Tomlak Pty Ltd v Westpac Banking Corporation
[2020] VSC 79
•28 February 2020
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST
S CI 2016 03212
BETWEEN:
| TOMLAK PTY LTD - and – GREGORY BUTERA | First Plaintiff Second Plaintiff |
| v | |
| WESTPAC BANKING CORPORATION | Defendant |
AND BETWEEN: S CI 2016 03211
| RAVENTHORPE PTY LTD | Plaintiff |
| v | |
| WESTPAC BANKING CORPORATION | Defendant |
AND BETWEEN: S CI 2018 00673
| BENAFIELD PTY LTD - and – GREGORY BUTERA | First Plaintiff Second Plaintiff |
| v | |
| WESTPAC BANKING CORPORATION | Defendant |
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JUDGE: | MOORE J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 21, 22, 23, 26, 28, 29, 30 November 2018 and 4, 5 December 2018 |
DATE OF JUDGMENT: | 28 February 2020 |
CASE MAY BE CITED AS: | Tomlak Pty Ltd & Ors v Westpac Banking Corporation |
MEDIUM NEUTRAL CITATION: | [2020] VSC 79 |
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BANKS AND BANKING – Where Code of Banking Practice 2004 incorporated into contract – Whether defendant exercised care and skill of a diligent and prudent banker in selecting and applying their credit assessment methods and in forming their opinion about ability to repay credit facility – Where credit facility sought by plaintiffs for purchase of land for development or sale with permits for development – Where defendant had knowledge of proposed use of credit facility for purchase of land – Where defendant had knowledge of sources of income available to plaintiffs – Where defendant did not have plaintiffs’ financial statements for the immediately preceding two years – Where defendant did not inform plaintiff of need to provide cash equity for development – Defendant exercised care and skill of a diligent and prudent banker in selecting and applying their credit assessment methods – Code of Banking Practice 2004, cl 25.1 – Doggett v Commonwealth Bank of Australia (2015) 47 VR 302 applied
BANKS AND BANKING – Where Code of Banking Practice 2004 incorporated into contract –Where defendant regularly approved excesses on overdraft account – Where defendant provided temporary overdraft facilities and extended existing credit facilities – Where defendant tolerated plaintiffs’ failures to comply with requests for financial information – Defendant used best endeavours and left no stone unturned in assisting plaintiffs to overcome their financial difficulties with credit facility – Code of Banking Practice, cls 2.2 and 25.2
MISLEADING OR DECEPTIVE CONDUCT – Whether defendant falsely represented to plaintiffs that an application for construction finance had a substantial prospect of success – Where defendant required plaintiffs to create a detailed financial plan – Where approval of further excesses on overdraft account contingent on detailed financial plan – Where plaintiffs issued with default notices – Defendant did not mislead or deceive plaintiffs – Australian Consumer Law, s 18
MISLEADING OR DECEPTIVE CONDUCT – Whether defendant misled or deceived the plaintiffs by proposing a conditional repayment plan and then subsequently serving demands for payment within one business day – Where defendant issued plaintiffs with a notice of default subsequent to conditional repayment plan – Where defendant provided a funding proposal subsequent to issuing notice of default – Where plaintiff failed to respond to funding proposal – Where defendant expressly reserved their rights – Defendant did not mislead or deceive plaintiffs – Australian Consumer Law, s 18
UNCONSCIONABLE CONDUCT – Whether defendant engaged in unconscionable conduct towards the plaintiffs – Defendant did not engage in unconscionable conduct – Australian Consumer Law, ss 20 and 21 – Paciocco v Australian New Zealand Banking Group Limited (2015) 236 FCR 199 applied
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | M Clarke QC with V Plain | HM Ong Lawyers |
| For the Defendant | H N G Austin QC with J A Findlay | MinterEllison |
TABLE OF CONTENTS
A.. FACTUAL BACKGROUND...................................................................................................... 5
A.1... The Butera Group................................................................................................................ 5
A.2... Westpac & the Butera Group............................................................................................. 6
A.3... Purchase and proposed development of properties...................................................... 8
A.4... Witnesses.............................................................................................................................. 8
B.. LEGAL PRINCIPLES................................................................................................................ 12
B.1... Section 18 of the ACL – misleading or deceptive conduct.......................................... 12
B.2... Sections 20 & 21 of the ACL – unconscionable conduct.............................................. 15
B.3... The Banking Code............................................................................................................. 20
C.. THE CLAUSE 25.1 CLAIM....................................................................................................... 24
C.1... Culcairn Drive.................................................................................................................... 25
C.2... Darebin Road...................................................................................................................... 40
C.3... Thames Street & Plenty Road.......................................................................................... 42
D.. THE CONSTRUCTION FUNDING CLAIM........................................................................ 43
D.1... Findings of fact................................................................................................................... 44
D.2... Did Westpac engage in misleading or deceptive conduct?......................................... 63
D.3... Did Westpac engage in unconscionable conduct?........................................................ 73
D.4... Did Westpac breach cls 2.2 and/or 25.2 of the Banking Code?.................................. 74
E... THE REPAYMENT PLAN CLAIM......................................................................................... 75
E.1... Findings of fact................................................................................................................... 75
E.2... Did Westpac engage in misleading or deceptive conduct?......................................... 94
E.3... Did Westpac engage in unconscionable conduct?........................................................ 97
E.4... Did Westpac breach cls 2.2 and/or 25.2 of the Banking Code?................................ 102
F... CONCLUSION......................................................................................................................... 102
HIS HONOUR:
Mr Gregory Butera[1] and his brother Mr Joseph Butera have been residential builders and property developers in the northern suburbs of Melbourne and in the Frankston area since the 1990s. Their business, the ‘Butera Group’, typically involved the purchase of blocks of land with an existing single dwelling, the demolition of that dwelling and the construction of multiple residential units in its place.
[1]Who I refer to as Mr Butera in this judgment.
The Butera Group pursued its property development business through three companies: Tomlak Pty Ltd (Tomlak), Raventhorpe Pty Ltd (Raventhorpe) and Benafield Pty Ltd (Benafield).[2] Another company in the Butera Group — Kimpal Pty Ltd — generally undertook the building work involved in the property developments.
[2]Gregory Butera and Joseph Butera were the directors of each of these companies.
The Butera Group encountered financial difficulties in 2013 and 2014. Receivers were appointed in March 2014. The Butera Group attributes its demise to various failures by Westpac Banking Corporation in the period between 2010 and 2014. Westpac had been the Butera Group’s principal financier since 2003 and had funded many of the Butera Group’s property purchases and developments.
The following seven properties were purchased by companies in the Butera Group between 2007 and 2011 and are the subject of the claims made in these proceedings:[3]
(a) 289–291 Broadway, Reservoir;
(b) 41−43 Deane Street, Frankston;
(c) 41 Culcairn Drive, Frankston;
(d) 2 Thames Street, Hadfield;
(e) 1001 Plenty Road, Kingsbury;
(f) 74 Royal Parade, Reservoir; and
(g) 64 Darebin Road, Northcote.
[3]For convenience, when referring to particular properties in this judgment, I will identify them by reference to their street location.
Tomlak, Raventhorpe and Benafield[4] commenced separate proceedings against Westpac in relation to various claimed failures by Westpac in the period between 2010 and 2014 in respect of the above properties. In each of the proceedings it was alleged that Westpac engaged in misleading or deceptive conduct in contravention of s 18 of the Australian Consumer Law (ACL); unconscionable conduct in contravention of ss 20 and/or 21 of the ACL; and conduct in contravention of cls 2.2, 25.1 and 25.2 of the Code of Banking Practice 2004 (the Banking Code).[5] As ultimately put at trial, they seek the following relief:
(a)in proceeding S CI 2016 03212, Tomlak, or alternatively Mr Butera, seeks an award of damages or compensation in the amount of $2,100,826.00.[6]
(b)in proceeding S CI 2016 03211, Raventhorpe seeks an award of damages or compensation in the amount of $700,000.00.
(c)in proceeding S CI 2018 00673, Benafield, or alternatively Mr Butera, seeks an award of damages or compensation in the amount of $1,200,403.00.[7]
[4]Mr Butera is also a plaintiff in the proceedings commenced by Tomlak and Benafield.
[5]The plaintiffs originally also claimed that Westpac contravened ss 12CA, 12CB and 12DA of the ASIC Act 2001 (Cth) and, in relation to Tomlak only, s 420A of the Corporations Act 2001 (Cth). These claims were not pressed.
[6]In the alternative, damages for loss of opportunity in the amount of $1,411,367 is sought.
[7]In the alternative, damages for loss of opportunity in the amount of $2,966,723.00 or, on another scenario, $3,171,292.00, is sought.
All three proceedings were heard together. On the fifth day of the trial, the Court made orders that all issues of liability be heard and determined separately and before any hearing as to the quantification of any loss and damage. The Court so ordered on Westpac’s application which was consented to by the plaintiffs.
The parties originally submitted 44 issues for determination by the Court. Those issues were expressed as questions which related to either liability, or causation and loss and damage, in each of the proceedings. The plaintiffs ultimately did not press 10 of those issues. The remaining 34 agreed questions are set out in Annexure 1.[8]
[8]The questions are numbered in accordance with the orders made by the Court on 27 November 2018.
In answering these agreed questions, it is necessary for me to resolve three central controversies relating to Westpac’s alleged acts and omissions.
The first controversy is whether Westpac complied with its obligations under cl 25.1 of the Banking Code (the clause 25.1 claim). Clause 25.1 required Westpac, before offering or giving a credit facility, to ‘exercise the care and skill of a diligent and prudent banker in selecting and applying our credit assessment methods and in forming our opinion about your ability to repay it’. The issues which arise in respect of this claim are whether Westpac breached this obligation in providing finance to Tomlak to purchase Culcairn Drive and in making three separate advances to Benafield secured by mortgages over Thames Street, Plenty Road and Darebin Road.
In considering the clause 25.1 claim, I will first address the contraventions alleged in respect of Culcairn Drive and then in respect of Darebin Road. I will then address the claims in relation to Thames Street and Plenty Road which Westpac submits are barred by the Limitation of Actions Act 1958.
