HIS HONOUR: There are before the Court two notices of motion. The first, filed by the first and second defendants on 17 April 2019, seeks leave to file an amended defence and a cross-claim. The second, filed in amended form by the plaintiff on 27 February 2019, claims summary judgment for possession of land pursuant to r 13.1 of the Uniform Civil Procedure Rules.
[2]
Loan, guarantee mortgage and default
The plaintiff carries on business as a provider of finance for commercial purposes. On 22 December 2017 it entered into a Loan Security and Guarantee Deed ("the Deed") with Y Corporation Pty Ltd ("Y Corporation") as borrower. The defendants are parties to the Deed as guarantors. On the same date the plaintiff advanced to Y Corporation, pursuant to the Deed, $1,120,000. The purpose of the loan was to refinance an existing facility from KR Services Pty Ltd ("KR Services"). At drawdown of the loan from the plaintiff on 22 December 2017 $1,050,000 was paid to KR Services.
It was a term of the Deed that the defendants as guarantors would execute in favour of the plaintiff a mortgage over residential property at 9 Beazley Street, Ryde of which they are registered proprietors as joint tenants. The first defendant, Mrs Zahra Yusofzai, and the second defendant, Mr Zia Yusofzai, are the parents of the third defendant, Mr Waise Yusofzai. At all material times the three defendants together with Melissa Yusofzai have each held one of the four issued shares in Y Corporation and the third defendant has been the sole director and secretary of the company. The mortgage was duly provided at settlement and has been registered by the plaintiff.
As security for Y Corporation's prior borrowing from KR Services the defendants had executed a guarantee mortgage that had been registered on 1 May 2017. At settlement of Y Corporation's borrowing from the plaintiff on 22 December 2017 a discharge of the KR Services mortgage was obtained upon payment of $1,050,000 of the loan proceeds to that prior mortgagee. The discharge of the KR Services mortgage was registered together with the guarantee mortgage in favour of the plaintiff on 8 March 2018.
It was a term of the Deed that Y Corporation would pay interest, at a rate stipulated in a schedule to the Deed, monthly in advance on the first day of each month. A higher rate of interest was stipulated, reducible to a significantly lower rate if paid punctually. By 11 May 2018 Y Corporation had failed to pay interest instalments totalling $76,938.46. This constituted an event of default under cl 8 of the Deed. On 11 May 2018 the plaintiff made demand in writing upon the defendants as guarantors for the overdue interest. Payment was not made. As a result the whole of the outstanding principal and interest became repayable pursuant to cl 9 of the Deed.
On 20 June 2018 the plaintiff served on each of the defendants a written demand for the whole outstanding balance of the loan account in the sum of $1,212,463.90 This had become payable by Y Corporation but had not been satisfied. The plaintiff also gave notice to each of the defendants pursuant to s 57(2) (b) of the Real Property Act 1900 (NSW) as a prerequisite to exercising its power of sale under s 58. The defendants have not paid any part of their liability under the guarantee as claimed by the plaintiff. The plaintiff filed its statement of claim herein on 25 June 2018 seeking judgment for possession of the Beazley Street property. The plaintiff also claims costs. No other relief, such as a money judgment for the debt, is sought.
The facts thus stated are established by an affidavit of Simon Heathcote sworn 13 December 2018. Mr Heathcote is the Chief Financial Officer of the plaintiff. Copies of the Deed, other transactional documents, the mortgage in favour of the plaintiff and the notices under s 57(2) (b) of the Real Property Act are annexed to his affidavit. The requirement of par (b) of r 13.1(1) that there should be evidence from "some responsible person, that in the belief of the person giving the evidence, the defendant has no defence to the claim" is satisfied by an affidavit of the plaintiff's solicitor, Paul Raymond Box, sworn 14 February 2019, at par 35.
The third defendant has not filed a defence. In default, judgment for possession of the mortgaged property was entered against him on 21 February 2019.
[3]
First and second defendants' current defence
The first and second defendants filed a defence on 14 August 2018. In that pleading they do not admit the advance of the loan, the Deed, the mortgage, the default, the plaintiff's demands or its s 57(2)(b) notices or the non-payment of the mortgage debt. All of these matters are proved straightforwardly by Mr Heathcote's affidavit and the business records he has annexed. The first and second defendants' non-admission of pars 3-15 of the statement of claim does not raise any serious question to be tried.
