Parties in Dispute Over Loan Agreement

MCL 102 Pty Ltd v Yuen [2022] VCC 545 (28 April 2022)

The parties are in dispute over a loan agreement secured by the mortgage.  Yuen complained about the magnitude of the interest, fees and charges payable to SOF under the loan and security documents.  The Court, in resolving this dispute, assessed whether Yuen received independent legal and financial advice and if there was misleading and deceptive conduct.

Facts:

Friseur was incorporated on 25 August 2015 and was deregistered on 17 January 2021.  The company conducted business from The Pines Shopping Centre in Reynolds Road, Doncaster East (“The Pines”).  The company provided hairdressing and other services to the public as well as retailing hair care and related products.  Yuen operated the business through the company.

Yuen worked at a salon which previously operated from the premises at The Pines, a franchise from Hairhouse Warehouse. It was operated for about one year before it failed and the franchisor closed the business. Soon after, Yuen offered to resume the business and she entered into a business management agreement with the franchisor.  According to Yuen, the franchisor agreed that, after a satisfactory 12 month trial period, the franchisor would sell her a franchise to the business for $100,000.  Although Yuen paid fees to the franchisor for about three and a half years, the franchisor never offered her a franchise.

On 13 April 2016, Friseur applied for and obtained finance from the ANZ.  It obtained a business loan, an overdraft facility and a credit card.  Yuen’s intention was for the overdraft to assist with working capital and the business loan to enable her to buy the franchise.  In December 2018, the franchisor changed the locks on Friseur’s premises and locked Yuen out of the business.  

Yuen said that the franchisor ceased operating the business in about mid-March 2019 and another unrelated business began operating from the premises.  On 4 March 2019, the Australian Taxation Office (“ATO”) issued a director’s penalty notice to Yuen for Friseur’s failure to pay superannuation guarantee contributions.  On 26 March 2019, the solicitors, Thomson Geer, sent Friseur a notice of demand on behalf of the ANZ seeking payment in the sum of $125,334.07.  

On 30 April 2019, the ATO issued a demand to Friseur seeking payment of $140,375.45.  In about March 2019, a friend of Yuen’s arranged for her to meet Scott Casey (“Casey”) the third party in the proceeding.   During June 2019, Casey arranged for Yuen to obtain a short-term loan from MA SOF 32 Pty Ltd (“SOF”).  During June 2019, Casey arranged for Yuen to obtain a short-term loan from MA SOF 32 Pty Ltd (“SOF”). 

On 26 June 2019, Casey took Yuen to the office of a solicitor, George Schifter (“Schifter”), in order for Yuen, as a director of Friseur and a guarantor of its obligations to SOF, to obtain independent legal advice about the loan and security documentation she was to sign.  On 28 June 2019, SOF advanced $275,000, which after retaining prepaid interest for six months, loan establishment fees, broker’s fee and other costs, resulted in a net advance of $234,422.  From this amount, the plaintiff paid $128,458.24 to the ANZ to discharge Friseur’s indebtedness to the bank.  Under the terms of the loan, Friseur was to repay the principal on 25 December 2019. 

Friseur never obtained a replacement loan from Bendigo Bank or any other financial institution.  SOF made demands upon Friseur and Yuen.  Neither of them paid the outstanding debt.  Yuen remains in possession of the property.  By deed on 20 May 2020, SOF assigned to MCL its interest in the loan and also transferred to it the mortgage it had obtained from Yuen over the property.  On 26 May 2020, the mortgage over the property was transferred and registered in the name of MCL, it included equitable rights and rights of subrogation. 

Issue:

Whether or not MCL is entitled to recover a debt from Yuen and to obtain possession of the property which Yuen owns.

Applicable law:

Australian Securities and Investments Commission Act 2001 (Cth) - provides that a person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive.

Corporations Act 2001 (Cth) - provides that a company must lodge with ASIC notice of a change of the address of its principal place of business not later than 28 days after the date on which the change occurs. 

Baden v Société Générale pour Favouriser le Développment du Commerce et de l’Industrie en France SA [1993] 1 WLR 509 - where Peter Gibson J formulated categories of knowledge which a person might have. 