The second controversy concerns Westpac’s dealings with the Butera Group before December 2013 in relation to the provision of funding to develop Culcairn Drive and Thames Street. It is alleged that Westpac gave the Butera Group a rosy impression about the likelihood of it providing construction funding for the development of these properties, when in fact it held grave concerns about the Butera Group and the prospects of such funding being provided (the construction funding claim). The key factual issue in relation to this claim is whether Westpac did in fact give the Butera Group a rosy impression about its prospects of obtaining construction funding. In light of my findings in relation to that matter, I will then need to decide whether Westpac:
(a)engaged in misleading or deceptive conduct in contravention of s 18 of the ACL;
(b)engaged in unconscionable conduct in contravention of ss 20 and/or 21 of the ACL;
(c)engaged in conduct in contravention of cl 25.2 of the Banking Code (which required it to try to help the Butera Group to overcome its financial difficulties with any credit facility it had with Westpac);
(d)engaged in conduct in contravention of cl 2.2 of the Banking Code (which required Westpac to act fairly and reasonably towards the Butera Group in a consistent and ethical manner).
If Westpac did contravene any or all of these provisions, I must also determine whether the relevant companies in the Butera Group suffered some loss as a result of that conduct.
The third controversy concerns the circumstances in which, on 31 March 2014, Westpac demanded that the Butera Group repay all of its debt of nearly $8 million within one business day (the repayment plan claim). In considering this claim, I will need to make detailed findings of fact about the dealings between the Butera Group and Westpac between 21 February 2014 and 30 March 2014 and determine, in light of those findings and other relevant evidence, whether Westpac:
(a)engaged in misleading or deceptive conduct in contravention of s 18 of the ACL;
(b)engaged in unconscionable conduct in contravention of ss 20 and/or 21 of the ACL;
(c)engaged in conduct in contravention of cl 25.2 of the Banking Code; and
(d)engaged in conduct in contravention of cl 2.2 of the Banking Code.
If Westpac did contravene any or all of these provisions, I must also determine whether the relevant companies in the Butera Group suffered some loss as a result of that conduct.
Before separately addressing each of these three central controversies, I will firstly set out the factual background to the Butera Group’s claims. I will then address the relevant legal principles in relation to misleading or deceptive conduct, unconscionability and the relevant provisions of the Banking Code.
A. FACTUAL BACKGROUND
In this section of the judgment I will address the following matters which were largely uncontroversial. First, I will outline the Butera Group’s business and operations. Secondly, I will summarise the history and nature of the relationship between the Butera Group and Westpac until the end of 2012. Thirdly, I will set out the basic facts relevant to the purchase of the properties which are relevant to this proceeding. Fourthly, I will provide my general observations about the evidence given by Mr Butera at trial and the fact that evidence was not adduced from two individuals who were involved in the events relevant to the proceedings.
The findings of fact which are specific to the clause 25.1 claim, the construction funding claim and the repayment plan claim are set out in Sections C, D and E respectively.
A.1 The Butera Group
Over about the 10 years prior to 2014, the Butera Group undertook about 50–60 property developments. Most of the developments were relatively small residential developments involving the construction of multi-unit residential developments on a suburban block occupied by a single dwelling. Typically, between four and six dwellings were built on a single site and then sold.
Although the individual developments undertaken by the Butera Group were relatively modest in size, they were undertaken as part of an ongoing building and construction business in which a number of developments were underway concurrently. At various times, the Butera Group may have had four or five developments occurring at the same time. These developments would be at various stages, ranging from the purchase of properties, the preparation of development plans and the obtaining of relevant planning and building permissions, the undertaking of building works and the sale of completed dwellings.
In most instances, Kimpal undertook the construction of the developments, with the various building subcontractors engaged by it moving from one Butera Group project to the next.
When a development was completed, the properties would be sold, with the net proceeds of sale used to pay out the associated loan obtained (in most cases from Westpac) for the purchase and/or development of the property. Surplus funds were then paid to Kimpal’s overdraft account to fund the Butera Group’s cash flow. In some instances however, if the Butera Group received a good offer from another developer or required cash flow, properties were sold after appropriate planning approvals had been obtained without the property having been developed.
Mr Joseph Butera’s role in the business of the Butera Group was to organise and supervise the construction of the projects, including attending sites, ordering materials and managing subcontractors. Mr Gregory Butera’s role was to select the properties for development. He also handled the financial side of the business, including dealing with banks or other lenders, buying properties, organising planning permits and preparing plans for each project.
A.2 Westpac & the Butera Group
Westpac was the Butera Group’s principal financier from about 2003. Until about 2013, the Butera Group undertook scores of apparently successful residential developments funded with the assistance of Westpac. It was a positive and successful relationship.
The relationship between Westpac and the Butera Group was maintained by a direct and close relationship between Mr Butera and Mr Sam Nicolaci. Mr Nicolaci was a Senior Relationship Manager with Westpac located at the Preston Business Centre. He was the Butera Group’s principal point of contact with Westpac for about 10 years until 20 December 2013.
Mr Butera was in regular contact with Mr Nicolaci in relation to the progress of the Butera Group’s property developments and the Group’s funding requirements. They met at least twice a month and spoke on the telephone about twice a week. Mr Nicolaci would bring spreadsheets to their meetings which contained information in relation to the Butera Group’s properties and which Mr Nicolaci regularly updated. Reference is later made to some of these spreadsheets which were in evidence before the Court.
In about July 2012, Mr Paul Tyndall commenced as the Commercial Credit Manager at Westpac’s Preston Business Centre. Mr Tyndall had a larger credit approval rating than Mr Nicolaci and was later involved in various meetings and communications with the Butera Group. Soon after he commenced in the role, Mr Tyndall recognised that the Butera Group had a good history with Westpac and was a proven and experienced developer which completed its projects on budget and on schedule. He also identified the Butera Group as being relatively highly geared and whose success depended on completing and selling developments and properties to service interest and other ongoing costs.
Mr Tyndall accepted as accurate the following ‘Connection Profile’ prepared by Mr Nicolaci about the Butera Group:
A strong ongoing working relationship has been established with estate agents. Although at times we have not had the luxury of presales to clients’ projects, the units have always been sold as soon as the development is completed – however, many sales are secured during the construction process. The clients always meet the market so as to retire the development debt, and have never retained a property following its completion.
Clients are fully aware that they are property developers and not investors.
Clients generally have up to five projects going at a time, which range from multi unit developments, dual occupancies and outside order jobs. We have also seen clients purchase properties that have development potential and on-sell the property once the relevant building permits have been approved by the local council.
Clients have a dedicated and experienced team of subcontractors who move from project to project and can relied [sic] upon to get the job done. Clients know their own capabilities and strengths and complete work that they are familiar with.
As a developer, clients always have a number of idle sites on hand whilst they complete projects at hand. During this time they will obtain the necessary plans and building permits so that they have a project to move on to when the existing development is completed. In most cases, the properties awaiting to be developed are rented out on short term leases to assist with the ongoing serviceability. At times, our exposure has exceeded $13,000,000. Currently our exposure is $12,000,000 …
In this ‘Connection Profile’, Mr Nicolaci also observed that the Butera Group had proven itself to be a ‘quality builder’ which had excellent working partnerships with key estate agents and key suppliers. He stated that Westpac had not financed a project for the Butera Group which had gone over budget, although some projects had experienced delays due to external circumstances, such as delays in obtaining subdivision approval. Mr Nicolaci also identified that the Butera Group’s overdraft facility sometimes came under pressure due to the speed at which developments were undertaken and as a result there had, at times, been account excesses, but generally only for a short time.
In an earlier Periodic Risk Review undertaken by Westpac in relation to the Butera Group’s financial performance for the 2010 financial year, Mr Nicolaci identified that the Butera Group had experienced delays in some of its development projects which had resulted in account excesses and the need for temporary overdrafts. Westpac had provided that financial support.
A.3 Purchase and proposed development of properties
Given the scope and nature of the claims made by the plaintiffs, it is necessary to make findings of fact about the purchase and development of the seven properties which are relevant to the plaintiffs’ claims. Those findings are set out in Annexure 2.
A.4 Witnesses
Mr Butera
Mr Butera was the principal witness called by the plaintiffs and the central actor on behalf of the Butera Group in the events the subject of these proceedings. It is therefore appropriate that I record my general observations about his evidence. These observations have informed the findings of fact which I have made insofar as those findings depend on, or are affected by, an assessment of Mr Butera’s credibility as a witness. These observations are illustrated in my later consideration of the evidence given by Mr Butera in relation to various matters.[9]
[9]See [87]–[90], [152]–[153], [166], [176], [229]–[233], [239], [242]–[246], and [250].
There are two important general observations which may be made about Mr Butera’s evidence which together seriously undermined his credibility as a witness. First, it is manifest that Mr Butera fervently believes that Westpac and its employees are morally, commercially and legally culpable for the collapse of the Butera Group. Although the holding of such a view by a plaintiff towards a defendant in commercial litigation is perhaps unsurprising and does not necessarily affect the credibility of a witness, in this case it is an important feature of Mr Butera’s evidence which significantly affected his credibility because of the conviction with which he holds this view. I consider that his belief in Westpac’s culpability for the failure of the Butera Group significantly coloured his evidence about a number of critical matters in the proceeding. It led him on a number of occasions to give evidence which manifestly did not accord with contemporaneous documents and the evidence of other witnesses, but which was harmonious with his pre-existing interpretation of events in which responsibility for the Butera Group’s demise rests squarely with Westpac.
This is a quintessential case where a witness, as a result of their close involvement in the events of a case, together with the effluxion of time, holds a singular overarching narrative view about those events, which view has seriously infected the credibility of their evidence on specific matters. It has also led, I consider, to Mr Butera engaging in a process of reconstructing relevant events so that, in the face of extensive cross-examination, his evidence accorded with his existing narrative of events. The emphasised parts of the following observations by Lord Pearce in Onassisand Calogeropoulos v Vergottis have a particular resonance in this case:[10]
“Credibility” involves wider problems than mere “demeanour” which is mostly concerned with whether the witness appears to be telling the truth as he now believes it to be. Credibility covers the following problems. First, is the witness a truthful or untruthful person? Secondly, is he, though a truthful person, telling something less than the truth on this issues, or, though an untruthful person, telling the truth on this issue? Thirdly, though he is a truthful person telling the truth as he sees it, did he register the intentions of the conversation correctly and, if so, has his memory correctly retained them? Also, has his recollection been subsequently altered by unconscious bias or wishful thinking or by overmuch discussion of it with others? Witnesses, especially those who are emotional, who think that they are morally in the right, tend very easily and unconsciously to conjure up a legal right that did not exist. It is a truism, often used in accident cases, that with every day that passes the memory becomes fainter and the imagination becomes more active. For that reason a witness, however honest, rarely persuades a Judge that his present recollection is preferable to that which was taken down in writing immediately after the accident occurred. Therefore, contemporary documents are always of the utmost importance. And lastly, although the honest witness believes he heard or saw this or that, is it so improbable that it is on balance more likely that he was mistaken? On this point it is essential that the balance of probability is put correctly into the scales in weighing the credibility of a witness. And motive is one aspect of probability. All these problems compendiously are entailed when a Judge assesses the credibility of a witness; they are all part of one judicial process. And in the process contemporary documents and admitted or incontrovertible facts and probabilities must play their proper part.
