The plaintiff, Melissa Gay Finlayson, and the defendant, Joseph Bagala, were in a close personal relationship from about August/September 2019 until August/September 2020. During the relationship Ms Finlayson claims that she loaned money to Mr Bagala. In August 2020, Ms Finlayson contends the pair signed a document entitled "Loan Agreement" recording the loan by her of a total of $400,000 to him. The Loan Agreement charged his residential property in Leichardt with repayment of that loan.
Mr Bagala denies signing the Loan Agreement. He now wishes to re-finance an existing mortgage over the Leichardt property. Ms Finlayson has refused to agree to the lifting of a caveat she has lodged over the property to permit the re-finance. He wants the caveat lifted to allow the refinancing to occur. This dispute came into the Equity Duty List today.
Mr KP Tang appeared for Ms Finlayson instructed by Stephen Noss Lawyers on the application. Mr J O'Sullivan instructed by Darian Iacono & Legal appeared for Mr Bagala.
[2]
Background to the Dispute - an Alleged Agreement in the Congo
Mr Bagala holds commercial interests in gold mines in the Democratic Republic of the Congo (the Congo). Soon after his and Ms Finlayson's relationship blossomed in late 2019, they travelled to the Congo. But the pandemic overtook Ms Finlayson and Mr Bagala in the Congo in March 2020, preventing them travelling internationally. They could not return to Australia. They lived together in the Congo, for a period. But their relationship soured partly because of Ms Finlayson's growing distrust in Mr Bagala's approach to many aspects of their relationship. She began to form the view that he might be unlikely to repay monies that she claims she had advanced to him during their relationship.
It was in this context that the Loan Agreement was signed. According to Ms Finlayson, she planned to fly back to Australia on 8 August 2020. Her case is that she drafted the form of Loan Agreement for signature before she left. She says the Loan Agreement was signed on that date and she flew from Kigali to Sydney the following day.
The text of the Loan Agreement document does record a loan of $400,000 from Ms Finlayson to Mr Bagala and contain a charging clause over the Leichardt property. It also contains a provision which is so odd it tends to authenticate the conclusion that Mr Bagala had a close involvement in drafting the terms and potentially in signing the Loan Agreement. Ms Finlayson claims that Mr Bagala insisted before signing the Loan Agreement that he wished to add another clause, which he then wrote in as Clause 15. The new clause in handwriting says "[this agreement] is void if Melissa Gay Finlayson decides not to marry Joseph Bagala for any reason". Whether that is an enforceable term of the Loan Agreement will be a matter for final hearing.
Mr Bagala insists in his evidence that he did not sign the Loan Agreement. He is firm in saying he did not enter the Loan Agreement with Ms Finlayson and that he does not recognise the signature appearing on the document and has no recollection of signing it. Moreover, he denies receiving funds from Ms Finlayson in the sum of $400,000 at any time. He admits on 5 August 2020 to sending a text message to Ms Finlayson saying "I will sign paper", but he says that this was an attempt to appease her because she was angry about aspects of their relationship but insists that he did not sign the Loan Agreement.
Ms Finlayson's case is that the position Mr Bagala is now taking is surprising. She says that he acknowledged the Loan Agreement many times over the years since it was signed. Ms Finlayson's case has much to be said for it upon the uncontested course of events that followed the Loan Agreement.
Ms Finlayson began to issue demands for payment based upon the Loan Agreement in April 2021. The evidence does not suggest that Mr Bagala wrote back at this time with any denial that he signed the agreement.
In June 2021, Ms Finlayson first lodged a caveat on the Leichardt property claiming an interest based upon the charge in the Loan Agreement. There is no suggestion in the evidence that Mr Bagala contested this first caveat and sought its removal on the grounds that he had not signed the Loan Agreement.
Mr Bagala persuaded Ms Finlayson to withdraw the first caveat temporarily in December 2021, so that he could refinance his existing mortgage over the Leichardt property. After the refinancing was completed, a second caveat was lodged over the Leichardt property in the same form as the first caveat in January 2022 with Mr Bagala's consent. His apparent assent to the re-lodging of the caveat appears to be inconsistent with his present case that he did not sign the Loan Agreement. The arrangement to lodge the second caveat in January 2022 was not made without prejudice to his rights to contend that he did not sign the Loan Agreement. Nor was it accompanied by any assertion that he did not sign the Loan Agreement.
Mr Bagala wanted to refinance the mortgage over the Leichardt property yet again in late 2022. He persuaded Ms Finlayson once again to lift the second caveat temporarily, which she did in January 2023, so that refinancing could occur. Once the refinancing was complete, Ms Finlayson lodged a third caveat over the Leichardt property in April 2023. This was done with his apparent consent and without apparent protest or challenge on his part on the basis that he had not signed the Loan Agreement. This is the caveat that Mr Bagala now seeks to have removed, so he can refinance the property once again, this time with a commercial lender, Pepper Finance.
