(Revised from transcript and annotated; issued 14 September 2022)
29 August 2022:
This is a case about money lending and security. The plaintiff company formerly held a registered mortgage over land belonging to the defendant company as security for a loan made to it. The mortgage was later discharged, purportedly because the loan had been repaid. The plaintiff company (now in receivership) disputes that this was actually so. It seeks judgment for the balance of the principal owing together with interest. It also seeks to have the mortgage restored to the property.
At the centre of the events which have given rise to these proceedings is the figure of Mr Frankie McDad. He is a Syrian‑Australian businessman who has operated under a number of different names. His birth name was Amjad Remi Al-Moqdad. He was also known as Franco or Franko Al‑Moqdad. He has also used the name Remi Saud Moqdad. It seems that he has now adopted Frankie McDad as his legal name. I will use that name to refer to him.
Mr McDad's business ventures have included a lending business. The focus of the business appears to have been the making of loans at high interest rates to borrowers unable to obtain credit from banks or other established financial institutions.
So far as the evidence in this case is concerned, the lending operations were carried out through four companies. One was Business Finance Pty Limited ("BF"), which is the plaintiff. [1] The other three were Private Fund Pty Limited ("PF"), Business Capital Pty Limited ("BC") and Partner Invest Pty Limited ("PI").
Mr McDad is married to Yuk Mei Regina Ko. At all relevant times, she worked for him in the lending business which I have described. Two other members of Mr McDad's family came into the case. One was Hanan Mokdad, his sister. The other was her son, Mr McDad's nephew, Nick Houmam Al Jayoush. [2]
BF's loan operations were funded by a syndicated loan from a group of external investors. In July 2019, those investors appointed a receiver to BF. Later, a winding up order was made. These proceedings have been brought by BF on the receiver's instructions, presumably in the interests of the external investors as secured creditors of BF.
There is little evidence about the sources of the funds which were lent by Mr McDad's other three companies: PF, BC and PI. It seems that, as PF's name suggests, the money is may have come in whole or part from Mr McDad's own assets or resources that he controlled. PI is now in liquidation, but PF and BC are not and remain under the control of Mr McDad.
The proceedings concern a loan of $1.23 million from BF to the defendant, Casula Projects Pty Limited ("CPPL"). That loan was made in October 2017. It was the subject of a written loan agreement. The loan carried an interest rate of 24 per cent.
The purpose of the loan was to fund the acquisition by CPPL of a townhouse at Surfers Paradise in Queensland. In accordance with the loan conditions, CPPL was required to provide security in the form of a first registered mortgage over the land in favour of BF.
The purchase was completed, and the loan was drawn down, on 9 October 2017. A mortgage from CPPL to BF of the Surfers Paradise land was duly registered.
On 12 October 2017, Mr McDad arranged for the transfer of $600,000 from PF's bank account to BF's bank account. On 10 November, he organised a further transfer from PF to BF of $800,000. Following the second transfer, Mr McDad proceeded on the basis that the two payments had effected a refinance of the loan, discharging any liability to BF and substituting a liability to PF. On 14 November, he procured the discharge of the mortgage over the Surfers Paradise property.
CPPL had been incorporated on Mr McDad's instructions in May 2017. Mr Al Jayoush was the sole director. Later, a discretionary trust for the benefit of Mr Al Jayoush's family was established. The purchase of the Surfers Paradise land was made by CPPL purportedly as trustee for that trust.
In November 2017, Ms Ko replaced Mr Al Jayoush as the sole director of CPPL. In turn, Ms Ko was replaced by Ms Mokdad in July 2018 before being reappointed in December 2018. During at least part of the period that Ms Ko was a director, Mr McDad and Ms Ko lived at the property.
Ms Mokdad has become the sole director again, the property has been rented out. Despite the contention that PF is now the lender, Mr McDad has seemingly made no effort to require CPPL to pay the full amount of interest on borrowings (the rental being received from the property does not fully cover the interest on CPPL's liability on the amount borrowed) or to enforce the security.
[2]
Issues for determination
The principal contention for BF in these proceedings was that the loan was not repaid (or fully repaid) before 14 November 2017. The mortgage in favour of BF should not have been removed from the Surfers Paradise property.
Furthermore, it was contended that the full principal amount of the loan remains outstanding, and judgment should be given for that amount against CPPL, together with interest. In addition, it was contended for BF that it was entitled to an equitable mortgage over the property to secure the amount outstanding.
