By summons filed in the duty list on 5 September 2019, the plaintiff, Capital Securities XVII Pty Ltd, sought judgment against the first and second defendants in the sum of $70,152.41 plus ancillary relief.
The defendants are, respectively, Anna's Garden Pty Ltd and Ms Shujuan Xue.
The plaintiff also sought a declaration that the amount of $70,152.41, together with interest thereon, is secured by an equitable charge over the property at 24 Barcoo Island, Sylvania Waters, being the land contained in Certificate of Title Folio Identifier 604/237274, which is registered in the name of the second defendant. The plaintiff also sought orders appropriate for the enforcement of the charge.
The plaintiff had earlier lodged a caveat against the title to the Sylvania Waters property, and, in response to a lapsing notice, it sought interlocutory relief in its summons extending the operation of caveat number AM901901 until further order.
The plaintiff's application for an order extending the caveat came before me in the duty list on 10 September 2019. It became necessary to adjourn the application, and, on that date, on an interlocutory basis, I made an order extending the operation of the caveat under s 74K of the Real Property Act 1900 (NSW) until further order. The extension until further order was made as a matter of convenience, and I made an order noting that the plaintiff would have the burden of proving that the extension of the operation of the caveat should not be vacated, when the matter next came before the Court. I stood the matter over part-heard to 18 September 2019. On that day, the hearing was completed.
There was no disagreement between the parties that the principles to be applied in deciding whether the caveat should be further extended are as stated by Slattery J in Peters v Lithgow Forge Pty Ltd [2010] NSWSC 283 at [35]-[36], as follows:
[35] The test which must be applied at this stage is similar to that that applies to an interlocutory injunction. The burden that the first and second defendants bear on this application is the burden of showing that in substance there is not a serious question to be tried on the issue of the existence of an equitable interest in the property. The power to extend operation of the caveat under s 74K(2) Real Property Act depends upon the court's satisfaction that "the caveator's claim has or may have substance". This had been described as "not a very demanding test": Dowdle v Inverell SC (1999) ANZ ConvR 429; (1998) 9 BPR 17,349 per Bryson J at 17,350. The test may be satisfied if the caveator can show an arguable case for final relief even though establishing the claim may not be without difficulties: Queanbeyan Leagues Club v Poldune Pty Ltd (1996) 7 BPR 15,078.
[36] It is not the role of the court to decide these questions finally now. It is undesirable for judges on interlocutory applications of this kind to give an opinion about a final view of the issues in the proceedings. I will limit myself accordingly to deciding whether or not there is a serious question to be tried.
The caveator identified in the caveat is the plaintiff, and the estate or interest claimed is described as a charge by virtue of an agreement between the plaintiff and the second defendant. The details supporting the claim are stated as being: "All asset security under the offer letter dated 1 September 2017 between [plaintiff] as Lender, [first defendant] as Borrower and [second defendant] as Guarantor".
The debt claimed of $70,152.41 was described in an affidavit of a director of the plaintiff as being made up of the following components, which were claimed to be payable under the terms of a document described by the plaintiff as the Letter of Offer:
(a) Application Fee $5,500
(b) Establishment Fee $39,930
(c) Liquidated Damages $16,561.88
(d) Legal Fees $2,783.04
(e) Valuation Fees $4,000
(f) GST 10% $6,877.49
Less payment received -$5,500
Total $70,152.41.
The background to the plaintiff's claim to be entitled to the payment of the sum of $70,152.41 is that the first defendant entered into a contract to buy five parcels of land on the Gold Coast in Queensland at a price of $3.3 million. The first plaintiff needed finance of approximately $2,000,000. The first defendant is apparently a company owned by the second defendant. The second defendant's husband, Mr Gaogeng He, known as Gordon, took steps to obtain an appropriate loan. He apparently acted on behalf of the two defendants. Mr He obtained the assistance of an acquaintance called Mr Zhou Zhuang. Both Mr He and Mr Zhuang gave evidence that, on or about 20 August 2017, contact was made by Mr Zhuang with Mr Henson Liang, of Acapital Fund Pty Ltd, who Mr Zhuang believed to be a finance broker.
