National Australia Bank Ltd v C & O Voukidis Pty Ltd

Supreme Court of NSW|2013-02-28|Before: Campbell J, Mr P

Judgment 1The National Australia Bank (the Bank) seeks summary judgment for possession in respect of three properties over which it holds mortgages to secure the obligations of the first defendant, C & O Voukidis Pty Ltd, and the fourth defendant, Mrs Voukidis, including under guarantees covering the liabilities of certain customers of the Bank who or which are in default of their obligations. 2The properties the Bank seeks possession of are as follows: (1)The property known as X XXXXX XXXXXX XXXXXXX New South Wales (the Burwood property) owned by the first defendant; and (2)The property known as XX XXXXXXXXXXXXXXX, Drummoyne New South Wales (the Drummoyne property) owned by the fourth defendant; and (3)The property known as XXX XXXXXXXXX XXXXX, Vincentia New South Wales (the Vincentia property), also owned by the fourth defendant. 3Each of the first and fourth defendants are parties to guarantees securing the debts of a number of entities associated with the fourth defendant and her husband, Mr Christos Voukidis.

Relevant legal principles 6The principles governing an application for summary judgment are well known. They were summarised by Macfarlan JA in O'Brien v Bank of Western Australia Limited [2013] NSWCA 71 at [3] (see also Ward JA at [66] - [68]). As Macfarlan JA and Ward JA both point out, the real issue is whether there is an underlying defence that has a real, not fanciful, prospect of success. This is distinct from the question of whether such a defence is actually pleaded. The applicant is required to demonstrate that the outcome of the litigation is so certain, that it would be an abuse of the process of the Court to require the action to proceed to a full hearing on the merits. 7I think it also relevant in the context of a mortgagee's power of sale, to refer to the judgment of Walsh J in Inglis v Commonwealth Trading Bank of Australia (1971) 126 CLR 161 (approved on appeal in Inglis v Commonwealth Trading Bank of Australia (1972) 126 CLR 168 per Barwick CJ, Menzies and Gibbs JJ at 168 - 9). Like Inglis, it is not disputed here by the first and fourth defendants that an indebtedness arises under the mortgage, nor is it said that the indebtedness has been discharged by payment. Rather, the various grounds advanced to dispute or deny the existence of a mortgage debt are based upon the contention that any debt that did exist "is more than counterbalanced by the damages (or equitable compensation) to which... (the first and fourth defendants) claim to be entitled" by way of cross-claim (Inglis at 163). 8At 164 Walsh J said: A general rule has long been established, in relation to applications to restrain the exercise by a mortgagee of powers given by a mortgage and in particular the exercise of a power of sale, that such an injunction will not be granted unless the amount of the mortgage debt, if this be not in dispute, be paid or unless, if the amount be disputed, the amount claimed by the mortgagee be paid into court. 9At 164-165, his Honour continued: In my opinion, the authorities which I have been able to examine establish that for the purposes of the application of the general rule to which I have referred, nothing short of actual payment is regarded as sufficient to extinguish a mortgage debt. If the debt has not been actually paid, the Court will not, at any rate as a general rule, interfere to deprive the mortgagee of the benefit of his security, except upon terms that an equivalent safeguard is provided to him, by means of the plaintiff bringing in an amount sufficient to meet what is claimed by the mortgagee to be due. The benefit of having a security for a debt would be greatly diminished if the fact that a debtor has raised claims for damages against the mortgagee were allowed to prevent any enforcement of the security until after the litigation of those claims had been completed. In my opinion the fact that such claims have been brought provides no valid reason for the granting of an injunction to restrain, until they have been determined, the exercise by a mortgagee of the remedies given to him by the mortgage. 10It is clearly established that a cross-claim for damages, or set-off of a mortgage debt, is not a defence to a claim for possession of land: Westpac Banking Corporation v Corry [2011] NSWSC 1041 at 14; Perpetual Trustee Co. Ltd v Paola [2010] NSWSC 997 at [47].