[10]Onassis and Calogeropoulos v Vergottis [1968] 2 Lloyd’s Rep 403, 431–432.
The second general impression I drew from Mr Butera’s evidence is that, in conducting the Butera Group’s business, he was someone who, colloquially, could accurately be described as a ‘big picture’ man. His focus was on certain essential elements of a successful property development business: the identification of attractive land for development; the creation of a concept for the development of a particular site; consideration of the key financial drivers for the successful development of the site; and the timely sale of that which was eventually developed on the site. My impression is that, in focusing on all of these important matters across various properties at different stages of development, Mr Butera was not generally concerned with matters of detail. The details relating to the actual building and construction of development were matters for his brother and he left details concerning the financing of the purchase and development of properties to Mr Nicolaci.
Mr Butera’s evidence to the Court reflected this. It was often characterised by the making of broad generalisations and recollections about what persons ‘would have said’. His ability to give clear and direct evidence about specific matters, such as particular conversations, was limited and, when challenged, often confusing and contradictory.
In light of these matters, I have treated Mr Butera’s evidence with particular care. In relation to a number of matters to which I refer below his evidence was clearly unreliable and could not be accepted. Contemporaneous documentary evidence provides a significantly more reliable foundation for the making of findings of fact than Mr Butera’s oral evidence.
Absent witnesses
Sam Nicolaci
As I have noted, Mr Nicolaci was the Butera Group’s principal point of contact with Westpac until about 20 December 2013. This includes the period relevant to the clause 25.1 claim and the construction funding claim.
Mr Nicolaci ceased employment with Westpac in late 2014. He left his employment ‘under a cloud’, due to a breach of the bank’s lending policies regarding the witnessing of documents in respect of the ‘Butera file’.
Neither party called Mr Nicolaci as a witness in the proceeding. No submission was advanced by either party that any adverse inference should be drawn as a consequence of that fact.
Mitch Karafili
Mr Mitch Karafili was the Butera Group’s accountant. He attended meetings with Westpac and corresponded with Westpac on behalf of the Butera Group, including in relation to dealings relevant to the construction funding claim and repayment plan claim.
Mr Karafili ceased acting as the Butera Group’s accountant in about mid-2016. Mr Karafili and the Butera Group are both currently engaged in litigation with each other.
Neither party called Mr Karafili as a witness in the proceeding. No submission was advanced by either party that any adverse inference should be drawn as a result of that fact.
B. LEGAL PRINCIPLES
B.1 Section 18 of the ACL – misleading or deceptive conduct
Section 18 of the ACL provides as follows:
Misleading or deceptive conduct
(1)A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
(2)Nothing in Part 3-1 (which is about unfair practices) limits by implication subsection (l).
Section 18 is concerned with ‘conduct’ by a person, including a corporation, in trade or commerce. ‘Conduct’ is defined in s 2(2) of the ACL to include, relevantly, doing or refusing to do any act.
A corporation will contravene s 18 of the ACL if its conduct is ‘misleading or deceptive’. Conduct is misleading or deceptive, or likely to mislead or deceive, if it has a tendency to lead a person into error.[11] It has been observed that ‘no conduct can mislead or deceive unless the representee labours under some erroneous assumption’.[12]
[11]ACCC v TPG Internet Pty Ltd (2013) 250 CLR 640, 651–2 [39], 655 [49].
[12]Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177, 200 (Deane and Fitzgerald JJ), referred to with approval in Campomar v Nike International (2000) 202 CLR 45, 50.
Whether conduct is misleading or deceptive is not, however, determined simply by establishing that a plaintiff adopted an erroneous assumption. Whether conduct is misleading or deceptive is an objective question to be determined by the Court itself.[13] An objective test imposes an element of reasonableness on the question of whether conduct had a particular meaning or effect. As stated by Keane JA (as he then was) in Downey v Carlson Hotels Asia Pacific Pty Ltd, the proper approach involves ‘an inquiry into what “a reasonable person in the position of the [representees], taking into account what they knew, would make of the [representor]’s behaviour”’.[14] His Honour continued:[15]
The issue is, as the High Court explained in Campomar, whether the erroneous assumption is extreme and fanciful or is of a kind that may be attributed to an ordinary or reasonable member of the class of person at whom the allegedly misleading and deceptive conduct is directed. It is therefore necessary to determine the true nature of the erroneous assumption held by the Downeys and then to consider whether or not the holding of this assumption was reasonable.
[13]Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304, 319 [25] (French CJ) (‘Campbell’); Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592, 625 [109] (McHugh J) (‘Butcher’).
[14]Downey v Carlson Hotels Asia Pacific Pty Ltd [2005] QCA 199, [69] (Williams JA and Atkinson J agreeing), quoting Butcher v Lachlan Elder Realty Pty Ltd (2004) 212 ALR 357, 370.
[15][2005] QCA 199, [72] (citations omitted).
Further, as the majority pointed out in Butcher v Lachlan Elder Realty Pty Ltd, in considering whether the conduct is misleading or deceptive:[16]
… it is important that the … conduct be viewed as a whole. It is not right to characterise the problem as one of analysing the effect of its “conduct” divorced from … circumstances which might qualify its character. Everything relevant … must be taken into account.
[16]Butcher (n 13) 605 [39] (Gleeson CJ, Hayne and Heydon JJ).
To similar effect, McHugh J stated:[17]
The question whether conduct is misleading or deceptive or is likely to mislead or deceive is a question of fact. In determining whether a contravention of s 52 has occurred, the task of the court is to examine the relevant course of conduct as a whole. It is determined by reference to the alleged conduct in the light of the relevant surrounding facts and circumstances. It is an objective question that the court must determine for itself. It invites error to look at isolated parts of the corporation's conduct. The effect of any relevant statements or actions or any silence or inaction occurring in the context of a single course of conduct must be deduced from the whole course of conduct. Thus, where the alleged contravention of s 52 relates primarily to a document, the effect of the document must be examined in the context of the evidence as a whole. The court is not confined to examining the document in isolation. It must have regard to all the conduct of the corporation in relation to the document including the preparation and distribution of the document and any statement, action, silence or inaction in connection with the document.
[17]Ibid 625 [109] (citations omitted).
The mere fact that a promise is not fulfilled, or that a prediction or promise proves to be incorrect, does not without more involve a contravention of s 18. As stated by the Full Federal Court in Global Sportsman Pty Ltd v Mirror Newspapers Ltd:[18]
The non-fulfilment of a promise when the time for performance arrives does not of itself establish that the promisor did not intend to perform it when it was made or that the promisor’s intention lacked any, or any adequate, foundation. Similarly, that a prediction proves inaccurate does not of itself establish that the maker of the prediction did not believe that it would eventuate or that the belief lacked any, or any adequate, foundation.
[18](1984) 2 FCR 82, 88.
It follows that a statement which is expressed as an opinion but which is said not to have been substantiated, is not misleading if the maker of the statement believed it to be true.[19] Although, as a general rule, s 18 of the ACL ‘does not require a party to commercial negotiations to volunteer information which will be of assistance to the decision-making of the other party’,[20] if the circumstances of a particular case give rise to a reasonable expectation that, if a fact existed, it would be disclosed, then the failure to disclose that fact may give rise to an inference that the fact does not exist. Where there is a reasonable expectation that, if a fact existed it would be disclosed, a failure to disclose the existence of that fact would constitute misleading or deceptive conduct. As stated by Hill J in Winterton Constructions Pty Ltd v Hambros Australia Ltd:[21]
Obviously, it is difficult to see how a mere silence could, of itself, constitute conduct which is misleading or deceptive … However, if the circumstances are such that a person is entitled to believe that a relevant matter affecting him or her adversely would, if it existed, be communicated, then the failure to so communicate it may constitute conduct which is misleading or deceptive because the person who ultimately may act to his or her detriment is entitled to infer from the silence that no danger of detriment existed.
[19]See, for example, Campbell (n 13) 345 [115] (Gummow, Hayne, Heydon and Kiefel JJ).
[20]Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357, 371 [22] (French CJ and Kiefel J).
[21](1992) 39 FCR 97, 114.
The plaintiffs referred to three authorities in which financiers were found liable to developers for misleading or deceptive conduct.[22] In general terms, liability arose in these cases because the developers had been led to believe that the prospect of approval for construction or further development funding was much rosier than those prospects actually were and the developers were not made aware of the real nature of their respective financier’s reservations. In each case, it was submitted that the customer was continually encouraged to purchase and develop land and that an application for development funding would be approved, yet the funding was not ultimately forthcoming in circumstances where the financiers’ reservations were not conveyed to the customer.
[22]Adour Holdings Pty Ltd (in liq) v Commonwealth Bank of Australia [1991] ATPR 41-147, 53,099, 53,100 (Burchett J); Arbest Pty Ltd v State Bank of New South Wales [1996] ATPR 41-481; Plum v Commonwealth Bank of Australia [2005] FCA 790, [147]–[155] (Wilcox J).
These authorities illustrate the applicability of principles relating to misleading or deceptive conduct to dealings between developer and financier in the field of property development in circumstances generally analogous to the allegations made by the Butera Group. They are not however of any further assistance in determining the Butera Group’s claims as they are necessarily products of their own facts and circumstances. The Court’s task is to apply the principles relating to s 18 of the ACL to the particular claims made by the Butera Group in the context of its dealings with Westpac about which I make various findings of fact in Sections C, D and E below.
B.2 Sections 20 & 21 of the ACL – unconscionable conduct
The plaintiffs allege that Westpac engaged in unconscionable conduct in contravention of s 20, or alternatively s 21, of the ACL.
Section 20 of the ACL provides:
Unconscionable conduct within the meaning of the unwritten law
(1) A person must not, in trade or commerce, engage in conduct that is unconscionable, within the meaning of the written law from time to time.
Note:A pecuniary penalty may be imposed for a contravention of this subsection.
(2)This section does not apply to conduct that is prohibited by section 21.
