Takemura v National Australia Bank Ltd

3751/01 - TAKEMURA v NATIONAL AUSTRALIA BANK LTD JUDGMENT 1 HIS HONOUR: The plaintiff and the second defendant, AIS International Pty Limited were parties to three loan agreements. All these agreements were in the same form with respect to the terms and conditions. The first loan agreement was made on 7 April 1999. By that agreement, the plaintiff provided AIS with $250,000. The interest rate was 6% per month compound, a rate which exceeded 72% per annum. Clause 5 provided that: "In consideration for [the plaintiff] providing to [AIS] the aggregate investment sum, [AIS] agrees to provide to [the plaintiff] upon written request a registered first mortgage over property located as follows:- Unit 19, 20 Moodie Street Cammeray." 2 The second agreement was for a loan of $270,000 at an interest rate of 5% per month compound (60% per annum plus) and the security, Unit 135, 41 Rocklands Road, Crows Nest. The third loan was by agreement made in July 1999 for a loan of $100,000 with a security, Unit 9, 373 Alfred Street, Neutral Bay, the rate being "determined by mutual agreement between the parties". 3 The loan agreements provided that the plaintiff would provide AIS three months' written notice prior to the request for reimbursement of the capital sum. 4 At all material times the registered proprietor of 19/20 Moodie Street, Cammeray, was AIS itself, 41 Rocklands Road, Crows Nest was owned by Southpac Corporate Service Pty Ltd, the third defendant in the present proceedings, and 9/373 Alfred Street, Neutral Bay was owned by Mr Chikamoto who was, it would seem, the person controlling the three companies. 5 On 15 December 2000 each of the registered proprietors gave to the plaintiff a mortgage apparently in registrable form upon which duty has been paid. However, none of the mortgages were ever registered. 6 The first defendant, National Australia Bank Ltd, held mortgages over all the properties. It also had security over the businesses being conducted by AIS, Southpac and an additional company, Sushi Roll Pty Ltd. All three properties were sold with the consent of the National Australia Bank and the net proceeds were paid to that Bank. The Bank now holds $100,000 as a result of the sale of those properties. The Bank also has $126,632 from the realization of other securities given by AIS and $353,084 from Sushi Roll which are in excess of what is required to discharge the Bank's indebtedness. 7 It is common ground that the whole of the moneys were actually lent and none have been repaid. 8 There are other factual matters some of which will have to be explored in due course. However, I have said enough to lay the foundation of the argument in the present case. 9 The National Australia Bank submitted to any decree the court might make, except as to costs. The combatants were the plaintiff, for whom Mr J E Armfield appeared, and the three AIS companies now in liquidation, for whom Miss Margaret Sneddon appeared. The case was argued before me on 1 April. I reserved my decision pending further written submissions. 10 Mr Armfield says that his client is entitled to the whole of the funds being held on three grounds, any one of which will justify an order in his favour. 11 First he says that there is an equitable mortgage over each of the three properties. Secondly he says that the doctrine of marshalling gives him access to the proceeds of the businesses. Thirdly he has an argument based on the role of subsidiary companies as guarantors with which I will deal later. 12 The general proposition put in Fry on Specific Performance 6th ed (Sweet & Maxwell, London, 1921) para 54 is: "[T]he Court will specifically enforce a contract to execute a mortgage, and that even with an immediate power of sale where the money has been actually advanced either before or at the time of the contract." 13 Mr Armfield says that I should apply that general proposition and, there being no dispute that his client lent the money, it is unarguably clear that his client has an equitable mortgage over the properties in question. 14 The answer to that proposition is that it is not all-embracing and that equity will not give its aid to every contract for loan in particular contracts for loan which are at an excessively high rate of interest. 15 To that proposition Mr Armfield says that he offers to do equity by foregoing any interest over and above a fair rate of interest. It might be remarked that this grand concession does not cost Mr Armfield anything because there is not enough money available to pay his capital in full, let alone any interest. 16 There is no doubt at all that there is a general principle which covers not only deposit of title deeds but also contracts to give a mortgage. In the context of a deposit, Kindersley VC said in Pryce v Bury (1853) 2 Drew 41, 42-43; 61 ER 633, 634: "The common rule of this Court as to an equitable mortgage by deposit is this: by the deposit, the mortgagor contacts that his interest shall be liable to the debt, and that he will make such conveyance or assurance as may be necessary to vest his interest in the mortgagee. He does not contract that he will make a perfect title, but he does bind himself to do all that is necessary to have the effect of vesting in the mortgagee such interest as he, the mortgagor, has. … Now, if the case were one of an equitable mortgage of freehold, the decree would be that the mortgagor should convey to the mortgagee, without saying at whose expense. In carrying this out, the course would be that the mortgagee would have to prepare a draft and submit it to the mortgagor. When the draft was settled, the mortgagee would have to engross and stamp it, and tender it for execution to the mortgagor, and on that tender being made and refused, and not before, the mortgagor would be guilty of breach of the terms of the decree." 