessions.
(c)They maintained contact with the respondents and kept them informed of the position. The Shannons complained that the respondents have not discovered file notes the contents of which would corroborate their account.
(d)In October 2011, the Shannons sought GEL Custodians' consent to a sale of the Property but consent to the sale was refused. The Shannons say they made an 'COSL' complaint about this.[76]
(e)In February 2013, the Shannons made a further COSL complaint about the circumstances of the loan application. The Shannons were frustrated with the COSL process and considered that the court would make a speedy determination that the loan and mortgage were unjust.
(f)The Shannons' health has deteriorated because of the stress caused by the dispute with the respondents and the associated litigation.
(g)The Shannons' business has been severely adversely affected and they have been suffered the loss of a 'very profitable income'.
[75] Appellants' submissions filed on 14 September 2021 [39] - [66].
[76] COSL is an acronym for 'Credit Ombudsman Service Ltd'.
The Shannons' contentions about the respondents' conduct following the making of the loan agreement are to the following effect:[77]
[77] Appellants' submissions filed on 14 September 2021 [67] - [119].
(a)Between 2006 and 2010 the GEL Custodians and the related respondents concealed the known and foreseeable risk that fraud may have occurred in the origination of the Shannons' loan. Specifically from 2007 or 2008 the Shannons contend the respondents were on notice that Yes Home Loans had acted fraudulently and had breached the terms of the Correspondent Deed governing its relationship with AFIG but did not notify the Shannons of the possibility of fraud or review the loan application.
(b)From June 2010 GEL Custodians was an 'Unlicensed Carried Over Instrument Lender' and was prohibited from having any contact with its customers.
(c)Section 76(2) of the Code requires the court to consider all the circumstances of the case and, even though it was not a matter raised at trial, the Shannons contend the relevant circumstances include that the respondents failed to act 'efficiently, honestly and fairly' contrary to s 47(1) of the NCCP Act. In this respect the circumstances relied on by the Shannons include the sale by GEL Custodians of its loan portfolio to Pepper and the fact that Pepper paid $3.77 billion for a $5.1 billion portfolio ‑ a discount of 26%.
(d)In February 2012, Pepper initiated proceedings in this court alleging the Shannons were in default under the loan agreement when they were not.
(e)Between June and September 2012, in response to a request for a copy of the loan application, Pepper and its solicitors obfuscated and delayed the provision of a copy of the loan application to gain a commercial advantage in negotiations with the Shannons and to conceal that Yes Home Loans had not provided GEL Custodians with a copy of the loan application in 2006.
(f)In 2012, Pepper should have appreciated that the loan and mortgage were brought about by fraud and at that point should have adopted a conciliatory approach to the Shannons but rather than take such an approach Pepper caused a further default notice to be served and thereafter commenced possession proceedings.
(g)Pepper should have availed itself of its rights against Yes Home Loans and by not doing so failed to mitigate its loss.
(h)Knowing that Yes Home Loans had engaged in fraudulent conduct Pepper initiated possession proceedings. In addition to the fact that the proceedings were commenced, the Shannons complained about four aspects of the conduct of those proceedings by the respondents' lawyers:
(i)a failure to provide particulars of a plea in the statement of claim to the effect that the Shannons had requested GEL Custodians to loan money;
(ii)the making of submissions on the respondents' application for summary judgment which the Shannons contend were false and misleading in that they suggested that a copy of the application for a loan had been provided by Yes Home Loans to one or more of GEL Custodians, AMS or AFIG;
(iii)a repetition of that submission to the trial judge; and
(iv)contrary to the findings of the primary judge, one of the respondents' witnesses at trial was 'an unhelpful witness'.
The Shannons refer to the power conferred by s 77(b) to relieve a debtor from payment of any amount as the court, having regard to the risk involved and all other circumstances, considers to be reasonably payable and undertake a comparison of the risks to which they have been exposed with the risks to which the respondents have been exposed.[78]
[78] Appellants' submissions filed on 14 September 2021 [121] - [139].
As to the risk to which they have been exposed, the Shannons refer to: the risk that they will lose their home and be rendered homeless; the risk they will lose the benefit of the payments made in respect of the Property and the benefit of the money spent on repairs and improvements; the risk to their health, their relationship, their business and their financial wellbeing created by the approval and acceptance of a loan they were unable to afford and the subsequent litigation and the stress it involved.
As to the risks to which the respondents are exposed the Shannons point to this court's findings that AFIG and GEL Custodians were prepared to take the risk that those borrowing $500,000 or less might not be able to service the loans made to them. The Shannons point also to the finding that as between them and the respondents, the latter were in a better position to address the risk of fraudulent conduct on the part of the Yes Home Loans and to prevent loans being made to those unable to afford them. The Shannons contend that GEL Custodians and Pepper had the opportunity to mitigate their losses by making a claim against Yes Home Loans and the possibility that Pepper could seek an indemnity from GEL Custodians. Finally, the Shannons contend that the total amount of debt claimed from them could not be described as 'reasonably payable' as it exceeds $2 million and has been increased by the addition of legal fees and other charges.[79]
[79] Appellants' submissions filed on 14 September 2021 [145] - [149].
The Shannons contend it would be unjust if they were ordered to pay any interest to the respondents.[80]
[80] Appellants' submissions filed on 14 September 2021 [154].
Outline of the respondents' principal contentions
The respondents emphasised the relief should extend no further than what is necessary to remedy the identified injustice. Among other matters that had to be considered, the respondents contend this principle requires the court to consider whether and to what extent the borrower would receive an unwarranted benefit.[81]
[81] Respondents' submissions filed on 12 October 2021 [4] - [8].
The respondents contest the Shannons' proposition that had they not entered the loan agreement and mortgage they would have been able to purchase the Property by borrowing the required funds from Mrs Bernice Shannon. They point out that to complete the purchase would have required $590,981 and, at the relevant time, the funds available to Mrs Bernice Shannon in cash were $557,178.[82]
[82] Respondents' submissions filed on 12 October 2021 [9] - [12].
The respondents point to the Shannons' failure to make the repayments due under the loan agreement from as early as October 2006 and their dependence on loans from Mrs Bernice Shannon to make payments as evidence that it must have been obvious to the Shannons 'at a very early stage' that they could not make the repayments required under the loan agreement and that they could not repay the debt without selling the Property.[83]
[83] Respondents' submissions filed on 12 October 2021 [13] - [18].
The respondents contend, in effect, that the Shannons' failure to list the Property for sale was inexplicable. The respondents contend that the evidence does not support the Shannons' argument that they were told in October 2011 that they could not put the Property on the market. The respondents refer to the Shannons' COSL complaint of November 2011 and make the point that the complaint does not include a reference to the alleged failure by Pepper to accept an offer to place the Property on the market.[84]
[84] Respondents' submissions filed on 12 October 2021 [19] - [25].
The respondents emphasise the Shannons have made no payments since 5 August 2011 when they paid $1,500.[85]
[85] Respondents' submissions filed on 12 October 2021 [29].
In response to the Shannons' contention the court should fashion relief which would place them in the position they were in before entry into the unjust transactions,the respondents argue the Shannons fail to appreciate the reality of their pre‑transaction position, which was, as the respondents contend that: the Shannons did not own a home, they had limited savings and a developing business.[86]
[86] ts 319.
The respondents contend that in assessing the Shannons' claims this court should have regard to the primary judge's findings as to the Shannons' credit.[87]
[87] Respondents' submissions filed on 12 October 2021 [30].