The ‘unwritten law’ incorporates the law developed by the courts of equity in relation to unconscionability. Most recently in Thorne v Kennedy,[23] a majority of the High Court restated and summarised those principles as follows:
A conclusion of unconscionable conduct requires the innocent party to be subject to a special disadvantage “which seriously affects the ability of the innocent party to make a judgment as to [the innocent party’s] own best interests”. The other party must also unconscientiously take advantage of that special disadvantage. This has been variously described as requiring “victimisation”, “unconscientious conduct”, or “exploitation”. Before there can be a finding of unconscientious taking of advantage, it is also generally necessary that the other party knew or ought to have known of the existence and effect of the special disadvantage.
[23]Thorne v Kennedy (2017) 263 CLR 85, 103 [38] (Kiefel CJ, Bell, Gageler, Keane and Edelman JJ) (‘Thorne v Kennedy’) (citations omitted).
Their Honours reiterated the statement in Kakavas v Crown Melbourne Limited[24] that, in any case where a transaction is sought to be impugned by the operation of vitiating factors such as unconscionable conduct, it is necessary for the trial judge to conduct a ‘close consideration of the facts … in order to determine whether a claim to relief has been established’.[25] Their Honours also referred to the following statement by Dixon CJ, McTiernan and Kitto JJ in Jenyns v Public Curator (Qld)[26] describing the nature of the evaluative exercise as requiring:
… a precise examination of the particular facts, the scrutiny of the exact relations established between the parties and a consideration of the mental capacities, processes and idiosyncrasies of the [other party]. Such cases do not depend upon legal categories susceptible of clear definition and giving rise to definite issues of fact readily formulated which, when found, automatically determined the validity of the disposition. Indeed no better illustration could be found of Lord Stowell’s generalisation concerning the administration of equity: “A court of law works its way to short issues, and confines its view to them. A court of equity takes a more comprehensive view, and looks to every connected circumstance that ought to influence its determination upon the real justice of the case.
[24](2013) 250 CLR 392.
[25]Ibid 400 [14], cited in Thorne v Kennedy (n 23) 104 [41] (citations omitted).
[26](1953) 90 CLR 113, 118–9, cited in Thorne v Kennedy (n 23) 105 [43].
Statutory unconscionability is dealt with in s 21 of the ACL which provides as follows:
Unconscionable conduct in connection with goods or services
(1) A person must not, in trade or commerce, in connection with:
a.the supply or possible supply of goods or services to a person; or
b.the acquisition or possible acquisition of goods or services from a person;
engage in conduct that is, in all the circumstances, unconscionable.
(2)This section does not apply to conduct that is engaged in only because the person engaging in the conduct:
a.institutes legal proceedings in relation to the supply or possible supply, or in relation to the acquisition or possible acquisition; or
b.refers to arbitration a dispute or claim in relation to the supply or possible supply, or in relation to the acquisition or possible acquisition.
(3)For the purpose of determining whether a person has contravened subsection (1):
a.the court must not have regard to any circumstances that were not reasonably foreseeable at the time of the alleged contravention; and
b.the court may have regard to conduct engaged in, or circumstances existing, before the commencement of this section.
(4)It is the intention of the Parliament that:
a.this section is not limited by the unwritten law relating to unconscionable conduct; and
b.this section is capable of applying to a system of conduct or pattern of behaviour, whether or not a particular individual is identified as having been disadvantaged by the conduct or behaviour; and
c.in considering whether conduct to which a contract relates is unconscionable, a court’s consideration of the contract may include consideration of:
i.the terms of the contract; and
ii.the manner in which and the extent to which the contract is carried out;
and is not limited to consideration of the circumstances relating to formation of the contract.
Section 22 sets out the matters to which the Court may have regard for the purposes of s 21.
It is clear that the statutory concept of unconscionable conduct is substantially broader and more flexible than that under s 20 of the ACL. As Beach J stated in ASIC v Westpac,[27] the statutory concept of unconscionable conduct is not constrained by concepts of unconscionability developed in equity, and it is not necessary to establish that a party operated under a special disability or disadvantage, or that there has been a taking advantage of such disability or disadvantage.[28] His Honour summarised the principles applicable to ss 21 and 22 of the ACL as follows:[29]
First, “unconscionability” means something not done in good conscience or conduct against conscience by reference to the norms of society. But that is to be understood and applied in the context of trade or commerce, but including consumer protection objectives directed at the requirements of honest and fair conduct free of deception. But one must be careful in using the phrase “norms of society” to ensure that the identification thereof is not interlarded with some distorted subjective view of social philosophy. It is fraught with risk to move beyond the explicit and implicit norms enshrined in and bounded by the statutory language of ss 21 and 22 construed in context, being trade or commerce, notwithstanding the apparent breadth of s 21(4) and the non-limiting prefatory words of s 22(1). Moreover, the evaluation of unconscionability must not be decontextualised from the particular case under consideration.
Second and relatedly, in order to determine whether conduct is unconscionable, it is necessary to look at all the conduct, by “[s]tanding back and looking at the whole episode”.
Third, as the norms of society include statutory prohibitions on deceptive conduct … deceptive practices … can form part of the “whole episode”, for the purpose of assessing whether, in all the circumstances, the conduct in question is unconscionable.
Fourth, s 22(1) of the ACL sets out a non-exhaustive list of factors to which the Court may have regard for the purpose of determining whether a person has contravened s 21. The matters enumerated assist in understanding the scope of the meaning of unconscionable conduct, but the presence of one or more matters contained in s 22(1) (or indeed their absence) is not necessarily determinative. (citations omitted).
[27]Australian Securities and Investments Commission v Westpac Banking Corporation (No 2) (2018) 266 FCR 147 (‘ASIC v Westpac’).
[28]Ibid 269 [2176].
[29]Ibid 269 [2177] (citations omitted).
As Chief Justice Allsop explained in Paciocco v Australia and New Zealand Banking Group, it is also unnecessary to establish a ‘high level of moral obloquy’ before a finding of unconscionable conduct may be made.[30] The consideration of what constitutes unconscionable conduct is undertaken by reference to an evaluative statutory standard. His Honour explained the approach as follows:[31]
[30]Paciocco v Australia and New Zealand Banking Group Limited (2015) 236 FCR 199, 276 [305] (Allsop CJ) (with whom Besanko and Middleton JJ agreed) (‘Paciocco’).
[31]Ibid 274–5 [296], 275 [297], 276 [304], [306].
The working through of what a modern Australian commercial, business or trade conscience contains and requires, in both consumer and business contexts, will take its inspiration and formative direction from the nation’s legal heritage in Equity and the common law, and from modern social and commercial legal values identified by Australian Parliaments and courts. The evaluation of conduct will be made by the judicial technique referred to in Jenyns. It does not involve personal intuitive assertion. It is an evaluation which must be reasoned and enunciated by reference to the values and norms recognised by the text, structure and context of the legislation, and made against an assessment of all connected circumstances. The evaluation includes a recognition of the deep and abiding requirement of honesty in behaviour; a rejection of trickery or sharp practice; fairness when dealing with consumers; the central importance of the faithful performance of bargains and promises freely made; the protection of those whose vulnerability as to the protection of their own interests places them in a position that calls for a just legal system to respond for their protection, especially from those who would victimise, predate or take advantage; a recognition that inequality of bargaining power can (but not always) be used in a way that is contrary to fair dealing or conscience; the importance of a reasonable degree of certainty in commercial transactions; the reversibility of enrichments unjustly received; the importance of behaviour in a business and consumer context that exhibits good faith and fair dealing; and the conduct of an equitable and certain judicial system that is not a harbour for idiosyncratic or personal moral judgment and exercise of power and discretion based thereon.
The variety of considerations that may affect the assessment of unconscionability only reflects the variety and richness of commercial life. It should be emphasised, however, that faithfulness or fidelity to a bargain freely and fairly made should be seen as a central aspect of legal policy and commercial law. It binds commerce; it engenders trust; it is a core element of decency in commerce; and it gives life and content to the other considerations that attend the qualifications to it that focus on whether the bargain was free or fair in its making or enforcement.
…
In any given case, the conclusion as to what is, or is not, against conscience may be contestable. That is inevitable given that the standard is based on a broad expression of values and norms. Thus, any agonised search for definition, for distilled epitomes or for shorthands of broad social norms and general principles will lead to disappointment, to a sense of futility, and to the likelihood of error. The evaluation is not a process of deductive reasoning predicated upon the presence or absence of fixed elements or fixed rules. It is an evaluation of business behaviour (conduct in trade or commerce) as to whether it warrants the characterisation of unconscionable, in the light of the values and norms recognised by the statute.
…
As Deane J said in Muschinski v Dodds at 616, property rights (and the same can be said of jural relations in trade or commerce) should be governed by law, and not some mix of judicial discretion or the subjective views as to who should win based on the formless void of individual moral opinion. Nothing in Subdiv C and ss 12CB and 12CC or the other statutes with which this case is concerned should be seen as requiring this. The notions of conscience, justice and fairness are based on enunciated and organised norms and values, including the organised principles of law and Equity, taken from the legal context of the statutes in question and the words of the statutes themselves. Employing judicial technique involving a close examination of the complete attendant facts and rational justification, the Court must assess and characterise the conduct of an impugned party in trade or commerce against the standard of business conscience, reflecting the values and norms recognised by Parliament to which I have referred.
B.3 The Banking Code
There was no dispute that the Banking Code has contractual force[32] and applies to Westpac and the companies in the Butera Group.
[32]Commonwealth Bank of Australia v Doggett [2014] VSC 423, [116] (Hargrave J); National Australia Bank Limited v Rice [2015] VSC 10, [145] (Elliott J); National Australia Bank Limited v Rose [2016] VSCA 169, [4] (Warren CJ and McLeish JA).
Clause 2.2
Clause 2.2 of the Banking Code provides:
We will act fairly and reasonably towards you in a consistent and ethical manner. In doing so we will consider your conduct, our conduct and the contract between us.
Clause 2.2 has not been the subject of extensive judicial consideration. In Sam Management Services (Aust) Pty Ltd v Bank of Western Australia Limited,[33] Young JA stated in obiter that, ‘[a]ssuming it must be given some meaning in a commercial document, it probably does not operate beyond requiring the bank to act in good faith towards the customer’.[34]
[33][2009] NSWCA 320.
[34]Ibid [74].
The Court of Appeal considered the principles relating to acting reasonably and in good faith in Masters Home Improvements Pty Ltd v North East Solutions Pty Ltd.[35] The Court stated that:[36]
… it is sufficient for present purposes to note that the contractual duty to act reasonably and in good faith encompasses the basic obligations (a) to act honestly and with fidelity to the bargain; (b) not to undermine the bargain or the substance of the contractual benefit bargained for; and (c) to act reasonably and with fair dealing having regard to the interests of the parties (which will, commonly, at times be in conflict), and to the provisions and objectives of the contract, objectively ascertained. The obligation does not require that a party subordinate its legitimate interests to those of the other party. The content of the obligation is informed by the contractual, commercial and factual context.