The hearing was originally fixed for 10 days. The estimate was later reduced to 8 days, and eventually, the hearing has occupied 5 days. The evidence, both documentary and testimonial, has been extensive. Three of the plaintiffs' witnesses were cross-examined. In CPPL's case, Mr McDad, Ms Mokdad and Mr Al Jayoush (belatedly) gave evidence and were all cross-examined. The cross‑examination of Mr McDad was lengthy and intense. Counsel for BF launched a wholesale attack on his credit. The credit of Ms Mokdad and Mr Al Jayoush was also attacked.
A particular focus of the attack was on the validity of a written loan agreement between PF and CPPL which bore the date 6 October 2017 and was relied upon by CPPL in support of its claim that the loan had been refinanced with PF. Counsel for BF invited me to find that the document had in fact been prepared much later, at some point in 2019 or early 2020, and that, even if the date was correct, it was a sham.
In final submissions, there was a dramatic reduction in the scope of the dispute. Counsel for CPPL abandoned the contention that the payment of $600,000 from PF to BF on 12 October 2017 had been made in reduction of CPPL's loan with BF. It followed that on any view the mortgage should not have been discharged on 14 November 2017. And while counsel for CPPL continued to maintain that the loan had been fully discharged as a result of later payments, he did not rely on the purported loan agreement from PF to CPPL dated 6 October 2017. The issues about the validity or enforceability of that agreement fell away, and the credit issues in the case largely fell away as a result.
The issue that remains is what the loan account balance now is. Counsel for CPPL does not dispute that if there is any amount owing, the mortgage should be reinstated by CPPL.
[3]
Loan account balance
As a result of the narrowing of issues which I have described, there are only two transactions, or groups of transactions, which require consideration.
[4]
May 2018 payment of $800,000
In May 2018, BF transferred to PF the sum of $800,000. This was the same amount as had been paid by PF to BF the previous November.
BF used accounting software (known as "LMA" software) to manage its accounts and its loan book. A statement generated by that software for the CPPL loan account from its inception to 30 June 2018, is in evidence. On that statement, the $800,000 paid by BF to PF in May 2018 is recorded as a "redraw". The balance shown on the statement as at 30 June is $1,208,500.
CPPL's position in the proceedings up until closing submissions was to deny that the $800,000 payment in May 2018 was properly attributed to CPPL's loan account. In closing submissions counsel did not formally concede the point, but he advanced no positive submission as to why I should disregard the LMA statement, which is a contemporaneous business record of BF and was tendered without any objection.
Furthermore, the treatment of the $800,000 as a debit in the account, yielding an amount outstanding of approximately $1.2 million at 30 June, was consistent with the payout figure adopted by Mr McDad himself in the following year (see below). I am satisfied that the $800,000 was a reversal of the payment from the previous November, and was properly debited against CPPL on the account.
[5]
March 2019 receipts totalling $1,199,900.
In February 2019 Ms Ko instructed BK's lawyers, who appear to have held what was in effect a continuous retainer to assist with Mr McDad's loan transactions, to prepare for payout of the CPPL loan. The payout figure given to the solicitors for the CPPL loan was $1,199,900. That figure corresponds with the figure showed as owing on the LMA statement as at 31 May 2018. For some reason that was not explored in the evidence, Mr McDad (who was the source of the instructions to Ms Ko) appears to have thought it legitimate not to charge CPPL the interest for the month of June.
This refinance did not proceed immediately. But in the middle of the following month, BF received payments which totalled the payout figure of $1,199,900.
The first two payments were received on 14 March. They were for sums of $350,000 and $600,000. The monies in question had come from external investors who had been persuaded by Mr McDad to invest monies with him on mortgage‑backed loans through his other company, BC.
The monies had found their way into the lawyers' trust account in the name of BC. On 14 March, Ms Ko wrote to the lawyers, instructing them to transfer the two amounts totalling $950,000 to BF by way of repayment of the CPPL loan.
The remaining $249,900 was received by BF four days later, on 18 March. This payment was made from PF's bank account to BF's bank account. The payment was effected by Mr McDad himself.
So far as the payments on 14 March are concerned, there is an express contemporaneous statement in the evidence, clearly originating from Mr McDad, that the monies were being paid by way of repayment of the CPPL loan. There is no equivalent evidence about the payment on 18 March, but there is a clear inference deriving from the coincidence with the payout figure given the previous month that that payment represented the balance of the loan.
