National Australia Bank v McCarthy

The underlying transaction

1. In 2005 the defendant owed money to St George Bank. That year he refinanced the loan or loans with the NAB, which paid out the defendant's liability to St George Bank (an amount of $753,540.11) on 22 August 2005, and granted a mortgage over the Property to the NAB. At that time the loan from the NAB was structured as follows: Type of loan Amount Variable rate home loan $250,000 Fixed rate interest only loan $400,000 Business mortgage combination $100,000 Business mortgage overdraft $3,540.11

1. In 2005, in support of his application for refinance, the defendant provided to the NAB information as to his income to support a capacity to repay the loan as well as his assets. The evidence is not complete as to the information provided but the documents relied upon by the defendant show that he provided material to the NAB which substantiated the following: 1. The defendant's residential security (which comprised three residential properties referred to below) was worth $1.55m (according to the defendant) and $1.24m (according to the NAB valuation); 2. In the 2005 financial year the defendant's business, Coffs Forklifts, earned (or could be expected to earn) a net profit before tax of $70,218 and paid tax of $5,172; 3. According to the verified Customer Particulars report, the defendant owned three residential properties, two in Korora (the Property and a property in Rowsells Road) and one in Coffs Harbour (which was developed into two units in Boultwood Street), as well as a forklift, a tipper and a tilt tray; 4. According to the verified Customer Particulars report, the defendant's net monthly income comprised $1,250 by way of rental income and $5,818.33 of "total self-employed income"; 5. The defendant verified the Customer Particulars on 16 August 2005, being the date on which he apparently signed the document.
2. The defendant subsequently defaulted on the loans. He sold his assets to repay the NAB. In 2006 he sold his forklift. By contract dated 31 August 2007 he sold the Rowsells Road property for $280,000, which settled on 5 October 2007. The net proceeds were paid to the NAB on that day. On 12 October 2007 he sold one of the Coffs Harbour units for $245,000.
3. Subsequently the arrangements between the plaintiff and the defendant were restructured by agreement in 2008 as follows: Type of loan Amount Fixed rate home loan $597,000 Business options interest only loan $130,000 National flexi-account (settlement funds) $210,197.55

1. In March 2009 the defendant sold the second Coffs Harbour unit for $290,000. On settlement the net proceeds were paid to the NAB. There was still a deficiency. The defendant admitted before me that has not paid any money to the NAB since 2014.
2. On 26 September 2103 the NAB served a notice of default on the defendant. On 5 November 2013 the NAB served a notice to occupier in respect of the Property. By letter dated 20 November 2013, the defendant's then solicitor, Mr Parisi, wrote to the NAB foreshadowing a summons to set aside the mortgage on the grounds of misleading conduct, details of which were not given.

Additional evidence at the hearing relied on by the defendant

1. At the hearing before me the defendant relied on his tax return for 2005 which indicated that he had made a loss of $712. In his tax return he described his main business activity as "building, house construction". This tax return also disclosed that he owned a property (apparently a residential property in Coffs Harbour) from which he derived rental income.
2. The defendant also relied on a document dated 13 July 2014 entitled "Forensic Report" prepared by Paddy McCormick from a firm called "Accountants and More". This report contains various comments by its author, and also by Terry Murphy, a director of Accountants and More, about the lending.
3. The defendant also relied on a document dated 12 December 2013 from Aussie Home Loans confirming that it refused his application for finance in 2005 because he would not have been able to service a loan and his business was a start-up business. The letter concluded: "Even without the increase requested, it was also impossible to show any benefit to you in refinancing the existing St George loan, as any refinance or new loan would have attracted a higher rate. It would have been against our ethics to put you in a worse position rate wise, as well as putting your other two properties at risk should any lender call in their loan."
4. There are also copies of documents entitled "WARREN McCARTHY TRADING AS COFFS FORKLIFTS/ PROJECTED CASH FLOWS FOR YEAR ENDED 30 JUNE 2006". One such cash flow shows total cash received of $73,126 and net cash flow (after tax) of $44,074 (which was apparently prepared by Glenn Desmond, the defendant's then accountant). Another, for the same period, shows total cash received of $80,376 and net cash flow of $60,218.