[35][2017] VSCA 88.
[36]Ibid [99] (citations omitted).
Clause 25.1
Clause 25.1 of the Banking Code provides:
Before we offer or give you a credit facility (or increase an existing credit facility), we will exercise the care and skill of a diligent and prudent banker in selecting and applying our credit assessment methods and in forming our opinion about your ability to repay it.
Clause 25.1 was considered by the Court of Appeal in Doggett v Commonwealth Bank of Australia.[37] At first instance,[38] the trial judge determined that cl 25.1 applied to certain guarantees and that a bank had breached the clause because the information provided to the customer disclosed on its face that it would not be able to service or repay the loan.[39] In the circumstances of the case, cl 25.1 made clear that the relevant enquiry concerned the borrower’s own ability to repay the loan.[40] The trial judge further concluded that the breach of cl 25.1 had caused the guarantors to suffer loss because, but for the breach, the bank would not have advanced the loan. The bank, however, succeeded at first instance because it had obtained releases from liability under the Banking Code from the guarantors.
[37](2015) 47 VR 302 (‘Doggett’).
[38]Commonwealth Bank of Australia v Doggett [2014] VSC 423.
[39]Ibid [156].
[40]Ibid [159].
The Court of Appeal, largely upholding the trial judge’s findings, unanimously dismissed the guarantors’ appeal. It concluded that cl 25.1 formed part of the guarantees and that, although it was natural and appropriate to take into account the guarantors’ financial position and the borrower’s ability to call upon these or any other resources, the assessment obligation principally related to the borrower’s capacity to repay the loan. The bank breached the assessment obligation toward the guarantors because the circumstances indicated that the borrower was unable to repay the loan.[41]
[41]The bank had wrongly assumed that the guarantors had $150,000 more in working capital than they actually had. The bank also possessed an accounting firm’s report demonstrating that the borrower had failed to account for the need to employ personnel to manage the investment properties and provide them with rent-free accommodation.
In relation to the construction of cl 25.1, McLeish JA (with whom Whelan JA and Garde AJA agreed on this point)[42] stated:[43]
Clause 25.1 does not presuppose or require that a bank must form an opinion that a borrower will be able to repay the loan. Rather, cl 25.1 requires care in the formation of an opinion as to whether a borrower will be able to repay the loan. The bank may take due care in forming an opinion as to whether a borrower can repay a loan and decide that, although it is possible that the borrower may not be able to repay the loan, it will offer the loan in any event. …
[42]Doggett (n 37) 306 [8], 353–4 [218].
[43]Ibid 342 [163].
It followed that any failure to comply with cl 25.1 went to the manner in which the bank applied its credit assessment methods and formed its opinions about the company’s financial position.[44] ‘Clause 25.1 is concerned with those processes and the forming of that opinion’.[45] Because it did not create a pre-condition to the granting of the facility that the bank should form an opinion that the borrower was able to repay the facility, simply proving that the borrower could not have complied with the facility did not mean that the bank’s decision to offer the facility was necessarily a result of the breach of that clause. These were matters with which Whelan JA and Garde AJA agreed.[46]
[44]Ibid [164].
[45]Ibid.
[46]Ibid 306 [8] (Whelan JA), 354 [219] (Garde AJA).
The Court was divided however on the treatment of the evidence. In considering the causal nexus, McLeish JA was not satisfied that, in the absence of the breach, the bank would not have agreed to lend to the company. His Honour held that the evidence ‘demonstrate[d] that, even if the Bank had ascertained the appellants’ true financial situation, the evidence still does not establish that it would have refused the loan’.[47]
[47]Ibid 347 [187].
Whelan JA (with whom Garde AJA agreed) appeared to hold a more pragmatic view about the realities of lending. His Honour stated that:[48]
McLeish JA’s observations upon the effect of cl 25.1, and upon other potential sources of funding and the level of security are valid considerations but, in my view, they should be tempered by the consideration that whatever recourse there might be to other sources of funds (by compulsion under guarantees or subject to the agreement of others) or to security, the capacity of a borrower to service a loan must remain a fundamental consideration. A conclusion that a loan would not have been made to a borrower who had a demonstrated incapacity to meet the required payments by a significant margin is not one which would be ordinarily in doubt, notwithstanding potential recourse to guarantors, other parties or security.
[48]Ibid 307 [12].
Whelan JA held that, ‘as a matter of probability’, the bank would have refused the loan application had it not made the errors it did.[49] His Honour stated that ‘[i]f the misconception [about the financial analysis which the appellants supplied] had been revealed, as it ought to have been, it seems most unlikely any relevant similar advance would have been made’.[50]
[49]Ibid 309 [26].
[50]Ibid.
Garde AJA agreed with Whelan JA’s reasons, finding that:[51]
But for the Bank’s misunderstanding of the [financial analysis] — this misunderstanding being a breach of cl 25.1 — it is unlikely that the already marginal loan application would have been approved in either its original or a reworked form.
[51]Ibid 354 [219].
Clause 25.2
Clause 25.2 of the Banking Code provides:
With your agreement, we will try to help you overcome your financial difficulties with any credit facility you have with us. We could, for example, work with you to develop a repayment plan. If, at the time, the hardship variation provisions of the Uniform Consumer Credit Code could apply to your circumstances, we will inform you about them.
Judicial consideration of cl 25.2 has been sparse. In Marsden v DCL Developments Pty Ltd (No 3),[52] Davies J doubted whether the clause imposed any enforceable obligation given that it contained what were described as ‘vague and amorphous concepts such as “try to help you overcome your financial difficulties”’.[53]
[52][2016] NSWSC 1795.
[53]Ibid [78].
Contrary to the plaintiffs’ submissions, his Honour did not determine that the clause imposed an obligation to use best endeavours and to leave no stone unturned. His Honour stated that, assuming that the clause did impose an obligation commensurate with ‘using best endeavours’, he was entirely satisfied that the bank had complied with the obligations. His Honour also observed that ‘the bank was not obliged to ignore its own interests when it tried to help’.[54]
[54]Ibid [82].
In Commonwealth Bank of Australia v Shannon,[55] Sackar J concluded that cl 25.2 could not be deployed to disentitle a bank from relying on any alleged breaches of the loan facilities and the Banking Code was clearly not intended to have that effect.[56]
[55][2013] NSWSC 1076.
[56]Ibid [296]–[298].
C. THE CLAUSE 25.1 CLAIM
Four contraventions by Westpac of cl 25.1 of the Banking Code[57] are alleged. They relate to the following credit facilities provided by Westpac to companies in the Butera Group:[58]
(a)the loan of $780,000 provided to Tomlak on 1 October 2010 for the purchase of Culcairn Drive;
(b)the loan of $458,000 provided to Benafield on 24 December 2010 for the purchase of Thames Street;
(c)the loan of $550,000 provided to Benafield on 7 April 2011 for the purchase of Plenty Road; and
(d)the loan of $1 million provided to Benafield in June 2012 in relation to the purchase of Darebin Road.
[57]Clause 25.1 is out in [62] above.
[58]It was also submitted by the plaintiffs that Westpac had breached cl 25.1 in relation to the provision of finance to Tomlak for the purchase of Deane Street. No such claim was pleaded by the plaintiffs and Westpac objected to the submission on that basis. No application to amend was made by the plaintiffs. I have accordingly disregarded this claim.
It is convenient to first consider the contravention alleged in relation to the loan advanced for the purchase of Culcairn Drive, followed by the alleged contravention in relation to the loan advanced for the purchase of Darebin Road. I will then consider together the alleged contraventions in respect of the loan facilities provided to Benafield for the purchase of Thames Street and Plenty Road. Those alleged contraventions raise common issues, including whether they are barred by the Limitation of Actions Act 1958.
C.1 Culcairn Drive
The pleaded case of contravention of cl 25.1 is that Westpac failed to exercise the care and skill of a diligent and prudent banker in selecting and applying its credit assessment methods and in forming its opinion about Tomlak’s ability to repay this loan because it ‘failed to diligently and prudently take into account’:
(a)the need for Tomlak to obtain construction finance to develop the land in order to promptly repay the loan advanced to purchase Culcairn Drive;
(b)the cost to complete the development, the likely sales income to be achieved from the development and the likely timeframe of the development of the land; and
(c)the inability of Tomlak to repay the loan.
Westpac’s defence to this claim fixed upon the obligation imposed on it by cl 25.1 in ‘selecting and applying our’ credit assessment methods in forming its opinion about Tomlak’s capacity to repay. It contended that cl 25.1 did not require it to create or devise new credit assessment methods, or to use such methods which were not already in place. In the context of the purchase of Culcairn Drive, it was submitted that there was no contravention of cl 25.1 because there was only one credit assessment policy for Westpac’s credit officers to select and because there can be no doubt that that policy was properly applied when assessing Tomlak’s request for finance.
I accept Mr Tyndall’s evidence that, between 2010 and at least 2014, Westpac had no dedicated lending policy for the purchase of a block of land for potential use as stock for future development. His evidence was that a purchase of that type was treated like any other purchase of a house and land. In October 2010, Westpac’s policy relevant to the purchase of residential house and land required it to apply a loan to value ratio of 80% and to undertake a simple assessment of the customer’s ability to service and repay the loan. I further accept Mr Tyndall’s evidence that Westpac applied this policy in relation to the purchase of Culcairn Drive.
Mr Tyndall also gave evidence that, at different times, Westpac has had policies in relation to the provision of finance for development or construction funding. One such policy entitled ‘Property Development’ was expressed to be valid in November 2010. The parties proceeded on the basis that that version of the Property Development policy was in place at the time of the purchase of Culcairn Drive.
It was uncontroversial that Westpac did not comply with the Property Development policy in relation to the purchase of Culcairn Drive; it did not seek to do so. It was also uncontroversial that the obligations imposed by that policy were very different to those imposed by the policy for the purchase of residential property which Westpac did apply.
It is therefore important to determine whether the Property Development policy did in fact apply in relation to the purchase of Culcairn Drive as submitted by the plaintiffs. If it did, then there would have existed at that time at least two materially different policies which Westpac was bound to exercise reasonable care in selecting between and then in applying.
Counsel for the plaintiffs placed particular emphasis on Mr Tyndall’s evidence that the Property Development policy applied to Tomlak, Raventhorpe and Benafield. So much is clear from the fact that these were property development companies and because the policy is expressed to cover ‘lending to property developers where typically’ lending is proposed to an entity ‘created specifically to acquire a land site on which a new property asset is to be developed’ or ‘an existing property asset for redevelopment, refurbishment or investment purposes’.
