Sam Management Services (Aust) Pty Ltd v Bank of Western Australia Ltd

Sam Management Services (Aust) Pty Ltd v Bank of Western Australia Ltd - [2009] NSWCA 320 - NSWCA 2009 case summary — Zoe

[38]

[10] In August 2007 the Bank agreed to provide a further facility in respect of land at Thagoona for $1 million but SMS did not in fact utilise the facility. 5 It was common ground that, because SMS had less than 20 employees, the Code of Banking Practice did apply to the agreement between SMS and the Bank. 6 It was accepted in cross-examination by Mr Baptist (Black 217-218) that the relationship between the parties started in 2004 with a $2 million facility; that the Bank asked Mr Marzouk to bring it more of his business; that in the result the amount that came to be owed was $25 million; that the Bank had security considerably in excess of $40 million according to valuations current in 2008; and that Mr Baptist believed that in May 2007, according to valuations that the Bank had, there was about $46 million worth of security (Black 273). 7 The relevant offer letter dated 15 May 2007 (Blue 14-25) set out particulars of the facilities referred to above, showing: (1) the Concord facility was for $13 million, expiring on 12 December 2012, with interest paid monthly in arrears. (2) the Restructure facility was for $2 million, expiring 12 December 2012, with interest paid monthly in arrears. (3) the vacant block facility was for $1 million, expiring 16 March 2009, with interest payable monthly in arrears. (4) the Bassett Lane facility was $1.45 million expiring 20 October 2007, with interest capitalised monthly in arrears within the facility limit and then payable monthly in arrears. (5) the Ingleburn facility was for $2.63 million expiring 17 October 2007, with interest capitalised monthly in arrears within the facility limit and then payable monthly in arrears. (6) the Claremont Meadows facility was for $4.66 million expiring five years after draw-down date (that is, in 2012), with interest capitalised monthly in arrears within the facility limit and then payable monthly in arrears. 8 The facility letter also stated the following requirements: 6.5 Financial Undertakings You must ensure that you satisfy the requirements for each of the following financial undertakings each time it is measured. See clause 21.1 of the General Terms for the meaning of the terms used.

[40]

9 The Ingleburn facility was a mortgage SMS had purchased from the Bank in 2006/2007, it having been a mortgage originally given to the Bank by SMS's accountant or entities associated with him. According to evidence of Mr Marzouk which was not challenged, this accountant had disappeared in 2006 having destroyed SMS's business records, and having defrauded SMS of large sums of money. 10 The time for repayment of the Basset Lane facility and the Ingleburn facility passed with no demand for repayment being made by the Bank. An email to Mr Poulos on 15 November 2007 from Lucy Hadfield of the Bank (Blue 1021) stated: A couple of facilities have reached their term but I understand from discussion with [Mr Baptist] that renegotiation of facilities is possibly available with provision of financials and in conjunction with the annual review which I am advised will be at the end of the year. 11 Although cl 14.2 of the facility agreement provided that copies of SMS's accounts be provided to the Bank by 120 days from the end of the financial year, the requirement stated in par 7 of the facility letter allowed 180 days; and the parties appear to have acted on that basis. Thus, the accounts for the 2006/2007 year should have been provided by about the end of December 2007. SMS could not comply with this because of the loss of records through the accountant's fraud, and on 12 December 2007 Mr Poulos emailed Ms Polly advising that 2007 financials should be ready by March 2008 (Blue 433). 12 On 18 December 2007, Vicky Ye of the Bank emailed Mr Poulos saying "we understand the 2007 financials will not be available until Mar 08. However, our review is due by the end of this month, we can use the 2006 financials together with the tenancy schedule to perform this review." (Blue 434). A tenancy schedule was provided on 8 January 2008 (Blue 1027). 13 In about April 2008 Mr Baptist had a conversation with Mr Poulos in which he asked when Mr Marzouk intended selling properties as per their previous discussions and asserted that Mr Poulos had been telling him for months that Mr Marzouk was going to sell properties, to which Mr Poulos replied Mr Marzouk had to get relevant approvals (Judgment par [60]). 14 On 11 April 2008, Mr Baptist wrote the following letter to Mr Marzouk: Further to my recent discussions with John Poulos of Lion Pacific Finance, I wish to advise that Sam Management Services (Aust) Pty Ltd is in breach of its undertakings with respect to provision of the above information which was required to be to hand by 31st March, 2008. As non receipt of this information denies the Bank the opportunity of assessing the historic performance of the Borrower, and whether you have complied with the Interest Coverage Ratio (ICR) requirement attendant to the facilities, we were relying on the deposit funds lodged with the Bank to provide comfort. The recent transfer of $250,000 of this amount to your operating account means that we have a significantly reduced level of comfort around this aspect of performance.