These proceedings

1. The NAB commenced these proceedings by statement of claim filed on 7 January 2014 seeking judgment for possession of the property and judgment for $683,069.85. The NAB's solicitor subsequently notified the defendant's solicitor of a proposed application for default judgment if the defence was not filed in time. As no defence was filed, the NAB sought and obtained default judgment on 28 February 2014.
2. The defendant moved by motion dated 5 March 2014 to have default judgment set aside. The application was heard by Hall J on 26 November 2014. At the hearing before Hall J, the defendant relied on an affidavit of his solicitor sworn 18 March 2014 in which he admitted that he had not attended to the filing of the defence because of other work commitments. The defendant terminated his solicitor's retainer by notice dated 21 November 2014.
3. Justice Hall dismissed the motion on 19 December 2014 on the basis that the defendant had not shown that he had an arguable defence: National Australia Bank v McCarthy [2014] NSWSC 1819.
4. The defendant applied for leave to appeal the decision of Hall J. While his application was still pending, he sought, and on 24 February 2015 was granted, an interim stay by the Court of Appeal (Basten JA) as well as leave to issue a subpoena to the NAB which was returnable on 16 March 2015. The defendant did not pursue his application for leave to appeal. Instead, he made another application to set aside the default judgment. That application was heard by Hamill J, who dismissed the application on 16 June 2015 on the basis that the defendant had not shown that he had an arguable defence on the merits: National Australia Bank v McCarthy [2015] NSWSC 731.
5. Accordingly, in so far as the defendant pressed his application to set aside default judgment in the present application, this is the third occasion on which he has sought to do so. In order for such an application not to amount to an abuse of process, it was necessary for the defendant to identify matters that were not raised previously.
6. As the defendant represented himself, I allowed him some latitude in outlining his defence. Although at least some of the matters raised before me were also raised before Hamill J, I will address the arguments he made before me in writing and orally. It was, in any event, not submitted by Mr Price that I ought not do so by reasons of their re-agitation being an abuse of process although that submission was made, on behalf of the NAB, in respect of the application generally.

