Adelaide Bank Ltd v Property Builders Pty Ltd - [2010] NSWSC 830 - NSWSC 2010 case summary — Zoe

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Adelaide Bank Ltd v Property Builders Pty Ltd

[2010] NSWSC 830

Supreme Court of NSW|2010-03-17|Before: Simpson J, Davies J, Hall J

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At a glance

Source facts

Court

Supreme Court of NSW

Decision date

2010-03-17

Before

Simpson J, Davies J, Hall J

Source

Original judgment source is linked above.

Judgment (72 paragraphs)

[1]

Background 10 Eurofinance and AIF are both companies which are part of an umbrella group known as "The Eurofinance Group". That group of companies operates as a funds manager, which advances funds on mortgage to borrowers. Its source of funds, relevantly, was Adelaide Bank. AIF, but not, apparently, Eurofinance, had a facility arrangement with Adelaide Bank. Mr Yianni Socratous was an officer of the Eurofinance Group. 11 Property Builders was a development company engaged, relevantly, in the construction of residential units. Mr Phontos was the director of Property Builders. He is also a solicitor of this Court, practising under the name "Phontos Legal". 12 It is convenient at this point to outline a chronology of relevant events. 13 In late 2006 Property Builders sought a loan of funds from Eurofinance for the purpose of refinancing a residential project at 110-112 Twin Road, Ryde. The project consisted of five home units. By letter of offer dated 10 October 2006 Eurofinance approved the application. The amount of the loan was $2.4 million. The term of the loan was nine months. Interest was to be charged at an indicative rate of 15.20 percent per annum, reducing to 10.20 percent per annum if paid promptly. The letter noted Property Builders' solicitors as Phontos Legal. The letter set out the terms and conditions of the offer of finance. The "Security" required was a registered first mortgage of the Twin Road property in favour of Eurofinance, together with joint and several guarantees by Michael Phontos and Peter Phontos (the latter since deceased, and not part of these proceedings). The letter provided for a "non-refundable settlement fee" of $33,000. One condition presently to be noted was: "3. [Property Builders] acknowledgment that this proposed mortgage may be transferred to Advance Investment Finance No 2 Pty Ltd and onto Adelaide Bank Ltd."

[2]

[11]

● Memorandum 2367091." 27 Whether these notices were received and whether they were effective is an issue in the proceedings. I digress from the chronology to note the affidavit evidence of Mr Phontos. In an affidavit sworn on 20 February 2009, he deposed: "4. I have reviewed the files held by [Property Builders] and myself and have not been able to locate any notices or other mail correspondence from Bransgroves Lawyers dated 21 August 2008. I did receive a 2 page facsimile from Bransgroves Lawyers dated 21 August 2008 a copy of which is attached hereto and marked with the letter 'A'; and a facsimile from Bransgroves Lawyers dated 29 August 2008 a copy of which is attached hereto and marked with the letter 'B'." (italics added) 28 Annexure A consists of two pages. The first is a covering letter dated 21 August 2008, addressed to Phontos Legal, for attention Michael Phontos, inviting confirmation that Phontos Legal acted for Property Builders and Michael Phontos, stating that a notice issued pursuant to s 12 of the Conveyancing Act was enclosed, and inviting Mr Phontos to advise whether he was instructed to accept service on behalf of Property Builders and himself. This is plainly the covering letter sent by Bransgroves and outlined above. The second document comprising Annexure A is a copy of one of the letters, sent by mail, to which I have already referred, pronouncing itself to be a notice under s 12 of the Conveyancing Act. There is no evidence of any reply to this correspondence. 29 Annexure B is a letter dated 29 August 2008 noting that Mr Phontos had not accepted service of the s 12 notice addressed to himself and advising that the s 12 notice would be mailed to the address for service provided in the loan documentation. 30 Mr Phontos also deposed that he received, by mail, four letters from Bransgroves dated 29 August 2008, the envelope of each of which was postmarked 5 September 2008 (Annexure D). Each is a replication of the second Annexure A document. The photocopying of these letters is very unclear, but three of the letters appear to have been addressed to Mr Phontos, one at each of the three then unsold units at Twin Road. The fourth is addressed to him at a different address, apparently that from which he conducts his legal practice. 31 Mr Phontos went on, in his affidavit, to depose: "7. Between 5 May 2008 and 28 August 2008 neither I nor [Property Builders] conducted a search of the certificates of title of the premises and neither I or [Property Builders] received any other notice issued by the Plaintiff pursuant to s 12 of the Conveyancing Act 1919 detailing any assignment or transfer of any mortgage or other security documents prepared in relation to the premises." 32 To return to the chronology: on 26 September 2008, a third unit was sold, and the proceeds applied in payment of interest and reduction of the debt. According to the affidavit of Mr Socratous, a sum of almost $600,000 was paid to Adelaide Bank. The evidence does not disclose whether that money was paid directly to Adelaide Bank, or to Eurofinance or AIF and sent on to Adelaide Bank. (Mr Phontos deposed that Property Builders had never made a payment to Adelaide Bank.) 33 As of the date of hearing two units remained unsold. Adelaide Bank claims that, from June 2008, Property Builders has been in default in its obligations to make interest payments, and that, from 1 July 2008, it has been in default of its obligation to repay the principal. Each of these allegations is denied by Property Builders and Mr Phontos. 34 On 27 August 2008 these proceedings were commenced.