Ms Finlayson has lost confidence in Mr Bagala since April 2023. She is no longer able to be persuaded to remove the caveat cooperatively. Any vestigial affection or regard that she may have once had for Mr Bagala is now long gone. She views the removal of the third caveat on a wholly commercial basis.
Mr Bagala's past refinancing of the Leichardt property has varied his equity in it over time. These variations are discussed below in relation to the consideration of the balance of convenience.
The proceedings are still some way off from fixing a final hearing. Although, the parties agree that most of the evidence has been filed.
[3]
Consideration
Ms Finlayson seeks extension of the operation of the third caveat pursuant to Real Property Act 1900, s 74K. The position of a caveat or seek an extension of the caveat is somewhat analogous to that of an individual seeking an interlocutory injunction. The applicant must satisfy the Court that the caveator's claim "has or may have substance": s 74K (2). Ms Finlayson must satisfy the Court that she has an arguable case for final relief: Queanbeyan Leagues Club v Poldune Pty Limited (1996) 7 BPR 15,078. Ms Finlayson has satisfied the Court that she does have an arguable case, or to use the language of interlocutory injunctions, that there is a serious question to be tried. Mr O'Sullivan rightly did not contest this aspect of her claim.
The real contest between the parties took place in relation to the question of the balance of convenience. In the context of caveats Brereton J has explained the operation of the principle in Mellish v Fetoza Pty Ltd [2007] NSWSC 790 in the following terms:
"It is to be remembered that on questions of balance of convenience the essential issue is the balance of injustice, namely, what prejudice would be suffered by the registered proprietor if the caveat is wrongly permitted to remain on the title on an interlocutory basis, against what prejudice would be suffered by the caveator if the caveat be wrongly allowed to lapse on an interlocutory basis."
This applies in the context of caveats as the same concepts that have long been expressed in relation to interlocutory injunctions. The Court's task on an interlocutory injunction hearing was well expressed by the English Court of Appeal in Francome v Mirror Group Newspapers Ltd [1984] 1 WLR 892; [1984] 2 All ER 408; (1984) 81 LSG 2225; (1984) 128 SJ 484 where Sir John Donaldson MR said (at 894H - 895A):
"The defendants now appeal. It is of paramount importance that everyone should understand the exercise upon which the judge was, and we are, engaged. There is to be a speedy trial at which the rights of the parties will be determined. That has not yet happened. We are concerned, so far as we can, to preserve the rights of the parties meanwhile. It is not our function to decide questions of fact or law which will be in issue at the trial. If they are arguable, that is the time and the place when they should be argued."
Later in the same judgment, his Lordship further explained the Court's duty in following terms (at 898E-898G):
"What then should we do? I stress, once again, that we are not at this stage concerned to determine the final rights of the parties. Our duty is to make such orders, if any, as are appropriate pending the trial of the action. It is sometimes said that this involves a weighing of the balance of convenience. This is an unfortunate expression. Our business is justice, not convenience. We can and must disregard fanciful claims by either party. Subject to that, we must contemplate the possibility that either party may succeed and must do our best to ensure that nothing occurs pending the trial which will prejudice his rights. Since the parties are usually asserting wholly inconsistent claims, this is difficult, but we have to do our best. In so doing, we are seeking a balance of justice, not of convenience."
When assessing the balance of convenience in relation to the extension of caveats, courts will not permit caveats to be used as a blackmailing device to force the registered proprietor to pay out a claim. If the registered proprietor is prepared to put up an alternative security, then the Court will generally remove the caveat even though the caveat may be completely valid: Gibson v Coordinated Building Services Pty Ltd (1989) NSW ConvR 55-481. The Court will order the removal of a caveat based on charges for small amounts compared to the value of the property, provided a sum sufficient to cover the amount secured by caveat is paid into Court: Business Acquisitions Australia Pty Ltd v Renshall (2006) 12 BPR 23,873. Caveats are ordered to be removed to enable first mortgage refinancing to occur on similar terms to existing first mortgage finance: Andrews v Wilcox [2008] NSWSC 280. It has been said that the balance of convenience normally favours the retention of a caveat: Kingstone Constructions Pty Ltd v Crispel Pty Ltd (1991) 5 BPR 11,987 at 11,990 and Custom Credit Corporation Limited v Ravi Nominees Pty Ltd (1992) 8 WAR 42 at 50. But removal will be ordered where for example the removal will permit the sale of a property to occur, which will mitigate the loss to a number of interested parties: Sarandal Pty Ltd v Nameplan Pty Ltd [2007] VSC 568.
