The Plaintiff and the First Defendant entered into a loan agreement on 16 March 2015 whereby the Plaintiff lent to the Defendant the sum of $3.5 million. The loan was a short term one and expired in October 2015. Guarantees were given by Nadim and Wilhelmina Moujalli who were the principals of the First Defendant. They are the Second and Third Defendants.
Security was taken over four properties in New South Wales as follows:
(1) 8 Hawkins Street, Moss Vale owned by the First Defendant;
(2) 34A Hoskins Street, Moss Vale owned by the First Defendant;
(3) 36/14 Narabang Way, Belrose owned by the Second Defendant; and
(4) 1/32-34 Banksia Street, Dee Why owned by the Second and Third Defendants.
It seems that security was also taken over a property at 21/35 Bruce Highway, Edmonton, Queensland but its value is fairly negligible.
Default was made in repayment of the principal and the proceedings were commenced on 24 December 2015 seeking judgment for possession against the four NSW properties.
On 23 June 2016 the Plaintiff sought summary judgment in respect of the two properties at Moss Vale and the property at Belrose. Before that Motion could be heard the First Defendant entered into a contract to sell the property in Hawkins Street, Moss Vale on 11 August 2016 for $2.3 million. It does not appear that the Plaintiff objected to that sale and an arrangement appears to have been reached for a sum which has been described as the undisputed amount to be paid to the Plaintiff out of the proceeds of sale. The balance was then to be held in a controlled moneys account pending the final determination of the proceedings.
When the Motion for summary judgment came before me for hearing on 12 August 2016, after hearing argument, I indicated that I would not give summary judgment in respect of the Hawkins Street, Moss Vale property in case that resulted in the contract for sale not going ahead. I said that I was prepared to entertain the Motion in respect of the Hoskins Street, Moss Vale property and the Belrose property. In the event, there was no opposition to summary judgment being given in respect of those two properties.
The parties came before me on 16 September 2016. They had reached agreement that the undisputed amount that was to be paid to the Plaintiff from the settlement was $1,441,918.31. It was undisputed in the sense that the Defendants accepted that that amount was properly payable to the Plaintiff even if their Defence and Cross-Claim were wholly successful. The Defendants' cross-claim asserted that charges imposed by the Plaintiff were penalties and that the Plaintiff had engaged in unconscionable conduct and misleading and deceptive conduct in relation to the loans.
The Defendants sought that out of the balance after payment to the Plaintiff of the undisputed amount they should be entitled to $230,000 for past and future legal fees. The Defendants through their counsel informed me from the Bar table what the values on the remaining properties were said to be in order to show that the Plaintiff had sufficient security when those values were added to the balance in the controlled moneys account. I indicated that I thought the legal fees were very high and I was prepared to allow a sum of $150,000 for legal costs to be paid out of the balance in the absence of there being any valuation evidence on behalf of the Plaintiff to answer what the Defendants had put forward. I also made orders that the Defendants were to pay a monthly amount because they were receiving rents from the properties.
The orders concerning the proceeds of sale of Hawkins Street, Moss Vale were these:
a. the defendants must pay to the plaintiff from the settlement proceeds the sum of $1,441,918.31, being the amount that the defendants accept is properly payable to the plaintiff even if the defendants' defence and cross-claim are wholly successful; and
b. the defendants must pay the whole of the balance of the settlement proceeds (less the sum of $6,600 for conveyancing and the sum of $50,600 in respect of agent's commission and any statutory charges) and any moneys received as a deposit less the sum of $150,000 in relation to the sale of the property into a controlled moneys account for which the solicitors for the plaintiff and the solicitors for the defendants are joint signatories (and in respect of which no withdrawal or debit can be made without the signature of both parties).
My Associate was contacted on 20 September 2016 asking for the matter to be re-listed urgently because settlement was scheduled for 2:30pm the following day and an issue had arisen. The matter was listed on 21 September. There was no appearance for the Defendants. Their solicitors had emailed my Associate suggesting that they were not available on 21 September.