[12]

The issues 35 In the circumstances outlined, one would think there could be no issue that Property Builders and Mr Phontos are indebted to Adelaide Bank, and that Property Builders' indebtedness is secured upon the Twin Road properties, and guaranteed by Mr Phontos. That, however, is contested. 36 I found the responses put on behalf of the defendants particularly elusive and perplexing. I will, therefore, attempt to set out the manner in which those responses were made, beginning with the pleadings. The operative defence is a Fourth Further Amended Defence ("the 4FAD"), filed after the conclusion of the hearing, in response to the Second Further Amended Statement of Claim ("the 2FASOC"), which removed Eurofinance as a defendant and incorporated it as a plaintiff. The 4FAD significantly clarified the issues raised on behalf of the defendants, which until then had been, to say the least, opaque. 37 The 2FASOC has inherently some difficulty in that it refers, on occasions, to "the plaintiff" or "the plaintiffs" without identifying which of, initially two, and subsequently three, plaintiffs is intended to be the subject of reference. For example, in paragraph 12 it pleads that, in the event of default under the mortgage, "the plaintiffs" are entitled to take possession of and sell the units. 38 The 4FAD is characterised by what purport to be "admissions", but which do not faithfully represent what has been pleaded on behalf of the plaintiffs. That is, under the guise of "admissions", the 4FAD pleads matters inconsistent with the plaintiffs' allegations. 39 For example, in paragraph 2 of the 2FASOC, the plaintiffs plead, in conventional and simple terms, that, on 31 October 2006, the defendants entered into an agreement with Eurofinance, the agreement "consisting" of four documents, being the Mortgage, the letter of offer of 10 October 2006, the Deed of Guarantee, and the Memorandum to the mortgage. (No doubt it was intended to assert that the Agreement is evidenced by, or contained in, those documents.) The defendants purport to "admit" something different: a "2006 loan agreement", the Deed of Guarantee, the 31 October 2006 mortgage and the Memorandum. They also purport to "admit" that the mortgage was "collaterally" secured by the Deed of Guarantee, and "the 2006 Loan as supplemented or replaced" (although no such allegations are made in the 2FASOC); and they purport to "admit" (in response to paragraph 2, which makes no such allegation) "a loan agreement for $1,528,602 … dated 31 March 2008". This was part of a strategy, the purpose of which slowly emerged. The strategy involved asserting a distinction between "the 2006 Loan" and "the 2008 Loan". Demarcation of the 2008 arrangement as an entirely separate entity from the 2006 arrangement was an essential element of the defence. 40 With those limitations in mind, I set out the claims made on behalf of the plaintiffs, and the responses made on behalf of the defendants in the pleadings. 41 In paragraph 5 of the 2FASOC, the plaintiffs plead that Mr Phontos guaranteed the obligations of Property Builders under the agreement. In the 4FAD Mr Phontos pleads that he agreed to guarantee the indebtedness of Property Builders to Eurofinance pursuant to the terms of "the 2006 Loan", with the further agreement of Mr Phontos: "… for the obligations under the Guarantee to end upon entry into the 2008 Loan … in consideration of [Property Builders] agreeing to provide alternate security to the Guarantee being a charge over the assets of [Property Builders]."

[57]

