Linkenholt Pty Ltd v Quirk [2000] VSC 166

11. On 25 February 2000 the defendant filed a summons seeking an order that the default judgment be set aside.

14. Master Wheeler dismissed the application and the authenticated order under the heading "Other Matters" recorded the following -

"1. The delay in this case is unacceptable (see Osborne & Co v Anderson [1905] VicLawRp 64; (1905) VLR 427 at 435); 2. In any event I am not persuaded that the Consumer Credit (Victoria) Code is applicable."

19. The plaintiff is a company which from time to time lends money.

22. The defendant describes himself as a scientist, and is an experienced businessman and a director of several public companies.

25. At all relevant times he was the holder of 50% of the issued shares in a company formerly known as The Melbourne Catalogue Company Pty Ltd., ("the Company"). The other 50% of the issued shares were held by Patricia Maree Amad. From at least 10 December 1993 the only two directors of the company revealed by the records held by the Australian Securities and Investments Commission were the said plaintiff and Patricia Maree Amad.

29. The appeal is a re-hearing de novo and hence the court hears the application afresh unfettered by the Master's order or his reasons. See Rule 77.05(7) of the Rules of Court.

33. An application to set aside a judgment entered in default is made pursuant to Rule 21.07 of the Rules of Court which provides -

"The court may set aside or vary any judgment entered or given in accordance with this order."

37. It is noted that the court may vary the judgment instead of setting it aside.

40. An applicant seeking to set aside a default judgment has to establish that he has a prima facie defence on the merits.

43. The principles were stated by Lord Atkin in Evans v Bartlam (1937) AC 473 at 479 -

"I agree that both rules Order XIII r10 and Order XXVII r15, give a discretionary power to the judge in chambers to set aside a default judgment. The discretion is in terms unconditional. The courts, however, have laid down for themselves rules to guide them in the normal exercise of their discretion. One is that where the judgment was obtained regularly there must be an affidavit of merits, meaning that the applicant must produce to the court evidence that he has a prima facie defence."

47. His Lordship's observations were quoted with approval by the Full Court in Kostokanellis v Allen [1974] VicRp 71; (1974) VR 596 at 603.

50. Mr Senathirajah of counsel for the plaintiff submitted that an applicant had to establish two other matters before he was entitled to have the judgment set aside, namely, that he had to provide "a justifiable explanation for his failure to enter an appearance" and secondly, that he had made a prompt application to the court to set aside the judgment after discovering that judgment had been entered against him. In support of the latter proposition he referred to Osborne & Co v Anderson [1905] VicLawRp 64; (1905) VLR 427.

53. The latter proposition evidently loomed large in the decision made by Master Wheeler.

57. The authorities establish that the court should be informed of the reason why the defendant failed to enter an appearance. However, in the absence of any prejudice to the other side which could not be overcome, I do not see how a court could refuse an application to set aside a judgment because there has not been a sufficient explanation given for failing to enter an appearance.

60. The question was discussed by the Full Court in Kostokanellis v Allen, supra and at p.605 said this -

"However, it does not necessarily follow that if the explanation does not amount to something which can be categorised as a 'sufficient reason' the defendant's application should fail. It must all depend on the circumstances."

64. In my opinion, the Full Court is not saying that a failure to provide a proper explanation for not entering an appearance means that the application must fail.

67. Indeed, the Full Court went on to refer to what Smith J said in Shepperdson v Lewis [1966] VicRp 59; (1966) VR 418 at 423-4 which the Full Court summarised as follows (p.605) -

"Where, in dealing with the discretion to be exercised on an application to dismiss an action for want of prosecution, it was pointed out that the adoption of a formula created by erecting what are merely relevant factors into arbitrary principles so as to allow the automatic production of a solution in all but the exceptional case, is a quite fallacious approach to the exercise of the discretion."

71. I accept that the Full Court has held that it is a relevant factor to be considered but is not a basis for refusing the application if justice otherwise demands that the judgment be set aside.

