Drury v Stone

R.A. Conti QC / A. Ogborne (Appellant) COUNSEL : A.S. Bell (1st Respondent) W.G. Muddle (5th Respondent) Bruce & Stewart (Appellant) Smyth King & Son (1st Respondent) SOLICITORS : Ross George Drury (2nd Respondent) Philip Henry Marks (3rd Respondent) E Philips & Company (4th Respondent) Minter Ellison (5th Respondent) CATCHWORDS : Whether mortgage unjust in the circumstances - Mortgage - orders sought under s 7(1)(b) of Contracts Review Act 1980 that mortgage was void - whether Bank should have advised on the viability of the business - whether Bank should have advised that there was a "real risk" that the appellant would lose her home and the legal effect of a mortgage. LEGISLATION CITED : Contracts Review Act 1980 DECISION : The appeal is dismissed with costs

THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40942/98 ED 4780/94 POWELL JA BEAZLEY JA FITZGERALD JA

1 POWELL JA: I agree with Fitzgerald JA. 2 BEAZLEY JA: I agree with Fitzgerald JA. 3 FITZGERALD JA: On 31 August 1987, Mike Pawleys Indoor Cricket Centre Pty Ltd acquired an indoor cricket centre which was conducted in leasehold premises at Brookvale. The company, which had been acquired to purchase and conduct the cricket centre, was owned and controlled by three men, who were its only directors and shareholders. Each owned one $1.00 share. One of the directors, Ross George Drury, the second respondent, is the appellant's son. The other two directors were the first respondent, Christopher Charles Stone, and the third respondent, Philip Henry Marks. 4 The fifth respondent, State Bank of New South Wales, lent the company the entire purchase price of the business, $205,000, which was repayable over six years by monthly instalments, together with $20,000 working capital by way of an overdraft which was subject to annual review. The company granted the bank a fixed and floating charge over its assets to secure its present and future indebtedness to the bank. Subsequently, the bank lent the company additional amounts for other purposes and there were other variations to their arrangements. 5 The cricket centre was conducted at Brookvale for about 3 years, then was closed for a period and subsequently re-established in different premises at Dee Why in 1991. The Dee Why premises were vacated in August 1993, and the company was deregistered under s 574 of the Corporations Law and dissolved. The company was then insolvent, and the bank was not paid under its charge or under personal guarantees which it had subsequently obtained from each of the company's three directors. 6 However, the bank also had other securities for the company's indebtedness. At the time of its initial loan to the company the bank obtained three registered mortgages over house properties. Mr Stone gave the bank a registered third mortgage over his house property at Birchgrove. The late Mrs Esme Florence Mary Marks, Mr Marks' mother, gave the bank a registered second mortgage over a home which she then owned at Balgowlah Heights, which, when she sold her house at Balgowlah Heights and purchased a home unit at Warriewood, was replaced by a registered mortgage over the Warriewood home unit. The appellant gave the bank a registered first mortgage over her house at Balgowlah. Each of the mortgages contained both a personal covenant and an "all monies" clause. In this Court, the appellant did not dispute that she and the other mortgagors expected to be equally responsible for any outstanding liability of the company to the bank. Mr Stone's co-directors, the sons of the appellant and the late Mrs Marks, had no assets at the time. 7 Mr Stone's Birchgrove house and the late Mrs Marks' Warriewood home unit have been sold and the amount which the company owned to the bank has been paid under the mortgages on those properties from the proceeds of sale. The trial judge held that each of Mr Stone and the executor of the late Mrs Marks is entitled to recover contribution from the appellant, and that each is entitled by subrogation, with equal priority, to the rights of the bank under its mortgage over the appellant's property at Balgowlah. 8 By this appeal, the appellant initially sought seeks an order under s 7(1)(b) of the Contracts Review Act 1980 declaring that the mortgage which she gave the bank is void and orders setting aside the orders entitling Mr Stone and the executor of the late Mrs Marks to contribution from her and to subrogation to the rights of the bank under that mortgage. 9 So far as presently material, s 7 of the Contracts Review Act provides: "7(1) Where the Court finds 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 so far as practicable an unjust consequence or result, … : (b) … make an order declaring the contract void, in whole or in part; ….. (2) Where the Court makes an order under subsection 1(b) …, the declaration … 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 time as specified in the order. (3) The operation of this section is subject to the provisions of section 19."

By s 4(1), "'unjust' includes unconscionable, harsh or oppressive…". Section 9 contains details of some of the matters to be considered by the Court for the purposes of s 7. 10 Subsection 19(1) provides: "19(1) An order made under sections 7(1)(b) .. has no effect in relation to a contract so far as the contract is constituted by a land instrument that is registered under the Real Property Act 1900."

