Ghougassian v Sutherland

The proceeding below 4Mr Michael Ghougassian was the Public Officer who controlled the School's finances and Dr Daniel Ghougassian was the Chairman of the School's governing Council. Each advanced moneys to it in the period from 2003 to 2010. Some of those moneys were advanced pursuant to a Deed of Loan dated 6 May 2005 and secured by a mortgage over the land on which the School was located. 5The following provisions of the Deed of Loan are relevant to how interest on any advances was to be calculated: "3. Payment of interest 3.1 The Borrower must pay interest at the Interest Rate on the Amount Owing by monthly instalments on each Interest Payment Date. 3.2 Where any payment made under this Agreement is not paid on or before the due date for payment, the Borrower must pay interest on the Default Interest Rate calculated from the due date for payment. Default interest will be calculated on a daily basis and will be compounded on the last day of each month. 4. Repayment 4.1 The Borrower may, in addition to payment of interest pursuant to clause 3, make lump sum payments, which payments shall be applied towards payment of the principal of the Loan. 4.2 The Borrower acknowledges that the Loan is repayable upon demand by the Lender. ..." The "Amount Owing" was the principal amount outstanding from time to time. "Interest Rate" was defined to mean the rate "equivalent to the interest rate charged by Westpac Banking Corporation and Home Loans Services Limited in relation to similar borrowings" and "Default Interest Rate" was defined as a rate which was two per cent above the Interest Rate. 6The parties adopted that description of the applicable interest rate to reflect the fact that Mr Michael Ghougassian had been making advances to the School from moneys borrowed from Home Loan Services Pty Ltd, later the Iden Group Pty Ltd, and that Dr Daniel Ghougassian had been doing so with the assistance of moneys borrowed from Westpac Banking Corporation. 7There was a dispute in the winding-up as to the amounts owed to each of the appellants and secured by the mortgage. In the proceeding for the winding-up of the School (SC 2010/66795), the respondent made an application for the taking of an account of the amounts due under the mortgage. On 13 December 2010, and by consent, orders were made that the appellants file and serve itemised statements of account of the amounts owing and that the respondent file and serve a notice specifying any item in those accounts said to be in error. The appellants filed and served statements of account on 12 April 2011. The respondent filed and served his notice on 3 May 2011. 8The proceeding first came on for hearing before Barrett J (as his Honour then was) on 10 May 2011. His Honour vacated that hearing to enable the appellants "to have an opportunity to put on evidence to deal with matters raised in the affidavit accompanying the mortgagor's falsifications": Vartinians v St Gregory's Armenian School Inc [2011] NSWSC 406 at [3]. He also dealt with an issue as to the amount of the moneys then held in Court which could be released to the liquidator. The appellants argued that a significant amount in excess of the aggregate amount claimed by the statements of account, approximately $3m, should be retained in Court. Barrett J rejected that argument: "[13] Mr King submitted that a large further retention should be made on account of interest not included in the accounts filed by the Messrs Ghougassian - being, I might say, accounts verified by their affidavits and certified and passed by an auditor. [14] I cannot see how a large further retention would be justified. The mortgagees have, in accordance with the procedures the Court has stipulated, filed their verified accounts and thereby made their claim. They cannot now maintain that there is some further hidden liability owed to them. The case before the Court is one concerning the verified accounts they have produced." 9The proceeding for the account was heard before White J on 30 June and 1 July 2011. Evidence was given by a number of witnesses, including the appellants, Mr Lott, the accountant who audited and verified the statements of account, and Mr Samarasinghe, an accountant in the employ of the liquidator. In his reasons delivered on 29 February 2012, the primary judge made findings as to the advances made and repayments received by each of the appellants: Sutherland v Ghougassian [2012] NSWSC 125 at [78], [95]. Having done so, he noted (at [96]) that the mortgage secured "simple interest at the 'Interest Rate' as defined in the Deed of Loan" and stood the proceeding over to enable the liquidator to bring in a calculation of the amount of interest payable on the amounts secured. In doing so, the primary judge was proceeding on the basis that there was no claim to interest under cl 3.2 of the Deed of Loan. Indeed, his Honour recorded that "[n]o argument was advanced that any interest was payable at the 'Default Interest Rate'": [2012] NSWSC 125 at [77]. 