The respondents contend:
(a)The Shannons' contentions in respect of the hardship suffered by them, the deterioration in their health and the collapse of their business are not relevant to the grant of relief and were neither pleaded nor supported by the evidence and were not foreseeable at the time the loan agreement and the mortgage were made.[88]
(b)The Shannons' allegations of concealed fraud are not supported by the evidence.[89]
(c)The terms of settlement between Yes Home Loans and any of the respondents are not relevant to the Shannons' pleaded claims.[90]
(d)The allegations concerning GEL Custodians status as a 'Carried Over Instrument Lender' were not pleaded and, if the Shannons were allowed to maintain these allegations, new evidence would have to be adduced.[91]
(e)The allegations to the effect that the respondents breached their obligations to act in a manner that was efficient, honest and fair were not pleaded.[92]
(f)That Pepper had initiated possession proceedings against the Shannons in February 2012 (which were later discontinued) was not relevant.[93]
(g)The complaints about the delay in the provision by Pepper of a copy of the loan application amounted to a complaint that there was a delay in the provision of the document by Pepper between June 2012 and November 2012, when the Shannons acknowledged that they had obtained a copy of the loan application from Yes Home Loans on 15 August 2012.[94]
(h)The Shannons' allegations made about the conduct of the proceedings by the respondents and their lawyers are based on speculation.[95]
(i)The Shannons' contention that it was open to the respondents to seek relief against Yes Home Loans ignores that it was open to the Shannons to seek relief against Yes Home Loans and that they did so until they abandoned those claims shortly before trial.[96]
(j)The Shannons' characterisation of the claim against them as a claim for an indemnity against losses suffered by Pepper which GEL Custodians was obliged to provide is a mischaracterisation ‑ the respondents sought payment of amounts due pursuant to the loan agreement and the mortgage.[97]
[88] Respondents' submissions filed on 12 October 2021 [31.1].
[89] Respondents' submissions filed on 12 October 2021 [31.2].
[90] Respondents' submissions filed on 12 October 2021 [31.3].
[91] Respondents' submissions filed on 12 October 2021 [31.4].
[92] Respondents' submissions filed on 12 October 2021 [31.5].
[93] Respondents' submissions filed on 12 October 2021 [31.6].
[94] Respondents' submissions filed on 12 October 2021 [31.7].
[95] Respondents' submissions filed on 12 October 2021 [31.8].
[96] Respondents' submissions filed on 12 October 2021 [31.9].
[97] Respondents' submissions filed on 12 October 2021 [31.10].
The respondents emphasise they did no more than offer finance to the Shannons on unexceptional terms and which were understood by the Shannons. The respondents stress they did nothing to influence the Shannons' decision to accept the offer and nor did the Shannons suffer from any disability that impacted on their ability to determine whether to accept it.[98]
[98] Respondents' submissions filed on 12 October 2021 [34] - [35]; ts 318.
The respondents contend the decisions made by the Shannons once it was apparent they could not afford to make the repayments were decisions made by them in which the respondents played no part.[99] The respondents point out that it was the Shannons who decided to spend money on 'improvements' to the Property (though the respondents do not concede that they were improvements) when they were aware that they were unable to make the repayments required by the loan agreement and they spent the funds on the Property rather than making repayments due under the loan agreement.[100]
[99] Respondents' submissions filed on 12 October 2021 [36].
[100] Respondents' submissions filed on 12 October 2021 [37].
The Shannons applied for and were granted hardship assistance several times and thereafter assistance was declined because the Shannons failed to apply for it.[101]
[101] Respondents' submissions filed on 12 October 2021 [38].
The respondents contend:[102]
(a)the Shannons would receive an unwarranted benefit were they to be relieved from their obligation to repay the principal sum advanced (being $452,000) given that the Shannons could not have purchased the property without that amount being provided to them;
(b)for the same reason, the Shannons should be required to pay interest at least at the judgment rate from the date of the advance, with consideration being given as to whether the $166,105 paid by them should be credited against the interest;
(c)no allowance should be made for other amounts claimed to have been expended on improvements; and
(d)the Shannons should not be permitted to remain in possession of the Property in circumstances where there is no realistic prospect of their paying any amount due by them.
[102] Respondents' submissions filed on 12 October 2021 [41].
Factual issues
The parties' contentions give rise to the following factual issues:
(a)Did the Shannons have a practical alternative to funding the purchase of the Property?
(b)Did GEL Custodians refuse to give its consent to a sale of the Property in October or November 2011?
(c)What amounts were expended (and additional liabilities incurred) by the Shannons as a consequence of purchasing the Property with the loan?
The evidence
The factual issues are to be determined by reference to the evidence adduced at trial supplemented by the evidence contained in an affidavit sworn by Mrs Anita Louise Shannon on 14 September 2021.
In the supplementary submissions filed by the Shannons in relation to the High Court's decision in Stubbings, the Shannons sought leave to adduce further evidence in relation to the costs they would incur on a sale of the Property and the costs they would incur in the purchase of a new home.[103]
[103] Appellants Further Submissions - Re: Stubbings filed on 22 June 2022 [31].
On 26 July 2022, Ms Shannon attempted to file an affidavit affirmed by Mr Warren Jacobs on 21 July 2022, a friend of Mrs Bernice Shannon, containing opinion evidence about the probability that she would have lent the Shannons the funds required to purchase the Property. On its face the evidence sought to be adduced in that affidavit is inadmissible and no formal application for leave to re‑open and adduce further evidence was made by the Shannons. Nor was there any explanation of the reasons why the Shannons were unable to adduce the further evidence prior to the hearing. Some 15 months elapsed between the delivery of judgment in the appeal and the hearing of the application for relief. Directions for the filing and service of further evidence were made on 2 July 2021 and the Shannons' time for filing and serving their further evidence was extended by orders made on 31 August 2021. The public interest in the just, efficient and expeditious conduct of litigation carries with it the expectation that the parties will present all of their evidence at one hearing. Permitting the Shannons to adduce further evidence at this late stage would prolong the litigation without achieving any benefit to the just resolution of this case. It is not in the interests of justice to permit the Shannons to adduce further evidence at this late stage in the litigation. In any event, as noted above, we are not satisfied that the proposed evidence in Mr Jacobs' affidavit would have been admissible.
A practical funding alternative
As recorded at [31] to [33] above, the Shannons' pleaded that Mrs Bernice Shannon offered to lend them the amount they required to purchase the Property and that, had the application not resulted in the loan agreement, they would have borrowed the funds required to complete the purchase of the Property from Mrs Bernice Shannon. The trial judge did not make express findings in relation to those issues. This may be explained by the fact that the Shannons' pleaded case in that regard arose from their claims in relation to the First and Second Misrepresentations. As recorded in Shannon [No 1], the trial judge found that the Shannons had not proved that the First and Second Misrepresentations were in fact made or that they relied upon them.[104] Those findings were not challenged in the appeal and have not been disturbed.[105]
[104] Shannon [No 1] [122] (Quinlan CJ & Tottle J).
[105] Shannon [No 1] [152] ‑ [157] (Quinlan CJ & Tottle J).
The learned trial judge did, however, make the following incidental finding:[106]
On 23 March 2006 the defendants took Mr Shannon's mother, who I will refer to as Mrs Shannon Snr, to look at the Land. Mrs Shannon Snr suggested that she purchase the Land. Between 23 March and 19 April the defendants and Mrs Shannon Snr discussed buying the Land. Mrs Shannon Snr offered to buy the Land. The defendants decided to see if they could get finance to purchase the Land themselves. (emphasis added)
[106] Permanent Custodians Ltd v Shannon [No 2] [33] (Le Miere J).
