Ozzy Loans Pty Ltd v New Concept Pty Ltd & Zhong

Background Facts 5It is useful to provide a narrative of fact at this stage to provide relevant context. I did not regard the facts as hotly in dispute rather the real issue concerned the legal complexion that should be placed upon them. 6The origin of the dispute traces back to late November 2009, the time at which the second defendant caused the first defendant to be incorporated. The company, New Concept, was created to carry on the business of buying and selling mobile phones and related products. Mr. Zhong was its sole director and shareholder at that time.

The Share Sale Agreement 7In his affidavit of 5 April 2012 (the first Zhong affidavit), Mr. Zhong deposes to first meeting Mr. Giang in 2008. From about February 2010 to May 2010, Mr. Giang approached Mr. Zhong a number of times offering to purchase from Mr. Zhong a 51% stake in New Concept, for $30,000 (to be paid to Mr. Zhong). It was an additional term of the offer that Mr. Giang would take steps to introduce an additional sum of $20,000 as working capital. 8According to Mr. Zhong's evidence, which I accept, in about May of that year Mr. Giang reiterated his interest in New Concept in a telephone conversation between the two. A proposal was put forward in which two cars would be leased by the company using a chattel mortgage arrangement - one for Mr. Zhong and one for Mr. Giang, with each to cover their own expenses - and an outside investor, willing to finance the purchase of the majority stake, would be found (first Zhong affidavit pp3-4[7]). 9This offer was accepted and the pair placed orders on the cars, but Mr. Giang failed to find an investor. 10 In or about September 2010, Mr. Giang made a further proposal to Mr. Zhong. The crux of this arrangement was that Mr. Giang would himself purchase the 51% stake, and then on-sell it to an investor when one could be found. The arrangement involved the appointment of Mr. Giang as a director of New Concept, the transfer of 51% of New Concept to W.G & Son Pty Ltd (a company owned by Mr. Giang's father) as Mr Giang's nominee, and the payment of $30,000 to Mr. Zhong in one month, with the remaining $20,000 investment in the company to follow at a later stage. An investor, once found, was to replace Mr. Giang as director (first Zhong affidavit at pp 5-6[16]). 11Mr. Zhong accepted this offer, and in performance of his part of the bargain, on or about 17 September 2010, caused 51 of the 100 issued shares in New Concept to be transferred to W.G & Son (see Exhibit KSO-1 p60), as Mr. Giang's nominee. Mr. Giang was also appointed as a director of the company (first Zhong affidavit p6[16]). Mr. Giang never paid the purchase price, and the additional capital was never raised.

Other Loan Agreements 12Mr. Zhong further deposes that in around mid September 2010, shortly after the share sale agreement was made, Mr. Giang asked Mr. Zhong to loan him some money through New Concept. Mr. Giang explained that he had some personal debts with a man called Ernest Ma. He further claimed that although he had sourced some money to pay these debts, through a lender called Adam Wilson, there would be a small shortfall which could be borrowed from the company and then repaid a short time later following the sale of units purportedly owned by Mr. Giang in Carlingford, in north-west Sydney (first Zhong affidavit pp 7-8 [19]-[25]). 13Mr. Zhong also agreed to this request, and between 22 and 30 September 2010, three payments were made from New Concept to Mr. Giang for a total of $7873. 14Mr. Zhong also deposes that over the period 30 July 2010 to 14 February 2011, a total of six other miscellaneous payments were made by New Concept to various third parties at Mr. Giang's request, totalling $3,249.83 (first Zhong affidavit p8[25]; statement of cross claim 9[22]). 15Mr. Zhong also alleges that over the same period (30 July 2010 to 14 February 2011) he loaned Mr. Giang amounts totalling $16,844 and made 42 payments on Mr. Giang's behalf as he directed to various third parties (statement of cross claim p9[23]). But there is no narrative in the affidavit explaining the basis for these payments and I cannot be satisfied of the entitlement of the cross-claimants to these amounts. 16I find that the total of these miscellaneous loans is 11,122.83 in accordance with [21]-[25] of the first Zhong affidavit.

