Plaintiff v Defendants

For the Plaintiff/First Defendant by Counterclaim and the Fourteenth Defendant by Counterclaim

For the Third, Fourth, Eighth and Ninth Defendants by Counterclaim

The Fifteenth Defendant by Counterclaim observed in person and did not seek to be heard

1 There are two applications by summons before the Court. By an amended summons filed 20 July 2021, First Mortgage Capital Pty Ltd (ACN 150 210 736) ('FMC'), the second plaintiff by counterclaim, seeks:

(a) leave under r 2.07(1) of the Supreme Court (Miscellaneous Civil Proceedings) Rules 2018 (Vic) to apply for judgment in default of defence to the counterclaim against Choppers Noona Pty Ltd (ACN 117 391 849) (Receiver and Manager appointed), the tenth defendant by counterclaim ('Choppers');

(b) a declaration that it has an equitable mortgage on the whole of the land described in Certificate of Title Volume 08610 Folio 287 situated at and known as 8 Mulgoa Street, Brighton ('property') as security for the payment of $764,877.39 plus interest; and

(c) directions for the judicial sale of the property by FMC, subject to any exercise by the Commonwealth Bank of Australia ('CBA') of its rights as registered first mortgagee over the property.

2 Moody Aboughattas ('Moody'), the second defendant by counterclaim, seeks to amend his summons filed 13 July 2021 so as to seek:

(a) an order that Choppers be added as an additional applicant to his summons;

(b) an order for leave for Choppers to file and serve a notice of change of practitioner;

(c) an order extending the time for Choppers to file and serve a defence to the counterclaim;

(d) an order for leave for Choppers to file and serve a defence to the counterclaim;

(e) an order refusing leave to FMC to apply for judgment against Choppers in default of defence;

(f) an order that Moody have leave to file and serve an amended defence to the counterclaim;

(g) a stay of the hearing and determination of this proceeding, pending the hearing and determination of a complaint to the Australian Financial Complaints Authority ('AFCA'); and

(h) an order seeking the discharge of various caveats over the property, including FMC's caveat, on the grounds that they serve no practical advantage as no net surplus will be available to any encumbrancers after the first mortgagee.

3 On or about 28 March 2019, MW Assets Pty Ltd (ACN 607 579 699) ('MW Assets') entered a loan agreement with FMC, whereby FMC provided a loan of $2,052,314 to MW Assets. To secure the repayment of the principal sum advanced by FMC to MW Assets, plus interest on that principal sum, Choppers mortgaged its interest in the property in favour of FMC. The mortgage was unregistered. MW Assets went into receivership on 11 December 2019, and was placed in liquidation on 26 February 2020. Choppers was one of ten guarantors. In addition to Choppers' mortgage, the guarantors provided security by way of various other mortgages. In the counterclaim, FMC seeks to recover the amount which it contends is currently outstanding from the ten guarantors, with interest. It also seeks, among other things, the judicial sale of, and removal of caveats over, the property, and the possession of certain other properties over which it contends it has charges.

4 On or about 28 March 2019, MW Assets also entered a loan agreement with Oak Capital Mortgage Fund Pty Ltd (ACN 161 407 088) ('Oak'), the first defendant and first plaintiff by counterclaim, whereby Oak provided a loan to MW Assets. The loan was guaranteed by the same ten guarantors. In December 2020, Oak and FMC executed a deed pursuant to which Oak assigned its rights and interests in the loan agreement, and related rights and interests, to FMC.

5 The parties made comprehensive written and oral submissions. I will refer to the main points that were made.

6 FMC relied on the affidavits of Mohamud Ahmed, its recoveries officer, and Christopher Yam, its solicitor. They establish that Moody was the sole director of MW Assets when Choppers' mortgage was executed. He was also the sole director of Choppers, which is the registered proprietor of the property. The property is subject to a registered first mortgage in favour of CBA. Richard Albarran was appointed as the receiver and manager of property of Choppers on 4 February 2020. Mr Ahmed deposed that as at 4 March 2021, Choppers was indebted to FMC in the amount of $763,265.27.

