Driat Pty Ltd v Thomas

Judgment 1This is an application by the First Defendant, Carey Thomas to set aside default judgment given against her on 7 November 2011. The judgment was for possession of land at xxx xxxxxxxxx xxxx Wildes Meadows and a property at x xxxxxxxxx xxxxxx Point Piper. 2The proceedings commenced on 23 August 2011 alleging default on two loan agreements. The first loan agreement was dated 22 July 2010 in an amount of $800,000. Under that loan agreement the principal sum was repayable on 22 July 2011. The second loan agreement was dated 16 May 2011 in the amount of $590,000 with that principal sum to be repaid on 16 August 2011. 3There were interest provisions in those loan agreements. Neither oft hose loans was repaid by the expiry date. It appears that each of the loans was taken out at the request of the Second Defendant who is the de facto husband of the First Defendant. 4According to the affidavit filed by the First Defendant he requested that she make available her two properties for security for the first loan. He told her that the purpose of the first loan was for the development of wine cellars that he was converting into strata lots at the old Pentridge Gaol in Melbourne. He told her that since she was putting up the money she would be the sole owner of the Pentridge project and she would make a substantial sum of money out of it. 5Prior to the second loan being taken out, the Second Defendant said that he needed to increase the borrowing on a short term basis so that things could be tidied up at the Pentridge development. He told her that on settlement she would have a substantial equity in Pentridge because of what it was worth and that she stood to make a good profit from it. 6Each of the loan agreements executed by the First Defendant described in item 1 of the Schedule a purpose of the loan as follows: To on lend money to Wine Bloc Pty Limited ACN 119 384 440 (over which the borrower intends on taking a charge) to fund further construction costs on commercial strata units in Victoria. 7The First Defendant was the sole borrower under the first loan agreement but both she and the Second Defendant were shown as the borrowers under the second loan agreement. 8After the proceedings were commenced, they were served on the First Defendant on 30 August 2011. The First Defendant says in her affidavit that she immediately went to the Second Defendant to tell him she had been served with a Statement of Claim and she asked him what was happening. He told her there was nothing to worry about and he would take care of it. 9She said that in September 2011 she had another conversation with him asking whether the problem had been handled, and he told her that it had been handled, and that there was nothing to worry about. There was a further conversation in late September when he told her that the lender had agreed not to take any further steps in enforcing payment for a period of six months. 10On 11 January 2012 she had a conversation with the Second Defendant and he told her that she needed to see a solicitor to prepare an affidavit. He also said to her that what he had told her about having nothing to worry about was untrue and she needed to see a solicitor if she wanted to save her property. She consulted a solicitor immediately after that time. 11It appears that a notice must have been served by the Sheriff to take possession at least of the Point Piper property where she lived, and urgent application was made during the vacation to stay the writ. Ultimately the matter came before Gzell J on 25 January 2012 who stayed the writ until today and referred the matter to me as the Possession List Judge. 12Since the First Defendant has applied to set aside the default judgment she must do two things. First, she must provide an adequate explanation for her failure to attend to the Statement of Claim and deal with it, and secondly, she must show an arguable defence on the merits. The second matter is the more significant of the two. 13In my opinion she has adequately explained the delay in dealing with the statement of claim. It does not seem to me unreasonable that she believed the Second Defendant when he told her on a number of occasions that he was looking after the matter. The loans appeared to have been made for his benefit to the knowledge of the First Defendant and it was reasonable for her to accept what he said in that regard. 14The more difficult determination is whether she shows an arguable defence on the merits. A number of things tell against her in that regard. 15When she was asked to provide security for the first loan agreement she went to see a solicitor, John Brophy at Carroll and O'Dea who, she says in her affidavit, advised her in relation to the first loan. However, in her affidavit she said Mr Brophy did not inform her that there was any unusual interest rate applicable to the loan, did not inform her that the said purpose of the loan was for the money to be on-lent to Wine Bloc nor did he ask her anything about the loan or that company. 