Solicitors:
Bransgroves Lawyers - Plaintiff
Zhang Shijing Lawyers - Defendant
Ashurst - for Super Vision Resources as amicus curiae
File Number(s): 2019/67645
[2]
Judgment
HIS HONOUR: The defendant (AC Holdings) is the registered proprietor of land at 1701/30 Glen St, Milsons Point, NSW 2061 and 110-112 Ida St, Sandringham, NSW 2219 (collectively, the Land).
In September 2018, AC Holdings borrowed $7,210,000 from the plaintiff (Golden Wealth) on the security of registered mortgages over the Land. [1] The terms of the loan are contained in a Deed of Loan which records the loan date as September 2018 and the loan repayment date as September 2019. It is common cause that the loan was repayable by 17 September 2019.
The mortgages incorporate terms contained in a Mortgage Memorandum (Memorandum) registered with the NSW Land Titles Office, dealing number AJ37814.
Both the Deed of Loan and the mortgages make provision for the payment, monthly, of interest at a Higher Rate of 21% and a Lower Rate of 11%. Both contain the commonly found provision that interest at the Higher Rate must be paid but, if interest is paid on time, the Lower Rate will be accepted. [2]
The Memorandum (para 339) provides that Golden Wealth has the power to take possession of the Land if an Event of Default occurs.
The Memorandum (para 233) provides that AC Holdings will be in immediate default without the necessity for any notice or demand, upon the occurrence of any one of a series specified events and that a determination by Golden Wealth that any of these events has occurred will be final and binding on AC Holdings.
The Memorandum (para 24) defines 'Debtor' to mean the Mortgagor and (para 41) defines 'Lender' to mean the party described as such in the Schedule, which is Golden Wealth.
Memorandum para 233 provides, relevantly:
233. The Debtor shall be immediately in default of this deed without the necessity for any notice or demand upon the occurrence of any of the following events. A determination by the Lender that any of these events has occurred will be final and binding on the Debtor. It makes no difference whether the Debtor caused the event of default or whether its prevention was within its control.
[…]
q) If the Debtor fails to pay on the due date for payment any part of the Secured Monies, or any interest or other monies payable at the time and in the manner provided by this deed;
[…]
y) If in the opinion of the Lender the Debtor suffers a material degradation in its ability to comply with the terms of any of this Deed;
[…]
The reference in Memorandum para 233 y) to 'this Deed' is plainly a reference to the Memorandum. The words 'any of' are an obvious but inconsequential drafting infelicity. No suggestion otherwise was made.
The chapeau to Memorandum para 233 refers to a 'determination' by the Lender.
However, the Event of Default in Memorandum para 233 y) occurs if Golden Wealth comes to hold the opinion described in it. Although in submissions the parties referred to a 'determination' by Golden Wealth, that concept does not, I think, apply to the event described in Memorandum para 233 y). It would not make sense for Golden Wealth to make a 'determination' as to the holding by itself of an opinion. The 'determination' refers to other external events described in Memorandum para 233, which are not presently relevant.
Interest under the mortgages (at the Lower Rate) accrued at over $66,091.70 per month.
On 26 November 2018, at the instance of Super Vision Resources Ltd (Super Vision), an entity apparently unrelated to AC Holdings, the Court made asset preservation orders (the freezing orders) restraining AC Holdings from disposing of, dealing with or diminishing its interest in the Land. Those orders were extended from time to time until, after a contested hearing before Ball J on 1 April 2019, his Honour extended them until further order. The freezing orders remain in force. Relevantly, they provide:
5.
a. [AC Holdings] must not in any way dispose of, deal with or diminish its interest in the properties identified in Schedule D to this order, (the 'Property'), including but not limited to selling, transferring, entering into any contract to contract or transfer, mortgaging (or drawing down any funds on any existing mortgage).
b. Paragraph 5(a) does not prohibit [AC Holdings] from entering into a contract for the sale of the Property (or any one of them), provided that:
i. [AC Holdings] provides the plaintiff, by service on the plaintiff's lawyers whose contact details appear in Schedule B to this order, with a copy of that contract within 24 hours of doing so; and
ii. [AC Holdings] pays the deposit and any net proceeds to be received at or before the time of settlement of that contract, into such bank account, to be held on such terms, as are agreed in writing between [AC Holdings] and the plaintiff, or in default of such agreement, into Court. In this subparagraph, 'net proceeds' means the balance of the sale proceeds payable to [AC Holdings] following payment of any adjustments in favour of the purchaser or otherwise credited to the purchaser under the contract for sale, any commission or other costs reasonably incurred by [AC Holdings] in selling these properties, and any other payments agreed in writing between [AC Holdings] and the plaintiff.
