Court of Appeal (Qld)|2012-05-04|Before: Jerrard JA, Fraser JA

Kellas-Sharpe & Ors v PSAL Limited [2012] QCA 94 (4 May 2012)

The appellants cite Drew v Makita (Australia) Pty Ltd [2008] QCA 312 for their proposition that a stay should be granted because they have an appeal with arguable prospects, success in which will be rendered nugatory without a stay.

The respondents submit that the Court should refuse a stay, taking into account the principles summarised by Jerrard JA in Elphick v MMI General Insurance & Anor [2002] QCA 347 at [8], that a stay should be granted only where it is established that there is:

(b) the applicant for a stay will be disadvantaged if a stay is not ordered; and

(c) competing disadvantage to the respondent should the stay be granted that does not outweigh the disadvantage suffered by the applicant if the stay not be granted.

The first question to be addressed concerns the viability of the appeal. The issue concerns the validity of the interest provision in the loan agreement made between the first and second appellants as borrowers and the third appellant as guarantor, and the respondent in December 2009 for a loan of $1,139,368 for a period of two months.

The interest provision provides that the interest rate is, "the standard rate of 7.50 per cent per month, but whilst the borrower is not in default under the facility the lender will accept interest at the concessional rate of 4.00 per cent per month".

The appellants defended the respondents' claim for possession and for payment of arrears of principal and interest on grounds which included the contention that this provision was void as a penalty. They also counter-claimed that certain provisions of the loan agreement were unconscionable and contravened statutory provisions.

The trial judge found for the appellants on their counter-claim and declared that the loan agreement and any collateral bills of mortgage be read and construed as if any reference to payment of interest on unpaid interest or capitalisation of interest were deleted from each of those documents, and that the loan agreement and any collateral bills of mortgage be read and construed as if the definition of "interest rate" provided a standard rate of five per cent per month, but while the borrower was not in default under the facility the lender would accept interest at a concessional rate of four per cent per month. Under the loan agreement and mortgages as so reformed, the amount owing by the appellants to the respondent was $1,366,330.05; hence the judgment mentioned earlier.

The trial judge rejected the appellants' defence that the interest rate provision of the loan agreement was void as a penalty. Before me, the respondent argued that even if there was jurisdiction to relieve against penalty, in this case the appeal faces the obstacle that the trial judge also found that, having regard to the loss that the respondent was likely to suffer by being kept out of its money and other categories of loss, the appellants had failed to prove that the 7.5 per cent interest rate was not a genuine pre-estimate of loss and was therefore not void as a penalty. As to that, the appellants argued that the trial judge was mistaken in comparing the income that would flow from applying the "default" rate with the income that would flow from other loans, rather than comparing income flowing from the "default" rate with the loss on this loan contract.

The appellants also argued that this penalty provision applied to any default in punctual payment, no matter how serious or trivial in terms of the potential loss, so that it was presumed, in the absence of any evidence to rebut it, that the provision was a penalty. For that proposition, the respondents cited cases including Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71; (2005) 224 CLR 656. It is sufficient that I say that, in my opinion, the appellants' case in this respect is arguable, although it is not practicable for me now to form any conclusion about its prospects.

There is then the question whether it is arguable that the penalty jurisdiction is enlivened at all. The trial judge held that there was no such jurisdiction if, instead of providing for a higher rate of interest in default of punctual payment, the mortgage stipulates, as in the loan agreement here, that the higher rate is payable under the mortgage and provides for its reduction in case of punctual payment.

The trial judge was referred to Lord Eldon's oft repeated criticism in Seton v Slade [1802] EngR 267; (1802) 32 ER 108 at 111 that the rule prefers form over substance. The trial judge acknowledged that the rule might have unsatisfactory origins and that the time might have arrived for it to be replaced, but held that it was so well-established in Australian law that it was not open to a judge at first instance to alter it. The trial judge cited many decisions in which the rule had been affirmed, although often with an accompanying criticism.

It was submitted to me that in none of the decisions cited by the trial judge was it necessary to decide whether or not that there was such a rule. It was argued that there was no judicial decision which provided authoritative support for the rule. That is certainly true of many of the decisions as the trial judge recognised, but it is not clear to me that it is universally correct. In David Securities Pty Ltd v Commonwealth Bank of Australia (1990) 23 FCR 1 at 29 Lockhart, Beaumont and Gummow JJ held that it was well established that a covenant offering a reduction in the rate for prompt payment does not attract the penalty doctrine. One of the decisions cited by their Honours for that proposition was Brett v Barr Smith [1919] HCA 4; (1919) 26 CLR 87 at 94, where Isaacs J referred with approval to Lord Hardwicke's judgment in Nicholls v Maynard 3 Atkyns' Chancery Reports 519 at 520. No argument was addressed to those decisions, or to the authorities cited in them.

In any event, the statements in favour of the rule have been made for such a period, so frequently, and by courts of such authority, as to create a formidable obstacle in the way of the appeal. Nonetheless, I accept that it is arguable, at least in the High Court, and perhaps in the Court of Appeal, that it should now be held that the jurisdiction to relieve against penalties does extend to an interest rate provision in the present form. I do not put the prospects any higher than that.

