Parties Dispute Enforceability of Loan Agreement
Dispute arose between the Company, being the developer of the Arden Street Property, and its financiers. The plaintiffs are seeking relief relating to the appointment of the second and third defendants as receivers of the Company, the sale of the Arden Street Property, and the debts and security interests claimed by the defendants. The Receivers seek relief principally by way of declarations relating to their rights to indemnity, remuneration and expenses claimed against the Company and Wael.
Facts:
By Loan Agreement dated 13 December 2011 between Trustworthy Nominees as lender, the Company and Mr Fadl El Saafin as borrowers, and the El Saafin Brothers as guarantors, Trustworthy Nominees agreed to loan the Company and Mr Fadl El Saafin the sum of $250,000, secured by a second mortgage over the Arden Street Property. On 20 December 2011, the Company was registered as proprietor of the Arden Street Property. By an alleged email of 19 March 2014 to New Concept Design Mr El-Hissi of NOH Legal attached an allegedly signed Investment Loan Agreement between the Company as developer and Mr Mekkya as investor wherein the latter had agreed to loan the Company the sum of $750,000.
The Company (the third plaintiff) with Hassan (the first plaintiff), and Mohamed (The second plaintiff) as its directors and shareholders, brought a claim ('the Derivative Proceeding') pursuant to the leave granted by Lyons J on 28 July 2020.
Wael (the fourth plaintiff), one of the shareholders and registered as proprietors of the Nairne Terrace Property, was joined to the proceeding. The plaintiffs are seeking relief relating to the appointment of the second and third defendants as receivers of the Company; the sale of the Arden Street Property to the seventh defendant (‘AAGG’) by the fourth defendant (‘MAG Financial’) as assignee of a mortgage executed by the Company in favour of Balanced Securities Ltd (‘Balanced Securities’) on 28 October 2016 (‘the Balanced Mortgage’); and, the debts and security interests claimed against the Company by, Mr Franek, Mr Mekkya, Mr Sacca, and the Builder or the first, eight, ninth, and tenth defendants respectively ('the MAG Parties').
The Receivers seek relief principally by way of declarations relating to their rights to indemnity, remuneration and expenses claimed against the Company and Wael. MAG Financial, AAGG and the Builder seek relief principally by way of enforcement of debts and security interests claimed against the first to sixth defendants. The MAG proceeding was brought by MAG Financial for relief against Wael and Bayda by way of enforcement of an equitable charge over the Nairne Terrace Property.
The Trustworthy Proceeding was brought by the plaintiff Trustworthy Nominees for relief against Wael and Bayda by way of enforcement of a security interest over the Nairne Terrace Property, and a declaration of priority over the equitable interest claimed by MAG Financial. Wael and Bayda seek relief principally by way of declarations that MAG Financial’s loan agreements are unenforceable and security interests are void insofar as they relate to the Nairne Terrace Property. The Mekkya Proceeding was a claim originally brought by Mr Mekkya in the County Court for relief against the Company by way of enforcement of an agreement between the parties. Judgment was entered in default of appearance in favour of Mr Mekkya. The Company seeks to have that default judgment set aside.
Issues:
I. Whether or not the loan agreement is unenforceable.
II. Whether or not the security is void.
III. Whether or not the mortgagee’s conduct in effecting the mortgagee’s sale was unconscionable.
IV. Whether or not the proceeds of mortgagee’s sale had been allocated in accordance with s 77 of the Transfer of Land Act 1958 (Vic)
Applicable law:
Consumer Credit (Victoria) Act 1995 (Vic) s 39 - provides that a contract is unenforceable if its rate exceeds 49 per cent.
Consumer Credit (Victoria) Act 1995 (Vic) s 40 - provides that mortgage is void if the rate under the credit contract exceeds 48 per cent.
Australian Securities and Investments Commission Act 2001 (Cth) s 12CB - identifies a non-exhaustive list of factors to which the Court may have regard in determining unconscionable conduct in connection with financial services like the vulnerability of the service recipient relative to the supplier, any bad faith or unfair dealing of the supplier to the service recipient in the transaction, and the standard of conduct of the supplier measured against its own conduct in similar transactions and industry codes.
Transfer of Land Act 1958 (Vic) s 77 - provides for the power of sale under a mortgage or charge.
Vella v Permanent Mortgages Pty Ltd [2008] NSWSC 505; (2008) 13 BPR 25,343 - provided that in determining the purpose for which credit was ‘provided or intended to be provided’, the Court should have regard to the purposes of the creditor or debtor, subjectively or objectively assessed, or by a combination.
Knowles v Victorian Mortgage Investments Ltd [2011] VSC 611, [38]-[47] - Croft J stated that if the credit provider does not obtain a signed declaration in the required form from the borrower then the credit provider is not afforded the protection of the presumption provided under s 11(2) of the CCC, and thereby invites the difficulty of proving that the loan was not intended to be used wholly or predominantly for personal, domestic or household purposes.