The Waitara loan agreement. The loan from Ozzy Loans. 17In or about late October 2010, Mr. Giang contacted Mr. Zhong with another business proposition. In his further affidavit of 12 April 2012 (the second Zhong affidavit), Mr. Zhong deposes that Mr. Giang claimed to be involved in a unit development project for about 112 units at Waitara, on Sydney's upper north shore (page 3[5]). Mr. Giang told Mr. Zhong that the units had been pre-sold, that there was no risk in the project, and that he would simply require some money for a short period to pay the deposit on the land. Mr. Zhong accepted the proposal. 18On the evidence before me, I am satisfied that the original terms of the contract were as follows: (1)Mr. Zhong would provide his home-unit as security for a loan, which was to be in the names of both Mr. Zhong and Mr. Giang; (2)Mr. Giang would provide his own house at 10 Hunter St, Auburn as security to Mr. Zhong in the event of any default on the loan; (3)The loan was to be for an amount of $76,000, for a term of three months. (4)Mr. Giang would repay the loan in full, including all interest and costs incurred in obtaining and maintaining the loan, as soon as his father could organise money transfers from overseas. 19In performance of their agreement, Mr. Giang then contacted George Hovan. Mr. Hovan is a business consultant who, relevantly for present purposes, then made arrangements with Wayne Sultan, a loan-broker of Nation Finance Pty Ltd, to find a lender. Mr. Hovan deposes to his involvement in his affidavit sworn 12 April 2012, read in the defendants' case. 20Mr. Sultan arranged for the loan to be provided by the plaintiff, through its director Kevin Steel (see Exhibit KSO-1 p1). Around the end of November 2010, Mr. Zhong phoned Mr. Steel at Mr. Steel's request in order to discuss the terms of the then proposed loan agreement. Mr. Steel gave evidence that this was his usual practice (tr 27.35). I am satisfied on the evidence before me that this was an in depth discussion, in which the terms of the loan were discussed at length, and which lasted between twenty and thirty minutes (tr p30.30, 76.25; second Zhong affidavit p10[16]). I am also satisfied that the plaintiff sought independent legal advice on the loan from Mr. Cam Ly, solicitor, in late November 2010, before signing the loan documentation (Exhibit KSO-1 pp44, 51, 53, 54, second Zhong affidavit page 12[18]). And that Mr. Zhong chose the solicitor. He had dealt with him before. 21Mr. Zhong deposes that shortly before the loan documents were to be signed, Mr. Giang informed Mr. Zhong that he would have to resign as a director of New Concept and have himself removed from the loan documentation as a guarantor. The reason given was that his poor credit rating and multiple aliases would cause the plaintiff to reject the loan. Mr. Giang suggested that he temporarily resign as a director, and then resume his appointment once the loan had gone through, and told Mr. Zhong that these changes would not impact on Mr. Giang's earlier offer of security. Strange as this may seem, I accept that Mr. Zhong agreed to this course and that the terms of their contract was varied accordingly. It was because of this variation that Mr. Zhong put himself forward to the plaintiff as the sole guarantor of the loan sought from the latter. 22Mr. Zhong then submitted a signed loan application form, together with a signed indicative letter of offer to Mr. Steel on 25 November 2010 (KSO-1 pp4-9, 34-36). 23A few days later on 29 November 2010, the mortgage agreement, registered number AG213288J, was executed. The plaintiff is listed on the mortgage as lender, the first defendant as borrower, and the second defendant as guarantor (KSO-1 pp75-77). Mr. Giang is not a party to the agreement and is not listed as a guarantor. A caveat was lodged over Mr. Zhong's home-unit in order to protect the plaintiff's interest (KSO-1 pp 57-58). It is common ground that the loan moneys were actually advanced on 3 December 2010, so that the repayment was due on 3 March 2011, rather than 28 February 2011, the date stated in the mortgage. 24The mortgage documents incorporated the terms of a registered memorandum, AE400237K, set out in KSO-1 pp78-153, comprising 450 clauses. Clause 435 provides that the Borrower will pay to the Lender the total amount outstanding of the Debt on the Loan Repayment Date. Also relevant for present purposes is clause 167K, in the following terms: 167. All of the Debtors shall be immediately in default of all the Agreements without the necessity for any notice or demand upon the occurrence of any of the following Events of Default... (k) If any Debtor fails to pay on the due date for payment any part of the Secured Monies, or any interest or other monies payable at the time and in the manner provided by the Agreements 25The loan was in the sum of $76,000, from which $21,000 was taken as deductions and fees, with the balance ($55,000) paid to New Concept. New Concept advanced that sum to Mr. Giang, in turn. The term of the loan was three months, with interest calculated at 120% per annum simple interest, reducing to 72% per annum simple interest if re-paid on time (KSO-1: p34, indicative letter of offer; p89-cl.129 of the mortgage). 26There was some debate before me about whether the terms of the mortgage permitted, as matter of interpretation, permitted "capitalisation" or compounding of the applicable interest rate. Although I am getting ahead of myself, this was said by Mr. Foley to represent an aspect in which the mortgage was "unjust". I should note here, whilst discussing the interesting rate, that the plaintiff, through its Counsel, Mr. O'Brien, made the following undertaking to the Court: No compounding has occurred in the calculation of the plaintiff's claim represented in MFI 1, and it will not charge compound interest in the future for the purpose of the calculation of the debt due under the mortgage (89.5 - .15T).