[67]

Should you require any further clarification I please do not hesitate to contact me to discuss. 17 The 2007 financial accounts for SMS were provided to the Bank on 15 May 2008, and there was no suggestion that they showed any breach of the ratios required by the facility. 18 There was considerable evidence before the primary judge concerning conversations between Mr Marzouk and Mr Poulos for SMS, and Mr Baptist and Ms Polly for the Bank. The primary judge found Mr Marzouk and Mr Poulos to be unreliable witnesses, but had confidence in the reliability of Ms Polly as a witness. He had doubts about Mr Baptist's evidence in one respect, but otherwise accepted his evidence where it was in conflict with Mr Poulos and Mr Marzouk. There is no challenge on appeal to that assessment of the witnesses. 19 One finding that was made by the primary judge, and that is relied on in the appeal, is a finding that in August 2008 Mr Marzouk asked Mr Baptist about partial re-financing, meaning repayment of the loans that had become due for repayment in return for release of some relevant securities, to which Mr Baptist responded by words to the effect "not unless the partial refinancing is part of a programme of full re-financing". 20 In the event, no particular proposal was put to the Bank for partial refinancing, and full refinancing was not arranged. Further, the primary judge found that SMS did agree to undertake full refinancing, and that it did not at any relevant time inform the Bank that it could not do this (Judgment par [83(c)]). 21 In September and October 2008, there were defaults by SMS in repayment of a temporary overdraft account and payment of interest, and SMS was advised that interest was payable at default rates on some of the facilities. 22 On 21 November 2008, Mr Baptist wrote to Mr Marzouk agreeing to extend SMS's facilities to 31 December 2008, and advising that default rates would apply to all facilities in the event that refinance did not occur then (Blue 1093). 23 On 4 January 2009, the Bank ceased rolling over the expired facilities. 24 By a letter dated 13 February 2009 from the Bank's solicitors to Mr Marzouk, the Bank notified SMS that all of its facilities were in default and that to put them back in order payment of $553,129 was required. 25 These proceedings were commenced on 26 February 2009.

[99]

The pleading issue 39 Mr Rayment QC for SMS submitted that, because par 35 of the defence raised breaches only in answer to SMS's case based on an implied term, such breaches could not be relied on in answer to SMS's case based on a breach of the Code of Banking Practice. 40 I do not accept this submission. 41 In relation to alleged pre-August 2008 breaches, namely failure to repay the expired facilities and failure to provide financial information, these were relied on in the Bank's defence to support reasonableness of the Bank's conduct in and after April 2008: see pars 21, 22 and 33. In any event, the onus lay on SMS to prove a breach of the Code of Banking Practice, and the circumstances surrounding the Bank's conduct including the terms of the facilities, the non-repayment of the expired facilities, and the matters referred to in the Bank's letter of 21 April 2008, were plainly circumstances to be taken into account in SMS's case alleging unfair and/or unreasonable conduct. 42 As regards post-August 2008 breaches, par 34 of the defence to the amended statement of claim pleaded them without limiting their relevance to the implied term, albeit not spelling out on what basis they could be an answer to SMS's case. 43 However, in relation to the breach of the Code of Banking Practice, SMS was seeking relief by way of declaration and injunction arising out of a conversation in August 2008, in proceedings commenced in February 2009. In such a case, a plaintiff has a considerable onus to demonstrate to the Court that there would be utility in making a declaration about a breach occurring so long before commencement of the proceedings, and that the circumstances justified the granting of an injunction. Indeed, for the relief to SMS to be effective, it was necessary to identify conduct of the Bank against which protection was needed. What SMS needed was an injunction that had the effect of preventing the Bank from calling up the totality of the loan on the basis, inter alia, of post-August 2008 breaches. Accordingly, identification of post-August 2008 breaches, from the effect of which SMS was to be protected, on its case, was part of SMS's case. 44 In my opinion, although it would have been preferable for the Bank's pleading to specify that the Bank relied on post-August 2008 breaches to show that the declaration would have no utility and to show that injunctive relief should not be granted, the absence of such pleading does not preclude this course. The post-August 2008 breaches relate to matters in respect of which the onus was squarely on SMS, and the reference to the post-August 2008 breaches in the pleading was sufficient to avoid surprise.

