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] NSWSC 676 - NSWSC 2009 case summary — Zoe

[109]

Credibility of Ms Polly 43 Ms Polly was extensively cross examined but in my view her credit was not impugned in the slightest. She seemed to me to be an entirely honest witness whose testimony ought be accepted. When she was uncertain of something she said so and she admitted that she could not now recall why she did not in fact proceed to debit SMS's CBA account on 19 September. She believes that she must have been told by Mr Poulos close to 19 September that the funds would not be there and it seems clear that the funds were not there on 19 September since the monies were not repaid on 19 September or at any time until 2009 and then not in full. I find her explanation entirely plausible and I accept it. 44 I accept Ms Polly's account wherever it is in conflict with Mr Poulos' account. I do so not only because I have confidence in her reliability as a witness generally and do not have confidence in Mr Poulos' reliability as a witness, but because her version is consistent with what passed between the Bank and Mr Poulos in writing and what was in fact done by the Bank. Although I have doubts about Mr Baptist's evidence in one respect, to which I shall refer, I otherwise accept his evidence where it is in conflict with Mr Poulos and Mr Marzouk. 45 Ms Polly accepted that Mr Marzouk, in her discussion with him, appeared to her to have had a misunderstanding as to the need for repayment on 19 September but she told him the Bank's position and she said, and I accept as truthful, that she told Mr Marzouk he should speak to Mr Poulos. If Mr Marzouk did speak to Mr Poulos, Mr Poulos never contacted Ms Polly to assert that the arrangements made did not require SMS to repay the overdraft amount on 19 September. There is no letter or email making any such assertion. There is no letter chasing up the facility documents that would, on Mr Poulos' version, have been needed. Mr Poulos claimed that the reason he did not follow up on the email (on the basis that on his version he had had no response) was that SMS had the previous year asked for a $250,000 "excess position" and that had been granted: see T189.10. Given that the relationship was quite different in September 2008 to what it had been in the previous year, this is hardly likely, but more significantly there were clearly demands for payments by the Bank of which I find Mr Poulos was aware, and I do not accept that he said anything about those demands other than that Mr Marzouk was aware he needed to obtain the funds and would have them. I think that Ms Polly's acceptance that Mr Marzouk had not been told of the true position in relation to the overdraft account was overly charitable to Mr Marzouk and it is more likely that Mr Poulos told Mr Marzouk exactly what he had done: see T141.42 - T142.12, and Mr Marzouk tried whatever tactic he could to buy time given SMS's and his own financial position as evidenced by SMS's inability to meet interest payments. Ms Polly's letter of 26 September 2006 (see Exhibit A1: TB230) and email to Mr Poulos (see Exhibit A1: TB231) did not prompt any letters or emails of protest or dispute. What followed was in fact another request for temporary relief: see Exhibit A1: TB233.

[110]

Conclusion in relation to the $250,000 overdraft 46 It is clear beyond doubt that Mr Poulos, on behalf of SMS, sought by email on 2 September 2008 a deferral for two weeks of the interest due to be taken by way of direct debit that was until 19 September. The Bank acceded to this request by granting a temporary overdraft for $155,000. When the money was not paid on 19 September the Bank held off taking action and agreed to a similar deferral in relation to interest for October 2008. 47 The Bank permitted SMS to pay interest that was otherwise due by utilisation of the overdraft account. That overdraft account was not specifically mentioned in the definition of the "Facility Documents" but it was an account which SMS established with the Bank which the Bank agreed to permit utilisation of in a manner agreed (see clause 3.1 at [6] above) and hence was an account established for the purpose of an overdraft facility specified in the Facility Terms. I accept that the definitions are somewhat circular but I think on a fair and purposive reading of the loan agreement the account in question was an overdraft facility contemplated by and for the purposes of the loan agreement. The submissions on behalf of SMS pointed to the need for the Court to interpret contracts in accordance with practical expectations of ordinary businessmen and I think that that principle is applicable here: see Port Jackson Stevedoring Pty Ltd v Salmond and Spraggon (Aust) Pty Ltd (1977) 139 CLR 231 at 250 and Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at 462. 48 If I am wrong in that view, the interest due on the loan facility was merely the subject of an agreement for deferral and remained due and payable as part of the facility. I do not accept that this argument cannot be advanced by the Bank without leave being granted to the Bank to reopen its case as asserted in SMS's written submissions responding to the Bank's written submissions after the hearing was completed and in respect of which submissions I had granted leave. I think there is much force in the Bank's point that since the argument that the monies owing on this account were not an obligation under the facility was raised at a very late stage (and not raised in the Reply to the Defence to the Amended Statement of Claim), the Bank should not be precluded from responding to it. 49 I reject SMS's contention that the Bank agreed to provide it with a new facility the terms of which it has never revealed. The email from Ms Polly of 2 September 2008 (see Exhibit A1: TB208) is destructive of this argument. The failure of SMS to repay the excess on 19 September or to subsequently pay the deferred out interest were defaults and the Bank advised on 21 November 2008 (see Exhibit A1: TB239) that default rates would apply after 31 December 2008.

