JCCL Global Pty Limited v Foundry Innovations Limited
[2019] NZHC 1270
•4 June 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-2248
[2019] NZHC 1270
BETWEEN JCCL GLOBAL PTY LIMITED
Plaintiff
AND
FOUNDRY INNOVATIONS LIMITED
First Defendant
CHRISTINE FLORENCE DOMECQ
Second Defendant
Hearing: 4 June 2019 Appearances:
A W Johnson for the Plaintiff
No appearance for the Defendants
Judgment:
4 June 2019
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
Solicitors:
Martelli McKegg (A W Johnson), Auckland, for the Plaintiff
JCCL GLOBAL PTY LIMITED v FOUNDRY INNOVATIONS LIMITED [2019] NZHC 1270 [4 June 2019]
[1] Under a loan agreement made in May 2018, JCCL Global Pty Ltd, an Australian corporation, lent Foundry Innovations Ltd, a New Zealand company, AUD 250,000. Foundry’s director, Christina Domecq, guaranteed the loan. In August 2019, Foundry Innovations Ltd went into receivership. That was a default event under the loan agreement. JCCL Global called up the loan and made demand on Ms Domecq under the guarantee. JCCL Global began this proceeding in October 2018. It has applied for summary judgment.
[2] Foundry has taken no steps in the proceeding. Ms Domecq filed a notice of opposition and a statement of defence with the assistance of lawyers she had instructed. On 31 May 2019, Ms Domecq advised the court and the plaintiff’s lawyers that she was applying to the Insolvency Service to have herself made bankrupt. She did not appear at the hearing. At present, I have no information that she has yet become bankrupt. If she had been made bankrupt before this hearing, this proceeding would be stayed under s 76 of the Insolvency Act 2006. While she is not yet apparently bankrupt, the plaintiff is entitled to continue its claim against her. Even though Ms Domecq is no longer actively opposing the summary judgment application, the plaintiff must still satisfy me that she does not have an arguable defence.
[3] Ms Domecq was the director and shareholder of Foundry, which she describes as a technology investment company with investments in six businesses across New Zealand and Australia. It had been operating for three years. Her shareholding comes through her majority shareholding in Wild Logic Ltd which in turn had a majority shareholding in Foundry. She says that Foundry had a 70 per cent shareholding in another investment vehicle she is involved in, called The Fulcrum Group Pty Ltd. The Fulcrum Group Pty Ltd was planning an IPO (an initial public offering) in 2019. Fulcrum needed funds. She sought bridging finance. Because of the IPO, she did not want the loans to appear on the books of Fulcrum. That might upset the pre-IPO funding strategy. So she decided that Foundry, as the largest shareholder, would take on the outside loans and would on-lend to Fulcrum. JCCL Global was one of the sources of finance.
[4] Foundry had a financial advisor in Sydney, Mr Robert Crossman of Corpac Partners Pty Ltd Australia. Corpac was acting as financial advisor to arrange a sale of shares in Fulcrum, and as financial advisor to Fulcrum in relation to the IPO and the pre-IPO funding strategy. Mr Crossman was instrumental in arranging for JCCL Global to lend AUD 250,000 to Foundry and for Ms Domecq to guarantee that loan.
[5] The loan agreement is described as a “loan note”. As commercial loan agreements go, it is a relatively simple agreement. The parties to the agreement are JCCL Global, Foundry and Ms Domecq. She signed both as director of Foundry and in her own right as guarantor. The principal amount under the loan is AUD 250,000 repayable six months after the date of the agreement. The interest rate is 20 per cent over six months, an annual interest rate of 40 per cent. The only security for the loan is the guarantee by Ms Domecq. The agreement provides for default events. A “default event” includes when the borrower incurs any insolvency event. An “insolvency event” is defined to include the appointment of a receiver. The agreement is governed by Australian law, in particular by the law of New South Wales. The contract also contains a non-exclusive jurisdiction provision allowing claims to be brought in New South Wales. The funds were advanced on 9 May 2018, and I take that as the date of the loan agreement.
[6] JCCL Global has given evidence that the Foundry Innovations Ltd went into receivership on 2 August 2018. It called up the loan under provisions allowing acceleration in the event of default and called on Ms Domecq to pay under the guarantee. No payments have been made.
[7] In her notice of opposition, Ms Domecq says that the terms of the contract were unfair under part 2 division 2 subdivision B of the Australian Securities and Investments Commission Act 2001 (Cth). She also alleges unconscionable conduct on the part of JCCL Global, which is provided for under subdivision C of that part of that Act. She also alleges unconscionable conduct at equity, and she contends that the agreement contains an unenforceable penalty.