[101]

Pre-August 2008 breaches 48 Mr Rayment submitted that the primary judge was correct to find that the Bank excused late submission of financial accounts and could not rely on this as a breach justifying calling up the loan (Judgment par [66]). He submitted that the terms as to interest contained in the facilities expiring in 2007 showed that it was contemplated they would be extended and that the primary judge was wrong to find to the effect that it was an indulgence by the Bank not to press for immediate repayment of those facilities (Judgment par [72]); albeit he was correct to find that the Bank did not treat SMS as in default as at April 2008 (Judgment par [73]). Also, he submitted, the primary judge was wrong to find that from October 2007 to April 2008 the Bank was requesting SMS to pay the expired facilities (Judgment par [75]). 49 Mr Dick for the Bank submitted that the Bank could rely on failure to repay the expired facilities and late provision of financial information as breaches justifying its requirement to repay the total amount, because cl 18.21(b) of the general terms of the facility provided that the granting of time or other indulgence to SMS did not affect the Bank's rights and SMS's liabilities under the agreement; and the Bank relied on failure to provide financial information when it gave notice on 14 April 2008 that SMS needed to refinance the entire facility. 50 In my opinion, the primary judge was correct to hold that the Bank had not, prior to August 2008, treated SMS as in default: it expressly said so in its communication of 24 April 2008. Also, I accept Mr Rayment's submission that the primary judge was wrong to hold that between October 2007 and April 2008 the Bank was positively requesting SMS to repay the expired facilities. However, in my opinion, the failure to repay the expired facilities on the due date was a breach of the agreement, unless there was a prior agreement by the Bank to extend the term: the provision as to interest beyond capitalised interest would apply during the term of the loan, once the facility limit was reached, and did not conflict with the clear requirement to repay on the expiration date. The evidence did not establish a prior agreement to extend the term, although it did establish that, until January 2009, the Bank did treat the expired facilities as "rolled over"; and this indulgence could mean that the Bank could not rely on non-payment of the facilities as a breach justifying a demand for repayment of the total facility without giving reasonable notice and a reasonable opportunity to rectify the breach. 51 In my opinion, the failure to repay the expired facilities and the late provision of financial information were breaches on which the Bank could, as at 21 April 2008, have relied to demand repayment of the whole facility, subject to the giving of reasonable notice that previous indulgences were not being continued; and that is a matter that can be taken into account in assessing the reasonableness of the Bank's conduct in April 2008 in informally requiring repayment (that is, requiring repayment without asserting breach and demanding repayment) and in August 2008 in asserting that a proposal for partial refinancing had to be part of a programme for full refinancing.

[102]

Code of Banking Practice 52 Mr Rayment submitted that, because the Bank had not treated SMS as in default and had not on that basis demanded repayment of the entire facility, it had no right in August 2008 to require repayment of the entire facility; and its Code of Banking Practice obligation to act fairly and reasonably towards SMS in a consistent and ethical manner obliged the Bank to give proper consideration to proposals for repayment of expired facilities that SMS might make. Accordingly, he submitted, Mr Baptist's assertion to the effect that the Bank would not participate in partial refinancing unless it was part of a programme of full refinancing was a breach of the Code of Banking Practice obligations; and this breach made it pointless for SMS to put to the Bank any particular proposal for partial refinancing that was not part of a programme of full refinancing: see Peter Turnbull & Co Pty Limited v Mundus Trading Co (Australasia) Pty Limited (1954) 90 CLR 235. 53 Mr Dick submitted that the conduct of the Bank should be assessed in circumstances where there were breaches available to the Bank to call up the whole of the loan, and where, on the findings of the primary judge, SMS was acceding to the Bank's request for full refinancing and never suggested to the Bank that it could not do this. 54 In my opinion, it is appropriate to assess the Bank's conduct in the light of the circumstance that the Bank was holding back from demanding full repayment on the basis of default, as it might have done, at least in relation to the expired facilities after the financial information had been provided in May 2008, and perhaps subject to some further notice; and in the light of the circumstance that SMS was not insisting on its right, in the absence of the Bank taking that step, to maintain its non-expired facilities until 2012, but rather was giving the appearance of moving towards total refinancing. 55 In those circumstances, in my opinion, the bare verbal exchange found by the primary judge did not amount to conduct in breach of an obligation to act fairly and reasonably towards SMS in a consistent and ethical manner. 56 It might have been otherwise if SMS had conveyed to the Bank an intention to maintain its non-expired facilities to their termination date, thereby giving the Bank notice that, if the Bank was to maintain its requirement for full refinancing, it would need to demand repayment on the basis of default. In the absence of that indication from SMS, in my opinion, it was not unreasonable or unfair for the Bank to maintain its informal requirement for full refinancing. 57 Also, it might have been otherwise if SMS had actually put to the Bank a clear formulated proposal for partial refinancing: fair and reasonable conduct may then have required that such a proposal be considered. I accept that Turnbull is authority for the proposition that a party to a contract is excused from fulfilling a condition that the other party has conveyed would be useful to fulfil; but here, I think, in the context of the dealings between the parties, more was required of SMS to trigger any obligation on the Bank to give consideration to a proposal for partial refinancing than the mere floating of the possibility. 58 Accordingly, I am not satisfied the primary judge was wrong to find no breach of the Code of Banking Practice.

