Hamafam Pty Ltd & Ors v Saadullah & Anor

(a) whether the defendants have shown a satisfactory explanation for the delay in filing a defence or moving to set aside the judgment;

(b) whether the default judgment was obtained without notice to the defendants;

(c) whether the proposed defence is asserted bona fide;

(d) whether, if the judgment was set aside, prejudice would be occasioned to the plaintiffs;

(e) whether the proposed defence presents an arguable or triable issue;

(f) whether it would be futile to set aside the judgment.

Have the defendants shown a satisfactory explanation for delay? 8 The plaintiffs commenced these proceedings by statement of claim filed on 11 September 2006. The defendants sought advice from a firm of solicitors, Dennis & Co. The person who had charge of the matter at that office was apparently a solicitor who, unbeknown to the defendants, did not hold a practising certificate at that time. He advised the defendants they had no defence to the claim. He wrote a letter to the solicitors for the plaintiffs dated 27 September 2006 which said, inter alia: "Our client will consent to a judgment for possession." 9 The defendants accepted the advice given to them by the solicitor. They did not file a defence. They sought, unsuccessfully, to sell the property. 10 On 6 March 2007 the defendants consulted their present solicitors. They were informed that the advice previously received by them was incorrect. On 12 March 2007 the present solicitors wrote to the plaintiffs' solicitors advising of the defences which would be sought to be raised, and requesting that the plaintiffs consent to the default judgment being set aside. The plaintiffs did not consent to the default judgment being set aside. On 16 March 2007 the defendants' solicitors filed the notice of motion seeking to set aside the default judgment. 11 In my opinion, the defendants have shown a satisfactory explanation for delay. The failure to file a defence was due to the advice given to the defendants by the solicitor then acting for them. The delay in failing to make an earlier application to set aside the default judgment is attributable to the same cause. There has been no undue delay since the present solicitors were instructed by the defendants.

Was the default judgment obtained without notice to the defendants? 12 In many cases it is appropriate to inform the defendant of the intent to sign default judgment shortly before taking that step. That did not occur here. However, nothing turns on that fact as the defendants' solicitor, in his letter dated 27 September 2006, had indicated the defendants were prepared to consent to judgment.

Is the proposed defence asserted bona fide? 13 Plaintiffs' counsel cross examined the first defendant in an endeavour to establish the proposed defences were not asserted bona fide. There was evidence the first defendant may have exaggerated the amount of his earnings in the loan application documents and it was the defendants' case that the loan declaration signed by them was not correct. However, neither this evidence, nor the evidence as a whole, demonstrates a lack of bona fides in the defendants in seeking to assert the proposed defence.

Prejudice to the plaintiffs 14 The plaintiffs did not submit they would suffer any relevant prejudice if the default judgment was set aside, apart from delay.

Does the proposed defence present an arguable or triable issue? 15 The defences which the defendants seek to assert are:

(a) that the plaintiffs failed to comply with the requirements of the Consumer Credit Code in that no default notice was given to the defendants pursuant to s 80 of the Code;

(b) that the transaction was unjust and should be reviewed pursuant to the Code, ss 70-72;

(c) that the terms of the loan contract were unjust and should be varied pursuant to the Contracts Review Act 1980 .

Section 80 16 The relevant statutory provisions of the Code are as follows: "80. (2) Enforcement of mortgage. A credit provider must not begin enforcement proceedings against a mortgagor to recover payment of money due or take possession of, sell, appoint a receiver for or foreclose in relation to property subject to a mortgage, unless the mortgagor is in default under the mortgage and - (a) the credit provider has given the mortgagor a default notice, complying with this section, allowing the mortgagor a period of at least 30 days from the date of the notice to remedy the default; and (b) the default has not been remedied within that period."

"6. (1) This Code applies to the provision of credit (and to the credit contract and related matters) if when the credit contract is entered into or (in the case of pre-contractual obligations) is proposed to be entered into - (a) the debtor is a natural person ordinarily resident in this jurisdiction or a strata corporation formed in this jurisdiction; and (b) the credit is provided or intended to be provided wholly or predominantly for personal, domestic or household purposes and…"

"6. (5) For the purposes of this section, the predominant purpose for which credit is provided is - (a) the purpose for which more than half of the credit is intended to be used; or (b) if the credit is intended to be used to obtain goods or services for use for different purposes, the purpose for which the goods or services are intended to be most used."

