Cook and Anor v Permanent Mortgages Pty Ltd

Consumer Credit (New South Wales) Act 1995 LEGISLATION CITED: Consumer Credit (New South Wales) Code Contracts Review Act 1980

Elders Rural Finance Ltd v Smith (1996) NSWLR 296; CASES CITED: House v The King (1936) 55 CLR 499; Perpetual Trustee Company Ltd v Khoshaba [2006] NSWCA 4; Smith v Elders Rural Finance Ltd (Bryson J, 25 November 1994, unreported).

PARTIES: Michael Robert Cook and Karen Ann Cook - Appellants Permanent Mortgages Pty Ltd - Respondent

COUNSEL: S Donaldson SC & R Francois - Appellants R Dubler SC & A G Rogers - Respondent

SOLICITORS: Legal Aid Commission of New South Wales - Appellants Gadens - Respondent

LOWER COURT JURISDICTION: Supreme Court

LOWER COURT FILE NUMBER(S): SC 12632/02; SC 13381/04

LOWER COURT DATE OF DECISION: 26 October 2006 (Orders 9 November 2006)

LOWER COURT MEDIUM NEUTRAL CITATION: Permanent Mortgages Pty Ltd v Michael Robert Cook and Karen Cook [2006] NSWSC 1104

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40787/06 SC 12632/02 SC 13381/04

BEAZLEY JA GILES JA HOEBEN J

Thursday 9 August 2007 COOK AND ANOR v PERMANENT MORTGAGES PTY LTD Judgment 1 GILES JA: The appellants took out a loan from the respondent in May 2003, mortgaging their home as security for the loan. They fell into default almost immediately. In October 2004 the respondent brought proceedings claiming an order for possession of the mortgage property. The appellants' cross-claimed for relief under the Consumer Credit (New South Wales) Code ("the Code"), which has statutory force by virtue of s 5 of the Consumer Credit (New South Wales) Act 1995, or alternatively under the Contracts Review Act 1980 ("the Act"). 2 There was in the end no real dispute that, subject to the cross-claim, the respondent was entitled to an order for possession. The relief claimed by the appellants was that the loan contract be set aside or declared void, or alternatively varied. At the trial only variation was sought. The appeal was concerned with the extent of variation granted by the judge, and with his Honour's order as to costs. 3 The appellants had borrowed in the 1990s to purchase the mortgaged property. Illness had affected earnings and they found it necessary to take out a series of loans, each one refinancing the last and for a larger amount, in order to meet interest and expenses. In 2003 they were in default under the then loan. The loan taken out from the respondent was the larger of two loans by which the then loan was refinanced. It was for a term of one year, interest only, carrying interest at 8.8% per annum with a default rate of 13.8% per annum. 4 Clause 70 of the Code provides that a transaction may be reopened if the court finds that, in the circumstances relating to it at the time it was entered into, it was unjust. Clause 71 states the orders which may be made if a transaction is reopened. The effect of s 7 of the Act is similar, although it is cast in different terms. If the court finds that a contract or a provision of a contract was 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, grant relief of kinds there set out. 5 The judge found that the Code applied to the loan contract. His Honour considered that the similarity between the Code and the Act was such that it was unnecessary to proceed under the Act, and addressed the Code. 6 The judge found that the loan contract was unjust, essentially on the ground that the appellants' credit history and means were such that the respondent was aware, or would have been aware had it made the most perfunctory of inquiries, that the appellants were not capable of servicing the loan even at the ordinary (non-default) rate of interest and could only satisfy their obligations by selling the mortgaged property for a sum sufficient to cover the principal and interest. His Honour observed that the beneficial nature of the Code indicated that it was intended to protect the unsophisticated and meagrely educated, such as the appellants, from their own foolishness, and that the respondent was, or should have been aware, of their foolishness, and had in effect encouraged it. 7 In arriving at the relief to be granted the judge said that the appellants should so far as possible be returned to the position they were in as at April 2003. He relieved them from the obligation to pay to the respondent fees associated with entry into the transaction, from payment of interest at a rate exceeding the ordinary interest of 8.8% per annum, and from any obligation to pay the respondent's costs and expenses following default. 8 The appellants' complaint on appeal was that the judge did not also relieve them from the obligation to pay interest at the rate of 8.8% per annum. We were informed that the mortgaged property had been sold prior to the hearing of the appeal, bringing the running of interest to an end, and that the interest in question was of the order of $67,000. The appellants required leave to appeal which was not opposed by the respondent, and leave to appeal was granted. 9 The appellants accepted that it was necessary that they establish error in the exercise of a discretion in accordance with the principles for which House v The King (1936) 55 CLR 499 at 504-5 is conventionally cited, see Perpetual Trustee Company Ltd v Khoshaba [2006] NSWCA 4 at [100] and [109]. They submitted that the judge's exercise of discretion miscarried in two respects:

