Provident Capital Ltd v Naumovski & Ors

Provident Capital Ltd v Naumovski & Ors - [2011] NSWSC 270 - NSWSC 2011 case summary — Zoe

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The Relevant Pleadings 12Provident proceeds upon a further amended statement of claim which was filed on 15 February 2011. The pleading alleges that Mr and Mrs Naumovski borrowed the sum of $403,000 on 18 July 2007, pursuant to a Deed of Loan. It is alleged that Mr and Mrs Naumovski mortgaged the Wallsend property to Provident as mortgagee by way of security for the loan. That mortgage has been registered. 13The pleading goes on to allege that there has been default under the loan and appropriate notices have been issued, thereby giving rise to an entitlement in Provident to possession of the property, and also to a monetary judgment. 14The pleading also goes on to make allegations against a firm of solicitors, which allegations are in the alternative to those against Mr and Mrs Naumovski. There is no need to detail those allegations. 15By their defence, Mr and Mrs Naumovski deny that they entered into the Deed of Loan, deny that they mortgaged their property, deny that they were in any breach of the loan and provisions of the mortgage and deny that they are indebted to Provident. 16The defence goes on to plead that Mr and Mrs Naumovski were "... at all material times under a disability ." The particulars of that disability are as follows: "The defendants; a. had minimal education; b. were illiterate in both English and their native language Macedonian; c. were unsophisticated commercially and relied on others for advice as to what they were signing; d. had no intellectual capacity to understand the mortgage and loan documents; e. spoke and understood no English; and f. were retired and elderly." 17The defendants plead that they were not aware, or informed, that the documents executed by them related in any way to their financial or personal affairs, nor that they constituted a mortgage or a loan agreement. The defendants plead non est factum as a defence to the claim and deny that any liability is secured by the loan agreement. 18On 25 March 2010, Mr and Mrs Naumovski filed an amended first cross-claim against Provident in which Mr and Mrs Naumovski repeated certain allegations set out in the defence, and sought relief under the Contracts Review Act 1980 and in accordance with general equitable principles. Included in that cross-claim was the following pleading: "8. Further or in the alternatively [sic]: a) the cross-defendant failed to take any or any adequate steps to satisfy itself that the cross claimants had the capacity or attributes to repay the money secured by the mortgage; b) the cross-defendant failed to assess properly or at all whether the alleged purpose of the loan was bona fide considering the disability of the cross claimants referred to in paragraph 2 hereof; c) the cross-claimants received no legal advice in relation to the terms of the loan and mortgage; d) the cross-claimants received no benefit from the loan; e) the cross-claimants repeat paragraphs 2, 3, 4 and 5 hereof." 19It is to be observed from sub-paragraph (d) of paragraph 8 that Mr and Mrs Naumovski asserted that they had received no benefit from the loan. 20On 2 July 2010, Provident filed a defence to that amended first cross-claim. The defence generally put in issue the content of the amended first cross-claim but specifically replied to the allegation that Mr and Mrs Naumovski received no benefit at all with the following pleading: "8. In response to paragraph (a)-(e) of the Amended First Cross-Claim the Cross-Defendant: (a) ... ... (d) in answer to subparagraph 8(d) of the Amended First Cross-Claim the Cross Defendant says: i. that the loan the subject of these proceedings was advanced for the purposes of refinancing earlier loans and for the payment of associated fees and costs fees for which the first and second defendants were liable, in the following amounts: 1 Hamafam Pty Ltd 286,000.00 2 Baccus Investments Limited 28,421.01 3 Lawteal Second Pty Ltd 83,310.49 4 Drake Administration Services 990.00 5 R L Kreminizer & Co 11,156.13