"11. (1) In any proceedings (whether brought under this Code or not) in which a party claims that a credit contract, mortgage or guarantee is one to which this Code applies, it is presumed to be such unless the contrary is established. (2) Credit is presumed conclusively for the purposes of this Code not to be provided wholly or predominantly for personal, domestic or household purposes if the debtor declares, before entering into the credit contract, that the credit is to be applied wholly or predominantly for business or investment purposes (or for both purposes). (3) However, such a declaration is ineffective for the purposes of this section if the credit provider (or any other relevant person who obtained the declaration from the debtor) knew, or had reason to believe, at the time the declaration was made that the credit was in fact to be applied wholly or predominantly for personal, domestic or household purposes. For the purposes of this subsection, a relevant person is a person associated with the credit provider or a finance broker (or a person acting for a finance broker) through whom the credit was obtained." 17 The background to the matter was that the defendants were in default in relation to mortgages over the property to Liberty Finance Pty Ltd and to Monaco Solicitors Pty Ltd. The defendants sought the advice of the solicitor at Dennis & Co as to what to do in respect of the defaults. After an initial unsuccessful attempt to refinance through a broker introduced by the solicitor, events proceeded as follows:

(a) On 26 January 2006 the first defendant received a call from Keith Holmes, who identified himself as a mortgage broker who had been requested to contact him by the solicitor. He told the first defendant that he had managed to obtain refinance for him and his wife and that he should contact the solicitor. The first defendant forwarded an email to Mr Holmes dated 26 January 2006 in relation to the refinancing. Mr Holmes was aware the defendants were seeking to raise funds to pay out the existing mortgages on their residential property.

(b) A few days after this call, the defendants attended the solicitor's office and were shown a letter dated 25 January 2006 from Bleier Mortgage Corporation Pty Ltd to Paramount Mortgage Services advising that a loan to Saadullah was approved subject to indicative terms and conditions. Documentation placed before the Court indicated that Bleier Mortgage Corporation Pty Ltd was linked with Baccus Investments Ltd, Kremnizer Mortgage Fund, and R.L. Kremnizer & Co.

(c) On 8 February 2006 a loan offer was made to the defendants by Baccus Investments Ltd as manager for Kremnizer Mortgage Fund.

(d) On 15 February 2006 the defendants signed various documents at the solicitor's office, including an application for mortgage finance. That application was headed "Kremnizer Mortgage Fund", "Baccus Investments Limited".

(e) On 16 February 2006 the defendants' solicitor sent the signed documents to the solicitor for the proposed mortgagees.

(f) On 17 February 2006 Baccus forwarded further documents to the solicitor. They contained a different loan figure than the earlier application. That figure accorded with the amount ultimately loaned by the plaintiffs.

(g) On 20 February 2006 the documents forwarded on 17 February 2006 were signed by the defendants at the solicitor's office and forwarded to the solicitor for the plaintiffs.

(h) On 24 February 2006 a letter was forwarded by the defendants' solicitor to the solicitor for the plaintiffs authorising and directing the drawing of cheques, which included a cheque to Liberty Funding Pty Ltd for $1,377,658.71 and to Monaco Solicitors Pty Ltd for $123,913.11.

(i) The transaction was settled on 27 February 2006. 18 It was common ground that no default notice pursuant to s 80 of the Code had been given to the defendants. As a consequence, the proceedings were susceptible, if the Code was applicable, to an order for summary dismissal - Permanent Mortgages Pty Ltd v Cook [2006] NSWSC 1104 per Patten AJ at [69]. Counsel for the plaintiffs formally submitted that Patten AJ was in error in this regard but accepted that the decision should be followed by me for reasons of comity. 19 Among the documents signed by the defendants on 20 February 2006 was a declaration which stated "…credit to be provided to me/us by the credit provider is to be applied wholly or predominantly for business or investment purposes (or for both purposes)." The defendants asserted they did not read this and the other documents but relied upon the solicitor. 20 The plaintiffs submitted the declaration gave rise to a conclusive presumption under s 11(2) of the Code that the credit was not provided wholly or predominantly for personal, domestic or household purposes and thus the Code and s 80 were inapplicable - s 6(1)(b). 21 The defendants submitted the declaration was ineffective by virtue of the application of s 11(3) because

(a) the plaintiffs knew, or had reason to believe, at the time the declaration was made, that the credit was in fact to be applied wholly or predominantly for personal, domestic or household purposes, and/or

(b) a "relevant person" who obtained the declaration from the defendants knew, or had reason to believe, at the time the declaration was made, that the credit was in fact to be applied wholly or predominantly for personal, domestic or household purposes. 22 The defendants relied, particularly, upon the Applications for Mortgage Finance signed on 15 and 20 February 2007 to establish knowledge or "reason to believe" on the part of the plaintiffs. Relevantly, those forms included the following information:

Amount Required: $1,150,000 Preferred Interest Rate: 9.25% Fixed/Variable Loan Purpose To repay existing loan relating to business Term of Loan 1 year Is the Loan purpose predominantly (more than 50%) for Investment or business purposes (or for both purposes?) Yes/No (delete one) Solicitor Acting for you: Dennis & Company Telephone: Name of Finance Broker (if applicable) Paramount Telephone Who referred you to Kremnizer Mortgage Fund?