On 28 November 2018, solicitors for Super Vision informed Golden Wealth, and provided them with a copy, of the freezing orders.
On 17 December 2018, Golden Wealth, unsurprisingly, formed the opinion (the Opinion) that AC Holdings had, as a result of the making of the freezing orders, suffered a material degradation in its ability to comply with the terms of the mortgages, within Memorandum para 233 y).
On 21 December 2018, Golden Wealth served notice of default requiring AC Holdings to discharge the mortgage within 30 days. AC Holdings failed to do so.
Golden Wealth takes the position that interest at the Higher Rate was payable from the Event of Default brought about by it forming the Opinion. I have taken the operative date of the Event of Default contended for to be 21 December 2018, when notice of default was given to AC Holdings.
Golden Wealth demanded possession of the Land. AC Holdings did not give it.
Golden Wealth commenced these proceedings by Statement of Claim on 1 March 2019 in the Common Law Division, seeking orders for possession of the Land. The proceedings were subsequently transferred to this list.
An interest instalment was due by AC Holdings on 17 May 2019. No payment was made. Golden Wealth amended its pleadings to rely on this as an additional default entitling it to possession. It is not in dispute that the failure to pay the instalment was a default under Memorandum para 233 q).
By its Defence filed on 21 March 2019, AC Holdings resisted the claim for possession only on the basis that, to be operative under Memorandum para 233 y), the Opinion had to be reached in good faith and reasonably, and had to be objectively available to be formed. It pleaded that the Opinion was not reached in good faith, was not reasonable and was not objectively available to be formed.
On 16 April 2019, AC Holdings brought a cross-claim, averring that the obligation to pay interest at the Higher Rate was an unenforceable penalty. Its cross-claim also asserted that the Opinion had not been formed in 'good faith and/or objectively and/or reasonably and/or at all' by Golden Wealth.
At the hearing, AC Holdings argued that Golden Wealth's reliance on AC Holdings' breach in failing to pay interest on 17 May 2019 was an impermissible attempt by Golden Wealth to take advantage of its own wrong, in that by bringing this case Golden Wealth had caused AC Holdings to incur and pay legal costs, which put it beyond its ability to meet its interest obligations. The consequence, AC Holdings put, was that Golden Wealth is precluded from relying on this breach.
It is deserving of mention that AC Holdings acquired the Land from one Lawrence Xu (Xu). Super Vision has brought proceedings in this Court, claiming that Xu's conveyance of the Land to AC Holdings is voidable under s 37A of the Conveyancing Act 1919 (NSW) because it was made with intent to defraud creditors. [3] Those proceedings are pending. Super Vision applied to be joined as a party to these proceedings to protect its potential interest in any surplus which might remain if Golden Wealth exercises a power of sale in respect of the Land. I refused the joinder application, but gave Super Vision leave to put submissions as amicus curiae.
The hearing took place on 29 August 2019.
The loan was repayable in full by AC Holdings by 17 September 2019. Although there was a contest about the liability of AC Holdings to pay interest at the Higher Rate from the time of the freezing orders Event of Default, the loan plus any outstanding interest at the Lower Rate had, on any view, to be paid by 17 September 2019, failing which Golden Wealth would, unarguably, be entitled to possession of the Land. I was informed from the Bar table by counsel for AC Holdings that it was AC Holdings' intention to discharge the mortgage by 17 September 2019. The sensible course was, it seemed to me, to wait and see whether this happened. AC Holdings gave an undertaking to the Court that if by that date it had not paid the principal plus outstanding interest at the Lower Rate, it would give possession of the Land to Golden Wealth. Golden Wealth was content to have the matter stood over to a date after 17 September 2019 on the footing that if such amount was paid, the remaining contest would concern liability for interest at the Higher Rate from 21 December 2018 or 17 May 2019. I stood the proceedings over to 20 September 2019.
Entirely predictably, one might have thought, AC Holdings made no payment. AC Holdings also did not comply with its undertaking to give possession to Golden Wealth.
Consequently, on 20 September 2019, I made orders for possession of the Land in favour of Golden Wealth. Before making the orders, I was told by counsel for Golden Wealth that they were by consent. Counsel for AC Holdings did not demur. Later, however, she informed me that the orders were not by consent but that they were not opposed, and it was accepted that Golden Wealth was entitled to them.