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Further Pleadings 24There are further pleadings which are relevant to this issue. 25On 2 July 2010, at the same time as it filed its defence to the amended first cross-claim, Provident filed a sixth cross-claim against Mr and Mrs Naumovski. 26Ordinarily one would have expected that the sixth cross-claim would have formed part, by way of amendment, of the original statement of claim. However, no point was taken at the time this document was filed as to its appropriateness or otherwise. In those circumstances, I will proceed upon the basis that the parties accept that this is a valid form of pleading. 27The sixth cross-claim was instituted by Provident as the cross-claimant, with Mr and Mrs Naumovski as the cross-defendants. The sixth cross-claim claimed restitution in the amount which had been advanced, namely $403,000, together with interest on that amount pursuant to the Civil Procedure Act 2005. The pleading sets out that it responds to the matters pleaded in the amended first cross-claim, and makes it plain that the pleading is an alternative to its original claim and would arise if the Court were to find that the Deed of Loan and mortgage were void and/or unenforceable. 28The sixth cross-claim asserts that Provident made the advance of $403,000 on the basis of a mistake or mistakes on the part of Provident, which might be described as follows: (a) the advance was sought at the express request of Mr and Mrs Naumovski; (b) Mr and Mrs Naumovski had sought a level of credit which, having regard to their history with outgoing mortgagees (and credit history generally), would not create financial hardship for them; (c) the contractual documents proffered by Provident had been executed by Mr and Mrs Naumovski; (d) Mr and Mrs Naumovski had the benefit of independent legal advice on the effect of the contractual documents and mortgage and acknowledged the receipt of that independent legal advice in declarations made by them on 16 January 2007; and (e) Mr and Mrs Naumovski understood the general nature of the contractual documents which they signed. 29The cross-claim goes on to plead the following: "5. The Advance was made to the First and Second Defendants to discharge them of their liabilities under the mortgages over the Wallsend Property that each had given to Hamafam Pty Ltd and Lawteal Seconds Pty Ltd. 6. Pursuant to the Advance, the First and Second Defendants have been unjustly enriched by reason of the unjust retention of the benefit flowing from the discharge of the aforesaid liabilities of the First and Second Defendants under the Hamafam Pty Ltd and Lawteal Seconds Pty Ltd mortgages referred to in paragraph 5 herein." 30On 30 July 2010, Mr and Mrs Naumovski filed a defence to that cross-claim. The defence included the following: "3. In answer to the whole of the cross-claim the cross-defendants deny: a. that they or either of them entered into or gave any binding mortgage over the Wallsend property as alleged and; b. that any monies allegedly advanced pursuant to any mortgage by the plaintiff, Hamafam Pty Ltd or Lawteal Seconds Pty Ltd were received or applied by them on or their behalf or; c. that they received any benefit or advantage; d. that they unjustly retained any benefit flowing from the discharge of any mortgage as alleged; e. that they were unjustly enriched." 31It is useful to set out here, to enable comparison, the terms of the reply which Mr and Mrs Naumovski proposes to file. It is to the following effect: "(1) Insofar as any monies provided by the plaintiff were paid to discharge any loan agreement(s) and/or mortgage(s) to Hamafam Pty Ltd and/or Lawteal Seconds Pty Ltd and which were secured over the residential property at Wallsend of the first and second defendants ('the Loans'): (i) No money, benefit or advantage was obtained by the defendants as a result of the Loans; (ii) the Loans were unjust within the meaning of the Contracts Review Act and/or unconscionable within the meaning of the general law. (2) The loans would but for their discharge have been or would have been likely to have been set aside pursuant to the Contracts Review Act as unjust or as being unconscionable within the meaning of the general law. (3) The defendants would not have proceeded with the loans had they known the existence, nature and implications of the loans." 32After paragraph 2 of the proposed reply, the pleading contains a list of particulars of the facts matters and circumstances relied upon to support the relef there claimed.