Consideration

1. The relevant principles are well known. A default judgment may be set aside in the interests of justice but will generally only be set aside if the failure to file a defence in time is explained; there has been no undue delay by the defendant in moving to set it aside; and the defendant has an arguable defence on the merits: see the summary of the authorities in Dunwoodie v Teachers Mutual Bank Ltd [2014] NSWCA 24 at [43]-[46] per McColl JA.
2. As no point was taken by the NAB about delay or the reasons for the default judgment being entered, the only substantial basis for setting aside the default judgment or granting a stay was that the defendant had an arguable defence on the merits. In order to establish and arguable defence on the merits, it is generally necessary for the defendant to adduce some evidence of the facts relied upon in support of the defence. Hodgson JA said in Magnate Projects Pty Ltd v Youma Constructions (No 2) Pty Ltd [2005] NSWCA 331 at 52: "In my opinion, an applicant seeking to set aside a judgment obtained after an undefended hearing does not have to show that a different result is likely should the judgment be set aside and a new trial ordered. However, the circumstances may be such, as Jordan CJ says, as to require "a reasonably clear case of merits to be shown"; that is, that it appear reasonably clearly that there is a defence capable of producing a different result. If that defence depends on facts, then there should be some evidence of those facts; and the circumstances may be relevant to the quality of the evidence that is required to show a defence on the merits in particular cases. Among such circumstances could be the degree of the applicant's default, and hardship to the respondent."
3. The defendant relied on the following to establish an arguable defence on the merits: 1. the NAB ought not to have lent him money in 2005 since he had no, or insufficient, income to repay the loans; 2. his lack of income amounted to a "special disadvantage"; 3. the NAB engaged in "asset lending" and therefore ought not be permitted to recover the money; 4. the NAB created a false document by transposing his signature on a document purporting to verify particulars as to his income that he had provided when it knew that he did not have income of that magnitude; 5. the NAB was in breach of the Code of Banking Practice (the Code) and in particular its obligations to: 1. act fairly and reasonably in a consistent and ethical manner towards the borrower; and 2. exercise the care and skill of a diligent and prudent banker in forming an opinion about the borrower's capacity to repay the loan. 1. The doctrine of subrogation did not apply as the change in arrangements in 2008 was a restructure, not a refinance.
4. In support of submissions (1)-(3), the defendant relied on Elkofairi v Permanent Co Ltd [2002] NSWCA 413 in which the Court of Appeal found that, in the circumstances of that case, it was unconscionable for a lender to lend money to someone whose income was such that repayments could not reasonably be met from income and default would necessitate sale of that person's only asset. He also relied on Perpetual Trustee Company Ltd v Khoshaba [2006] NSWCA 41 where the Court of Appeal considered asset lending and considered that such a practice might be unjust, at least where the security was the sole residence of the borrower.
5. The defendant relied generally on the Contracts Review Act 1980 (NSW). He also referred me to National Australia Bank Limited v Smith [2014] NSWSC 1605, in which Slattery J set aside mortgages and guarantees, in part, pursuant to the Contracts Review Act.
6. In support of submission (5), the defendant relied on a decision of Elliott J in National Australia Bank Ltd v Rice (No. 2) [2015] VSC 147.
7. Mr Price contended, on behalf of the NAB, that not only had the defendant failed to establish an arguable defence on the merits, but that it would be futile to set aside the default judgment since the NAB would be subrogated to the rights of St George Bank against the defendant as the NAB loan repaid the loan to St George Bank. He relied on Burston Finance v Speirway Limited [1974] 1 WLR 1648 and Bofinger v Kingsway Group Ltd [2009] HCA 44; 239 CLR 269.
8. I shall address submissions (1) - (3) together since each is based on the proposition that the NAB ought not to have advanced the funds to the defendant because he could not repay them.
9. I do not consider that the evidence adduced supported these allegations so as to give rise to an arguable defence on the merits. Indeed the evidence is largely to the contrary. In 2005, the defendant presented himself to the NAB as a builder/ bricklayer, who owned three properties (only one of which was his home) and had commenced a forklift business with a substantial cash flow (I will address the documents in support of this with respect to submission (5) below). He could therefore expect to receive income while he was also developing the other two properties for eventual sale. Furthermore the defendant, at the time of refinance, owed St George Bank the money which he subsequently borrowed from the NAB. He was, accordingly, in no worse position having refinanced with the NAB than he would have been had he remained as a borrower from St George (leaving aside the questions of the respective terms and interest rates).
10. The term "asset lending" is an ambiguous one since it may cover a range of situations from one where the borrower has no income to service a loan and only one asset, which is his or her own, and a developer who requires capital for a development, which will be repaid when the development is completed and the developed properties are sold. The first may give rise to relief as it did in Elkofairi v Permanent Co Ltd, whereas the latter is unlikely to.
11. The decision of Elkofairi v Permanent Co Ltd turned on facts that are far removed from the present case. In Elkofairi v Permanent Co Ltd the appellant was found to be in a special position of disadvantage as she had no income and a large borrowing, which was secured over her only asset. This was apparent to the respondent from the loan application form and sufficient to put the respondent on notice of the appellant's lack of capacity to meet the mortgage repayments and thus of the unconscionability of the transaction. However, in the instant case, the documents provided to the NAB supported the serviceability of the loan. There is nothing in the NAB's documents that indicates that there was anything speculative or risky about the loans from the NAB's point of view.