16She signed a declaration in July 2010 saying that she was the borrower, that she had received independent legal advice regarding the loan security documents, and after receiving the advice she freely and voluntarily signed the following documents. She also signed a Business Purposes Declaration under the Consumer Credit Code in Mr Brophy's presence. 17At the time of the second loan she says that she saw a different solicitor, David Evans of O'Neill Partners, to have the second loan and mortgage explained to her. On this occasion the Second Defendant was present at the time of the advice given to her. That may well have been because, as I have said, he was a co-borrower on the loan document. Once again in her affidavit she says that she was not informed of any unusual interest rate or that the money was to go on to a company called Wine Bloc. 18Nevertheless again she signed a declaration in the same terms as the earlier one. She also signed a Business Purposes Declaration. On this occasion she also appears to have been given independent financial advice, and there is a certificate in the documents apparently provided to the lender from the accountant who provided that advice. 19She also on that occasion signed a statutory declaration which said only this: the loan advanced be provided by Driat Pty Limited ACN 002 247 127 will be applied for the purpose of lending money to Wine Bloc Pty Limited ACN 119 384 440 to fund further construction costs of more strata units in Victoria. 20She signed a further statutory declaration concerning the property at Point Piper that is not particularly relevant for present purposes. 21Those matters that I have referred to are not helpful to the First Defendant because the proposed Defence that she wishes to file, if the judgment is set aside, pleads two substantive matters. The first is a defence under the Contract Review Act 1980 , and the second is a defence based on general equitable principle of unconscionability on the basis that she was at a special disadvantage that was known, or ought to have been known, to the Plaintiff. 22Section 6(2) of the Contracts Review Act provides that: A person may not be granted relief under this Act in relation to a contract so far as the contract was entered into in the course of or for the purpose of a trade, business or profession carried on by the person or proposed to be carried on by the person, other than a farming undertaking (including, but not limited to, an agricultural, pastoral, horticultural, orcharding or viticultural undertaking) carried on by the person or proposed to be carried on by the person wholly or principally in New South Wales. 23In circumstances where she has signed a Business Purposes Declaration in relation to each loan, it might be thought that there are some difficulties for her in relation to calling in aid the Contracts Review Act . In Mango Media Pty Ltd v Comitogianni [2011] NSWSC 152 I reviewed a number of authorities in relation to the question of what amounted to a business and what amounted to an investment for the purpose of s 11(3) of the Consumer Credit Code. 24Amongst other authorities was a decision of the Court of Appeal of Queensland in Shakespeare Haney Securities Limited v Crawford [2009] QCA 85 and I set out paras [42] to [46] of that judgment where Muir J discussed the word "business". He allowed for the fact that a one-off transaction or venture may have sufficient business character at least to make the matter one of business within the meaning of the Credit Code . As I pointed out in Mango Media , however, a number of decisions have referred to the Credit Code as being beneficial legislation to be liberally interpreted, and the same must be said for the Contracts Review Act : Beneficial Finance v Karavas (1991) 23 NSWLR 256. 25One consideration in the present matter is whether the borrowing of money for the purpose of loaning to another person will amount to the purpose of a business, trade or profession carried on by the person. Even if the loan made to the First Defendant is not characterised as an on-loan to a person but is regarded as being for the purpose set out in the schedule to the loan agreements, the question still arises whether it can be said that that is a trade, business or a profession carried on by the First Defendant. On the evidence there does not seem to be any suggestion that she carried on the business of Wine Bloc despite the promises of a benefit that were made to her by the Second Defendant on both occasions. 26Despite the difficulties to which I have referred it seems to me that the First Defendant has a weak but nevertheless arguable defence by reason of the Contracts Review Act and/or general equitable principles. The matter of whether the loans were not for the purposes of a business of the First Defendant is arguable. But, in any event, even if the loans were for such a purpose they would not preclude the First Defendant having a defence based on general equitable principles. 