(a) that his Honour failed to take into account a material consideration, being the public interest relevant to his finding of injustice; and

(b) that his Honour recognised but failed to act upon the principle that the appellants should be relieved of the burden of the injustice. 10 Clause 70(2) of the Code provides for matters to be considered by the court in determining injustice. It commences that the court is to have regard to the public interest and to all the circumstances of the case, and then lists a number of specific matters to which the court may have regard. 11 Evidence was led before the judge that the loan transaction was in the category of a "Ponzi" loan, meaning a loan which could only be repaid either by taking out a larger subsequent loan or by selling the asset financed using the loan. Professor Keen's evidence included - "(g) were the practice of Ponzi Lending to become widespread, it would substantially increase the tendency of the Australian financial system to asset bubbles and subsequent financial crises by: i accelerating the accumulation of excessive debt during the up-swing to an asset bubble;

ii accelerating the rate of decline during the bursting of the bubble; and

iiii causing the recovery to take much longer. (h) Ponzi Loans thus have adverse economic consequences that extend well beyond the immediate parties to the loan agreement." 12 The judge said that, against any public interest in discouraging loans of the type described by Professor Keen and in broad terms by another witness, there was a public interest in the enforcement of contractual obligations freely entered into. His Honour said: "In the result I do not regard the public interest as of much significance in resolving this case, rather I think the greater focus should be upon factors personal to the defendant or directly concerned with the particular transaction". 13 The appellants submitted that this regard to the public interest carried over to the grant of relief, and that the judge erred in the respect set out above. They did not necessarily confine the public interest in discouraging "Ponzi" loans to concern for the Australian financial system, and extended it to discouragement because, put broadly, such loans were not desirable in the interest of borrowers. 14 I have some difficulty in seeing that the health of the economy falls within the public interest to which regard may be had in determining injustice of the particular transaction. Be that as it may, the public interest in either of the respects mentioned above, if taken into account in determining injustice, has further effect only in determining the relief which should be granted in relation to the particular transaction. "Ponzi" loans no doubt have a part to play in the financial system, and whether they be desirable or undesirable has at best a tenuous connection with the relief to be granted in respect of the particular transaction. I do not think that error is shown in the judge's preference to place the greater focus on the particular transaction. 15 The appellants submitted that in granting relief against the injustice of the transaction it was necessary to mould the relief to the injustice, and that in the present case the injustice lay in their inability to service the loan and so they should have been relieved from the need to service it. They said that in Smith v Elders Rural Finance Ltd (Bryson J, 25 November 1994, unreported) the borrowers had been relieved from interest on their loan, and that the relief had survived the appeal in Elders Rural Finance Ltd v Smith (1996) NSWLR 296. They said that the borrowers in Perpetual Trustee Company Ltd v Khoshaba had also effectively been relieved from payment of interest. 16 In my opinion, the submission takes an unduly narrow approach to the grant of relief. The judge correctly had in mind returning the appellants to their former position. Their former position was that of borrowers obliged to service their then loan, which was in large part refinanced with the loan from the respondent. But for the refinancing they would have been obliged to pay interest to the previous lender. Relieving them from payment of interest to the respondent would do more than restore them to their previous position. It would improve their position. 17 The appellants' submission as it developed came down to the argument that, had the respondent not made the loan to them, the previous lender would have sold the mortgaged property whereby they would have received in 2003 their equity in the property, and that the injustice would not be remedied if the equity which they would have received were eaten up by the payment of interest under the loan from the respondent. 