Orders for possession having been made, all that remains for determination is AC Holdings' cross-claim.
Three live questions remain:
As at 21 December 2018, had an Event of Default occurred as a result of the Opinion?
Is Golden Wealth precluded from relying on AC Holdings' failure to pay interest on 17 May 2019 as an Event of Default under the mortgages because to do so would be to take advantage of its own wrong?
Is the obligation to pay interest at the Higher Rate an unenforceable penalty?
I will deal with each question in turn.
[3]
The freezing orders Event of Default
AC Holdings put that to constitute an Event of Default, the Opinion had to have been reached in good faith and reasonably (or have been objectively available). I took the reference to 'objectively available' to mean that the event opined to have brought about a material degradation of AC Holdings' ability to comply with the mortgages, must have been reasonably available in the sense of the event being capable of being reasonably considered as causing such a degradation.
AC Holdings argued that Golden Wealth did not form the opinion which Memorandum para 233 y) requires at all, or if it did form that opinion it did not form it in good faith, or if it did form it in good faith it did not form it reasonably.
At the outset, it may be accepted that in forming its opinion for the purposes of Memorandum para 233 y), Golden Wealth had to act in good faith. An opinion not held in good faith, or held dishonestly, is in reality not an opinion. No doubt the Opinion had to be genuinely held.
There is no express requirement in Memorandum para 233 y) for the opinion to be reasonable. The implication is to the contrary. An opinion, honestly reached, is an opinion even if it is unreasonably formed. Additional support for the conclusion that the Opinion did not need to be reasonable or objectively available, can be garnered from the provision which makes a determination by Golden Wealth that an Event of Default has occurred, final and binding. A requirement for reasonableness or objective availability would undermine the certainty for which Memorandum para 233 strives. If the submission were correct, there could always be an inquiry into the objective role of the factors of which account was taken in the formation of the Opinion. Reasonable parties in the position of those here would not, I consider, have intended this to be the situation. Of course, the reasonableness or objective availability of an opinion may be a factor relevant to the question of its genuineness.
The implication of a term of reasonableness would, in this case, not meet at least two of the settled requirements for the implication of a term, namely that it must be obvious and be necessary to give the contract business efficacy: see Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 347.
However, for the reasons which emerge below, if reasonableness or objective availability was a requirement, Golden Wealth satisfied it.
Doing the best I can then, what follows is what I understood AC Holdings ultimately to submit.
First, it argued that the freezing orders did not, objectively viewed, bring about a material degradation in AC Holdings' ability to comply with the terms of the mortgages and that a view that they did was not objectively available.
This submission is untenable. The freezing orders plainly brought about such a degradation. Initially, counsel for AC Holdings correctly conceded this, but then withdrew the concession.
The freezing orders severely restricted AC Holdings' ability to deal with not only the mortgaged Land, but all of its assets. As regards the Land, it could sell it provided the proceeds were paid into a bank account to be held on terms agreed in writing between AC Holdings and Super Vision, or paid into Court, that is into an account not under the control of AC Holdings and not to Golden Wealth. Revenue earned from the Land could not be used to pay interest to Golden Wealth.
Second, AC Holdings argued that Golden Wealth formed no opinion at all as contemplated by Memorandum para 233 y) because those who are said to have formed the Opinion on its behalf, did not read the terms of the freezing orders, did not understand their import, and did not have a grasp of the true construction of the meaning of the term 'material degradation'. This submission appeared to proceed on the hypothesis that the freezing orders did not in fact cause a material degradation. The misunderstanding which those representing Golden Wealth were said to have had as to the effect of the freezing orders was that they incorrectly thought that the orders prevented the sale of the Land per se, whereas in fact the Land could have been sold with the proceeds going into a specified account or into Court.
This submission is untenable. The director of Golden Wealth, Ms Fei Yang, and its company secretary, Ms Jie (Grace) Jiao, gave evidence and were cross-examined. Plainly, they were truthful witnesses and the cross-examination served the purpose of establishing the genuineness of their opinion and concern as to the significant effect of the freezing orders. They are not lawyers but they are persons not without commercial experience. Contrary to AC Holdings' submission, the evidence is that Ms Jiao read the freezing orders. It would not matter if Golden Wealth did not read them. Those concerned well understood that the freezing orders were a significant impairment of AC Holdings' ability to meet its obligations to Golden Wealth and that an event seriously disadvantageous to AC Holdings' commercial interests and, correspondingly, those of Golden Wealth had occurred. The letter from Super Vision's solicitors providing a copy of the freezing orders contained the following statement:
The freezing orders provide, amongst other things, for restrictions to be imposed on Xu or AC Holdings from making any additional drawing upon the facilities you may have provided to them.