The Plaintiff sought an order amending the previous orders I made on 16 September omitting the words "less the sum of $150,000". That was said to be because the Plaintiff had valuations which suggested that a payment out of $150,000 to the Defendants for legal costs was likely to leave the Plaintiff unsecured in the event that the Defendants were not entirely successful on their Defence and Cross-Claim. Accordingly, I amended order 1(b) made on 16 September by deleting the words "less the sum of $150,000".
The matter came back before me for argument on 2 November 2016. On that occasion the Defendants relied on valuations they had obtained of the properties to suggest that the figure of $150,000 should be reinstated into the order so as to permit that amount to be paid out to the Defendants' solicitors for past and future legal costs. The Defendants' valuations had only been served two days prior. The Plaintiff sought an adjournment so that it could obtain valuations. In circumstances where both parties were aware that the principal issue to be determined on 2 November 2016 was the value of the other security properties and the Plaintiff had done nothing about obtaining valuations since 20 September I said that I was only prepared to adjourn the matter on the basis that $50,000 was released to the lawyers for the Defendants immediately and I would then consider whether any further sum should be released when the Plaintiff's valuations were available. It was in those circumstances that the matter came back before me on 14 December 2016.
What was put forward by the Plaintiffs could not accurately be described as valuations. They were said to be a review of the valuation in each case that the Defendants had put forward in November 2016. There was nothing to indicate, for example, that the author of the document had inspected the properties or had inspected them since earlier valuations performed in March 2015. Rather, an assessment of comparable sales had been made and a figure arrived at on that basis and on the earlier inspection.
A comparison between the valuations on either side can be shown from the following table:
Property Plaintiff's valuation (forced sale) Plaintiff's valuation (market value) Defendants' valuation
34A Hoskins Street, Moss Vale $275,000 $340,000 $545,000
36/14 Narabang Way, Belrose $150,000 $190,000 (est $150,000)
1/32-34 Banksia Street, Dee Why $590,000 $735,000 $920,000
21/35 Bruce Highway, Edmonton, Queensland $25,000 $42,500 (est $25,000)
TOTAL $1,040,000 $1,370,500 $1,640.000
Less Mortgage to ANZ 31/324 Banksia Street, Dee Why $411,888 $411,888 $411,888
Net maximum security $628,112 $895,612 $1,228,112
[3]
It should be noted that the Defendants had no valuation of the Belrose property. Counsel had informed me on 16 September that the Belrose property was probably worth $250,000. Since it is the Defendants' onus to show that the mortgagee will be secured by what is proposed, I have used the figures in the above table that were put forward by the Plaintiff without objection.
The amount due to the Plaintiff as disclosed on the ledger of the loan account (exhibit C) is $1,617,642.75. The amount in the Controlled Monies Account after payment out of the $50,000 is $748,235.61.
The Plaintiff estimates sale costs of the other security properties at $74,200 based on agent's fees of 3% and other costs of $25,000. I consider that a figure of $70,000 is appropriate for sale costs. That figure should be deducted from the final totals in the above table so that the respective figures are $558,112, $825,612 and $1,158,112.
If the amount in the Controlled Monies Account of $748,235.61 is added to each of those figures the security available is respectively $1,306,347.61, $1,573,847.61 and $1,906,347.61. Those figures do not take account of the Plaintiff's legal costs to the conclusion of the proceedings. Further, it may be seen that security would only be available (even allowing for the Plaintiff's legal costs) if the Defendants' valuations are accepted as being correct.
The Defendants criticised the documents put forward as valuations by the Plaintiffs for the reasons I have earlier mentioned. The parties accepted that I was in no position to judge between the valuations put forward by the Defendants and the review of those valuations put forward by the Plaintiffs. The Defendants, whilst urging that they were the only party to have put forward true valuations, accepted with the Plaintiff that the only reasonable way to proceed on an application such as the present was to take a mid-point between the valuations. If that was done the figures would be as follows:
34A Hoskins Street, Moss Vale - $442,500.
36/14 Narabang Way, Belrose - $170,000.
