Aquamore Credit Equity Pty Ltd v Hung; First on First Development Pty Ltd v Aquamore Credit Equity Pty Ltd

20/341930) Edgar Hung (First defendant, 2019/371915) Trevor Chappell (Second defendant, 2019/371915) First on First Development Pty Ltd (Plaintiff, 2020/341930) Allen Hsu (Second defendant, 2020/341930) Zachary Chang (Third defendant, 2020/341930) Representation: Counsel: B Le Plastrier and R Sud (Plaintiff, 2019/371915; Defendants, 2020/341930) F Corsaro SC (Defendants, 2019/371915; Plaintiff, 2020/341930)

Solicitors: Independent Legal (Plaintiff, 2019/371915; Defendants, 2020/341930) Tzovaras Legal (Defendants, 2019/371915; Plaintiff, 2020/341930) File Number(s): 2019/371915; 2020/341930 Publication restriction: Nil

Introduction

1. There are two proceedings before the Court for determination. In the first in time (2019/371915) the plaintiff (Aquamore), which advanced moneys to First on First Development Pty Ltd (First on First) pursuant to a Facility Agreement dated 7 December 2016, seeks a money judgment against two director guarantors of that advance. Those directors are Mr Edgar Hung and Mr Trevor Chappell.
2. In the second (2020/341930) First on First seeks equitable compensation or damages from Aquamore and its directors, Mr Zachary Chang and Mr Allen Hsu, the former for breach of its equitable and statutory duties in exercising a power of sale, and the latter for breaches of statutory and common law duties when acting as directors of Aquamore. The latter claim against the directors was abandoned during the final hearing.
3. In their defence to Aquamore's claim, the guarantors maintain that there was no money default under the Facility Agreement, and Mortgage securing it, before the due date for repayment (being 6 or 7 September 2017) agreed by the Deed of Amendment and Restatement which became binding on 28 June 2017. Aquamore contends that Deed never became binding because a condition precedent to its doing so was not satisfied. Relying on that being the position, Aquamore maintains that the moneys advanced under the Facility Agreement became due for repayment on either 7 May or 7 June 2017. Following demands for payment on 12 July 2017, Aquamore served a notice under s 57(2)(b) of the Real Property Act 1900 (NSW) in respect of those alleged payment defaults.
4. On 5 March 2018 Aquamore contracted to sell the security property "as mortgagee exercising power of sale pursuant to registered mortgage AM9356". Later it terminated that contract with effect on 31 May 2018. There followed brief litigation concerning the removal of a caveat, after which a second contract for sale was exchanged with the same purchasers on 9 July 2018. That second contract was completed on 15 January 2019.
5. The guarantors further maintain in their defence that Aquamore was not entitled to sell the property and that in doing so it breached its equitable and statutory obligations (the latter as a "controller" under Corporations Act 2001 (Cth), s 420A). No particular damages are identified as claimed for that "wrongful sale", as distinct from the alleged breach of those obligations. In the latter case it is accepted that should Aquamore be found to be in breach, the guarantors are entitled to a pro tanto reduction in the amount due under the guarantee reflecting the difference between the price eventually received on the sale and the price which would have been obtained had the mortgagee taken "all reasonable care" to sell the property for not less than its market value. (In this last respect it is common ground that at the time it was sold the property had a "market value", thereby engaging s 420A(1)(a)).
6. Aquamore's money claim against the guarantors is for the amount owing by First on First under the Facility Agreement. The determination of that amount, whether or not the Facility Agreement was varied, requires attention to the applicable interest rate. The agreement provides for the payment of interest at two rates - a Higher Rate of 5% per month and a Lower Rate of 2.5% per month. There are issues as to which of those rates apply and over what period or periods of time. Those issues raise questions as to the construction of the relevant default provisions; and as to whether there were, and if so, when, subsisting non-monetary or monetary Events of Default in the period before Aquamore sold the property. There is also a question as to whether the provision requiring payment of interest at the Higher Rate is unenforceable as a penalty.

The principal issues

1. After recording my findings as to the general circumstances in which they fall for determination, I propose to deal with the following issues: 1. Whether the Deed of Amendment and Restatement executed by First on First and its two directors on 28 June 2017 became binding; 2. Whether there were Events of Default entitling Aquamore to interest calculated at the Higher Rate, either before or after 6 September 2017; 3. Whether Aquamore was authorised to exercise any power of sale under s 58 of the Real Property Act (NSW) or cl 9.4 of the Mortgage; 4. Whether Aquamore breached its equitable and statutory obligations in exercising any power of sale; 5. Whether the provisions for payment of interest at the Higher Rate are unenforceable as a penalty; and 6. What remedies follow from the determination of these issues.