7 FMC submitted that an unregistered mortgage of Torrens land is regarded as being in the nature of an equitable mortgage. Relying on Hycenko v VHY Enterprises Pty Ltd & Ors,[1] FMC submitted that:

(a) an order for judicial sale lies within the inherent power of the Court, and is available to an unregistered second mortgagee;

(b) the Court also has a similar power under s 91 of the Property Law Act 1958 (Vic);

(c) if a prior mortgagee or encumbrancer does not consent to a judicial sale, the sale would ordinarily be subject to payment out of its mortgage or encumbrance;[2] and

(d) the Court has a discretion and should exercise control over the terms and manner of the sale, including the reserve price, timing and conduct of the sale.[3]

8 Choppers' receiver has wide powers to execute documents, to bring and defend proceedings in the name of Choppers, and to appoint solicitors and advisers. He has appointed Kingston & Partners, solicitors, to act for Choppers and assist him. Choppers has filed an appearance but not a defence to the counterclaim. As determined by the receiver, Choppers consents to the relief sought by FMC in its amended summons. At the hearing, Choppers supported FMC's submissions.

9 If Moody, as the sole director of Choppers, were to be permitted to instruct solicitors to act for Choppers and defend the counterclaim, FMC submitted that he should indemnify Choppers against any liability for costs, and provide satisfactory security for the indemnity.

10 As to the merits of the counterclaim against Choppers, FMC submitted that, at the relevant time, Moody was the sole director and a shareholder of both MW Assets and Choppers. It was difficult to see how any form of unconscionability could arise, or how Choppers could require independent advice before providing a guarantee, given that both companies had common single directorship. FMC also submitted that an argument that the interest rate constituted a penalty was bound to fail, relying on the Queensland Court of Appeal decision in Kellas-Sharpe v PSAL Ltd,[4] and the New South Wales Supreme Court decision of Oxygen Funding Solutions Pty Ltd v Dick-Telfar.[5]

11 In relation to the complaint made by Moody to AFCA, FMC submitted that it was not a member of AFCA and was not subject to its determinations. However, Oak is a member of AFCA.

12 As to the defence to counterclaim proposed by Moody on behalf of Choppers, FMC submitted that essential material facts had not been pleaded. Particulars of the allegations of agency, partnership, and lack of independence had not been provided.

13 Moody submitted that a director was not necessarily prevented from causing a proceeding to be initiated and giving instructions to the solicitors on the record for a company under receivership.[6] In Deangrove Pty Ltd (recs & mgrs apptd) v Commonwealth Bank of Australia,[7] Sackville J held that if a satisfactory indemnity were given, a director had the power and authority to give instructions for a proceeding to be instituted by the company.

14 Moody submitted that it was not appropriate to require him to indemnify Choppers against any liability for costs or to provide security. It would be oppressive and might stifle the company's right to litigate. The disparity of resources between the plaintiffs and defendants by counterclaim was a significant consideration. Orders for security for costs were not ordinarily made against parties defending themselves, and thus forced to litigate.

15 Moody deposed that he was unemployed, and was dependent on Centrelink benefits and borrowings from friends and family. He had no significant assets. However, he was willing to provide an indemnity to cover Choppers' litigation costs, and the amount of any costs that Choppers was ordered to pay. If a condition requiring security for the indemnity were imposed, he would seek to borrow money from his extended family and friends. He believed he could do so in tranches corresponding with stages in the litigation. To begin with, he would ask for a payment of $50,000.

16 Safaa Aboughattas, the fourteenth defendant by counterclaim, is Moody's wife. She deposed that she had made substantial contributions to the purchase price of the property, which was her home and that of Moody. She said that she never expressed any intention of making a gift of her interest in the property to Choppers.

