Tokarev v Capri
[2016] VCC 452
•22 April 2016
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE | Revised Not Restricted Suitable for Publication |
EXPEDITED CASES LIST
Case No. CI-14-04076
| DAVID TOKAREV | Plaintiff |
| v | |
| JOSEPH CAPRI & ORS | Defendant |
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JUDGE: | HIS HONOUR JUDGE COSGRAVE | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 18, 19 April 2016 | |
DATE OF JUDGMENT: | 22 April 2016 | |
CASE MAY BE CITED AS: | Tokarev v Capri | |
MEDIUM NEUTRAL CITATION: | [2016] VCC 452 | |
REASONS FOR JUDGMENT
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Subject: CONTRACT; PENALTIES
Catchwords: CONTRACT- loan agreement – where dispute as to whether for domestic or commercial purposes – application of National Credit Code – whether absence of warning box on section 13(2) declaration invalidates declaration;
PENALTIES – whether interest rate of 48% per annum constitutes a penalty
Legislation Cited: National Consumer Credit Protection Act 2009 (Cth); National Credit Code; National Consumer Credit Protection Regulations 2010 (Cth), Supreme Court Act 1986 (Vic);
Cases Cited:Andrews v ANZ Banking Group Ltd (2012) 247 CLR 205; Auzcare Pty Ltd v Idameneo (No 123) Pty Ltd [2015] NSWCA 412; Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79, 86-7; King of the Pack Pty Ltd v Luong [2012] NSWSC 785; O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359; Paciocco & Anor v Australia and New Zealand Banking Group Ltd (ACN 005 357 522) (2014) 309 ALR 249; Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656; Seton v Slade (1802) 7 Ves 265, 273-4, (1802) 32 ER 111; Stern v McArthur (1988) 165 CLR 489
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr S Woolley | Boris Pogoriller Solicitor |
| For the Defendants | No appearance |
HIS HONOUR:
Nature of Case
1 This case concerns whether the plaintiff (“Tokarev”) is entitled to recover a loan made to the defendants. The first defendant (“Joseph”) and the second defendant (“Rosemary”) are husband and wife and Rosemary is the daughter of the third defendant (“Damigella”), for whom Rosemary holds a power of attorney. At trial there was no appearance by any of the defendants.
Background
2 Tokarev is a property consultant who also engages from time to time in making loans relating to property. In about September 2013, a broker approached Tokarev on behalf of the defendants seeking a short term loan. The broker gave Tokarev various documents including rates certificates, pay slips, ABN searches, and VEDA (credit history) documents. The broker told Tokarev that, apart from Rosemary working as a cleaner in a hospital, she and Joseph ran their own cleaning business. He said that they needed the loan to obtain a van and cleaning supplies. After conducting a due diligence exercise, either by himself or through his solicitors, Tokarev decided to advance moneys to the defendants.
3 On about 1 October 2013, Tokarev sent an indicative loan approval to the defendants setting out the main terms of the proposed loan. The defendants signed and returned the approval to indicate their acceptance.
4 Before Tokarev advanced any moneys to the defendants, he obtained a document certified by a solicitor, Sam Dinley, in relation to the various loan and security documents which the defendants were required to sign. Dinley gave evidence at the hearing. He said that he met with Joseph and Rosemary and went through the loan agreement, the mortgage, the declaration of purpose document, the disbursement authority and declaration by Rosemary to explain to them and satisfy himself that Joseph and Rosemary understood their general nature and effect. Dinley also undertook an identity check to ensure that the persons purporting to be Joseph and Rosemary were in fact them. He certified copies of identity documents such as drivers licences, credit cards and medicare cards. While he could not specifically recall the details of his meeting with Joseph and Rosemary, Dinley verified his signature on the various documents and said he believed that he would have followed the usual procedure he routinely adopted in carrying out this kind of work.
5 In the documents which Joseph and Rosemary signed, the schedule to the loan agreement provided an entry headed “Purpose of Loan”. This said that the “funds will be used in the operation of the cleaning business conducted by the borrowers”. This was consistent with what the broker had told Tokarev when making his initial enquiry about finance.
6 Also, the document headed “Declaration of Purpose” provided as follows:
“In accordance with paragraph 13 of the Code, the borrowers and the mortgagors jointly and severally declare that they will apply the Loan Advance funds wholly or predominately for a commercial and/or investment purpose that is not a “Code purpose” as that term is defined by section 13(2) of the Code.”