Paragraphs 4-17 of the defence plead the first and second defendants' case that the plaintiff's loan to Y Corporation and the mortgage were "unjust and/or unconscionable and void pursuant to s 7(1)(b) of the Contracts Review Act 1980 (NSW), alternatively pursuant to the general law". In support of this contention the following matters are alleged in the defence:
1. In about December 2017 the third defendant represented to the first and second defendants (in Dari and/or Farsi) "that a new mortgage from the plaintiff secured over the property would enable him to pay out the existing mortgage of a similar amount to a mortgagee known as Andask Pty Ltd and that the new mortgage would be at a lower interest rate" [pars 4.5, 5]. The reference to Andask Pty Ltd is no doubt a mistake in the drafting. The prior mortgagee of the subject property was in fact KR Services. Andask Pty Ltd was the mortgagee of another property owned by the third defendant and his wife: see Yusofzai v Andask Pty Ltd [2019] NSWSC 124.
2. In reliance on this representation the first and second defendants executed the mortgage in favour of the plaintiff, as requested by the third defendant [pars 4.6, 6].
3. The first and second defendants believed they had to "assist the third defendant to be relieved from his or his company's indebtedness" [par 12(c)].
4. The first and second defendants could not read and did not understand the documents they signed in reliance upon their son's representation [pars 4.7, 7].
5. The plaintiff failed to take reasonable or adequate steps to ensure that the first and second defendants understood the nature of the risk and effects of the loan and mortgage, that they received independent legal and financial advice and that they had sufficient income to be able to make payments of principal and interest [par 9].
6. The plaintiff knew that the first and second defendants did not have financial capacity to service or to repay the loan and that it was of no commercial benefit to them [pars 8, 11, 15(b)].
7. In the circumstances the first and second defendants were in a weak position relative to the plaintiff in entering into the Deed and the mortgage and were under a special disability and at a special disadvantage of which the plaintiff took advantage [par 12].
There are very obvious problems with this defence case. Items (1), (2) and (3) are an acknowledgement that the first and second defendants understood correctly the nature of the transaction they were entering into, namely, a mortgage of their property to secure a loan to their son's company from a new lender, to replace an existing loan already secured over the property. This acknowledgement substantially undermines the allegations referred to in (5), that the plaintiff failed to ensure that the first and second defendants understood the nature of the transaction.
The allegations referred to at (5) and (6), concerning the first and second defendants' financial capacity, are irrelevant because they were not the borrowers, merely the providers of guarantee security. The pleading takes an enormous leap to the conclusions asserted in pars 12(d) and (e) and 15 that the first and second defendants were at a special disadvantage and that the plaintiff unjustly and/or unconscionably took advantage of them. This leap is not sustainable on the primary facts alleged in the defence.
[4]
Limited effect of the current defence at its highest
In asserting that, on the facts pleaded, the Court should refuse to enforce the plaintiff's mortgage, the defence fails to address the circumstance that, at the time the transactions with the plaintiff were entered into, Y Corporation was already indebted for $1,050,000 to KR Services and the defendants' land was already burdened with a mortgage to secure that debt. Upon implementation of the transactions with the plaintiff, Y Corporation's liability was increased by only $70,000 and the encumbrance of the defendants' property was increased, contingently upon default of Y Corporation, by the same amount. The evidence does not disclose the rate at which interest was payable to KR Services and I cannot determine whether the contingent encumbrance of the defendants' land referable to the plaintiff's interest charges was greater.
On the hearing of these motions the Court is not in a position to determine finally whether the first and second defendants are precluded from obtaining relief under the Contracts Review Act by force of s 6(2). The business records identified by Mr Heathcote indicate that the original borrowing from KR Services was for "consolidation of business debts" of Y Corporation and was "a commercial business loan". The evidence shows that Y Corporation operated a franchise real estate business and was to some extent involved in property development. The loan from the plaintiff would, prima facie, be attributed to the same business purpose as the loan from KR Services that was being refinanced. As all three defendants were shareholders in Y Corporation it appears likely that the evidence at final hearing would establish that the Deed and mortgage with the plaintiff were entered into "in the course of or for the purpose of a trade, business or profession carried on by" the defendants through Y Corporation.
However, assuming in favour of the first and second defendants that they would be able to invoke the Contracts Review Act, it becomes necessary to consider how the Act might be applied. Section 7 is the operative provision, as follows:
7 Principal relief
(1) Where the Court finds a contract or a provision of a contract to have been unjust in the circumstances relating to the contract at the time it was made, the Court may, if it considers it just to do so, and for the purpose of avoiding as far as practicable an unjust consequence or result, do any one or more of the following:
(a) it may decide to refuse to enforce any or all of the provisions of the contract,
(b) it may make an order declaring the contract void, in whole or in part,
(c) it may make an order varying, in whole or in part, any provision of the contract,
(d) it may, in relation to a land instrument, make an order for or with respect to requiring the execution of an instrument that:
(i) varies, or has the effect of varying, the provisions of the land instrument, or
(ii) terminates or otherwise affects, or has the effect of terminating or otherwise affecting, the operation or effect of the land instrument.