74. The point was made by Lord Atkin in Evans v Bartlam, supra at p.480 when he said -

"It was suggested in argument that there is another rule that the applicant must satisfy the court that there is a reasonable explanation why judgment was allowed to go by default, such as mistake, accident, fraud or the like. I do not think that any such rule exists, though obviously the reason, if any, for allowing judgment and thereafter applying to set it aside is one of the matters to which the court will have regard in exercising its discretion. If there were a rigid rule that no-one could have a default judgment set aside who knew at the time and intended that there should be a judgment signed, the two rules would be deprived of most of their efficacy. The principle obviously is that unless and until the court has pronounced judgment upon the merits or by consent, it is to have the power to revoke the expression of its coercive power where that has only been obtained by failure to follow any of the rules of procedure."

78. In the present matter the defendant after receiving the Supreme Court writ wrote to the plaintiff's solicitors and informed them that he did not intend to file "an appearance through my solicitor". He went on to put a proposition.

81. By letter dated 7 December 1999 the plaintiff's solicitors informed the defendant that judgment had been entered and forwarded a copy to him.

84. It was not until shortly prior to 21 February 2000 after a bankruptcy notice had been issued and served on the defendant that he approached solicitors to set aside the judgment.

87. It is clear from the defendant's evidence that he did not intend to defend the proceeding and that is the explanation for him not entering an appearance. However, he asserts that he has a good defence on the merits after receiving legal advice.

90. In my opinion there is no rule that the defendant must have a "justifiable explanation" or a reasonable explanation as to why he allowed the judgment to go by default.

"The supposed second rule (the rule requiring a reasonable explanation) does not in my opinion exist."

98. The judgment was entered on 10 December 1999, and the judgment creditor applied for and obtained the issue of a warrant of seizure and sale on 19 January 2000. Subsequently it issued a bankruptcy notice that prompted the defendant to seek legal advice.

101. The defendant did not make his application until 25 February 2000. The defendant frankly admitted that upon receipt of the writ he formed the view that he had no defence to the proceeding and deliberately made a decision not to file an appearance. It was only after he consulted his solicitors, Messrs Dunhill Madden Butler, that he realised there may be some defences available to him by reason of the provisions of the Consumer Credit Code which applies in the State of Victoria by reason of s.5 of the Consumer Credit (Victoria) Act 1995 ("the Act").

104. There is no suggestion by the plaintiff that it suffers any prejudice by the delay in bringing the application which could not be met by an order for costs thrown away.

107. In Denzel Griffiths v Malika Holdings Limited, I delivered a judgment on 27 August 1997 in which I discussed the effect of what was in that case a delay of some years in an application to extend time to appeal. I said this at p.15 of the unreported reasons for judgment -

"In considering this delay it is pertinent to note that the defendant has not alleged any prejudice. As against this one must weigh up the fact that the rules are there to be observed; and secondly, that the delay here as been inordinate. The question of delay was considered by the New South Wales Court of Appeal in Danny Kidron and Andrew Spaile Architects Pty Ltd v Garrett (1994) 35 NSWLR 572. In that case a Court of Appeal judge refused an extension of time based solely on what was said to be a failure to explain delay. Not surprisingly, the Court of Appeal allowed the appeal. At p.578, Priestly, JA (with whom Sheller JA agreed) said - 'It seems to me that it follows from the above that Meagher JA's exercise of discretion miscarried in that it was based solely on what was said to be a failure to explain delay and did not take into account the absence of any prejudice on which the other parties could rely. It was not argued that the architect's appeal had no prospect of success. Where delay is small, an appeal is not hopeless, and no relevant prejudice will be caused by an extension of time, it seems to me that a due exercise of discretion requires the granting of an extension of time. To refuse to grant an extension in such circumstances solely because of lack of satisfaction with the reasons for delay seems to me to show failure to take into account the other highly relevant factors I have mentioned and in this case to have led to a miscarriage of discretion.' His Honour's reference to other factors included lack of prejudice. It is noted that his Honour used the phrase 'where delay is small'. The delay in that case was something less than 14 days. An explanation for delay is expected from a party seeking an extension of time to apply for leave to appeal, but whether it is adequate or not carries little weight one way or the other. In my opinion delay per se is of little moment in an application to extend time. The inadequacy or adequacy of the explanation likewise is of little moment. What is of importance is the length of the delay and whether it has any prejudicial effect on the other party in relation to its affairs or ability to contest the case and present its own."