Mr. Steel's Evidence 27The evidence suggests that Mr. Steel and the plaintiff were not privy to most of the events predating the execution of the mortgage. Mr. Steel denies being approached by either Mr. Giang or Mr. Hovan in preparation of the loan, and states that he had dealings only with Mr. Sultan and Mr. Zhong for this purpose (affidavit of Kevin Steel sworn 27 April 2012 p2[5]-[6]). Mr. Steel also claims that his first contact with Mr. Giang was not until after default on the loan had occurred, and was in the form of a telephone call that he received from an unknown caller identifying himself only as 'Patrick' (p2[7]; tr 23.40). 28The contemporaneous evidence supports these propositions. It is certainly the case that the loan application was made in Mr. Zhong's name and signed only by Mr. Zhong (Exhibit KS-01 pp 4-9). Mr. Giang's name appears on the indicative letter of offer (Exhibit KS-01 p34), however it was removed before being signed by Mr. Zhong. I accept Mr. Steel's evidence. There is nothing about the contemporaneous material from which one would infer that the documents did not accurately reflect the legal nature of the contract between the plaintiff, on the one hand, and the defendants, on the other.

The Plaintiffs Claim 29As foreshadowed earlier in this judgment, the plaintiffs' claim is a relatively simple one. The evidence before me clearly establishes the existence of a registered mortgage agreement between the parties. It being clear that the agreement between the plaintiff and defendants for which the plaintiff contends was formed, and that default on that agreement has occurred, absent any conduct vitiating the contract, or giving rise to statutory or equitable relief, in my view, the plaintiff is entitled to the relief sought in the amended statement of claim. 30Although Mr. Foley submits on the cross claim that the defendants are entitled to relief in equity or under statute, I am not satisfied, for reasons that are fully elucidated below, that any of those claims has been made good. Accordingly the plaintiff's claim succeeds. Mr Foley accepts that if successful the plaintiff is entitled to an order for possession, but seeks a stay for a period of time before issue (114.40-50T). He takes issue with the amount of the indebtness, a matter to which I will return.

The Cross - Claim Against Mr. Giang 31It is convenient to deal first with the cross claim against Mr. Giang. In my view, the evidence outlined above establishes on the balance of probabilities that there was a valid contract for the sale of shares in New Concept, that no money was or has since been paid for those shares pursuant to the terms of the agreement and accordingly the second cross defendant is in breach of that contract and that Mr. Zhong is entitled to damages with interest. Interest should run from 17th September 2010, the date of the registration of the change in company membership: Exhibit KOS-1, p61. 32I am also satisfied on the balance of probabilities on the evidence before me that a valid agreement was made between Mr. Giang and Mr. Zhong with respect to the loan agreement with the plaintiff. In consideration of Mr. Zhong raising the funds from the plaintiff for his use, Mr. Giang promised to indemnify, and keep indemnified, New Concept and Mr. Zhong against the consequences of Mr. Giang's failure to repay the loan advanced by the plaintiff. I am further satisfied that Mr. Giang has not repaid any of the moneys owing to Mr. Zhong under that agreement and is therefore in breach, and accordingly the second defendant is entitled to damages against the second cross defendant in an amount equivalent to the debt due by the defendant to the plaintiff (see MFI 1). Given that the amount due to the plaintiff may not be fixed by my judgment, but may continue to mount by dint of the terms of the mortgage, damages are unlikely to be an accurate remedy and Mr. Zhong will be entitled to a declaration of right establishing his indemnity. 33In my judgment Mr. Zhong is also entitled to judgment against Mr. Giang in respect of the miscellaneous loans, as I will call it, in the sum of $11,122.83. Interest on that judgment should run from 14th February 2011, the date of the last advance, according to the first Zhong affidavit (page 8[25]). 34Having come to this view, it is not necessary to consider the other bases of liability advanced against Mr. Giang. The Cross Claim Against Ozzy Loans 35The cross claim against the Ozzy Loans is however a different story. The statement of cross claim is a lengthy document, in which the first and second defendants (second and first cross claimants respectively) deny their indebtedness on multiple grounds and seek various forms of relief setting aside, or at least modifying the terms of the loan agreement. Indeed, in the end, I understood the major thrust of the argument at the practical level was against the exorbitant rate of interest. 36During the course of hearing before me, the cross claimant conceded that of the myriad averments contained in the statement of cross claim, the substance of the claim against the Ozzy Loans distils down to three distinct arguments. These amount to a claim that the agreement be varied or set aside under the National Consumer Credit Protection Act 2009 (Cth), the Contracts Review Act 1980 (NSW) or in equity. As I have said, so far as the former were concerned in any event the emphasis, finally, was on variation of the interest rate.