17 The equity to grant specific performance comes from the maxim that equity looks on that as done which ought to be done, but also from a line of cases which indicate that equity rarely declines to grant specific performance where a contract has been executed on one side; see Wight v Haberdan Pty Ltd [1984] 2 NSWLR 280. In Hart v Hart (1881) 18 Ch D 670, 685, Kay J said: "[W]hen an agreement for valuable consideration … has been partially performed, the Court ought to do its utmost to carry out that agreement by a decree for specific performance." 18 I now turn to the question as to whether the court would grant specific performance even of an agreement for mortgage where the rate exceeded 48% per annum. I pick 48% because, under the old usury laws in various jurisdictions, it used to be thought that where the interest rate was above that figure it was up to the moneylender to justify the rate. 19 In England there were usury laws, but these were repealed in 1854 because they were found to be completely ineffective. The English usury laws did not apply in New South Wales: MacDonald v Levy (1833) 1 Legge 39. The Usury, Bills of Lading and Written Memoranda Act 1902, by s 3, made it clear that no Imperial Act relating to usury was applicable to this State, but went on to fix the maximum rate of interest in situations where "the rate of interest has not been previously agreed on by the parties" at 8%. This seems to follow the practice in the State during the 19th century which was referred to by the Full Court in MacDonald's case. However, that Act was repealed by the Usury, Bills of Lading and Written Memoranda (Repeal) Act 1990. 20 There was legislation dealing with certain types of loan transactions throughout the 20th century mainly dealing with registered moneylenders or loans for consumer credit purposes. There still is some legislation in the field, for instance, as was cited in this case, ss 588FD, FE and FF of the Corporations Act 2001. Section 588FD deals with unfair loans to a company "if the interest on the loan was extortionate when the loan was made or has since become extortionate …". Perhaps the principal way in which the court handles such a case is to consider all the circumstances and, if appropriate, to make an order reducing the amount that is due. 21 In Barrett v Hartley (1866) LR 2 Eq 789, 795, Stuart VC said: "It is an observation of some importance now that the usury laws are repealed, that one effect of such repeal was to bring into operation, to a greater extent than formerly, another branch of the jurisdiction of this Court which existed long before them - I mean, that the principle of the Court which prevented any oppressive bargain, or any advantage exacted from a man under grievous necessity and want of money, from prevailing against him." 22 The situations where equity has exercised this power are said to fall into four categories; see Waldock on Mortgages 2nd ed (Stevens & Sons, London, 1950) pp 192 and following, which has found its way in a different form into Cousins Law of Mortgages 1st ed (Sweet & Maxwell, London, 1989) pp 311 and following. The four classes are:

(4) Where the court is given jurisdiction by statute to reopen extortionate credit arrangements. 23 It is the third of these categories that may be relevant in the present case. 24 It is usually not sufficient to show that a mortgage falls into the third class to show that the interest rate was much higher than one might expect. What must be shown is that there is unconscionable pressure on the mortgagor to enter into the arrangement. A mortgage given by a business person at a very high rate of interest, if that mortgage was freely and voluntarily given, will not be able to be attacked. 25 A leading illustration of this principle is Reading Trust Ltd v Spero [1930] 1 KB 492. In that case, Spero, a man of 40 years of age, carried on the business of a dealer in objets d'art. His business was a speculative one, he needed to hold on to jewellery etc until the price was right and he had commenced his business without any capital. That meant he had to borrow, and as he had little security, he had to borrow from moneylenders. He borrowed from Reading Trust Ltd at interest rates ranging from 80-96%. The litigation took place in the context of the Moneylenders Act 1927. However, the English Court of Appeal held that there being no suggestion that anyone put any pressure on the borrower to borrow at those rates and that he made a business decision to do so, he could not show that the transaction was harsh and unconscionable so that it should be set aside. Rowlatt J found (see p 515) that the business man was: "a man of great intelligence … carrying on a high class business, simply finding that his business is so speculative that he cannot get finance from the banks, but so profitable in his skilful hands that he can make profits which can pay 60 or 80 per cent interest." 26 There is some suggestion in early authorities that a provision in a mortgage such as giving the mortgagee a bonus or commission on certain events might be oppressive as "tending to usury; though it is not usury" (Chambers v Goldwin (1804) 9 Ves 254, 271; 32 ER 600, 607). 