27It is apparent from documentation that the loan was in the first instance arranged between Mr Allison, the Second Defendant and/or the brokers acting for him with the Plaintiff. The loan offer in respect of the first loan is addressed to the Second Defendant at an email address at the company or business called Edge Finance. Similarly the second loan offer, whilst being addressed to the registered proprietor of xxxx xxxxxxxxx xxxxxx Point Piper, is then said to be care of Mr Michael Woodworth, (apparently, the broker) and the document on its face appears to have been sent by email to the Second Defendant again at Edge Finance. 28On one view of the matter, although the First Defendant is shown on the loan documents to be a borrower, the position that she was in, in circumstances where the loan moneys were lent elsewhere and she was putting up the security, might be thought in substance to characterise her as a guarantor. 29Mr Price, who appeared for the Plaintiff on this application, urged upon me that I should not regard her as a guarantor because he said, at least in relation to the first loan agreement, there was no other borrower. So much is true and it can be accepted also that the promises made by the Second Defendant for the First Defendant when he asked her to provide security might mean that she should not properly be regarded as only a guarantor. 30Nevertheless it appears from the material that I have seen, particularly having regard also to the First Defendant's affidavit, that it is at least arguable that the lending involved in this case might be able to be characterised as asset-based lending. The loan agreements do not appear to provide for regular instalments of the principal sum to be paid. Rather the principal sum with interest was repayable on a certain date. Further the First Defendant has said in her affidavit that at no stage was she ever asked to provide details about her ability to service the loan, about her occupation or about her earnings. She also says she has not worked since 1963. 31It is at least arguable therefore that the only way these loans could have been repaid was the successful completion of the development for which the loans was ultimately taken out, a matter known to the Plaintiff by reason of item 1 in the schedule to the loan agreements, or by the sale of the First Defendant's property if for some reason the purpose of the loan was not able to be fulfilled. 32In Kowalczuk v Accom Finance Pty Limited [ 2008] NSWCA 343 Campbell J said at [96]: It can be accepted that pure asset lending - described by Basten JA in Khoshaba at [128] as being "to lend money without regard to the ability of the borrower to repay by instalments under the contract, in the knowledge that adequate security is available in the event of default" - is in at least some circumstances unjust within the meaning of the Contracts Review Act , or unconscionable: Elkofairi v Perpetual Trustee Co Ltd [2002] NSWCA 413; (2003) 11 BPR 20,841 at [57]-[59], [79] per Beazley JA (with whom Santow JA and MW Campbell AJA agreed); Khoshaba at [92] per Spigelman CJ (with whom Handley JA agreed on this point), [128] per Basten JA. However whether lending on the basis that the loan can adequately be repaid from the security, is in the circumstances of any particular case unconscionable or unjust, depends on other matters as well. Thus, in Elkofairi the facts that neither the applicant nor her husband had any income, the loan in question was for five years, and the security was over the applicant's only asset (involving the proposition that the applicant had no other resources from which to service the loan) and that the secured property was the applicant's home, were all relevant matters in reaching the conclusion that the transaction was both unconscionable and unjust. In Khoshaba , other factors relevant to the conclusion of injustice were that the applicants were a husband and wife, one of whom earned $43,000 pa and the other of whom was a pensioner, the lender had no information at all about the purpose for which the loan was being sought, and the security was over their home. 33There is no evidence that the Plaintiff knew of the matters which the First Defendant wishes to rely on both for her Contracts Review Act defence and for her plea of equitable unconscionability. It can be accepted that the authorities show that there can be cases under the Contracts Review Act where the Plaintiff does not have knowledge of the unjustness that is relied on by the First Defendant. These are, however, unusual cases. 34It can also be accepted that part of the basis of the equitable doctrine of unconscionability is that the position of special disadvantage should be known to the stronger party. 