[8] None of these give her a defence to the claim for repayment of the principal amount of AUD 250,000. At best, they can only provide her with a defence to the claim for interest.
[9] As the contract is governed by Australian law, I need to say something about the evidence. While the court applies New South Wales substantive law to decide the parties’ rights and liabilities, it applies New Zealand law for the procedural aspects of the case. The plaintiff’s proceeding is under the High Court Rules. The summary judgment application is decided under Part 12 of the High Court Rules. New South Wales procedural law is not relevant to this claim. As to the substantive law, foreign law is a question of fact and needs to be proved. The conventional way of proving foreign law is to call an expert to give evidence as to that law. However, there is some relaxation of that requirement under s 144 of the Evidence Act 2008. For JCCL Global, Mr Johnson has tendered copies of relevant Australian legislation and extracts from an Australian text which I accept is a relevant authority giving useful guidance on the Australian Securities and Investments Commission Act 2001.1
[10] Subject to Ms Domecq’s defences, JCCL Global has satisfied me as to its cause of action. It has proved the loan, the default under the loan, and the non-payment by the defendants. Now for her defences. On a summary judgment application, the burden remains on the plaintiff to negate any affirmative defences raised by the defendant.
[11] The first defence is under division 2 subdivision BA of the Australian Securities and Investments Commission Act 2001. Section 12 BF says:
12BF The term of a consumer contract or small business contract is void if;
(a)The term is unfair; and
(b)The contract is a standard form contract; and
(c)The contract is;
(a)a financial product; or
(b)is a contract for supply, or possible supply, of services that are financial services.
1 Everett and McCracken, Banking and Financial Institutions Law (9th ed Thomson Reuters, Sydney, 2017).
[12] Mr Johnson accepted that the contract provided for a financial product, that is, the payment of money, to be repaid over time. He submitted, however, that the other requirements were not satisfied.
[13] A consumer contract is defined as a “contract at least one of the parties to which is an individual whose acquisition of what is supplied under the contract is wholly or predominantly an acquisition for personal, domestic, or household use or consumption”.2 I accept on the basis of Ms Domecq’s evidence that this was not a consumer contract. The funds were clearly borrowed for business purposes to provide on-funding to the Fulcrum Group to assist it towards the planned IPO. There is no personal or domestic element in the transaction at all.
[14]A “small business contract” is defined:3
(a)at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
(b)either of the following applies:
(i) The upfront price payable under the contract does not exceed
$300,000;
…
The plaintiff has not shown that the contract is not a “small business contract”. From Ms Domecq’s evidence, it appears that Foundry was little more than an investment vehicle for holding investments in other businesses and as such is likely to have employed fewer than 20 people. The upfront price, the amount advanced under the contract, did not exceed $300,000. Accordingly, it is necessary to consider whether the terms of the contract are unfair and whether the contract is a standard form contract.
[15]“Unfair” is defined in s 12BG:
(1) A term of a contract referred to … is unfair if:
(a) it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
2 Australian Securities and Investments Commission Act 2001 (Cth), s 12BF(3).
3 S 12BF(4).
(b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
(c) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
Section 12BH of the Act gives examples of unfair terms. The text, Banking and Financial Institutions Law, refers to these examples and notes that they can be put into three categories:4
1. unilateral provisions related to the variation, renewal or termination of the contract or permitting one party to avoid or limit performance of the contract;
2. unilateral assignment provisions where the rights of one party may be adversely affected without their consent; and
3. unilateral provisions restricting enforcement of the contract, such as limitations on liability, limitations on rights to sue or evidentiary limitations including provisions imposing an evidential burden on one party in proceedings relating to the contract.
[16] Mr Johnson submits that the contract in this case does not have any provision that equates to these unilateral elements. Notwithstanding that, s 12BH only gives examples of unfair terms. Ms Domecq’s complaint is with the interest rate. It remains arguable that an interest rate that operates in the way described in s 12BG(1) could be considered unfair. It is therefore necessary to enquire whether this case comes under the cumulative tests in that subsection.
[17] There is helpful context in an affidavit by a Mr Mark Guest, a Sydney chartered accountant. He has qualified himself as an expert. He says that in his career he has conducted a number of financial investigations. He has given evidence in court and is familiar with commercial and loan arrangements between corporate entities and investors. He says that in New South Wales, a lender of last resort loans, loans absent real estate security, “pay day” loans, debt factoring loans and bridging finance loans are more often than not agreed with very high interest rate charges. He says that in the circumstances of an IPO the interest rate would in many cases be of limited significance. A client needing $250,000 to finalise the raising of an amount of, say,
4 Everett and McCracken, above n 1, at 269.
$10 million, would in his view be most concerned with accessing the loan and ultimately the $10 million via the capital raising. He does not consider that the 40 per cent interest rate in this contract would be considered in New South Wales or Australia to be a penalty but would be considered a normal commercial loan arrangement, arising due to the considerable risk, and the lack of any real property security.