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Issues on the Pleadings 33The issues which arise, and which are relevant to the application are: (a) were Mr and Mrs Naumovski entitled, under either the Contracts Review Act , or else the general law, to relief against Provident's enforcement of the loan? (b) if so, to what extent would that relief go? That is, would the relief be against the whole of the contract or only part of it? (c) Was Provident entitled to restitution on the basis that Mr and Mrs Naumovski were unjustly enriched by the loan? and (d) Did Mr and Mrs Naumovski obtain any benefit from the loan, ie, were they "enriched" by the loan? 34The first of these issues, relating to relief sought by Mr and Mrs Naumovski on the bases of either the Contracts Review Act or else the general law, was first clearly raised in these proceedings on 25 March 2010, when Mr and Mrs Naumovski filed an amended cross-claim. Although it may be argued that their defence to Provident's claim, which they filed on 6 November 2008, raised the general law issue, I am not satisfied that it is inherent in a non est factum pleading that relief of this kind was being sought. As well, in the absence of a cross-claim, I do not think that I should hold that Provident was on notice from 6 November 2008 that relief of that kind was being claimed. 35Nevertheless, I am satisfied that the issue was clearly a contentious issue in the proceedings from 25 March 2010. 36The second issue is closely related to the first. The second issue is whether the relief being sought related to the whole of Provident's advance, ie, capital and accrued interest, or whether only a part of that advance, for example, the default interest component. 37The relief sought by Mr and Mrs Naumovski in the first amended cross-claim is in the alternative. It seeks that the mortgage and deed of loan and guarantee be "... set aside or varied ... ". That claim clearly includes a claim for complete relief against the mortgage and loan. A successful plea of non est factum would also achieve the same result. 38On the basis of the terms of the first amended cross-claim, it is clear that Provident has been on notice of the claim for relief by Mr and Mrs Naumovski from the entire transaction since 25 March 2010. 39The third issue to which reference is made above is Provident's claim for relief on the basis of unjust enrichment by Mr and Mrs Naumovski at Provident's expense. That claim was open to be made by Provident once the original defence of Mr and Mrs Naumovski was filed on 6 November 2008. However, it was first made on 2 July 2010 when the sixth cross-claim was filed by Provident. That pleading identifies clearly the benefit which Provident argues accrued to Mr and Mrs Naumovski, namely, the discharge of their liabilities to the earlier mortgagees, Hamafam Pty Ltd and Lawteal Seconds Pty Ltd. 40In dealing with the last of these issues, the factual circumstances that were relevant and necessary to be examined included: (a) the identity of the recipient or recipients of the funds advanced by Provident in 2007; (b) the facts, circumstances and matters surrounding the direction to Provident to pay the funds to the recipients and the entitlement of the recipients to receive the funds; and (c) whether Mr and Mrs Naumovski obtained any real benefit from the payment of the funds, and if so, the extent of that benefit. 41The loan approval letter from Provident to Mr and Mrs Naumovski dated 12 December 2006 (Ex B) noted that the purpose of Provident's loan was to refinance existing first and second mortgages and provide working capital for business. 42The identity of the actual recipients of the funds advanced by Provident is not in doubt. On 18 July 2007, in preparation for settlement and the making of the mortgage advance, Provident ordered a series of bank cheques from its bank as follows (Ex R): (a) Hamafam Pty Ltd $286,000.00 (b) Baccus Investments: $28,421.01 (c) Lawteal Seconds Pty Ltd $83,310.49 (d) Drake Administrative Services $990.00 (e) R.L. Kreminizer & Co $11,156.13 Total $409,877.63

