Kowalczuk v Accom Finance Pty Ltd [2007] NSWCA 225 | Case summary

Monday 20 August 2007 EDWARD JOHN KOWALCZUK & ANOR v ACCOM FINANCE PTY LTD & ANOR Ex Tempore Judgment 1 CAMPBELL JA: This is an application for stay of an order for possession and judicial sale of property located at 979 Pacific Highway Berowra. The order granted possession subject to a lease of the property to the Wentworthville Children's Early Learning Centre Pty Limited. The property in question is a house, which is let under a commercial lease to the Children's Early Learning Centre. 2 The plaintiff in the Court below, Accom Finance Pty Limited, is a lender of money on mortgage. The rates of interest that it charges are rates that fall at what one could, exercising maximum restraint, call the higher end of the market in which mortgage funds are available. Payment calculations tendered in the proceedings show that a borrowing of $807,000 made on 15 December 2005 has accumulated interest so that an amount of $2,059,098.90 is now owing, after the mortgagee has received payments of $41,000 on 23 January 2006, and a further amount of $1,123,309.41 from the sale of another piece of real estate that secured the same loan. 3 The Berowra property came to be the subject of the order for a judicial sale because it was caught up in the 68th clause of a lengthy memorandum of mortgage relating to the mortgaging of another property. That 68th clause provided, in effect, that both the mortgagor under that mortgage, and any guarantor, gave a mortgage to secure the mortgage debt (or guaranteed debt as the case may be) over all other property that that mortgagor or guarantor owned. 4 In the Court below, attacks were made on the mortgage over the Berowra property, under the Trade Practices Act 1974 (Cth) (both section 51AA and section 51AC), and under the Contracts Review Act 1980. In each case, the remedy sought amounted to an order for judicial obliteration of the mortgage over the Berowra property. The learned primary judge rejected those applications. 5 The Berowra property is, according to the evidence before me, subject to a first mortgage to the National Australia Bank that secures around $330,000. The value of the property appears to be between $550,000 and $580,000. Thus, the amount that the mortgagee would receive from a sale is in the range of $220,000 to $250,000, minus whatever the sale costs will be. That goes nowhere near, of course, the amount that it claims is its shortfall of $2,059,098.90. 6 On an application for stay of an order to enforce a mortgage security a similar principle often applies to that articulated in Inglis v Commonwealth Trading Bank of Australia (1972) 126 CLR 161, whereby a sale could not be injuncted by a mortgagor unless the mortgagor either repays all principal and interest claimed by the mortgagee - not the amount admittedly owing - or else pays that amount into Court. There is, however, a long recognised exception to that principle, whereby the amount claimed is not required to be paid into Court or paid to the mortgagee where the existence of a power of sale itself is under attack: Harvey v McWatters (1948) 49 SR (NSW) 173. If the existence of the power of sale is attacked because it is sought to rewrite the mortgage pursuant to a provision such as section 87 Trade Practices Act, that can provide a reason why the usual Inglis principle does not apply: cf Ferro Corporation (Aust) Pty Limited v International Pools (Aust) Pty Limited (1993) 30 NSWLR 539. It is a sufficient reason in the present case why the Inglis principle does not apply. It is not necessary to consider any other exceptions that might exist: cf Parist Holdings Pty Ltd v Perpetual Nominees Ltd [2006] NSWSC 599; Fisher & Lightwood's Law of Mortgage 2nd Australian ed, para [20.38]. 7 Before a stay is granted, the onus is on the applicant for the stay to demonstrate a proper basis for the stay that will, so far as is practically possible, be fair to all parties: Alexander v Cambridge Credit Corporation Ltd (1985) 2 NSWLR 685 at 694. 8 In the present case, an unusual evidentiary situation presented itself. The matter came before the Court on the basis of an affidavit by Mr Kowalczuk, the registered proprietor of the Berowra property, in which he deposed to the rent being received from the property being $3,267.20 per month, and to the monthly repayment to National Australia Bank being approximately $3,545.78. The affidavit continued: "Out of my wages, I pay the mortgage shortfall". Mr Kowalczuk gave evidence that he works as a motor bechanic, and earns approximately $620 per week gross. 9 Today, Mr Kowalczuk gave oral evidence that the affidavit evidence on this topic was mistaken. He gave evidence that in fact it was the mortgage repayments that were $3,267.20 per month, and the rental received that was $3,545.78. He said he never needs to pay money to the bank. Apparently the lease is one under which it is the tenant that pays the periodical outgoings, not the landlord. 10 I accept the evidence that Mr Kowalczuk gave today, for the purpose of the present application. 11 The situation that the Court is now placed in, is that if the stay is granted, and the mortgagee ultimately succeeds in the appeal, there will be a loss to the mortgagee of the returns it could have earned, over the period between now and when the appeal is ultimately decided, on the sum of between $220,000, and $250,000, minus sale expenses. The rates of interest that the mortgagee has lent at in the present case, are 60 per cent, as the lower rate, and 120 per cent per annum as the higher rate. Those rates compound monthly. It appears from the trial judge's judgment, that this transaction is not an isolated transaction, that the mortgagee has a business of lending at high rates of interest, and that some 75 per cent of its mortgages are in default. 