Background facts

1. There follow my findings as to the circumstances in which these questions arise.
2. By the Facility Agreement dated 7 December 2016, Aquamore advanced $8,925,000 to First on First. That loan was secured by a registered first mortgage over a development property owned by First on First at 2-6 First Avenue, Blacktown. The loan was initially for a term of four months, expiring on 7 April 2017. It was then extended for one month to 7 May 2017, and then for a further month to 7 June 2017. During and after this second one month extension the parties negotiated an additional three month extension to 6 or 7 September 2017. Those negotiations were conducted by Mr Hsu on behalf of Aquamore, and Mr Hung on behalf of First on First.
3. As at 7 April 2017, the amount due to be repaid was $8,925,000. That was the amount advanced on 7 December 2016 and included prepaid interest for the four months to 7 April 2017 of $926,530, calculated at the Lower Rate of 2.5% per month compounding monthly.
4. In the period from 7 April to 7 June 2017, a further $446,250, being two months' interest at 2.5% per month, accrued due with the result that as at 7 June 2017 the amount required to be repaid (before consideration of the effect of any non-monetary Events of Default which may have occurred but were not then known to Aquamore) was $9,371,250.
5. By 28 June 2017 the parties had reached at least "in principle" agreement that Aquamore would extend the existing facility for three months from 7 June 2017 in return for an establishment fee of 3% (calculated on the amount of $9,371,250) and prepaid interest calculated on that same amount for those three months and at the Lower Rate. Accordingly the amount advanced, and to be repaid by 6 or 7 September 2017, was $10,470,670 being the amount due as at 7 June 2017 ($9,371,250) plus the establishment fee of 3% and three months' interest at 2.5% per month compounded monthly
6. The Deed of Amendment and Restatement was signed and returned to Aquamore's solicitor, Mr Phil Hustler, on 28 June 2017, a Wednesday, as requested. In its terms it provided that it would become effective on the date that "all Conditions to Variation" had been satisfied.
7. On 3 July 2017, the following Monday, Aquamore's solicitors caused "updated" Personal Property Securities Register (PPSR), land title and ASIC searches to be undertaken. The results of those searches revealed that a security interest statement had been registered under the Personal Property Securities Act 2009 (Cth) (the PPS Act) on the application of NWC Finance Pty Ltd (NSW) (NWC) and remained in place; that a caveat against dealing had also been lodged in relation to the mortgaged property on 25 January 2017 by NWC; and that Mr Chappell had resigned as a director of First on First on 5 April 2017.

Whether Deed of Amendment and Restatement became binding

The sequence of events

1. I make the following findings as to the specific events leading to this variation. In the evening of 6 June 2017, Mr Hsu emailed Mr Hung advising "we are happy to offer you a further three-month term". That term was to commence on 6 June and to be for the total amount, including prepaid interest and an establishment fee, of $10,470,670. Mr Hsu concluded "we will need a new contract in place. Please let me know if I should instruct Phil [Hustler] to commence drafting the new agreement". On 19 June, Mr Hustler sent an email to Mr Tzovaras, solicitor for First on First, advising that he had been instructed that Aquamore and First on First: "have agreed that the finance is to be rolled into a new facility. To minimise additional costs and paperwork we have amended and restated the previous facility (re-working where necessary to include the new terms). Please see the documentation attached. Our client will continue to rely on its existing security".
2. In the morning of 28 June, Mr Hung emailed Mr Hsu querying the calculation of the interest for the three months to 6 September 2017. In his later response to Mr Hsu's explanation as to the make up of the amounts proposed to be borrowed, Mr Hung said "happy with your explanations. No more issue with me". Following receipt of that email, Mr Hsu replied requesting that Mr Hung "execute the documents and email Phil scanned copies today as agreed. Another month has almost passed and I wish to finalise this contract". He added "Phil will send you his invoice for work done".
3. The Deed of Amendment and Restatement, which annexed a marked up copy of the Facility Agreement, was executed by First on First, signed by Messrs Hung and Chappell and returned to Mr Hustler at 5:20pm on 28 June 2017. Further documents were provided to the Borrower and guarantors for signature and return at the same time. They were a statutory declaration by Messrs Chappell and Hung as directors of First on First as to the condition of the mortgaged property and separate acknowledgements (also in the form of statutory declarations) by each as guarantor, confirming that he had received independent legal and financial advice.
4. On or about 3 July, someone at Mr Hustler's firm caused the updated ASIC, land title and security interest searches to be undertaken. Mr Hsu's evidence was that he became aware of Mr Chappell's resignation as a director and the existence of the caveat on 4 July 2017. He did not suggest that he had required or requested any information from First on First, or the guarantors, in connection with the execution of the variation to the Facility Agreement.

6. The above mentioned defaults have either not been remedied within the time period allowed in the Facility Agreement or are not capable of remedy. 7. Accordingly, the Facility Agreement has not been varied, the Term has expired and interest may be charged at the higher rate."
7. That letter (especially pars 4 and 5 as extracted above) does not correctly record the conditions which had to be satisfied before the Deed of Amendment and Restatement became effective.
8. Clause 1.2 of that Deed defines "Effective Date" to mean "the date that all Conditions to Variation have been satisfied". Those conditions are set out in cl 3.1 as follows: "3. Conditions 3.1 Conditions to Variation It is a condition precedent to the variations in clause 2.2 becoming effective, that the Financier receives the following in form and substance satisfactory to it: (a) Signing A duly executed original counterpart of this Deed of Variation signed by all parties (other than the Financier). (b) Legal Certification An opinion from the Financier's legal advisors confirming, amongst other things, that the Agreement has been property executed; and (c) Approvals Such other approvals, certificates, opinions, statutory declarations and other documentation or information as the Financier may reasonably require. (d) Variation costs The Obligors must ensure that the following costs are paid on or prior to the Effective Date: (i) Legal Fees: The Borrower must pay the costs of the Financiers legal advisors in attending preparation of this Deed and the related documents, estimated to be $3,500.00 plus GST and disbursements. The total amount will be confirmed upon satisfaction of items 3.1(a), (b) and (c). This must be paid by direct deposit to Independent Legal's nominated account, or by Bank Cheque. (ii) Variation Fee The Borrower must pay to the Financier a non-refundable Establishment Fee of $314,120.11 being 3% of the New Facility. The parties agree this will be withheld from the advance, along with the Prepaid Interest."
9. It is necessary also to note the terms of cll 3.2, 3.3, 4.1 and 4.2: "3.2 Conditions precedent for benefit of Financier only Each condition is for the sole benefit of the Financier and compliance with any of the above conditions precedent may only be waived or deferred by the Financer in its absolute discretion. 3.3 Amendment and restatement (a) The parties agree to the variations set out in clause 2.2 and otherwise restate the Facility Agreement as a new facility with effect on the Effective Date. (b) Clause 3.3(a) does not affect any right or obligation of any party that arises or has arisen before the Effective Date. … 4.1 Representations and warranties by Obligors Each Obligor makes each representation and warranty set out in clause 9 of the Facility Agreement on the Effective Date. 4.2 Reliance by the Financier Each Obligor acknowledges that the Financer has executed this Deed and agreed to take part in the transactions that it contemplates in reliance on the representations and warranties that are made under clause 4.1."