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43The balance of the $420,000 loan advance was accounted for because funds were retained by Provident as a Loan Establishment Fee and a payment of interest in advance. 44Mr Michael O'Sullivan, the Managing Director of Provident, in his affidavit sworn on 2 July 2010, which was read into evidence at the hearing without objection, deposes to Provident's knowledge evidenced by documents in its file and the file of its solicitors, Bersten Pain, of these facts: (a) As at 5 January 2007, an application for mortgage finance by Mr and Mrs Naumovski identified the two existing mortgages, which were to be paid out by the Provident advance, as mortgages to Hamafam Pty Ltd and Lawteal Seconds Pty Ltd; (b) As at 10 January 2007, Provident's solicitors, Bersten Pain, wrote to the solicitor for Mr and Mrs Naumovski, notifying that on settlement, Provident would require receipt of, inter alia, a discharge of each of mortgage AC291080 and mortgage AC291081; (c) Prior to that time, Provident's solicitors had obtained copies of each of those mortgages: (i) AC291080 - a mortgage to Hamafam Pty Ltd; and (ii) AC291081 - a mortgage to Lawteal Seconds Pty Ltd; (d) As at 11 January 2007, Provident's solicitors had a copy of a title search of Mr and Mrs Naumovski's property which showed that these two mortgages were registered on the title. 45From this it is clear that by the time of drawdown and settlement of the loan advance in July 2007, if not much earlier, Provident was well aware of the asserted facts and matters surrounding the first two factual circumstances to which I have referred in paragraph 40 above. 46These facts inform, and underpin, the third factual circumstance, namely, whether or not Mr and Mrs Naumovski obtained any, and if so, what, real benefit from the loan advance. So expressed, the issue is described in legal terms. It is therefore appropriate to identify in the context of these proceedings the pleadings which address that issue. 47The existence of the issue, and hence Provident's knowledge of it, can be seen in at least these documents and matters: (a) the first cross-claim filed by Mr and Mrs Naumovski and the defence filed by Provident to that claim, referred to in paragraphs 18 to 20 above; (b) by operation of the UCPR there was an implied joinder to Provident's defence which amounted to a denial of its contents; (c) the sixth cross-claim filed by Provident and the defence filed by Mr and Mrs Naumovski to that claim, referred to in paragraphs 25 to 30 above; (d) the original defence filed on 30 March 2010 of Messrs Anthony and others, known as the Attwaters defendants, to the amended statement of claim filed by Provident, which pleaded the following facts in paragraph 33(b): "(iv) In or around 23 December 2004 Suzanna caused, arranged and/or assisted the first and second defendants to attend upon Stephen Harvey solicitor to sign loan documents for a loan with Hamafam Pty Limited in the sum of $292,000.00 for a 12 month term and a loan with Hely Nominees Pty Limited for the sum of $48,000.00 for a 12 month term, secured by mortgages over the first and second defendants' property at ... Wallsend; (v) Suzana received in or around January 2006 a cheque in the sum of $289,396.00 payable to Susan and Tony Nedanovski drawn from the loan advance by Hamafam Pty Limited and Hely Nominees Pty Limited to the first and second defendants. (vi) In or around February 2006 Suzana caused, arranged and/or assisted the first and second defendants to instruct the solicitor defendants to act on their behalf in relation to new loans from Hamafam Pty Limited and Lawteal Seconds Pty Limited, secured by mortgages over the 1 st and 2 nd defendants' property at ... Wallsend ('the 2006 loans')." (d) The third cross-claim filed on 30 June 2009, which is a claim by Mr and Mrs Naumovski against the Registrar General, which makes it plain that Mr and Mrs Naumovski were claiming that their entry into the original mortgage in July 2007 was as a result of fraud on the part of Susan Nedanovski. It also makes it clear that Mr and Mrs Naumovski were alleging that they received no loan funds or benefit from that loan. The terms of that pleading would have come to the notice of Provident no later than September 2009, when it was joined as a cross-defendant to the fifth cross-claim filed by the Registrar General of NSW.