However, the question of present relevance is whether the Property Development policy applied specifically in relation to Tomlak’s request for funding to purchase Culcairn Drive. The principal evidence before the Court in relation to the Butera Group’s funding request to purchase Culcairn Drive and Westpac’s consideration of that request was a Sponsor Memo & Credit Approval Summary submitted by Mr Nicolaci on 20 September 2010,[59] as well as oral evidence given by Mr Butera.
[59]Given the parties’ extensive reliance on various aspects of the document, relevant extracts from the document are set out in Annexure 3.
The Sponsor Memo dated 20 September 2010 concerned the Butera Group’s purchase of four residential properties, one of which was Culcairn Drive. In it, Mr Nicolaci stated that, due to the nature of the industry that the Butera Group operated in, it was ‘require[d] to purchase stock … in advance so that the sites are held/ready for future development in a timely manner’. The Butera Group ‘intend[ed] to draw up plans to develop multi-units on each of the residential sites’ and that ‘[i]n the interim, the existing residences will be offered for short term rental until the relevant council planning permits are obtained’. Mr Nicolaci noted that the Butera Group had ‘been active in the last six months in both selling their existing projects (both undeveloped and developed) …’.
These aspects of the Sponsor Memo make clear that, although the Butera Group intended to develop multiple units on Culcairn Drive in the future, no actual development proposal was advanced when Tomlak applied for funding to purchase Culcairn Drive. Such a proposal was anticipated to be provided at a later time.
I do not accept Mr Butera’s evidence in cross-examination that, before he signed the contract to purchase Culcairn Drive, he discussed with Mr Nicolaci the amount of construction funding needed to develop the property. Mr Butera went so far as to claim that construction funding was ‘locked in’ on the day of purchase of Culcairn Drive, like every other one.
Mr Butera’s evidence that he discussed with Mr Nicolaci the amount of construction funding needed to develop Culcairn Drive before he purchased the property is also inconsistent with the evidence he gave about his conversation on 5 December 2013 with Mr Nicolaci when it was made clear to Mr Butera that no application for construction funding had been made. In his evidence about that conversation, Mr Butera stated a number of times that he may have been operating under a ‘misunderstanding’ about what Mr Nicolaci had said in relation to construction funding. Mr Butera was clear in his evidence that this misunderstanding was for a period of approximately six months before his conversation on 5 December 2013. He gave evidence that he said to Mr Nicolaci during the conversation on 5 December, ‘What, now you’re going to put the finance application up when 6, 7 months ago we discussed that it was going up’.
Mr Butera’s detailed outline of evidence which he signed before trial contained no reference to any discussion with Mr Nicolaci before he purchased Culcairn Drive. More significantly, he did not give evidence as to what specifically was said in this claimed discussion with Mr Nicolaci. His vague assertion that there was a ‘pattern in place’ does not assist. Moreover, any meaningful discussion about the required amount of construction funding would depend upon the number of townhouses to be developed on the site. This clearly was not known with any certainty at the time of purchase and would not be known until architectural plans had been prepared and planning approvals obtained. Mr Butera’s claim is also inconsistent with his evidence that it was while he was in the process of obtaining plans and permits for the development of Culcairn Drive[60] that he told Mr Nicolaci the total amount that might be needed for construction.
[60]At which he point he decided to reduce the number of townhouses on the property from nine or 10 to seven.
Contrary to Mr Butera’s evidence, I find that, before he signed the contract to purchase Culcairn Drive, Mr Butera relevantly told Mr Nicolaci two things in relation to the property: (a) that the purchase price was about $765,000 (to which Mr Nicolaci assented); and (b) that he was looking at building between seven and 10 townhouses on the property.
The Property Development policy is premised upon a customer providing Westpac with an actual proposal for the development of a property which has been, or is capable of being, fully costed. It refers to the need for ‘a well structured proposal’ which is to be assessed against various criteria including the adequacy of the financial resources to cover potential cost overruns to a minimum of 10% of ‘total project cost’. Similarly, the maximum loan amounts are identified as the lower of 75% of the loan to development cost ratio or 65% of the loan to value ratio. The customer is also required to demonstrate that adequate market demand exists for the ‘product being created’. Satisfactory levels of pre-sales are normally required. The policy requires a written feasibility analysis and quantity survey.
Although it purchased Culcairn Drive with an intention to construct a multi-unit development in the future, when it approached Westpac for funding to purchase the property, the Butera Group had not formulated a proposal for the development of the property so as to engage the Property Development policy. I therefore accept Westpac’s submission that there was only one credit assessment policy for its credit officers to select when Culcairn Drive was purchased, namely, its policy relevant to the purchase of residential property to which I have referred. As I have noted, it is uncontroversial that Westpac applied that policy.
This analysis is not however dispositive of whether Westpac contravened cl 25.1 of the Banking Code in relation to the provision of finance to purchase Culcairn Drive. Clause 25.1 is expressed to require the exercise of due care and skill in the selection and application of a bank’s credit assessment methods and in the formation by the bank of its opinion about the lenders ability to repay it. The latter is the ‘critical inquiry’ required by the clause.[61] Clause 25.1 ‘requires care in the formation of an opinion as to whether a borrower will be able to repay the loan’.[62] The exercise of due care and skill in the selection and application of credit assessment policies is plainly likely to be significant in the formation of that opinion. However, it does not necessarily follow in all cases that the exercise of due care and skill in the selection and application of credit assessment policies will have the consequence that the opinion about a borrower’s ability to repay a loan will have been formed with due care. Much will depend on the circumstances of the case.
[61]Doggett (n 37) 332 [119] (McLeish JA).
[62]Ibid 342 [163] (McLeish JA).
To construe cl 25.1 otherwise would be to render the application of the important obligations imposed by it as being solely dependent on the prevailing state of affairs in relation to credit assessment policy within particular financial institutions from time to time. The content and application of such policies is likely to vary between financial institutions. It cannot have been intended that, in determining with due care the critical issue of a lender’s ability to repay a loan, it will be sufficient for a financial institution to do no more than exercise due care in selecting and applying credit assessment policies where, for example, those policies are manifestly deficient or ill-suited. Such an approach does not require a bank to create new credit assessment methods; it means that the requirement of due care in forming an opinion about a borrower’s capacity to repay will depend on the circumstances at hand and is not necessarily confined to the selection and application of credit assessment polices.
For these reasons, despite my conclusion that Westpac’s policy relevant to the purchase of residential property was the only credit assessment policy for its credit officers to select when Culcairn Drive was purchased and that they applied that policy in relation to Tomlak’s funding request, it remains necessary to determine whether Westpac exercised due care in forming its opinion about Tomlak’s ability to repay the loan provided to purchase the property.
The contention that Westpac failed to exercise reasonable care in forming its opinion about Tomlak’s ability to repay the loan was advanced principally by reference to expert evidence given by Evan Armstrong, an expert in banking practice. In his evidence, Mr Armstrong set out what he referred to as the ‘common practice’ of a banking institution bound by the Banking Code in assessing ‘the provision of funding to a developer for the purchase of a multi-unit residential development site’. Before considering that evidence, it is convenient to deal with a number of complaints advanced by Westpac about Mr Armstrong’s evidence.
First, I accept that, because Mr Armstrong has had no relevant experience in applying provisions of the Banking Code, it is appropriate to approach his opinions with some caution.
Secondly, it was submitted that, because Mr Armstrong’s opinions were expressed in relation to the ‘common practice of a banking institution bound by the code’, his evidence did not engage with cl 25.1, was irrelevant and outside the obligations imposed by the Banking Code.
As I have already noted, Westpac’s obligations under cl 25.1 of the Banking Code extend to exercising reasonable care in forming an opinion about a customer’s ability to repay a credit facility. As I have explained, the answer to that question is not limited to a consideration of the selection and application of a bank’s existing credit assessment policies. Furthermore, the obligation to exercise the care and skill of a diligent and prudent banker imposes an objective standard in the formation of an opinion about a lender’s ability to repay a loan. Mr Armstrong’s opinions expressed by reference to the ‘common practice of a banking institution bound by the code’ are accordingly relevant and Westpac’s submissions are rejected.
Thirdly, Westpac submitted that Mr Armstrong’s evidence was not aligned with the actual request made for funding to purchase Culcairn Drive. This objection is rejected. Mr Armstrong’s evidence concerned his opinion about the common practice of a banking institution ‘in the assessment for the provision of funding to a developer for the purchase of a multi–unit residential development site’. That description fairly describes Tomlak’s request for funding to purchase Culcairn Drive. Although Tomlak did not request construction funding in seeking approval of a loan to purchase Culcairn Drive, it was purchased with an intention to develop it in the future as a multi–unit residential site, which purpose was known by Westpac. It was, as Mr Armstrong agreed, an example of ‘land banking’ and involved the purchase of a ‘speculative development site’. The fact that there was no firm development proposal when Culcairn Drive was purchased does not alter this conclusion.
Fourthly, an issue arose as to the relevance of Mr Armstrong’s evidence in light of certain evidence given by Geoff Green, a banking expert called by Westpac. In Mr Green’s opinion, Mr Armstrong’s evidence about the common practice of banking institutions in assessing funding applications to developers for the purchase of multi-unit residential development was ‘best practice’ for developers undertaking larger residential or specialist commercial developments. Mr Green did not consider that the various steps and actions identified by Mr Armstrong (set out below) were either ‘market standard’ or necessary where the request was to finance the acquisition of a residential or small commercial property and where the rental return on the property would service a large portion of the loan repayments. Mr Green considered the Butera Group to be a small to medium sized property developer and the proposed development at Culcairn Drive to be small in scale. Although he accepted that all of the prudential steps and actions identified by Mr Armstrong were generally relevant, in his opinion, their applicability depended upon matters including the complexity and size of a project and the lender’s knowledge about the borrower from past dealings. As will become apparent, it is largely unnecessary for me to resolve this debate.
The actions or steps identified by Mr Armstrong as being the primary matters comprising the ‘common practice’ of a banking institution in assessing the provision of funding to a developer for the purchase of a multi-unit residential development site are set out below. In relation to most of these actions or steps, I have also set out below Mr Armstrong’s evidence in relation to the Butera Group in the context of its business and operations in 2010.
(a)To be careful — by undertaking a range of prudent measures and considerations in the assessment of any development site acquisition lending proposal in order to protect the interests of both the developer and the banking institution.
