National Australia Bank Ltd v Sayed

The Defence of the Second Defendant 17The Second Defendant admits to signing the mortgage on 19 June 2006, she admits the entry into the 2 loan facilities and the advances by the Bank of the amounts of $500,000 and $430,000 pursuant to those facilities but she pleads that the mortgage and the loan facilities were not enforceable by reason of the unconscionable conduct of the Plaintiff under the general law and contrary to s 12CB ASIC Act , by reason of the misleading and deceptive conduct of the Plaintiff contrary to s 12DA of the ASIC Act and under the Contracts Review Act 1980. The particulars relied upon to support all of these claims include that the Second Defendant had no interest in the development site and received no benefit for the grant of a cross-collateralised mortgage over the residential property as security for the loan for the development site, that the Second Defendant did not obtain any independent legal advice at the time of entry into the Agreements, that the Second Defendant was subject to the direction and control of the husband the First Defendant, and further standard particulars that are set out in s 9 of the Contracts Review Act . She no longer relies on any illegality. 18The Second Defendant also says, in relation to the advance of the $430,000, that it was collateral to and formed part of the financial accommodation supplied for the exclusive benefit of the First Defendant relating to the acquisition of the development site. 19Finally, the Second Defendant pleads that the Plaintiff purported to exercise the power of sale over the development site, that the site was sold for approximately $535,000, that the sale was at an undervalue, and that the Plaintiff has failed properly to account to her in relation to that sale. 20The Cross-Claim effectively repeated the positive assertions in the Defence but, in addition, sought a declaration that the Plaintiff had acted in breach of its fiduciary duty to the Second Defendant (nothing was pleaded about that) and a declaration that the Plaintiff breached its duty of care in respect of the sale of the development site - although there was a pleading to that effect, there is no such duty on the Plaintiff under Australian law: Pendlebury v The Colonial Mutual Life Assurance Society Limited (1912) 13 CLR 676; Forsyth v Blundell (1973) 129 CLR 477 at 493. 21The Plaintiff submits that, because the second loan of $430,000 was simply a refinance of an existing loan the Defendants had with another financial institution, there can be no defence to the Plaintiff's claim to the extent of that refinance, said in round terms to be $430,000: Collier v Morlend Finance Corporation (Vic) Pty Ltd (1989) 6 BPR 13, 337; [1989] NSW ConvR 55-473. The Plaintiff submits that the only amount in issue is the additional burden of about $58,000 (remaining after the sale of the development property) as a result of the cross-collateralisation of the mortgage on that property. 22The Second Defendant submits that default only occurred as a result of the additional liability imposed upon the Second Defendant by the cross-collateralisation associated with the loan on the development property and the refinance of the home loan. The Second Defendant submits further that the unjustness associated with the transaction arose from the undue influence by the Bank and the First Defendant. I note that undue influence has not been pleaded in the proposed Defence and Cross-Claim apart from the standard particular extracted from the Contracts Review Act . 23The Second Defendant also claims to be entitled to set-off against any claim the Bank might have (even if only the $58,000 is in issue), amounts arising from the alleged breaches of duty of the resale of the development property. 24Care must be taken not to exalt the principle in Collier v Morlend Finance into an unyielding rule that entitles a Plaintiff to say that there is no defence to a claim to the extent that money was lent for the purpose of a refinance. The principle is one probably derived by analogy from the equitable principle that he who seeks equity must do equity: Collier at BPR 13,342. Further, the Court of Appeal made clear in St George Bank Ltd v Trimarchi [2004] NSWCA 120 that the fact that a lender discharged an earlier lender's debt is not conclusive and does not mean that relief has to be withheld to a borrower to that extent - see at [24] - [25]. 25The Collier principle establishes a prima facie position that the whole of the circumstances must be examined. An example of where the principle will not operate to its full extent is to be found in Trimarchi and in Bank of Western Australia Ltd v Tannous [2010] NSWSC 1319 where unjustness is able to be shown in relation to the loan that was paid out by the new lender. 