This information would on its own have been sufficient to ground an effective opinion. The formation of the Opinion was not only genuine, but entirely justified and indeed correct.
Third, AC Holdings argued that those on behalf of Golden Wealth who formed the opinion were motivated by the irrelevant and improper consideration that they did not want Golden Wealth to become embroiled in litigation to which Golden Wealth was a stranger. It may be accepted that a reluctance to be drawn into the litigation was part of their motivation, but it was not irrelevant and not an improper consideration. It went together with their view of the effect of the freezing orders and did not impair the efficacy of the Opinion. It cannot be said that, absent this reluctance, Golden Wealth would not in any event have formed the opinion.
I find that by 21 December 2018, an Event of Default had occurred.
The consequence of this finding is that the Higher Rate of interest was payable from no later than 21 December 2018.
[4]
The default in paying interest
The contention that Golden Wealth is seeking to take advantage of its own wrong can be disposed of briefly. Even if bringing the proceedings could be characterised as a wrongful act - which I seriously doubt - Golden Wealth was justified in bringing them and the orders it sought have been made. Golden Wealth committed no wrong. In any event, the evidence brought by AC Holdings did not establish that the bringing of the proceedings had the effect that AC Holdings could not meet its obligations to pay the interest instalment. Qiao Wang, a director of AC Holdings, gave evidence as to its financial position. She was unpersuasive. What her evidence did, however, establish was that not insubstantial amounts of money from AC Holdings' account were spent at the Star Casino in Sydney.
The consequence of this finding is that had interest at the Higher Rate not been payable earlier, it would have been payable from no later than 17 May 2019.
[5]
Penalty
The contention that the interest clause is an unenforceable penalty must be rejected. In O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 at 366, Gibbs CJ said:
Similarly there is no penalty where it is agreed to charge a certain rate of interest on condition that if payment is made punctually the rate will be reduced (Astley v. Weldon (1801) 2 Bos & Pul 346, at p 353 (126 ER 1318, at p 1322) ) or where a creditor agrees to accept payment of part of his debt in full discharge if certain conditions are met but stipulates that if the conditions are not met he will be entitled to recover the original debt: Thompson v. Hudson (1869) LR 4 HL 1, at pp 15-16, 27-28, 30 ; Ex parte Burden; In re Neil (1881) 16 ChD 675. In all the cases of this kind there is a present debt, which, by reason of an indulgence given by the creditor, is payable either in the future, or in a lesser amount, provided that certain conditions are met. The failure of the conditions does not mean that the creditor becomes entitled to damages; the consequence is that the sum which was always owed, but which the debtor was allowed to pay by instalments or in a smaller amount, becomes recoverable at once or in full.
The provision here is the first example referred to by Gibbs CJ as not constituting a penalty.
Counsel for AC Holdings referred to a number of authorities including Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 and Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525. None of the authorities cited displaces the clear dictum quoted above. There is no scope for me to depart from the High Court.
In any event, no evidence was put before the Court which persuades me that the three tier interest provision is anything other than an appropriate commercial reflection of Golden Wealth's risk in lending money to AC Holdings.
[6]
Conclusion
The cross-claim is dismissed.
I provisionally order that the defendant/cross-claimant is to pay the costs of the proceedings of the plaintiff/cross-defendant. This order will solidify after seven days unless either party notifies my Associate in writing that some other order is sought, specifies the terms of the order sought and provides brief reasons for seeking it. If notice is received, directions will be made for determination of any issue of costs.
The exhibits are to be returned.
[7]
Endnotes
Dealing numbers AN717584U and AN717637A.
Memorandum para 267. If interest is paid late by less than 7 days, the rate is 15%.
Section 37A provides:
37A Voluntary alienation to defraud creditors voidable
(1) Save as provided in this section, every alienation of property, made whether before or after the commencement of the Conveyancing (Amendment) Act 1930, with intent to defraud creditors, shall be voidable at the instance of any person thereby prejudiced.
(2) This section does not affect the law of bankruptcy for the time being in force.
(3) This section does not extend to any estate or interest in property alienated to a purchaser in good faith not having, at the time of the alienation, notice of the intent to defraud creditors.
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Decision last updated: 04 October 2019