Was condition 3.1(c) satisfied?

1. Aquamore relies only on the condition in cl 3.1(c) as not having been satisfied. It contends that the information obtained by the solicitor from the searches undertaken on 3 July (see [14] above) was information which Aquamore "reasonably" required within the meaning of that clause and which, when received, was not in "substance satisfactory to it".
2. The language of cl 3.1(c) does not identify in its terms the subject matter of the documentation or information to which it refers. However the words "such other" give some indication as to that subject matter by reference to what precedes that subclause, namely the Deed signed by the Borrower and Guarantors and an opinion from the Financier's lawyers as to the legal efficacy of that signed Deed. In addition the introductory words to cl 3.1 and the closing language of cl 3.1(c) contemplate that the documentation or information to which it refers is something that the Financier may "require", in the sense of request or call for, from the Borrower or guarantors, and subsequently "receive". The Financier's entitlement to call for such documents from the other parties is limited to what may "reasonably" be required.
3. In addition cl 3.1(d)(i) provides that the final amount of the legal advisor's costs to be paid by the Borrower is to be "confirmed" upon the "satisfaction" of items 3.1(a), (b) and (c). In other words after whatever the Financier has "required" under cl 3.1(c) has been received "in form and substance satisfactory" to it, the amount of those legal costs will be finalised.
4. Turning to the evidence, it establishes the following matters relevant to whether the information obtained by the solicitors on 3 July 2017 was ever "required" of the Borrower or guarantors by Aquamore and accordingly within cl 3.1(c). First, there are documents which were apparently required by the Financier to be completed at the time the signed Deed of Amendment and Restatement was returned. They are the three statutory declarations, also returned on 28 June 2017 (see [25] above). Secondly, the evidence does not identify any other approvals, certificates, statutory declarations or information which was requested or required by Aquamore of the other parties with respect to the finalisation of the Deed of Amendment and Restatement. Nor, if it mattered, is there any evidence that it requested any such information from any non-party. Thirdly, the following evidence establishes more probably than not that there were no other such requests or requirements of the Financier. The terms of Mr Hsu's email of 28 June, stating that he wished to "finalise this contract" and that on receipt of the signed documents Mr Hustler would send his invoice "for work done", are consistent with there being no other requirements within cl 3.1(c) having been communicated by that time. That is confirmed by Aquamore's internal records which indicated that the further advance was treated as made on 28 June on the receipt of the signed documentation, at which time the estimated costs of $3,500 were also deducted from the establishment fee, that occurring in accordance with cl 3.1(d)(i). Finally, all of that is consistent with Mr Hustler's letter of 12 July which did not assert that the agreement did not become effective because any documents or information "required" by his client had not been provided, or if provided, had not been satisfactory "in form and substance".

Whether there were non-monetary Events of Default

1. For the reasons appearing above, the existence of the three Events of Default is only relevant to the calculation of interest during periods in which those defaults subsisted.

Relevant provisions of the Facility Agreement

1. Clause 7.1 of the Facility Agreement as varied provides: "7.1 Default Interest The Borrower must pay interest on the Money Owing at the Higher Rate for the period from (and including) the date on which an Event of Default occurs until (and including) the date on which the Event of Default is remedied to the satisfaction of the Financier (acting reasonably), at which point it will revert to the Lower Rate from the following day."
2. The Money Owing is defined (cl 1.1) as the Principal Outstanding and "all other monetary liabilities of the Obligors" under the Finance Documents.
3. Clause 11.1 relevantly provides in relation to Events of Default: "11. Default 11.1 Events of Default Each of the events set out in this clause 11.1 constitute an Event of Default, whether or not it is within the control of the Obligors: … (b) (non-payment) an Obligor fails to pay an amount that is due and owing under the Finance Documents when due (or, if such failure is solely due to an administrative or systems error arising in the transmission of funds, within two Business Days after the due date); (c) (other obligation not complied with) an Obligor fails to comply with any obligation under a Finance Document … and, if capable of being remedied, it continues unremedied for 5 Business Days (Cure Period) after the earlier of: (i) receipt by the Borrower of a notice from the Financier identifying the failure to comply; or (ii) an Obligor becomes aware of the failure to comply; (d) (misrepresentation) a statement, representation or warranty made by or on behalf of an Obligor in a Finance document, or in a document provided in connection with a Finance Document, or in a document provided in connection with a Finance Document, is incorrect or misleading when made or repeated unless the underlying circumstances (where capable of remedy), are unremedied within 10 Business Days of the earlier of: (i) receipt by the Borrower of a notice from the Financier identifying the incorrect or misleading statement, representation or warranty; or (ii) an Obligor becoming aware of the incorrect or misleading statement, representation or warranty;"
4. Prior to the amendment of the Facility Agreement, the Cure Period in cl 11.1(c) was a period of 10 Business Days, rather than 5 Business Days as provided by the varied agreement.

The three alleged non-monetary Events of Default

1. In its closing submissions, Aquamore only relied on three non-monetary Events of Default. They were (1) the replacement of Mr Chappell as director of First on First during the period from 5 April 2017 to 26 June 2017; (2) the failure to disclose the NWC Term Sheet dated 22 July 2016 and its charging clause, and (3) incorrectly representing that its property was not the subject of any Security Interest . Each is considered below.
2. Before doing so I should record that the effect of the variation of the Facility Agreement was that the date for repayment of the facility was extended to 6 September 2017. Although there is some confusion about the date on which the new term expired by reason of the definitions of Effective Date and New Term in the Deed of Amendment and Restatement, the position as intended by the parties is made clear in the marked up Facility Agreement attached to that Deed. As there stated the effect of the Deed was to extend the Termination Date under the Facility Agreement to "3 months after the Interest Commencement Date or such later date as agreed to by the Financier" (cl 2.2(h)). The Interest Commencement Date was 6 June 2017 (cl 2.2(e)). It follows, applying the definition of a "month" as meaning a period starting on one day of a calendar month and ending on the numerically corresponding day of the next calendar month (cl 1.2(j)), that the Termination Date was extended until 6 September 2017 by the Deed of Amendment and Restatement. Finally, the Borrower was required to repay all Money Owing on or prior to the Termination Date (cl 6.1). As First on First did not repay the facility on 6 September 2017, there was an Event of Default under cl 11.1(b) from 7 September 2017. The amount owing depended on the calculation of interest to that time which in turn depends on whether any earlier Event of Default had occurred and the period during which it subsisted, and whether the Higher Rate of interest was unenforceable as a penalty.