10What then happened is sufficiently recorded by White J in his reasons delivered on 30 March 2012: Sutherland v Ghougassian (No 3) [2012] NSWSC 334 at [2], [3]: "[2] On 14 March 2012 counsel for Dr and Mr Ghougassian sought to make a claim that interest should be calculated in accordance with clause 3.2 of the Deed of Loan. Counsel submitted that interest was payable without demand by monthly instalments on each Payment Date and that as interest had not been paid, compound interest at the default rates was payable under clause 3.2. At that time I said that it was too late for that contention to be raised, and I directed that the calculation be brought in on the basis of simple interest at the Interest Rate as defined in the Deed of Loan and not at the Default Interest Rate. [3] On 21 March 2012, at my request, my associate sent a note to counsel for the parties advising that I wished the matter to be relisted for further argument as to whether it was open to Dr and Mr Ghougassian to claim interest in accordance with clause 3.2 of the Deed of Loan, and if so, whether that clause applied. ..." 11In those reasons, the primary judge concluded, based in part upon a concession made by the respondent, that the appellants should be awarded interest on unpaid interest (and to that extent, compound interest) at the non-default rate of interest: at [14].

Disposition of the appeal 13By their amended notice of appeal, the appellants challenge the primary judge's decision as to the rate of interest to be applied on the following grounds: "1. The Judge erred in holding that the default rate of interest did not apply to the judgment sum. 2. The Judge erred in failing to award compound interest based on the default rate specified in the mortgage debt. 3. The Judge erred in holding that the profitability of the mortgage debt or other considerations other than the proper interpretation of the deed was a relevant consideration in deciding the interest rate payable under the judgment." 14None of these grounds, except perhaps the third, challenges the primary judge's decision on the basis that it involved any error in the exercise of his discretion. In their written and oral submissions, the appellants also maintained that the issue in the appeal is not whether there was any such error but whether, in accordance with the proper construction of cl 3.2, they were entitled to interest on unpaid interest calculated at the Default Interest Rate. 15Whilst the primary judge did not award interest under cl 3.2 at the default rate, he did not do so on the basis that the appellants were not as a matter of contract entitled to have that rate applied. On the contrary, his Honour accepted that as a matter of contract that rate did apply. He proceeded on the basis that the appellants needed leave to claim interest under cl 3.2 and only permitted them to do so on the basis that they could not claim interest at the default rate. 16Neither of grounds 1 or 2 identifies any error in his Honour's formulation of the relevant question as being one of amendment, or in the exercise of his discretion. Ground 3 contends that when addressing the amount of interest to which the appellants were entitled under cl 3.2, the only relevant issue was whether, as a matter of construction, the Deed of Loan justified that amended claim. It was argued that so understood this ground challenges both the primary judge's formulation of the question before him and the manner of exercise of his discretion. This makes it necessary to address whether the primary judge was correct to treat the question before him as involving an amendment to the appellants' claim and, if so, whether he erred in the exercise of his discretion in dealing with that application to amend. 17The primary judge did not err in treating the statements of account and the notice of errors as equivalent to pleadings. The Court ordered under Uniform Civil Procedure Rules r 46.2(1)(a) that an account be taken to determine the amount secured by the mortgage. The manner for doing so, adopted by the orders made on 13 December 2010, was that the appellants would file and serve an itemised account of the amounts claimed to be owing. In the language of rr 46.5 and 46.6, with which they were directed to comply, the appellants were the "accounting party". The respondent was required, in accordance with r 46.7(2), to respond by giving notice of any item in the account which was alleged to be erroneous, stating the grounds for alleging the error. The accounts and notice of errors performed the same function as pleadings. They gave the respondent notice of the amounts claimed and the appellants notice of the matters which were subject to dispute. If the parties were in any doubt as to that being the effect of the documents exchanged between them, that doubt was removed by the observations of Barrett J extracted in [8] above. 