Does the National Consumer Credit Protection Act 2009 (Cth) apply? 37The National Credit Code ("the code") is Schedule 1 to the National Consumer Credit Protection Act 2009. The cross claimant submitted that the Act and the Code apply to the provision of credit in this case. For this to be so, the requirements of section 5 must first be satisfied. The section is in the following terms: 5 (1) [Key elements] 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 precontractual obligations) is proposed to be entered into: (a) the debtor is a natural person or a strata corporation; and (b) the credit is provided or intended to be provided wholly or predominantly: (i) for personal, domestic or household purposes; or (ii) to purchase, renovate or improve residential property for investment purposes; or (iii) to refinance credit that has been provided wholly or predominantly to purchase, renovate or improve residential property for investment 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 carried on in this jurisdiction or as part of or incidentally to any other business of the credit provider carried on in this jurisdiction. 38This section must be read in the context of section 13, which outlines a set of presumptions relating to the application of the code: 13 (1) [Code presumed to apply] 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. (2) [Debtor's declaration as to purpose] It is presumed for the purposes of this Code that credit is not provided or intended to be provided under a contract wholly or predominantly for any or all of the following purposes (a Code purpose): (a) for personal, domestic or household purposes; (b) to purchase, renovate or improve residential property for investment purposes; (c) to refinance credit that has been provided wholly or predominantly to purchase, renovate or improve residential property for investment purposes; if the debtor declares, before entering the contract, that the credit is to be applied wholly or predominantly for a purpose that is not a Code purpose, unless the contrary is established. (3) [Credit provider's knowledge as to purpose] However, the declaration is ineffective if, when the declaration was made, the credit provider or a person (the prescribed person) of a kind prescribed by the regulations: (a) knew, or had reason to believe; or (b) would have known, or had reason to believe, if the credit provider or prescribed person had made reasonable inquiries about the purpose for which the credit was provided, or intended to be provided, under the contract; that the credit was in fact to be applied wholly or predominantly for a Code purpose. (4) [Ineffective declaration] If the declaration is ineffective under subsection (3), paragraph 5(1)(b) is taken to be satisfied in relation to the contract. (5) [Form of declaration] A declaration under this section is to be substantially in the form (if any) required by the regulations and is ineffective for the purposes of this section if it is not. ... 39The position with respect to the application of the Code is this. There is a presumption that the Code applies where that assertion is made: s13(1). The cross claim contains such an averment, and Mr. Foley maintained it in the course of argument. If this were all, the onus of rebutting the relevant statutory presumption of fact would fall on the plaintiff. 40However the presumption - and accordingly the onus of rebuttal - is reversed where a declaration is made by the debtor that the loan in question is not for a Code purpose: s13(2). Ozzy Loans tendered Exhibit 1, a document entitled Declaration of Purposes For Which Credit is Provided. The document is signed by Mr. Zhong, both in his personal capacity as guarantor and in his capacity as director of New Concept, and dated 29 November 2010. The document states that the purpose for which the credit was to be applied by Mr. Zhong was the purchase of a store, which I take to be a reference to stores or stock, which is a business (non-code) purpose. 41Once the s 13(2) presumption arises on the evidence, as in this case, it is for the party claiming the declaration is ineffective to make good their claim. That is, that party carries the legal onus of rebutting the statutory presumption. Mr. Foley sought to do this in two ways. 42First, by reference to s13(5) Mr. Foley sought to highlight two erroneous references within Exhibit 1 to former legislative instruments. Exhibit 1 purports to apply section 11 of the repealed Consumer Credit Code, and regulation 10 of the repealed Consumer Credit Regulations. The form also makes the following statement: By signing this declaration you may lose your protection under the Consumer Credit Code [my emphasis]. 43It is common ground that Exhibit 1 is in a form prescribed under the regulations to the repealed code. However for present purposes, s13(5) of the current code requires only that a declaration is substantially in the form... required by the regulations. That is a reference to the National Consumer Credit Protection Regulations 2010 (Cth), more specifically regulation 68, which sets out these requirements. Mr. Foley submitted on behalf of the defendants that the erroneous references were 'fatal' to validity of the declaration (tr 105.35). Mr. O'Brien submitted that the declaration was in substantial compliance with the requirements of the regulation. In my judgment the plaintiff's submission is correct; the declaration in Exhibit 1 - notwithstanding the misnomers described above - is in all respects substantially in the form required by the regulations, and is therefore effective for the purposes of s13(2) of the Code. The references to the former code do not alter the substance of the declaration. 44Mr. Foley also made a further submission on the basis of s13(3), to the effect that the first cross defendant knew or ought to have known that the credit was in fact to be applied wholly or predominantly for a Code purpose. In support of this submission reference was made to the fact that Mr. Giang's name appeared on the indicative letter of offer (Exhibit KS-01 p34), but was removed before being signed by Mr. Zhong. Mr. Foley submitted that this should have put the first cross defendant on notice to make reasonable inquiries, which would have revealed that the credit was in fact to be applied wholly or predominantly for a Code purpose. 45There is, with respect, very little force in this submission. Although inquiries might have been made by the first cross defendant about the reasons for the removal of any reference to Mr. Giang in the loan documentation, it is not apparent how such inquiries would have given the first cross defendant even constructive knowledge that the purpose for which the loan was really required was a Code purpose. Indeed it is difficult to see why, had enquiries of this kind been made, the person instigating any purported improper purpose would reveal that purpose. It seems to me more likely that such a purpose would have been denied in this scenario. 46Moreover, I interpolate, had the plaintiff made inquiries, and had they uncovered the information that the purpose of the loan was to enable Mr. Giang to advance in some way, not specified in the evidence before me, the Waitara project a Code purpose would not have been disclosed. The evidence about the Waitara project is at best sketchy. But it seems to have involved a large development or construction project. Even if one assumes the project was largely residential, pars.5(1)(b)(ii)-(iii) of the code are not in my judgment engaged. That matter is not covered by the concept of purchasing, renovating or improving a residential property. That concept seems to refer to an existing property. And to my mind to what might be called a "Mum and Dad" investment, not a major construction project. 47But more importantly, it apposite to refer in this context to the operation of the general law of contract, against the background of which the legislation currently in question was passed and now operates. When determining, as is required by the provisions of sections 5 and 13 of the Code, the intention for which the credit is to be provided as between the parties to the loan agreement, regard ought to be had to the objective intention of the parties. In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd & Ors (2004) 219 CLR 165 Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ said the following at 179 [40]: This Court, in Pacific Carriers Ltd v BNP Paribas, has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction 48Such considerations are in my view with respect highly persuasive in this context. To my mind a reasonable reader in the position of the parties at the time the contract was made would have concluded from the documents that the principal was not being loaned for a code purpose. 49One accepts that a claim for statutory relief may bring into play different considerations: Toll at 185 [57]. And s.13(3) makes the actual or constructive knowledge of the credit provider, here Ozzy Loans, a factor capable of rendering the declaration ineffective. To that extent, as Mr. Foley argued, the objective theory of contract is displaced and the parol evidence rule would not forbid the admission of extrinsic evidence to prove that the real purpose was a code purpose, or to establish relevant knowledge on the part of the lender: a lender may not turn a blind eye to a code purpose. But as I have said there is no satisfactory evidence capable of engaging that provision. 50Given my finding of the validity of the declaration, Exhibit 1, the presumption against the application of the Code in s13(2) applies in this case. To my mind, nothing in the evidence before me causes that presumption to be rebutted, and accordingly in my judgment the loan was not made for a code purpose pursuant to section 5. The result is that the National Consumer Credit Protection Act and the Code do not apply, and the relief sought in this part of the cross claim cannot be granted.