(2) Where the Court makes an order under subsection (1) (b) or (c), the declaration or variation shall have effect as from the time when the contract was made or (as to the whole or any part or parts of the contract) from some other time or times as specified in the order.
(3) The operation of this section is subject to the provisions of section 19.
By force of s 19(1), an order under s 7(1)(C) or (d) cannot avoid or vary, in whole or in part, a registered land dealing such as the mortgage in this case. However a similar effect could be achieved, as between the defendants and the plaintiff, by an order under par (d).
On the assumption that the facts pleaded in the current defence would all be proved and that, upon those facts, the Court would find for the purposes of s 7(1) that the mortgage was "unjust in the circumstances relating to [it] at the time it was made" in my view the Court could not conclude that it would be just to refuse entirely to enforce the security. On any view, the plaintiff has, in consideration for the mortgage granted to it, paid $1,050,000 to remove a prior encumbrance on the land to that value. If the new mortgage in favour of the plaintiff should be regarded as having been obtained in circumstances unjust to the first and second defendants the Court could not fairly set aside or refuse to enforce it except on terms that the defendants reimburse the plaintiff for the $1,050,000 that was applied in discharge of the prior encumbrance.
Another way of expressing this conclusion is to say that the mortgage in favour of the plaintiff could only be found by the Court to be unjust insofar as it increased the encumbrance of the defendants' land. That being the extent of injustice in the transaction of 22 December 2017, the upper limit of relief that might be granted to the defendants under the Act would be to prevent the plaintiff enforcing its mortgage for any more than the debt that was already secured to KR Services. Thus, if all of these findings most favourable to the defendants should be made, the best they could achieve would be permission to redeem the mortgage for a payment of only $1,050,000, instead of the full amount that has now accrued due to the plaintiff, including default interest, being $1,560,645.96 at 23 April 2019.
Neither the defence nor the first and second defendants' affidavits, referred to below, suggest that they are willing or have capacity to pay the plaintiff $1,050,000. The defendants have not offered or expressed a willingness to offer any sum as a term of the mortgage not being enforced.
The first and second defendants rely upon the general law in the alternative to the Contracts Review Act. If the facts pleaded were all found favourably to the defendants and if the Court should conclude that general law principles governing equitable relief against unconscientious transactions are engaged, the law as stated by Deane J in Commercial Bank of Australia Ltd v Amadio (1986) 151 CLR 447; [1983] HCA 14 would apply. His Honour said (at 481, [26]):
Relief against unconscionable dealing is a purely equitable remedy. The concept underlying the jurisdiction to grant the relief is that equity intervenes to prevent the stronger party to an unconscionable dealing acting against equity and good conscience by attempting to enforce, or retain the benefit of, that dealing. Equity will not, however, "restrain a defendant from asserting a claim save to the extent that it would be unconscionable for him to do so. If this limitation on the power of equity results in giving to a plaintiff less than what on some general idea of fairness he might be considered entitled to, that cannot be helped" (per Lord Greene MR, Wrottesley and Evershed LJJ, In re Diplock [1948] 1 Ch 465, at p 532). Where appropriate, an order will be made which only partly nullifies a transaction liable to be set aside in equity pursuant to the principles of unconscionable dealing (see Bank of Victoria Ltd v Mueller [1925] VLR, at p 659 and the cases there cited). Where an order is made setting aside the whole of a transaction on the ground of unconscionable dealing, the order will, in an appropriate case, be made conditional upon the party obtaining relief doing equity.
Under these principles the limit of relief available to the first and second defendants would be in substance the same as under the Contracts Review Act. The result is that, because the first and second defendants are not willing and able to pay the plaintiff $1,050,000, on the current defence there is no basis for refusing to grant the plaintiff the relief it seeks by way of enforcement of its security, namely, judgment for possession.
I will next consider whether the first and second defendants' affidavits or their proposed amended defence and cross-claim indicate that they have any basis, involving triable issues of fact or law, upon which to resist judgment for possession.
[5]
First and second defendants' evidence
On 7 November 2018 the first and second defendants were directed to file any evidence upon which they wished to rely by 1 February 2019. Both of them failed to comply with this direction but each swore an affidavit on 5 April 2019. Those two affidavits, but no others of relevance, have now been filed. Neither of the affidavits of the first and second defendants contains any refutation of the facts pleaded and relied upon by the plaintiff.