It is then necessary to consider the disadvantage to the applicant if a stay is not ordered and the disadvantage to the respondent should the stay be granted. As to the first, if the stay is not ordered the respondent will exercise its power as mortgagee to sell all of the land owned by the appellants, which includes a farm which has been in the first appellants' family's hands for generations. The appellants might, and probably would, also become insolvent. There must be a prospect that a trustee and liquidators would be appointed and it might then become impracticable for the appeal to be pursued at all.

The first appellant also deposed that: should the appeal succeed, it is likely that the appellants would be required to pay about $500,000 to the respondent by the time judgment in the appeal is delivered; that a company has agreed to advance up to $500,000 to the appellants to enable them to satisfy any such judgment; that she has made or is confident of making arrangements to re-finance her loans to other lenders, subject to removal of the respondent's caveats and mortgage over the properties; and that if the appeal does not succeed, the respondent would be in no worse position than it now is in because of the shortfall in the appellants' assets as compared to the debt as it presently stands. However, if the appeal does succeed, it is far from being certain that each of the arrangements necessary to provide for a payment of about $500,000 to the respondent will in fact be effected. There must be real prospect that, even if the appeal succeeds, the appellants may be unable to pay the amount of the judgment owing, even upon the footing that the interest provision is void as a penalty.

The fact is that there was a shortfall in the repayment of the principal advanced and expenses relating to the loan. Prima facie, the respondent was entitled to exercise its security rights despite the appellants' contentions about the interest rate provision. If the interest rate provision is void as a penalty, then, as I understood the appellants to accept, the respondent would be entitled to recover as interest at least the cost of its funds. The trial judge analysed the evidence and found that the cost of external funding to the respondent was 28.5 per cent per annum, the bulk of its borrowings having been obtained at 30 per cent per annum for this loan. The trial judge went on to hold that, had he found that the provision of the loan agreement as to the interest rate was void as a penalty, the appropriate rate for interest pursuant to statute would be 25 per cent per annum compounding annually.

Either on that footing, or under a common-law entitlement, it is difficult to see that the appellants have an arguable case that the rate should be less. I understood the appellants to accept as much in the course of argument. Upon that assumption, an exchange of emails between the parties' solicitors established that the debt as of today's date is in the order of $580,000.

However, on the figures produced by the appellants, the only equity available to the respondent to recover that debt is $250,000 as equity in Lot 2, 396 Lake Cooroibah Road. Thus the effect of staying the judgment would be to erode the respondent's likely recovery by the respondent's interest expense of 25 per cent per annum compounding annually applied to that estimated shortfall of $250,000. Furthermore, the schedule produced by the appellants suggests that there may be equity in another property over which the respondent has an equitable mortgage, 545 Ainsworth Road, Leeville. The schedule states that its value is $1,550,000 and the amount owed in respect of it is $1,300,000. On that basis, a stay would prejudice the respondent to the extent of 25 per cent per annum compounding annually on $500,000, the total of the apparent equity in the two properties.

In the first appellant's affidavit filed on 28 March 2012 she deposed that she created the schedule and that it showed her estimate of the value of the real estate and motor vehicles the appellants own, the identity of the mortgagees and caveators, and the value of the secured debt. However, in a further affidavit sworn on 13 April 2012 she deposed that $700,000 was owing and secured over 545 Ainsworth Road to Paul Mulherin, the family's accountant and a long time friend. The two affidavits can be reconciled if the debt and security were created in the fortnight between the times at which they were sworn. I make no finding about this, but it does tend to illustrate the risk of placing implicit faith in the figures in the schedule.

A further potential disadvantage for the respondent is that the appellants' net equity positions would be eroded by the amount of interest owing to mortgagees having priority to the respondent. That will not be significant if, as the schedule shows for some of the properties, the value of the property is significantly less than the amount owing to a prior mortgagee. The position in this respect in relation to all properties is, however, not entirely clear.

The appellants are not in a position to offer any security to protect the respondent against the erosion of the amount it will be able to recover if the stay is granted and it is evident that the appellants' personal undertakings as to damages are likely to prove worthless if the appeal fails. Indeed, it is not clear that such undertakings would necessarily be valuable even if the appeal succeeds.

The appellants submitted that the amount of equity is currently so small, being of the order only of $250,000, that a further reduction in that equity as a result of the delay would not be significant. That is, however, cold comfort for the respondent. As I have said, it is also not clear to me that there is only $250,000 worth of equity in the properties which stand as security for the respondent's debt.

In summary, even if the appeal succeeds there is a risk that granting a stay will result in a reduction in the amount otherwise recoverable by the respondent under the orders that would be made and so much seems inevitable if the appeal fails. In these circumstances, I am not prepared to grant a stay. I refuse the application.

FRASER JA: The costs of this application are reserved to the Court of Appeal.

Kellas-Sharpe & Ors v PSAL Limited [2012] QCA 94

At a glance

Court

Decision date

Before

Source

Judgment (29 paragraphs)

Kellas-Sharpe & Ors v PSAL Limited [2012] QCA 94 (4 May 2012)

Kellas-Sharpe & Ors v PSAL Limited [2012] QCA 94 (4 May 2012)

Parties

Cases Cited (3)