Accepting that finding, it is for this court, upon a review of the evidence to determine whether to make the further finding that, had the Shannons not entered into the loan agreement, Mrs Bernice Shannon would have offered to lend, and they would have borrowed from her, the funds required to complete the purchase of the Property.
The trial judge's finding reproduced at [65] above reflected Mrs Shannon's evidence‑in‑chief which was as follows:[107]
[107] GAB 2 - 3 - Witness statement of Anita Louise Shannon filed on 28 November 2017 [6] - [8], [11].
Mrs Shannon was showing early signs of memory loss and we knew that this condition would deteriorate over time, so we decided to look for a property that ·would accommodate both Mrs Shannon as well as ourselves and considered a second dwelling on the property to be advantageous. This property was to be used, and it is being used as our primary residence.
We discussed the Property with Mrs Shannon who had initially considered purchasing the property herself as it suited her needs as well as ours, and she would obtain the benefit of living on the property.
Mrs Shannon had previously sold her residential property in Sydney and had money invested in shares and other investments and she was in a financial position to purchase the Property. TB‑39 is a copy of Mrs Shannon's Colonial First State Account Balance, printed 19 April 2006 showing a balance of $527,661.48.
After reviewing the bank accounts and assets of Mrs Shannon I believe around April 2006 Mrs Bernice Shannon had about $588,796.00 made up by the following assets:
(a)A Commonwealth Bank Pensioner Security Account containing $3,447.89 (TB‑312)
(b)An ING Direct Account containing $26,687.43 (TB‑344);
(c)A Colonial First State Account containing $527,661.48 (TB‑346 and TB‑39);
(d)And. around $31,000 in BHP Shares, being 994 shares (TB‑364, TB‑365).
We decided to decline her offer at the time on the provision that we would apply for finance and, if approved would purchase the Property ourselves. (emphasis added)
And:[108]
If Yes Home Loans had just said no to the loan, rather than committing a series of criminal acts including forgery and fraud (for profit) then we would have purchased the property anyway utilising money offered to us by Mrs Bernice Shannon. (emphasis added)
[108] GAB 13 - Witness statement of Anita Louise Shannon filed on 28 November 2017 [59].
Mrs Shannon supplemented the evidence in her witness statement with oral evidence‑in‑chief. The supplementary evidence was to the effect that on 23 March 2006 she and Mr Shannon and Mrs Bernice Shannon visited the Property together and Mrs Bernice Shannon suggested that she purchase the Property herself using her money.[109] Mrs Shannon's evidence was to the effect that Mrs Bernice Shannon made this suggestion on 23 March 2006 and in 'multiple conversations'.[110] Mrs Shannon elaborated on this evidence as follows:[111]
And it was basically to do with whether she was going to fund the loan and if that was going to happen, how that was going to happen and I was very concerned not to actually exhaust all her money and that was when ‑ so she had made the offer to us and said, look, I will buy the property and then I had said I think we should probably see if we could get finance first, but if we are unable to obtain finance, then we would take her up on her offer for her to purchase the property and it was going to be purchased in our name and we would then place a caveat or a mortgage over the title in her name to protect her money.
[109] Transcript of primary court dated 5 December 2017, 379.9.
[110] Transcript of primary court dated 5 December 2017, 380.
[111] Transcript of primary court dated 5 December 2017, 380.7.
Mr Shannon's evidence‑in‑chief was to the same effect as that of Mrs Shannon. In his witness statement he recorded that he 'was concerned not to exhaust [Mrs Bernice Shannon's] ready cash in case it was needed for her aged care later on'.[112] Mr Shannon was Mrs Bernice Shannon's only child.
[112] GAB 47 - Witness statement of Chris Shannon filed on 20 November 2017 [5].
It is common ground that Mrs Bernice Shannon lent the Shannons approximately $132,000 to put towards the purchase price of the Property (including the stamp duty) and that the Shannons executed a second mortgage in her favour.[113] The second mortgage was not registered but Mrs Bernice Shannon lodged a caveat against the title of the Property to protect her interest.[114]
[113] Shannon [No 1] [2] (Quinlan CJ & Tottle J). The amount claimed by the Shannons, as reflected in the settlement statement TB 1017, is $132,688. Another schedule adduced at trial recorded a slightly higher sum of $133,088.12 (TB 2141 ‑ 2142).
[114] Transcript of primary court dated 6 December 2017, 471.7.
It is also common ground that following the acquisition of the Property Mrs Bernice Shannon made substantial loans to the Shannons. Between 16 June 2006 and 20 April 2009, in addition to the sum put towards the purchase price of the Property and the stamp duty, Mrs Bernice Shannon lent the Shannons $295,604.40.[115] Indeed, by September 2009 the entirety of Mrs Bernice Shannon's assets had been realised and lent to the Shannons.[116]
[115] TB 2141 - 2142.
[116] Transcript of primary court dated 6 December 2017, 472.8.
Mrs Shannon's evidence was that the majority of the money was 'going towards the property'.[117] If the figures in the Shannons' table of losses are taken as correct, they spent a total of $305,754 in relation to the Property as follows:
(a)interest and other repayments up to August 2011‑ 166,105.71;[118]
(b)property improvements and maintenance ‑ $101,614.33;[119] and
(c)payments for labour ‑ $38,234.38.[120]
[117] Transcript of primary court dated 6 December 2017, 472.5.
[118] TB 1339 - 1352.
[119] TB 1615.
[120] TB 1764 - 1765. The total listed is $38,034, however the withdrawal on 25 January 2007 was listed as $700.00 when it was $900.00. See TB 1886.
There is no dispute that in April 2006 the total value of Mrs Bernice Shannon's investments was $588,796 and that they comprised the investments referred to in Mrs Shannon's witness statement.[121] It appears from Mrs Bernice Shannon's bank statements that in addition to income derived from her investments she received a pension from Veterans' Affairs of approximately $1,000 per month.[122] In April 2006 Mrs Bernice Shannon lived in a rented unit in South Perth.
[121] GAB 3 - Witness statement of Anita Louise Shannon filed on 28 November 2017 [10].
[122] TB 2143 - 2215.
The Shannons' available cash reserves were very limited. Mrs Shannon's bank statement for the period 15 April 2006 to 14 May 2006 recorded an opening balance that was overdrawn by $44.94 and a closing balance of $51.17 with total credits in that period of $2,250.18.[123] No statement for the May‑June 2006 period appears to have been in evidence. Mr Shannon's bank statement for the period 12 April 2006 to 11 May 2006 recorded that the account was overdrawn by $5 on 12 April 2006 and the closing balance was $40.27. There were total credits in that period of $200.[124] No statement for May‑June 2006 period appears to have been in evidence.
[123] TB 1838 - 1841.
[124] TB 2002 - 2003.
The Shannons' business account in the name of 'E‑News Direct' for the period 25 March 2006 to 24 April 2006 recorded an opening balance of $1,802.81 and a closing balance of $4,422 with total credits for that period of $10,657.50.[125] The next period for which a statement is available in respect of the business account is 25 May 2006 to 24 June 2006.[126] For that period the opening balance was $1,671.06 and the closing balance was $23,414.08 with total credits for the period of $33,092.28. These credits included a sum borrowed from Mrs Bernice Shannon of $21,521.28. Adjusted to remove the loan funds the balance which represented the Shannons' own funds was $1,892.80.
[125] TB 2008 - 2013.
[126] TB 2014 - 2020.
The Shannons had no significant savings of their own to put towards the purchase of the Property.