111. I refer to what the Court of Appeal in England has recently said in the case of Marshall v Gradon Constructions (1997) 4 All ER 880.

114. In that case the Court of Appeal was concerned with an extension of time to appeal and at first instance the judge refused the application on the sole ground of an absence of an excuse for the lengthy delay. The Court of Appeal held that that factor was of little moment and that other factors such as the justice of the case far outweighed any question of failing to explain the delay.

117. In the present proceeding, the plaintiff relied upon the decision of Osborne and Co v Anderson, supra, as did the Master.

120. The judge who heard it at first instance, Hood J, held there was no defence on the merits. His Honour made no mention of the delay in bringing the application. The delay was approximately two months. Mr Cussen of counsel for the plaintiffs did not evidently argue that the delay could be a basis for refusing the application. At p.430 of the report his argument is summarised as follows -

"In view of the defendant's delay, if the judgment be set aside at all it should only be on terms."

124. In the Appeal Court Mr Cussen did submit that the defendant was barred by his delay from having the proceeding set aside and quoted the Victorian case of Henry v Smith [1879] VicLawRp 137; (1879) 5 VLR(L) 188.

127. In Henry v Smith a defendant against whom judgment had been entered made application to set aside the proceeding on the ground that there had been irregular service. The Full Court held that he was too late in his application to have the writ set aside and that he should have applied promptly. However, as the report shows a week later he obtained leave to appear and defend on terms.

130. That decision provides some support for the proposition that a defendant seeking to set aside the service of a writ on the ground of irregularity must move promptly. But it does not support the proposition that delay per se is a ground for refusing to set aside a judgment entered in default.

133. In the appeal of Osborne & Co v Anderson, Holroyd J stated that he felt disposed to agree with Hood J for the reasons which he gave but went on to say that he did not feel certain about the matter and added - "But upon the point of delay which has been raised in answer to the application that set aside the judgment, I think that it has been excessive, and quite sufficient to prevent the court from interfering to set aside the judgment at this time of day."

136. His Honour went on to say after summarising the circumstances of the proceeding that considerable expense had been incurred which was entirely the fault of the defendant. He noted that the defendant had ample time to consult his solicitors and then concluded -

"For these good reasons, and according to the very common rule of justice, I think that the court, which has the discretion, ought to exercise it by refusing to set aside the judgment."

140. Hodges J agreed with the judgment of Holroyd J and specifically said that the defendant had come too late to make his application.

143. However, it is clear from the judgments of Holroyd and Hodges JJ that they also found in accordance with the reasons of Hood J that the defendant had no defence. Accordingly their observations on delay were obiter and not binding on me.

146. A'Beckett J dissented and pointed out that Hood J did not base his judgment on delay.

149. His Honour observed with respect to delay at p.441 -

"But I understand that the delay which has taken place in this matter affords an obstacle in their view, whatever the rights of the defendant otherwise might be. The question of delay must, of course, be judged according to the circumstances in each case, and I do not know that any authority can be found which would precisely dispose of this case. ... The parties being at arms' length on this subject, I think the delay should not deprive the defendant of the relief to which he would otherwise be entitled."

153. In my opinion a delay in bringing the application is a factor to take into account but must be accorded very little weight in the absence of prejudice which cannot be overcome and in the presence of a defence on the merits. In my view no court doing justice between the parties could deny a litigant's right to contest a claim against him on the ground that he had delayed in bringing an application to set aside a default judgment where there was no prejudice that could not be overcome by a suitable order.

156. The defendant's delay in bringing this application is not a basis for refusing the application. No prejudice has been alleged.

159. The delay however is a matter to be considered on the question of costs.

163. The defendant asserts that he has a defence on the merits because the provisions of the Consumer Credit Code applied to the contract of loan and the plaintiff was in breach of certain sections of the Code which precluded it from bringing the present proceeding.

166. The plaintiff for its part contends that the Code does not apply to the loan contract.

172. The test is - does the defendant have a prima facie defence on the merits? See Kostokanellis v Allen, supra at p.605.