[18] I record these matters. The loan was arranged in circumstances where Ms Domecq was not able to access finance from normal sources. JCCL Global is not a financier. It is run by the director and his wife. It did not have its own standard form contract for loans. The contract was drawn up by Mr Crossman, acting as agent for Foundry and Ms Domecq. Mr Crossman had been looking for finance from a number of sources. He advised Ms Domecq that there were only two cases where he had been able to raise funds successfully. The loan was for a short term. If the IPO had been successful it stood to make very substantial gains for Ms Domecq. Conversely, JCCL Global was assuming considerable risk by advancing the funds to Ms Domecq. It was lending money for a short term, on the basis that if the IPO was successful, it would be repaid. But the chances of repayment were, at most, risky. There was the added risk that JCCL Global was lending money without any security except a personal covenant of Ms Domecq. Moreover, she was not in New South Wales but in New Zealand and therefore less accessible for enforcement purposes.
[19] In these circumstances and in the light of the evidence of Mr Guest, I do not regard the interest rate as unfair. It is relevant, of course, that Mr Crossman personally prepared the agreement and negotiated the rates, acting as agent for Foundry and for Ms Domecq. I regard the interest rate as reasonably necessary to protect the legitimate interests of the JCCL Global. I do not regard the enforcement of the interest rate as causing undue detriment so as to bring the case within the meaning of “unfair” under s 12BG.
[20] That section also addresses questions of transparency. When compared with many commercial loan agreements found in Auckland, the loan agreement is in reasonably plain language and easy to understand. There is no lack of transparency.
[21] Section 12BK of the Australian Securities and Investments Commission Act addresses standard form contracts. It sets out a number of matters to be taken into account in establishing whether an agreement is a standard form contract. It goes to whether one party has more bargaining power than the other, the extent of negotiations before the agreement was entered into, whether one party was required to accept or reject terms in the form in which they were presented, whether there was any effective opportunity to negotiate the terms, and whether the terms take into account specific characteristics of another party to the transaction.
[22] Taking those matters into account, the fact that the agreement was drawn up by Mr Crossman – not by JCCL Global – and that there had been a period of negotiation extending over some months before the agreement was entered into, I am satisfied that this was not a standard form contract so as to trigger the operation of s 12BF of the Act. In short, I am satisfied that Ms Domecq and Foundry Innovations Ltd do not have a defence under s 12BF.
[23] The next defence goes to unconscionable conduct. Ms Domecq has raised it in two ways. First, under the Australian Securities and Investments Commission Act, and second, under the general law. Section 12CA of the Act says:
(1) A person must not, in trade or commerce, engage in conduct in relation to financial services if the conduct is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories.
…
Similarly, s 12CB says:
(1)A person must not, in trade or commerce, in connection with:
(a) the supply or possible supply of financial service to a person; or
(b) the acquisition or possible acquisition of financial services from a person;
engage in conduct which is, in all the circumstances, unconscionable.
Section 12CC sets out matters the court may have regard to under s 12CB. These include matters such as the relative strengths of the bargaining position of the supplier
and the service recipient, whether as a result of conduct engaged in by the supplier, the service recipient was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier, and other matters.
[24]Ms Domecq alleges unconscionability because of these matters:
(a)the high interest rate;
(b)the terms of the loan were not transparent;
(c)the loan was not easily understandable;
(d)the terms of the loan were not explained to an acceptable standard, and were not explained to her;
(e)JCCL Global was not willing to negotiate the terms of the loan with her;
(f)the disparity in bargaining power;
(g)JCCL Global subjected her to unfair pressure;
(h)JCCL Global did not advise her to obtain independent legal advice; and
(i)the time given to her to repay the debt was unreasonable.
[25] None of those matters count against JCCL Global. What I have said about the interest rate as a matter of unfairness also goes to her unconscionability complaint. The terms of the loan were transparent. Ms Domecq is clearly an experienced businesswoman. She would have had no difficulty understanding the terms in this case. She was represented by an agent, Mr Crossman. She complains that he did explain to her that this was the best that he could do for her. That is recognition that there were obvious difficulties in obtaining finance for her, and she was dealing with a last resort lender. The mere fact that JCCL Global is a last resort lender is not a
reason for finding against it on unconscionability. Mr Frangieh’s evidence shows that the agreement was negotiated over time, with the agent Mr Crossman taking the leading part in drawing up the terms of the contract - an unusual aspect for a financier. There is nothing to suggest that Ms Domecq was under any special disability. There is no suggestion that JCCL Global exploited any vulnerability of Ms Domecq.