The Shannons' combined taxable income for the 2005/2006 year was $88,155[127] and their combined taxable income in the 2006/2007 year was $7,292.[128]
[127] TB 2379 - 2390.
[128] TB 2405 - 2417.
The funds required to complete the purchase were $590,704.[129] The Shannons obtained a First Home Buyers Grant of $7,000[130] and they paid a deposit of $2,000.[131] Had they not secured the loan from GEL Custodians, the amount they would have been required to borrow from Mrs Bernice Shannon would therefore have been $581,704. Accordingly, if Mrs Bernice Shannon had realised all her investments she would have (just) been in a position to lend the Shannons the funds required to purchase the Property. She would not, however, have been able to purchase the Property in her own name unless the Shannons provided the balance of $2,525 to add to her $588,178 in order to complete the purchase.
[129] TB 1017.
[130] TB 964.
[131] TB 1017.
It would have been an inherently and extremely risky proposition for Mrs Bernice Shannon to have lent practically all her available capital to the Shannons to enable them to buy a home for themselves and her in a small country town. Widows of 81 years of age with modest incomes and limited capital generally avoid such risky propositions.
It may be inferred from the fact that Mrs Bernice Shannon offered to buy the Property, thereby maintaining some control over her capital, that she was alive to the need to protect her interests. An inference to the same effect may be drawn from the steps she took (obtaining a second mortgage and lodging a caveat) to obtain security for her loan of $132,688 made to enable the Shannons to proceed with the purchase of the Property.
As is apparent from their own evidence the Shannons were alive to the significant risk to Mrs Bernice Shannon in borrowing the full amount of the purchase price from her. As Mrs Shannon said in her oral evidence‑in‑chief, she was very concerned about exhausting Mrs Bernice Shannon's funds.
Weighed against the risk to practically all her capital inherent in lending it to the Shannons were the benefits that Mrs Bernice Shannon would have expected to receive if she made the loan. The Property would have been (as it in fact became) her home and she would have received care and support from the Shannons. That following the purchase of the Property, Mrs Bernice Shannon loaned the Shannons all her available capital, provides some support for the proposition that she would have lent the funds to the Shannons to enable them to complete the purchase. It may be observed, however, that a willingness to provide a series of smaller loans over a period of three years following the purchase of the Property does not necessarily support the inference that Mrs Bernice Shannon would have been prepared to lend all her available funds to purchase the Property.
We acknowledge the learned trial judge's incidental finding that Mrs Bernice Shannon had offered to buy the Property (though in actuality she did not have the resources to do so). We do not accept, however, that, had they not received the loan from GEL Custodians, the Shannons would have proceeded to purchase the Property with the assistance of a loan from Mrs Bernice Shannon.
The application of all but a tiny amount of Mrs Bernice Shannon's capital in such a loan would have left her without any protection against the vicissitudes of ageing. Investing practically all her capital in a loan to the Shannons would have been a fundamentally unwise and imprudent step for Mrs Bernice Shannon to take. Given that she was alive to the need to protect her own interests, it is in our assessment unlikely that she would have taken that step.
Moreover, while they contend otherwise now (in hindsight), it is unlikely that the Shannons would have proceeded with the purchase of the Property relying on a loan from Mrs Bernice Shannon knowing two things: first, that such a loan would exhaust her funds and expose her to the risk that, should the need arise, she would be unable to pay for her own care, and secondly, knowing they did not have the financial resources to support her in the event such a need arose.
In short, Mrs Bernice Shannon was in a vulnerable position. To have borrowed practically all her capital in those circumstances would have jeopardised not only her financial security but also her welfare. While the Shannons did not exercise sound judgment in relation to their ability to repay the loan offered to them by GEL Custodians, their evidence is that they appreciated the risk to Mrs Bernice Shannon that accepting an offer of a loan from her would have created. Accepting such an offer would have been inconsistent with the concerns voiced by them about exhausting Mrs Bernice Shannon's funds.
Did GEL Custodians refuse to consent to a sale of the Property
As recorded earlier, the Shannons contend that in October 2011 when they could not make any further payments towards the loan they wrote to Ms Anna Harris of GEL Custodians and attempted to obtain permission from GEL Custodians to sell the property. They contend consent to the sale was refused.
To evaluate this contention, it is necessary to examine what occurred in relation to the loan between mid‑2009 until late 2011. The relevant history is as follows:
(a)On 11 June 2009, in response to the Shannons' request for hardship assistance, GEL Custodians agreed to accept three monthly instalments equal to one half of the monthly payments that would otherwise have been due and to add the unpaid proportion of the payments to the principal.[132]
[132] TB 1097 - 1099.
(b)On 20 October 2009, the Shannons sought an extension of the hardship assistance for a further three months. In their letter seeking this assistance the Shannons referred to improvements in their 'business situation' and to the fact that Mr Shannon had been able to resume work in the business on a full‑time basis following treatment for anxiety and depression caused by their financial position.[133] On 10 November 2009, GEL Custodians agreed to extend hardship assistance for a further three months.[134]
[133] TB 1100.
[134] TB 1102 - 1107.
(c)A further request for hardship assistance was made in early 2011 but the request was incomplete and could not be dealt with.[135]
[135] TB 1117.
(d)On 22 March 2011, GEL Custodians' solicitors served a default notice.[136] At that date the balance due on the loan was $491,313.78.
[136] Second supplementary GAB 48 - 54 - TB 1128 - 1134.
(e)In April 2011, the Shannons received the proceeds of an insurance payout with which they used to reduce the arrears on the loan from $16,756 to $4,898.[137]
[137] Second supplementary GAB 127 - TB 1343.
(f)On 15 August 2011, Yes Home Loans sent a letter to the Shannons giving them notice that Pepper Australia Pty Ltd had entered arrangements in relation to the home loan portfolio of GE Capital and that as a result the loan would be managed by Pepper or on its behalf.[138]
[138] TB 1143 - 1144.
(g)In September 2011, the Shannons made a further application for hardship assistance and they were informed that it would be assessed by Pepper. By letter dated 22 September 2011 the Shannons objected to their request for hardship assistance being dealt with by Pepper and maintained that it should have been dealt with by GEL Custodians.[139]
[139] TB 1145 - 1146.
(h)On 5 October 2011, the Shannons sent a letter addressed to Ms Anna Harris, at GEL Custodians, in which they proposed that they make repayments of $433 per month until the Property was sold.[140] The Shannons advised that they were experiencing financial hardship for a 'number of reasons'.[141] They elaborated on those reasons as follows:[142]
[140] TB 1147 - 1148.
[141] TB 1147.
[142] TB 1147 - 1148.
The first of these reasons being the issue of both Anita's and Chris' mental health which have been medically diagnosed as a compilation of both anxiety and depression for which we have both had to seek treatment. A main cause of these conditions has been attributed to the persistent lack of finances available to ourselves as a result of losing two years worth of development work on our software product when our first contracted programmer left the business at the point where we were about to go to market leaving us with an unfinished and unsaleable product. We then had to 'start over' from scratch when our second contracted programmer came into the development team. While this has resulted in a far superior product with more features and resulting in a much more saleable product which is now ready for market, we are still effectively and financially two years behind where we anticipated we would be. The second iteration of the product has now been sold to over 15 clients and has received very positive feedback which confirms that the product will be [a] profitable and successful venture when it is officially released early next year.
Secondly, there has also been the issue of rising interest rates during the course of our loan which have increased from the initial 6.89% rate of interest resulting in a monthly payment figure of $2,595.23 to the present rate of 9.56% with the monthly repayment figure now being $4,201.96. This represents a significant increase of $1,606.73 per monthly payment period. G.E.'s rate being higher than the normal rate for local banks. Our loan has gone from being an expensive but manageable monthly amount to something less than manageable.
