By its Amended Summons dated 20 November 2020, the plaintiff ("First Mortgage") seeks orders to facilitate transfers to it of two registered mortgages held by the first defendant ("Westpac"). The mortgages are over a property at 24/51 Princes Highway, Fairy Meadow ("Lot 24"), and a property at 25/51 Princes Highway, Fairy Meadow ("Lot 25") respectively. Lot 24 is owned by the second defendant, Ms Juri. Lot 25 is owned by the third defendant, Mr Husain. Ms Juri and Mr Husain are a married couple. They have four children.
In May 2019, the plaintiff lodged caveats in respect of each property, claiming interests pursuant to a Loan Agreement dated 10 May 2018. Under the Loan Agreement, the sum of $289,915 was advanced to a company associated with Ms Juri for a term of about six months. Ms Juri and Mr Husain are guarantors of the loan. The loan was not repaid by the due date of 30 October 2018.
The fourth defendant, Mr Albert, has also lodged caveats in respect of each property, claiming interests pursuant to an agreement with Ms Juri and Mr Husain dated 17 September 2019. He lodged his caveats in November 2019. One of the orders sought by the plaintiff is an order that Mr Albert's caveats be withdrawn so as to permit the transfers of the Westpac mortgages.
Westpac has filed a submitting appearance, save as to costs.
Ms Juri and Mr Husain resist the relief sought by the plaintiff. By a Cross-Claim filed on 18 January 2021, they seek injunctive relief to restrain First Mortgage from redeeming any mortgage over any property owned by them. Ms Juri and Mr Husain further seek relief against First Mortgage in respect of alleged unconscionable conduct in relation to the entry into the Loan Agreement and associated mortgages, and allegedly improper or unconscionable exercises of powers by First Mortgage. In particular, the cross-claimants complain about:
1. the rate of interest stipulated, namely, 60% p.a. as the Higher Rate and 30% p.a. as the Lower Rate; and
2. the exercise of a power by First Mortgage under its mortgages to pay-out other mortgagees, and add the amounts so paid to the Secured Money such that interest would henceforth run on those amounts as well.
A number of other claims made in the Cross-Claim were ultimately not pressed, including the claims of unconscionable conduct based upon the cross-claimants being in a position of special disadvantage vis-à-vis First Mortgage.
Mr Albert, who appeared for himself, resisted any order that he withdraw his caveats over Lots 24 and 25, largely on the basis that if the transfers of mortgages occurred and the Secured Money was increased accordingly, any remaining equity in the properties would likely be quickly eroded by the high interest that would be charged by the plaintiff.
Westpac was named as a cross-defendant. So, too, was the Commonwealth Bank of Australia ("the CBA"). The CBA appeared when the hearing was called on. However, in circumstances where the CBA no longer holds any mortgages over properties owned by the cross-claimants and it appears that no relief is sought against it, the CBA was excused, with the agreement of the cross-claimants, from further attendance.
By way of further background, it should be noted that the plaintiff has already exercised rights to pay-out mortgages over properties owned by Ms Juri and Mr Husain. This occurred on 29 January 2020 in respect of two properties in Hamish Road, Darley, Victoria, over which the CBA held a mortgage (AN702449D), and on 19 May 2020 in respect of a property in Albion Park Rail, over which Westpac held a mortgage (AG766735).
In relation to the Darley mortgage, the plaintiff paid $226,301.63 to the CBA. The plaintiff later sold the Darley properties and recovered a total of about $420,000.
In relation to the Albion Park Rail mortgage, the plaintiff paid $260,996.33 to Westpac. The plaintiff later sold that property and recovered about $430,000.
In summary, First Mortgage outlaid $487,297.96 and recovered about $850,000. However, in the intervening period the amount so outlaid (which is almost 1.7 times the size of the principal sum originally lent by the plaintiff) was added to the Secured Money and caused the interest liability to increase significantly, bearing in mind that the Higher Rate of 60% p.a. has been charged by the plaintiff at least since about 30 October 2018 when the loan was due to be repaid. Amongst the relief that is sought by the cross-claimants are orders to redress that additional interest burden.
It should also be noted that in addition to the properties already mentioned, Ms Juri and Mr Husain own other properties, including a property in Point Cook, Victoria, which is the family home, and a property in Belmont, Victoria. Each of those properties is subject to a first ranking registered mortgage in favour of Westpac and a second ranking registered mortgage in favour of the plaintiff.
It is convenient to now set out a summary of the salient facts, largely taken from the documents in the Court Book (which runs to more than 1400 pages - Exhibits C1 to C4).
[3]
Summary of salient facts
Glocal Villager International Pty Ltd ("Glocal") was incorporated on 3 April 2018. Ms Juri was the sole director and secretary, and the holder of all the issued shares. On 23 April 2018 she signed a director's resolution in relation to a proposed loan from First Mortgage to Glocal. The resolution stated that the reason for the loan was:
Business activities to buy an equity in Supachill.
Supachill Pty Ltd conducted a business in the food industry and intended to develop a food preservation process to assist in the export of Australian food products to Asia. Ms Juri had been approached by the Chief Executive Officer of Supachill Pty Ltd about an investment of $250,000 into the business. Ms Juri deposed that she and Mr Husain spoke to the "recognised bank lenders" but none was willing to lend "on account of the fact that I was unwell and was not in receipt of any wages". However, in about March 2018, Ms Juri was introduced to a finance broker, Mr Cameron Merritt, who further introduced Ms Juri and Mr Husain to another finance broker, Mr Noel Ridler of Ridcorp Capital. Ms Juri gave evidence that she entered into mandate contracts with both Mr Ridler and Mr Merritt. The evidence is not clear as to the roles played by either in relation to the loan later entered into with the plaintiff. By 18 April 2018 Ms Juri and Mr Husain had paid what is described as a non-refundable deposit of $18,000 to Supachill Pty Ltd.