Does the Contracts Review Act 1980 (NSW) apply? 51My findings of fact above relating to the application of to s5 of the code have relevance to the cross claimants claim for relief against the first cross defendant under the Contracts Review Act. The relevant part of that act, s6(2), is in the following terms: 6 Certain restrictions on grant of relief ... (2) A person may not be granted relief under this Act in relation to a contract so far as the contract was entered into in the course of or for the purpose of a trade, business or profession carried on by the person or proposed to be carried on by the person... 52In my judgment the objective theory of contract applies to the fact-finding process relevant to the purpose for which the parties entered into the contract, or whether it was entered into in the course of a business. As I have said, in a different context, a reasonable reader in the position of the parties would infer that the loan contract was entered into for a business purpose, that is, the acquisition of stock for sale in New Concept's business. 53As I have made clear, the declaration in Exhibit 1 is, to my mind, evidence that the loan was made for a business purpose. Likewise Exhibit KSO-1 p4, which is the loan application form, and which states under a section titled loan purpose in detail the following description: Working capital into business - New Concept P/L to cover costs of buying mobile phone stock 54Indeed all of the evidence of the surrounding circumstances viewed objectively point to this conclusion. There is no material from which I would infer that Mr. Steel knew or should have known anything about the true purpose of the loan as discussed between Mr. Zhong and Mr. Giang. Mr. Steel impressed me as something of a hard-headed man of business. He followed his due diligence procedures faithfully. The documentation was not created to mask some other purpose. 55Even if the correct view were that the loan contract was entered into for the purpose of the Waitara project, I would conclude that this was a business purpose. It was clearly a venture the purpose of which was to produce a profit in an organised, methodical manner requiring entrepreneurial in-put from its promoter. 56The overwhelming weight of the evidence is in favour of the conclusion that the loan contract was entered into in the course of or for the purpose of a trade or business. It is unnecessary to say anything further on this aspect of the cross claim, save for noting that the legislation does not apply and accordingly the relief sought pursuant to its provisions cannot be given.