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A. Absence of Explanation 57An explanation satisfactory to the Court is generally, but not universally, required from an applicant: Aon Risk Services at [103] per Gummow, Hayne, Crennan, Kiefel and Bell JJ. On some occasions, the explanation can appear from the circumstances leading up to or else surrounding the application being made. In this case, the transcript records an exchange between counsel for the applicants and the bench during which it became clear that counsel had previously formed the view that a reply was not necessary. Senior counsel for Provident joined issue with that view. 58The circumstances giving rise to the reply were first raised on Tuesday, 22 February 2011, by reason of an objection by senior counsel for Provident to questions being asked in cross-examination of Suzana Nedanovski, the daughter of Mr and Mrs Naumovski, whom they allege was principally responsible for misleading them into signing the various mortgage documents without telling them the true nature and effect of those documents. 59Objection having been taken, and then a discussion having ensued, senior counsel for Provident put a submission that in the absence of a specific reply to the defence to the first cross-claim, his client was prejudiced in not fully appreciating that Mr and Mrs Naumovski were arguing, in support of their contention that they received no real benefit from the mortgage funds provided by Provident, that the earlier mortgages were liable to be set aside under the Contracts Review Act or by application of the general law. 60In answer to a question from the bench, it became clear that counsel for Mr and Mrs Naumovski was under the belief that the implied joinder of issues on the defence to the first cross-claim, was, having regard to the issues pleaded, adequate to enable him to advance the arguments which he sought. He also pointed out that there had been no request for particulars relating to his clients' pleading. 61At that point in time, I directed counsel for Mr and Mrs Naumovski to file an application for an extension of time in which to file the reply. I indicated that the making of such an application could be done orally provided that a copy of the proposed reply was distributed in time before I heard the matter. 62The matter was then heard on Friday, 25 February 2011. 63To my mind, a sufficient explanation is to be found within the exchange, initially between counsel for Provident, the bench, and counsel for the seventh cross-defendants, and then the exchange between the bench, counsel for Provident and counsel for Mr and Mrs Naumovski. It is plain that that exchange highlights the facts and circumstances giving rise to this application. It is plain that the need for a reply to be filed was a matter of some doubt and that what is now being sought responds to those exchanges. 64No further explanation was required in this case. 65I would not be prepared to decline the application on the basis of this ground.

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B. A Surprise Reply 66It was submitted by Provident that the nature and content of the reply catches it by surprise. In its supplementary submissions, Provident said: "5.1 The Proposed Reply raises for the first time the allegation of no benefit having been received in the Hamafam and Lawteal loans and security contracts by reason of their unjustness. This new pleading introduces a number of new issues relevant to the sixth cross-claim, which reach beyond the potential to deny Provident recoupment of the monies advanced in reliance on the principle that the Naumovskis must account for any benefit that each has accrued by reason of the advance." 67The submissions then give a reference to the decision of the Court of Appeal in Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413 at [83]-[85] per Beazley JA, at [98] per Santow JA. 68To the extent relevant, the reference to Elkofairi identifies the well-known principle that where a transaction is set aside for unconscionability, a condition may be imposed requiring repayment of any "unwarranted" benefit. 69A succinct statement of this principle can be found in Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102 at 114, where the High Court of Australia said: "Unconscionability works in two ways. In its strict sense, it provides the justification for setting aside a transaction. More loosely, it provides the justification for not setting aside the transaction in its entirety or in doing so, subject to conditions so as to prevent one party obtaining an unwarranted benefit at the expense of the other." 70This principle is equally applicable to transactions in respect of which relief is granted under the Contracts Review Act . By a combination of s 7, s 8 and Schedule 1 of that Act, the Court may, as the Court of Appeal did in Elkofairi , grant principal relief to one party against an unfair contract and at the same time ancillary relief to another party by way of a payment of money in respect of any unwarranted benefit. 71However, calling attention to the existence of this principle serves to demonstrate that the issue of whether Mr and Mrs Naumovski received a benefit, what that benefit was, and whether it (or any part of it) was unwarranted, had been an issue in these proceedings since early 2010. It was not raised for the first time by the proposed reply. It can be seen in the pleadings to which reference has been made in paragraphs 18, 20, 29 and 30. 72The submission calls attention to the basis upon which the absence of a benefit may be calculated, ie, that the loan was "unjust". But that, so it seems to me, is merely a particularisation of how it is said that Mr and Mrs Naumovski did not receive any benefit from the discharge of the earlier loans. 