The minutes of a meeting between Ms Juri and Mr Husain held on 23 April 2018 record:
It was decided in this meeting that Glocal Villager International Pty Ltd (ACN: 625 364 865) will initiate a business loan application with First Mortgage Capital Pty Ltd, after carefully considering the terms and the required collaterals against the $290,000 loan. It was understood by both Zu [Ms Juri] and Sheik [Mr Husain] that only $250,000 may be used as Business Capital as close to $40,000 will be disbursed as administrative costs and fees associated with the loan amount. Both Sheik and Zu have agreed to put up their residence (17 Fuchsia Crs, Point Cook, VIC 3030) and one of their investment properties (4-33, Settlement Road, Belmont, VIC 3216) as collaterals for this loan.
On 10 May 2018, First Mortgage entered into a Loan Agreement with Glocal pursuant to which a principal amount of $289,915 was advanced. The cheque directions to the plaintiff's solicitors indicate that after the payment of various fees, an amount of brokerage to Ridcorp Capital, and three months interest in advance, a net amount of $250,000 was paid to Glocal. This sum was in fact paid into a Westpac account held jointly by Ms Juri and Mr Husain.
Ms Juri and Mr Husain executed mortgages over the Point Cook and Belmont properties in connection with the advance of $289,915. Under the heading "Additional Terms and Conditions", the front pages of the mortgages refer to that Principal Amount, as well as to the Higher Rate of Interest of 60% p.a. and the Lower Rate of Interest of 30% p.a. Reference is also made to document AA3394, which is a registered memorandum of "Mortgage Common Provisions" entitled "Summer Lawyers 2017 Memorandum". The terms of the memorandum are clearly incorporated into the mortgages. At this point, it is only necessary to refer to the following provisions of the memorandum:
1. clause 2.1, which provides that the Mortgagor grants to the Lender a mortgage of the Mortgaged Property. Mortgaged Property is defined to mean the land described in the mortgage and the Charged Assets, which is in turn defined to mean all of the Debtor's property including all real estate. Debtor is relevantly defined as the Borrower and/or the Mortgagor, with liability being joint and several;
2. clause 3.1, whereby the Debtor covenants to pay the Secured Money in accordance with the terms of this Mortgage by the end of the Term (which is the period from 30 April 2018 to 30 October 2018). Secured Money is defined to mean the aggregate of all monies which the Debtor is liable to pay the Lender on any account whatsoever;
3. clauses 5.5 to 5.7, which specify how the Higher Interest Amount and the Lower Interest Amount are calculated, and provides that the Higher Interest Amount is payable for an Interest Period if, inter alia, the Debtor has failed to pay an amount due under the mortgage by the due date for payment;
4. clause 5.11, which sets out the applicable interest rate regime, being monthly in advance, and where there is a failure to pay interest when due, interest runs on the outstanding interest at the Higher Interest Rate compounding monthly;
5. clauses 18.1 and 18.2, which define Events of Default, including the Debtor failing to pay any Secured Money in accordance with the mortgage;
6. clause 18.3 which relevantly provides:
If an Event of Default occurs, or is deemed to have occurred:
(a) the Lender may demand the immediate payment to it of the Secured Money and the Debtor is obliged to repay the Secured Money in full to the Lender in accordance with that demand;
(b) the Lender may exercise any right, power or privilege conferred on it as a Mortgagee by this Mortgage, whether under any Legislation or at common law, or in equity;
(c) the Lender may:
(i) take possession of and eject any occupants from the Mortgaged Property; and
(ii) sell, assign, transfer, dispose of, or exchange the Mortgaged Property, or grant options in respect of or over the Mortgaged Property;
(d) any sale by the Lender of the Mortgaged Property may be in any manner and on such terms and conditions as the Lender may in its absolute discretion determine and in that respect the Lender may sell the Mortgaged Property in one line or in lots;
…
(h) the Lender may pay to any mortgagee of any other Encumbrance the whole or any part of the amount owing to that mortgagee and any money so paid by the Lender will form part of the Secured Money and will be secured by this Mortgage; and
1. clause 28, which contains the guarantees given by Ms Juri and Mr Husain.
Ms Juri and Mr Husain signed numerous other documents as part of the transaction including Powers of Attorney, and declarations as to having understood the mortgage and the guarantee. There are certificates from legal practitioners about having explained to each of Ms Juri and Mr Husain the nature and effects of the mortgage documents and the guarantee.
The mortgages taken by First Mortgage were registered on 16 June 2018. As already mentioned, both the Point Cook and the Belmont properties were subject to first registered mortgages in favour of Westpac.
It appears from a loan account produced by the plaintiff (as at 9 July 2021) that interest was paid as required throughout the six month term of the loan. The loan, or more accurately the Secured Money, was not however repaid by the end of the term on 30 October 2018. That was an Event of Default.
There is evidence that Ms Juri and Mr Husain deposited a sum of $213,625.10 into their joint account on 7 November 2018. Ms Juri said that she could not recall whether that sum was the proceeds of a sale of a property in Singapore that occurred at about that time. The credit balance in the joint account on that day was $247,067.67. Ms Juri agreed that instead of paying that money to First Mortgage, she elected to pay the money "to other sources". The evidence reveals that at that time she and Mr Husain were pursuing various business opportunities including investments in an aviation company and a fuel distribution company located in Papua New Guinea. Ms Juri gave evidence to the effect that she continued to make payments to the Papua New Guinea enterprise throughout 2019.
First Mortgage commenced enforcement proceedings in the County Court of Victoria. It appears that a default judgment for possession was obtained in respect of the Point Cook property on 23 May 2019, and a warrant of possession was issued on the following day. Ms Juri and Mr Husain then entered appearances, and amongst other things requested First Mortgage to pause all court proceedings and allow a reasonable time "to sell off our NSW properties to raise capital to repay the loan in full with costs". To that end, agents were appointed for the sale of the Albion Park Rail property and Lots 24 and 25.