The replacement of Mr Chappell as a director

1. Under cl 10.2(b)(ii), First on First agreed not to "vary the shareholders or officeholders without the prior approval of the Financier". It was not contested that the officeholders of First on First included its directors, and in particular Mr Chappell. As has already been noted, between 5 April 2017 and 26 June 2017, Mr Chappell retired as a director because of ill-health. It was accepted that Mr Hung became aware of Mr Chappell's resignation "on or shortly after" it occurred.
2. That breach was one which could be remedied, either by reappointing Mr Chappell or by seeking Aquamore's consent. That did not occur during the Cure Period, at that time a period of 10 Business Days from the Borrower becoming aware of the breach. Accepting that First on First became aware of the breach on 5 April 2017, the 10 Business Days expired on 21 April 2017. There was accordingly an Event of Default from 22 April 2017 until Mr Chappell's reappointment on 26 June 2017. That default did not subsist at the time the Deed of Amendment and Restatement became effective.

The failure to disclose the NWC term sheet and the charging clause

1. By clause 9.1 of the Facility Agreement, First on First represented and warranted "to and for the benefit of the Financier" that: "(l) (No failure to disclose) it has fully disclosed in writing to the Financier all material information of which it is aware relating to itself, the Finance Documents, each acquisition and each Obligor and which, in the opinion of the Obligor (acting reasonably), if not disclosed may have adversely affected the decision of a prudent financial institution to participate in the Facility on the terms set out in this document;"
2. An Event of Default under cl 11.1 includes: "… (d) (misrepresentation) a statement, representation or warranty made by or on behalf of an Obligor in a Finance document, or in a document provided in connection with a Finance Document, or in a document provided in connection with a Finance Document, is incorrect or misleading when made or repeated unless the underlying circumstances (where capable of remedy), are unremedied within 10 Business Days of the earlier of: (i) receipt by the Borrower of a notice from the Financier identifying the incorrect or misleading statement, representation or warranty; or (ii) an Obligor becoming aware of the incorrect or misleading statement, representation or warranty;"
3. Aquamore submitted that the representation and warranty made by cl 9.1(l) was incorrect or misleading because at the time the Facility Agreement was made on 7 December 2016, First on First had not disclosed the fact of the NWC Term Sheet by which it had agreed to "charge all present and after acquired property" in favour of NWC as security for any costs owing to it under that agreement. First on First's response was that there had been no failure to disclose material information in relation to the term sheet because of disclosures which it made to Aquamore prior to the signing of the Facility Agreement.
4. On 7 December 2016 and before that agreement was executed, Mr Tzovaras sent the following email to Mr Hustler: "Hi Phil I refer to our discussion at your office earlier this morning in relation to NWC Finance Pty Ltd's [PPS Act] security interest registration [PPSR number omitted] and Remagen Capital Pty Ltd. … In respect of each of these parties, I confirm as follows: 1. First on First Developments Pty Ltd had applied for finance, but no acceptable offer was provided, and therefore no loan or security documentation was proceeded with. 2. First on First Development Pty Ltd paid all application, legal and valuation fees payable in respect of each finance application, and there are no outstanding fees due to either of the above parties. The directors of First on First Development Pty Ltd have also confirmed to me that there [are] no outstanding fees due by First on First Development Pty Ltd to either of the above parties. 3. Consequently, neither of the above parties has any security interest the subject [of] the above PPSA security interest registration, and each of these ought to be discharged. 4. I acted for First on First Development Pty Ltd in respect of each finance application; and have therefore direct knowledge of the matters stated in 1, 2 and 3 above."

Incorrect statement that First on First's "property" not subject to any Security Interest

1. By cl 9.1(o), First on First represented and warranted that: "(o) (no Security Interests) (i) its property is not, nor is the property of any Obligor, subject to any Security Interest, other than a Permitted Security Interest; (ii) no person holds an interest in its property other than under a Permitted Security Interest; and (iii) each Security has the priority which it is expressed to have."
2. The representation and warranty made by cl 9.1(o) in relation to the Blacktown property was said to be misleading at the time of the Facility Agreement and accordingly a separate Event of Default under cl 11.1(d).
3. The terms "Security Interest", "Permitted Security Interests" and "Security" are defined in cl 1.1 as follows: 1. "Security Interest means: 2. A mortgage, pledge, lien, charge, caveat, assignment by way of security, hypothecation, title retention arrangement, preferential right, trust arrangement or other arrangement (including any set-off, sale and repurchase agreement or flawed-asset arrangement) having the same or equivalent commercial effect as a grant of security (including under PPS Law), but excludes a PPS lease, commercial consignment, a transfer of account or chattel paper (each as defined in the PPS Act); or 3. An agreement to create or give any arrangement referred to in paragraph (a) of this definition. 4. … Permitted Security Interests means 1. Each Security or Security Interest in favour of the Financier; 2. Any lien or Security Interest arising under any retention of title, hire purchase or conditional sale arrangement or arrangements having similar effect in respect of goods supplied to the Borrower in the ordinary course of trading and on the supplier's standard or usual terms and not arising as a result of any default or omission by the Borrower; 3. Any lien or other Security Interest arising by operation of Law in the ordinary course of ordinary business activity and securing an obligation that is not yet due; and 4. Any other Security Interest consented to by the Financier, provided that any condition of the Financier's consent has been complied with." 5. … 6. Security means: 7. The General Security Agreement; 8. The Mortgage; 9. Each other Security Interest granted by an obligor to the Financier to secure the Money Owing."
4. First on First submits that the representation or warranty made by cl 9.1(o) with respect to no security interests was not incorrect within cl 11.1(d) because whilst there was an agreement for charge, there was no money owing to NWC which was or could be secured by that charge. That argument does not take account of the breadth of the definition of "Security Interest" as including "an agreement to create or give" a charge which may be made or exist before any moneys or liabilities to be secured have been advanced or incurred.