In the end, the question of the balance of convenience is, in this case, a balance of the possible injustice to Mr Bagala or Ms Finlayson from lifting or not lifting the caveat to allow the refinancing to occur.
The security provided by the charge in the Loan Agreement, protected by the caveat is important to Ms Finlayson. The evidence of Mr Bagala's assets is vague and untested on the evidence, although he claims to have substantial assets in gold mines in the Congo. But his past refinancings of the Leichardt property suggest he has a tendency in recent times to accumulate rather than satisfy his liabilities. Whether Mr Bagala has any assets in Australia other than the Leichardt property is unclear.
Ms Finlayson has offered an undertaking as to damages. Unlike Mr Bagala, she is resident in Australia and has a full-time job. Her precise asset position is otherwise obscure. The Court weighs her undertaking as to damages as of some value in deciding whether to retain the caveat, as it will offer a degree of protection to Mr Bagala if her claim is unsuccessful.
The historical value of the Leichardt property and the first mortgage debt owing on it at the time of each of the prior refinancings, is important background in the Court's present consideration. When Mr Bagala originally took out the first mortgage loan over the Leichardt property in about 2019 or 2020, the property was worth approximately $1.75 million and the loan amount was either $1 million or $1.1 million. Assuming it is the latter, there was an equity of about $650,000.
In December 2022, when the first refinance occurred and Ms Finlayson agreed to the lifting of the caveats, the property was worth $2.5 million, reflecting the increase in Sydney property values in that period, but the first mortgage had increased to $1.4 million, leaving an equity of $1.1 million. This indicates that either more money was borrowed on the mortgage during this period or interest that was due was not paid.
But in December 2023, the position in which we are now faced, the property is worth $2.2 million but the debt has grown to $1.6 million, leaving equity of, depending upon which figures one accepts, $600,000 or possibly about $645,000. This further increase in the secured liability appears to have resulted from the non-payment by Mr Bagala of accruing interest on the existing mortgage.
The principal choice the Court faces in the case presented by these two parties with their respective competing financial interests is the following: if the caveat is not lifted and there is no refinancing, there is real justification in Mr Bagala's submission that both parties will lose from the situation because of the high interest rates being charged to Mr Bagala by the current first mortgagee. These high interest rates will rapidly erode the remaining equity in the Leichardt property to the disadvantage of both Mr Bagala and Ms Finlayson.
But if Ms Finlayson's caveat is removed and a refinance takes place, there is a risk that the transaction will entrench a reduction in the equity available to satisfy Ms Finlayson's charge, due to Mr Bagala's past non-payment of accruing first mortgage interest. Erosion in her equity has occurred through the refinancing transactions in the past. Between December 2022 and December 2023 in relation to the property where, in substance, there was a deterioration in that equity over that time apparently due to non-payment of interest during that period and the increase in the mortgage liability, which was not fully offset by an increase in the market value of the property. It is true to say the available equity in the Leichardt property to Ms Finlayson has been steady overall when compared with 2020. But this has only occurred because of the offsetting effect of rising property values, against an increase in the mortgage liability due to unpaid interest on fresh advances.
There is a real risk in this case, that if Ms Finlayson is ordered to do for a third time what she has done consensually twice, to lift the caveat to accommodate Mr Bagala and allow the refinancing to occur, that the result will be to entrench a further erosion of the equitable claim that she has as a chargee over the Leichhardt property behind the current mortgagees if Mr Bagala continues not to pay the first mortgagee as has occurred since at least December 2022.
It is an important consideration on the balance of convenience to allow the parties to take advantage of the financial benefits of a refinance. But that should not happen where one or other party unnecessarily bears the risk of that refinance. There seems to be little financial risk to Mr Bagala if the refinance occurs and the interest rate is reduced. And there will be little risk to both parties if the mortgage payments are made by Mr Bagala after the refinance. The greater risk seems to me to be borne by Ms Finlayson, who presently faces a deterioration in the quality of her security if Mr Bagala decides not to pay interest on a refinanced mortgage, as he has done since December 2022.
If the Court does not intervene Mr Bagala's financial affairs will be brought to a head if he falls into default on the existing high interest rate mortgage and is unable to refinance. Mr Bagala wants to prevent that occurring. But it does not seem unreasonable or unjust now to expect him to organise his affairs, if there is a refinancing on the basis that he will pay and keep up-to-date the ongoing interest on his refinanced mortgage. This should protect Ms Finlayson from further erosion of her equity provided he honours that requirement.