Mr Liang sought the approval of a lender arranged by Mr Liang to make an appropriate loan to the first defendant. For the present, it must be noted that the defendants raised an issue as to the true identity of the company with which they dealt.
The event that gave rise to these proceedings was that Mr Liang initially advised Mr He that preliminary approval had been given for a loan of $1,815,000 to enable the first defendant to complete its contract for the purchase of the Queensland properties. In due course, a formal valuation of the properties was obtained, which caused the plaintiff to reduce the amount that it would agree to lend to the first defendant to a limit of $1,110,000. That was not a sufficient amount to enable the first defendant to complete the contract. Consequently, the first defendant decided not to proceed with the loan. The amount of $70,152.41 is the amount that the plaintiff claims it is owed by both defendants as a result of the first defendant not proceeding with its application for the loan.
The plaintiff claims to be entitled to the debt and the charge securing it under a Letter of Offer dated 1 September 2017. The defendants do not contest that the second defendant signed the Letter of Offer on behalf of the first defendant and herself.
The second defendant gave her credit card details in the Letter of Offer, which enabled the plaintiff to be paid the amount of $5,665. In due course, that amount was paid through the second defendant's credit card, although apparently to a related company of the plaintiff. That amount was evidently intended to cover the application fee of $5,500 as stated in Section 6.0 of the Letter of Offer. There was no explanation as to why the amount actually required to be paid was $5,665. The plaintiff's claim does not give credit for the full amount paid by the second defendant.
The manner in which the Letter of Offer is actually described in the document itself is somewhat unfortunate. The document was not called a Letter of Offer. It was called: "Loan Approval for $1,815,000". There is a bold statement on the first page of the Letter of Offer that the application had been approved, albeit on the terms and conditions outlined in the document.
The statement: "Acapital Loans - Henson Liang" and an email address appears immediately under the date and the reference. It is not clear whether there was any commercial relationship or agency between Mr Liang and the plaintiff, and the reason his name and his business name appears on the Letter of Offer in addition to the business name "Prime Capital", which is apparently associated with the plaintiff, is not known.
6 September 2017 was given as the expiry date for the offer.
There was an instruction on the first page for the document to be completed and the last page signed and returned to "us". There was an instruction to arrange the payment required on the last page, being the $5,665, so that: "We can then order a valuation and loan documents". This latter instruction is relevant to certain evidence given on behalf of the defendants as to what their expectation was concerning how the $5,665 would be applied.
Section 2.0 identified the first defendant as the Borrower and the second defendant as the Guarantor. It also identified the security as being first ranking freehold mortgages securing all monies over the properties situated in Queensland that the first defendant had contracted to buy.
Section 3.0 dealt with Drawdown Requirements, and provided that certain matters "must be completed to our satisfaction (or waived) prior to the first drawdown". The first condition was the completion of a satisfactory independent valuation. It was noted that the first defendant had estimated the value of the five properties as being a total of $3,300,000.
Section 5.0 contained the "Terms & Conditions". The following terms and conditions are relevant to the present application. Clause 1 described the Letter of Offer as representing "a brief summary of facility terms, and full terms will be outlined in the General Terms". This suggests that the General Terms were another document to be provided in the future. This issue is relevant to a matter that I come to below.
The effect of clause 2 was that the loan approval was conditional on the terms and conditions in the document, and was not an unconditional offer.
Clause 3 is significant to an argument raised by the defendants, and is in the following terms:
3. Any reference to 'you' or 'your' means the Borrower and the Guarantor(s) jointly and all of them together. 'We' or 'us' means Prime Capital Securities Pty Ltd ACN 168 662 173 and/or Capital Securities XVII Pty Ltd ACN 616 158 920.
Clauses 4 to 6 had the effect that the defendants instructed "us" to engage a valuer to complete a valuation of the security property, and "you" agreed to pay the cost of the valuation.
By clause 10, the defendants instructed "us" to engage a law firm to prepare loan and security documents, and by clause 11 the defendants agreed to pay for the cost of all legal work on a full indemnity basis.
Clause 12 contained a recommendation that the defendants obtain independent legal advice before signing the document.
Under clause 14, all fees, costs and outlays outlined in the document became payable by the defendants, among other things, on the defendants' withdrawal from the offer.
The Application Fee, as outlined in section 6.0, was required by clause 15 to be paid upon acceptance of the offer by the defendants.