7 Having received these documents from the borrowers, Tokarev proceeded with the transaction, the parties entered into the loan agreement, and Tokarev advanced the funds.
8 There were terms of the loan agreement, inter alia, that:
(a) the loan was to be repaid within 4 months of the loan funds being advanced to the borrowers;
(b) the advance by Tokarev totalled $50,000 of which $40,000 would be disbursed to, or at the direction of, the borrowers and $10,000 would be retained as a fee by Tokarev;
(c) interest would accrue at the rate of 4% per month if paid more than three business days after the due date, and after the end of the period of the loan;
(d) interest was payable at a rate of 2% per month if paid on or within three business days of the due date;
(e) as security for the loan, Joseph, Rosemary and Damigella provided a second registered mortgage over the land in Certificate of Title Volume 11038 Folio 970 being the land known as 3 Eclipse Avenue, Epping in the State of Victoria (“the security property”);
(f) if the borrowers failed to pay any amount due and payable under the loan agreement at the expiry of the loan term, the borrowers committed an event of default;
(g) if an event of default occurred, Tokarev, by notice in writing to the borrowers, could declare that the loan and any accrued but unpaid interest and any other amounts outstanding under the loan agreement were due and payable, in which case the borrowers were to immediately pay those amounts to Tokarev;
(h) the borrowers indemnified Tokarev and would pay on demand the total amount of charges, fees, costs and expenses (including without limitation, all legal expenses on an indemnity basis) incurred in connection with:
(i) the negotiation, preparation, execution, stamping and registration of the agreement and the securities, including the production fee;
(ii) the enforcement or attempted enforcement or preservation or attempted preservation of any rights under the agreement;
(iii) any amendment to, or consent, waiver or release of or under the agreement; and
(iv) the transactions that the agreement contemplates.
9 Joseph, Rosemary and Damigella admitted receiving the loan advance from Tokarev. They repaid Tokarev two amounts, namely $1,000 and $3,300 in November 2013 and March 2014 respectively. They did not make any other payments. The loan term expired on 24 February 2014 at which time the loan became due and payable. Originally Tokarev sought an order for possession of the security property but the first mortgagee had already taken possession of that property, and the property is currently for sale. Tokarev now seeks judgment for debt only.
10 The defence raises two main issues:
(a) does the National Credit Code[1] (“the Code”) apply to this loan in circumstances where the borrowers have alleged that credit was provided or intended to be provided to each of Joseph, Rosemary and Damigella, wholly or predominately for personal, domestic or household purposes?
(b) if the Code did not apply, did Tokarev wrongly claim an amount of interest as a penalty in circumstances where there is an additional rate of 24% applied to the outstanding balance if the borrowers are in default?
[1]National Consumer Credit Protection Act 2009 (Cth), sch 1 (‘National Credit Code’).
Applicability of the Code
11 Section 13(1) of the Code provides that:[2]
“In any proceeding… in which a party claims that a credit contract … is one to which this Code applies, it is presumed to be such unless the contrary is established.”
[2]National Credit Code, section 13(2).
12 Tokarev has the burden of displacing this presumption.
13 Section 5 of the Code specifies the circumstances in which the Code applies to the provision of credit and includes the following:[3]
[3]Ibid sections 5(1), 5(3) and 5(4)(a).
“(1) This Code applies … when …
… (b) the credit is provided or intended to be provided wholly or predominately for personal, domestic or household purposes…
[…]
… (3) For the purposes of this section, investment by the debtor is not a personal, domestic or household purpose…
… (4) For the purposes of this section, the predominant purpose for which credit is provided is
… (a) the purpose for which more than half of the credit is intended to be used;””
14 Section 13(2) of the Code provides:[4]
“Credit is presumed conclusively for the purposes of this Code not to be provided wholly or predominately for personal, domestic or household purposes if the debtor declares, before entering into a credit contract, that the credit is to be applied wholly or predominately for business or investment purposes…”
[4]Ibid section 13(2).
15 Section 13(5) of the Code provides:[5]
“A declaration under this section is to be substantially in the form (if any) required by the regulations and is ineffective for the purpose of this section if it is not”
[5]Ibid section 13(5).