On 28 May 2019 First Mortgage lodged caveats against the titles to the Albion Park Rail property and Lots 24 and 25.
In June 2019, negotiations commenced between the parties in relation to a Forbearance Deed. Such a deed was entered into between First Mortgage, Glocal, Ms Juri and Mr Husain on 17 June 2019. The Forbearance Deed contained various acknowledgements by the Debtor (see cll 4.1 to 4.3). By cl 2.1 it was provided that subject to compliance with certain conditions by the Debtors, First Mortgage would forbear from taking any enforcement action against them during the Forbearance Period. As defined, that period would end no later than 11 October 2019. The conditions included entry into unconditional exchanged contracts for sale for Lots 24 and 25 and the Albion Park Rail property by no later than 21 August 2019. It appears from the Forbearance Deed that First Mortgage claimed that as at 6 June 2019 the amount of the Secured Money was $380,938.24. No challenge is made to the validity of the Forbearance Deed.
On 3 July 2019 First Mortgage requested the Sherriff's Office to put the possession warrant "on hold".
Ms Juri and Mr Husain were unable to comply with the condition concerning the exchange of contracts for sale by 21 August 2019. It seems that the appointed selling agent may have ceased business. Whatever the reason, there followed some further negotiations, involving the solicitors for the respective parties, for an extension of the dates in the Forbearance Deed. These negotiations did not lead to a further agreement. At one stage, the solicitors for First Mortgage stated that it would be willing to provide an extension of the Forbearance Deed if the debt was reduced by $50,000 by 6 September 2019. A payment of $2,000 was made on that day, and it was stated that a further $48,000 would be paid by 13 September 2019, but this second payment was never made. The solicitors for First Mortgage had made it clear that if the $50,000 was not received by 6 September 2019 then recovery action would proceed. This position was confirmed on 17 September 2019.
It should be noted that around this time Ms Juri and Mr Husain signed various documents addressed to Mr Albert. In one such document it was acknowledged that Mr Albert had transferred almost $294,000 to Ms Juri earlier in 2019. On 17 September 2019 a document was signed by Ms Juri and Mr Husain that contained the following:
We, Sheik Taleb Bin Sheik Husain…and Zufaidah Juri…have taken a total sum of $90,000 AUD and $140,000 USD from Mr Jude Thaddeus Albert between August 2018 and June 2019 being the agreed total sum of $320,000 AUD all inclusive.
We give you our Personal Guarantee and Security as collateral, on our properties listed below that we will return and pay to you all your funds of $320,000 AUD all inclusive by 30th September 2019.
…
OUR PROPERTIES FOR YOUR SECURITY OF PAYMENT.
(1) A/199 Princes Highway, Albion Park Rail, NSW 2527
(2) 24/51-59 Princes Highway, Fairy Meadow, NSW 2519
(3) 25/51-59 Princes Highway, Fairy Meadow, NSW 2519
(4) 17 Fuchsia Crescent, Point Cook, VIC 3030
This document is the basis of the interest claimed by Mr Albert in the caveats he later lodged.
From 17 September 2019 First Mortgage took steps to enforce its rights, including requesting the Sherriff's Office to reactivate the possession warrant, and continued to investigate the feasibility of selling the Belmont property, which seems to have been in a poor condition. The execution of the possession warrant was delayed because the Sherriff advised that there was a tenant at the Point Cook property. This led to the making of further enquiries. On 16 October 2019 the plaintiff's solicitors were advised by solicitors acting for Ms Juri and Mr Husain that there was indeed a tenant, although the tenancy agreement could not be located.
Ms Juri and Mr Husain continued their efforts to sell their New South Wales properties. On about 23 October 2019 contracts were exchanged for the sale of Lot 25 for a price of $470,000. That contract was due to settle by 18 December 2019. On about 22 November 2019 contracts were exchanged for the sale of Lot 24 for a price of $437,500. That contract was due to settle by 20 December 2019.
On 5 November 2019 the plaintiff's solicitors provided a loan statement that indicated that the plaintiff claimed an amount of $464,607.04.
On 7 November 2019 Mr Albert, who had recently commenced proceedings against Ms Juri and Mr Husain in the Supreme Court of Victoria, lodged caveats in respect of Lots 24 and 25 and also in respect of the Albion Park Rail property.
On 11 November 2019 Westpac served a notice under s 57(2)(b) of the Real Property Act 1900 (NSW) in relation to Lot 24. This was made known to the plaintiff as a caveator.
It appears that little was done on the vendor's side to deal with the caveats until about 16 December 2019 when Ms Juri and Mr Husain instructed separate solicitors (Diamonds Solicitors) to deal with that matter. On 20 December 2019 those solicitors wrote to the plaintiff's solicitors. An up-to-date pay-out figure was sought, as well as an indication of the minimum amount the plaintiff would require in order to release its caveats over Lots 24 and 25. In response, the plaintiff's solicitors sought details of the contracts for sale, adjustment statements and proposed cheque directions. On 23 December 2019 contracts for sale were provided, but no settlement statements were "as there is presently no settlement booked". Diamonds Solicitors were also at that time dealing with Mr Albert's solicitors in relation to his claims.
On 24 December 2019 the purchaser of Lot 24 served a Notice to Complete.
On 3 January 2020 Westpac served a s 57(2)(b) notice in relation to Lot 25. This was made known to the plaintiff as a caveator.
On 15 January 2020 the plaintiff's solicitors informed Diamonds Solicitors that the plaintiff's current pay-out figure (not including the solicitors' fees) was $515,899.23. On 16 January 2020 Diamonds Solicitors responded, stating that the pay-out figure on its own would not suffice. A copy of the loan account ledger was sought, and the request was repeated for the minimum amount required in order to release the caveats. On 17 January 2020 the plaintiff's solicitors sent a Lender's Certificate pursuant to cl 24 of the mortgage which stated that the pay-out figure as at 20 January 2020 was $584,606.65. The covering letter stated that the plaintiff required payment of that amount. Diamonds Solicitors pressed for provision of the loan account ledger. On 20 January 2020 the purchaser of Lot 24 purported to rescind the contract for sale. A refund of the deposit was demanded. On the same day, the purchaser of Lot 25 served a Notice to Complete. That purchaser eventually terminated the contract on 21 April 2020.