The issue has also been significantly detrimental to both Anita's and Chris's mental health condition though the fear of losing our home as we have already serviced this loan to the figure of approximately $150,000 only to see the principal increase from $450,000 to $490,000 during that time which has been less than heartening.
Following our decision to list the house for sale, we have followed the directions of Anna Harris from G.E. and we are currently in the process of reviewing suitable Real Estate agents with a view to listing our house for sale in the immediate future. Upon the sale of our property it is our intention to resolve our mortgage debt with GEL CUSTODIANS PTY LTD promptly and in full.
Significantly the letter of 5 October 2001 is the evidence identified in the Shannons in support of the submissions that they 'attempted to obtain permission from the GE respondents to sell the property'.[143]
[143] Appellants' submissions filed on 14 September 2021 [44].
(i)On 31 October 2011, the Shannons sent a letter addressed to Ms Harris asking for the 'precise payout figure' in respect of the loan on two dates: 15 and 29 November 2011.[144]
[144] TB 1149.
(j)On 4 November 2011, Pepper responded to the Shannons' letter of 31 October 2011 and provided the payout figures as requested.[145]
(k)On 8 November 2011, the Shannons made a COSL complaint about GEL Custodians.[146] The complaint summary read as follows:[147]
1 GE Money/GEL Custodians PTY LTD has not responded in writing (or otherwise) to our letter seeking clarification of their interest in our mortgage contract.
2 GE Money/GEL Custodians PTY LTD has not responded in writing (or otherwise) to our letter concerning our Hardship proposal dated ‑ 5th October 2011. This letter was sent to Anna Harris of GE Custodians Pty Ltd proposing reduced payments.
And, in the section of the complaint in which the Shannons were invited to say what they considered was a fair and reasonable outcome to their complaint, they stated:[148]
A)Acceptance of our Hardship proposal to GEL Custodians PTY LTD dated ‑ 5th October 2011 by GEL Custodians PTY LTD.
B) Explanation of the following:
1 Clarification of who owns our mortgage contract?
2 Explanation as to why our letters have not been responded to by GE Money/GEL Custodians PTY LTD.
[145] TB 1150 - 1154.
[146] TB 1155 - 1157.
[147] TB 1156.
[148] TB 1156 - 1157.
The lack of detailed evidence as to the nature of the property improvements, and the current value of the property, is a deficiency in proof in support of the Shannons' case for relief. The gaps in the evidence are such that I am not satisfied that there is relevant loss or damage in relation to the various property improvements.
Third, the Shannons' insistence that they have suffered loss or damage by reason of the identified outgoings by way of expenditure connected with the purchase or continued occupation of the property takes no account of the countervailing benefit that the Shannons have derived from their occupation of the property.
Senior counsel for the relevant respondents observed, correctly, that the Shannons have lived in the property since June 2006 (some 16 years) ‑ doing so in circumstances where the last payment made under the Loan Agreement was $1,500 on 5 August 2011. The relevant respondents contended that this had to be taken into account.[233] I accept that contention. If, as the Shannons contend, they ought to be able to recoup all identified expenditures ‑ including property improvements ‑ in relation to the property, countervailing benefits derived from their occupation of the property ought also to be taken into account. As between the Shannons and the relevant respondents as lender it would not be just to ignore the occupation benefit so far as the Shannons rely on the expenditure to set aside the first respondent's interest in the property. There is, in this respect, an analogy (one that is of practical assistance although imperfect) with the principles that underpin an equitable accounting between co‑owners.[234]
[233] Appeal ts 319 - 320, 329; Respondents' submissions pars 28 - 29.
[234] See eg Draper v Official Trustee in Bankruptcy [2006] FCAFC 157; (2006) 156 FCR 53 [56], [102(b)], [113] - [114], [163.1].
Plainly, the benefit derived from occupation was not taken into account in the relief sought by the Shannons. In pointing to the various expenditures as loss or damage no allowance was given for the benefit of residing in the property since around mid‑July 2006 (the evidence suggested that the Shannons moved into the property a little after settlement).[235] In financial terms that benefit is substantial. There was limited evidence as to the rental value of the property ‑ the Hegney Property Valuations report assessed the unfurnished rental value of the property as being $450 per week.[236] But for present purposes it is enough that there was evidence of the rent being paid by the Shannons immediately before purchasing the property. Between March 2005 and late 2005 the Shannons had been living in rented accommodation in Mt Lawley paying a weekly rental of $450 per week. From late 2005 until just after 19 July 2006 the Shannons were living in rented accommodation in Bassendean paying a weekly rental of $350 per week.[237]
[235] ts 470.
[236] GAB 281.
[237] Mrs Shannon's witness statement filed 28 November 2017 par 5 GAB 2.
It may be inferred that, had the Shannons not purchased the property, they would have sought to live in accommodation that was at least commensurate with their accommodation before purchase of the property. Accordingly, even ignoring the effects of inflation, in residing at the property the Shannons have avoided rental expenses of in the order of $291,200 to $374,400.[238]
[238] Calculated at the rates of $350 and $450 per week over 16 years.
Senior counsel for the respondents contended that the occupation benefit was to be taken into account by the imposition of interest on the loan[239] ‑ the respondents seeking interest at a rate no less than the statutory rate allowed on judgment debts (ie 6% per annum).[240] That would result in more than the $291,200 to $374,400 I have mentioned in the previous paragraph.[241]
[239] Appeal ts 329.
[240] Appeal ts 325; Respondent's submissions par 41.3.
[241] Simple interest of 6% per annum over 16 years on the principal amount of $452,000 results in $433,920.
The question of interest on the loan may be deferred for now. For present purposes the significance of the occupation benefit is that the Shannons are seeking recovery of their various outgoings as loss or damage without any allowance for an occupation benefit (whether in the form of interest or otherwise). Assuming, contrary to my view, that in making orders under s 77 of the National Credit Code it is permissible to provide for loss or damage caused or materially contributed to by the purchase and continued ownership of the property, to provide for recovery of the Shannons' various outgoings without taking into account the countervailing occupation benefit they have derived would be to reform the transaction in a manner that is not just. In going outside the transaction as constituted by the loan, and seeking loss or damage arising from the purchase and continued ownership of the property, the Shannons must take into account the countervailing occupation benefit that they derived from the purchase and continued ownership of the property. This is not addressed in the orders sought by the Shannons.
Fourth, as discussed at [206] ‑ [242] below, I am satisfied that reopening the transaction and ameliorating the relevant unjustness - reforming the transaction so that the $452,000 loan to the Shannons under the Loan Agreement and the Mortgage is just ‑ requires lesser relief than the orders sought by the Shannons. That lesser relief has proper regard to the relevant unjustness, the respective positions and participation of the Shannons and the relevant respondents, and the degree and extent to which the parties are responsible for what has happened and it is just that the relief reflect such responsibility.
The appropriate relief under s 77 of the National Credit Code
From the perspective of the Shannons, the relevant unjustness is found in the provision of the loan to them when they could not afford it without substantial hardship. I turn to consider how, deploying the range of orders and relief under s 77, that unjustness may be relieved to render the transaction just.