35Nevertheless what can be inferred with little doubt from the material that I have seen is that the Plaintiff dealt principally with the Second Defendant and/or those acting on his behalf, that the Plaintiff must have been informed by the Second Defendant or those acting for him that the Second Defendant knew of someone who was in a position to provide security which he was not able to provide as collateral for the loans which were made. 36It seems to me there are arguable questions of fact about the extent of the Plaintiff's knowledge concerning the First Defendant's position. One possible scenario is that the Plaintiff simply did not make any inquiries about the First Defendant in terms of whether she had the capacity to service the loan or the arrangements between the First and Second Defendants. Another possible scenario is that the Plaintiff was informed to a lesser or greater extent about the Second Defendant's position sufficient to enable the Plaintiff to accept the First Defendant as an appropriate person to designate a borrower for the loan but who in reality was involved simply for the provision of security for the loans which the Plaintiff knew would be used other than by the First Defendant. 37As I have said, I consider that the defence shown by the First Defendant is a relatively weak one but I cannot say that it is unarguable. I do not think it would be appropriate to go into greater detail about the matters on an interlocutory application which results in the setting aside of the default judgment. These matters will ultimately be for consideration at the trial. 38Mr Price has drawn my attention to material contained principally in an affidavit of Mr Straton, who is director and secretary of the Plaintiff, about the available equity in the two properties. There is also evidence extraneous to that affidavit to which I will refer. 39The affidavit of Mr Straton discloses that a market appraisal for the Wildes Meadow property was obtained before the making of the first loan and the property was estimated being worth between $1.1 and $1.2 million. Mr Straton says he is concerned that since that time property values in Kangaroo Valley have fallen substantially. He has provided a print-out which appears to have been obtained from the internet about the median sale prices in Kangaroo Valley. I think I can take judicial notice of the fact that Wildes Meadow is not in Kangaroo Valley, rather it is on the escarpment immediately above it, but the localities are nevertheless different. 40In any event the information in the document that Mr Straton provides shows, at best, that there has been a slight decline in the median sale prices in Kangaroo Valley between 2010 and 2011. It does not seem that there is any other evidence about the value of that property. The amount owing under that first loan is at the present time a little under $808,000 plus legal costs. 41In relation to the property at Point Piper there is a current estimate of the value of that property from a director of Raine and Horne at Bondi Junction showing a value estimated between $2 million and $2.2 million. The position with that property is that there is a first mortgage to the ANZ Bank for $1.4 million plus interest and costs. That is the extent of the ANZ first mortgage. The mortgage to the Plaintiff follows that for $590,000 plus interest and costs. Thereafter the ANZ is permitted to tack. A letter which has been tendered from the solicitors acting for the ANZ Bank says that as at 27 January 2012 there is a payout figure for what is owing to the bank of $1,397,184.03. That is an indicative figure only and interest fees continue to accrue. 42It can be seen therefore that the amount owing to the ANZ Bank has almost reached the extent of its priority without regard to the fact that interest and costs can be added. The significance of that is that there is in evidence a section 57 notice dated 5 September 2011 addressed to the First Defendant alleging default of an amount due of some $33,500. There is also a letter of 20 January 2012 from the Bank's solicitor saying that the default still exists in relation to that money. The relevance of this is only that there would not appear to be very much equity left in the property at Point Piper if the estimate provided by Raine and Horne is to be accepted. 43I do not think, however, that that is a matter sufficient to displace the fact that there is an arguable defence on the merits. What it points to is the need for very firm case management to bring any proceedings on for hearing at the earliest opportunity. 44I make the following orders: 1.Default judgment against the First Defendant of 7 November 2011 is set aside. 2.The First Defendant is to pay the costs of the Motion and costs thrown away by reason of obtaining the judgment. 3.Writs of possession issued on 10 November 2011 are set aside. 4.The First Defendant is ordered to file and serve any evidence on which she intends to rely and all cross-claims which she intends to bring on or before 4 pm on 17 February 2012.