17 Kathryn Aboughattas, the plaintiff and first defendant by counterclaim, deposed that she had made a complaint to AFCA about the conduct of Oak and FMC. She was challenging an initial threshold determination by AFCA that it was unable to deal with a complaint against FMC. Kathryn also deposed that as a co-guarantor, she would be materially prejudiced by a judicial sale of the property. She contended that the borrower was never in default as alleged by FMC.

18 Moody, Safaa and Kathryn submitted that Oak and FMC failed to take adequate steps to ensure that Choppers and the other guarantors received adequate disclosure and independent advice before signing the guarantees and mortgages. They contended that Oak's conduct, including the imposition of a higher interest rate on default, constituted unconscionable conduct under s 12CB(1) of the Australian Securities and Investments Commission Act 2001 ('ASIC Act'). They submitted that although the ASIC Act provisions did not apply to FMC, similar provisions in the Australian Consumer Law ('ACL') did apply.[8] Sections 20 and 21 of the ACL addressed unconscionable conduct both within and outside of the unwritten law. They submitted that the relative strength of the parties' bargaining positions was relevant under s 22(1) of the ACL, and that the conditions imposed by FMC were not reasonably necessary for the protection of its legitimate interests. Among other things, they submitted that the terms giving the lender discretion as to whether or not to charge a higher or lower rate of interest pointed towards unconscionability.

19 Moody, Safaa and Kathryn submitted that the higher rates of interest charged by Oak and FMC were penalties and could not be enforced. Under the Oak loan agreement, the higher rate of interest was 18% per annum compounding. Under the FMC loan agreement, the lower rate of interest was 30% per annum and the higher rate was 60% per annum compounding monthly. Because of the large difference between the higher and lower rates, it was likely that interest attributable to the difference between the higher and lower rates under each agreement made up a substantial part of the amount claimed by FMC. They developed their submissions at some length by reference to authority.

20 Moody, Safaa and Kathryn submitted that it would be undesirable if judgment were enforced against Choppers while the same claims may fail against other defendants to the counterclaim.

21 As to a judicial sale, Moody, Safaa and Kathryn submitted that FMC could not be authorised to sell the interest of CBA in the property. There was no evidence of CBA's consent, and the amount owing was in dispute. The Court should know how much debt was secured by the property before any sale was ordered. It should order an account to be taken.

22 Moody also sought a stay on the basis that he had submitted a complaint to AFCA. Under the AFCA rules, a member cannot take enforcement action against a consumer if the consumer has lodged a complaint with AFCA. He contended that FMC, as an assignee of Oak, could not ignore the restrictions placed on Oak by reason of its membership of AFCA.

23 Stephen and Jennifer Kernahan, the third and fourth defendants by counterclaim, and Craig and Donna Bradley, the eighth and ninth defendants by counterclaim, made similar submissions. They submitted that the debt secured by the CBA mortgage over the property was approximately $9.6 million. There would be no surplus available to FMC following a judicial sale. They submitted that it might emerge that no money was owed to FMC, or much less than was claimed.

24 Brett Chalmers, the fifth defendant by counterclaim, noted that FMC claimed that Choppers was indebted to it in the amount of $763,265.67. His solicitors had served a notice to produce, calling for documents setting out the means by which that sum was calculated. FMC's loan statement of 7 August 2020 showed an initial advance approved of $1.9 million on 5 April 2019 and a yearly interest rate of 30%. Together with fees and interest, this amounted to $2,052,314. The statement also showed that as at 12 November 2019, there was an undrawn amount of $1,363,618.13. At that date, the balance of the loan was shown as reducing to $692,214.15. Interest of 30% per annum had been charged on the amount of $2,052,314, even though most of this money had not been advanced. Mr Chalmers' solicitor submitted that interest on interest had also been charged, and he estimated that an amount of $450,000 had been overcharged by FMC.

25 Eagle Financial Solutions Pty Ltd (ACN 007 276 075), the thirteenth defendant by counterclaim, submitted that $1.3 million of the loan had been retained, and it was doubtful that there had been any default.

26 CBA, the eleventh defendant by counterclaim, stated that the debts secured on the property as at 7 September 2021 amounted to $9,809,707 plus interest and costs.