26In the present case the position was that the First and Second Defendants had a loan in respect of the Woonona property of about $430,000 in June 2006. Thereafter, as a result of the borrowing of monies for the purposes of the development site the Woonona property became encumbered with amounts totalling $930,000 although $430,000 of that amount was used to repay the prior mortgagee. The Second Defendant's Defence, in substance, is directed to the circumstances of the obtaining of the two facilities totalling $930,000 and the signing of the mortgage over the Woonona property that secured those amounts. 27There is some evidence, albeit from the First Defendant, that he directed the Second Defendant to come to the Bank to sign the documents, that she obtained no independent advice, and she did not really understand what she was signing. That evidence is at least consistent with part of the Defence and Cross-Claim pleaded by the Second Defendant. 28This is an application by the Second Defendant for leave to file the Defence and Cross-Claim. The Plaintiff urges, in relation to this first aspect of the Defence and Cross-Claim (the circumstances surrounding the execution of the documents) that the Second Defendant ought not to be allowed to rely on the defences she raises because the matter is so clear in relation to the refinance. 29The Second Defendant suggests that if it had not been for the borrowing of the $500,000 the Defendants would not have defaulted under the home loan already in place. If that could be shown, and since the refinance took place at the same time as the further borrowing, an adjustment may be made to the amount for which the Second Defendant must give credit. Relative interest rates and other matters as between the Plaintiff and the prior lender may have to be examined: Mizzi v Reliance Financial Services Ltd [2007] NSWSC 37 at [42] 30In my opinion, it cannot be said that there is no arguable defence and/or cross-claim in respect of the matters raised by the Second Defendant. There is a very high probability, close to a certainty, that the Second Defendant will have to give credit for some benefit received by the payment out of the prior mortgagee, but precisely the extent of that credit can only be determined after all factual matters are aired at the hearing. Any consideration of the proposed defences by resort to the tests set out in General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 129 would result in a similar outcome. 31The Second Defendant is entitled to plead this defence in substance but should not be entitled to file the proposed pleadings in their present form. The pleadings appear to me to contain a number of problems, of which the following are the most obvious. I will deal first with the defences relating to the entry into the facilities and mortgage. 32First, to the extent that paragraph 3 of the Defence and paragraph 18 of the Cross-Claim pleads unconscionability under the general law there ought to be proper pleading in relation to the special disadvantage of the Second Defendant, the knowledge by the Plaintiff of that special disadvantage and the acting in an unconscionable fashion with that knowledge. Secondly, it is apparent that the particulars under paragraph 3 of the Defence contain a mixture of particulars that go well beyond unconscionability and appear to relate to other pleadings such as the Contracts Review Act , and misleading and deceptive conduct. 33Thirdly, if, as the solicitor for the Second Defendant asserted, undue influence is to be relied upon by the Second Defendant, it ought to be properly pleaded and not simply thrown in as a particular of unconscionable behaviour or any of the other matters raised in the Defence. 34Fourthly, although paragraph 4 of the Defence alleges misleading and deceptive conduct it does not plead such a cause of action properly or at all. It certainly does not do so by reference back to particulars in an earlier paragraph unrelated to misleading and deceptive conduct. 35Fifthly, if the Second Defendant wishes to assert that the Business Purposes Declaration is not enforceable (as paragraph 12 of the Defence appears to do) the matter needs to be properly pleaded. It is insufficient simply to refer back to the particulars contained under paragraph 3 because nothing in those particulars relates to the matters in s 11(3) of the Consumer Credit Code that suggests the conclusive presumption in that section does not apply. 36The second substantive aspect of the Defence and Cross-Claim relates to the exercise of the power of sale of the development property by the Plaintiff. Paragraph 29(c) of the Defence and paragraph 17 of the Cross-Claim wrongly alleges that the Plaintiff owed a duty of care to the Second Defendant. 