12. Although there appeared to be an inconsistency between the defendant's tax return for 2005 and the documents provided to the NAB, it does not appear that the former was provided to the NAB in 2005, or that the NAB had any reason to doubt the veracity of the information the defendant provided as to his financial position. I do not propose to address specifically the other authorities relied on by the defendant referred to above. They are factually distinguishable and do not assist the defendant.
13. The documents tendered do not indicate the various agreements that were reached between the NAB and the defendant between August 2005 (when the St George Bank debt was refinanced by the NAB) and 2008 (when the NAB restructured the debt) as set out above. It appears that further monies must have been advanced by the NAB, since assets were sold to reduce the debt. There is no indication that this amounted to accommodation which might absolve the defendant from the responsibility of repaying the monies borrowed.
14. Submission (4) amounts to an allegation of fraud. The only basis put forward to substantiate the allegation is that the figure recorded for the defendant's income from Coffs Forklifts was said to be higher than the figures set out in the two cash flow statements in evidence. Although the defendant conceded that the signature apparently verifying the customer particulars appeared to be his signature, he alleged that a bank officer had copied the signature and constructed it from other documents.
15. I reject the allegation. It was not appropriate that it be made. Although allowance must be given for litigants in person, this Court ought not be used as a forum for scurrilous and unsubstantiated allegations. The defendant's accountant prepared one of the cash flow statements in evidence. It is reasonable to infer that the other was prepared by the defendant himself. There is a substantial variance between the one prepared by the defendant's accountant and the other cash flow. It appears that the cash flow statement that formed the basis of the figures in the NAB's records was derived from a cash flow statement prepared by the defendant and that he was prepared to sign the particulars as accurate at the time on the basis of that cash flow statement. I reject the suggestion, which I regard as mischievous, that a bank officer scanned documents after copying the defendant's signature in order to make it look as if the defendant's income was higher than it was.
16. Submission (5) depends in large measure on the earlier submissions. The defendant has failed to identify an arguable basis for the proposition that the NAB has behaved in breach of the Code with respect to him. However, in any event, even if a breach were established, it would not necessarily be actionable: National Australia Bank Ltd v Rice [2015] VSC 10 at [192] - [217] and [240]; National Australia Bank Ltd v Rice (No. 2) at [16] per Elliott J.
17. I reject submission (6) made by the defendant that the description applied to the alteration of the structure of the facilities in 2008 has any bearing on the availability of subrogation to the NAB. Strictly speaking, what occurred in 2005 was a "refinance" since one creditor, the NAB, paid out another, St George Bank. In 2008 there was a "restructure" in that the NAB rearranged its loans to the defendant. None of this affects the substance of the NAB's entitlement to subrogation.
18. I accept the NAB's submission that the defendant's indebtedness to it arose from the indebtedness created in 2005 when it refinanced the defendant's debt to St George Bank. Accordingly the law of subrogation applies. The relevant principle, approved in Bofinger v Kingsway Group Ltd at [10], was expressed as follows by Sir John Romilly MR in Drew v Lockett (1863) 32 Beav 499 at 505-506 [55 ER 196]: "I am of opinion that a surety who pays off the debt for which he became surety must be entitled to all the equities which the creditor, whose debts he paid off, could have enforced . . . against the principal debtor . . . it would be, in my opinion, a violation of all principle if, when the surety pays off the debt, he were not to be entitled, as against the principal debtor . . . , to be paid the full amount due to him."
19. As the defendant did not challenge either the justness or enforceability of the loan from St George Bank, he cannot, in the circumstances of the present case, overcome the doctrine of subrogation since he obtained the benefit of the NAB's repayment of his indebtedness to St George Bank.
20. The defendant has not established an arguable defence on the merits. Accordingly, there is, in my view, no proper basis for setting aside the default judgment, on the basis of which the NAB is entitled to possession. The only basis on which the application for a stay of the writ of possession was sought was that the defendant could establish an arguable defence on the merits. Accordingly, it, too, must be refused. The prayer for relief that the defendant have the matter "fully dealt with by the Court" was also based on there being an arguable defence on the merits.

Alleged abuse of process

1. I entertained the defendant's application since it was not clear that all of the matters he had raised before me were raised by him before Hamill J. However, I accept that he essentially sought the same relief before me as he did before Hall and Hamill JJ and has provided no satisfactory explanation as to how this application differed from that brought before Hamill J (although he did explain that it was different from that brought before Hall J). In these circumstances it may be that the present motion amounted to an abuse of process.
2. However, rather than dismiss it on that basis, and because the NAB was prepared to contest the motion on the merits (although it also contended that the motion was an abuse of process), I dealt with it as a substantive application. I was influenced in part by the circumstance that Mr John was permitted to appear as the defendant's McKenzie friend on prior occasions. As referred to above, I did not permit Mr John to speak on the defendant's behalf at the hearing of the notice of motion before me.
3. Nonetheless, it would appear that there is a possibility that the defendant has had a greater opportunity, than that to which he was entitled, to establish an arguable defence on the merits. He has failed to do so.

Orders

1. I make the following orders: 1. Dismiss the defendant's notice of motion filed on 1 July 2015. 2. Unless an application for a different order is made to my Associate in writing within seven days hereof, order the defendant to pay the plaintiff's costs of the motion.

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