27 CBA neither consented to nor opposed an order for the judicial sale of the property. It relied on the decision of Derham AsJ in Hycenko. The matters relevant to the exercise of the Court's discretion as to whether to order a judicial sale of security property included the setting of conditions for the protection of the first mortgagee.[9]

28 CBA submitted that if the Court were to order a judicial sale:

(a) FMC's authority to sell the property should be suspended if CBA exercised its rights under its registered mortgage;

(b) the reserve price should be fixed by the Court and be sufficient to cover the principal, interest and costs of the first mortgagee; and

(c) the sale proceeds should be allocated to repay debts owing to CBA which are secured against the property plus interest and costs, subject to the deduction of certain costs such as costs reasonably and properly incurred by FMC directly in connection with the sale of the property.

29 Moody has obtained a formal valuation of the property as at 10 August 2021. This shows the property to have a value of $6,750,000. I consider this valuation to be the best guide as to the value of the property for present purposes. FMC provided a low confidence estimate from property services of $7 million to $11.3 million. I prefer the formal valuation signed by qualified valuers obtained by Moody.

30 I conclude that if a judicial sale were ordered, the sale price is most likely to be significantly under the amount of $9,809,707 plus interest and costs owed to CBA. All settlement moneys from the sale apart from some expenses would be paid to CBA. No chargees would receive any funds from the sale.

31 It is well established that the appointment of a receiver to the assets and undertakings of a corporation does not strip the directors of all of their powers and duties. They remain in office, but have no power during the receivership over the assets in the possession and control of the receiver.[10] The board of directors of a corporation in receivership has residual powers to cause a proceeding to be taken in the corporation's name to enforce rights not comprised in the receiver's appointment or which the receiver does not wish to pursue. This may include a proceeding against the debenture holder and a proceeding challenging the validity of the debenture or charge pursuant to which the receiver was appointed. However, the directors will not be allowed to pursue actions which prejudice the legitimate interests of the receiver or the appointor, or which would impede the receiver in the proper exercise of his or her functions.[11]

32 In Deangrove, Sackville J held that where a company in receivership has a claim against the debenture holder and the receiver declines to pursue the claim, the directors are entitled to initiate and maintain a proceeding in the name of the company, provided that they offer the company a satisfactory indemnity against costs. The latter requirement is designed to ensure that the interests of the debenture holder are not prejudiced. It borders on the absurd to contemplate that a receiver would institute a proceeding in the name of the company against the debenture holder.[12]

33 As to whether security should be provided to support the indemnity, his Honour held that the governing principle was that those giving instructions on behalf of the company must demonstrate that nothing in the course of the proceeding to be instituted would threaten the interests of the debenture holder in any way. To achieve this, his Honour ordered that security be provided to support the indemnity if the company in Deangrove were to pursue its claim.[13]

34 In Ernst & Young (Reg) v Tynski Pty Limited, the Full Court of the Federal Court described the requirement that directors who initiate and maintain a proceeding in the name of a company to challenge the debenture under which a receiver was appointed must ordinarily provide the company with a satisfactory indemnity against costs as a requirement that exists for the benefit of the debenture holder.[14]

35 These authorities were considered and followed by Hetyey AsJ in Tred Nominees Pty Ltd (recs & mgrs apptd) v Albarran.[15] As the conduct of proceedings by a director in the name of a company in receivership might result in an order for costs being made against the company and thereby put the secured property of the company at risk, the right to continue the proceeding is conditional on the company being indemnified against any liability for costs.[16]

36 The principles stated in the authorities provide guidance to the Court in the exercise of its discretion to require an indemnity and, where appropriate, security.

37 The circumstances of this case are unusual and very different from those in the authorities to which I have referred. Here, the sole director of the company does not wish to bring a claim on behalf of the company at all. He does not seek to challenge the appointment of the receiver. Rather, he seeks that the company defend a counterclaim brought against it by a security holder which the receiver does not intend to resist.