Ms Juri and Mr Husain alleged in their Cross-Claim that First Mortgage had breached the Forbearance Deed and engaged in unconscionable conduct by refusing to remove its caveats so as to allow settlement of the contracts for sale for Lots 24 and 25. However, these allegations were not pressed. A complaint about a failure on the part of First Mortgage to provide a pay-out figure was also not pressed.
On 29 January 2020 First Mortgage paid out the mortgage held by the CBA on the two properties in Hamish Road, Darley. The amount so paid was $226,301.63. There is no evidence of the decision-making process of First Mortgage in relation to this transaction, and there is little evidence of its dealings with the CBA apart from what appears in the PEXA settlement record. However, it appears that following the settlement, First Mortgage withdrew its caveats, discharged the CBA mortgage, and registered its own mortgage over the properties.
First Mortgage thereafter took steps to sell the Darley properties. A contract for sale was entered into in relation to 7 Hamish Road on about 20 March 2020 for a price of $231,000. This contract settled on 19 May 2020. A contract for sale was entered into in relation to 3 Hamish Road on about 29 June 2020 for a price of $222,000. This contract settled on 28 August 2020.
In the meantime, First Mortgage paid out the Westpac mortgage over the Albion Park Rail property. Again, there is no evidence of the decision-making process of First Mortgage in relation to this transaction, although it appears that the solicitors for First Mortgage sent a letter to Westpac as early as 18 December 2019 seeking a redemption of the mortgage pursuant to s 93 [sic] of the Conveyancing Act 1919 (NSW). That letter is not in evidence. However, a letter from the solicitors to Westpac dated 15 May 2020 reveals that in April 2020 First Mortgage changed course, seeking instead to take a transfer of the Westpac mortgage. The transfer was effected on 19 May 2020. First Mortgage became registered as proprietor of mortgage AG766735 on the following day. First Mortgage paid Westpac $260,996.33 for the transfer.
On 21 May 2020 the solicitors for First Mortgage sent a letter to Ms Juri and Mr Husain which included the following:
Relying on powers under the Mortgage, on or about 19 May 2020, the Mortgagee redeemed the first mortgage (no. AG766735) over the Land by paying the amount of $260,996.33 to Westpac Banking Corporation.
The amount the Mortgagee paid Westpac Banking Corporation to discharge their mortgage now forms part of the secured money you owe under the Mortgage.
You are no longer required to make any payments to Westpac Banking Corporation.
All future payments you would usually make to Westpac Banking Corporation must now be paid directly to the Mortgagee.
On 10 June 2020 Ms Juri and Mr Husain sent an email in response, stating that they usually pay Westpac $600 per month in respect of the Albion Park Rail property. Account details were sought. On 15 June 2020 the solicitors for First Mortgage provided a contact number so that the account details for First Mortgage could be confirmed if necessary.
On 12 August 2020 First Mortgage entered into a contract for sale in respect of the Albion Park Rail property for a price of $440,000. First Mortgage entered into the contract as mortgagee in possession exercising its power of sale. The contract settled on 23 September 2020.
First Mortgage had earlier taken steps towards paying out the Westpac mortgages over Lots 24 and 25 which remained unsold. On 25 May 2020 the solicitors for First Mortgage sent a letter to Westpac which included the following:
We act for the Second Mortgagee.
You act for or are the First Mortgagee of the Land.
The Second Mortgagee's mortgage is in default as the Mortgagor failed to repay the mortgage by the term date.
Pursuant to section 94 of the Conveyancing Act 1919 (NSW) we are instructed that the Second Mortgagee intends to redeem the First Mortgagee's mortgage.
Please provide a payout figure for 4 June 2020 which we propose as the settlement date for the discharge.
First Mortgage sought to effect the redemptions using powers of attorney that had been given by Ms Juri and Mr Husain in May 2018. It seems that Ms Juri and Mr Husain informed Westpac that the powers of attorney were not valid, or no longer valid. Westpac was willing in these circumstances to "hold off" on processing the redemptions pending the receipt of further information. This appears from an email sent by Mr Srikaran of the bank to Mr Husain on 18 June 2020.
On 19 June 2020 Westpac withdrew from the PEXA workspace that had been established, on the stated basis that the power of attorney had been "rescinded". That is difficult to understand given that the powers of attorney proffered by First Mortgage were expressed to be irrevocable. Westpac appears to have decided to take no action in circumstances where the solicitors for Ms Juri and Mr Husain were threatening to "embroil" the bank in litigation if it "acted contrary to the customers' instructions". Ms Galpin of the bank informed the plaintiff's solicitors that Westpac recognised that the power of attorney was irrevocable, "but with the notice of a dispute, Westpac will not take any action until notification is received that this has been resolved".
On 8 July 2020 Diamonds Solicitors sent an email to Westpac in the following terms:
The foreshadowed proceedings against First Mortgage Capital Pty Ltd should be issued in the very near future. I renew my request that you do not act in any way to facilitate First Mortgage Capital Pty Ltd's agenda or assist its lawyers, Summer Lawyers, in any way.
Further, should a payout figure be requested by Summer Lawyers, with respect to any mortgage you hold, I would ask that any payout figure quoted should be based on the Bank's entitlement to cross-collateralise its various securities. Further, I ask that I be copied in to any correspondence relevant to my clients. The granting of a power of attorney does not create some obligation of confidentiality on the Bank's part and I believe that the Bank, under these circumstances, retains a duty to act consistently with its customers' best interests.