Decision 11For the reasons which follow, I have decided that the Bank is entitled to summary judgment for possession of the Burwood property and the Drummoyne property, but that there is a triable issue in relation to its claim for possession of the Vincentia property. The triable issue relates to a claim by the fourth defendant that the Bank promised to release the Vincentia property upon taking the mortgage over the Drummoyne property as part of a re-arrangement of the credit facilities provided by the Bank to Mr and Mrs Voukidis and their related entities (Exhibit RZ1 page 101). I will refer to the fourth defendant as Mrs Voukidis.

A summary of the Bank's contentions about the loans and guarantees 12The Bank made certain facilities available to Mr and Mrs Voukidis and some related entities. The position may be summarised as follows: (a)A second portfolio facility in the sum of $1.84 million was made available to Mr and Mrs Voukidis. It is guaranteed by the first defendant, a company controlled by them, under what is referred to as the fourth guarantee, to a maximum of $2.45 million. As of the commencement of the hearing before me on the 28th of February 2013, the total amount due was $2,148,255.45. The obligation of the guarantor is secured by a mortgage over the Burwood property. Mrs Voukidis' direct liability as a debtor for this facility is secured by a mortgage over the Drummoyne property; (b)An overdraft facility of $500,000 was made available to a company named Jedda Projects Pty Ltd, associated with Mr Voukidis. Mrs Voukidis, under the first guarantee, guaranteed Jedda's debts in respect of the overdraft. The guarantee is also secured by the mortgage over the Drummoyne property and a mortgage over the Vincentia property. As at the 27th of February 2013, the total amount due in respect of Jedda's indebtedness was $666,452.79; (c)The Bank made a bills facility available to a company named Koombari Pty Ltd in the sum of $2.5m. Koombari was associated with Mr Voukidis. Under a document entitled the third guarantee, Mrs Voukidis guaranteed the debts of Koombari to a limit of $2.5m. The third guarantee is also secured by the mortgages over the Drummoyne property and the Vincentia property. The total amount owing under the third guarantee is said to be $1,364,290.80.

The evidence 13The Bank relied upon two affidavits of Ruiming Zeng, a senior manager employed by it. The first was sworn on the 18th of January 2013, to which a bundle of documents (Exhibit RZ 1) is attached. The second affidavit was sworn on the 28th of February 2013. The main purpose of the second affidavit is to prove the amount due under each of the facilities as summarised above. The deponent was not required for cross-examination and no one contested the basic facts deposed to. Rather, as I have said, except in respect of the Vincentia property, matters of cross-claim or set-off were raised based on various causes of action asserted against the Bank. 14I will summarise the key facts by reference to the submissions advanced by Mr Reynolds of Counsel on behalf of the Bank, as I have said there is no real dispute about them. In my judgment, the affidavit evidence satisfies the requirements of Rule 13.1 Uniform Civil Procedure Rules 2005 (NSW).