[26] There is guidance as to the application of subdivision C of the Australian Securities and Investments Commission Act in the judgment of Allsop P in Tonto Home Loans Australia Pty Ltd v Tavares.5 There, the President said:6
Aspects of the content of the word “unconscionable” include the following: the conduct must demonstrate a high level of moral obloquy on the part of the person said to have acted unconscionably; the conduct must be irreconcilable with what is right or reasonable; factors similar to those that are relevant to the CRA are relevant; the concept of unconscionable in this context is wider than the general law and the provisions are intended to build on and not be constrained by cases at general law and equity; the statutory provisions focus on the conduct of the person said to have acted unconscionably. It is neither possible nor desirable to provide a comprehensive definition. The range of conduct is wide and can include bullying and thuggish behaviour, undue pressure and unfair tactics, taking advantage of vulnerability or lack of understanding, trickery or misleading conduct. A finding requires an examination of all the circumstances.
[27] There is nothing in the circumstances of this case that suggests unconscionable conduct on the part of JCCL Global. That finding that there was no unconscionable conduct under the statute, also covers the question of unconscionable conduct at equity. As the President said in Tonto Home Loans, under the statute the concept may be wider than the general law. It follows that if conduct is not unconscionable under the Act, it cannot be unconscionable at equity either. For good measure, while I have not been given Australian case law on unconscionability, I will apply the presumption that the law is the same as unconscionability under New Zealand law. There is nothing in the circumstances of this case which make the agreement between JCCL Global and Foundry Innovations Ltd and Ms Domecq unconscionable at equity in New Zealand. In the absence of proof of Australian law, I apply the New Zealand test.
5 Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389, (2011) 15 BPR 29,699.
6 At 291 (citations omitted).
[28] Mr Johnson addressed me on whether the agreement contains an unenforceable penalty. He referred to the New Zealand Court of Appeal’s decision in Wilaci Pty Ltd v Torchlight Fund No.1 LP.7 That decision is relevant because the court was required to decide a question of penalties under New South Wales law. That involved considering the decision of the High Court of Australia in Paciocco v Australia and New Zealand Banking Group Ltd.8
[29] What emerges from the decisions of the High Court of Australia and the New Zealand Court of Appeal is that a provision is only considered a penalty if it imposes an obligation which is punitive in effect if it is applied only in consequence of a breach of a contract. In this case, there are no provisions in the contract that can be considered to impose some additional obligation on Foundry and Ms Domecq as a consequence of a breach. The sting of Ms Domecq’s complaint is the interest rate. But the interest rate remained constant, whether the contract had been complied with or had been breached. The problem for Ms Domecq is that the company was not able to repay the loan but the initial interest rate agreed when the loan was taken out continued to apply. She has not faced any additional obligation in consequence of any breach. Accordingly, any complaint about an unenforceable penalty stops there. It is not necessary to consider the matter any further.
[30] Ms Domecq has also claimed contribution. She seems to allege that there was something in the conduct of JCCL Global that was contributory negligence. Her complaint of contributory negligence does not apply in the context of a loan agreement where the lender asks to be repaid the funds advanced plus interest. Moreover, her complaints of contributory negligence go to non-compliance with the Australian legislation but I have held that there was no basis for those complaints.
[31] Accordingly, having considered all the matters raised by Ms Domecq, I am satisfied that she has no defence to the claim. I enter judgment against her for AUD 250,000 plus interest at the contract rate up until today, AUD 107,396.26. Interest will continue to run at that rate after judgment.
7 Wilaci Pty Ltd v Torchlight Fund No1 LP (in rec) [2017] NZCA 152, [2017] 3 NZLR 293.
8 Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28, (2016) 258 CLR 525.
[32] Mr Johnson referred to the indemnity clause in the guarantee provision, to say that it entitles the plaintiff to recover solicitor/client costs. The indemnity provision applies if any obligation in the loan agreement or the guarantee is unenforceable, invalid or illegal. I am satisfied, however, that the guarantee is enforceable, valid and legal, and therefore any costs are not recoverable under the indemnity clause. Instead, the plaintiff is entitled to costs under the High Court Rules, category 2 band B.
……………………………….
Associate Judge R M Bell
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