Was Aquamore authorised to exercise any power of sale under s 58 of the Real Property Act or cl 9.4 of the Mortgage

1. The answer to this question is no. As at 7 September 2017 the only subsisting Event of Default was First on First's failure to pay the amount due under cl 6.1 of the varied Facility Agreement. However no s 57(2)(b) notice was served in respect of that continuing monetary default and before the property was sold. The only non-monetary Event of Default had subsisted between 22 April and 26 June 2017.
2. It is not necessary to consider whether cl 11.4(a) of the Mortgage was effective to dispense with the requirement for service of a s 57(2)(b) notice in relation to any non-monetary default because none of those defaults subsisted at the time the power of sale was exercised in 2019 (see Real Property Act, s 58A(1); Bevham Investments Pty Ltd v Bellgot Pty Ltd (1982) 149 CLR 494 at 498; [1982] HCA 45 and Notaras v Sly & Weigall; Notaras v Newman Psaltis [2005] NSWCA 275 at [84]).
3. Nevertheless the property was sold and First on First claims damages from Aquamore for its "wrongful" sale; meaning that the property was sold in circumstances which did not enliven either the power under s 58 of the Real Property Act or the authority conferred under cll 9.1 and 9.4 of the Mortgage. However First on First had notice of the proposed sale and did not move to restrain it. The question remains what damages did it suffer as a result of the unauthorised sale of which it had advance notice, but did not seek to restrain.
4. It is pleaded that as a result of Aquamore's wrongful conduct in taking and retaining possession, and in selling the property, First on First suffered loss and damage. The damage particularised is: "loss of opportunity to use of the Property"; for "legal costs, valuation fee and receivers' fees" incurred in relation to the exercise of the power of sale; and "aggravated and exemplary damages". However no evidence was led or submissions made in support of the claims to any of these heads of loss. In the circumstances First on First has not proved that it suffered any damage as a result of Aquamore's unauthorised exercise of its power of sale as distinct from its alleged breaches of duty in doing so.
5. The present is not a case where the mortgagee failed to give notice to the borrower of its proposed exercise of its power of sale resulting in loss due to the borrower's inability in the absence of knowledge to redeem the mortgage and prevent the sale: cf Hoole v Smith (1881) 17 Ch D 434. First on First had knowledge of the proposed sale. However it was not in a position to redeem the mortgage so as to prevent it from proceeding. Nor could it have prevented Aquamore from serving a valid s 57(2)(b) notice, and thereafter proceeding with the sale.

Whether Aquamore breached its equitable and statutory obligations in exercising the power of sale

Equitable and statutory obligations

1. Under the general law a mortgagee exercising a power of sale must act in good faith. The test of good faith "focuses primarily upon whether the mortgagee has seriously failed to take reasonable steps in all of the circumstances to obtain a proper price, and not upon what valuers may say the property should have sold for" (per Palmer J (Mason P and Ipp JA agreeing) in Stockl v Rigura Pty Ltd [2004] NSWCA 73 at [37]; (2004) 12 BPR 23,151).
2. More relevantly, as a "controller" within Corporations Act, s 9, Aquamore in exercising a power of sale in respect of the property was required to take "all reasonable care to sell the property for" not less than its market value (s 420A(1)(a)). That provision modifies the obligation otherwise existing under the general law and in doing so "enhances the duty of the controller and the protection afforded to the corporation" (per Bryson J in GE Capital Australia v Davis (2002) 180 FLR 250; [2002] NSWSC 1146 at [53]). Accordingly the guarantors are entitled to insist on a pro tanto reduction in the amount due under the guarantee should Aquamore have breached its duties owed to First on First when exercising its power of sale, including the requirement that it act in accordance with s 420A(1) (James v Australia & New Zealand Banking Group Ltd (2018) 97 NSWLR 663 at [67]-[68] (Leeming JA and Sackville AJA)).
3. In Investec Bank (Australia) Ltd v Glodale Pty Ltd (2009) 24 VR 617; [2009] VSCA 97 at [47] (Neave and Redlich JJA and Forrest AJA) cited with approval the following statement of Campbell J in Artistic Builders Pty Ltd v Elliot & Tuthill (Mortgages) Pty Ltd [2002] NSWSC 16; (2002) 10 BPR 19,565 at [126]: "In deciding whether there has been a breach of s 420A, a court looks at the process that a controller of property of a corporation has gone through in selling that property. The enquiry is whether, in the course of that process, the controller has taken all reasonable care to sell the property for not less than its market value. It is not necessary to prove that the property was in fact sold for less than its market value - a controller could breach s 420A, but, through luck, still manage to sell the property for its market value or more. Further, it is not necessary for me to find what actually was the market value of the property, to be able to find that s 420A(1)(a) was breached - all that I need find is that the process gone through was not one where all reasonable care was taken to sell the property for its market value, whatever that market value might be." See also Black J in In the matter of Australasian Barrister Chambers Pty Ltd (in liq) [2017] NSWSC 597 at [38], citing Le Miere J in CME Properties (Australia) Pty Ltd v Prime Capital Securities Pty Ltd [2016] WASC 231 at [18].