The Bank's case against the first defendant 15The second portfolio facility was established on the 14th of December 2007 by the Bank agreeing to extend credit to Mr and Mrs Voukidis to a limit of $2.45 million. This was varied by agreement on the 29th of October 2010, when the limit was reduced to $1.84 million (Zeng 1 at [11] - [14]; Exhibit RZI; pp 66-113). 16The first defendant was the guarantor of the debts, inter alia, of Mrs Voukidis by dint of the fourth guarantee entered into on the 10th of May 2006 (Zeng 1 [54]; Exhibit RZI; pp 307-320). The obligations of the first defendant as guarantor were secured by a mortgage over the Burwood property (Zeng 1 [65] - [66]; Exhibit RZ1; pp 335-350). The mortgage was originally granted on the 2nd of January 2003, with a dealing no. 9536878J. 17The effect of the mortgage is that the first defendant mortgaged the Burwood property for the purpose of securing to the Bank the payment of "all money which one or more of you owe the Bank, or will or may owe the Bank in the future". This is an all money clause and extends to the amount due under the guarantee. (Exhibit RZ1; pp 341 and 349). The relevant terms of the fourth guarantee set out at Exhibit RZ1, pp 307-320 are clauses 5.2, 5.3, 6 and 8.1. By the fourth guarantee the first defendant guaranteed the debts of both Mr and Mrs Voukidis. It is only the latter who is relevant for present purposes. Conventionally, the first defendant guaranteed payment by Mrs Voukidis and promised to pay itself if she did not. The guarantee extends to any amount in respect of which the customer is in default at any time, and entitled the Bank to realise any security granted by the first defendant. 18Although somewhat tortuous, in my judgment it is beyond argument that the mortgage provided to the Bank by the first defendant was available to the Bank to secure the first defendant's liability under the fourth guarantee in the event of a default by Mrs Voukidis of her obligations. 19Mr and Mrs Voukidis fell into default of the second portfolio facility by failing to maintain it within the agreed limit (Zeng 1[30]). On the 9th of May 2011, the Bank served notice of termination and default on Mrs Voukidis (Zeng 1[32]) requiring her to correct the default by making immediate payment of the amount owing. She did not comply with that notice and on 20th of May 2011, the Bank served on her a Notice of Demand requiring payment of the full amount due within 31 days. The demand was not complied with. 20On the 4th of July 2011, the Bank issued a notice to the first defendant pursuant to the fourth guarantee demanding payment of the amount due in respect of the second portfolio facility (Zeng 1[62]; Exhibit RZ1; pp 333-334). The first defendant did not comply with the demand.

Enforcing the mortgage over the Burwood property. 21Subject to the provision of notices, under Clause 20.1(e) of the mortgage (Exhibit RZI; pp 346-7) the Bank is, inter alia, entitled to take possession of the property. The relevant notices were provided in relation to the Burwood property on 24th August 2011 under s 57(2) Real Property Act 1900 (NSW) and further demand was made on 27th January 2012. The first defendant did not comply with either the statutory notice or the demand. (Zeng 1[67] - [70]). Subject to the matters raised by the first defendant, the Bank is clearly entitled to an order for possession. 22Before dealing with the matters raised, it is necessary to set out other factual matters relevant to the arguments of the parties.

Freezing orders and surplus funds. 23As referred to at [5], Mr Voukidis had an association with a company named Break Fast Investments Pty Ltd. That company commenced proceedings against Mr Voukidis in this Court and obtained freezing orders in respect of the assets of the first and fourth defendants on the 12th of July 2010. That matter was cross-vested to the Supreme Court of Victoria (Zeng 1[97]-[102]). In March 2012, by consent of the parties in those proceedings, the other Burwood property was sold by the first defendant, the Bank's secured debt was paid out and the surplus produced by the sale is held by the Bank in the controlled money account, subject to the freezing order. The amount of the surplus is in the order of $1.4m. An application to the Supreme Court of Victoria to vary the freezing order to permit the release of the surplus was refused by Vickers J on 27th February 2013. 24On the 29th of October 2010, Mrs Voukidis deposited the sum of $750,000 in a term deposit as additional security for the overdraft and the bills facility (Zeng 1[109]-[110]). The freezing order was varied on 20th December 2012 to exclude the term deposit: Zeng 1[112] Exhibit RZ1 page 478-9). Mrs Voukidis is also a party to the Victorian proceedings. The amount of the term deposit was applied in partial reduction of the bills facility, which as I have said, is also secured by mortgage over the Drummoyne property and the Vincentia property.