Counsel for BF pointed out that, on the evidence, the external investors who had funded the payments on 14 March had not intended that the monies would be applied to discharging CPPL's loan from BF. At one point in closing submissions counsel argued that the payment of the monies was a breach of the terms of a Quistclose trust (see Barclays Bank Ltd and Quistclose Investments Ltd [1970] AC 567) between the external investors and BC, or alternatively the monies had in effect been stolen, given rise to a trust on the principles in Black v S Freedman & Co (1910) 12 CLR 105. Counsel suggested that this prevented the monies from being treated as a repayment of the loan.
There were numerous difficulties with this argument. One was that it had not been pleaded. Nor had the investors (or BC) been joined as parties to the proceedings. Nor was BF prepared to acknowledge that the BC investors had any proprietary interest in any of the assets of BF which would prevail over the BK lenders' security.
In the end counsel for BF withdrew the argument. Counsel, however, did not completely abandon the contention that the moneys were not to be attributed to the CPPL loan account.
Counsel accepted that, in the ordinary course, if ill-gotten money is used to discharge a debt, the debt is effectively discharged at law, even though equity may later intervene. Counsel also accepted that the question was ultimately a question of the intention of Mr McDad as the person who controlled the affairs of all of the relevant companies. Counsel frankly acknowledged the difficulty facing him but submitted, by reference to subsequent statements made by Mr McDad, that I should not accept that it was his intention that the moneys in question were to repay the CPPL loan.
The principal subsequent statements were those made by Mr McDad to Mr Neil Sutton and Mr Jay Mertens. The statements were made in June 2016.
Mr Sutton and Mr Mertens worked for M.H Carnegie & Co. ("Carnegie"). In his work for a previous employer, Mr Sutton had been responsible for putting the syndicated loan facility deal together, and when he moved to Carnegie, Carnegie effectively acted for the investors in monitoring the reporting about the loan book which was required under the facility.
As early as 2018, Mr Sutton and Mr Mertens had become concerned that Mr McDad was not complying with the terms of the facility agreement. In fact, the CPPL loan as a related party loan was not permitted under the terms of the facility agreement, although Mr McDad appears to have concealed this from Carnegie (and the lawyers).
In order to report to Mr Sutton and Mr Mertens, Mr McDad used spreadsheets which set out details of the loan. Mr Sutton and Mr Mertens detected discrepancies in the spreadsheets associated with the CPPL loan. Initially it was shown as owing to BF. Then in a later report it was removed, as having been repaid.
Mr Sutton and Mr Mertens queried this. In a conversation in late June, Mr McDad told them that the repayment had been a "mistake" and that the mortgage should not have been discharged. He then undertook, in response to their request, to restore the mortgage and "fix" the account. Mr McDad did not immediately re‑register the mortgage but he did cause BF to lodge a caveat which has remained on the land ever since.
Counsel also pointed to evidence of statements by Mr McDad in the course of the trial that the payments made in March were "temporary". Counsel submitted that, at the time, Mr McDad had never formed any settled intention for the payments to reduce the loan. Rather, it was a temporary expedient, as part of his attempts to juggle the loan book and keep Carnegie happy.
I do not accept this submission. There are five main reasons for that:
1. The statement made to the Carnegie representatives that the repayment was a "mistake" was itself a lie. It is perfectly obvious from the evidence that whatever other features those payments may have had, they were entirely deliberate on Mr McDad's part. I am quite satisfied, and there was no dispute about this, that he gave the instructions to Ms Ko. And there can be no question that he intended that the payments would be made in accordance with the statements that she made to BF's lawyers.
2. Counsel mounted a strenuous, and in my view, successful, attack on Mr McDad's credit before that issue largely fell away. I will not summarise all the points made by counsel. They are set out in detail in the written submission which was provided to the Court. It is sufficient to say that I thought that Mr McDad emerged from the hearing as a wholly untrustworthy witness. I was left with the impression that he would say anything at all, at any time, to suit his perceived interests. I have no doubt that when dealing with Carnegie, he adopted the same approach. Even if his statement to Carnegie did not contain a direct lie, it is not something that the Court could ever safely give any credence to.
3. It may be accepted that Mr McDad intended that the repayment would be temporary in the sense that it would or might be later reversed in whole or in part as a result of some other deal or arrangement. But the fact that a transaction is undertaken with the intention that it will or may later be reversed does not make it ineffective in the meantime. Mr McDad's description of the transaction as temporary does not assist BF.