37Further, it is asserted, without any material facts being pleaded, that the development site was sold at a substantial undervalue. When I endeavoured to obtain from Mr Luong for the Second Defendant at the hearing of the Motions what the true value was said to be, he asserted that it was $1 million plus. However, it became apparent that that figure had been chosen because of the way the loan had been structured when it was borrowed in 2006. How that was said to be a guide to the sale of the property some 3 years later where the Defendants themselves had been unable to achieve a sale for amounts considerably lower than $1 million was not made clear. At the present time it appears that the pleading concerning sale at an undervalue is an assertion without any material to support it. It is difficult to see, in the circumstances, how the certificate purportedly signed under s 347 of the Legal Profession Act 2004 could be properly signed. 38The proposed Cross-Claim has its own problem. I have already made reference to the claim for relief for breach of fiduciary duty although there is nothing pleaded in the Cross-Claim about breach of fiduciary duty. Paragraph 18 of the Cross-Claim refers to representations earlier pleaded in the Cross-Claim. When I asked Mr Luong where the representations were pleaded he first suggested they were in paragraphs 1-17, a matter that was self-evidently wrong. He then suggested that the "best" representation was contained in paragraph 8 which reads: On about 30 June 2006, the cross respondent made a "home loan" advance to the first defendant in the sum of $500,000.00 secured by mortgage over a development site and further secured by a purported cross collateralized security over the Second Defendant/cross claimant's residential property. That was said to be a representation by virtue of the characterisation of the loan on the development property as a "home loan". Nowhere is it asserted that by calling the loan a home loan the Bank was making a misrepresentation. Nor is it pleaded anywhere how the Second Defendant suffered loss by having acted on the basis of that misrepresentation. 39Further, the particulars under paragraph 18 which refers to representations and conduct of the Plaintiff which were said to be false, misleading and/or deceptive and unconscionable, merely repeat the matters pleaded and particularised in paragraphs 1-17. Since only a limited number of both paragraphs even set out things allegedly done by the Plaintiff, it cannot be the case that paragraphs 1-17 constitute particulars of representations, misleading and deceptive behaviour and unconscionable behaviour. 40Although, for the reasons I have given, I consider that the Second Defendant has an arguable Defence and Cross-Claim in respect of the claims made, because of the unsatisfactory history of the matter including a number of attempts to plead properly the Defence and Cross-Claim, the Second Defendant should be given one final chance only to file the Defence and Cross-Claim properly pleaded. This must be done within a limited time frame which I will stipulate.

The First Defendant 41The First Defendant raises defences of illegality, unconscionable conduct of the Plaintiff both at general law and contrary to the provisions of the ASIC Act , and misleading and deceptive conduct on the part of the Plaintiff. He also raises the unjustness of the contract under the Contracts Review Act and has an almost identical pleading to the Second Defendant's in relation to the alleged sale of the development site at an under value. (a) Illegality 42The particulars associated with the illegality are these: (i) The plaintiff represented that the first defendant and one Richard Robert Taylor engage in an apparent sale of the Development Site to the first defendant as sole proprietor for the purpose of facilitating the plaintiff entering into a loan facility agreement for the Development Site and the Residential Property. (ii) The plaintiff falsely characterised the loan in respect of the Development Site as a home loan when it knew that there was no residential property or any dwelling located upon the land. (iii) The plaintiff knew that the actual sale of the Development Site to the first defendant was only in respect of a half share in the sum of $500,000.00. (iv) The plaintiff knew that the first defendant and Richard Robert Taylor were joint venture partners in the development and owned the Development Site in equal shares. (v) The plaintiff knew that the apparent sale of the Development Site to the first defendant as sole owner in the sum of $1,500,000.00 was false. (vi) The plaintiff incited the first defendant to make a false income declaration to the plaintiff in order for the plaintiff to approve the first defendant's application, jointly with the second defendant, for loan finance in respect of the Residential Property and a further development site located at 267-273 Rothery Road, Corrimal, NSW ("the Development Site"). (vii) The plaintiff engaged in the conduct referred to above in the knowledge that the rights and obligations of the first defendant would be materially affected. 43The details of the alleged illegality appear in an affidavit sworn by the First Defendant on 22 August 2011. That affidavit discloses that the co-venturer in relation to the development property at Corrimal, Mr Taylor, had been the owner of the land for some time. The arrangement was that the First Defendant would purchase one half of the property for $500,000. By the time he approached the Plaintiff he had paid some of the money to Mr Taylor. 