The first defendant's asserted underlying defence 25The matters relied upon by the first defendant as demonstrating an underlying defence, are set out in a proposed amended defence handed up in Court during argument on the 6th of March 2012. A further version was tendered as Exhibit 2 on 8th March 2012. It includes averments to the following effect: (a)That the Bank wrongfully and unconscionably caused the surplus funds for the sale of the other Burwood property to be paid into the controlled money account rather than applying them to the reduction of the second portfolio facility; (b)In December 2012 "wrongfully and unconscionably caused' the term deposit to be paid in reduction of the Bills Facility, rather than in reduction of the debts secured by the mortgage on the Burwood property. It is also averred that the provision of the term deposit was meant to be an interim security which would be released when the mortgage over the Drummoyne property was established; from what was argued by counsel, it may be that these matters are also relied upon as an estoppel by representation. The amended defence seeks a discharge of the first mortgage and a discharge of the fourth guarantee. 26The only remedy sought by the Bank is summary judgment for possession. It does not seek to recover the monetary debt. It is difficult to see how there could be any complaint about the surplus funds given that the Bank has dealt with them in accordance with Court orders, likewise, the term deposit. These funds in total amount to about $2 million and would be insufficient to discharge the whole of the indebtedness of Mr and Mrs Voukidis and their related entities. They are insufficient to discharge the total of the indebtedness of Mrs Voukidis alone. But, as I have said, the term deposit was initially frozen by virtue of a Court order and the Bank had no choice but to comply with it. The surplus funds remain in the same category. 27Nothing brought forward in the Amended Defence, or by way of argument, vitiates the Bank's title under its mortgage. To the extent to which the various matters raised by the first defendant might be arguable, and it is not obvious to me that they are, they are caught by the principle discussed in Inglis. That is to say, these matters do not undermine the Bank's title as mortgagee to possession, but rather arise by way of counterclaim or setoff and as such cannot defeat the claim for possession. 28The first defendant's averments may after a hearing on the merits give rise to claims which sound in damages or equitable compensation and they should be permitted to continue. But that does not mean that the Bank is not entitled to possession.

Summary judgment against the fourth defendant - the Vincentia property 29As I have already said, Mrs Voukidis is the registered proprietor of the Drummoyne Property and the Vincentia Property. On the 14th of March 2006, by the first guarantee, she guaranteed the debts of Jedda, and by the third guarantee dated the 15th of June 2006, guaranteed the debts of Koombari. The mortgage over the Vincentia property was given on the 2nd of January 2003. The Vincentia mortgage is in the same terms as the mortgage over the Burwood property and includes an all monies clause and a contractual right of the Bank to take possession upon default (Exhibit RZ1: 430, 435 -536, 438). 30On the customer's default, Mrs Voukidis promised to pay the debt and indemnify the Bank for losses arising out of it. Under the guarantee, the Bank is entitled to have resort to any security from Mrs Voukidis at any time over any of her property "unless the security by its express terms does not apply to this liability". (Emphasis added - Clause 12 Exhibit RZ1:250). 31Based on the evidence set out in Zeng 1 at [15] - [16], [37] - [43], it is clear to the point of certainty that Jedda entered into the overdraft arrangement on 8th of March 2006, but it fell into default on the 9th of May 2011 and did not comply with the subsequent demand for repayment made on the 19th of May 2011. By these facts the terms of the first guarantee are prima facie engaged. However, the difficulty for the Bank is the words I have underlined. It is arguable that the mortgage over the Vincentia property in express terms does not apply to this liability. 32In the course of renegotiating the finance arrangements for Mr and Mrs Voukidis, particularly something described as an NAB Portfolio Facility Agreement, arguably the second portfolio facility referred to above, in October 2010 the Bank agreed to release the Vincentia property in exchange, inter alia, for a mortgage over the Drummoyne property (Exhibit RZ1; 111 - 113). Admittedly, the overdraft provided to Jedda was required to be supported by a registered mortgage over the Vincentia Property (Exhbiti RZ1; 114 - 117) and that agreement was entered into on or about the 8th of March 2006. 33Moreover, in an email dated 16th September 2010 relating to a proposal for the finance of the Drummoyne property, Mr Voukidis, not a party to these proceedings, offered the Vincentia property as interim security for, inter alia, the Jedda facilities. 34The point is, that in the context of this summary judgment application, it does appear to be at least arguable that the re-arrangement of October 2010 provides Mrs Voukidis with an underlying defence, as she seeks to plead in her First Amended Defence, that the Vincentia property has been released from security. She does not in terms seek specific performance of the alleged agreement, but as I have said, the question is not whether the defence is pleaded, but rather whether it may be arguably available. 35In my judgment, that issue ought to be permitted to proceed to trial. It does not fall into the category of case covered by the judgment of Walsh J in Inglis. Rather, it falls into the exceptional category where the matter relied upon by the defendant seeks to impugn the title of the mortgagee seeking possession. 36I therefore refuse summary judgment of the claim for possession of the Vincentia property.