STATEMENT OF ASSETS & LIABILITES (INDIVIDUALS/GUARANTORS)

Assets: Value Liabilities Amount Owing Property Address: Existing Loans 1. 11a Mears Ave Randwick $2,100,000 Liberty 1,377 000 1,377,000 2. Monaco Solicitor 140,000 140,000 3. Business 250,000 Council 2,600 Motor Vehicles: 5000 Savings - Institution 4000 Furniture & Personal Effects 100,000 Total Assets $ Total Liabilities $

Amount Required: $1,193,000 Preferred Interest Rate: 9.25 Fixed/Variable Fixed Loan Purpose To expand business and discharge mortgage Term of Loan 1 year Is the Loan purpose predominantly (more than 50%) for Investment or business purposes (or for both purposes?) Yes/No (delete one) Solicitor Acting for you: Dennis & Co Telephone: 82560600 Name of Finance Broker (if applicable) Paramount Telephone Who referred you to Kremnizer Mortgage Fund? Paramount

STATEMENT OF ASSETS & LIABILITES (INDIVIDUALS/GUARANTORS)

Assets: Value Liabilities Amount Owing Property Address: Existing Loans 1. 11a Mears Ave Randwick $2,000,000 Liberty $1,337,000 $1,337,000 2. Business (internet café) 150000 Monaco $120,000 3. Motor Vehicles: 5000 Savings - Institution 4000 Furniture & Personal Effects $120,000

23 The application dated 15 February 2007 states that the loan purpose was "to repay existing loan relating to business". However, it failed to answer the question "Is the loan purpose predominantly (more than 50%) for investment or business purposes (or for both purposes)", and clearly indicated that there were existing mortgages for over $1.5 million on the property, that the amount requested was in excess of $1 million and that the value of the business was only $250,000. The application dated 20 February 2007 states that the loan purpose was to expand business and discharge mortgage. It answered the question as to the loan purpose affirmatively. However, it stated that the amount owing on the mortgage over the property was $1,337,000. Clearly, if that mortgage was to be discharged, the predominant purpose of the loan could not be "to expand business". The intent that credit is primarily required to refinance a mortgage in default over a residential property is, prima facie, a circumstance which indicates a personal, domestic or household purpose - Permanent Mortgages Pty Ltd v Cook at [53]. 24 There were also included in the documents forwarded to the plaintiffs' solicitors on 16 February 2007 three declarations regarding security property. These documents each contained a typed paragraph in the following terms: "I/We warrant that there is no unsatisfied judgment of any Court or any process or Writ of Prosecution issued out of such Court, which may be enforced against all or any part of the Property"

to which was added in handwriting "other than notified namely Liberty Funding". This suggests some additional communication to the plaintiffs as to the nature and extent of the liability to Liberty Funding, the detail of which is not presently known to the defendants. Similarly, the nature of any other searches or inquiries made by the plaintiffs are unknown at this stage. 25 A "relevant person" for the purposes of s 11(3) is defined in that subsection as "a person associated with the credit provider or a finance broker (or a person acting for a finance broker) through whom the credit was obtained." The evidence did not establish that Keith Holmes was "associated" with the plaintiffs, although this was asserted by the defendants' counsel. However, I would infer that Keith Holmes was a finance broker or a person acting for the finance broker, Paramount Mortgage Services, through whom the credit was obtained. Section 11(3) does not in terms require that the finance broker be an agent of the credit provider. Keith Holmes was aware the defendants were seeking to raise funds to pay out the existing mortgages on their residential property, and it is arguable he obtained the declaration from the defendants. 26 In my opinion, there is an arguable or triable issue that the plaintiffs and/or the finance broker knew or had reason to believe at the time that the declaration was made that the credit was in fact to be applied wholly or predominantly for personal, domestic or household purposes, and that by the operation of s 11(3), the declaration signed by the defendants was rendered ineffective for the purposes of the section, with the result that the presumption in s 11(1) applied. 27 It would be open to the plaintiffs to avoid the application of the Code by adducing evidence establishing, as a fact, that the Code did not apply to the mortgage. 28 I accept that the defendants' purpose in seeking to borrow from the plaintiffs and Lawteal was to obtain funds to pay out the existing mortgages on their property. The first defendant said this in his affidavit, and he gave oral evidence in cross examination that "the loan was to refinance what I owe my previous lender for my home". The solicitor for the plaintiffs was requested to draw cheques in favour of the prior mortgagees to pay out their mortgages and this, presumably, occurred. 29 The plaintiffs submitted that, by reason of use of the word "provided" in s 6(1)(b), the purpose for which credit was provided was to be assessed at the time the credit contract was entered into from the standpoint of a reasonable person in the position of the credit provider and that, so assessed, the credit advance was for business or investment purposes. 30 There is a conflict in the authorities as to the correct approach to this issue: see Rafiqi v Wacai Investments Pty Ltd (1998) ASC 1550-024 (District Court, Qld), Park Avenue Nominees v Boon [2001] NSWSC 700, cf Jonsson v Arkway (2003) 58 NSWLR 451, see also Permanent Mortgages Pty Ltd v Cook at [50]-[51]. It is unnecessary to resolve this question. It is sufficient that the conflict in the authorities leads to an arguable issue of law. Further, the available facts give rise to a triable issue as to the purpose of the loan, even if judged from the plaintiffs' standpoint. 31 I thus conclude that the defendants have shown an arguable or triable issue as to the application of the Code and in particular s 80 thereof. 32 In my opinion, the defendants also have demonstrated an arguable or triable issue in respect of the review provisions of the Code and of the Contracts Review Act. In the light of my determination of the s 80 issue, it is unnecessary to consider those matters in any detail.