44He sought $500,000 from the Bank to pay the outstanding balance of the purchase price for the one half share and to use the balance to develop the site. Mr Taylor and the First Defendant estimated the value of the property to the Bank to be about $1 million. 45The First Defendant says that the officer of the Bank, Kylie Hancox, told him that the Bank would not provide loan finance due to the fact that the First Defendant was only acquiring a 50% share of the development site, and the Bank wanted the whole of the property as security. The Bank would not make the loan even if Mr Taylor was named as a borrower because he was unemployed. She said the only way the Bank would approve the loan advance was if the First Defendant and Mr Taylor agreed to structure the transaction so that the First Defendant was named as the sole purchaser and borrower of the whole development site. She said the Bank also required the Woonona property to be refinanced with the Bank. 46When told of this, Mr Taylor agreed. 47The First Defendant then informed Mr Taylor that he had spoken to his accountant who said that, from a tax effective point of view, it would be better if a price of $1.5 million for the whole of the land was shown on the contract of sale to the First Defendant. This would be so, even though there was increased stamp duty to pay on a price of $1.5 million rather than on $500,000. A contract was accordingly prepared. It is not suggested that the proper amount of stamp duty was not paid. This was said to be the first aspect of the illegality. 48Subsequently the First Defendant says that he received a phone call from Ms Hancox to say that the application for finance was not approved because his income was not high enough. She told him that that could be fixed if "he paid himself some more". He alleges she said "Just increase your income from $100,000 to $120,000". Accordingly, the First Defendant attended the Bank and signed a new Income Declaration showing an income of $120,000. The application for finance was thereafter approved. 49The First Defendant says that this behaviour on the part of the Plaintiff (and, it would seem, himself) contravened ss 192B, 192C, 192D, 192E, 192G, 345 and 351B Crimes Act 1900. In fact, of those sections, it is only ss 192E and 192G that create substantive offences. Sections 345 and 351B simply bring into the illegality abetters and accessories. The other sections are merely definition sections. 50The First Defendant submitted that the Plaintiff could not rely on a contract that is tainted by its own illegality. This submission was modified by suggesting that the authorities demonstrate that in certain cases the illegality can preclude enforcement of the contract by the party that engaged itself in illegal conduct. 51Even making the assumption that ss 192E and 192G were contravened (and there must be some doubt when, on the pleading, it is the Bank who is said to be involved and not a rogue officer acting outside the course of her employment, with the result that it is difficult to see how the Bank could be deceived), the authorities suggest that in a case like the present the Bank could not be precluded from recovering the money otherwise due to it and being able to enforce rights given by the mortgage. In the first place, the First Defendant cannot point to a statute which precluded the making of the contract of loan and mortgage. What the First Defendant appears to say is that a legal contract was tainted by illegality by reason of the way it was made. 52Yango Pastoral Company Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 concerned a loan made by a bank which did not have the authority to carry on the business of banking pursuant to s 8 Banking Act 1959 (Cth). The Bank had sought to exercise its powers under a mortgage when there was default by the borrower. The borrower pleaded the illegality associated with the Bank's not having the authority to operate as such. Whilst the principal consideration in the judgments was the proper construction of the prohibition in the Banking Act and whether the provisions of the Act were intended to avoid banking transactions, Mason J (with whom Aickin J agreed) went further and discussed the principle of ex turpi causa non oritur actio . As Mason J said (at 428), the suggested application of the ex turpi principle often involves a conflict between competing common law policies. He went on to say, in the context of how avoiding such transactions would be detrimental to depositors with the Bank: To hold the contract unenforceable at the suit of the plaintiff [the Bank] would be to provide a windfall gain to the defendants and other borrowers in a similar position, and, although indirectly, to impose substantial hardship on those who originally made funds available to the plaintiff. He went on to speak of the fact that Parliament has provided a penalty for the Bank's wrong doing which was a measure of deterrent. 