Possession of the Drummoyne property 37It should not be overlooked that Mrs Voukidis is not only a guarantor but also a principal debtor in respect of the second portfolio facility. That debt is secured by the mortgage over the Drummoyne property. Mrs Voukidis, as I have said more than once, provided the first guarantee to secure the debt of Jedda under the overdraft, and the third guarantee to secure the obligations of Koombari under the Bills facility. Taking an overall view, Mrs Voukidis' total indebtedness to the Bank is in the order of $4.24m, as at February 2013. 38I have already recounted in this judgment the circumstances demonstrating that Mrs Voukidis is in default of her direct obligation under the second portfolio facility, her obligations as guarantor in respect of Jedda's overdraft, and her obligations as guarantor in respect of Koombari's bills facility. 39Mrs Voukidis' liability, for all matters, is joint and several with all other signatories in respect of the loan and guarantees. Under the loan agreement for the second portfolio facility, Clause 18, Mrs Voukidis undertook to pay the total amount owing to the Bank in full without setting off any amount she believed owed to her, and without cross-claiming: Exhibit RZ1 (105). Each guarantee postpones rights of set-off, which the guarantor may have against the Bank until the Bank recovers the full amount of the debt owed by its customer: Exhibit RZ1 253 clause 15.2; Exhibit RZ1 p. 292 clause 15.2. 40The Drummoyne mortgage and its memorandum are at Exhibit RZ1: 403-420. Mrs Voukidis provided the mortgage as security for the payment of "the amount owing". The phrase "amount owing" is defined in very broad terms (Exhibit RZ1 418) extending to all amounts for which Mrs Voukidis "at that time ... may become actually or contingently liable (to the Bank) for any reason including all amounts for which you are or may become liable (to the Bank)" in respect of "any", inter alia, "guarantees or indemnities". 41Under Clause 15, Mrs Voukidis was in default if she did not pay any amount owing under the mortgage on time, or any debtor, whose debt she guaranteed, fell into default. (Exhibit RZ1 413 clause 15). By necessary implication arising from clauses 16 to 19 of the mortgage (Exhibit RZ1 413 - 415), the mortgage empowers the Bank to go into possession of the Drummoyne property if Mrs Voukidis defaults in her obligations under the mortgage. From Zeng 1 [82] - [85], I am satisfied that Mrs Voukidis is in default in her obligations under the mortgage. In particular she failed to comply with the demand of 20th May 2011, referred to above, for the repayment of the monies due under the Second Portfolio Facility; she failed to comply with a demand under the first guarantee dated 4th July 2011 (Zeng 1 [56] - [58]); and failed to comply with a demand dated 12th July 2011 under the third guarantee (Zeng 1 [59] - [61]). 42A statutory demand was issued under s 57(2)(b) of the Real Property Act on 24th August 2011 (Exhibit RZ1 421-423). That notice was issued in respect of the second portfolio facility. Mrs Voukidis did not comply with this notice. 43I am satisfied that the Bank is entitled to possession of the property, subject to the matters raised by Mrs Voukidis.