175. The Consumer Credit (Victoria) Code is part of the law of this State. In fact the Code is set out in the appendix to the Consumer Credit (Queensland) Act as in force for the time being. See s.5 of the Consumer Credit (Victoria) Act 1995.

178. It is unfortunate that the Legislature in this State has not taken steps to have the Code reproduced with the Victorian statute to enable those in this State who wish to know what the code contains, a ready access to it. It is an extraordinary situation that a law in this State is not readily available in statutory form to its citizens who have to obtain a copy of the appendix to the Queensland Act.

181. The Code only applies to the provision of credit in certain circumstances.

"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

(c) a charge is or may be made for providing the credit; and

(d) the credit provider provides the credit in the course of a business of providing credit or as part of or incidentally to any other business of the credit provider."

191. Each of these elements has to be established before the Code applies.

194. There is no doubt that the loan agreement in the present matter is a credit contract.

197. It is noted that the time to determine when the Code applies is the time when the contract is entered into. In this case this is 30 September 1997.

200. The onus of establishing that the Code applied to a particular credit contract is on the party who asserts that it does but in the present case that burden is satisfied by reason of the provisions of s.11(1) of the Code. It provides -

"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."

204. The defendant claims that the Code applies and accordingly has the benefit of the presumption. The burden is then upon the plaintiff to show that the Code does not apply.

207. The plaintiff concedes that the elements found in s.6(1)(a),(c) and (d) are established.

210. However, the plaintiff submits that the element found in s.6(1)(b) does not apply and that it has established that the credit provided to the defendant was not provided "wholly or predominantly for personal ... purposes".

213. It is common ground that the credit was not provided for domestic or household purposes.

216. Both counsel accepted that the issue for my consideration was whether or not the credit was provided for "personal purposes".

219. The defendant submitted that the Code did apply and that the plaintiff had breached a number of sections of the Code which it was submitted either denied the right of the plaintiff to bring the proceeding or gave the defendant defences to the proceeding. In addition, the defendant submitted that clause 5.2 of the loan contract which dealt with an increase in interest payable upon default was unenforceable as constituting a penalty.

222. The application and opposition to it is on affidavit evidence. No deponent was cross-examined. However, there is no dispute of fact between the parties and counsel for both parties submitted that ultimately the question of a prima facie defence was a matter of law on undisputed facts.

225. Mr D.G. Robertson of counsel for the defendant referred to a number of sections of the code.

228. First, he referred to s.80(1) which provides -

"A credit provider must not begin enforcement proceedings against a debtor in relation to a credit contract unless the debtor is in default under the credit contract and -

(a) the credit provider has given the debtor, and any guarantor, a default notice, complying with this section, allowing the debtor 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."

235. It is noted that that is a criminal offence carrying a penalty for breach.

238. It is common ground between the parties that no notice was given by the plaintiff to the defendant.

241. There is no provision in the Code which provides what the effect of failure to give a notice has upon the present proceeding.

244. The second provision is s.14 which requires the credit provider to give a pre-contractual statement setting out matters required by s.15 and also an information statement of the debtor's statutory rights and obligations.

247. It is common ground that that sub-section was not complied with.

250. Section 20 makes a breach of that obligation a serious criminal offence.

253. The third provision is s.15E which requires that the contract document must contain a statement of the total amount of interest charges payable under the contract.

256. It was common ground that this provision was breached and it is also a serious offence under s.20 of the Code.

259. The obligation under s.15E is a key requirement under the code - see s.100(1) - and this gives certain rights to the borrower which could result in a payment of a sum of money - see ss.102 and 103. Any order made for the payment of a penalty can be set off against any amount owing to the credit provider.

262. It appears that the only court that can give such relief is the Victorian Civil and Administrative Tribunal - see s.8(1) of the Consumer Credit (Victoria) Act.

265. Finally, Mr Robertson referred to s.28 which is concerned with a prohibition on the credit contract increasing the interest rate where a debtor is in default. It prohibits a higher rate of interest on default except where the debtor is in default in payment and only in respect of the amount in default and while the default continues.

268. Mr Robertson points out that the claim for interest in the present matter and which was the subject of the judgment related to an increase in interest not on the amount that was not paid but an increase in interest for the whole amount of the loan. He submitted that there was a clear breach of s.28.