Allegations of breach of duty and failure to act in good faith

1. In oral argument, senior counsel for First on First and the guarantors summarised their case on this issue shortly. It is not contended that the property had to be sold by auction rather than by private contract. Rather it is said that Aquamore proceeded to sell the property in March 2018 without having embarked on a marketing campaign and did so in circumstances where it did not have any "reliable market valuation" or any "credible realistic appraisal" of the property's market value. It is said that in those circumstances the exercise of reasonable care required that it be sold following a marketing campaign. In its outline of written submissions, First on First contends that the market value of the property at the time it was sold was $15 million whereas the sale price was $10 million. The valuation of Mr Kent Wood dated 18 August 2020 is relied on in support of the former contention. No expert evidence was called which addressed what steps might reasonably have been taken by Aquamore in the circumstances as they existed in December 2017 and early 2018, when the decision to sell was made.
2. In response Aquamore submits that it exercised all reasonable care. The property had not sold in the hands of two experienced professional agents between February and December 2017. At that same time the "offers" that were made gave some indication as to its value. In January 2018 one of those agents, CBRE, estimated the "indicative" value of the property, following a further marketing campaign, and sale on an expression of interest basis, as between $8 and $9 million (plus GST). The price for which the property was sold exceeded that range by $1 million.
3. Aquamore also relies on a valuation of Mr Mark Ellis dated 28 April 2021 which assesses the value of the property as at 5 March 2018, based on the current development application approval and potential changes in planning controls, as being $9,825,000.
4. For the reasons which follow I am not satisfied that there was any breach by Aquamore of its obligation to take all reasonable care in selling the property for not less than its market value.
5. In estimating the "sale price" of the property as at January 2018, CBRE described the market for development sites in the Blacktown area as follows: "There [are] far less buyers in the market for development sites in Blacktown due to the funding constraints and slow resale demand. The high volume of supply in the apartment market is diluting demand and profit for developers."

The circumstances leading to the sale of the property

1. It is necessary to make findings as to the position, as it was known to Aquamore, by the end of January 2018 when it took possession of the property and engaged LJ Hooker, Blacktown (Mr Roumeliotis, a principal of that agency) to sell the property.
2. First on First purchased the vacant property following its exercise of a call option, for a price of $6,790,000. The main purpose of the Aquamore loan was to enable it to complete that purchase in December 2017, and to cover initial property development costs. At some stage before that option was entered into, Mr Hung obtained a valuation of three proposed developments from Mr Wood. The report, described as being "for First Mortgage security purposes", valued the property as at 5 October 2016 at $12,750,000. It will be necessary to return to that valuation.
3. On 6 December 2016, First on First retained CBRE and Matrix Property Group Australasia Pty Ltd (Matrix) as exclusive selling agents of the property. Matrix specialised in identifying and marketing property development sites and commercial property as well as acting as a selling and purchase agent of property development sites. The person involved for CBRE was Mr Alex Mirzaian, described as "CBRE's Western Sydney specialist".
4. The agency agreement contained an estimate of the selling price range at $14-$15 million and recorded the agents' recommendation as to the most suitable method of sale being "Private Treaty - EOI". At that time it had the benefit of a development consent for the construction of an 18 storey "shop top housing development" consisting of a two-storey podium with business/retail floor space and 16 floors of residential development. That development assumed a floor space ratio (FSR) of 6.5:1 and a building height limit of 56m, in accordance with the relevant planning instrument, the Blacktown Local Environmental Plan (LEP) 2015.
5. In February 2017, CBRE published a media release in the property sections of the Sydney Morning Herald and The Australian which invited expressions of interest, describing the land area as "of 2,111 sqm" with a development approval. The property was advertised in print media and online listings. By the end of June 2017, Matrix had received two purchase proposals, one in May 2017 of $10.8 million (plus GST) and the other made orally in June 2017 of $11.2 million (plus GST). Each was rejected by Mr Hung as "too low". Mr Hsu of Aquamore gave evidence, which I accept, that by the end of 2017 he was aware from meetings and telephone calls with CBRE personnel that the purchasers who had earlier expressed interest in the property were no longer interested.

The valuation evidence

1. Before addressing the relevance of the two valuations of Mr Wood and that of Mr Ellis, it is necessary to make findings as to "potential changes in planning controls" to which each of the valuers refers.
2. On 23 December 2016, the Blacktown City Council wrote to the Department of Planning and Environment requesting a Gateway Determination under Environmental Planning and Assessment Act 1979 (NSW), s 56 in relation to a proposal to amend Blacktown LEP 2015 to remove FSR controls for the Blacktown central business district and nominate key sites where additional heights of up to 20m (six levels) might be achieved. A delegate of the Department of Planning and Environment responded to that request on 12 April 2017, determining that the proposed amendments to that LEP should proceed subject to certain conditions. The request for that Gateway Determination and the delegate's response became known to Mr Hung at the times each was made. It may be inferred that he took them into account in his subsequent actions in relation to the property.
3. It is convenient to deal first with Mr Wood's second valuation and Mr Ellis' valuation, each of which considered the market value of the property as at 5 March 2018. Those valuations adopted the same methodology. Two comparable sales were considered to be particularly relevant. The first was of a property at 5-19 George Street, Blacktown and the second of a property at 26 Second Avenue, Blacktown. The gross floor area (GFA) of each property was derived by multiplying its site area by the applicable FSR, which under the existing LEP was 6.5:1. The comparable sale price was then divided by the GFA (expressed in m2) to arrive at a rate of dollars per m2 of GFA. Having considered the market value of the subject property by reference to those comparable sales, it was then necessary to consider the value of the potential changes in the planning controls which were the subject of the Gateway Determination. Their effect was to increase the potential FSR above 6.5:1, and to increase the maximum building height to 76m or thereabouts.
4. Mr Wood and Mr Ellis disagreed as to the applicable GFA dollar rate per m2 for the Second Avenue property. Mr Wood calculated it at $697/m2 and Mr Ellis at $567/m2. That difference is due to Mr Wood not using the site area figure derived from the relevant development approval. For that reason Mr Ellis' rate is the correct one for deriving a GFA dollar rate.