On 29 July 2020 the solicitors for First Mortgage sent a letter to Westpac stating that First Mortgage would commence proceedings unless Westpac arranged a "discharge settlement" by 7 August 2020.
On 14 October 2020 the solicitors for First Mortgage made a further request to Westpac to allow its mortgages over Lots 24 and 25 to be redeemed, failing which proceedings would be commenced. Westpac responded on 21 October 2020 stating, in effect, that it was not in a position to redeem the mortgages until the dispute between First Mortgage and the mortgagors was resolved. First Mortgage commenced the proceedings by filing a Summons on 23 October 2020.
[4]
Determination
As already mentioned, various aspects of the Cross-Claim were ultimately not pressed. These include the claims of unconscionable conduct based upon the cross-claimants being in a position of special disadvantage vis-à-vis First Mortgage, and the allegations that First Mortgage had acted wrongfully in refusing to withdraw its caveats over Lots 24 and 25 and in failing to provide pay-out figures when requested to do so. In addition, I did not understand the cross-claimants to press the allegation that First Mortgage had acted unconscionably by "allowing the short term loan to become a long term loan at very high interest rates".
The aspects of the Cross-Claim that remain for determination can be broadly described as:
1. the complaint that the conduct of First Mortgage in entering into the Loan Agreement and associated mortgages was unconscionable due to the high rates of interest provided for; and
2. the complaint that First Mortgage has exercised (and proposes to exercise) its powers under cl 18.3(h) of the mortgages to redeem mortgages in an improper manner and such as to engage in unconscionable conduct.
I will deal first with the complaint about the high interest rates. Counsel for the cross-claimants described the interest rates of 30% (Lower Rate) and 60% (Higher Rate) as extraordinarily and extortionately high. In closing submissions, it was put that the 60% rate was an offence to conscience, such that equity should intervene. Counsel for First Mortgage submitted that the interest rates had to be viewed in the context of a commercial loan, entered into for speculative purposes, that (on the evidence of Ms Juri) none of the "recognised bank lenders" was prepared to make. Counsel also referred to her evidence in cross-examination to the effect that she saw the references to the interest rates on the mortgage at the time she executed the documents. Further, it was pointed out that no evidence had been adduced by the cross-claimants about market interest rates for loans of the type present here, in an attempt to show that the rates charged ought to have been lower (see Guardian Mortgages v Miller [2004] NSWSC 1236 at [104]-[105]).
The essence of the cross-claimants' case is that it was unconscionable for First Mortgage to enter into the loan and mortgage agreements that provided for interest at the stipulated rates. In that regard, I understood them to rely upon s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) as well as the general law (or "unwritten law"). For the following reasons, I do not accept the cross-claimants' submissions. Whilst I accept the broad proposition that the rates of interest are high, indeed many times higher than Court rates of interest and the rates commonly seen on first ranking mortgages taken by the major banks, I cannot be satisfied that the rates are exorbitant for a short term commercial loan of the type made here by First Mortgage. In addition, it is clear that the cross-claimants entered into the transaction with knowledge of the interest rates. The relevant documents were explained to them by a solicitor, who gave certificates to the effect that the cross-claimants signed the documents after having the legal effect of the documents explained to them. The cross-claimants themselves certified that they proceeded freely and voluntarily, without undue influence or pressure from any third party, and after obtaining legal advice. As I have said, the cross-claimants abandoned the claim that they were in a position of special disadvantage. In these circumstances it was not unconscionable for First Mortgage to enter into the loan and mortgage agreements that contained the interest rate provisions that they did. There was no relevant exploitation or victimisation of the cross-claimants, let alone any moral obloquy. These claims, whether under statute or the general law, must be rejected.
Before leaving this topic I should note that despite being permitted under the terms of the mortgages to charge compound interest (see cl 5.11(b)), First Mortgage has not in fact done so, and the Court was informed that it had waived its rights in that regard.
I turn now to consider the complaint concerning the exercise of the powers under cl 18.3(h) of the mortgages. It may be recalled that cl 18.3(h), which operates if an Event of Default occurs, allows First Mortgage to pay to any mortgagee of any other Encumbrance the whole or any part of the amount owing to that mortgagee, and any money so paid by First Mortgage forms part of the Secured Money and is secured by the mortgage. (Encumbrance is defined to include any interest created in respect of or over the Mortgaged Property.)
In paragraph 37 of the Cross-Claim, the cross-claimants allege that First Mortgage has exercised and is intending to exercise its power under cl 18.3(h) "such that it can charge interest at the rate of 60% rather than the commercial rates charged by Westpac and CBA and therefore effectively acquire all of the cross-claimants' equity in their property portfolio (on a $289,915 loan)". It is then alleged that such conduct is contrary to implied terms of the mortgages (including obligations to act in good faith, only exercise powers reasonably, and only exercise powers for the purpose of recovering its secured money and not for some indirect or ulterior purpose), and also unconscionable.
Counsel for the cross-claimants submitted that by the exercise of the power under cl 18.3(h), First Mortgage obtained a collateral advantage beyond the payment of principal, interest and costs. It was submitted that redeeming low interest rate mortgages and incorporating the amount paid into its own high interest rate mortgages was very profitable for First Mortgage to the extent that it caused the liability of the cross-claimants to increase. Counsel calculated that interest charged at the rate of 60% p.a. on the money used to payout the mortgages on the Darley properties and the Albion Park Rail property up to the dates of completion of the sales of those properties would be approximately $127,000. It was submitted that as First Mortgage had other alternatives available to it, such as seeking orders for judicial sale, the path taken should be seen as lacking in good faith. It was pointed out that First Mortgage did not adduce evidence of what considerations it took into account in deciding to exercise its powers under cl 18.3(h).