I would not set aside the Loan Agreement and the Mortgage. The terms and conditions of the Loan Agreement and the Mortgage are unexceptional. There is nothing unusual in the terms. The form and language of the Loan Agreement and the Mortgage are clear and intelligible. The relevant respondents recommended that the Shannons obtain independent advice; the Shannons read and understood that recommendation but elected not to obtain legal or other expert advice. The Shannons were given time to read and review the Loan Agreement and the Mortgage. In these respects appropriate measures were taken by the relevant respondents to ensure that the Shannons understood the nature and implications of the Loan Agreement and the Mortgage. Importantly, as was found by the primary judge and was never challenged on appeal, the Shannons understood the legal and practical effect of entering into the Loan Agreement and the Mortgage.[242]
[242] Shannon [No 1] [413].
The unjustness is not found in the kind of lending structure and relationship created by the Loan Agreement and the Mortgage. That structure and relationship was understood and accepted by the Shannons. There is, in my view, no warrant to set aside the Loan Agreement and the Mortgage in their entirety. Nor, in my view, should the court revise or alter the primacy of the first respondent's security interest in the property over the Shannons' proprietary interest in the property. That was a fundamental aspect of the parties' respective rights and interests as bargained for ‑ it created no unjustness and the unjustness I have identified does not require such far‑reaching modification of the parties' respective rights and interests to remove the unjustness.
I would, instead, relieve the relevant unjustness ‑ addressing the affordability of the loan ‑ by revising and altering key commercial terms of the Loan Agreement and the Mortgage.
In this respect, as an initial step, I would make orders so that ‑ on any default under the Loan Agreement and the Mortgage ‑ the first respondent's rights of recourse are limited to the proceeds of sale of the property on exercise of the power of sale under the Mortgage.
The Shannons could not afford the loan without substantial hardship and the relevant respondents had no reason to believe otherwise (due to their failure to make any or any reasonable inquiry). The provision of the loan in those circumstances carried with it a material risk of default and the potential for personal exposure to be visited on the Shannons so far as capitalised interest at commercial rates and default costs increased the debt under the Loan Agreement. As between the Shannons and the relevant respondents, taking into account the degree and extent of their respective responsibilities as discussed in my reasons in Shannon [No 1], it is just that in the event of default the amount owing under the Loan Agreement and the Mortgage be repayable without recourse to any claim against the Shannons personally. There is power to so order under s 77(b) (thereby relieving the Shannons from payment in excess of that realised on exercise of the power of sale under the Mortgage) and s 77(c) (by revising or altering the terms of the Loan Agreement and the Mortgage).
Next I would order under s 77(c) that the Loan Agreement and the Mortgage be revised and altered by removing all entitlements of the lender for the time being to charge any fees and disbursements or recoup any default costs. The matters that I have referred to in the previous paragraph are equally applicable here. It is unjust that the Shannons are required to pay fees and default costs when the Shannons could not afford the loan without substantial hardship.
The disallowance of fees and default costs pursuant to the Loan Agreement or the Mortgage includes the $2,424 in fees and expenses charged by GEL Custodian in relation to the establishment of the loan (see [179.2(f)] above). It is unjust that the Shannons were required to pay these amounts in relation to a loan that they could not afford without substantial hardship. It is just that the relevant respondents bear these fees and expenses (even the out‑of‑pocket expenses such as the stamp duty on the loan documentation and mortgage registration fee) insofar as the Loan Agreement and the Mortgage were unjust due to the failure of their business structure. In practical terms the $2,424 should then be accounted for as a repayment of the principal on the date of the advance.
The Shannons also sought that the court disallow all interest payable in relation to the loan. The relevant respondents sought to maintain the interest entitlement. In a lending transaction interest is payable for the use of the money the subject of the loan. The Shannons have had the benefit of the money advanced under the Loan Agreement. Accordingly, as between the Shannons and the relevant respondents, subject to two matters I will come to, it is just that the Shannons pay interest in relation to the loan. To relieve the Shannons from the payment of interest altogether would fail to take account of a key countervailing benefit that the Shannons derived under the transaction. It is, in my view, appropriate that the Shannons pay interest ‑ albeit, as will be seen, at a reduced and reasonable rate[243] and for a lesser period than sought by the relevant respondents.
[243] Compare Maguire v Makaronis [1997] HCA 23; (1997) 188 CLR 449, 477.
There are, however, two additional matters to consider in relation to interest. First, the time period over which the interest is to accrue. Second, the basis and rate on which the interest is to accrue.
In considering the nature of the relevant unjustness, and how it is properly to be ameliorated and removed, I am satisfied that it is necessary and appropriate to provide for a period of interest relief at the inception of the loan. From the perspective of the Shannons the relevant unjustness is found in the provision of the loan to them when they could not afford it without substantial hardship. Relieving the Shannons from the accrual of interest for a period of the loan is an available means to neutralise its unaffordability.
I appreciate that this form of relief has the effect that, over the interest free period, the Shannons obtain a benefit from the transaction (ie the use of the loan funds) for which they incur no corresponding cost. Moreover, this is at the expense of the lender. There is, however, a balance to be struck. The relevant respondents provided the loan in circumstances where their business structure failed, they knew that critical information in the lenders mortgage insurance application and the mortgage purchase application was false, and they had no reason to believe that the Shannons could afford the proposed loan without substantial hardship. Despite those matters the relevant respondents made no reasonable inquiry as to whether the Shannons would be able to meet their obligations under the proposed loan without substantial hardship. In the circumstances there was a real risk that the Shannons could not afford the proposed loan without substantial hardship. So far as that risk materialised, and it is necessary and appropriate to adopt counter measures to alleviate the circumstance that the Shannons could not afford the loan without substantial hardship, that is a risk that the relevant respondents undertook by their actions and omissions.
An interest free period should be allowed for such time as represents a reasonable period for the Shannons to identify that they were unable to afford the loan without substantial hardship and then to extricate themselves from the loan. This, in my view, results in a transaction that is just. Affording relief from the accrual of interest to this extent is a practical answer to the relevant unjustness. It requires that the relevant respondents absorb the unaffordability of the loan until such time as the unaffordability was manifest and the Shannons should have sold the property and repaid the loan.
In providing for an end point to the interest free period there is, at least implicitly, a recognition that a point comes where the Shannons should have acted in their self‑interest. In this respect I am cognisant of the matters raised by Quinlan CJ & Tottle J at [124(a)] above. However, I consider that such difficulties experienced by borrowers in the position of the Shannons cannot justify an interest free loan in perpetuity insofar as account must be taken of the countervailing benefit that the borrowers derived under the transaction. In any event those difficulties do not persuade me that there should not be an end point to the interest free period in the circumstances of this particular case. There are two additional reasons why the interest free period should be limited in this particular case.
First, while an interest free period is justified by the circumstances of the unjust Loan Agreement and Mortgage, it should not be overlooked that the Shannons did not have any reasonable grounds for believing that they could make the monthly mortgage payments. They too entered into the loan arrangement without making any proper inquiry or assessment as to whether they could afford the payments without substantial hardship. The degree and extent to which the Shannons bear responsibility for their predicament is to be reflected in the extent of the remedial relief.
Second, as has been seen (see [87] ‑ [90] above), in October 2011 the Shannons recognised that the loan was unmanageable and decided to sell the property so as to resolve the loan. The Shannons did not provide any compelling reason for not having proceeded as was then contemplated. It was open to the Shannons to take that practical step to deal with the circumstance that they could not afford the loan without substantial hardship.
The length of the interest free period falls to be examined in the context of the matters I have already discussed.
Senior counsel for the relevant respondents submitted that the unjustness ceased to be causative at the point when the Shannons realised they could not pay for the loan. In terms of a date this was put at being some time between June and December 2006 ‑ with one potential date being October 2006 because this was when the first monthly payment was missed.[244] In this respect Quinlan CJ & Tottle J have found that, objectively, the Shannons should have realised that they were unable to meet the repayments at an early date ‑ and certainly by no later than early 2009 (see [124(b)] above).