Among other things, clause 17 obliged the defendants, if they withdrew from the offer, to pay "liquidated damages equivalent to one month's interest at the Lower Rate".
Clause 18 was the charging clause, and provided:
18. You and each Guarantor charge all present and after acquired property in favour of us in respect of monies payable under these terms.
The Letter of Offer also contained a provision that, by signing the document, both the Borrower and the Guarantor accepted and agreed to be bound by the terms of the document.
The components of the amount of $70,152.41 claimed by the plaintiff are supported by the Letter of Offer as to the Application Fee (clause 15), the Liquidated Damages (clause 17), Legal Fees (clause 11) and Valuation Fees (clause 4), assuming that the plaintiff can ultimately prove the amounts claimed.
It is appropriate to say something in particular about the plaintiff's claim for an Establishment Fee of $39,930. There is no provision in Section 5.0 for the payment of an Establishment Fee in the event of the defendants withdrawing from the loan application. As mentioned, there is provision for an Application Fee, which was paid.
Mention is made of an Establishment Fee in Section 1.0, called "Loan Approval". That section contains the following statement:
This section outlines a summary of your loan approval terms.
Full terms and conditions will be included in our standard loan agreement and securities (the General Terms).
This clearly suggests that the General Terms were intended to be the plaintiff's standard loan agreement and securities, which would be entered into by the defendants, if the Letter of Offer became unconditional and the defendants proceeded with the loan.
Section 1.0 also contained the following entry: "Other fees & costs as set out in the General Terms". Beside that there was printed "Establishment Fee" and then "2.2% of Facility Limit".
Although it is not necessary for the issue to be finally decided at the present, it does not appear under the Letter of Offer that the plaintiff became entitled to the Establishment Fee, in addition to the Application Fee, if the defendants did not proceed with the loan. In principle, the Establishment Fee should be a fee earned by the plaintiff in return for the actual establishment of the loan. Further, it is difficult to see how the plaintiff could be entitled to both the Establishment Fee and liquidated damages.
The plaintiff's solicitors sent a letter to the defendants' then solicitors on 26 September 2017 enclosing a draft "Loan, Security and Guarantee Deed". Clause 6.1 of that draft document provided: "The Borrower must pay to the Lender the Establishment Fee in Item 6 of the Key Details on or before the earlier of the Initial Advance Drawdown Date and the First Advance Date". Item 6 of the Key Details stipulated that the Establishment Fee was 2.2% of the Limit. The Limit was stated in Item 3 as being $1,110,000. 2.2% of that amount is $24,420. That is the Establishment Fee that would have been payable if the defendants had proceeded with the loan. The Establishment Fee of $39,930 claimed by the plaintiff is 2.2% of the originally offered Facility Limit of $1,815,000. This consideration reinforces the logic in the conclusion that the plaintiff did not become entitled to the Establishment Fee if the loan was not established.
However, the entitlement of the plaintiff to an extension of the caveat does not depend upon the plaintiff being able to establish at this time that it has an arguable case that it is entitled to be paid all of the components of the $70,152.41 that it has claimed. It would not matter even if the Court was positively satisfied that the plaintiff was not entitled to some part of the amount claimed, provided that there was a reasonably arguable case that the plaintiff was entitled to some payment by the defendants.
That said, when account is taken of the effect that a caveat can have in cases such as the present, as a result of the commercial pressure that it may impose upon the owner of the property the subject of the caveat to pay the amount claimed in order to remove the caveat, it is likely to be pernicious if lenders include in their claims substantial amounts to which they are not reasonably entitled.
The defendants put a number of arguments as to why the plaintiff has not satisfied the legal test for the extension of its caveat.
First, the defendants argued that the party to the Letter of Offer was not the plaintiff, but was another related company called Prime Capital Securities Administration Pty Ltd. The defendants pointed to the fact that the Letter of Offer described the business name of the offeror in the footer as "Prime Capital", the valuation report described the instructing party as "Prime Capital", and the valuer addressed its tax invoice to "Prime Capital". The defendants also relied upon the apparent fact that the company that acted upon the authority in the Letter of Offer to claim the $5,665 was Prime Capital Securities Administration Pty Ltd, which is not the same company as the plaintiff.