Would it be futile to set aside the judgment? 33 I have concluded that there is an arguable or triable issue that a default notice under s 80(2) of the Code was required to be given before the commencement of these proceedings, and that did not occur. If that issue is tried and determined favourably to the defendants, the present proceedings will fail. 34 It will then be a matter for the plaintiffs to determine if they wish to bring fresh proceedings. If they do, as is probable, the defendants will be entitled to have determined in those proceedings the issues raised by them pursuant to the Code, ss 70-72, and the Contracts Review Act. Only when those issues are determined will the defendants know the precise extent of their indebtedness to the plaintiffs and, armed with that knowledge, be able to determine the appropriate course to be taken by them in respect of this matter. 35 Although it may well be the plaintiffs would, in fresh proceedings, obtain an order for possession of the property, this does not lead me to conclude the defendants should be shut out from asserting their defence to the present proceedings. 36 In my opinion, it is of considerable importance that compliance with procedural requirements designed for the protection of consumers be insisted upon. The defendants are entitled to know the full extent of their indebtedness before orders for possession and sale are made. It may be the service of the default notice under the Code in this case would have alerted the original solicitor to the application of the Code and the possible application of the relief provisions contained therein.

Conclusion 37 In my opinion, having regard to all of the relevant considerations, it is in the interests of justice that the defendants should be permitted to contest the plaintiffs' claim. Accordingly, the default judgment should be set aside. 38 Counsel for the plaintiffs sought an order pursuant to s 80(4)(c) of the Code in the event the default judgment was set aside and the plaintiff sought to commence fresh enforcement proceedings. In response, counsel for the defendants stated that "from the point of waiving the thirty day period under s 80(4)(c), my instructions are to consent to such a course if that be the case." In these circumstances, I understand the defendants consent to an order under s 80(4)(c) should the plaintiffs bring further enforcement proceedings in respect of this matter. In those circumstances, I will make the order sought. 39 Counsel for the plaintiffs sought the release to the plaintiffs of the moneys held in trust by their solicitors pursuant to the orders of this court made on 23 March 2007. Counsel for the defendants consented to such an order being made. I propose to make that order.

Costs 40 The defendants are out of time and require an indulgence of the court to be let in to defend. The plaintiffs were afforded the opportunity to consent to the judgment being set aside but chose to defend the application, and they have been unsuccessful. It remains to be determined whether, ultimately, it will be established that a s 80 default notice was required. 41 In my opinion, the appropriate order is that the costs of this application should be costs in the cause.

The default judgment entered against the defendants on 28 November 2006 is set aside.

The writ of possession dated 28 November 2006 in respect of the subject property is set aside.

The defendants are to file and serve a defence to the statement of claim filed on 11 September 2006 by 4.00 pm on 7 August 2007.

The costs of this application are to be costs in the cause.

The Court authorises the plaintiffs to begin fresh enforcement proceedings against the defendants in respect of the default under the mortgage without requiring a default notice to be given pursuant to s 80(2) of the Consumer Credit Code .

The funds held in trust by the plaintiffs' solicitors pursuant to the order of this Court made on 23 March 2007 may be released to the plaintiffs.

The proceedings are stood over to the registrar's list at 9.00 am on 14 August 2007 for further directions.

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