Did Aquamore breach its obligation to take all reasonable care in selling the property for not less than its market value

1. Before selling the property, Aquamore sought and obtained advice from CBRE as to the manner in which the property might be sold and the price likely to be achieved assuming the marketing campaign CBRE proposed. That advice was sought in the context of CBRE (and Matrix) having undertaken an earlier sales campaign. In the light of CBRE's somewhat pessimistic description of the state of the market, Aquamore is certainly not shown to have acted unreasonably in deciding to sell the property to Mr Roumeliotis' proposed buyer for $10 million.
2. The exchanges between Mr Hsu and Mr Hung in mid-December 2017 concerning the latter's consent to a sale at that value do not suggest that sale was regarded by Mr Hung as outside the market range at that time. Nor do the results of CBRE's and Matrix's earlier marketing endeavours suggest otherwise. In the face of CBRE's advice as to the state of the market, Aquamore's decision to sell for $10m, rather than proceed with a marketing campaign which the agent did not think likely to produce a higher price, was justifiable and reasonable.
3. The valuation evidence confirms the reasonableness of that decision, in the sense that Mr Ellis' opinion, which I accept, assessed a market value which was less than the amount for which the property was sold.
4. In the result, there was no breach of Aquamore's equitable or statutory obligations in exercising the power of sale. In reaching this conclusion I have not addressed any suggestion that Aquamore acted unreasonably in terminating the first contract for sale and then entering into the second with the same purchaser. First on First's written and oral submissions did not make such a case.

Whether the provisions for payment of interest at the Higher Rate are unenforceable as a penalty

The relevant interest provisions

1. The provisions as to the calculation and payment of interest and default interest are contained in cll 5.1, 5.2 and 7.1 of the Facility Agreement, which are extracted below, together with the definition of prepaid interest: "Prepaid interest means the amount of $785,300.29 which represents 3 months interest at the lower rate, which is to be retained by the Financier from the first Advance … 5. Calculation and payment of interest 5.1 Calculation Interest is calculated from the Interest Commencement Date to the date of full and final repayment of the Money Owing and: (a) accrues on a daily basis; (b) will be compounding monthly in arrears; and (c) will be paid in advance on the Drawdown Date. 5.2 Interest period The Borrower shall pay to the Financier Interest at the Higher Rate on the Termination Date provided that if no Event of Default has occurred and is subsisting, then the Financier shall accept the payment of interest for the Term calculated at the Lower Rate. Any difference between interest charged at the Higher Rate and the Prepaid Interest will be added to the Money Owing. … 7. Default Interest 7.1 Default interest The Borrower must pay interest on the Money Owing at the Higher Rate for the period from (and including) the date on which an Event of Default occurs until (and including) the date on which the Event of Default is remedied to the satisfaction of the Financier (acting reasonably), at which point it will revert to the Lower Rate from the following day."

The construction of cll 5.1, 5.2 and 7.1

1. Clause 5.1 specifies the period for which interest is to be calculated and paid, the basis on which it accrues, the fact that it is to be compounded monthly in arrears, and that it is to be the subject of a payment in advance on the Drawdown Date, which under the varied Facility Agreement was 6 June 2017, the same date as the Interest Commencement Date. This clause makes no reference to the rate at which interest is to be calculated. However the statement that it will be "paid in advance" is a reference to the Prepaid Interest, which is to be calculated at the Lower Rate and paid out of the advance of $10,470,670.
2. There is a potential inconsistency between the provisions of cl 5.2 and those of cl 7.1. The latter provides for the payment of interest at the Higher Rate for the period during which there is a subsisting Event of Default, before and following which interest is payable at the Lower Rate. However on one reading of its language, cl 5.2 provides that interest is payable at the Higher Rate unless no Event of Default has occurred and is subsisting on the Termination Date, in which event interest payable will be calculated at the Lower Rate. That clause was no doubt drafted in that way with a view to avoiding an argument that the imposition of the Higher Rate was a penalty, by providing that if there is no default, an indulgence is granted by allowing for payment of interest at the Lower Rate. See, for example, O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 at 366-367; [1983] HCA 3 (Gibbs CJ) and more generally the discussion in Kellas-Sharpe v PSAL Ltd (2013) 2 Qd R 233; [2012] QCA 371 at [32]-[38] (per Gotterson JA).
3. In providing that if there is no subsisting Event of Default the Financier "shall accept the payment of interest for the Term calculated at the Lower Rate", cl 5.2 leaves uncertain whether that condition applies throughout the Interest Period so that interest is calculated at the Lower Rate during any period when there is no subsisting Event of Default, or only where there is no default subsisting at the end of the term. The former construction is consistent with cl 7.1, which provides that the Higher Rate only applies during a period where there is a subsisting Event of Default. Furthermore, if cl 7.1 was construed as only granting the indulgence, being interest at the Lower Rate, if there is no subsisting Event of Default on the Termination Date, it would have the unlikely outcome that the Higher Rate would apply through the whole of the Interest Period in the event there was an Event of Default subsisting on the Termination Date. Such an outcome would be inconsistent with the clear language of cl 7.1.