A registered mortgage is a "land instrument" as defined in s 4(1). 11 Subsections 7(3) and 19(1), which appear intended to preserve the indefeasibility of registered title, escaped notice until the argument in this Court. Subsequent to the hearing, the appellant applied for leave to amend to seek an order that the bank execute and register a discharge of its mortgage. 12 The trial judge found that the contract between the appellant and the bank, that is to say, the registered mortgage which the appellant gave the bank, was not "unjust in the circumstances relating to the [mortgage] at the time it was made." That conclusion has been challenged by the appellant. 13 The bank had not previously dealt with the appellant or the company or the others who gave it security, and did not request a mortgage from the appellant. Her son and his associates had arranged for mortgages from her and the late Mrs Marks prior to approaching the bank for a loan to the company on the basis of the securities which they offered. An experienced commercial solicitor who acted for the company and its directors also provided assistance to the appellant, and either advised her or was available to do so. The appellant's husband, who had more business experience than she did, perused projected figures for the business based on its previous results and told her that the business would return a profit. Either the solicitor or her husband advised the appellant that the business was a good proposition. Thereafter, she did not question the proposal to borrow or how the loan would be repaid. There was no finding, or basis for a finding, by the judge that the appellant was influenced in her decision to give the mortgage to the bank by a belief that the bank considered that the business which the company purchased was viable. 14 Although the business continued for a number of years and ultimately failed only because of poor management and increased competition, the appellant contended - with the benefit of hindsight - that it was never viable, and that the bank should have known that that was so. Attention was drawn to financial information which the bank might or might not have had which it was argued, unpersuasively, indicated that the company would have difficulty repaying the bank, the significant risk of failure said to be associated with an indoor cricket centre, the initial borrowing of working capital as well as the full purchase price, the lack of business experience of the directors (young men in their mid-to late 20s) and the subsequent borrowings from the bank by the company. However, the experienced commercial solicitor who acted for the appellant and her son and his associates and an accountant whom they engaged after the company had acquired the business were sanguine about its prospects. The business went through a period of expansion and the appellant consented to the company's additional borrowings from the bank, some of which were for additional or replacement equipment, and urged the bank to support the continuation of the business. The trial judge was entitled to find, as he did, that the business was viable when purchased, and to decline, as he did, to find that the decision to purchase it was imprudent. 15 Further, contrary to the appellant's submission, the bank did not form or act on an opinion that the business and its assets were valueless or an adverse opinion of the prospects of the business when it made the initial loan. Nor was the information which was available to it such that it ought to have done so, either because of the information available or because it did not have sufficient information to form favourable opinions about the assets and prospects of the business. Because of the mortgages which it was offered, the bank's position was well secured, and it paid little, if any, attention to the value of the assets of the business or its prospects. 16 The trial judge also found, and the appellant accepted, that it was not the bank's function to advise the appellant on the commercial merits of the transactions entered into by her or the company, and that she was well aware of the purpose of the mortgage and that there was a risk that she would lose her house if the business failed. His Honour also found, without challenge, that there was little communication between the appellants and the bank and that the communications which occurred were substantially confined to the execution of the mortgage and later documents. 17 The appellant nonetheless argued that the circumstances were such that the bank should have known that the appellant's mortgage was unwise and should have warned her that the risk that she would lose her home was "real". At its highest, this submission seemed to involve the proposition that the bank knew or ought to have known that there was a likelihood that the appellant would lose her home. That obviously cannot be sustained. In a more moderate version, the proposition was that the bank knew or ought to have known the risk that the appellant would lose her home was significant. The trial judge did not find that that was so or that the appellant's decision to support her son's career by giving the bank the mortgage to secure the company's borrowings was imprudent. On the contrary, his Honour formed conclusions which were open to him which are inconsistent with such findings. 18 Attention was drawn by the appellant to a number of additional factors which were said to make her mortgage unjust in the circumstances in which it was entered into, including the importance to her of her home, the absence of any financial benefit to her (or any benefit to her other than her son's business interests) and the conflict between her interests and those of her son and his associates and the company without her receiving independent legal advice. 19 In her evidence, the appellant also claimed some uncertainty about the legal effect of the mortgage and other documents which she subsequently signed, but the trial judge was disinclined to accept her evidence on those matters or her evidence that she was not paying attention when, on the occasion when she and the late Mrs Marks signed their mortgages, a bank officer informed them that they were putting their houses up as security for the money which the bank was going to lend and that if the loans went into default the bank could sell their homes. His Honour was of the opinion that, in any event, the appellant was well aware that that was so. 20 The appellant cannot succeed in this Court merely because it might have been preferable for the bank to form an opinion on the extent of the risk which she ran and explain its perception to her, with reference perhaps to such possibilities as bad management, interest rates or increased competition, or to caution her to obtain independent advice. She must persuade the Court that the trial judge either made a discernible error or that the only conclusion reasonably open to his Honour was that the mortgage was unjust in the circumstances relating to it at the time when it was made. Such an error was not demonstrated. On the contrary, I consider that the trial judge's conclusion that the mortgage was not unjust was correct. 21 Even if the appellant's mortgage to the bank had been "unjust in the circumstances relating to the [mortgage] at the time it was made," the Court's power to declare the mortgage void or order the bank to discharge the mortgage is dependent upon a conclusion that it is "just to do so … for the purpose of avoiding as far as practicable an unjust consequence or result …". The bank's only remaining interest in the mortgage relates to costs in proceedings between the appellant and the bank. The appellant did not seek any limited relief related to the bank's interest in the mortgage, and a conclusion that it is just to declare the mortgage void or order the bank to discharge the mortgage would be warranted only if it is just to deny Mr Stone and the executor of the late Mrs Marks rights to contribution from the appellant and subrogation to the right to the bank under its mortgage over the appellant's property at Balgowlah in support of those entitlements to contribution. The appellant made no attempt to advance such a case in her grounds of appeal or her written or oral arguments in this Court. 22 I cannot identify any basis for the relief claimed by the appellant. In my opinion, the appeal should be dismissed with costs.

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