[111]

Credibility of Mr Baptist 50 Mr Baptist's credit was also attacked. It was contended that I should not accept his denial of the conversation with Mr Poulos in May and Mr Marzouk in August. Overall I did not regard the cross examination of Mr Baptist as damaging to him but in relation to the conversation with Mr Marzouk in August I was left in some doubt as to his veracity as I shall endeavour to explain. I also thought he was somewhat evasive in answering questions to do with his connection with Mr Poulos (involving a personal investment of Mr Baptist): see T196 - T197. 51 As at August 2008 the only plan for something other than a full refinance by another bank advanced by SMS was that by which SMS sought a further $5.45 million: see Exhibit A1: TB195 - 196. The Bank in clear terms rejected that by its letter of 27 August 2008: see Exhibit A1: TB199. SMS has produced no evidence of any approval by a bank of a partial refinance in August 2008 and Mr Marzouk, in his alleged conversation with Mr Baptist, gives no details. Mr Baptist accepted that Mr Marzouk did say "give me a partial discharge of the Company and release those assets that you want paid off and I will refinance with another bank" and that his response was as set out in [22] above. Mr Baptist seemed to accept at T244 that there was a lack of clarity in what he said to Mr Marzouk. 52 If that was his response it was anodyne, and Mr Rayment accepted that it could not be regarded as unreasonable. Mr Rayment, however, submitted that Mr Baptist's evidence that that is what he said should not be accepted. Cross examination of Mr Baptist undermined Mr Baptist's credibility on this point as he asserted that the words set out at [22] were a response to a request that the Bank release security without having received payment of the outstanding debt on the relevant property: see T241 - T242, but then agreed that he had not understood Mr Marzouk to be saying that: see T243.40. 53 Further, Mr Baptist said at para 53(b) of his first affidavit "It was never my intention to allow partial repayment" and at para 26 of his affidavit of 2 June 2009 when dealing with Mr Poulo's affidavit of 29 May 2009, he said: "I have reviewed the affidavit of Mr Poulos dated 29 May 2009. I am certain that I never had the conversation with Mr Poulos described in paragraph 8 of his affidavit. If the plaintiff had formally proposed to the defendant that it reduce its loan facilities and receive a discharge of some part of the security held by the bank, the bank would have considered that request. At a minimum, the defendant would have needed to know (a) how much the facility would be reduced, (b) what security the plaintiff proposed to have discharged and (c) the time frame involved. The defendant would have required any reduction of part of the facility to be implemented together with a plan for the overall reduction of the entire facility. Because no such proposal was ever made to the defendant, it was never considered." 54 The matters to which Mr Baptist refers in para 26 of his affidavit are matters that I accept would be necessary items of information to be provided. The second last sentence is a statement as to the Bank's attitude to partial refinancing - i.e. that unless the partial refinancing was part of a full refinancing the Bank would not agree to it. This and the comment at para 53(b) come close to the position that Mr Marzouk asserts was communicated to him, although in less colourful language. 55 In one sense, the factual contest about what Mr Baptist and Mr Poulos said becomes less important because by paras 26 and 53(b), Mr Baptist makes clear the Bank's position. Given the unreliability of Mr Marzouk and Mr Poulos I am not satisfied that there was any request for partial refinancing in May. Insofar as August is concerned, the position is more difficult particularly given the unreliability of SMS's witnesses and my doubt as to whether any partial refinancing was ever seriously in prospect, but I shall proceed on the basis that Mr Marzouk asked about partial refinancing and that Mr Baptist said words to the effect: "Not unless the partial refinancing is part of a program of full refinancing." recognising that neither he nor Mr Marzouk asserts that that was said by him, but also recognising that the statements he makes in his affidavit is a reflection of the Bank's position. The Bank's entitlement to take such a position in the circumstances can then be considered.