The first defendant has deposed that she signed "various documents" on or about 22 December 2017 and she acknowledges her signature on the Deed and on the mortgage. The Deed incorporates a statutory declaration signed by the first defendant and witnessed by Joseph Taouk, legal practitioner of Kingsgrove. It contains these clauses:
1. I am a Guarantor named in the loan and security deed of which this declaration forms part relating to a loan to be provided by the Lender to the Borrower.
2. I have received independent legal advice and independent financial advice regarding the loan and security deed referred to in paragraph 1.
3. After receiving that advice I have freely and voluntarily signed the loan and security deed.
The first defendant has deposed that she is fluent in Farsi and Dari and can understand and speak oral English "a bit" but "cannot read and understand written English very much at all". The statutory declaration contained a fourth clause to the effect that an independent interpreter was present at the time when independent legal and financial advice was given and that the advice was translated. This clause has been struck through in the first defendant's statutory declaration. On a subsequent page of the Deed there is an interpreter's certificate. That has been left blank.
The first defendant has deposed in her affidavit of 5 April 2019 that on 22 December 2017 Joseph Taouk "read out part of the documents quite quickly and only for a short time" and that she did not understand what he said. She has deposed that he discouraged her from asking questions, did not give any legal advice about the documents and did not advise "what they meant". She says that, contrary to her statutory declaration, she did not receive any financial advice. According to the first defendant's affidavit her husband and son, the second and third defendants, were present when she signed the documents. The first defendant has deposed that she later received one of the notices of default served by the plaintiff but that she did not understand what it was.
In his affidavit of 5 April 2019 the second defendant has described his linguistic skills as subject to the same limitations as those of his wife. He claims to recall only that "on a day in 2017" his son drove himself and the first defendant to an office where they were given documents and instructed by "a man" to sign them. He has deposed that the man did not explain what the documents meant, did not ask if he needed an interpreter and did not translate the documents. He also signed a statutory declaration in terms identical to the first defendant's declaration, also with cl 4 struck through. He has now deposed that he did not in fact receive legal or financial advice. The second defendant says that he does not recall having received any notices from the plaintiff.
The plaintiff received the statutory declarations of the first and second defendants as part of the executed Deed. They are explicit representations, witnessed by a solicitor, that as guarantors they understood the documents and did not require an interpreter.
The defendants' evidence is obviously directed to the proposition that the Deed and mortgage are liable to be avoided under the Contracts Review Act and/or that the first and second defendants have a claim to equitable relief against enforcement. However, so far as the affidavits go, they address only half the case. That is, the affidavits are concerned with the first and second defendants' claimed lack of understanding but they do not go any way to proving that the plaintiff knew of this. The latter would be essential to showing that the instruments are unjust or that the plaintiff acted unconscionably. Most materially for present purposes, the affidavits do not disclose any arguable basis upon which the first and second defendants could avoid, as a term of any relief that might be granted against the plaintiff enforcing its security, a requirement that they repay to the plaintiff the $1,050,000 disbursed for removal of KR Services' prior mortgage.
[6]
Proposed amended defence and proposed cross-claim
The first and second defendants' proposed amended defence is for the most part in the same terms as the current pleading, as considered above. There are the following material additions:
1. It is alleged that the third defendant holds his undivided one third interest in the mortgaged property on trust for the first and second defendants in equal shares, on the ground that they provided the whole of the purchase price [par 1 of the amended defence and pars 21, 22, 89 and 90 of the proposed cross-claim].
2. The claim under the general law for relief against enforcement of the mortgage is abandoned. Particulars of how the Contracts Review Act is said to be engaged are pleaded in greater detail, together with a more specific statement of the relief claimed [pars 16A, 16B and 17].
3. It is alleged that, as a condition of the relief claimed under the Contracts Review Act, the first and second defendants should not be required to repay the $1,050,000 to KR Services "because the KR Services Loan and Mortgage was itself an unjust contract under the Contracts Review Act" [par 18].
4. The provision in the Deed for interest to be paid is alleged to be void as a penalty [pars 19 and 20].
As to (1), there would be no justification for granting leave with respect to either the proposed amended defence or the proposed cross-claim to enable the first and second defendants to pursue in these proceedings a contention that the third defendant holds his interest in the mortgaged property on trust for them. Whatever the outcome of this issue it could not make any difference to the plaintiff's right to enforce its mortgage. If, following sale of the property, there is a balance of proceeds available for distribution to the mortgagors, the first and second defendants can at that time bring their own separate proceedings against the third defendant to claim the entirety of that surplus.