38 This proceeding is brought by Kathryn against Oak and FMC, seeking, among other things, declarations that certain Oak and FMC mortgages involve unlawful penalties, and orders related to unconscionable conduct and undue influence. She contends that Oak and FMC did not take reasonable steps to ensure that she comprehended the full meaning, effect and risks of her signing a guarantee.

39 For their part, Oak and FMC counterclaim seeking judgment for the amount said to be owing against the first ten defendants to the counterclaim as guarantors. They seek orders for the judicial sale of the property, and for the removal of caveats lodged over the property by the other defendants to the counterclaim.

40 Most of the first ten defendants to the counterclaim raise, or intend to raise, similar issues in their defences to counterclaim to those raised by Kathryn in the statement of claim. Moody wishes to defend the counterclaim brought against Choppers on a similar basis. In so doing, he seeks to protect the assets of Choppers. He also desires to amend his own defence to counterclaim, which raises similar issues. If Choppers were to file the defence proposed by Moody, very little would change in terms of the issues in dispute at the trial, and the costs of the trial.

41 This proceeding was issued in late 2019. Pleadings are now close to completion and discovery has been provided by most parties. Moody and other members of the Aboughattas family are already witnesses who will need to provide witness statements, as is the employee solicitor of Mills Oakley who gave advice to the guarantors.

42 It will make very little difference to the overall costs of the proceeding to be incurred by Oak, FMC and the other parties whether Choppers defends the counterclaim or not. The existing parties already include Moody, Safaa and Kathryn in their personal capacities. Moody's evidence as a director of Choppers is likely to be little more extensive than his evidence would be at present, given his roles as the director of MW Assets, a defendant to the counterclaim, and a witness who might be able to speak as to the position of other guarantors. I do not expect that his evidence at the trial will take very long.

43 If Moody, as the sole director of Choppers, takes charge of the defence of the counterclaim, he will do so at his own cost, possibly using the same counsel as Safaa and Kathryn. While Choppers might be liable for Oak's and FMC's costs if the guarantors are unsuccessful in resisting the counterclaim, those costs will most likely be shared with all of the other parties who are advancing the same defences to the counterclaim. The costs incurred by Oak and FMC are not likely to be significantly increased by Choppers' participation as one of the defendants to the counterclaim.

44 I accept that there are serious issues to be tried as to whether the guarantees given by the defendants to the counterclaim are valid and enforceable, and as to the amount (if any) owed by the guarantors. The issues that have been raised by the defendants to the counterclaim need determination at trial, and are not suitable for summary determination. It is not in the interests of justice for judgment in default to be entered against Choppers before these issues have been determined.

45 I accept the submission that it is very undesirable for judgment to be entered against Choppers in circumstances where the other defendants to the counterclaim might be successful in whole or in part in their defence of the counterclaim. There is a significant risk of inconsistent results.

46 If Moody, as the sole director of Choppers, is to assume the defence of the counterclaim in its name, he will need to give an indemnity to Choppers for the costs of the litigation, and for any liability Choppers may incur for costs or otherwise as a result of his conduct of the proceeding.

47 Moody's evidence is that he is without significant assets in his own name, and is dependent on Centrelink benefits and borrowings from friends and family. He is prepared to provide an indemnity to cover Choppers' costs and the amount of any costs that Choppers is ordered to pay to any other party. He does not seek an indemnity from Choppers for such costs, except to the extent that an order is made in favour of Choppers against Oak and FMC.

48 If he is required to provide security in support of an indemnity to be given in favour of Choppers, Moody will be obliged to borrow the amount of the security from his extended family and friends. He believes that he can successfully do so, if necessary, in tranches corresponding with stages in the litigation, commencing with a payment into Court of $50,000.