53In a similar way, if criminal offences have here been committed, a substantial penalty is provided as a deterrent. 54In a similar vein, in Westpac Banking Corporation v Suzanne Bower [1996] ACTSC 21 Westpac had lent funds to purchase 2 properties which the borrower intended to operate as a brothel. At the relevant time brothels were illegal in the ACT. There was a default by the borrower and Westpac sought to enforce its mortgage. The borrower resisted on the basis that the contract of borrowing was illegal. Master T Connolly (as he then was) examined the authorities including the High Court's decision in A v Hayden [1984] HCA 67; (1984) 156 CLR 532 and the decision of the Full Court of the Federal Court in Barac v Farnell [1994] FCA 1389; (1984) 125 ALR 241, a case where a clerical worker in a brothel was injured in the course of his employment in the brothel. Connolly M then went on to say: [14] Applying this approach I do not see how justice would be done if a party to a commercial loan agreement is able to simply refuse to repay the loan by pleading that they themselves engaged in unlawful or immoral conduct. A prospective purchaser of a high performance motor vehicle could well enquire of its ability to travel in excess of 110 kph on the motorway, and yet they surely could not defeat a claim for the balance of the purchase price by pleading illegality. 55The First Defendant was not an innocent party in any illegality alleged. Indeed, he sought, and I agreed to give, a certificate pursuant to s 128 Evidence Act 1995 in respect of the evidence contained in his affidavit. To enable him to refuse to repay the loan because of the illegality to which he was a willing party would grant him a windfall, and would be out of all proportion to the illegality alleged - see also Farrow Mortgage Services Ltd v Edgar (1993) 114 ALR 1 at 18. 56In my opinion illegality should not be permitted to be pleaded. (b) Other defences 57It is necessary then to consider the remainder of the proposed Defence. 58First, it is difficult to see how by the First Defendant has any defence under the Contracts Review Act . The loan was obtained for the purpose of a development and section 6(2) of the Act would operate to mean that the Act had no application. 59Secondly, in relation to the plea of unconscionable conduct under the general law, as with the Second Defendant, there is no pleading of any position of special disadvantage of the First Defendant, the knowledge of such disadvantage by the Bank and the taking advantage of that position by it. Most of the particulars under paragraph 3(b), where the plea of unconscionability at general law is to be found, do not, in fact, relate to unconscionability. 60Thirdly, paragraph 3(c) alleges misleading and deceptive conduct but then proceeds to repeat particulars under paragraph 3(b) concerning unconscionability. It is not at all clear what the misleading and deceptive conduct is said to be, nor how it is that the First Defendant suffered damage by reason of that conduct. 61Fourthly, in paragraph 9 the First Defendant acknowledges having signed the Business Purposes Declaration in respect of the First Facility and says, somewhat inexplicably, that he denies it is enforceable because it related to the development site and did not relate to the residential property. I should have thought that the fact that it concerned the loan for the development property was the reason a Business Purposes Declaration was required to be signed. 62Fifthly, the pleading in paragraph 12 which appears to be defensive of the Second Defendant is not understood as a defence on the First Defendant's part. The fact is that the home loan for the Woonona property was refinanced by the Plaintiff and that was of benefit to both the First and the Second Defendant. 63Sixthly, material facts are not set out in support of the allegation that the s 57(2)(b) notice was not such a notice. In any event, the service of such a notice is not requirement before possession can be obtained: Long Leys Co Pty Ltd v Silkdale Pty Ltd (1991) 5 BPR 11,512. 64Finally, the same criticisms can be made in relation to the pleading about the exercise of the power of sale of the development property as were made of the Second Defendant's pleading in that regard. 