Counsel for First Mortgage submitted that the exercises of the power to redeem other mortgages had to be assessed in the light of all the circumstances existing at the time of the exercise. It was submitted that by the time the first of the redemptions occurred in January 2020, First Mortgage had commenced the process of enforcement, then granted indulgences to the cross-claimants in the form of the Forbearance Deed, and then seen the cross-claimants fail to satisfy the conditions of the Forbearance Deed and thereafter fail to complete the sale of any property. It was submitted that it could not be said that First Mortgage jumped at the opportunity to effect redemptions of other mortgages, and indeed that course ought be seen as one taken as a last resort. It was submitted that had First Mortgage taken the course of seeking judicial sale orders, there would likely have been delays as the cross-claimants would have attempted to defend such proceedings by raising arguments similar to those raised in the present case. Finally, it was submitted that there was no suggestion that First Mortgage had been guilty of delay in the selling of either the Darley properties or the Albion Park Rail property.
First Mortgage adduced evidence from Mr Mohamud Ahmed, a Recoveries Officer employed by First Mortgage. Mr Ahmed deposed that he had knowledge of the policies that guide First Mortgage's recovery process and the strategies it employs to recover its debts in line with those policies. After acknowledging that First Mortgage charges high interest rates, Mr Ahmed deposed that it was thus necessary for First Mortgage to enforce its loans promptly in order to ensure full recovery of the amount owed. He further deposed:
Due to its high interest rates, it is FMC's [First Mortgage Capital's] policy to recover its debt expeditiously so as to limit the accumulation of debt under a loan.
One of the processes undertaken by FMC to expedite recovery of its debt is to redeem a mortgage held by a prior mortgagee.
When considering whether to redeem a prior mortgage, the following factors are relevant to FMC:
(a) whether FMC's subsequent mortgage is registered;
(b) the cost of enforcing FMC's mortgage by commencing proceedings in court;
(c) the time it will take to enforce FMC's mortgage by commencing proceedings in court;
(d) the time and cost of taking possession of a security property;
(e) the debt owing to a prior mortgagee;
(f) the expected value of a security property;
(g) whether a borrower client has been given an opportunity to repay the debt;
(h) whether a borrower client has failed to repay the debt within a reasonable period of time; and
(i) the rate of interest and the rate of accumulation of debt.
Mr Ahmed was not cross-examined. Counsel for the cross-claimants explained that he decided not to cross-examine because the evidence set out above was expressed at a high level of generality and not by reference to the particular circumstances of the cross-claimants.
The power under cl 18.3(h) arises upon default. The provision thus operates in circumstances where the mortgagee is entitled to charge interest at the Higher Rate of 60% p.a. In those circumstances the power allows First Mortgage to pay out the mortgagee in respect of other Encumbrances, and treat the money so paid as part of the Secured Money upon which interest runs at that rate. If the Encumbrance that is paid out provides for interest to be charged at much lower rates, there is scope for the mortgagors to suffer a significant additional burden. For as long as the relevant property remains unrealised, the mortgagors would be subjected to an additional interest burden even though the amount of the debt secured has not increased. As the estimates prepared by counsel for the cross-claimants suggest, that burden can be very substantial. Where, as here, the Encumbrances that are paid out are first registered mortgages held by major banks, upon which interest is charged at standard commercial rates, such a redemption effectively converts that portion of the mortgagors' debt into a high interest rate loan. That is so even though repayment of that portion remains secured by a first ranking security. First Mortgage is thereby able to assume a position akin to that of a first mortgagee in respect of that portion of the debt, yet charge interest on that portion at the Higher Rate (or default rate) provided for under a different type of loan that was to be secured by a lower ranking mortgage. The ability to charge interest on such debt at that rate seems to me to be a right that is collateral to the interest of First Mortgage in recovery of the amount it advanced together with interest.
In my opinion, the effect of an exercise by First Mortgage of its power under cl 18.3(h), at least where it involves the paying out of a first registered mortgage held by a major bank (such as Westpac or the CBA), can be regarded as a collateral advantage to First Mortgage as mortgagee, and a clog on or an impediment to the exercise by the cross-claimants as mortgagors of the equity of redemption. (More accurately, in respect of land under the Torrens system, their ability to discharge the charges that mortgages create over such land: see Almona Pty Ltd v Parklea Corporation Pty Ltd [2019] NSWSC 1868 at [507]-[508]).
In Re Modular Design Group Pty Ltd (1994) 53 NSWLR 96 at 103 Santow J (as his Honour then was) stated that it has been authoritatively held that a clog on the equity of redemption exists where the effect of a stipulation is merely to impede its exercise. His Honour went on to state that equity will not intervene merely by reason of the mortgagee obtaining a collateral advantage, but will do so if there is unconscionable conduct. Reference was made to the decision of Young J (as his Honour then was) in Westfield Holdings Ltd v Australian Capital Television Pty Ltd (1992) 32 NSWLR 194 at 202-3 where it was stated (in obiter dictum):
There does not appear to be any commercial reason why, in 1992, the court should invalidate any transaction merely because a mortgagee obtains a collateral advantage or seeks to purchase a mortgage property. Quite obviously equity must intervene if there is unconscionable conduct. Again equity must intervene in the classic case where it can see that a necessitous borrower is not, truly speaking, a free borrower.
In my view, in 1992, the rule only applies where the mortgagee obtains a collateral advantage which in all the circumstances is either unfair or unconscionable. It may be that the court presumes from the mere fact of a collateral advantage that the transaction is unconscionable unless there is evidence to the contrary, but the principle does not extend to invalidate automatically cases in which the mortgagee has obtained the right to purchase the whole or part of the mortgaged property in certain circumstances or has obtained a collateral advantage where the circumstances show that there has been no unfairness or unconscionable conduct.