(b)To undertake an appropriate level of financial analysis of the developer and any supporting guarantor in order to satisfy itself in respect of the developer’s financial capacity to satisfactorily service and repay the associated loan.
·Mr Armstrong’s evidence was that, in considering the Butera Group’s request for funding to purchase Culcairn Drive, it would have been important for Westpac to understand the Butera Group’s overall financial condition and cash flow.
·Mr Armstrong also identified that it would have been important for Westpac to understand the financial position of Kimpal in particular, as it was the Butera Group’s main operating entity. The need to understand Kimpal’s financial position also arose because it had previously made short-term overdraft requests and because it was behind in its statutory reporting obligations.
(a) caused their own loss; and/or
(b) failed to mitigate their loss?
ANNEXURE 2
Purchase and proposed development of properties
Each of the properties purchased by the Butera Group which are relevant to the plaintiffs’ claims are considered separately below, broadly in order of their purchase.
Broadway
1.Benafield became the registered proprietor of Broadway on 27 June 2007. It purchased the property for $726,000, using funding provided by Westpac in the amount of $460,000 secured by a registered mortgage over the property in favour of Westpac.
Deane Street
2.Tomlak purchased Deane Street on 16 March 2010 for $1,885,000. In the following month an independent valuer valued the property at $1,780,000. The purchase of the property was, in part, funded with a loan from Westpac in the amount of $1,400,000, secured by a mortgage in its favour. Tomlak became the registered proprietor of Deane Street on 27 May 2010.
3.At the time of purchase, Deane Street was comprised of six subdivided residential units and land at the rear of the property which had the potential to be subdivided into a further five residential units. The Butera Group intended to undertake cosmetic works on three of the existing six units, with such work to be completed within six weeks of settlement of the purchase of the property. When the plan of subdivision of the rear land had been re-approved, the Butera Group intended to offer the existing six front units for immediate sale, with the construction of the new units at the rear to commence in October 2010.
4.Prior to purchasing Deane Street, Mr Butera rang Mr Nicolaci and told him of his interest in the property and the purchase price of the property.
5.The refurbishment of the existing units at Deane Street was completed in about August 2010 at a cost of approximately $200,000. However, the Butera Group encountered significant complications in the further development of the property.[110]
[110]Essentially because the rear townhouses were required to be constructed prior to the local council issuing a statement of compliance which was needed to subdivide the front six units. A statement of compliance was necessary in order for separate titles to be issued for the units proposed to be developed at the rear of the block.
Culcairn Drive
In addition to purchasing Deane Street in March 2010, on 18 March 2010, Tomlak purchased Culcairn Drive for $765,000.
On 1 October 2010, Westpac approved Tomlak’s request for finance to purchase Culcairn Drive. Westpac advanced $780,000 to Tomlak to that end, being $15,000 more than the purchase price for the property, secured by a mortgage in its favour over the property. The loan provided by Westpac was an interest-only facility and for a term of 18 months. Settlement occurred on 8 October 2010 and Tomlak became the registered proprietor of the property shortly thereafter. At the time of purchase, there was an existing single dwelling on the property.
Tomlak obtained a planning permit for the development of seven townhouses on Culcairn Drive on 20 October 2011.
On 2 April 2012, Westpac agreed to extend the loan facility used to fund the purchase of Culcairn Drive to 1 October 2013.
On 5 April 2012, Mr Butera on behalf of Tomlak entered into ‘off-the plan’ contracts with third party purchasers for the purchase of two of the seven townhouses to be constructed at Culcairn Drive. Contracts of sale in relation to the remaining five units were entered into in August 2012, April 2013, July 2013, and October 2013.
Further findings in relation to the purchase of Culcairn Drive are set out in Section C of the reasons for judgment.
Thames Street
Benafield purchased Thames Street on 16 October 2010 for $573,000. Before purchasing the property, Mr Butera spoke to Mr Nicolaci about its price and, in a very general way, about the possibilities for its development. He spoke again to Mr Nicolaci a few days after the purchase about his intention to build four townhouses on the property. The topic of construction funding for the development of the property is likely to have arisen in a general way in that conversation. However, I reject Mr Butera’s evidence that he told Mr Nicolaci that construction funding of $600,000 was required for its development, whether before or shortly after its purchase.
On 24 December 2010, Westpac and Benafield entered into a Business Finance Agreement pursuant to which Westpac provided a number of loan facilities to Benafield, including one in the amount of $458,000 in respect of the purchase of Thames Street. The loan was for a term of 18 months and was secured by a registered mortgage over the property. Settlement on the purchase of Thames Street occurred on 10 February 2011.
In support of Benafield’s application for finance, Mr Nicolaci prepared a Sponsor Memo and Credit Approval Summary which recorded that the Butera Group was undecided about whether to develop Thames Street and another property, or to offer them for sale once planning permits had been obtained. Although Mr Butera denied that this was the case in relation to Thames Street, I consider that the Sponsor Memo and Credit Approval accords with what Mr Butera actually told Mr Nicolaci at the time. I consider that the Butera Group remained undecided in this regard while it waited on the provision of planning approval in 2011 and 2012.
The Butera Group obtained a planning permit to construct four units on Thames Street on 19 September 2012. Mr Butera provided the permit to Mr Nicolaci and discussed the proposed development with him. The existing dwelling on the property was demolished a month or two later.
Plenty Road
Benafield purchased Plenty Road on 7 December 2010 for $750,000. The property was purchased with existing plans and permits for the construction of 21 units for student accommodation. Mr Butera’s evidence, which I accept, was that he spoke to Mr Nicolaci prior to or at the time of the purchase and obtained his approval to purchase the property to develop it for this purpose.
The purchase of Plenty Road was partly funded by a loan from Westpac for $550,000, secured by a mortgage over the property. The loan was for a term of 15 months and was one of the facilities contained in a Business Finance Agreement dated 2 April 2011 accepted by Benafield on 7 April 2011. Settlement of the contract to purchase Plenty Road occurred on 3 May 2011.
Mr Butera experienced difficulties finding purchasers for the proposed student accommodation. He therefore decided to instead develop several townhouses on the property. In about October 2012, the Butera Group submitted for approval plans for the development of 10 townhouses at Plenty Road.
Royal Parade
In September 2011, Westpac provided funding of $500,000 to assist with the purchase of Royal Parade, secured by a mortgage over the property. Raventhorpe became the registered proprietor on 7 October 2011. It subsequently refurbished the existing dwelling at the front of the property and constructed two townhouses at the rear.
Darebin Road
Benafield purchased Darebin Road on 2 November 2011 for $1 million. Mr Butera had sought and obtained Mr Nicolaci’s verbal approval to place a deposit of $80,000 on the property, using funds from Kimpal. He intended to develop Darebin Road into four residential units.
Despite its original intention to develop Darebin Road, in about May 2012, the Butera Group decided to on-sell Darebin Road when planning permits for its development were issued. To that end, the Butera Group sought funding from Westpac for the whole purchase price of $1 million for a term of nine months to allow it to complete the sale of the property.
On 2 June 2012, Westpac agreed to provide funding for the whole of the purchase price of Darebin Road secured by a mortgage in its favour over the property. Benafield became the registered proprietor of the property on 19 June 2012.
On 21 August 2012, the Butera Group obtained a planning permit for the development of four units on Darebin Road.
ANNEXURE 3
The Sponsor Memo & Credit Approval Summary dated 20 September 2010 relevantly provided as follows:
Preamble
The Butera Brothers have purchased four residential properties on long purchase settlement terms which are now due to be settled.
Due to the nature of the industry that they operate in, clients require to purchase stock (residential properties) months in advance so that the sites are held/ready for future development in a timely manner.
The purchases are timed to settle after a reasonable timeframe provided for by clients when they expect to settle their existing projects. Having operated within the building industry for over 20 years, clients have a very good understanding of forecasting their work. This estimation that clients try and calculate can be undone if there are any unforeseen delays encountered in their existing development projects.
Over the last few months clients have experienced delays in a residential development being settled as the local council in Frankston did not provide the compliance certification in order that the Plan of Subdivision can be approved. Matter has been subject to a protracted negotiation process since June and only in the middle of September did the council agree to the works being completed so that the compliance certification can be issued. This delay has placed a strain on the clients cash resources given the sale proceeds have not eventuated as planned.
To alleviate the clients strain on cash flow, we have provided a Temporary Overdraft of $500 until the middle of October when the settlements of the 6 units are expected to occur. Client will receive approximately $500 after the Bank facilities, including the Temp O/Draft is cleared.
This development was anticipated to be settled by August and client arranged his ongoing work/future projects around this expected timeframe - given the lead in time, clients in this industry require to purchase stock months in advance so that the sites are held/ready for future development.
This is demonstrated as follows:-
Month
Action
Mar Client anticipates project to complete in July/August Apr Purchases further sites for future development with a settlement date in Sep/Oct Jul Delays encountered with projects which has impacted on clients ability to complete existing projects/future projects already committed to Aug/Sep Excesses in trading account. Equity anticipated from the schedules sale settlements has not yet materialised. Temporary Overdraft provided …
Clients have also sold a number of existing projects to balance out the four purchases that they now require funding assistance for. Details of the projects sold are as follows:-
…
Total Gross Sales $7,491 Related Bank Debt to clear $4,278 Gross funds to client $2,813
To facilitate the clients contribution/equity required to settle the four residential properties, we will rely on the equity available from the Group’s existing properties held as security as well as increasing their permanent overdraft facility n/o Kimpal Pty Ltd (033-073 25-5320) to $585 (+$275).
The four residential properties that have been purchased are in the suburbs that the clients are familiar with and have had successful projects in the past. Clients intend to draw up plans to develop multi units on each of the residential sites (subject to council approval) In the interim, the existing residences will be offered for short term rental until the relevant council planning permits are obtained. This process can vary from six months to eighteen months depending on the plans – clients are well known to the local council and only submit requests that comply with the local planning guidelines without the need to apply to VCAT for a ruling (which delays their process)
The properties have been purchased in the Group’s property holding entities of Tomlak Pty Ltd (ATF The Tomlak Discretionary Trust) and Benafield Pty Ltd (ATF The Benafield Property Trust).