The cross claimants' case in equity 57The statement of cross claim sets out under the heading general equitable principles a range of matters which, it is said, give rise to equitable relief against the Ozzy Loans. The pleadings in this regard were, with respect, prolix in nature, and it was not clear to me from reading them that any specific principle of equity was invoked. In the course of argument before me, Mr. Foley clarified this by pitching his case as against the first cross defendant on the doctrine of unconscionability alone. 58There are however a number of problems with this submission. As a preliminary matter, the evidence before me makes clear that the cross claimant does not come to equity with clean hands. On his own evidence Mr. Zhong has not been forthcoming, as he had multiple opportunities to state what he now seeks to assert in this Court was the true objective of the loan agreement. He might have divulged the true purpose of the loan at the application stage (Exhibit KSO-1 page 4), prior to signing the declaration in Exhibit 1, to Mr. Steel in his telephone conversation prior to signing the loan agreement, or at any other stage prior to signing the mortgage agreement now in dispute. He has on the evidence before the Court been a party, albeit at Mr. Giang's instigation, to concealing what he now says is the truth of the matter about the purpose of this loan. 59Even were this not so; the more significant and in this case decisive factor telling against the grant of equitable relief is the failure to make good the assertion that the loan agreement represents an unconscionable bargain by reference to any identifiable principle of equity. 60As I understood the case propounded it would have been necessary for Mr. Zhong to demonstrate that he was in a position of special disadvantage, as required by the doctrine of unconscionability, vis-à-vis the lender. As will be seen, the cross claimant is unable to establish this crucial element in relation to the first cross defendant, and so equitable relief is not available against it. 61In Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, Mason J made the following remarks at 461: Historically, courts have exercised jurisdiction to set aside contracts and other dealings on a variety of equitable grounds. They include fraud, misrepresentation, breach of fiduciary duty, undue influence and unconscionable conduct. In one sense they all constitute species of unconscionable conduct on the part of a party who stands to receive a benefit under a transaction which, in the eye of equity, cannot be enforced because to do so would be inconsistent with equity and good conscience. But relief on the ground of "unconscionable conduct" is usually taken to refer to the class of case in which a party makes unconscientious use of his superior position or bargaining power to the detriment of a party who suffers from some special disability or is placed in some special situation of disadvantage... His Honour went on to point out at 462, the plaintiff must be placed at a special disadvantage. There can be no suggestion that any difference in the relative strengths of the position of each party will suffice. Moreover, it is also necessary that the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party. It is also essential that the other party seeks to take unconsciousness advantage ... of the opportunity thereby created. 62Gibbs CJ also said the following at 459, in the context of unconscionability: A transaction will be unconscientious within the meaning of the relevant equitable principles only if the party seeking to enforce the transaction has taken unfair advantage of his own superior bargaining power, or of the position of disadvantage in which the other party was placed [my emphasis] 63Likewise, Kitto J in Blomley v Ryan (1956) 99 CLR 362 at 415 made reference to a well known head of equity which - ...applies whenever one party to a transaction is at a special disadvantage in dealing with the other party because illness, ignorance, inexperience, impaired faculties, financial need or other circumstances affect his ability to conserve his own interests, and the other party unconscientiously takes advantage of the opportunity thus placed in his hands. 64In that case, Fullagar J at 405 said that the circumstances adversely affecting a party which may induce a court of equity to set aside a transaction are various and cannot be satisfactorily classified. His Honour pointed that [t]he common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-à-vis the other (emphasis added). However it is clear from what was said by Dawson J in Amadio at 489 that unfamiliarity with the English language may be one such circumstance. 65Stating the elements necessary for Mr. Zhong to make good his equity in this way demonstrates their absence in this case. There is no proof of special disadvantage, nor is there any proof of advantage being unconscientiously taken of the opportunity thereby created. 66Mr. Foley relied upon the conjunction of number of disparate factors to attempt to make good his argument. They included Mr. Zhong spoke English as a second language; the mortgage was a particularly long, difficult and complex document which Mr. Zhong had a limited opportunity to consider; Mr. Zhong was a victim of Mr. Giang's fraud; the lender's due diligence was inadequate; the lender was concerned only about the property value to the secure the loan, rather than the capacity to repay ("asset lending"). In this latter regard it was argued that it was almost a ruse or sham for the lender to refer to an "exit strategy" (32.20T). But it was not put to Mr. Steel that the process of assessment of the loan application he undertook was a ruse or sham. 67Both Mr. Steel and Mr. Zhong agree that they spoke on the phone for about 20 minutes to half an hour before the loan was approved: (30.30T); (76.25T). Mr. Steel formed the impression over the telephone that Mr. Zhong: Presented himself in a clear well spoken manner with a very good command of English and, indeed, very little residual Chinese accent at all. (27.25T) 68Mr. Zhong read the affidavits filed on behalf of the plaintiff in the English language. He received an explanation of the details regarding the affidavits from his solicitor in English. He is in business and whilst most of his customers are Chinese, he has a Chinese-speaking solicitor, Mr. Cam Ly, who explained the lease on his shop to him. He purchased a home unit at Hurstville in 2006 subject to a mortgage, the details of which were explained to him by a mortgage broker at the NAB Bank (43.5 - 44.5T). At 44.10T he gave the following evidence: Q. You understood at the time that you signed the loan and mortgage documents with Ozzy Loans that your flat was going to be used as security? A. Yes. Q. And you understood that if there was a default you might lose your flat? A. Yes. Q. That the lender, Ozzy Loans, could take possession of your flat if there was a default? A. Yes. Q. I suggest that any difficulty you may have in reading English isn't an obstacle to your understanding of what a mortgage is? A. I understand the mortgage, yeah. Q. And you understood the Ozzy loan mortgage when you signed it, is that correct? A. Yes. 69I will not recite it, but paragraph 16 page 9 to 11 of Mr. Zhong's affidavit of 12th April 2012 indicates that there is nothing in his own account which suggests to me that he had any difficulty communicating with Mr. Steel. 70At paragraph 18 (page 12) of the same affidavit, Mr. Zhong gives evidence of his interview with his own solicitor when the documents were signed. That interview took about half an hour (73.35T). During the course of it, the solicitor said: I advise you that this loan is charging a very high interest. You have to make sure beforehand that you can repay it, otherwise ... you will lose your unit as it is your unit that the loan is secured on. 71In any event at 47.40 - .50T, he gave the following evidence: Q. Do you agree that at that time you could have pulled out of this loan? A. You mean myself. Q. Yes, yourself? A. Yes. 72Mr. Zhong gave the following evidence at 61.5 - 25: HIS HONOUR Q. What pressure did you have at that time? A. At that time, no, because I was agree to help him on the money Q. Patrick. A. Patrick. Q. So the pressure was you felt committed to Patrick? A. Yeah. Q. Mr O'Brien's question is that so far as Ozzy Loans were concerned you could have said at any time up until the money was paid to you or at least until you signed, 'I don't want to proceed'. That's his question. Do you agree with that or not? A. Any time I can disagree to the loan? Q. Apart from the pressure you felt from Patrick you could have said to Ozzy Loans at any time up until you signed the document this is Mr O'Brien's proposition that I don't want to go ahead. Do you agree with that or not? A. Yes. Yep. 73It is certainly true that English is not Mr. Zhong's first language. It is also fair to say, on any understanding of it, that Mr. Zhong was naïve and gullible in his dealings with Mr. Giang. However this is a very different case to the kind represented by Amadio. In that case, the party seeking to overturn the bargain on grounds of unconscionability had no commercial background whatsoever, suffered from extremely poor English skills, and did not seek independent legal advice before entering into the impugned transaction. Furthermore, the party seeking to enforce the bargain was aware of those factors and also of information to which the other party was not privy about the precarious financial position of the person for whose benefit the loan was advanced. The party seeking to enforce the transaction therefore had knowledge of the inequality of bargaining power and special disadvantage thereby created, and was accordingly prevented from taking advantage of that knowledge. 74The present case however presents very different circumstances. Mr. Zhong is a commercial person, having owned and operated a mobile phone store in the central business district of Sydney for a number of years. It is also clear on the evidence that he sought and received independent legal advice of his own choosing. Furthermore, having had the benefit of observing the Mr. Zhong give evidence in Court, I have formed the view that he has a proficient command of the English language, and was not at any disadvantage on that score. 75The reality however is that any special disadvantage Mr. Zhong might have suffered was vis-à-vis Mr. Giang, rather than Ozzy Loans. I am not convinced that he was at such a disadvantage, but he certainly was surprisingly compliant in his dealings with Mr. Giang. 76In my view the evidence establishes that Ozzy Loans was not aware, and did not seek to take unfair advantage, of any vulnerability or special disadvantage. Indeed, the evidence which I accept is that Ozzy Loans had no knowledge that the money was intended for Mr. Giang; knew nothing of the Waitara project; dealt only with Mr. Zhong; and took multiple steps to ensure that Mr. Zhong understood the significance of what he was doing, notwithstanding any difficulties he might experience due to English being his second language. On that basis, as Mr. O'Brien argued, the case is a mirror reverse of Amadio. The party kept in the dark about the real purpose of the loan and the unsuitability as a borrower of the ultimate recipient of the loan was the lender. Accordingly, the elements of the unconscionability claim are not made out, and therefore the cross claimant is not entitled to relief on equitable grounds.