As to (2), the narrowing of the legal basis upon which relief against enforcement of the mortgage is sought and the greater detail in which the application of the Contracts Review Act is now alleged do nothing to address the necessity for the first and second defendants to repay the $1,050,000. Those changes likewise do not redress the inability and/or unwillingness of the first and second defendants to make this repayment.
As to (3), the assertion that "the KR Services Loan and Mortgage was itself an unjust contract under the Contracts Review Act" implicitly recognises that, prima facie, the first and second defendants received a benefit as a result of the plaintiff paying out the prior debt and removing the prior encumbrance on the title. The pleading is an attempt to avoid the consequence that, if the first and second defendants should otherwise show an entitlement to relief against enforcement of the plaintiff's mortgage, they would have to reimburse the plaintiff as a condition of that relief.
The attempt does not go far enough. For the plea to achieve its purpose it would be essential that the first and second defendants also allege and in due course prove that the KR Services loan and mortgage were liable to be set aside at the suit of the defendants, so that the prior mortgage was no real encumbrance on their land and that they were not bound to pay it out, and that they did not consent to it being paid out on their behalf. Further, they would have to allege that the plaintiff knew all of these facts and that in paying out the prior encumbrance the plaintiff intentionally delivered a windfall to KR Services, knowing that this was without the first and second defendants' authority and without benefit to them.
In pars 24-40 of the proposed cross-claim, the first and second defendants would allege that the $1,050,000 owed to KR Services and secured by the prior mortgage over the Beazley Street property had been advanced to Y Corporation under a facility negotiated by the third defendant. They would further allege that KR Services took no steps to ascertain their level of comprehension of the transaction or their capacity to service or repay the loan if called upon to do so. They would plead that they did not receive independent legal or financial advice before assuming liability as guarantors to KR Services and mortgaging their property in support of the guarantee. In the draft cross-claim the first and second defendants assert that they did not understand the transactions with KR Services and that, had they done so, they would not have entered into them. There is no allegation that the plaintiff knew any of these matters.
At par 82 it is alleged that the KR Services loan and mortgage were unjust contracts according to a number of the criteria in s 9 of the Contracts Review Act. At par 86 it is alleged that in consequence the first and second defendants should not, as a condition of obtaining the relief they seek against the plaintiff, be required to repay so much of the plaintiff's advance to Y Corporation as was used to discharge the KR Services prior debt and mortgage. Neither of these conclusions could be supported in the absence of any allegation or proof of essential primary facts as identified above at [34].
As to (4), even if the plaintiff's interest charges are voidable as penalties this could not affect the plaintiff's entitlement to enforce its mortgage and to recover judgment for possession. There is no suggestion that the first and second defendants are willing or able to pay to the plaintiff or into Court the principal portion of the outstanding mortgage debt.
[7]
Judgment for possession and refusal of leave for defendants' pleadings
The amended defence and proposed cross-claim do not raise a triable issue that could, if resolved in the first and second defendants' favour, result in the plaintiff being denied judgment for possession. As the plaintiff has made out its case for summary judgment for possession, that judgment will be entered. This means that large parts of the amended defence and proposed cross-claim will cease to be relevant to anything that the first and second defendants could usefully litigate. If they wish to pursue any residual parts of the draft pleadings in order to contest the amount of the plaintiff's debt, they may prepare a fresh cross-claim to incorporate those issues. Leave can be sought later with respect to filing such a cross-claim.
In so holding I do not purport to have shut the first and second defendants out from pursuing more limited relief under the Contracts Review Act, that is, relief other than avoiding the mortgage or restraining the plaintiff from exercising its power of sale. I have merely determined that on any view $1,050,000 must be repaid by the defendants to the plaintiff, that the mortgage may be enforced for at least that sum and that as the defendants are not willing or able to pay it either to the plaintiff or into Court the plaintiff is entitled to possession.
In addition to judgment for possession of the mortgaged property, an order will be made for the first and second defendants to pay the plaintiff's costs of the proceedings to date. The plaintiff should have leave to issue a writ of possession forthwith. The first and second defendant's notice of motion seeking leave to file amended pleadings will be dismissed with costs. If the first and second defendants seek an opportunity to file a cross-claim contesting the amount of the plaintiff's debt, directions will be made requiring them to bring forward a draft and to apply on notice of motion for leave to file it. In view of past defaults of the first and second defendants with respect to the Court's directions, the period fixed for compliance will be short. Upon any such application being made it may well appear that the amount in issue is relatively small and that either the first and second defendants should be left to commence separate proceedings in the District Court or these proceedings should be transferred to that Court.
[8]
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Decision last updated: 30 April 2019