[112]

Reasonableness of the Bank's conduct 56 I think it is very material to a consideration of the Bank's conduct that SMS had not repaid the expired facilities in October 2007. 57 Mr Baptist's evidence was that in late 2006 or early 2007 he had a conversation with Mr Poulos in which Mr Poulos told him that Mr Marzouk was selling properties including one the Bank had no mortgage over, i.e. a property at Cannon Hill in Queensland and that the proceeds would be applied to reduce SMS's debt to the Bank. Mr Marzouk said that he did sell Cannon Hill for $1.4 million and that he did not use the proceeds to reduce the debt: see T97.45. 58 Mr Marzouk said SMS had sought extra time to repay the expired facilities in October 2007: see T92, and that he told the Bank he would try to sell those properties. He said he did not at that time ask the Bank to agree to a refinancing: see T93. He was emphatic that he did not agree with the Bank to reduce the debt by $5 to 6 million which the Bank had asked him to do, but rather only that he would try to do so: see T80 - T82. Mr Poulos' response to the letter of 11 April 2008 from the Bank (at Exhibit A1: TB181 - 183) did not raise the possibility of a partial refinance. 59 There is evidence from Mr Baptist that at some time in 2007 Mr Poulos provided him with put and call option contracts for the Cannon Hill property and one at Karalee: see para 9 of Mr Baptist's second affidavit and see T82.40 - .49. The provision of those contracts makes sense in the context of Mr Marzouk having assured the Bank that he would be selling properties to reduce the debt and does not make sense if he did not. 60 Mr Baptist said at para 12 of his second affidavit that in approximately April 2008 he had a conversation with Mr Poulos in the following terms: "[Mr Baptist]: When does [Mr Marzouk] intend selling these properties as per our previous discussion? How much longer am I supposed to wait? You have been telling me for months now that [Mr Marzouk] is going to sell properties.

[114]

62 By clause 14.2 the SMS was required to provide, at the latest 120 days after the end of the financial year, copies of the consolidated and unconsolidated accounts of SMS and each Guarantor. The Bank was entitled to require the accounts. Clause 7 of the letter of offer referred to accounts being requires 180 days after the end of the financial year. I shall treat the more generous period as the requisite period. 63 There was another clause which required accounts to be provided by the end of December 2007. SMS did not provide the accounts by 31 December 2007. Mr Marzouk's evidence (which was not challenged) is that SMS's accountant embezzled money from SMS and decamped, and that SMS could not comply. 64 Mr Poulos wrote to Ms Polly on 12 December 2007 and told her the 2007 financials should be ready by March 2008. On 18 December 2007, Ms Vicky Ye, an Assistant Relationship Manager, wrote to Mr Poulos saying that the review was due by the end of December 2007 and that "we can use the 2006 financials together with the tenancy schedule to perform this review." She asked for the updated tenancy schedule which was provided on 8 January 2008: see Exhibit A1: TB173 - 174. 65 The failure of SMS to provide the relevant accounting information constituted a breach of the loan agreement but the Bank, until 11 April 2008, seemed to be understanding of the problem and to have indicated that immediate delivery was not imperative. Mr Poulos did not, in his email of 12 December 2007, promise delivery of the accounting information by March 2008, but said that it "should" be ready. 66 I think it is understandable that the Bank expected the information by March 2008 at the latest, but the Bank had not complained that it could not undertake the review without the accounts before 11 April 2008 and in the light of the earlier correspondence, the Bank seems to have excused SMS from providing the accounting information anytime earlier than the end of May 2008 - when it was, it appears, provided. I would not regard the Bank's reliance on the failure to provide accounting information until May 2008 as now constituting a default as justified.