The Relief claimed by Mr. Zhong 77Had any basis for the cross-claim against Ozzy Loans succeeded, the substantial relief sought by Mr. Zhong was the reduction in the rate of interest. It was argued that I could, by reference to the permissible rate of interest for short term loans under the National Credit Code, reduce the effective interest rate to 24 per cent: S.6(1)(c) National Credit Code. Had I been otherwise persuaded, I would have been satisfied that this was a permissible approach. It seems to me that the interest rate fixed by an act of the Federal Parliament as the maximum appropriate in circumstances similar to the present provides some guidance. 78Mr. Foley drew my attention to a number of cases concerned with unjust contracts, where the court had exercised its powers to reduce the interest rate e.g.: Fast Fixed Loans Pty Ltd v. Samardizic [2011] NSWCA 260; Perpetual Trustee Co. Limited v. Khoshaba [2006] NSWCA 41; Kowalczuk v. Accom Finance Pty Ltd (2008) 77 NSWLR 205. As each of the bases upon which the plaintiff has sought to establish that the mortgage is unjust has failed, the question of the application of these authorities does not arise. 79Mr. Foley, as I have stated, also put some emphasis upon an argument that the mortgage in the present case was a form of asset lending. I am not satisfied that that is so, but in any event, I note that in Samardizic at [43] Allsop P said: "asset lending" is not a label or a legal frame of reference. The question is whether the contract is unjust or unconscionable for the purpose of consumer protection legislation or equity. Again, I have found the present contract is not unjust. 80To the extent to which Mr. Foley argues that the interest rate, itself, is sufficient to attract the intervention of the equity, the matter is covered by the decision of Young CJ in Eq. (as his Honour then was) in Takemura v. National Australia Bank Limited (2003) NSWSC 339 at [21] - [29]. None of the four categories identified by his Honour at [22] arises in this case on the findings I have made. I lay emphasis upon paragraph [24] which is in the following terms: It is usually not sufficient to show that a mortgage falls into the third class to show that the interest rate was much higher than one might expect. What must be shown is that there is unconscionable pressure on the mortgagor to enter into the arrangement. A mortgage given by a business person at a very high rate of interest, if that mortgage was freely and voluntarily given, will not be able to be attacked. Young CJ in Eq's third class was expressed as follows: Where the mortgagee has unconscionably exploited the necessity of the circumstances of the mortgagor to extort from his exorbitant terms for the loan (sic). The findings I have already made exclude this case from that category. Mr Zhong's cross claim against the plaintiff should be dismissed.