57 The circumstances of this case are not usual. More commonly, when a mortgage is transferred, the debt arising from a separate loan agreement will be transferred with it …" 64 The facts of French were complex. The mortgagee made two loans, one to a company ("QPM"), and one to QPM jointly with two individuals. The loans were collaterally secured by mortgages, in favour of the lending company, over property of which QPM was the registered proprietor. The individuals were not parties to the mortgages. On the transfer of the mortgages, the transferee sought to assert, in respect of the loans to the individuals, the rights conferred by s 62. The High Court held that s 62 did not effect a transfer of those obligations, as they were "freestanding", and arose otherwise than "under" the mortgage. 65 The decision can assist the present defendants only if it is the case that the 2008 arrangements gave rise to a new and "freestanding" loan. The mortgage itself acknowledges the 2006 debt of $2.4 million which cannot, therefore, be said to be a "collateral" obligation. 66 It seems to me to be implicitly accepted in the defendants' case that, if the debt secured by the mortgage was that incurred by the 2006 arrangement (however it may have been varied), it was not "separate from" the mortgage, it was not a debt merely "collaterally secured by the mortgage", it was not an obligation "arising otherwise than under the terms of the mortgage"; it was not a "freestanding" loan. 67 That is why it is so important to the defendants' case that they establish that the 2008 arrangement represented, in effect, a revocation of the 2006 arrangement, and its replacement by a new arrangement. The debt involved in that arrangement was not expressly secured by the mortgage (as was the 2006 debt) and could be said to be no more than collaterally secured by the mortgage. On the authority of French, Adelaide Bank, therefore, as transferee of the mortgage, was deprived of the benefit of s 52. 68 I turn now to the basis upon which the defendants submitted that the two arrangements created independent loans, "freestanding" from one another. 69 As I have indicated above, the argument put on behalf of the defendants depends upon an analysis of the original (10 October 2006) letter of offer, and the (31 March 2008) letter from Eurofinance by which that loan was "rolled-over". 70 Variations identified in submissions are:

[61]

There was also variation in the interest rate. 71 Considerable weight was placed upon what was said to be an absence, in 2008, of a requirement that Mr Phontos provide a personal guarantee and the requirement instead (as it was argued) of a fixed and floating charge over Property Builders. 72 It is true that, in the 2006 letter, under the heading "Security", an explicit requirement for "joint and several guarantees" by Michael Phontos and Peter Phontos was made; there was no corresponding requirement under the "Security" clause in the 2008 letter, which identified, besides first mortgages over the three remaining units, a fixed and floating charge over Property Builders. But Mr Phontos was identified, on the first page, as "Guarantor". 73 By his signature to the Memorandum of Acceptance to the 2008 letter, Mr Phontos signified his acceptance of this circumstance. It is of some interest that he did not, in signing the Memorandum of Acceptance, limit the acceptance to that of Property Builders, by signing in his capacity of director. He signed in his personal capacity and his acceptance is of all conditions, including his guarantee. The only sensible construction to place upon this letter is that it represents an extension or variation of the original loan. 74 It was submitted that, in the 2008 letter, the personal guarantee was specifically excluded. This is disingenuous. Although it is true that the requirement of a guarantee does not appear under the heading "Security", Mr Phontos is noted as "Guarantor" on the first page of the letter. Far from suggesting that, in 2008, an entirely fresh loan arrangement was made, this is indicative that the 2006 arrangement was to continue, but with some variations as to the due date for repayment, and as to the interest rate. 75 The requirement of a fixed and floating charge over Property Builders was obviously an additional security requirement, having regard to the history of the dealings between the parties; the registered first mortgage was noted, not only for completeness, but because, by reason of the registration of the Strata Plan, the nature of the title had changed. 76 It was unnecessary to note, again, the requirement of the guarantee by way of security, because the guarantee was in place. 77 It is not to be forgotten that the "Debt" secured by the Mortgage (and therefore the subject of the Guarantee) was defined in the memorandum as including money owing by Property Builders at the time of signing or "in the future on any account". 78 The language of the letter is consistent only with the arrangement being that of an extension of the existing loan arrangement. The term "roll-over" appears four times in the 2006 letter. That is a term that is well understood by those engaged in borrowing and lending in the finance industry. The letter includes specification of a "roll-over fee" (as distinct from "application" and "settlement" fees required by the 2006 letter) which was, by a subsequent provision, waived. 79 The only cause for puzzlement lies in the term (periods) of the facility. The 2006 arrangement began on 31 October 2006 and was due to end on 1 July 2007; the 2008 arrangement began on 1 April 2008 and ended on 1 July 2008. The evidence does not disclose what arrangements were made between the parties between 1 July 2007 and 1 April 2008. 80 However, it is quite clear on the evidence (and I do not understand it to be other than common ground) that, although the $2.4 million originally owing was reduced, it was never fully repaid by 31 March 2006, and as at that date an amount of approximately $1.5 million remained unpaid. 81 I am quite satisfied that the transaction of 2008 was precisely what it purported to be, and what Mr Socratous was adamant (under cross-examination) that it was: an extension of an existing facility, of the kind commonly known as a "roll-over". Indeed, this was the effect of evidence given by Mr Phontos. The following cross-examination is instructive: "Q. … Can I put it to you you never had any belief at any time that the document of 31 March 2008 was anything other than a mere extension of time, did you? A. It was a roll-over of the facility.