1/32-34 Banksia Street, Dee Why - $827,500.
21/35 Bruce Highway, Edmonton - $33,750.
Total - $1,473,750.
Less ANZ mortgage - $411,888.
Net maximum security - $1,061, 862
Less selling costs - $70,000
Total - $991,862
If that amount is added to the monies in the Controlled Monies Account the total security (excluding the Plaintiff's legal costs) are $1,740,097.61.
The Plaintiff submitted further that it was unlikely a judgment would be delivered in the proceedings for another 12 month period. That may be accepted as being correct since affidavits are only now being prepared by the Cross-Defendants in the matter. The number of parties and likely length of the proceedings makes a hearing date before July or August 2017 unlikely. The Plaintiff says that regard should be had to what will be due in December 2017, a figure of $2,272,118.53.
The Defendants say that it is inappropriate to take account of what the debt might be in 12 months' time. The Defendants submit also that there are obviously wrong aspects to the figures that go to make up the Plaintiff's total claim. For both those propositions the Defendants point to what is said in a number of authorities including Inglis v Commonwealth Trading Bank of Australia (1972) 126 CLR 161 and Clarke v Japan Machines (Australia) Pty Ltd (No. 2) [1984] 1 QdR 421.
In Inglis the Plaintiff sought to restrain the mortgagee from exercising its power of sale because the Plaintiff had a cross-claim for damages for a number of reasons against the mortgagee and it was said those damages would exceed what was owing under the mortgage. Justice Walsh said (at 164-165):
[13] A general rule has long been established, in relation to applications to restrain the exercise by a mortgagee of powers given by a mortgage and in particular the exercise of a power of sale, that such an injunction will not be granted unless the amount of the mortgage debt, if this be not in dispute, be paid or unless, if the amount be disputed, the amount claimed by the mortgagee be paid into court.
[14] The rule, as it affects the exercise by a mortgagee of the power of sale, is stated in the following terms in Halsbury's Laws of England, 3rd ed., vol. 27, p. 301:
"The mortgagee will not be restrained from exercising his power of sale because the amount due is in dispute, or because the mortgagor has commenced a redemption action, or because the mortgagor objects to the manner in which the sale is being arranged. He will be restrained, however, if the mortgagor pays the amount claimed into court, that is, the amount which the mortgagee swears to be due to him, unless, on the terms of the mortgage, the claim is excessive."
Then there is a reference to a special case where the mortgagee was the mortgagor's solicitor. The plaintiffs contend, however, that such a rule can have no application in this case, in which the action brought by them is brought to establish a claim that upon balance there is no debt due by them to the defendant, but on the contrary, there is a balance due to them. They contend that that action is not one in which they seek to maintain rights in the capacity of mortgagors.
[15] In my opinion, the authorities which I have been able to examine establish that for the purposes of the application of the general rule to which I have referred, nothing short of actual payment is regarded as sufficient to extinguish a mortgage debt. If the debt has not been actually paid, the Court will not, at any rate as a general rule, interfere to deprive the mortgagee of the benefit of his security, except upon terms that an equivalent safeguard is provided to him, by means of the plaintiff bringing in an amount sufficient to meet what is claimed by the mortgagee to be due.
[16] The benefit of having a security for a debt would be greatly diminished if the fact that a debtor has raised claims for damages against the mortgagee were allowed to prevent any enforcement of the security until after the litigation of those claims had been completed.
In Clarke G N Williams A-J dealt with the exceptions to the general rule laid down in Inglis as follows (at 422):
The general rule is no more than a particular application of the maxim of equity that "he who seeks equity to equity must do equity". Where the mortgagor is asking a court of equity to deprive the mortgagee of the benefit of his security (because, for example, the mortgagor has some counterclaim against the mortgagee) it is not unreasonable to require the mortgagor to pay into court the amount demanded by the mortgagee, or otherwise provide an "equivalent safeguard".