The Plaintiff's Relief. 81It follows from what I have said that the plaintiff is entitled to judgment with interest at the mortgage interest rate, subject to the undertaking it has given. It is also entitled to an order for possession. And I will give leave for the issue of a writ of possession, but I will accede to Mr. Foley's application to stay the issue of the writ for 28 days from the date of entry of final orders. The orders should include a note of the undertaking I have referred to already. 82Mr. Zhong is not entitled, in the event, to any relief against the plaintiff other than in respect of the fees set out in the indicative letter of offer which were not in fact incurred and in respect of the payments it has made. This is not by way of statutory or equitable relief but simply because the costs indicated were not in fact incurred by the plaintiff and therefore the retention of an amount on account of them, to that extent reduces the principal advanced. Each of the following amounts should be deducted before the calculation of interest: 83The amounts are: Legal fees/mortgage documentation $1,490.00 Insurances, taxes lodgements. (Only lodgement fees have been incurred: 116.0-10T; MFI 1) There is no evidence as to the amount of them but Mr. Foley conceded $261 (116.5T) I will allow$602.00 The application already paid $500.00 The amount of paid before the expiration of the term:$1,500.00

$4,092.00 The amount of the principle is therefore reduced to:$71,908.00 ( See 6.25-40T; 8.30-9.10T; 24.15-25T)

Relief to which Mr. Zhong is entitled against Mr. Giang 84As I have already stated, Mr. Zhong is entitled to judgment with interest on the agreement to transfer shares, the miscellaneous loans, and in respect of the loan made by the plaintiff. At this stage it is not possible to enter monetary judgment until the amount of the plaintiff's entitlements are calculated. I acknowledge that unless paid forthwith, the debt will continue to mount, and costs under the terms of the mortgage will need to be added to it. In these circumstances I will make a declaration that Mr. Giang is to indemnify Mr. Zhong and New Concept and to keep them indemnified in respect of the total amount of their indebtedness to the plaintiff. They can have liberty to apply to enter judgment in the final amount when it is ascertained. Mr. Giang should pay the plaintiff's costs of the proceedings including the costs incurred in defending the plaintiff's claim. 85My orders are, in the interim: 1.I publish my reasons. 2.I direct the parties to bring in short minutes of order in accordance with my reasons. 3.I stand the matter over to 10:00 a.m. on Friday, 27th July 2012 for the entry of final orders.

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: 23 July 2012