271. As I have stated there was no real dispute between the parties that there were breaches of the code if it did apply and this raised the very difficult question as to what was the effect of any of the breaches on the present proceeding?

274. There is no provision in the Act which provides a clear answer to that question.

277. Mr Robertson submitted that under s.80 it was clear that the proceeding was irregular and accordingly should be dismissed.

280. It is a difficult question to determine what is the effect of an obligation to give notice prior to issuing a proceeding in a court of law. There have been many cases discussing the matter and I refer to Mole v Forest Commission of Victoria [1957] VicRp 82; (1957) VR 583 and Hunter v State of Victoria [1960] VicRp 56; (1960) VR 349. The latter case refers to a number of cases which show that the answer to the question is not open and shut as one might think.

283. Mr Robertson also referred the court to the New South Wales Court of Appeal decision of Graham v Aluma Lighte Pty Ltd (1996) 39 NSWLR 58.

286. The question was discussed by Clarke JA at pp.66-7 and by Cole JA at pp.76-77.

289. I also refer to what Windeyer J said in Scoles v Commissioner for Government Transport [1960] HCA 29; (1960) 104 CLR 339 at 343.

292. The effect of the admitted breaches of the code on the present proceeding raises difficult questions of law that have to be fully considered after a consideration and determination of all relevant facts. The parties have filed affidavits in the application and although one could feel a degree of confidence that all the relevant facts on this aspect are before the court there are, in my view, some matters that may have to be explored and taking into account the difficulties involved in resolving the legal question and the fact that this application is concerned with a defence on the merits in my opinion it is inappropriate for me to further consider this vexing question.

295. Further, both counsel did not go into all the authorities which have discussed similar issues and in the absence of a clear authority at an appellate level I would be reluctant on an application such as the present to make a definitive ruling.

298. If the code applies there are prima facie defences on the merits.

302. The interpretation of the Code is a question of law. Hence it is a question of law for the court to decide what is meant by "personal purposes" in s.6(1)(b) of the Code. However, having construed the provision it is a question of fact whether at the time when the credit contract was entered into, the credit was provided or intended to be provided for personal purposes?

305. It is inappropriate on an application such as the present for the court to attempt to exhaustively define what is meant by the phrase "for personal purposes".

308. The parties agree that if a loan was made for the purpose of a business transaction then that would not be for "personal purposes". I agree - see s.11(2).

311. The debate between the parties focussed on whether the money was lent for "business purposes" or "personal purposes".

314. Mr Senathirajah submitted that the court should consider and determine what was done with the money and that this will establish what the purpose was for the loan. He submitted that the facts demonstrated that the money was used for a business purpose and accordingly the Code did not apply.

317. Mr Robertson on behalf of the defendant submitted that the money was used to satisfy a personal obligation by the defendant and accordingly was provided for personal purposes. He further submitted that if there was any real doubt about the purpose of the loan then the plaintiff fails to rebut the presumption that the Code applied found in s.11 of the Code.

320. In my opinion, it is appropriate to consider what the money was used for in order to determine the purpose of the provision of the credit. In considering the question it is important to consider the substance of the transaction in the context of its performance.

326. On 9 October 1995, the company, The Melbourne Catalogue Company Pty Ltd, carried on business. At that time it was jointly owned by the defendant and Patricia Maree Amad who each held 50 shares. They were the only two directors.

329. Based on those facts it could be said that it was a typical partnership company. It approached the plaintiff to provide finance to assist it in the operation of its business. The plaintiff lent the company three advances totalling $280,000.

332. The defendant guaranteed the loan and the plaintiff, the defendant and the company executed a loan agreement on 9 October 1995. On any view the money was lent for business purposes and the Code did not apply to the credit provision.

335. The company defaulted under the agreement on a number of occasions and although the defendant made repeated promises to have the loan re-financed and the principal re-paid none of the proposed arrangements came to any effect.

338. On 19 September 1996, a Federal Court order was made winding up the company.

341. On 10 December 1999, a court order was made staying or terminating the winding up order indefinitely and on 18 January this year the liquidator resigned.