4. The repayment of the loan was in fact consistent with BF's obligations under the syndicated loan agreement and Mr McDad's obligations as a director of BF. The loan, as I have said, was a non-compliant one. BF's interests demanded that if possible, the money lent should be recovered so as to remove the loan from the loan book. That is what Mr McDad did, albeit so far as $950,000 was concerned, to the disadvantage of the investors who he persuaded to put in the necessary funds. Mr McDad is unlikely to have been very concerned about compliance with directors' duties and the terms of the syndicated loan agreement. But I see no force in the suggestion that the Court should, in circumstances where Mr McDad's conduct was objectively in BF's interest, infer that, in truth, his intentions and actions were otherwise.
5. And finally, even if Mr McDad were a more credible witness, the best evidence of his intention at the time is still the contemporaneous evidence. That evidence is all one way, and supports the conclusion that the monies were intended as a repayment of the CPPL loan.
[6]
Interest
This conclusion does not mean that nothing is owing under the loan now. As I already mentioned, the payout figure was less than the amount in fact recorded as owing on the LMA statement on 30 June 2018. It also made no allowance for interest for the period between 1 July 2018 and March 2019. In the end, counsel for CPPL accepted that if I concluded, as I have, that the $800,000 paid in May 2018 was a redraw on the loan, there would be an amount owing by way of interest.
Furthermore, even in the period up to June 2018, the interest has apparently been understated. Counsel also accepted that CPPL could not resist the recalculation of the interest for the period up to June 2018 in accordance with the terms of the loan agreement. Because of the high interest rate and the effect of compounding, the amount outstanding will still be more than $500,000.
[7]
Conclusions and orders
I conclude that BF is entitled to judgment, but on the footing that the $1,119,900 received in March 2019 was a repayment of principal. Interest will have to be recalculated accordingly.
It follows that BF is entitled to have the mortgage registered as security for the judgment (and perhaps for costs of these proceedings). Although further orders were sought on BF's behalf to provide for the sale of the property, that is not necessary. I will order that CPPL register a fresh mortgage in the same terms as the mortgage which was originally granted in October 2017, and any further debt recovery or security realisation procedures can then take place extra-curially.
I will hear the parties on the form of orders to be made to give effect to these conclusions.
(Having failed to agree on a minute of order giving effect to the judgment, counsel addressed further).
[8]
14 September 2022:
The orders made of the Court are:
1. Notes that for the purposes of these orders:
1. "Memorandum" means the memorandum of standard terms is described as "Summer Lawyers 2017 Memorandum" registered with the Queensland Titles Registry on 11 October 2017 by general request numbered [XX];
2. "Mortgage" means the instrument being formerly registered mortgage number [XX] in respect of Lot [XX] of RP [XX] (Mortgage) which includes the Memorandum; and
3. unless stated otherwise, capitalised terms shall have the same meaning as stated in the Memorandum.
1. Orders the defendant to execute within 28 days of the date of these orders a mortgage in registrable form in favour of the first plaintiff in the same or substantially the same terms as contained in the Mortgage (including the Memorandum as incorporated into the Mortgage), to stand as security for the payment of the Secured Money (as defined in the Memorandum).
2. Declares that for the purposes of the Mortgage, the quantum of the Secured Money, including interest and fees, as at 31 May 2018 was $1,199,900.
3. Declares that the following repayments of the Secured Money were made on the following dates:
1. $650,000 and $300,000 on 14 March 2019; and
2. $249,900 on 18 March 2019.
1. Orders the plaintiffs to file and serve any evidence and any written submissions (not exceeding 5 pages) in relation to the issue of the costs of the proceedings (Costs Issue) by 5pm on 20 September 2022.
2. Orders the defendant to file and serve any evidence and any written submissions (not exceeding 5 pages) in relation to the Costs Issue by 5pm on 28 September 2022.
3. Orders the plaintiffs to file and serve any evidence and any written submissions in reply (not exceeding 5 pages) and in reply in relation to the Costs Issue by 5pm on 6 October 2022.
4. The Court to determine the Costs Issue on the papers provided unless a short hearing on the Costs Issue is requested by any party to the proceedings.
5. The parties have liberty to apply on 3 days' notice.
[9]
Endnotes
BF is actually the first plaintiff. The second plaintiff is the receiver, Mr Ayres. No separate relief was sought by him. For convenience, I refer to BF as if it were the sole plaintiff.
Mr Al Jayoush has changed his legal name to Nick Mac Mokdad. I will refer to him as Mr Al Jayoush.
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Decision last updated: 14 September 2022