The Higher and Lower Rates of interest

1. The Lower Rate is 2.5% per month and equivalent to slightly more than 30% per annum. Similarly the Higher Rate of 5% per month is equivalent to slightly more than 60% per annum. In each case the difference arises because interest is compounded monthly in arrears. In the period of the varied Facility Agreement, the amount owing on which interest was payable for the three months ending 6 September 2017 was $8,925,000. For the first month of that period, interest at the Lower Rate was $7,437 per day and $223,125 for the first month (deleting cents, and assuming 30 days in a month). At the Higher Rate, interest was $14,875 per day and $446,250 for the first month.
2. The first advance was for an initial period of four months, and subsequently extended. It was secured by a registered first mortgage over the property and guarantees from the directors of First on First. That there was a market for the provision of bridging finance for short periods at rates, at least up to 30% per annum, is to some extent confirmed by the NWC Term Sheet dated 22 July 2016 which records that NWC was prepared to provide or arrange finance which included interest at a "normal" rate of 5% per month (although described as the "normal" rate, it was a default rate) and a "lower" rate of 2.5% (being the rate payable if there was no default). Those rates were quoted for a loan period of six months with "an option to roll over for a further three months subject to good conduct". I do not, however, find that the NWC Term Sheet is any evidence that commercial borrowers seeking short term bridging finance for a development project would pay interest at a starting rate of 60% per annum to secure such finance.

Is cl 7.1 unenforceable as a penalty?

1. In Andrews v Australia & New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30 at [10], the Court (French CJ, Gummow, Crennan, Kiefel and Bell JJ) described the "settled aspects" of the penalty doctrine as including that: "In general terms, a stipulation prima facie imposes a penalty on a party (the first party) if, as a matter of substance, it is collateral (or accessory) to a primary stipulation in favour of a second party and this collateral stipulation, upon the failure of the primary stipulation, imposes upon the first party an additional detriment, the penalty, to the benefit of the second party. In that sense, the collateral or accessory stipulation is described as being in the nature of a security for and in terrorem of the satisfaction of the primary stipulation. If compensation can be made to the second party for the prejudice suffered by failure of the primary stipulation, the collateral stipulation and the penalty are enforced only to the extent of that compensation. The first party is relieved to that degree from liability to satisfy the collateral stipulation."
2. The "collateral" stipulation, or term of the Facility Agreement said to constitute a penalty and accordingly to be unenforceable, is cl 7.1 which imposes an obligation on the Borrower to pay interest at the Higher Rate for the period during which an Event of Default subsists. If that default is "remedied", interest reverts to the Lower Rate. The interest rate difference is equivalent to 30% per annum and that is so irrespective of the occurrence constituting the Event of Default.
3. The "primary" stipulation upon the "failure" of which cl 7.1 operates is that no Event of Default should occur during the period of the borrowing. That is the condition, the non-performance of which engages the obligation to pay interest at the Higher Rate whilst the default subsists. There are sixteen "events" which separately constitute Events of Default (cl 11.1(a)-(p)). The 'headline' descriptions of the subject matter of those "events" include insolvency, payment obligation not complied with, other obligation not complied with, misrepresentation, litigation, loss of priority, ceasing business, maintenance of capital, cross-default, compulsory acquisition, and qualification of accounts.
4. There is no express contractual promise on the part of the Borrower to perform the condition that there be no Events of Default, however two of those events (cll 11.1(b) and (c)) consist of breaches of monetary and non-monetary obligations arising under one or more of the Finance Documents. With few exceptions, the remaining "events" are not in terms breaches of any of those agreements. Some of the occurrences constituting or giving rise to an Event of Default may have been avoidable by the Borrower. Others will not necessarily involve any acts or omissions over which the Borrower has direct control. Some may be capable of being "remedied". Others may not.

Summary of conclusions

1. In the result I have concluded: 1. That the Deed of Amendment and Restatement became binding on 28 June 2017; 2. That there was a non-monetary Event of Default from 22 April to 26 June 2017 and a continuing monetary default from 7 September 2017; 3. That cl 7.1 of the Facility Agreement is unenforceable as a penalty. Accordingly no interest was recoverable at the Higher Rate as a result of either of the defaults in (2); 4. That although Aquamore was not authorised to exercise any power of sale under s 58 of the Real Property Act or cl 9.4 of the Mortgage, its want of authority to do so did not give rise to any recoverable loss or damage suffered by First on First; 5. That Aquamore did not breach its equitable and statutory obligations in exercising its power of sale in respect of the property in March and July 2018.

Directions for finalising of orders

1. The parties provided, in the course of argument, a document titled "Quantum Matrix" which was intended to identify the judgment sum depending upon the resolution of various issues. I remain unable to determine the amount for which judgment should be entered having regard to my conclusions recorded above. Accordingly, I propose to direct that the parties confer and agree short minutes of order providing for the amount of the judgment, including interest to the date of judgment, and the costs of the proceedings.
2. There were five principal issues in the proceedings. First on First and the guarantors have succeeded in relation to at least three of them, including whether the Deed of Amendment and Restatement became binding and whether cl 7.1 is unenforceable as a penalty. Having regard to the time occupied during the hearing with respect to those issues, and assuming that time reflects the division of work undertaken more generally in preparing for the hearing, I would propose that Aquamore pay 25% of First on First's costs of the proceedings. If the parties cannot agree on the costs order to be made, they should exchange written submissions addressing that question, which will then be dealt with on the papers.
3. Accordingly, I make the following directions: 1. That the parties confer and agree if possible by 5:00pm on 23 December 2021 short minutes of order giving effect to the reasons for judgment published on 21 December 2021. Such short minutes are to be forwarded to Meagher JA's associate by that deadline. 2. That if the parties are unable to agree on the form of orders to be made, other than in respect of costs, the proceedings be stood over for directions before Meagher JA at 4:30pm on 31 January 2022. 3. That if the parties cannot agree on the costs orders to be made, the Aquamore parties should provide their written submissions on costs (not exceeding 4 pages) by email to Meagher JA's associate and the First on First parties by 5:00pm on 24 January 2022. 4. That the First on First parties are to provide their written submissions on costs (not exceeding 4 pages) by email to Meagher JA's associate and to the Aquamore parties by 9:00am on 31 January 2022.

Amendments 21 December 2021 - [142] - first sentence, "It may be accepted" changed to "It may be taken as not controversial". Last sentence, "likely" deleted before "increased credit risk" DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 21 December 2021