[118]

73 The Bank did not in its correspondence formally assert that SMS was in default prior to October 2008 and it did not claim entitlement to terminate the relationship based on the failure of SMS to repay the two expired facilities (or failure to pay the valuation fee or the failure to provide accounting information) as at April 2008. It is likely that this latitude was given by reason of a perception on the part of the Bank's officers that if they took the steps that the Bank was entitled to take, this would have made it less likely that a new financier would be found willing to take over the SMS debt (see Ms Polly at T364.5 - .10 and T367.30 - .35 and T348.30). I am not persuaded that the Bank, which for its own reasons studiously avoided treating its customer as in default of the loan agreement until the end of 2008 (it did not end rolling over the expired facilities until 4 January 2009), can now assert that SMS was in default as at April 2008. That does not mean, however, that the Bank would have been acting unreasonably in not permitting a partial refinance in August 2008. It is also relevant that SMS led the Bank to believe that it was able to effect a full refinance and it never told the Bank that it could not achieve such. Nor has SMS credibly demonstrated that it was or is unable to obtain a full refinance on terms, and could not do so now. 74 By its submissions SMS asserts that it was unfair and unreasonable of the Bank to refuse to release securities because it required SMS to refinance the expired facilities but would not make the underlying securities available to support the refinance and that it was not reasonably necessary for the Bank's own protection to keep all securities because the Bank's valuation ratio was well beyond its required 60%. 75 On SMS's own case it did not seek agreement to a partial refinance at any time before May 2008 and on my finding did not do so before August 2008. In the period October 2007 to April 2008 the Bank was requesting SMS to repay the debt on the expired facilities (as SMS was obliged to do) and there is no question of any refusal of the Bank to agree to a partial refinance - none was in contemplation: T93.21 - .50.

[122]

[137] In determining whether reliance is unconscientious, regard must be had to the nature of the bargain, the circumstances in which it was made and the circumstances in which the mortgagee seeks to assert the mortgagor's promise to defeat the right to redeem." 80 There are two reasons why the principle has no application here. First, the Bank does not seek to fetter SMS from redeeming its property, what it seeks to do is have SMS repay the loan and it relies on a contractual provision that entitles it to retain all security until the debt is paid, that does not prevent SMS retaking the unencumbered title on payment of the debt. There is no specific allocation in the loan agreement of any particular security to a particular portion of the debt. 81 The Bank asserts a second basis, namely that SMS was in default of its obligations under the loan facility since October 2007. As I have indicated, I am not persuaded that SMS was, in a technical sense, in default until this year, but since the principle is one of an equitable nature, which focuses on whether there has been unconscientious behaviour on the part of the mortgagee I think that the failure of SMS to repay the amounts due on the expired facilities in October 2007 coupled with unfulfilled promises to reduce the debt by other means would be sufficient to rebut any assertion of unconscientious conduct. Further, the failure to repay the overdraft in October or at least November 2008, and following its failure after 4 January 2009 to repay the amounts due under the expired facilities, did put SMS in default and reinforces my view that there has been no unconscientious behaviour on the part of the Bank and no clog or fetter on the equity of redemption. 82 Further, SMS, even on its own case, has not asked the Bank to release any particular security to permit refinancing of some of the facilities - therefore no particular security over which there is claimed to be a clog has been identified. Conclusion 83 I conclude: (1) SMS established that as at August 2008 the Bank was not prepared to consider a plan for partial refinancing that was not part of a full refinancing.

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