65It seems to me that if the First Defendant has a defence based on unconscionability either at general law or under the ASIC Act , and a defence based on misleading and deceptive conduct (although that is more likely to amount to a cross-claim) the First Defendant ought to be permitted to plead those matters properly. There is an arguable case in that regard. Similarly, if the claim in relation to the exercise of the power of sale is properly pleaded that claim ought also to be allowed. (c) Cross-Claim 66The First Defendant also seeks to file a Cross-Claim which names not only the Bank as a cross-respondent (it ought to be cross-defendant) but also names the former co-venturer, Mr Taylor. I managed to ascertain with some difficulty from counsel for the First Defendant that the claim against Mr Taylor was intended to be a claim for contribution in respect of any amount the Bank recovers against the First Defendant. A perusal of the proposed cross-claim suggests something considerably more. For example, apart from claiming a large number of unnecessary declarations, the First Defendant seeks an accounting from Mr Taylor, damages pursuant to ss 68 and 72 Fair Trading Act 1987, equitable damages, orders for indemnity and restitution, orders setting aside the contract of sale and the mortgage between him and Mr Taylor and an order that Mr Taylor be estopped from making any claim against the First Defendant in reliance on the mortgage. 67It seems to me, in the first place, that the claims against Mr Taylor are so significantly different from the dispute between the First Defendant and the Bank that the claims against Mr Taylor should be pursued in a separate cross-claim in these proceedings or in separate proceedings against Mr Taylor. That in itself will require the filing of a new document because the claims against Mr Taylor are at times completely intertwined with claims against the Bank. This can be particularly seen in the particulars under paragraph 58. 68The claims in the Cross-Claim against the Bank, apart from the claim in relation to sale at an undervalue, are difficult to understand. It is said that Ms Hancox from the Bank made representations about the way the transaction would have to be documented but it is not said how it is that the First Defendant suffered any loss as a result of reliance on those representations even if it is accepted that they amount to misleading and deceptive conduct. Similarly, although it is understood that illegality and unconscionable conduct are pleaded against the Bank it is not said how the First Defendant suffered loss as a result of those matters. 69What is clear is that the Bank lent the money to the First and/or the Second Defendant as it agreed to do under the Facility Agreements. The First Defendant admits default (paragraph 36) but does not plead or suggest that the default was occasioned by any acts or omissions of the Bank. The default is said to have arisen from the financial difficulty experienced by the First Defendant in about mid 2008. The entry into the Facility Agreements and the mortgage were said to have been induced by unconscionable conduct and misleading and deceptive conduct but there is no allegation that as a result of those matters the First Defendant suffered loss and damage, nor is there any statement of how or why the First Defendant should be entitled to the damages and relief sought in the Cross-Claim. 70The claim that the Facility Agreements and mortgage were unjust under the Contracts Review Act is considerably confused by particulars dealing with acts and omissions of Mr Taylor. It is not stated how those acts and omissions are brought home to the Bank. In any event, there is the difficulty to which I have already referred in relation to the Contracts Review Act that the $500,000 loan would appear to have been obtained for business purposes. 71Whilst it cannot be said that there is no arguable defence for the First Defendant in relation to matters of unconscionability, and misleading and deceptive conduct (although the latter appears very slim) the present proposed pleading cannot be allowed to stand. 72What has now been put forward differs only in substance from the first Defence filed by both Defendants by the provision of some, but entirely unsatisfactory, particulars, and by the separation of the two Defendants, and the abandonment by the Second Defendant of an allegation of illegality.

Conclusion 73In my opinion, the Defendants should be given a further short period of time to provide the Plaintiff with any Defences and Cross-Claims properly pleaded and limited in the ways I have discussed earlier in this judgment. As I have said, the Cross-Claim against Mr Taylor is to pleaded in a separate document from the Cross-Claim against the Plaintiff. Given the lengthy history of the proceedings and the opportunities afforded to the Defendants to file proper pleadings, I consider that if any proposed pleadings are not in proper form for filing, leave should then be refused and the Plaintiff should be permitted to move for default judgment. 74Accordingly, I make the following orders:

1. The leave sought by the First Defendant in his Notice of Motion filed 31 August 2011 is refused.
2. The leave sought by the Second Defendant in her Notice of Motion filed 9 September 2011 is refused.
3. Any proposed Defence and Cross-Claim by either Defendant is to be served on the Plaintiff by 4pm on 15 December 2011.
4. Stand over the Notices of Motion and the proceedings for Directions to 31 January 2012 at 9:30am before me.
5. Reserve the question of costs.

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: 29 November 2011