Dale v Nichols Constructions Pty Ltd [2003] QDC 453, [28] - provided that in determining whether lending occurs in the course of a business, the Court will apply a broad and liberal interpretation appropriate for the Code as a piece of beneficial legislation.
Haynes v St George Bank (2018) 130 SASR 551, 563 [45] - Kourakis CJ specifically held that the test for assessing the relevant purpose of the provision of credit was objective. He concluded that the intention of a debtor was not determinative and that the Court must consider ‘the substance of the transaction in the context of its performance’.
Linkenholt Pty Ltd v Quirk [2000] VSC 166, [98] - considered the application of the Credit Code in the following circumstances:
(a) The defendant, a natural person, was the guarantor of an original loan taken out by a related company for business purposes.
(b) After the related company was wound up, the defendant entered into a credit agreement with the creditor to satisfy his obligations as guarantor.
(c) The defendant argued that the later loan was regulated by the Code because the defendant and the related company were ‘completely different entities’, and a loan to the defendant to enable him to discharge a personal guarantee was not a loan to any business or a loan for business purposes.
Jonsson v Arkway Pty Ltd [2003] NSWSC 815; (2003) 58 NSWLR 451 - found that the term ‘personal’ purpose should not be given a narrow construction limiting it to the debtor’s personal, domestic or household purposes.
Analysis:
Franek GSA states that the security granted was in consideration of Mr Franek ‘lending the Loaned Amount [being the amount loaned under the Second Franek Loan Agreement] to the Grantor’ and the Consumer Credit Act applies if the mortgage relates to the credit contract and does not require the mortgage to be given as security for such a contract.
The Franek Settlement Deed was not intended to supersede and replace the Second Franek Loan Agreement. The parties’ intention was that Wael and Bayda would remain liable under the Second Franek Loan Agreement; but that such liability could be discharged on performance by Wael, Bayda and the Company of their obligations under the Franek Settlement Deed and, in particular, the ‘Settlement’.
The nature and purpose of s 40 of the Consumer Credit Act is to void a mortgage that imposes an interest rate exceeding 30% per annum insofar as it relates to a credit contract. The provision is of a remedial nature and should be construed as liberally as its terms and context permit. If the Second Franek Loan Agreement is unenforceable, the security with respect to it, under the Franek GSA, is similarly unenforceable.
The appointment of the Receivers was effected on an expedited basis on 9 April 2018. The payment of the Receivers by an advance of $50,000 was made by Mr Mekkya and Mr Sacca on 6 April 2018 through their company, Trade On.
The Receivers’ appointment was made without prior notice to the Company. MAG Financial did not act in good faith, and sold the Arden Street Property to deprive the Company of the opportunity of redeeming the mortgage. Furthermore, the purported consideration for the sale of the Arden Street Property was not applied to repay the amount due under the Balanced Facility Agreement, which enabled that security to be used to appoint the Administrators over the Company and to attempt to prevent the Derivative Proceeding from continuing.
Conclusion:
The Court concluded that the Second Franek Loan Agreement is unenforceable under s 39 of the Consumer Credit Act.
The Franek GSA Mortgages and the Franek Settlement Deed Mortgage are void under s 40 of the Consumer Credit Act insofar as each relates to the Second Franek Loan Agreement.
The appointment of the Receivers under the Franek GSA was invalid.
The Company was not a party to the Sacca Loan Agreement. The Company did not enter into the Mekkya Loan Agreement; and even if it did, the Mekkya Debt was repaid in any event.
The MAG Parties entered into an arrangement where entities related to Mr Sacca and Mr Mekkya paid for the assignment of the Balanced Facility Agreement, the Franek GSA and the Franek Settlement Deed to MAG Financial and in consideration MAG Financial transferred the Arden Street Property, under the assigned Balanced Mortgage, to AAGG, an entity related to Mr Sacca and Mr Mekkya, for illusory consideration.
The sale of the Arden Street Property should be set aside because it was in breach of MAG Financial’s duty as mortgagee under s 77 of the Transfer of Land Act 1958 (Vic); and unconscionable under s 12CB of the ASIC Act.
Due to MAG Financial's refusal to accept proposed tenders of the amounts due, the Company’s obligation to pay interest under the Balanced Facility Agreement is limited; the El Saafin Brothers are discharged from liability as guarantors under the Balanced Facility Agreement; and the Company is discharged from liability as guarantor under the Franek Settlement Deed.
The equitable interest of Trustworthy Nominees in the Nairne Street Property has priority over the equitable interest of MAG Financial as assignee of the Second Franek Loan Agreement.