344. Throughout the period from 9 October 1995 the ASIC records show that the defendant and Patricia Maree Amad were directors of The Melbourne Catalogue Company Pty Ltd.

347. According to the affidavit of the defendant the company ceased to operate any business in 1997. However, he does not state the date when the company ceased business.

350. It appears between the date of the loan in 1995 and 30 September 1997 the defendant requested an extension of time for re-payment of the original loan. A demand for payment was made upon him pursuant to the guarantee after the company was put in liquidation. The evidence is that the plaintiff stated it would grant an extension of the time for payment if the defendant agreed to assume primary liability for the loan by taking out the loan in his own name. The transaction could also be described as the plaintiff borrowing money to satisfy the liability under the guarantee. The reality was the execution of a new loan agreement on 30 September 1997.

353. The recitals recited that the plaintiff advanced what was described as the original loan of $280,000 to The Melbourne Catalogue Company Pty Ltd and that the borrower, namely, Mr Quirk, executed a personal guarantee for re-payment of the loan together with interest and legal costs and that he acknowledged his personal liability for what was described as the new loan and "agreed to enter into this Agreement to evidence the agreed terms of re-payment." (Emphasis added.)

356. Clause 1 defined some of the terms in the agreement.

"The borrower acknowledges that he is indebted to the lender for the Principal Sum."

363. If one goes back to the definition "Principal Sum" means the New Loan.

366. The new loan is defined as meaning the sum of $319,742.61. The definition provision also defines the original loan meaning the sum of $280,000. The reference to "original loan" is the loan to the company.

369. It is clear from the evidence that no money was actually paid and that the transaction was effected by agreement in written form.

372. The defendant swore in an affidavit on 14 March 2000 the following -

"In fact, neither I nor Quirk Partners Pty Ltd have ever conducted such a business. Melbourne Catalogue Company Pty Ltd/The Australian Catalogue Company ceased business in 1997 and its business has not been continued nor resumed by any person."

376. The reference to Quirk Partners Pty Ltd, which is a company controlled by the defendant, is to a statement made by the solicitor acting on behalf of the plaintiff that the defendant had effectively continued the catalogue distribution business run by the company through Quirk Partners Pty Ltd.

379. It is clear from what the defendant said is that the business ceased some time in 1997 but at what point is not clear.

382. However, bearing in mind that a winding up order was made in respect to the company I am prepared to find on the untested affidavit material that at the time when the loan agreement was executed the defendant was not operating any business through The Australian Catalogue Company.

385. Mr Robertson on behalf of the defendant makes the point that the loan was made for the sole purpose of satisfying a personal debt owed by Mr Quirk pursuant to a personal guarantee. The re-financing was to discharge the original guarantee and to put in place a personal obligation on Mr Quirk to re-pay the loan. He submitted that this was a personal transaction, that the credit was provided for personal purposes and not business purposes and hence the Code applied.

388. He submitted that the court should take into account the fact that the company and Mr Quirk were completely different entities and a loan to Mr Quirk to enable him to discharge a personal guarantee was not a loan to any business or a loan for business purposes.

391. Mr Senathirajah submitted that the reality of the transaction was that there was a re-financing of a loan which had been made for the sole purpose of operating the business conducted by the company. He submitted that Mr Quirk was in effect the company, that it was a corporate partnership and the reality was that there was no real distinction to be drawn between Mr Quirk and the company. For all intents and purposes they were one and the same. He submitted that all loans to an individual are personal and hence it is necessary to consider the purpose of the loan. He submitted that the original loan was for business purposes, that the original loan was not repaid, that the personal guarantee was for business purposes and the substitution of the defendant's liability under the guarantee by a direct obligation to repay a loan realistically was for business purposes and not for personal purposes. In deciding this issue it is my opinion that the court must consider the substance and reality of the transaction.

394. The money was lent to a company partly owned, controlled and operated by the defendant. The money was lent for business purposes. The defendant guaranteed the company's debt.

397. In order to understand the nature of the defendant's obligation it is necessary to consider the loan agreement made in October 1995.

400. The defendant was a party to that agreement which was made between the plaintiff as lender of the first part, The Melbourne Catalogue Company Pty Ltd as borrower of the second part and "Thomas William Quirk ... ("the guarantor") of the third part.