16 Joseph, Rosemary and Damigella purported to provide Tokarev with the signed declaration contemplated by section 13(2) of the Code. It seems that the relevant regulation referable to section 13(2) of the Code is Regulation 68 of the National Consumer Credit Protection Regulations 2010 (Cth), which provides the substance of the form of declaration to be made for the presumption to be effective. Here, Tokarev acknowledges that the form of declaration does not contain the warning box immediately below the declaration in the form set out in subsection (2) of Regulation 68. Authorities which have considered this point have held that the absence of the warning box, in the context of protective legislation, results in the declaration being viewed as not substantially in accordance with the regulations.[6]
[6]This was seen in cases considering the former provisions that governed declarations. The former provisions imposed the same form requirements regarding warning boxes as the National Credit Code): Knowles v Victorian Mortgage Investments Ltd & Anor [2011] VSC 611 at [32] - [34], Ranmor Finance Pty Ltd v Dworjanyn and Anor [2010] VSC 334 at [40]-[43].
17 Thus, Tokarev accepts that the declaration provided by the borrowers is not effective to create the conclusive presumption that would otherwise result under the Code.[7] However, Tokarev submits that the declaration is nonetheless persuasive evidence regarding the purpose for which Tokarev believed he was providing finance.
[7]Plaintiff’s outline of submissions at [27].
18 In circumstances where there is evidence that:
(a) the broker informed Tokarev that the finance was sought for the purpose of obtaining a van and cleaning supplies for the business conducted by Joseph and Rosemary;
(b) Tokarev obtained the declaration of purpose signed by the borrowers;
(c) Tokarev obtained the loan agreement signed by the borrowers which referred to the purpose of the loan as being for use in the operation of the cleaning business conducted by the borrowers; and
(d) Tokarev had checked that the borrowers had an ABN through which they might operate a cleaning business.
I am satisfied that Tokarev has overcome the presumption raised by the borrowers’ invocation of the Code, in particular section 13(1), and that the Code does not apply to this loan transaction.
Does a claim for interest at the rate of 48% per annum constitute a penalty?
19 The borrowers’ defence alleged that if the Code did not apply to the credit supplied by Tokarev or the loan agreement, then to the extent that the loan agreement and mortgage applied an additional annual rate of 24% interest to amounts owing in default of timely payment, the interest paid in consequence of default was not a genuine pre-estimate of the damage sustained by Tokarev but was extravagant and unconscionable in comparison to the greatest loss which Tokarev could prove as a result of the default. Accordingly, it was said that this additional payment constituted a penalty and was unenforceable at common law.
20 The starting point of a discussion on penalties is Lord Dunedin’s speech in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd.[8]
[8][1915] AC 79, 86-7.
“2. The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage…
3. The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach…
4. To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are:
(a) It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.
(b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid…
(c) There is a presumption (but no more) that it is penalty when “a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage”.
On the other hand:
(d) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequence of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties.”
21 In Ringrow Pty Ltd v BP Australia Pty Ltd,[9] the High Court unanimously stated that:[10]
[9](2005) 224 CLR 656.
[10]Ibid at [10].
“The law of penalties in its standard application is attracted where a contract stipulates that on breach, the contract-breaker will pay an agreed sum which exceeds what can be regarded as a genuine pre-estimate of the damage likely to be caused by the breach”.
The court went on to refer to the passage quoted above from Lord Dunedin’s judgment and said that it was proper to proceed on the basis that Dunlop continued to express the law applicable in this country. [11] The later decision in Andrews v ANZ Banking Group Ltd[12] did not undermine that statement.
[11]Ibid at [12].
[12](2012) 247 CLR 205.
22 It should also be noted in this context that, as identified by Gordon J in Paciocco & Anor v Australia and New Zealand Banking Group Ltd,[13] other members of the court in Dunlop laid down supporting principles as follows:
“(2) Where the damages which may arise out of a breach of contract are of their nature uncertain, the law permits the parties to agree beforehand on the amount to be paid on breach in determining whether the sum being paid is a penalty. It will not be a bona fide pre-estimate of damage if the sum stipulated is in excess of any actual damage which could possibly or probably arise from the breach or if the parties have stipulated for the payment of a larger sum in the event of a breach of an agreement for the payment of a smaller sum: Lord Parker at [97].
(3) Where the damage of the breach of a covenant to pay a fixed or definitely ascertainable sum is capable of exact definition, the substitution of a larger sum for that smaller ascertainable sum will not be a pre-estimate of damage, but a penalty”: Lord Parmoor at [101] – [102].
[13](ACN 005 357 522) (2014) 309 ALR 249 at [19].
23 I accept that whether a provision is a penalty is a question of interpretation to be determined having regard to the whole agreement at the time the contract is made, not at the time of breach.