In the Court's view, conditions should be imposed upon any requirement for Ms Finlayson to temporarily lift the caveat to allow a refinancing. These conditions have four elements: Mr Bagala should not deal with the property other than in respect of the refinancing; if a refinancing occurs, Mr Bagala should not increase the moneys drawn down upon the refinancing to borrow more than will be refinanced on his existing accumulated interest; if the refinancing occurs, Mr Bagala should promptly pay the monthly finance payments on the refinanced mortgage; and, fourthly, and most importantly, Mr Bagala should provide a fund which, among other things, will mitigate the risk to Ms Finlayson of Mr Bagala defaulting, by accident or by choice, on the refinanced mortgage.
The last point is important. There is little reliable evidence of the liquid assets available to Mr Bagala for him to keep up payments on a refinanced mortgage. Given his recent conduct in allowing mortgage interest to be capitalised, there is a risk that an order for him to keep up mortgage payments may not be honoured, and Ms Finlayson will be put the not insignificant expense of relisting these proceedings to seek ancillary relief to deal with that default.
That further risk is avoidable. Mr Bagala can pay a sum of money into Court principally to be available to meet mortgage payments, in the event he does default. The fund should be sufficient to cover Mr Bagala's mortgage payments over the expected procedural life of these proceedings.
Mr O'Sullivan submits on behalf of Mr Bagala that any such fund should be a figure of approximately $115,000. This would represent 12 months interest on the refinanced loan with Pepper Finance, which has an interest rate of 7.74%, as estimated in the letter of offer.
There is a two-fold difficulty with that figure. The first difficulty is that if there is a default and if there is to be some reasonable measure of protection to Ms Finlayson, a default rate of interest rather than the primary rate of interest charged by Pepper Finance will accrue on the loan. If one does a simple calculation of increasing the interest rate of 7.4 per cent by half again, one gets to a figure for 12 months of $172,000.
But the second difficulty is that the Court is not convinced that an allowance of a fund representing 12 months interest would be enough. Longer may be required to deal with all the risks of dealing with the default, including the possibility of judicial sale of the property upon the application by Ms Finlayson, if her equitable interest is made out. So, the Court will allow a little longer than 12 months. This leads the Court back to the figure, which the Court discussed during argument, of $200,000. The Court will order that sum of money to be paid into Court as a condition of the refinancing occurring.
Ms Finlayson suggested the figure should be $400,000, but in the Court's view that misapprehends the purpose of the Court imposing this condition. The Court is not imposing this condition to give additional security to Ms Finlayson's equitable interest. The Court is imposing this condition, principally, to mitigate the loss that might occur if Mr Bagala does not honour the Court's order as a condition of lifting the caveat that he continues to pay interest on the refinanced loan.
The sum of money to be paid into Court is calculated on this basis. But it need not solely be used to pay interest and the Court will not limit its use in that way. The fund will be able to be applied as the Court may direct in the future. Funds paid into Court may have to be paid to a mortgagee, or to Ms Finlayson, or back to Mr Bagala, depending upon the outcome of the proceedings.
[4]
Conclusion and Orders
Accordingly, the Court makes the following orders and directions:
1. Orders that upon the Defendant paying the sum of $200,000 into Court or into an agreed controlled moneys account, the plaintiff shall withdraw caveat having dealing number AT [not published] ("First Caveat") lodged with respect to folio identifier 67/[not published] in deposited plan [not published] known as [address not published], Leichardt, NSW 2040 ("Property").
2. Grants leave to the Plaintiff to lodge, immediately after registration of the discharge of mortgages having dealing numbers AQ680920 (as varied by dealing numbers [not published] and [not published]) and [not published] ("Old Mortgages") and the registration of a further first registered mortgage to Pepper Finance Corporation Ltd (ACN 094 317 647) or Pepper Finance Pty Ltd (ACN 119 475 786) and a second registered mortgage or caveat to FBW Investments Pty Ltd ("New Mortgages"), a further caveat with respect to the same interest in the Property as is claimed in the First Caveat ("Second Caveat").
3. Order the defendant:
1. not to transfer, dispose of, encumber or otherwise deal with the Property other
2. than to undertake the refinance referred to in paragraph 2 above, not to increase or seek to increase the amount advanced on the New Mortgages and,
3. to pay monthly interest due from time to time on the New Mortgages and not otherwise permit the New Mortgages to go into default, such that default interest might be charged,
until the earlier of the finalisation of these proceedings or until further order of the Court.
The plaintiff is ordered to file a statement of claim setting out her claim for equitable relief and any claim she has for money relief articulating the claim in the First and Second Caveats.
The proceedings are stood over for directions before the real property list judge on 1 March 2024.
Costs of the application today are reserved.
Grant liberty to apply.
[5]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 14 February 2024