The fourth defendant's underlying case 44By Notice of Motion made returnable before me on the 20th of February 2013, Mrs Voukidis sought leave to amend her defence in the form attached to the Notice of Motion on the grounds set out in the affidavit of her solicitor. I have already dealt with the matter in relation to the asserted release of the security of the Vincentia property and will not revisit that issue. 45The proposed Amended Defence essentially raises four matters as follows: (a)The failure to apply the surplus from the proceeds of the sale of the other Burwood property in reduction of the liabilities of Mrs Voukidis; (b)Applying the amount of the term deposit monies, other than in accordance with Mrs Voukidis' instructions; (c)Selling property owned by Koombari at what is said to be a gross undervalue. In respect of this, Mrs Voukidis asserts a breach of the Bank's duties as mortgagee in possession or alternatively under s 420A of the Corporations Act; and (d)The release of the security of the Vincentia property referred to above. 46I did not understand the argument about the surplus funds to be pressed as one which would deny the Bank its entitlement to possession. On the basis of Inglis and the other authorities I have referred to above, this is the correct approach. One might add, that it is difficult to see how both the first defendant and the fourth defendant can have the benefit of the same fund. But this is a mere matter of set-off which can be dealt with later in terms of the claim asserted by the fourth defendant. 47As I have recounted above, the term deposit funds have now been released from the freezing order and have been applied to the reduction of Mrs Voukidis' liability. Whether she has some continuing claim in relation to loss suffered by her because the funds were not applied as she would have wished can be determined at a subsequent hearing. This is not a matter which disentitles the mortgagee bank to an order for possession. The claims in respect of the sale at a gross undervalue, again are money claims which can be ventilated later and by application of Inglis and the other authorities referred to above do not disentitle the Bank to possession for default on the mortgage. The Bank relied upon the decision of Bryson J in GE Capital Australia v Davis & Ors (2002) 11 BPR 20,529. Whether this decision provides a complete answer to this claim can be decided once the facts are known. It is not necessary for me to decide that matter now. 48Accordingly, I will make orders for possession in respect of the Burwood and Drummoyne properties. I will grant leave to the first defendant and Mrs Voukidis to file cross-claims asserting the matters raised in their proposed amended defences, including any claim for relief in respect of the asserted release of the Vincentia property. 49As the orders I will make will not finally dispose of the proceedings, it seems to me appropriate that the question of costs of the application before me should abide the outcome of any trial on the remaining issues. The Bank has been substantially successful, but Mrs Voukidis has enjoyed success in relation to the Vincentia property. Only when all the facts are known and a final decision is made can a decision be properly made about who should bear the costs of this application or whether they should be apportioned. However, I will reserve liberty to apply to any party who is dissatisfied with this approach to costs. 50My orders are: (1)Under Rule 13.1 Uniform Civil Procedure Rules 2005, judgment for the plaintiff for the possession of the whole of the land in folio identifier X/XXXXXX situated at and known as X XXXXX XXXXXX, Burwood in the State of New South Wales; (2)Leave to the plaintiff to issue a Writ of Possession in respect of the property identified in Order (1); (3)Under Rule 13.1 Uniform Civil Procedure Rules 2005, judgment for the plaintiff for the possession of the whole of the land in folio identifier X/XXXXXX situated at and known as XX XXXXXXXX XXXXXX, Drummoyne in the State of New South Wales; (4)Leave to the plaintiff to issue a Writ of Possession in respect of the property identified in Order (3); (5)Summary judgment for possession of the property referred to in the Statement of Claim as the Vincentia property is refused. (6)Leave granted to the first defendant to replead the matters averred in its proposed Amended Defence tendered as Exhibit 2 on 8th March 2013 in the form of any cross-claim it wishes to assert against the plaintiff within 21 days of the date hereof. (7)Leave granted to the fourth defendant to replead the matters averred against the plaintiff in her proposed First Amended Defence attached to her Notice of Motion filed on the 18th of January 2013 by way of Amended Cross Claim within 21 days of the date hereof. (8)List the matter for directions before the Common Law Case Management Registrar at 9 a.m. on Thursday 8th May 2014. (9)Costs of the various applications heard by me to abide the determination of the cross claims brought by the first and fourth defendants. (10)Reserve liberty to the parties to apply for variation of the costs order on 3 days prior written notice to my associate.

Amendments 21 May 2014 - Walsh JA becomes Walsh J Amended paragraphs: 8 21 May 2014 - Line 3, part becomes party Amended paragraphs: 24 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 03 April 2014

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