18 This, however, does not take account of a number of matters. First, the appellants were in default under the previous loan, and would have had to pay at least some penalty interest until the mortgaged property was sold together with the expenses of sale. Secondly, they were able to occupy the mortgaged property for the period of the loan obtained from the respondent. Thirdly, they would obtain the benefit or detriment from any increase or decrease in the value of the mortgaged property during the term of the loan from the respondent, so that their equity at the expiration of the respondent's loan could be greater or less than any equity they might have realised in 2003. There was no valuation evidence directed to this, and so it was not possible to carry out the exercise properly required if the argument were followed through. 19 Elders Rural Finance Ltd v Smith and Perpetual Trustee Company Ltd v Khoshaba were different from the present case. In Elders Rural Finance Ltd v Smith the borrowers borrowed to purchase a property. In Perpetual Trustee Company Ltd v Khoshaba they borrowed to put the money to new uses. In neither case was the loan used to refinance an existing loan under which the borrowers were obliged to pay interest. 20 In my opinion no error has been shown in the judge's exercise of discretion in relation to relief. 21 The judge made no order as to the costs of the proceedings, meaning that the appellants and the respondent were left to pay their own costs. His Honour's reasons were - "Mr Rogers points out that the plaintiff has been successful in obtaining an order for possession and also points out that the relief to which the defendants have been held entitled is limited to a relatively small reduction in the principal secured and a reduction (albeit significant) of the interest payable. Mr Rogers also pointed to the difficulties experienced by the plaintiff in having the defendant's particularise the precise relief which they sought. On the other hand, as Mr Rogers concedes, no offer of compromise was made. Ms Francois, on the other hand, in support of her submission that her client should be entitled to costs, argued that her clients succeeded in establishing that the Credit Code applied, were successful in obtaining significant relief and that no offer of compromise was made by the plaintiff. The competing submissions, I think, are such that justice will be best served if there be no order for costs of the later action". 22 In my opinion this was not a sound exercise of the judge's discretion. As I have said, there was in the end no real dispute that the respondent was entitled to an order for possession. The real dispute was over the relief claimed by the appellants. The hearing lasted five days, and was all but exclusively devoted to that dispute. The issues were whether the Code applied to the loan transaction, whether the contract of loan was unjust and what relief should be granted. The respondent failed on all of these issues. There may have been some uncertainty in the precise relief claimed by the appellants, but in substance the appellants were successful. The respondent would be entitled to costs reflecting the commencement of the proceedings claiming possession and the relatively formal steps to prove its entitlement to possession, but otherwise the costs should, in my view, have gone to the appellants. 23 The respondents submitted that nonetheless it was a matter for the judge's discretion, and it was insufficient that this Court would have exercised the discretion differently. Where I consider the judge erred is in failing to take account of the appellant's success in obtaining significant relief. It may have been by way of a relatively small reduction in principal and a greater reduction of the interest payable, but it was relief which the respondent had resisted on all of the issues of the application of the Code, injustice and the grant of relief. The judge's reasons indicate, in my respectful opinion, such misapprehension of this that I think he failed to take into account a material consideration. His exercise of discretion can thereby properly be displaced. 24 In my opinion the costs order made by the judge should be set aside, and in lieu thereof it should be ordered that the plaintiff pay ninety per cent of the defendant's costs of proceedings 13381/04. 25 The orders I propose are therefore that the appeal be allowed in part, and that the costs order made by the judge be set aside and in lieu thereof it be ordered that the plaintiff pay ninety per cent of the defendants' costs of proceedings 13381/04. I have not at this moment proposed anything about the costs of the appeal. 26 BEAZLEY JA: Yes, I agree with the reasons and proposed orders of Justice Giles. 27 HOEBEN J: Yes I agree with Justice Giles and the orders which he proposes.

[Counsel addressed as to costs] 28 BEAZLEY JA: The orders of the court are that the appeal be allowed in part and the costs order made by the trial judge be set aside and in lieu thereof it is ordered that the plaintiff pay ninety per cent of the defendant's costs of proceedings 13381/04. The respondent is to pay fifty per cent of the appellants' costs of the appeal.

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