Details of the purchases are as follows:-
Borrower Tomlak Pty Ltd (ATF The Tomlak Discretionary Trust) Request 1 41 Culcairn Drive, Frankston Purchase Price $765 Gov’n Fees & charges $ 45 Less Own Contribution $ 30 Loan Required $780
Funding to be structured as follows:-
Borrower Tomlak Pty Ltd (ATF The Tomlak Discretionary Trust) Facility BBBL $780 (+$780) Repayment/Term Int Only for 18 months until 1/4/2012 then review. Interest Rate BBBR + 1.15% p.a Line Fee 1.15% p.a Est Fee $3,120-00 Request 2 35-37 Cheddar Road, Reservoir … TAE to this entity $4,781 (+1,606) Security As Held together with a registered 1st mortgage over the properties being purchased (Refer to Security Schedules F for full details) Secy L/V $4,781 LLVR 100% SQI FS Grading D49 (N/C)
…
Approval is recommended.
Customer rationale
…
As detailed in proposal above, clients have purchased four residential properties with the view to obtaining the relevant planning approvals to develop them into multi unit sites. A process that the clients have undertaken on numerous occasions and with our support.
Under advice from their external accountant, the purchases of the said properties will be in the Group’s property holding entities with two being directed to Tomlak Pty Ltd (ATF The Tomlak Discretionary Trust) and two directed to Benafield Pty Ltd (ATF The Benafield Property Trust).
The development/construction of the units will be completed by the Groups registered building entity, Kimpal Pty Ltd.
The Butera brothers have a longstanding relationship with us and these four purchases are in suburbs that the clients have previously completed residential developments. Demand for the medium density houses in these suburbs is high and clients anticipate that they will obtain planning approval to construct up to four units on each of the sites.
Our clients have shown that they are highly experienced in completing residential developments of this nature.
…
SM also confirms that the refurbishment works to the six units in Deane Street, Frankston had been completed. In Approval of 26/5/2010, CCM detailed that SRM was to monitor the progress of the planned renovations and report in the next submission. SRM can now confirm that the renovations have since been completed …
Business Risks
…
To date external accountant has not yet completed the Groups 2009 financial statements. Originally were set to be finalised by July this year however, accountant has experienced delays in collating all the required information on the clients projects completed in the 2008/2009 financial year. The 2009 financials are themselves historically and accountant is also working towards delivering both 2009 and 2010 financials by end October this year. This latest information will be meaningful data which we can compare clients previous trading results. Although disappointing, we do have comfort with the knowledge that all of the clients development projects are channelled through our trading account and we control the disbursement of funds.
Clients have displayed very good account behaviours, with the exception of a short period in August this year when they first experienced delays from the Frankston council in providing the relevant certificate of compliance so that they could settle the six unit development. When it became obvious that matter would not settle anytime soon, we provided assistance (via a Temp O/Draft).
Clients have been active in the last six months in both selling their existing projects (both undeveloped and developed) as well as positioning themselves for future residential projects as their works is finalised.
This Sponsor Memo details the Gross realisations in numerous projects that clients will receive – with funds going towards debt reduction and the balance will be re-invested into the business. Clients have simple lifestyles and do not spend money on items of extravagance.
Although TAE will now increase to $10,769 (+$2,609) clients have numerous sales which will significantly reduce our position over the coming months. Details are as follows:-
…
Total Gross Sales $5,116 Related Bank Debt to clear $3,155 Gross funds to client $1,961
TAE will reduce to $7,614 (-$3,155 from the above sales).
Not included in the above sales, as they settle during September, were three properties …, which reduced Group TAE by $1,123.
Directors have also taken steps to off load further properties which will also see our debt reduced. Details of the sites being sold are:-
Deane Street, Frankston, expected in the new year, Exposure to this site is $1,200
…
As well as carrying out their own development projects, clients also undertake private order jobs that also supplements their cash flow. Are in the final stages of two order jobs in Glenroy and Safety Beach.
Clients are also awaiting a Plan of Subdivision to complete at the LTO on a five unit development in William Street, Glenroy. …
Clients have demonstrated their ability to service proposed debt levels. In recent times, we have extended funding to >$11,000 to clients over various projects.
The gross profits from the above sales that have been tabled above will cover the ongoing servicing of the clients facilities as well as contribute to the development of the sites on hand. Their strategy to concentrate on select projects (both their own speculative sites as well as order jobs) and sell down assets to better position themselves is their main driver.
These are long term clients who have demonstrated their ability to successfully develop residential properties. All facilities have been conducted within approved arrangements.
…
Short Form / Full Analysis Only
Risks analysis
…
As with clients other projects, interest costs are to be met from proceeds of sale of Group’s other investments/development over the remaining term of the facility.
…
Whilst it is acknowledged that the income is primarily from the development profits of the numerous projects completed, clients also had a strong performance in 2009 – something that we can verify due to the numerous development projects that the clients completed with ourselves. As previously advised, the financial statements for year ended 30/6/09 are not yet completed by external accountant.
As detailed in the above section, Business Risks, the following reduction to our TAE is scheduled from the settlements/anticipated sales;-
…
The net funds generated from the above sales (both firm and anticipated) will then provide for servicing of the Group facilities as well as equity for their other development opportunities.
…
ANNEXURE 4
Mr Murphy’s email to Mr Butera & Mr Karafili dated 13 March 2014
Greg
As requested, we have summarised the key points from our meeting on 21st February relating to the bank’s requirements to assess your request to fund developments in Frankston South and Hadfield.
We confirm that at our meeting, David Hinves advised the following:
Any potential funding needs to fit within the bank’s policies.
As a first point, a bank panel QS (Quality Surveyor) would need to be appointed to analyse the projects. Information would need to be supplied to the QS to facilitate his review. These costs would be at Greg’s expense.
Next, the bank would need to review the results of the QS’s analysis to determine if funding was feasible from the bank’s perspective.
If fresh moneys are to be advanced, the facilities will need to be re-documented, which will include the Bank entering into a deed with the borrowers and guarantors cross linking all securities (amongst other matters). Our legal advisers will need to prepare this deed.
It would need to take no longer than 3 months to complete and settle each project, with a total refinance of all remaining facilities effected no longer than 2 months thereafter.
Both yourself and Mitch confirm that sunset extensions have been executed for Frankston site and that Mitch would on forward confirmation to the bank. However, these have not been provided to us.
Mitch also advised that he would prepare a cash flow for each project (These have not been provided) and confirm what costs to date have been expended on the projects. David advised that we would review outstanding costs and determine which ones we would consider funding, subject to addressing the matters set out above.
Separately, regarding the prospective settlements for Royal Parade, Reservoir and Netherbrae Road, Frankston, the bank will take all proceeds including deposit funds after usual costs at settlement to reduce bank debt.
The following steps have been taken since the meeting:
To start the process a (bank panel) QS was appointed by the bank on the 26th of February. QS is Richard Vaughan.
Richard has made requests directly to Greg Butera for the following information:
2 Thames St, Hadfield
1. Building Permit
2. Structural drawings
3. Civil drawings
4. Building contract
5.Certificate of currency for contracts works insurance & Public liability insurance
6. Domestic Building Insurances
7. Specification
8. Break down of the contract sum or budget
9. Feasibility analysis
10. Valuation report
41 Culcairn St Frankston South
1. Building Permit
2. Architectural drawings
3. Structural drawings
4. Civil drawings
5. Building contract
6.Certificate of currency for contracts works insurance & Public liability insurance
7. Domestic Building Insurances
8. Specification
9. Break down of the contract sum or budget
10. Feasibility analysis.
To date the QS has not been supplied with the information requested to conduct his assessment which has stalled the bank’s assessment of your funding request. Multiple requests from the QS and the bank to Greg to provide the information have been made but have been unanswered.
As advised in our meeting, without a detailed report from the QS the bank cannot formally assess any funding requests.
As advised in our letters to the borrowers dated 11 March 2014, various facilities are in default and the bank’s rights are fully reserved. In these circumstances, the bank cannot allow the funding request to remain indefinitely stalled.
Your inability of you to provide information in a timely manner will leave the bank with little option but to reconsider the entire position.
The bank advises that all information required by the QS to conduct his assessment should be provided by no later than close of business Wednesday 19th of March. Should this not be provided, the bank will not proceed with any further consideration of the funding requests.
In the event that any funding was approved and relevant documentation executed, the bank would look to regularise current excess positions by establishment of appropriate limits. This will then mean that accounts would be in order from this date. The accounts would then need to be maintained to stay in order.
The bank reserves all of its rights.
Trusting this clarifies.
Regards
ANNEXURE 5
Westpac’s Indicative Funding Proposal
Indicative Funding Structure
Time to complete 4-6 weeks based on Greg Butera’s comments Funding costs $260,000.00 For paying unpaid creditors associated with the project only (Mitch’s spreadsheet) $20,000.00 Living allowance until total refinance effected $783,000.00 Construction Costs to complete the project based on QS feedback $39,000.00 GST to cover timing differences 30 days $100,000.00 To cover interest accruing on all group facilities from date of draw down until refinance is effected $1,202,000.00 Total Any facility would include the following key terms:
1. Estimated net proceeds are $2,272,800 as set out below.
Estimated End Value Gross $2,600,000.00 Minus GST $260,000.00 Agents costs est 2.2% $57,200.00 Legals estimated $10k $10,000.00 Net Total $2,272,800.00 Sale proceeds are to be applied as follows:
(a) Repayment of facility (ie $1,202,000).
(b) Repayment of facility establishment fee of $10,000.
(c) Repayment of land purchase $780,000.
(d) Payment of professional fees incurred:
(i)KordaMentha $25,000 estimated (To supervise the project until completion and verify progress claim/ payments);
(ii)Quantity Surveyor $10 - $15k estimated
(iii)Minter Ellison $60k estimated.
2.Remaining proceeds (estimated at $170,000) to be applied to permanent debt reduction at the bank’s discretion.
3. Facility will be documented by a new business finance agreement.
4. The group must enter into a Deed of Forbearance incorporating:
(a) Full cross-collateralisation of facilities and securities.
(b)Confirmation of KordaMentha’s role in supervising the Culcairn development.
(c)Bank will regularise facility limits to remove current arrears and excesses. This includes current excesses on the Kimpal overdraft. You will note that the funding includes $100,000 to cover interest on group facilities going forward until repayment of group debt as set out below.
(d)A repayment period for all remaining bank facilities of no longer than 3 months from the completion of the Culcairn development.
5.Confirmation there will be no further funds made available for living allowances.
The benefits to the group in proceeding down this path include:
·Successful finalisation of the Culcairn development;
·Ability to reduce group debt; and
·Regularisation of accounts to assist with refinance.
Please note that in order to progress any application for credit approval, I still need evidence of extensions in respect of the pre-sale contracts, and confirmation they are still valid.
I propose that we meet today to discuss the proposal as outlined above. Please confirm your availability at 2 pm
Finally, I note that we expect to receive costings from the QS tomorrow in respect of Thames Street.
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