Earlier, in Charmelyn Enterprises Pty Ltd v Klonis (1981) 2 BPR 9527, the Court of Appeal considered whether a clause in a mortgage that provided for the mortgagor to pay an amount in addition to the principal sum advanced was a clog on the equity of redemption. Reynolds JA (with whom Glass JA agreed on this point) said at 9535-6:
The provision in that clause can be classified as a collateral advantage within the meaning of the principles to which I shall come because that term is wide enough to embrace any advantage which the mortgagee obtains as a condition of the mortgagor being able to redeem. It cannot, however, be classified as a premium or bonus. Since the repeal of the usury laws in the middle of the nineteenth century, a collateral advantage may be stipulated for and the right to redeem on payment only of principal, interest and costs no longer existed (G & C Kreglinger v New Patagonia Meat and Cold Storage Co Ltd (1914) AC 25).
The three grounds upon which courts of Equity would hold stipulations for collateral advantages invalid were identified in that case and the only one submitted to be in point in this case is that the stipulation is unfair and unconscionable as found in this mortgage.
In Multiservice Bookbinding Ltd v Marden [1979] 1 Ch 84, Browne-Wilkinson J reviewed the authorities which throw light on the test to be met before equity will intervene under this heading. He concluded that something more must be shown than that the provision called in question was unreasonable. He came to the following conclusion (at 110):
"In my judgment a bargain cannot be unfair and unconscionable unless one of the parties to it has imposed the objectionable terms in a morally reprehensible manner, that is to say, in a way which affects his conscience."
I respectfully adopt that view.
The reference to the three grounds of invalidity of collateral advantages is to the judgment of Lord Parker in G. and C. Kreglinger v New Patagonia Meat and Cold Storage Company Ltd [1914] AC 25 at 60-1 where his Lordship said:
My Lords, after the most careful consideration of the authorities I think it is open to this House to hold, and I invite your Lordships to hold, that there is now no rule in equity which precludes a mortgagee, whether the mortgage be made upon the occasion of a loan or otherwise, from stipulating for any collateral advantage, provided such collateral advantage is not either (1.) unfair and unconscionable, or (2.) in the nature of a penalty clogging the equity of redemption, or (3.) inconsistent with or repugnant to the contractual and equitable right to redeem.
(In that case the Earl of Halsbury, Lord Atkinson and Lord Mersey agreed with both Lord Parker and the Lord Chancellor, Viscount Haldane.)
In accordance with these principles, even if cl 18.3(h) is regarded as a stipulation for a collateral advantage and an impediment to the ability to discharge the mortgages, it will be upheld unless it is found to be unfair and unconscionable (see also Cityland and Property (Holdings) Ltd v Dabrah [1968] 1 Ch 166 at 180).
I have little doubt that cl 18.3(h) operates unfairly to the mortgagors where it is used to pay out first registered mortgages of the type found in the present case. I consider that it is unfair that large amounts of debt, hitherto subject to standard rates of interest charged by banks lending on first mortgage security, be effectively converted into loans at very high rates. The unfairness lies not in the paying out of the mortgages per se, or in adding the amount paid to the total required to be repaid by the mortgagors, but in the charging of the Higher Rate of 60% p.a. on the amount. That is done simply by treating the amount as part of the Secured Money. The result is that part of the mortgagors' total indebtedness suddenly attracts a much greater rate of interest, even though nothing has occurred to diminish the security available in respect of that part of the total indebtedness. The mortgagors, who were in default in the repayment of a principal sum of $289,915, are treated as in default in the repayment of a much larger principal sum. The unfairness is significant in circumstances where First Mortgage has, so far, paid more than $487,000 to the CBA and Westpac to pay out first registered mortgages held by them.
A more difficult question is whether cl 18.3(h) should also be held to be an unconscionable provision. The provision forms part of contracts that were freely entered into by the mortgagors, who had the benefit of legal advice. There was no unconscionable conduct on the part of First Mortgage in entering into the contracts upon the terms they contained. However, in the context of considering stipulations in mortgages that provide for a collateral advantage or are an impediment to discharge, attention may also be given to the actual operation of the stipulation and the manner in which it is sought to be relied upon. I think that such a stipulation may be held to be relevantly unconscionable if it would be unconscionable, or unconscientious, of First Mortgage to rely upon it.
Clause 18.3(h) contains a power that may be exercised by First Mortgage in circumstances where an Event of Default occurs. Again, it is not so much the exercise of the power to pay out the first mortgages that gives rise to any issue. Indeed, depending upon the circumstances, First Mortgage may have one or more other powers available to it (including under statute) to redeem such mortgages. Rather, issues arise due to the reliance upon cl 18.3(h) to treat the amounts paid out as part of the Secured Money and thereby charge interest upon such amounts at the rate of 60% p.a.
I have come to the conclusion that reliance upon cl 18.3(h) in that fashion by First Mortgage is relevantly unconscionable. Or, put another way, reliance upon cl 18.3(h) in that fashion by First Mortgage amounts to an unconscientious exercise of its legal rights against the mortgagors.
It can be accepted that following an Event of Default circumstances can arise in which it is entirely reasonable for First Mortgage to pursue the redemption of higher ranked securities in order to facilitate the realisation of secured assets. That is the case even though First Mortgage, as a chargee, has remedies available to it as such, including the obtaining of orders for judicial sale. In the circumstances that unfolded, in which the process of realisation had produced no results by late 2019, I do not think that it was at all unreasonable for First Mortgage to proceed to redeem or acquire the first mortgages over the Darley properties and the Albion Park Rail property. Pursuit of that course enabled First Mortgage to assume a position of control in respect of those properties, and thus facilitate the efficient realisation of the assets.