[67]

(ii) Equitable assignment of the loan by Eurofinance to AIF 84 Section 12 of the Conveyancing Act 1919 relevantly provides as follows: "Any absolute assignment by writing under the hand of the assignor … of any debt … of which express notice in writing has been given to the debtor … shall be, and be deemed to have been effectual in law … to pass and transfer the legal right to such debt … from the date of such notice, and all legal and other remedies for the same, and the power to give a good discharge for the same without the concurrence of the assignor …" 85 It was never suggested that either Eurofinance or AIF had given Property Builders notice of any assignment of its (Property Builders') debt to Eurofinance to AIF. Accordingly, there was, under s 12, no effective assignment in law. The defendants submitted, nevertheless, that there was an equitable assignment. 86 The argument advanced on behalf of the defendants was that, on 2 May 2008, Eurofinance assigned the loan (the debt by Property Builders) to AIF. That was evidenced by the twin resolutions of the companies, Eurofinance resolving to transfer to AIF, and AIF resolving to accept the transfer of, the loan. That was sufficient to constitute assignment in equity. AIF then drew on its facility with Adelaide Bank to pay out Eurofinance. Accordingly, when Eurofinance transferred the mortgage to Adelaide Bank, no money was owing to Eurofinance. There was no debt associated with or secured by the mortgage, and the mortgage was "empty". If Property Builders owed money to anybody, it was to AIF. (However, that was questionable - indeed, denied - because no notice had been given of the assignment.) 87 The defendants' proposition is this: Eurofinance divested itself of the debt by transferring it to AIF. Eurofinance thereafter had no property in the debt, and no entitlement to receive payment of it from Property Builders. The property in the debt was, in equity, that of AIF. But because notice had not been given to Property Builders, s 12 rendered the debt unenforceable against it at the hands of AIF. 88 The notion is unattractive, because Property Builders has never suggested that it has repaid the debt. But it is also, in my opinion, wrong. 89 As I understand it, an equitable assignment operates to confer an equity upon the equitable assignee. I do not understand it to confer rights upon third parties, including the debtor. It may or may not be the case that, on 2 May 2008, Eurofinance conferred upon AIF, and AIF received, an equitable assignment, enforceable (if the circumstances arose and it sought to do so) by AIF against Eurofinance. What the resolutions did not do was confer on Property Builders any equitable rights, and it certainly did not give Property Builders any absolution from its obligations to repay the debt to Eurofinance. 90 The second proposition upon which the defendants' argument rests is not sustained.

[68]

(iii) Notice 91 The defendants' final proposition rested upon the evidence concerning the service, under s 12 of the Conveyancing Act, of notices of the assignment of the "Agreement". The contention was that no such notice was served prior to the commencement of proceedings on 27 August 2008, and Adelaide Bank therefore lacked the foundation for its cause of action. 92 The evidence is that notices were sent to Mr Phontos by Bransgroves on 21 August 2008. Mr Phontos' evidence (in his affidavit) was that he was unable to locate, in the files of Property Builders and himself, any notices or mail correspondence from Bransgroves of that date. But in the very next sentence, he deposed to having received from Bransgroves a two page facsimile dated 21 August 2008, one page of which identified itself as a "s 12 notice". 93 It is true that that notice is addressed to Mr Phontos, apparently in his private capacity, and notified him, as guarantor, of the assignment of "the agreement". In cross-examination Mr Phontos agreed that he was "the alter ego" of Property Builders. 94 I am satisfied that both Property Builders and Mr Phontos were given notice of the assignment of the loan prior to the commencement of the proceedings. * * * 95 The fundamental difference in the positions of the parties is this: the plaintiffs maintain that there was one agreement, the terms of which are contained in four documents - the 2006 letter of offer, the Mortgage, the Mortgage Memorandum, and the Deed of Guarantee. By reason of provisions contained in these documents, the terms of the agreement could be varied from time to time, including by the extension of the loan amount and/or the loan term, and, in 2008, they were varied. Essentially, however, on the plaintiffs' case, there was a single transaction or agreement, giving rise to the obligations of Property Builders to repay the debt, and to Mr Phontos on his Guarantee in the event of default by Property Builders. 96 The defendants insist that this does not correctly recognise what happened. Their case is that there were two quite separate loan agreements: the first on 31 October 2006; the second on 31 March 2008. "The 2008 Loan" stood alone and separate from "the 2006 Loan". It lacked certain important incidents of "the 2006 Loan", most particularly, the Guarantee by Mr Phontos. 97 For reasons I have given above, I reject the defendants' contention. The agreement was a single agreement made in 2006 and varied in 2008.

Adelaide Bank Ltd v Property Builders Pty Ltd

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