[244] Appeal ts 323 - 324.
The primary judge found that in June 2006 the Shannons could not afford the loan and they would not be able to meet the repayments without substantial hardship unless there was some change in their financial circumstances for the better.[245] That finding was consistent with the Shannons' evidence.[246] Both Mrs Shannon and Mr Shannon said that performance under the terms of the Loan Agreement was always an impossibility without extreme financial hardship being endured.[247] Indeed, as Mrs Shannon explained, the Shannons had to borrow money from Mrs Bernice Shannon (Mr Shannon's mother) to meet the very first monthly payment.[248] Mrs Shannon accepted that the Shannons could not make the payments under the Loan Agreement effectively from the start of the loan[249] and that they had struggled since 2006 ‑ they relied on personal loans from Mrs Bernice Shannon to assist them to meet the monthly payments.[250] The Shannons borrowed large sums from Mrs Bernice Shannon to spend on the property (including the monthly loan payments) but by September 2009 Mrs Bernice Shannon's assets had all been spent.[251]
[245] Primary reasons [29]. See also [239], [242].
[246] Mrs Shannon's witness statement filed 28 November 2017 pars 82 - 87 GAB 16; Mr Shannon's witness statement filed 28 November 2017 par 77 GAB 60.
[247] Mrs Shannon's witness statement filed 28 November 2017 par 87 GAB 16; Mr Shannon's witness statement filed 28 November 2017 par 77 GAB 60.
[248] Mrs Shannon's witness statement filed 28 November 2017 par 84 GAB 16.
[249] ts 468.
[250] Mrs Shannon's witness statement filed 28 November 2017 par 109 GAB 19. See also pars 115, 125(b) GAB 20 - 21.
[251] ts 472; Mrs Shannon's witness statement filed 28 November 2017 par 125 GAB 21.
The Shannons first failed to make a monthly repayment on 19 October 2006.[252]
[252] Second supplementary GAB 123.
The loan statement records that there were defaults from October 2006 to September 2008 but generally this involved no more than a late monthly payment.[253] A $8,500 payment in September 2008 substantially brought the account up to date.[254] However, from December 2008 to June 2009 there were a series of missed or part payments that saw the arrears reach $11,714.83 as at 30 June 2009[255] (three years into the Loan Agreement). The arrears increased to $17,657.97 as at 22 September 2009 before the outstanding amount was capitalised following a hardship application.[256]
[253] Second supplementary GAB 123 - 125.
[254] Second supplementary GAB 125.
[255] Second supplementary GAB 125.
[256] Second supplementary GAB 125 - 126.
The Shannons first requested financial hardship assistance on around 10 June 2009.[257] A second request for financial hardship assistance was made on around 20 October 2009.[258] However, as referred to at [88(h)] above, it was only in early October 2011 (two years later) that the Shannons informed the lender that the monthly loan amount was 'less than manageable' and they had decided to list the property for sale.[259]
[257] Mrs Shannon's witness statement filed 28 November 2017 par 110 GAB 19.
[258] Mrs Shannon's witness statement filed 28 November 2017 par 112 GAB 20.
[259] See also Mrs Shannon's witness statement filed 28 November 2017 par 125 GAB 21.
The Shannons could not afford the loan from its commencement. However, the practical reality is that during the early period of the loan the availability of Mrs Bernice Shannon's funds masked the circumstance that the Shannons were unable to afford the loan without substantial hardship. By June 2009 the position should have been obvious to the Shannons. While the Shannons had previously struggled to meet the monthly loan payments, and could not do so without the use of Mrs Bernice Shannon's funds, by the three‑year anniversary of the Loan Agreement more substantial arrears had started to accumulate and the Shannons were making a hardship application. By mid‑October 2009 the Shannons were communicating openly about the possibility that they could lose their home.[260]
[260] Second supplementary GAB 23.
In the circumstances I am satisfied that it is necessary and appropriate to provide for an interest free period until 19 December 2009 ‑ ie for the first three and a half years of the loan.
I am satisfied that, objectively, the Shannons should have realised that they were unable to afford the loan without substantial hardship by no later than the three‑year anniversary of the loan (ie by 19 June 2009). By that time it was no longer merely a struggle to make the payments. Nor was it a case of mere late payments. Arrears had accumulated and the Shannons had considered it necessary to make a hardship application. So far as the Shannons had relied on Mrs Bernice Shannon's funds since the commencement of the loan, those funds had either been exhausted or were about to be exhausted. The Shannons' position was laid bare. Any belief the Shannons might still have harboured as to their ability to afford the loan without substantial hardship ought to have been dispelled. Some further interest free period should be allowed post‑19 June 2009 ‑ the Shannons were unable to close out the loan without selling the property. Having due regard to the sort of considerations referred to by Quinlan CJ & Tottle J at [124(a)] above I would allow a further six months interest free for this to occur. To allow any greater period of time would be unjust to the lender in all the circumstances.
Accordingly, pursuant to s 77(c) of the National Credit Code, I would revise and alter the terms of the Loan Agreement so that interest only commences to accrue on the principal under the Loan Agreement from 19 December 2009. To the extent that payments were made under the Loan Agreement pre‑19 December 2009 they will reduce the principal. Post‑19 December 2009 payments should be applied first to outstanding interest and, to the extent that there is no outstanding interest, will reduce the principal.
That leaves the basis and rate on which the interest is to accrue.
The Loan Agreement provides for interest to capitalise monthly. That is unjust in circumstances where the Shannons could not afford the loan without substantial hardship. The practical effect of the capitalisation of interest at commercial rates on monthly rests is shown by the substantial interest obligation that had accrued and was included in the judgment debt as entered by the primary judge. The court was informed that this had increased to a sum exceeding $2.2 million as at the appeal hearing. In relieving the unjustness I would only allow interest on a simple interest basis. In other words the Loan Agreement must be revised and altered under s 77(c) to limit the accrual of interest to simple interest. There is to be no capitalisation of interest or interest on interest.
In terms of the rate of interest, three possibilities were raised at the appeal hearing: the rate from time to time under the Loan Agreement; the statutory rate on judgment debts (6% per annum); or the 'cash rate'[261] as fixed by the Reserve Bank of Australia from time to time.
[261] Also referred to as the 'Cash Rate - Target'.
The nature of the relevant unjustness is such that it is inappropriate to provide for interest at the rate under the Loan Agreement. It is inappropriate that the Shannons be required to pay interest at the relevant respondents' commercial rates where the loan was provided to the Shannons when they could not afford it without substantial hardship in the circumstances summarised at [167] above. The court's primary focus must be to address the affordability of the loan. Use of the relevant respondents' commercial rates would only reinforce the hardship faced by the Shannons. There is a similar problem with the statutory rate on judgment debts. Moreover, one of the purposes served by the fixing of a statutory rate for judgment debts is to encourage the payment of such debts without the necessity for enforcement action. That purpose has no place in the present case. I would, in the circumstances, adopt the cash rate as fixed by the Reserve Bank of Australia from time to time.
The Reserve Bank cash rate is the interest rate on unsecured overnight loans between banks. It is widely considered to represent a risk‑free benchmark rate. The relevant respondents will no doubt feel aggrieved with its use on the transaction as reopened ‑ a lending transaction with the Shannons is unlikely to be considered risk‑free. However, the first respondent will retain its security. And the relevant respondents bear the primary responsibility for the unjust Loan Agreement and the Mortgage. In adopting the cash rate as the relevant interest rate I have balanced what is required to relieve the relevant unjustness having regard to the other relief that I would order.