73It is the factor which accompanies their denial of the benefit, arising from the fact that they did not receive any money from the earlier mortgage. 74A moment's pause for reflection by Provident, on the basis of all that was known to it, and the pleadings which existed prior to the presently proposed reply, would clearly demonstrate that this was an issue to be confronted. I do not accept that Provident did not know until the proposed reply was received that the basis upon which the lack of benefit would be argued was that the earlier mortgage and transaction was unjust. 75My view in this regard is fortified by the fact that at the commencement of the hearing, Provident read the affidavits of Stephen Harvey of 2 July 2010 and Susan Patricia Harvey of 10 September 2010. 76Mr Harvey was the solicitor who acted for Mr and Mrs Naumovski when in 2004 and 2005 they first mortgaged their home to support borrowings from Hamafam Pty Ltd and Hely Nominees Pty Ltd (the previous mortgagee to Lawteal Seconds Pty Ltd). The affidavit of Mr Harvey sets out at length the steps which he says he took to ensure that Mr and Mrs Naumovski understood the nature of, and the legal effect and consequences of, the loan and mortgage transactions which they were entering into with Hamafam Pty Ltd and Hely Nominees Pty Ltd. 77Whether of course that account of the facts is to be accepted is not presently the question. That issue remains for later determination. However, the fact is that this evidence was led by Provident in its case in chief. 78Whilst the contents of the affidavit do have relevance to the underlying issues pleaded in the defence of Mr and Mrs Naumovski to Provident's statement of claim, namely that they were: "... at all material times under a disability ", it also has direct relevance, and application to, the claim which is now made about whether Mr and Mrs Naumovski received a benefit from the earlier mortgage transactions and whether the transactions were unjust or unconscionable by reason of their disability, or any other basis, and were liable to be set aside. 79The contents of these affidavits, including, as they do, clear factual material as to the identity of the recipients of the earlier mortgage funds, strengthen my view that the contents of the proposed reply do not catch Provident by surprise as it submits. Before the reply was raised, Provident had led evidence to contradict the arguments now encapsulated by the proposed reply. 80I reject the submission that the proposed reply catches Provident by surprise.

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C. Prejudice 81Provident submits that the grant of an extension of time to file the proposed reply would cause it irremediable prejudice. That prejudice is claimed to arise because the delay has "... deprived Provident of the substantive right to recover against the ultimate beneficiaries of the money advanced to the Naumovskis in July 2007 by exercising its rights of subrogation ". 82The submission articulated more fully is that if Mr and Mrs Naumovski were successful in resisting, on the basis pleaded in the reply, the claim of Provident, then it would be open to Provident to seek to pursue its rights against the real beneficiaries of the original loan and security transaction by Hamafam Pty Ltd and Hely Nominees Pty Ltd in January 2005, namely Tony and Susana Nedanovski. It submitted that any claim against the Nedanovskis is now statute barred. It submitted that such a claim against Mr and Mrs Naumovski was not hitherto pleaded: " ... because it was unnecessary on the case as pleaded ". 83The core of this argument is that the disposition of the issues raised by the proposed reply would bring into existence, or else enliven, rights which rest in Provident and which could be exercised against Mr and Mrs Nedanovski, and that those rights are now statute barred. 84Perhaps, put differently, Provident is seeking to argue that, if they are unsuccessful in their claim against Mr and Mrs Naumovski because the Court is satisfied that Mr and Mrs Naumovski did not obtain any benefit from the Provident loan, which would include a finding by the Court that it was satisfied that Mr and Mrs Naumovski did not obtain any benefit from the earlier loan or mortgage transactions, then for the first time Provident would have a claim against Mr and Mrs Nedanovski. 85There is a fundamental misconception in this argument. Any finding of fact by the Court in the present case will not bind individuals or companies who or which are not parties to the proceedings. The finding will go no further than a determination of one of the fundamental issues in the proceedings brought by Provident, namely, whether Mr and Mrs Naumovskis received any benefit from the Provident loan, and if not, why not. That issue has been a part of these proceedings from a time well before this application. The proposed reply does not raise that issue for the first time. 86The argument advanced by Mr and Mrs Naumovski that the earlier mortgages were unjust, and therefore liable to be set aside, is a counter to the argument advanced by Provident that Mr and Mrs Naumovski obtained a real benefit from the loan which it advanced because of the fact that the earlier loans were repaid and the mortgages discharged. But that argument, if successful, does not create any new rights for Provident. 87If Provident has lost the benefit of any cause of action because of the elapse of time, and I make no finding that they have, then that is because of their failure to take action in a timely manner and not because of the issues raised by the proposed reply. 88I reject this argument.

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