12 In that situation, it submits that the potential that it has for financial loss, even if a trial could be brought on promptly, is significant. The financial circumstances of Mr Kowalczuk are such that he cannot offer any meaningful undertaking as to damages as a condition of the stay. 13 The desire of Mr Kowalczuk, as expressed in his affidavit, was to keep the Berowra property for as long as possible as a long-term investment for himself and his family. He says he has no assets apart from that property. 14 It is also necessary to give some weight to the fact that, prima facie, a successful litigant is entitled to the fruits of its victory: Alexander v Cambridge Credit Corporation Ltd at 693, 694. 15 The interest rates that are charged are ones that on their face create a significant concern. Ordinarily a court would look very closely at any mortgage transaction that involved charging such interest rates. However, I also bear in mind that an experienced trial judge has looked closely at the circumstances of this particular loan, and has come to the conclusion, based in part upon matters involving credit, that the mortgage is not one that should be set aside. 16 The Court knows little on this application about the financial circumstances of Accom Finance Pty Limited. The fact that it is a Pty Limited company raises a possibility - not shown by evidence to be more than a possibility - that if the mortgagor succeeds on the appeal, the mortgagee might be unable to repay any sale proceeds of the Berowra property that it received. However, that possibility might not come to pass in the present case. That is because the order that has been made in the Court below is one under which the proceeds of any sale are to be held by the plaintiff upon trust pending further order of the Court with respect to distribution of the sale proceeds. 17 If a stay were granted, and the mortgagee were to succeed on appeal, it would be necessary for any sale process to be commenced again, following the appeal. However, the order that has been made in the Court below has the effect that, if no stay is granted and the mortgagor succeeds in the appeal, it is unlikely to be at risk of Accom Finance Pty Limited being in a financial condition where it is unable to repay whatever needs to be repaid. In saying that, I am assuming that the Court below would not order payment out of the proceeds of sale until the sale was complete and the Court was satisfied of the propriety of charges that the mortgagee made. That is likely to take all, or nearly all, of the time that would be involved in the appeal being pending. However, if the Court below did not order payment out of the proceeds of sale while the appeal was pending, the mortgagee would not be in a position, during that time, to earn the large sums of interest it appears to charge in the course of its business. 18 There is no evidence before me concerning how the real estate market in Berowra is moving, whether prices are increasing, decreasing, or stable. 19 If the sale were to proceed, the most likely event is that the proceeds of sale would remain in trust until the appeal had been determined. When that is the most likely event, it seems to me that the difference to the mortgagee between having the property sold immediately, and having it sold following the determination of the appeal, is comparatively small. 20 Mr Young, for the mortgagee, points to the prospect that his client would be at risk if the first mortgage payments were not kept up. That is so. However, on the evidence I have accepted today, there appears to be no reason why those mortgage payments could not be kept up, and it would clearly be in the financial interest of the Appellant to ensure those payments were kept up. 21 While there has not been a fully articulated set of grounds of appeal, some draft grounds of appeal were put before me today. Without binding the Appellant to those particular grounds, it seems to me that there is at least a sufficient prospect of success in the appeal to warrant the question of whether a stay should be granted being looked at. When I look at the balance of convenience, it seems to me that the balance of convenience favours the granting of the stay. In coming to that conclusion, I mention also that an undertaking has been proffered by the Appellant to proceed with expedition. Mr Gracie has offered to file a Notice of Appeal promptly. 22 I direct that a full Notice of Appeal be filed by 5.00pm Friday, 24 August 2007, or at such earlier date as counsel is able to settle it to his satisfaction. 23 I note an undertaking from the Appellant to proceed with expedition with the appeal. Upon that undertaking, I order that the orders of Justice Windeyer made 17 July 2007, be stayed pending the determination of the appeal. The costs of the stay application are to be costs in the appeal. I note that the Second Respondent to the Notice of Motion, Mr Dalla, was represented today, that his legal representative was given the opportunity to depart quite early in the course of the hearing, when it became apparent that no orders detrimental to his position would be sought today, but that he elected to stay to observe. **********

Kowalczuk v Accom Finance Pty Ltd

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