Meagher Gummow and Lehane, Equity Doctrines and Remedies (para. 316) suggest that there are two established exceptions to the general rule: (a) where the amount claimed by the mortgagee is obviously wrong; and (b) when there is a question as to whether the mortgagee's power has become exercisable at all. They rely in support of the first exception on the decision of the Court of Appeal in Hickson v. Darlow (1883) 23 Ch.D. 690. In that case the mortgage contended that the mortgagor must pay into court the whole amount he claimed. The Court of Appeal (Jessel M.R. Lindley and Bowen L.J.J.) rejected that argument. Jessel M.R. said (p. 694):
"the ordinary practice in cases between mortgagor and mortgagee was to be followed, namely, that on an application by a mortgagor to stay a sale, if the mortgagee swears that an amount which, consistently with the terms of the mortgage, may be due to him, is due, that is the amount which the mortgagor must bring into Court."
Lindley L.J. said that the court was not bound by the mortgagee's affidavit "if he swears that a sum is due which, according to the terms of his security, cannot be due upon it", (p. 695). In that case the Court of Appeal ordered that a lesser sum than that demanded by the mortgagee be paid into court. It is clear from that decision that the court is entitled to look at all the relevant facts in order to determine what amount, if any, should be paid into court.
Harvey v McWatters (1948) 49 SR (NSW) 173 at 174 seemingly approved some English cases that said the general rule may not apply where "the amount sworn to is obviously wrong". That matter was picked up by Hamilton J in Parist Holdings Pty Ltd v Perpetual Nominees Ltd [2006] NSWSC 599; [2006] NSWConv R 56-161 at [15].
The Plaintiff submitted that the present application was not the sort of application being discussed in cases such as Inglis. That submission appears to have been made principally to answer the Defendants' submission that certain matters on the ledger were obviously wrong and should be deducted so that the amount claimed is thereby reduced.
In my opinion, the present application is sufficiently analogous to the case of a mortgagor seeking to restrain a mortgagee's sale that the general principle enunciated by Walsh J in Inglis should apply. That, of course, is to the Plaintiff's benefit. The focus must be on protecting the mortgagee's position when the Defendants are asking for the indulgence of funds to be provided from part of the settlement proceeds of one of the security properties. The onus is on the Defendants to show that the mortgagee's position will be protected if the order sought is made.
In his written submissions counsel for the Defendants pointed to three matters which were said to be obviously wrong. They are:
(a) Early repayment interest charge;
(b) Balance of the establishment fee; and
(c) Lower interest rate charge.
In his oral submissions counsel referred to a fourth matter being the charging of a loan management fee after default.
[4]
(a) Early repayment interest charge
The Defendants say that when the Second and Third Defendants sold their home in late June 2015 the Plaintiff charged the loan account with a charge of 10% of the net amount it applied to reducing the loan principal. That was an amount of $181,000. It appears on the ledger on 26 June 2015. The ledger referred to clause 4.2 of the loan agreement to justify that charge. Clause 4.2 says this:
4.2 Early repayment
The Borrower may at any time prepay the whole or any part of the Secured Money before the Termination Date provided that:
(a) the Borrower gives the Lender at least 3 months' irrevocable notice in writing of the Borrower's intention to prepay;
(b) the Borrower makes repayment on the day specified in the notice and repays all money due and owing (including all accrued-interest on the amount prepaid and together with all outstanding costs and expenses); and
(c) no Event of Default has occurred.
The Defendants say that the Plaintiff waived the requirements regarding three months' notice and there was a prior event of default. The Defendants say that two contradictory explanations have been given for the charge and made reference to emails passing between the lawyers.
I cannot be satisfied that this charge is obviously wrong. Although clause 4.2 does not positively justify the charge, that may depend on whether the three months' notice was given as clause 4.2(a) provides or whether the requirement has been waived as is now asserted. Whether the three months' requirement was waived is a factual issue which I am not in a position to resolve on the present application. I do not consider that this matter falls within what is described as being "obviously wrong".