18The primary judge was also correct to conclude that the statements of account did not make a separate claim for interest under cl 3.2 of the Deed of Loan. As his Honour explained at [7], the statements of account claimed "loan receipts" and "loan interest". The former as claimed were advances to the School. The latter as claimed were the amounts of interest paid by the appellants under their facilities with other lenders. In the case of Mr Michael Ghougassian, those amounts were equivalent to the monthly interest charged by Home Loan Services Pty Ltd, later the Iden Group Pty Ltd, and paid by him each month on a debt of $500,000. That interest was charged at a rate which answered the description of the Interest Rate. It was not a default rate of interest. The position was the same in relation to the amounts claimed by Dr Daniel Ghougassian, except that the interest was calculated by reference to the amount outstanding from him to Westpac under an Equity Access Loan. Thus, the amounts claimed as "loan interest" were claims for simple interest, but not in accordance with cl 3.1. Whilst those claims applied an interest rate which answered the description of the defined Interest Rate, they were not calculated on the Amount Owing by the School. No amount in the statements of account was claimed under cl 3.2 or calculated using any Default Interest Rate. 19In oral argument it was pointed out on behalf of the appellants that the evidence they relied upon in the taking of the accounts did include calculations involving claims for interest on interest and at default rates. That was so, and was noted by the primary judge: at [9]. That evidence included a spreadsheet produced by Mr Michael Ghougassian which claimed interest on the cumulative total of the amounts in his statement of account at an interest rate of 12 per cent compounded on a monthly basis. A similar calculation was undertaken by Mr Lott in relation to the cumulative total of the amounts in Dr Daniel Ghougassian's statement of account using interest rates between 11.35 and 14.10 per cent. The latter calculations were described by Mr Lott as "including compound interest in accordance with cl 3.1". As the primary judge observed, each of these claims involved a doubling up of interest and also a compounding of interest at default rates. The default rates adopted were higher than the Default Interest Rate as defined. None of these calculations was produced or relied upon before the primary judge during the substantive hearing as amending or substituting for the statements of account. Nor did these calculations expressly identify themselves as including claims made under, or in accordance with, cl 3.2. That being the position, the primary judge did not err in proceeding upon the basis that the statements of account continued to set out the basis of the appellants' claims to moneys secured by the mortgage. 20In the exercise of his discretion, the primary judge permitted the appellants to make a claim under cl 3.2 to interest on unpaid interest. He declined, however, to allow the appellants to claim that interest at the default rate. Looking at the matter in more formal terms, he imposed a condition upon their being allowed to make a claim under cl 3.2 to interest on unpaid interest. That condition was that the appellants only be permitted to do so at the non-default rate. 21The primary judge held that to permit the appellants to claim such interest at non-default rates would not result in a profit to the appellants, whereas to permit them to do so at default rates might arguably do so: at [13]. Neither of these conclusions is challenged on appeal. He also considered that the fact that the appellants might profit in that way could have constituted a breach of their duties as fiduciaries so as to provide the respondent with a defence by way of equitable set-off to a contractual claim to interest at default rates. Before this Court, the appellants took issue with the proposition that there had been any breach of fiduciary duty, but accepted that the liquidator could have raised such an arguable defence. The primary judge concluded that it "would not be just" to permit an amendment "if there might be an arguable defence to such claims": at [12]. Although his Honour did not elaborate, it is plain that the unjustness would arise because the respondent could not make that argument at the stage the amendment was sought in the absence of a re-opening of the substantive hearing to enable further evidence directed to that issue. That would have involved further expense and delay and was not suggested as a possible way forward by either party. In the circumstances, the respondent would be prejudiced by the granting of the amendment sought. The primary judge accommodated that prejudice by permitting the amendment on condition that interest be calculated at non-default rates. 22Returning to ground 3, it was relevant to the exercise of the primary judge's discretion to consider whether there was any arguable defence to the amended claim which the respondent would not have the opportunity to press because of the lateness of the amendment. It was in addressing that question that his Honour considered whether the appellants might profit from the operation of cl 3.2. He did not err in doing so. Ground 3 should be rejected.

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Judgment (6 paragraphs)

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