However, the evidence shows that the solicitors who prepared the draft loan documentation sent their tax invoice to the plaintiff.
Given that all the plaintiff has to prove is that there is a reasonably arguable case that it is entitled to enforce the charge that the caveat was lodged to protect, in my view clause 3 in Section 5.0 of the Letter of Offer is decisive at this interlocutory stage. It provided that 'we' or 'us" means Prime Capital Securities Pty Ltd "and/or" the plaintiff. In my view, that term leaves it open to the plaintiff to prove at a final hearing that it was the party who incurred the costs and entitlements under the Letter of Offer.
In this respect, it is to be noted that the draft loan documentation prepared by the solicitors described the plaintiff as the Lender.
Secondly, the defendants put an argument that the Letter of Offer does not bind the defendants. They relied upon detailed evidence given by Mr He and Mr Zhuang of the circumstances in which the second defendant came to sign the Letter of Offer. That included that Mr He is not proficient in English, and that Mr Liang said that the money paid for the Application Fee was intended to cover the valuation and legal costs. That evidence, on its face, is capable of supporting a case that Mr Liang misled Mr He, and thus the defendants, concerning the terms contained in the Letter of Offer.
However, at this stage of the proceedings, there is no evidence at all linking Mr Liang with the plaintiff, so there is no basis for the Court to attribute to the plaintiff any of the conduct alleged to have been undertaken by Mr Liang. Even if there was some arguable basis for making the plaintiff responsible for Mr Liang's conduct, that by itself would not negate the plaintiff's entitlement to a continuation of the extension of the caveat, as the plaintiff only need establish that it has a reasonably arguable claim to enforce the charge.
Finally, the defendants put an argument that, on its proper construction, clause 18 did not create a charge over the second defendant's property, and could only create a charge over the property of the first defendant, being the borrower.
However, clause 18 of the Letter of Offer is clearly drawn in terms that include each Guarantor charging its property.
The defendants relied upon the decision of Young CJ in Eq in Iaconis v Lazar [2007] NSWSC 1103 at [23] to [24]. That decision, which is authority for the proposition that, where A gives authority to B to lodge a caveat in connection with an obligation by A to pay money to B, and there is no sufficient indication to the contrary, the implication is that an equitable charge is intended to be created to secure payment to B of the money. Insofar as his Honour suggested that the Court may find that A never intended to give a charge, notwithstanding the words used in the document, if A was of limited commercial experience, and the clause relied upon had not been properly explained to A, that is an argument which may be available to the defendants at a final hearing, but it would not justify the Court, at this interlocutory stage, to decline to extend the plaintiff's caveat on the basis that it did not have a sufficiently arguable claim to support the further extension of the caveat. This says nothing about the correctness of Young CJ's comments, which may be open to question in light of subsequent decisions of this Court.
It is also significant that the defendants have not tendered any evidence that the further extension of the caveat will cause the second defendant any significant injury or inconvenience pending the final determination of these proceedings.
For these reasons, I find that the plaintiff is entitled to the continuing extension of the caveat. That is so, even though there is a relatively strong argument that the debt claimed by the plaintiff, as being secured by the charge, cannot be substantiated at the final hearing.
It is not necessary for the Court to make any substantive order at this stage, as the existing order that the caveat be extended until further order of the Court will continue in operation.
The plaintiff seeks an order for costs against the defendants. As the application is an interlocutory one, and as it has not yet been finally established that the plaintiff is entitled to the charge that is protected by the caveat, I have concluded that it would be premature to make a costs order in favour of the plaintiff at this interlocutory stage of the proceedings. On the issue of costs, I think it is significant that the amount of the debt to which the plaintiff may be entitled is likely to be less than half of the amount claimed. It is likely that the defendants' reaction to the plaintiff's claim has been influenced by the amount of the claim in proportion to the real loss caused to the plaintiff by the decision of the defendants not to proceed with the loan.
In these circumstances, I order that the costs of the interlocutory application be reserved, to be dealt with by the Court when it hears the plaintiff's application on a final basis.
The only other order I make is to stand these proceedings into the Real Property List on Friday, 4 October 2019 for directions.
[2]
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Decision last updated: 24 September 2019