However, adding the amounts so paid by First Mortgage to the Secured Money and seeking to charge interest on those amounts at 60% p.a. until realisation of the assets allows repayment, is not reasonably necessary for the protection of the legitimate interests of First Mortgage as mortgagee. There is no apparent commercial justification for charging interest at that rate on the amounts paid. None was suggested by counsel for First Mortgage. I note in this regard that after First Mortgage paid out the Westpac mortgage over the Albion Park Rail property and took a transfer of the mortgage, First Mortgage initially directed the mortgagors to pay only the payments they would usually make to Westpac. That is what would be expected in situations where the subordinate mortgagee either redeems the first mortgage (and is subrogated to the rights under the first mortgage) or takes a transfer of the first mortgage (as occurred here). It seems to me that to charge interest at the rate of 60% p.a. on the amount of debt that was owed to the former first mortgagee involves an element of exploitation of the situation of default faced by the mortgagors. Moreover, the charging of interest at that rate enables First Mortgage to extract an unjustifiably high return in respect of a portion of debt that remains secured by a first ranking mortgage. First Mortgage is thereby able to benefit from the situation that arises upon default.
A finding that conduct is unconscionable is one that is not lightly made. Such a finding generally requires a conclusion that the conduct falls well below accepted community standards, and involves moral deficiency. In my opinion, the conduct of First Mortgage in relying upon cl 18.3(h) to charge interest at 60% p.a. on amounts paid by it to redeem or acquire first mortgages does fall well below those standards and may be said to be morally deficient. The conduct involves resort to a contractual provision that is not reasonably necessary for the protection of its legitimate interests as mortgagee, and in such a way as to inflict an unjustifiable burden upon the mortgagors and confer an unjustifiable benefit upon itself. In my view the conduct can be denounced as offensive to conscience, so that seeking to rely upon cl 18.3(h) in that fashion ought be seen as an unconscientious exercise of a contractual right.
Put another way, exercising the power in that way would allow First Mortgage to obtain an unconscionable collateral advantage that impedes the mortgagors' ability to discharge (cf Re Modular Design Group Pty Ltd (supra) at 104D and 108G).
In these circumstances the provision should be regarded as relevantly unfair and unconscionable. I therefore conclude, in accordance with the principles referred to earlier, that cl 18.3(h) ought not be upheld to the extent that it would permit First Mortgage to engage in that conduct. It is not necessary to decide whether the conduct is unconscionable for the purposes of s 12CB of the Australian Securities and Investments Commission Act.
The result is that on an account between First Mortgage and the mortgagors First Mortgage will not be permitted to charge the mortgagors with interest at the rate of 60% p.a. on the amounts it has paid in respect of the CBA mortgage over the Darley properties and the Westpac mortgage over the Albion Park Rail property. First Mortgage should be confined to the interest rates provided for in those mortgages or, in the absence of evidence of those rates, interest at Court rates. I should add that the amounts paid out by First Mortgage are themselves plainly recoverable from the mortgagors, either under the terms of its mortgages, or on restitutionary grounds because the monies paid out conferred benefits upon the mortgagors by reducing their liabilities to the CBA and Westpac. Further, First Mortgage should be restrained, in any future exercise of power under cl 18.3(h), from charging the mortgagors interest at the rate of 60% p.a. on amounts paid by it in paying out any first registered mortgage. Declarations and orders should be made to give effect to these conclusions.
The Amended Summons makes it clear that First Mortgage wishes to proceed to redeem the mortgages held by Westpac over Lots 24 and 25, and take transfers of those mortgages. They are first ranking registered mortgages. If First Mortgage seeks to redeem those mortgages pursuant to cl 18.3(h) it should be allowed to do so, save that it ought not be permitted to charge the mortgagors interest at 60% p.a. on any amount paid to effect the redemption. First Mortgage should be confined to interest at the rate provided for in the redeemed mortgage. Declarations to this effect should also be made.
In order to facilitate these further redemptions, an order should be made requiring Westpac to provide First Mortgage with payout figures within, say, 7 days of a formal request. An order should also be made requiring Mr Albert to withdraw his caveats over Lots 24 and 25 to enable the mortgages to be transferred to First Mortgage. The interests claimed by Mr Albert were apparently created after the interests claimed by First Mortgage, and at a time when First Mortgage had caveats on the titles claiming those interests. I cannot discern any basis upon which Mr Albert could restrain First Mortgage from properly exercising its rights in relation to those properties. However, the order should make it clear that Mr Albert may immediately after the transfers lodge fresh caveats to protect his claimed interest. Liberty to apply will be given in case any issues arise in relation to these orders.
The above conclusions render it unnecessary to deal with the other challenges to the exercise of powers under cl 18.3(h), including the claims that First Mortgage did not exercise the powers in good faith or for proper purposes. However, it should be apparent from what I have already said about the circumstances that existed in late 2019 that I would not conclude on the available evidence that in deciding to pay out the mortgages over the Darley properties and later the Albion Park Rail property, First Mortgage was acting in bad faith or for an improper purpose. In particular, I would not conclude that First Mortgage made those decisions so that it could charge interest at 60% p.a. on amounts paid and thereby effectively acquire all of the cross-claimants' equity in their property portfolio (as alleged in paragraph 37 of the Cross-Claim). I do not think that the existence of that purpose can be inferred in the circumstances, and such evidence as there is concerning First Mortgage's policies suggests, if anything, that First Mortgage pursues redemptions of mortgages as a means of expeditiously recovering debts owed to it. That evidence was left unchallenged.
[5]
Conclusion
The parties are directed to confer, and seek to reach agreement as to appropriate orders to give effect to these reasons. Proposed Short Minutes of Orders (whether agreed or not) should be provided to my Associate within 7 days. Orders will then be made in chambers unless it is considered that some point of principle requires further argument.
As for costs, it seems to me, prima facie, that in circumstances where:
1. Westpac filed a submitting appearance save as to costs;
2. the CBA was excused from further attendance in the circumstances earlier described;
3. it was not suggested that there was no serious question as to the existence of the interests claimed by Mr Albert in his caveats; and
4. there was no clearly successful party in the central controversy as between First Mortgage and the cross-claimants,
the appropriate order is that there be no order as to costs, to the intent that each party bears its own costs.
[6]
Amendments
14 March 2022 - Amendments made to Coversheet (Parties and Representation) only.
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Decision last updated: 14 March 2022