[107]

"we will act fairly and reasonably towards you in a consistent and ethical manner. In so doing we will consider your conduct, our conduct and the contract before us." 74 The clause in a legal document is so fraught with ambiguity. Its exact meaning was not canvassed before us so that it would be unwise to attempt to be definitive in its construction. Assuming it must be given some meaning in a commercial document, it probably does not operate to beyond requiring the bank to act in good faith towards the customer. 75 However, the principal purpose of these remarks is to suggest to bankers that the cross reference in legal documents to their promotional material is likely to lead to complications in litigation. 76 SACKVILLE AJA: I agree with the orders proposed by Hodgson JA and, subject to what appears below, with his Honour's reasons. I wish only to add some observations on SMS's contention that the primary Judge erred in failing to find that the Bank failed to comply with cl 2.2 of the Code of Banking Practice (set out in [4] above, sub-par [7]). 77 SMS's contention rests on the content of the conversation between Mr Marzouk and Mr Baptist that took place in August 2008. Hodgson JA has referred to the primary Judge's findings in relation to that conversation (at [18] - [20] above). SMS submits that in this conversation, Mr Baptist, on behalf of the Bank, rejected outright any suggestion that it would consider any proposal from SMS to re-finance the two short term loans (the "Expired Loans") enabling it to obtain a discharge of the mortgages in respect of these loans, while leaving the long term loans from the Bank in force. According to SMS, this constituted a breach of the Bank's obligation under cl 2.2 of the Code of Banking Practice to "act fairly and reasonably towards [SMS] in a consistent and ethical manner". 78 In my opinion, it is necessary to place the conversation in context. The primary Judge did not accept the version of the conversation given either by Mr Baptist (of the Bank) or Mr Marzouk (of SMS). His Honour considered that it was difficult to assess what had occurred, but he "proceeded on the basis that Mr Marzouk asked about partial refinancing". Mr Baptist replied, so his Honour found, with words to the effect: "Not unless the partial refinancing is part of a program of full refinancing". 79 By the time this apparently brief conversation occurred, SMS had not paid the amounts due under the Expired Loans. According to SMS, even though the Expired Loans had not been repaid, it was not in breach of the facility agreements because the Bank had agreed to roll over the loans. Even if that is correct, the Bank had agreed to roll over the Expired Loans (as his Honour found) because of repeated assurances made to the Bank by Mr Marzouk or Mr Poulis on behalf of SMS. The assurances were to the effect that the amounts due to the Bank under the Expired Loans would be paid out from the sale of the properties concerned. The assurances had not been met and Mr Baptist was obviously (and reasonably) dissatisfied with the failure of SMS to comply with the assurances given on its behalf. 80 Within this context, all that happened in August 2008 was a single conversation in which Mr Marzouk floated a general idea about refinancing and was met by a response that clearly reflected Mr Baptist's dissatisfaction with SMS's conduct. Mr Marzouk put no specific proposal for refinancing to the Bank in this conversation, let alone a detailed written proposal. The first indication of such a proposal came in the form of evidence SMS sought unsuccessfully to adduce before the primary Judge on the day his Honour delivered judgment. 81 It is arguable that, had SMS put a detailed refinancing proposal to the Bank, cl 2.2 of the Code of Banking Practice would have obliged the Bank to give good faith consideration to the proposal. But any such obligation (assuming it to have existed) was never enlivened in the present case. 82 In my opinion, SMS has not shown that Mr Baptist or the Bank acted otherwise than "fairly and reasonably towards [SMS]" in the conversation of August 2008. It is to be remembered that cl 2.2 of the Code of Banking Practice expressly entitled the Bank, in discharging its obligation to act reasonably, to take into account SMS's conduct preceding the conversation. Accordingly, SMS has not demonstrated any error in the primary Judge's conclusion that the Bank did not breach cl 2.2 of the Code of Banking Practice. **********

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Judgment (108 paragraphs)

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