Solicitors:
Malcolm McDonald & Co (Plaintiffs)
Mistry Fallahi (Respondent in the application)
File Number(s): 2018/91831
[2]
Judgment
On 16 December 2019, I delivered judgment ([2019] NSWSC 1810) ("earlier judgment") indicating that I would adopt the report of a referee, Mr Gregory Burton SC, in respect of the amount of interest and fees payable in respect of loan arrangements and securities involving Fearndale Holdings Pty Ltd (admin apptd) (recs & mgrs apptd) as guarantor and Consolidated Capital and Funding Limited ("CCF") as lender. Another entity, Australian Lending Investment Pty Limited ("ALI"), had acquired CCF's rights in that regard and had sought to vary the referee's report in the hearing before me. I also observed that the Court would make orders in accordance with the provisional view expressed by the referee as to the costs of the reference.
ALI had raised a further issue in the hearing before me as to the asserted right of CCF to recover costs of the reference under the mortgage documents. Although ALI did not expressly seek to have the Court determine that issue, it plainly came into issue between the parties, because Mr Ashhurst (with whom Mr Afshar appeared for ALI) submitted that ALI had a separate contractual entitlement to recover the costs of the reference under that mortgage documentation, and that right might impinge the orders that the Court should make as to costs. Mr Ashhurst also submitted that the referee had overlooked CCF's right to claim the costs of the reference pursuant to the terms of the mortgage documentation, which placed in issue the question whether such a right existed, and submitted that ALI was contractually entitled to its costs pursuant to the terms of the loan documentation.
I reviewed the terms of the documents on which ALI relied (at [47] of the earlier judgment) and also referred to Mr Ashhurst's reliance on an observation of Hodgson J in Project Research Pty Ltd v Permanent Trustee of Aust Ltd (1990) 5 BPR 97,341. I noted that:
"It is not immediately apparent why CCF's participation in a Court-ordered reference would properly be characterised as the enforcement of, or exercise of powers under the mortgage or guarantee, still less the preservation or maintenance of "Property" as defined in that mortgage, or the exercise of rights, powers or remedies under the guarantee."
I have no doubt that the proceedings and the reference at least related to disputes between the Plaintiffs on the one hand and CCF on the other as to claims made by CCF in respect of the mortgage. In its further submissions, ALI also submitted that the proceedings were commenced by CCF in order to oppose an exercise or attempted exercise for enforcement by CCF of its rights under a guarantee or mortgage, and the reference was the process by which the parties agreed to facilitate determination of amounts owing under the mortgage or guarantee. I also recognise, as the referee's report recorded, that CCF had taken steps to enforce its security by the appointment of receivers, and then an administrator, prior to the reference ordered by the Court and that may support ALI's contention that the costs of the reference are (or are in part) costs of the enforcement of, or exercise of powers under the mortgage or guarantee. It is not necessary to address a final view as to that question given the conclusions that I reach on other grounds below.
I also observed (at [49] of the earlier judgment) that:
"It seems to me that there are more fundamental difficulties with ALI's reliance on the principle expressed in Project Research Pty Ltd v Permanent Trustee of Aust Ltd above. The findings made in the referee's report as to CCF's claims in the reference to a 10% share of the sales proceeds of the land and to over $995,000 in fees claimed by associated entities, which are not contested by ALI, would support a provisional view that CCF had not acted "reasonably in stating the figure" for which it contended in the reference and had not determined that figure "bona fide and on reasonable grounds" and that its conduct of the reference amounted to "misconduct", in the sense noted by Hodgson J in Project Research Pty Ltd v Permanent Trustee of Aust Ltd above, and that would be sufficient to deprive CCF (and ALI as its assignee) of any contractual or wider right to the costs of the reference. Although ALI has already had an opportunity to lead such evidence and make such submissions as it wished in respect of this hearing, I will nonetheless allow it a brief further opportunity to make further submissions limited to that issue if it seeks to establish the contrary."
ALI took the opportunity to make further submissions as to that matter and, at my request, provided a copy of a bundle of documents referred to in its submissions. I will assume that those documents were either in evidence in the hearing before me or before the referee. I should make two preliminary observations as to ALI's further submissions, which relate to matters that are not addressed in them. First, ALI does not recognise either the statutory and regulatory environment in which CCF operated or the legislature's and the community's proper expectations of credit providers. It is sufficient, for present purposes, to note the identification in the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry of several norms of conduct, expressed in general terms, requiring participants in the financial services industry, including credit providers, to obey the law; not to mislead or deceive; to act fairly; to provide services that are fit for purpose; to deliver services with reasonable care and skill; and when acting for another, to act in the best interests of that other. That statutory and regulatory environment is plainly relevant to an assessment of the position taken by CCF in the reference.