"C. The guarantor is a party to this agreement to guarantee the due and proper performance of the obligations on the part of the borrower as herein contained as the finance being made available by the lender to the borrower at the request of the guarantor."

407. The defendant as guarantor unconditionally guaranteed to the plaintiff "the due and punctual payment of all sums of money which the borrower may be or hereafter may be liable to pay to the lender under or pursuant to the terms hereof".

410. This is a class of guarantee whereby the guarantor undertakes that the debtor will carry out the contract. Failure by the debtor to perform the contract puts the guarantor in breach of the contract. See Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; (1988) 166 CLR 245 at 256 per Mason CJ.

413. This view of the defendant's obligation is underlined by clause 8(g) of the agreement which provides -

"(g) That this guarantee shall operate and take effect as if in the case of default by the borrower the guarantor was the borrower and subject to all the obligations of the borrower under the terms hereof."

417. This makes it clear in my opinion that this is not a guarantee of the other common class of guarantee, namely, the obligation to answer for the debt or default of the debtor. The fact is that the defendant as guarantor assumed the primary obligation of his company for re-payment of the debt.

420. That in my opinion was the nature of the obligation resting upon the defendant when the parties further discussed a new agreement with respect to the loan.

423. Turning to the second loan agreement made 30 September 1997, it is apparent from the recitals that the defendant as borrower acknowledges his personal liability for what was described as the new loan which was specified as $319,742.61. In context this was the amount that was owing under the original loan agreement which was $280,000 together with interest.

426. In my opinion the nature and character of the loan did not change. It was provided as a business loan and remained as such when the defendant was obliged to re-pay as a borrower under the original loan agreement. The substitution of the loan agreement by another loan agreement in my opinion did not in any way change the character of the loan.

429. The fact was that on a proper construction of both documents the defendant remained throughout a borrower of money which was used for business purposes.

432. Mr Robertson for the defendant referred to a review decision of the Commonwealth Administrative Appeals Tribunal in the case known as case U127, (1987) 87 ATC 749. In that case a tax payer borrowed some money from a finance company and on-lent that amount to another. The borrower defaulted and subsequently none of the money was recovered. In order to re-pay the finance company loan the tax payer obtained a new loan from a bank on security of an existing mortgage and subsequently substituted the mortgages with other mortgages with different banks.

435. The tax payer sought to deduct her share of interest paid on the three bank loans on the basis that the initial borrowings from the finance company were for a business purpose and the later borrowing from the bank to re-pay the finance company was in effect the one transaction.

438. Mr B.J. McMahon held that in order to determine the purpose of the borrowings it was necessary to consider the matter on an objective basis.

441. At p.752 he said - "In my view they clearly establish that the purpose of borrowing from each of the three banks was in order to discharge capital obligation to the previous lender. The very fact that a written direction was given to a lending bank to apply the proceeds to discharge a liability to a preceding bank is sufficient corroboration of that objective purpose. However, the applicant visualised each loan in her own mind, there was no doubt that the proceeds were not layed out for income derivation purposes. They were, at her express written direction, applied in discharge of a capital obligation."

444. That case was decided on its own facts. The facts are different to the present matter. In that case the tax payer borrowed from an independent finance company, lent the money to another and then borrowed from a bank in order to discharge the first borrowing. They were separate transactions.

447. In the present matter on an objective basis the transactions were one and the same and all that occurred was the substitution of a new agreement for what was an obligation to re-pay money which had been lent for business purposes.

450. In my opinion the Consumer Credit Code did not apply to the contract entered into by the parties on 30 September 1997.

457. Interest rate was defined by clause 1.4 as a rate of interest of 10% per annum.

"5.2 The interest rate shall be increased by an additional four per cent (4%) if the borrower is more than three (3) days late in making any payments due hereunder."

464. Mr Robertson submits that clause 5.2 is a penalty and could not be said to be a genuine pre-estimate of the plaintiff's loss and accordingly the clause seeking penalty interest is unenforceable.