It will be implicit in what I have stated to this point that, despite providing for limited recourse at [210] ‑ [211] above, I would not relieve the Shannons more generally from repayment of the principal advanced under the Loan Agreement. The money so advanced to the use of the Shannons is a countervailing benefit derived under the transaction which must be taken into account in shaping the appropriate orders under s 76(1) and s 77 of the National Credit Code. It should, however, be appreciated that the effect of disallowing the fees and expenses debited to the Shannons' loan account and the interest accruing to 19 December 2009 operates to reduce the principal so far as payments made for those items are instead to be applied in the reduction of the principal amount owing.
I would not make orders providing for a sale of the property. Such an order was sought on behalf of the relevant respondents but resisted by the Shannons. I would not make such an order as I do not consider it to be ancillary to or consequential on the other orders I would make under s 77. An order for sale will not act in aid of or further the revisions and alterations I would make to the Loan Agreement and the Mortgage.
The inability to provide for an order for sale means that, were my view to be preferred, the parties' relationship would continue (although, were my view to be preferred, that relationship would be governed by the Loan Agreement and the Mortgage as modified by the orders I propose below).
There are two practical difficulties with a continuation of the parties' relationship even in this modified form. First, there will be multiple subsisting defaults which may be actioned by the relevant respondents and, inevitably, imminent future defaults as the Shannons deal with a new regime in which they must recommence payments under the Loan Agreement as modified or face enforcement of the security. That strikes me as unjust. It is a legacy of the disputation that has followed the need to address the unjust Loan Agreement and Mortgage. Second, the protracted history of the litigation means that the term of the Loan Agreement will expire in 2036. Insofar as the Shannons will be called on to make repayment of the remaining principal over a compressed period their monthly repayments will increase and so too the risk of default. That too is unjust and may rightly be seen as a consequence of disputation that was necessitated by the need for reformation of the unjust Loan Agreement and Mortgage. In this respect I am satisfied that the protracted history of the litigation cannot be solely attributed to either party.
In my view these two remaining aspects of unjustness are to be relieved by revising and altering the Loan Agreement and the Mortgage as follows:
1.All subsisting defaults under the Loan Agreement and the Mortgage are waived; and the time for the Shannons to recommence monthly repayments under the Loan Agreement is fixed as 28 February 2023 (although interest will accrue in the interim). This will allow the Shannons time to sell the property or to seek to refinance if they do not wish to continue with the Loan Agreement and the Mortgage as modified.
2.The term of the Loan Agreement is extended from 30 years to 40 years ‑ the additional 10 years approximating the length of the time that the dispute between the Shannons and the relevant respondents has impacted on the Shannons' willingness to comply with the obligations under the Loan Agreement and the Mortgage.
It will be necessary for the first respondent to calculate the amount owing by the Shannons under the Loan Agreement and the Mortgage as revised and altered. That should be a relatively simple exercise in mathematics. The dates and amounts of the past payments are known[262] and the Reserve Bank cash rate from time to time is a matter of historical record. The first respondent should inform the Shannons of that figure (and the anticipated monthly repayment figure) within a relatively short time. To the extent that there is a dispute as to the amount owing it should be determined by an inquiry and account before a registrar. There should be liberty to apply in relation to the inquiry and account.
[262] See Second supplementary GAB 123 - 136.
Conclusion and orders
The orders of the court will be in the terms proposed by Quinlan CJ & Tottle J.
It is, however, appropriate that I identify the form of the orders I would make to give effect to my reasons. For the reasons I have given, I would make orders to the following effect (allowing the parties to be heard on the precise terms):
1.Subject to par 2 below, pursuant to s 77(c) of the National Credit Code the Loan Agreement and the Mortgage are revised and altered as follows (with such revisions and alterations taking effect from the commencement of the Loan Agreement and the Mortgage and applying despite any term to the contrary in the Loan Agreement or the Mortgage):
(a)The lender for the time being under the Loan Agreement and the Mortgage may not charge or recoup any fees and disbursements or default costs pursuant to the Loan Agreement or the Mortgage.
(b)The interest payable by the Shannons on the principal outstanding under the Loan Agreement from time to time:
(i)is only to commence to accrue from 19 December 2009 (so that, for the avoidance of doubt, no interest is to accrue on the principal outstanding under the Loan Agreement for the period from 19 June 2006 to 18 December 2009);
(ii)is to be calculated on a simple interest basis (so that, for the avoidance of doubt, there is to be no capitalisation of interest or interest on interest);
(iii)is to be at the rate being the 'Cash Rate ‑ Target' as fixed by the Reserve Bank of Australia from time to time.
(c)The term of the Loan Agreement is extended from 30 years to 40 years.
(d)All defaults under the Loan Agreement and the Mortgage subsisting as at the date of these reasons are waived.
(e)There is a moratorium on the Shannons being obliged to make monthly repayments of the loan under the Loan Agreement until 28 February 2023 (although interest will continue to accrue in accordance with sub‑par (b) above). Commencing on 28 February 2023 and thereafter on the last day of each calendar month the Shannons must make monthly repayments of the loan under the Loan Agreement.
2.Pursuant to s 77(b) and (c) of the National Credit Code, on default under the Loan Agreement or the Mortgage the first respondent's recourse against the Shannons for payment of all amounts due under the Loan Agreement and the Mortgage is limited to such amount as may be realised on exercise of the power of sale under the Mortgage.
3.Pursuant to s 77(g) of the National Credit Code:
(a)within 14 days after the date of these orders the first respondent must inform the Shannons of:
(i)the amount owing by the Shannons under the Loan Agreement and the Mortgage as revised and altered pursuant to these orders;
(ii)the anticipated monthly repayment figure as at 28 February 2023 under the Loan Agreement and the Mortgage as revised and altered pursuant to these orders;
(b)if, within 14 days after compliance with par 3(a) above, the Shannons inform the first respondent that they dispute the calculation of the amount owing by the Shannons under the Loan Agreement and the Mortgage as revised and altered pursuant to these orders, that amount is to be determined by a registrar following an inquiry and account in which the first respondent is to be the accounting party;
(c)there is liberty to apply to a judge of the General Division in relation to the conduct of the inquiry and account.
For the avoidance of doubt, par 2 of my proposed orders is simply intended to limit the first respondent's recovery rights to enforcing the security under the Mortgage. It means that there is to be no personal recourse as against the Shannons. The limitation on the property available to meet the Shannons' debt under the Loan Agreement and the Mortgage will not affect the existence of that debt or the Shannons' obligation to make monthly repayments once the moratorium period has expired. Default in making a monthly repayment may, as with other defaults under the Mortgage, lead to enforcement of the security and exercise of the power of sale under the Mortgage allowing the first respondent to recover the debt under the Loan Agreement and the Mortgage (as modified by the orders that I propose) from the proceeds of sale of the property.
I would hear from the parties in relation to the costs of the primary proceedings and the costs of the appeal. Insofar as it matters, and it probably does not given that the costs discretion falls to be exercised in accordance with the disposition preferred by Quinlan CJ & Tottle J, while I have rejected the relief sought by the Shannons and would provide for relief in lesser terms than that allowed by Quinlan CJ & Tottle J, I still view the Shannons as being the substantially successful party in the appeal. The Shannons have disturbed the order of the primary judge and, on my view of the matter, are entitled to relief under s 76(1) and s 77 of the National Credit Code.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
RC
Associate to the Honourable Justice Tottle
25 AUGUST 2022
0
17
0