Second, ALI's further submissions do not address the detailed findings of fact made by the referee in respect of the claims advanced by CCF in the reference. While I do not seek to provide a comprehensive summary, a brief sample will be sufficient to indicate the basis of the preliminary view that I expressed in the earlier judgment. The referee noted (at [146]) the absence of substantiation of the very high interest rates claimed by CCF on the loan which was, I interpolate, secured on very valuable property. The referee addresses (at [194]ff) a claim for a "management fee" of $5000 per month made by CCF and (at [224]) noted a significant discrepancy between time records on which CCF relied and time records of solicitors which did not have corresponding entries. That is not an insignificant matter, when a credit provider operating in the statutory context and subject to the expectations to which I referred above relied on such entries to support a substantial claim for fees and expenses against a borrower. In making that observation, I have not neglected the referee's finding, which was unchallenged in this application, that the management service fee charged by CCF was inherently reasonable.
The referee also addressed (at [237]ff) claims by two other entities associated with CCF for in excess of $750,000 including for litigation support. The referee noted the absence of substantiation of aspects of that claim or of any associated power in the mortgage or guarantee, inconsistencies in the documentation relied on to support those claims (at [243]) and unsupported claims for the costs of overseas travel by Mr Cassaniti (a person associated with CCF) made against the borrower (at [245]ff). He then turned (at 248]ff) to claims made by a business trading as "Lit Assist" also for litigation assistance and the deficiencies in the evidence supporting those claims. He also addressed (at [263]ff) a claim by CCF for 10% of the gross sale proceeds of the mortgaged land, based on no more than an asserted oral agreement.
In its further submissions, ALI acknowledged that the referee had made findings concerning a claim for a 10% share in sales proceeds and fees claimed by CCF's associated entities, but submitted that the referee had not found that those claims had no reasonable basis or that they were not made bona fide. It does not seem to me that it was necessary for the referee to reach any express finding as to that matter, given the issues which he was tasked to decide. It is necessary for me to address that matter where ALI had put it in issue in the hearing before me by contending that, inter alia, the referee had neglected CCF's contractual right to recover costs in reaching his preliminary view as to costs, and that I should have regard to that right in now making costs orders.
I also recognise that the referee had observed (at [189]) that, if the initial appointment of a receiver by CCF was invalid by reason of an excessive scope, there was no suggestion it was made in bad faith. That does not, however, provide any answer to the range of other claims advanced by CCF in the reference. It seems to me that the conclusions that the referee also reached as to the nature of the fees claimed by CCF and its associated entities, in extraordinarily large amounts, support the provisional view which I had expressed in my earlier judgment, that CCF had not acted reasonably in stating the figure for which it contended in the reference and had not determined that figure bona fide and on reasonable grounds and that its conduct of the reference amounted to misconduct in the relevant sense. ALI also submits that the referee's findings do "not amount necessarily to 'misconduct'" (my emphasis) on the part of CCF. The Court does not, of course, apply such a standard in finding relevant facts. On the balance of probabilities, and having appropriate regard to the serious character of such a finding, the extent of the overstatement of CCF's entitlements claimed in the reference, and CCF's inability to establish those amounts when put to proof of them before the referee, amounts to misconduct in the relevant sense.
ALI submits that "misconduct" that would deprive a mortgagee of its entitlement to costs is analogous to "misconduct" in the context of an indemnity costs order, and the focus is on the nature of the mortgagee's conduct, rather than the merit of the mortgagee's claims. It seems to me that those matters here overlap, where the making of many claims in substantial amounts that cannot properly be justified by evidence, when challenged, is a form of wrongful conduct, although it may also demonstrate a lack of merit of the particular claims. ALI submits, and I accept, that partial success or failure does not, without more, amount to misconduct, but that is not to the point where more than that is established here.
I also do not accept ALI's submission that there cannot be any reasonable contention that CCF's claims were not reasonably arguable or bona fide, because such a finding was not made by the referee. As I noted above, that issue has arisen in the application before me rather than in circumstances where the referee needed to make any finding in that respect. It is a matter for the Court to make that finding, so far as ALI has put that question in issue in respect of costs, on the basis of the unchallenged factual findings made by the referee in the report which the Court adopts.
For these reasons, I now reach, on a final basis, the provisional view expressed in paragraph 49 of the earlier judgment. It is not necessary to make any further order to give effect to that finding, where that finding binds the parties and underpins the orders that I will make to give effect to the provisional views expressed by the referee as to costs.
[3]
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Decision last updated: 20 December 2019