467. As I understood Mr Robertson he asserted that the mere fact that there was an increase of 4% in the interest rate on default, especially as it was on the whole sum, clearly demonstrated that the increase in the interest sub-clause was a penalty.

470. Whether or not a sum is a penalty or liquidated damages is a question of construction to be decided upon the terms of the agreement and the inherent circumstances judged at the date of execution of the contract. See Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd [1914] UKHL 1; (1915) AC 79 at pp.86-7 per Lord Dunedin.

473. His Lordship went on to say that in order to assist construction, various tests had been suggested and the first was - "(a) It will be held to be a penalty if the sum stipulated for, is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach."

476. There is ancient authority for the proposition that if the breach consists in not paying a sum of money and the sum stipulated is a sum greater than that which ought to have been paid then, that is, prima facie, a penalty. However, that is not a hard and fast rule and again depends upon all the circumstances and in particular whether it is extravagant and unconscionable in amount in comparison with the greatest loss that could be suffered.

479. The evidence on the question of loss is sparse. Mr Roache the solicitor for the plaintiff has sworn in an affidavit that he was involved in drafting the second loan agreement and asserted that the interest calculated in accordance with clause 5.2 was intended to be a genuine pre-estimate of the loss which would flow. Although he has asserted that, I would place no weight on that evidence which was objected to, in the absence of any details of the likely loss.

482. Another point is made by Mr Senathirajah for the plaintiff that the second agreement was drafted and executed in a background of continuous default by the defendant's company and himself under the first loan agreement.

485. Given the background circumstances there is much force in the submission of Mr Senathirajah that the stipulated payment was not in terrorem of the offending party but was a genuine pre-estimate of damage. But the evidence is not there as to the loss suffered as a result of the default.

488. Mr Senathirajah referred to a number of decisions which he submitted supported the proposition that the mere fact that there is an increase of 4% by reason of the defendant's failure to make re-payments cannot be characterised as a penalty. These cases do not foreclose the argument that the increase by 4% of the interest rate on a default of 3 days is a penalty. Indeed there is force in Mr. Robertson's submission that it is a penalty because the increase in interest is on the whole amount of the loan. It may be difficult to establish that the lender suffers that amount of loss on default. However, that is a matter for full investigation at trial. The evidence on this application does not persuade me that the additional rate of 4% on default is a proper pre-estimate of the damage suffered by the plaintiff.

491. In my opinion the defendant does have a prima facie case that clause 5.2 in the circumstances represents a penalty. It will be necessary to consider all the evidence at the time of the execution of the contract to determine what the parties contemplated would be the loss suffered if the defendant failed to pay on time. In my opinion there is an argument that the sub-clause is a penalty and it is appropriate that the defendant have an opportunity to establish this at trial.

495. In my opinion the loan agreement entered into by the defendant is not covered by the Consumer Credit (Victoria) Code and accordingly the provisions of that Code do not apply to it. It follows that the defendant has failed to establish any defence to the re-payment of the loan.

498. However, in my opinion he has established a prima facie defence with respect to clause 5.2 not being a genuine pre-estimate of the damage likely to be suffered by the plaintiff by reason of any default.

501. The most appropriate course to follow is to vary the judgment which the plaintiff has obtained by deducting the amount due for the increase of interest by reason of default and granting leave to the defendant to defend in respect of that sum.

504. However, the plaintiff is entitled to its judgment for re-payment of the loan together with interest at 10%.

507. Subject to submissions from counsel I propose to make the following orders -

(i) Appeal from orders made by Master Wheeler on 15 March 2000 be allowed.

(ii) That the orders made by Master Wheeler be set aside.

(iii) That the default judgment entered by the plaintiff against the defendant on 10 December 1999 be varied by substituting the sum of $318,216.15 for the amount of $334,684.07, and $3,400.12 for the amount of interest of $8,729.29 but otherwise the judgment is confirmed.

(iv) That the defendant pay the plaintiff's costs thrown away as a result of the variation of the judgment.

(v) That the balance of the proceeding be transferred for hearing in the Magistrates' Court pursuant to the Courts (Case Transfer) Act 1991.

513. I will hear the parties on the question of costs and the form of the orders. It will be necessary to calculate the amount of the amount outstanding less the default interest.