27 However, in 1804, there could be no debate as to whether provisions fixing the interest rate itself were oppressive as the Usury Laws completely covered the field. The Equity court was merely concerned with clauses which sought to outflank that legislation. 28 After the repeal of the Usury Laws, equity still did not intervene just because of the rate of interest, taking the view that it was now competent for the parties to contract for any rate of interest they chose to fix upon: Eyre v Hughes (1876) 2 Ch D 148, 163. 29 In the instant case, had the borrower sought to set aside the mortgage in equity and the facts were as presented to me in the instant case, the probability would be that the mortgage would not be set aside merely because of the high interest rate. 30 However, in order to establish his title, it is the plaintiff who needs to obtain specific performance. Does the fact that the mortgage stipulates for such a high rate of interest mean that equity would not grant specific performance? 31 The point concerned me for a while, but it seems to me that short of unconscionability including what is sometimes comprehended in the defence of lack of clean hands, the mere fact that there is a high interest rate charged in trade and commerce between people of business does not of itself mean that equity would decline specific performance. 32 Miss Sneddon raised a defence of hardship. However, in this context, one is focusing on hardship in granting specific performance as opposed to leaving the plaintiff to his remedy in damages - an irrelevant consideration here. 33 Accordingly, in my view, on the authorities, the plaintiff must be regarded as being an equitable mortgagee and thus has first claim to the $100,000 surplus in the hands of the National Australia Bank. 34 Perhaps a more technical way of putting the matter is that by virtue of s 91 of the Conveyancing Act 1919 on the discharge of the NAB mortgage, the surplus passes to the next person entitled to a mortgage, namely, the plaintiff. 35 I now have to turn to the question of the interest on the third mortgage. I do not need to deal with this at length, because, for all practical purposes, the plaintiff will recover no interest at all on the third mortgage. 36 The general rule is that where parties enter into a transaction where money is lent on mortgage and intend that there be interest payable, that in default of them specifying the rate, the court may fix the rate. The interest rate is the rate current in the country in which the land charged is situated; see In re Drax [1903] 1 Ch 781, 796. There is no evidence before me as to what that rate is. It seems to me that in default of evidence I would fix the customary 8%. As I say, it matters not one whit in the present case. 37 I now turn to marshalling. Marshalling applies where a creditor has the means of satisfying its debt out of several funds and is not to prejudice another creditor whose security comprises only one of the funds. Thus, if the owner of two properties, X and Y, mortgages them both to A, and then mortgages one of them, Y, to B, B may require the securities to be marshalled. That means that A's mortgage shall be thrown upon property X so far as it will suffice, and property Y, or so much of it as is not required for A's mortgage, shall be left to satisfy B's mortgage; see Fisher & Lightwood, Law of Mortgage Australian edition (Butterworths, Sydney, 1995) [30.7]. In the instant case, the National Australia Bank held security against the business as well as against the land. The land was sold for a total amount of $1,136,000.00 and has paid itself at least $900,000.00, but has left $479,000.00 which it could have utilised from the sale of the businesses. 38 However, it must be pointed out, that of the $479,000.00, only $126,632.00 came from the sale of business of AIS, the balance came from the sale of the business of Sushi Roll. There is also the question as to the priority of liquidators' fees etc in respect of those funds, but I will put those aside for the moment. 39 For the doctrine of marshalling to apply, all the securities must be given by the debtor: Re O'Leary; ex parte Bayne (1985) 61 ALR 674, 680 and see Meagher, Gummow and Lehane Equity Doctrines and Remedies 4th ed (Butterworths, Sydney, 2002) [11-040]. 40 I cannot see any reason, nor has Miss Margaret Sneddon on behalf of the defendants, drawn my attention to any reason, why the doctrine of marshalling should not apply. 41 Accordingly, the plaintiff should be treated as if he had a mortgage over the $126,632.00 fund subject to an argument as to whether such funds are subject to a liability for administrators, liquidators and legal fees. 42 So far as the $353,084.00 as derived from the sale of the Sushi Roll business is concerned, the plaintiff's main attack was based on the document Exhibit PX04. In that, Mr Chikamoto acknowledges that in consideration of the plaintiff forbearing legal proceedings, "I charged in a document dated 22 December 2000, a copy of which is attached and marked 'A' all property I owned for the payment of all debts owed to" the plaintiff. 43 The attached document bears the date in typewriting 22 December 2000. It has on it the seal of Southpac and provides "I Robert Hiroyuki Chikamoto … do hereby authorise as follows: (a) [the plaintiff] to take mortgage of all company assets and properties in the name of the following … Sushi Roll Pty Ltd."

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