49 Given that the costs that Oak and FMC will incur in the remaining pre-trial steps and at the trial itself will in all likelihood be incurred anyway in the existing proceeding, I consider that the payment of $50,000 into Court is an acceptable resolution of the need to provide security in relation to the indemnity to be given by Moody. Under s 7 of the Civil Procedure Act 2010 (Vic), the Court is required to facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute. While I could require expert evidence as to the amount of security, or refer the determination of security to an Associate Justice, that would not be a cost-effective course. It is not desirable to see the parties' limited resources expended in this way. The costs incurred in undertaking such an assessment might well be of the same order of magnitude as the amount of additional costs likely to be incurred by Oak and FMC if Choppers were allowed to defend the counterclaim. If it should later emerge that the amount of $50,000 is inadequate to meet the additional costs of Oak and FMC having regard to the manner in which Choppers has actually conducted its defence to the counterclaim, a further application can be made.

50 There are some other matters that should be mentioned. Moody seeks leave to file and serve an amended defence to the counterclaim, and has brought forward a proposed defence to the counterclaim on behalf of Choppers. These pleadings were criticised by Oak and FMC as lacking in material facts and particulars. The criticisms should be addressed before these pleadings are filed.

51 The final matter relates to the complaints made to AFCA. It is not appropriate to stay this proceeding while the complaints are under review by AFCA. If necessary, this matter can be raised later or at the trial.

52 In the circumstances, the Court will dismiss FMC's amended summons filed 20 July 2021. I will make orders amending Moody's summons filed 12 July 2021, so that it is generally in the form of the proposed amended summons, being Exhibit MA-7 to Moody's affidavit filed 13 August 2021. Subject to the provision of an appropriate indemnity and security by way of the payment of $50,000 into Court by a date to be fixed in the order, I will make orders substantially in the form of paragraphs 1 to 4 and 6 of the summons as amended, with the amended defences to be filed and served within 21 days of the filing of the notice of change of practitioner by Choppers.

53 I will not make the other orders sought in Moody's amended summons as these are not necessary, or are matters that can be addressed at trial. Liberty to apply will be granted.

OAK CAPITAL MORTGAGE FUND PTY LTD (ACN 161 407 058)

FIRST MORTGAGE CAPITAL PTY LTD (ACN 150 210 736)

OAK CAPITAL MORTGAGE FUND PTY LTD (ACN 161 407 058)

FIRST MORTGAGE CAPITAL PTY LTD (ACN 150 210 736)

CHOPPERS NOONA PTY LTD (ACN 117 391 849) (Receiver and Manager appointed)

COMMONWEALTH BANK OF AUSTRALIA (ACN 123 123 124)

EAGLE FINANCIAL SOLUTIONS PTY LTD (ACN 007 276 075)

[1] [2020] VSC 834, [33]-[48] (Derham AsJ) ('Hycenko').

[2] See also King Investment Solutions v Hussain [2005] NSWSC 1076, [95].

[4] [2012] QCA 371; [2013] 2 Qd R 233.

[5] [2020] NSWSC 582, [78]-[81] (Adamson J).

[6] Oswal v Burrup Fertilisers Pty Ltd (recs & mgrs apptd) [2013] FCAFC 9 ('Oswal').

[7] [2001] FCA 173; (2001) 108 FCR 77, 87 ('Deangrove').

[8] Competition and Consumer Act 2010 (Cth) sch 2.

[13] Ibid 88, referring to Charmae Investments Pty Ltd v Australia & New Zealand Banking Group Ltd (1991) ARPR 41-063, NEC Information Systems Australia Pty Ltd v Lockhart (Supreme Court of New South Wales, Brownie JA, 8 June 1990), Phillips Oysters Pty Ltd v National Australia Bank Ltd (Federal Court of Australia, Lockhart J, 13 November 1992) ('Phillips Oysters'), and Newhart Developments Ltd v Co-operative Commercial Bank Ltd [1978] QB 814 ('Newhart').

[14] [2003] FCAFC 233, [26].

[15] [2021] VSC 494.

[16] Ibid [29]; see also Phillips Oysters (n 13), Newhart (n 13), Deangrove (n 7) and Capital Globe Investments Pty Ltd v Parker Investments Australia Pty Ltd [2011] 2 Qd R 565.