This is an action to recover principal and interest owing under of a loan agreement. By a written agreement entered into on 4 February 2020 the plaintiff agreed to lend to the first defendant $250,000 for a term of three months to be repaid on 3 May 2020. The agreement provided that interest would be prepaid on the date of the advance for the full term at the rate of 3% per month. When the loan funds were advanced, the plaintiff held back $22,500 on account of interest being 9% of the principal or 3% for each of the three months of the term. Establishment, expedition and legal fees were also held back from the advance.
Clause 9(b) of the schedule to the agreement had the effect that, in the event of default of repayment, interest would be payable on the outstanding balance monthly in advance from 4 May 2020 until repayment at 4% per month.
The second, third and fourth defendants executed the loan agreement as guarantors, promising by clause 8.1.2 "to pay on demand any amount which the Lender is entitled to recover from the Borrower under this Loan Agreement". The Loan Agreement was subsequently varied in respects that will be described shortly.
The plaintiff filed a statement of claim in September 2020 when the outstanding principal and accrued interest stood at $378,560. An amended statement of claim was filed on 12 April 2021. The first, second and fourth defendants filed appearances and a defence but on 25 October 2021, after the proceedings had been listed for final hearing today, their solicitor gave notice of having ceased to act. The third defendant has not filed an appearance or taken any part in the proceedings. All defendants were notified of the listing of the case for final disposition today. The defendants were called outside the courtroom at the commencement of the hearing but did not appear. The hearing of the action has proceeded in their absence.
In early May 2020, the first defendant sought from the plaintiff an extension of the term of the loan by three months to 3 August 2020. The plaintiff agreed to this, and also to a reduced interest rate for the further term, namely, 2.5% per month to be prepaid for the extra three months on 4 May 2020. It was further agreed that establishment and legal fees totalling $6,500 would be paid.
The second, third and fourth defendants as guarantors agreed to the extension on these terms. In the event interest of 2.5% per month was paid in mid-May for the month of May and in late June for the month of June. The plaintiff accepted those payments and has taken no issue with the failure of the Borrower to satisfy the interest obligation for the whole extended three month term from 4 May to 3 August by a pre-payment of interest in advance on 4 May.
On 2 July 2020 further variations were made by agreement between the plaintiff and all defendants. The amount of the loan was increased by an additional advance of $100,000. It was agreed that the enlarged principal of $350,000 would be repaid on 3 November 2020. It was further agreed that interest at 2.5% per month would be paid for three months in advance. Establishment and legal fees were also to be paid.
The plaintiff accepted payment of the interest for the first month following the increase in the loan amount, namely $8,750, being 2.5% of $350,000. This was paid on 7 July. No interest has been paid since that date. The original obligation of the first defendant as Borrower to pay interest at 4% monthly in advance, compounding monthly, in the event of any default has remained a term of the Loan Agreement undisturbed by the subsequent variations as to duration of the loan and as to the total amount of principal. As a result of the defendants having made no further payments since 7 July 2020, the balance owing to the plaintiff now stands at $655,543.20 including the most recent interest instalment that fell due on 3 November 2021.
Judgment for that outstanding balance will be entered against all defendants and interest at the rates prescribed under the Uniform Civil Procedure Rules (2005) will accrue on the judgment sum from 3 December 2021.
The first, second and fourth defendants pleaded in their defence that the original interest rate of 3% per month and the varied rate of 2.5% per month were, in each case, unconscionable. This may have been intended to support a claim for relief under the Contracts Review Act 1980 (NSW) but no facts have been pleaded to engage that legislation nor have the first, second and fourth defendants tendered evidence, as would be necessary. The Court has heard no submission in support of the pleading of the alleged unconscionable level of interest at 3% of 2.5% per month.
The first, second and fourth defendants also pleaded that the default rate of 4% per month compounding is penal and unenforceable. Again, no facts are pleaded let alone substantiated by evidence to sustain that contention. Presumably the penal element intended to be alleged is the difference between 2.5% per month and 4% per month during the term of the loan and then the whole rate of 4% per month which is to be charged after the expiry of the term. After expiry of the term there is no agreed "lower rate" of 2.5% because the principal is supposed to have been returned to the plaintiff.
It is well settled that the onus rests upon the party asserting that a provision is a penalty to prove its case in that respect: Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28 at [167] (Gageler J). The principles according to which the Court assesses whether a contract term such as the default interest provision in this case is a penalty are collected and summarised in the judgment of McDougall J in Arab Bank Australia Limited v Sayde Developments Pty Ltd (2016) 93 NSWLR 231; [2016] NSWCA 328 at [69] to [76]. It is clear from those principles that in a case such as the present, the first, second and fourth defendants could not discharge their burden of showing that the default interest rate is unenforceable as a penalty without pleading and proving facts concerning the circumstances of the loan and of the Lender's business. The defendants would have to prove facts that would throw light upon the relationship between the high rate of default interest, on the one hand, and, on the other hand, the cost to the Lender of not obtaining prompt repayment.
Such evidence would particularly have to address the cost of funds to the plaintiff in the business that it carries on. There would have to be material before the Court to show the rate of return that the plaintiff is able to obtain in the market for its financial services.
There would have to be evidence to show that the level of returns capable of being derived by the plaintiff upon redeploying funds when a loan is repaid to it would not be so great as to justify charging to the Borrower in this case an interest rate of 4% per month for default of repayment. Without such evidence the Court cannot form any view about whether the high default rate in the present case, including the marginal difference between 4% and 2.5%, is extravagant or commercially unnecessary or unconscionable. There is no basis, in the absence of evidence, upon which the Court could reach a conclusion that the 4% rate is stipulated in terrorem of the Borrower, or that it is otherwise not a genuine covenanted pre-estimate of the loss that would be sustained by the plaintiff in the event of default in repayment of principal such as has occurred.
In any event, the defendants have not provided any submission which would assist the Court to understand how they could sustain an allegation that the default interest rate is a penalty without evidence. Nothing has been advanced before the Court that would cause it to refrain from entering judgment for the plaintiff as earlier indicated.
Accordingly the orders of the Court are:
1. Judgment for the plaintiff against the defendants in the sum of $655,543.20.
2. The judgment is to Bear interest at the rates prescribed by the Uniform Civil Procedure Rules from a date not earlier than 3 December 2021.
3. The defendants are to pay the plaintiff's costs of the proceedings.
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Decision last updated: 12 November 2021