Banco Exterior Internacional v Mann [1995] 1 AII ER 936 - provided that the bank was entitled to assume that the relevant solicitor would act honestly and give proper advice to the security provider.

Certane CT Pty Ltd v Whight [2021] QSC 77 - make clear that, while equitable defences can operate to discharge security given by or on behalf of vulnerable borrowers and guarantors whose circumstances were improperly exploited, such relief can be given on the condition that the borrower who enjoyed the full benefit of the advance repaid the advance or made restitution.

Commonwealth Bank of Australia v Iloska & Anor [2018] VCC 144 - relied upon in holding that because SOF paid approximately $128,000 to ANZ to discharge the ANZ mortgage, even on a worst case for the plaintiff, it would nonetheless be entitled to be subrogated to the rights of the ANZ in relation to that indebtedness.

Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 - the High Court accepted that the third Baden category of knowledge was a species of “actual knowledge, as understood both at common law and in equity”. 

Hoysin Pty Ltd v Corelli [2021] VCC 1197 - where his Honour agreed with the lender’s counsel that, whether the borrower could repay the loan when due from its own assets or income was not relevant when the two short-term loans were granted on the basis that they would be refinanced. 

McIvor v Westpac Banking Corporation [2012] QSC 404 - Applegarth J dealt with a case where a mother, who had provided security for advances made for her son’s business, sought to prevent the bank from realising its security when the son failed to meet his financial obligations to the bank. 

Micarone v Perpetual Trustees Australia Limited [1999] SASC 265; (1999) 75 SASR 1 - held that it is not unconscionable for a lender to enforce the financial obligations of a loan agreement if the borrower has received competent independent and disinterested advice.

Paciocco v Australia and New Zealand Banking Group Limited [2015] FCAFC 50 - provides that the interest rate, especially the default rate of nearly 24%, is not of itself unconscionable within section 12CB of the ASIC Act. 

Secure Funding Pty Ltd v Moon [2012] QSC 244 - held that it would be remarkable if a lender owed a duty to a borrower to investigate an untrue statement about the borrower’s income, for which statement the borrower was dishonestly responsible.

Violet Home Loans Pty Ltd v Schmidt [2013] VSCA 56 - provides that to the extent that any information supplied by a prospective borrower was inconsistent or implausible or evidenced a likely inability to either repay or refinance the loan, a financier’s conduct in ignoring the same might be relevant as part of the synthesised assessment which is required.

Analysis:

Yuen submitted that she was in a vulnerable position at the time Friseur and she entered the loan and security agreements with SOF.   In 2019, Yuen was in serious financial difficulty.  The franchisor closed down the business which she had run for more than three years.  MCL denied that Yuen was vulnerable, noting that she obtained financial accommodation from the ANZ in the sum of about $150,000 and provided security in the form of a mortgage over the property.  Yuen’s business operations were sufficiently profitable to meet her statutory and other obligations as she continued to trade successfully for a significant period of time.

While Yuen was in a difficult financial position in the first half of 2019, she still had her technical skill and experience and had the capacity to re-establish herself as a hairdresser, whether independently or as an employee.  The interest on the SOF loan was paid for six months and Yuen was able, if she chose, to focus on her work.   Yuen’s claim did not allege that SOF knew of any alleged vulnerability.  The agreed evidence about the lengthy period of time spent at Schifter’s office supports Schifter’s position that he gave Yuen detailed explanations and legal advice about the substance and effect of the loan and security documents which she signed.

SOF required that Friseur and Yuen obtain independent legal advice before it made any loan.  The loan from SOF was only ever intended to be short-term in nature.  It was made in a situation where, based on what Casey said, SOF, Yuen and Schifter all expected that SOF would simply provide Friseur with temporary funding until Bendigo Bank refinanced the debt.  Yuen accepted the terms of the agreement with SOF (including the special conditions) because she expected that Bendigo Bank would provide the refinancing which she and Friseur required.  The fact that Bendigo Bank did not ultimately refinance her debt had nothing to do with any conduct by SOF.

Conclusion:

The Court does not consider that Yuen was in a position of vulnerability at the time she entered the loan and security agreements with SOF.  The Court is satisfied that Yuen knew and understood the substance of the obligations which she and Friseur assumed in entering the loan and security arrangements with SOF and that she understood the general nature and effect of the transaction.