24 The loan agreement provided as follows:
“6.1.1 The Loan will accrue interest daily at the Contract Rate.
6.1.2The Lender will accept interest at the Lower Rate during the Term of the Loan if paid within three (3) days after the monthly due date.”
25 In the schedule to the loan agreement, interest at the Contract Rate was referred to as “4.00% per month – if paid more than three business days after the due date and after the end of the period of the loan”. Interest at the Lower Rate was said to be “2.00% per month – if paid on or within three business days of the due date”.
26 Fisher & Lightwood’s Law of Mortgage (3rd ed) provides that:[14]
“It is a well settled, if not an intelligible, rule that if the mortgagee wishes to stipulate for a higher rate of interest in default of punctual payment he must reserve the higher rate as the interest payable under the mortgage and provide for its reduction in case of punctual payment: Strode v Parker (1694) 2 Vern 316; 23 ER 804. An agreement to pay a higher rate for non-payment at the appointed time is considered to be a penalty against which equity may give relief: Wallingford v Mutual Society (1880) 5 App Cas 685.”
[14]Edward Tyler, Peter Young and Justice Croft, Fisher & Lightwood’s Law of Mortgage (LexisNexis Butterworths, 3rd ed, 2014), p.95 [3.18].
27 This is what Tokarev has done in the present case. The Contract Rate is 4% per month if the interest is paid more than three business days after the due date but Tokarev agrees to accept 2% per month if the interest is paid within three business days of the due date. While the distinction between what is permissible and what is not has been criticised as elevating form over substance,[15] the principle is of longstanding and remains good law.[16] Because Tokarev has structured his loan agreement in accordance with long accepted principle, I consider that the higher interest rate sought does not constitute a penalty.
[15]Seton v Slade (1802) 7 Ves 265, 273-4, (1802) 32 ER 111 per Lord Eldon.
[16]O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359, 366-7; Stern v McArthur (1988) 165 CLR 489, 540; Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 at [12]; King of the Pack Pty Ltd v Luong [2012] NSWSC 785 at [16]; Auzcare Pty Ltd v Idameneo (No 123) Pty Ltd [2015] NSWCA 412 at [21].
28 In this case I find that the defendants are liable to Tokarev for the total amount of $50,000 (which includes the $10,000 fee) together with interest at the rate of 4% per month from when the advance was made on 28 October 2013. This rate is applicable because the interest payments due were not paid within 3 days of the due date. The interest accrued from 28 October 2013 to 22 August 2014 was $21,747.95. From this, I deducted $4,300 being the total of payments made by the borrowers, giving a nett interest amount of $17,447.95. The total amount owed to Tokarev at 22 August 2014 was $67,447.95.
29 Tokarev did not adduce any specific evidence about the legal costs incurred. Accordingly, I do not include any amount for this component.
30 Tokarev also claims interest from the time of the issue of the writ until judgment. In its written submissions, Tokarev stated:
“The Plaintiff claims interest on that sum [$72,485.45] from the time of issuing, to judgment, at the rate applicable under the Supreme Court Act 1986:
From
To
Days
Per day
Sub-total
Total Interest
22/08/2014
30/05/2016
647
$20.85
$13,491.15
1/06/2015
18/04/2016
322
$18.87
$6,074.84
$19,565.99
Total debt
$92,050.99”
31 In dealing with this part of the claim, I note first that the amount of the alleged debt is overstated. Second, the claim as articulated makes no sense because Tokarev claims interest for 647 days between 22 August 2014 and 30 May 2016 while also claiming interest for 322 days at a lower rate between 1 June 2015 and 18 April 2016. In my view, this plainly overstates the claim and I give no credence to the amounts claimed by the plaintiff – no claim for post-issue interest accrued over 969 days can be made for a case which issued about 20 months ago. I can speculate as to what claim Tokarev might have made. But it is the plaintiff’s job, not mine, to articulate its case (including any after submissions as to other alternatives for which a party might contend). It has not done so. Accordingly, I disallow this part of the interest claim. If the plaintiff had asked for it, I would have allowed an amount less than the sum claimed.
32 In the draft order Tokarev submitted, he sought costs on a standard basis.
Conclusion
33 I propose to order that there be judgment for Tokarev against the defendants in the sum of $67,447.95 and that the defendants pay Tokarev’s costs of the proceeding, including reserved costs, to be taxed on a standard basis in default of agreement.
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