[5]
(b) Balance of the establishment fee
The Defendants say that when the First Defendant failed to repay the loan on the termination date an amount of $362,500 was debited to the account and described as "Balance of establishment fee". This was said to be something well hidden in the definitions in the loan agreement and not disclosed in the Schedule. It is said to be clearly a penalty in accordance with what the High Court said in Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28; (2016) 90 ALJR 835.
What amounts to a penalty is dependent upon an evaluative judgment by the Court. It may be accepted that the figure seems extremely high and may not ultimately be able to be justified by the Plaintiff. However, whether it can be justified or whether some smaller amount can be substituted can only be determined after the evidence is heard on the matter. Again, it does not seem to me that this falls within the description of being "obviously wrong".
[6]
(c) Lower rate of interest
According to the ledger interest was charged at the lower rate until the date for repayment of the loan. The ledger recorded that the lower rate was 1.33% per month. That would amount to an annual interest rate of 16%. The Defendants point out that the Schedule to the loan agreement identifies the lower rate at 8%.
Although one would ordinarily take an interest rate as being on a per annum basis unless otherwise stated it is not clear beyond doubt in the present case that that is so here. The loan was for a six month period.
Although I have considerable doubts that 8% should mean other than on an annual basis the test is a demanding one to be "obviously wrong". In any event, it does not seem to me that the difference it would make to the total due would be material for present purposes. It was a charge levied on four occasions.
[7]
(d) Loan management fee
The basis for this complaint is that when Mr Scanlon for the Plaintiff swore an affidavit earlier this year for what was due to the Plaintiff the loan management fee of $7,000 had not been added for the months after the default. By contrast that fee appears in exhibit C on the present application which is the equivalent ledger of the account. The Defendants say that the only sworn evidence of what is due is contained in Mr Scanlon's earlier affidavit. The Plaintiff suggests that an error was made when the affidavit was sworn.
I am in no position to say whether the earlier affidavit annexed a schedule that was incorrect. However, the fact that that schedule was sworn as being correct at the time does not say anything about the entitlement to charge the loan management fee for the months following default if the loan agreement otherwise permits that. I do not consider that the inclusion of this loan management fee is obviously wrong.
The Defendants' challenges to the amount which must be secured fails.
However, I do not agree with the submission of the Plaintiff that regard may be had to what will be owing in 12 months' time when the matter may first be determined. Although the analogy with an injunction to restrain a mortgagee's sale is an imperfect one, the matter is, as I have said, concerned with protecting the mortgagee's security. What a mortgagor who seeks to restrain a mortgagee's sale until, perhaps, some cross-claim is determined, is being required to do is theoretically to redeem the mortgage at the time of the injunction by paying into Court what is due to the mortgagee at that time. As Walsh J made clear in Inglis, if there is a dispute about what that amount is, it is the amount claimed by the mortgagee. Nowhere is it suggested in the authorities that the amount must be such as to protect the position of the mortgagee at the future time when the cross-claim will be determined.
That point flows through to the question of legal costs also. The mortgagee's legal costs, in all likelihood, will be able to be claimed under the mortgage and, in that way, simply form part of what will be due to the mortgagee at the determination of the proceedings. I accept that they are not yet claimed on the ledger. However, those costs are not due at the present time and should not be taken into account.
By reason of the way the present matter has arisen, some allowance must be made for the fact that some or all of the security properties will be worth less than a market value estimate because a forced sale will be involved. I find it difficult to accept that a discount as high as 22.4% should be applied for a forced sale. The position cannot be tested on the present application and I am not prepared to accept that that is the appropriate discount.
Taking the valuation figures at the midway point there is a surplus from what is presently claimed by the Plaintiff of a little over $120,000 ($1,740,097.61 - $1,617,642.75). In my opinion, part of that amount should remain in the Controlled Monies Account against the risk that one or more of those properties, if sold, might need to be sold on a forced sale basis. I consider, however, that it would not be unreasonable in the circumstances for a further $60,000 to be released to the Defendants for their past and future legal costs.
Accordingly, I order that $60,000 is to be paid out of the controlled moneys account referred to in the orders of 16 September 2016 to the Defendants' solicitors.
[8]
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Decision last updated: 16 December 2016