FEDERAL COURT OF AUSTRALIA

Duckworth as Trustee for Ocean Farms Trust v H G & R Securities Pty Ltd [2007] FCA 1690

PRACTICE AND PROCEDURE –interlocutory injunction – whether serious question to be tried that the stipulation for a risk fee in a facility agreement is unconscionable conduct in contravention of s 12CC of the Australian Securities and Investments Commission Act 2001 (Cth)

Australian Securities and Investments Commission Act 2001 (Cth) ss 12CA, 12CC, 12GD

Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57

Australian Competition and Consumer Commission v Simply No‑Knead (Franchising) Pty Ltd (2000) 104 FCR 253

NEIL JAMES DUCKWORTH AS TRUSTEE FOR OCEAN FARMS TRUST v H G & R SECURITIES PTY LTD AND BALANCED SECURITIES LIMITED

WAD 100 OF 2007

SIOPIS J

9 JULY 2007

PERTH

THE COURT ORDERS THAT:

1                    Upon the applicant undertaking to the Court that he will pay to any party restrained by this interlocutory injunction or any interim continuation thereof such compensation as the Court may in its discretion consider in the circumstances to be just, such compensation to be assessed by the Court or in accordance with such directions as the Court may make and to be paid in such manner as the Court may direct, until judgment or further order in this application, the first respondent be restrained from exercising, whether by their directors, servants, agents or otherwise, any powers of sale under any of the loan agreements and/or mortgages made between the applicant and first respondent to sell the land known as portion of Melbourne Location 3913 being the whole of the land in Certificate of Title Volume 1553 Folio 661 or the land known as Lots 33 and 34 Sappers Road, Lancelin, Western Australia, or to deal in any way with any portion of the abovementioned land or to sell any of the assets of, or to appoint a receiver over, West Sunrise Estate Pty Ltd.

2                    Until further order, the applicant is to pay to the first respondent the sum of $150,000 per month on the twenty-fifth day of each month, commencing on 25 July 2007, on account of its obligations to pay interest and other fees under the loan agreements between the applicant and the first respondent.

3                    In the event that the applicant defaults in the performance of order two, the first respondent shall be at liberty to apply on three clear days notice to set aside the injunction referred to in order one above.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

1                     The applicant is engaged in a property development known as the “Sunset Estate“ near Lancelin in the State of Western Australia.  The development has advanced to the stage where titles have been issued for 104 lots as part of stages A to D of the development.  By 9 May 2007, settlement had occurred in respect of the sale of 28 of the 104 lots comprising stages A to D.  Stages E, F and G will provide another 74 lots.

2                     The respondents are related corporations and were described by their counsel as “non‑mainstream lenders”.  Counsel referred to the first respondent as a “high risk/high return lender”, securing its borrowings through second and subsequent mortgages.

3                     At various times during the period January 2004 to July 2006, each of the respondents advanced monies to the applicant to purchase the land comprising the Sunset Estate development, and also to finance the development works.  Included amongst the monies advanced by the first respondent was the sum of just over $3.75 million advanced in July 2006, primarily to permit the applicant to satisfy the requirement to furnish a performance bond to the Water Corporation in respect of the development.  The monies which were advanced by the second respondent were secured by a first mortgage and the monies provided by the first respondent are secured by a second mortgage.

4                     On 3 May 2007, the first respondent issued a notice of default alleging that the applicant was in default in compliance with the provisions of the mortgage and various facility agreements, in that the applicant had failed to make payments of interest on the due date set out in the facility agreements and to repay all the monies at the end of the accommodation period set out in those agreements.  The notice demanded that the applicant remedy the default by paying $15,500,296.44 within seven days of the demand.  The notice also said if payment was not made the first respondent would sell the mortgaged land pursuant to the exercise of its powers under the mortgage.

5                     On 18 May 2007, the applicant commenced a proceeding in this Court seeking relief under the Australian Securities and Investments Commission Act 2001 (Cth) (the Act) on the basis that the first respondent had engaged in unconscionable conduct in contravention of the Act.  The applicant sought damages and declarations that certain provisions in the facility agreements requiring the applicant to pay fees, described as “risk fees”, be declared null and void, and that other provisions relating to the rate of interest payable by the applicant on the outstanding amount be varied.  The applicant also seeks an interim injunction, presumably under s 12GD(3) of the Act, enjoining the first respondent from taking any action under the facility agreements and the second mortgage to sell the land the subject of the mortgage until the hearing of this application, or until further order.

6                     The first question is whether there is a serious question to be tried in the sense referred to in Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57 that the first respondent has engaged in unconscionable conduct in contravention of s 12CC and s 12CA of the Act.

7                     In support of his claim that the first respondent has contravened s 12CC of the Act, the applicant contended that the amount of the fees and the interest rates that were charged under the facility agreements were in senior counsel’s words “exorbitant”, and were substantially in excess of what was necessary to protect the legitimate interests of the first respondent.  It is also said that the size of the risk fees and the rate of interest charged indicated that the first respondent had taken advantage of the gravely impaired bargaining position of the applicant who initially required the funding from the respondents because he faced a notice of default issued by the seller of the land; and, thereafter, had no practical means of obtaining finance from alternative sources because of the existence of the two mortgages in favour of the respondents over the land.

8                     The risk fees complained of, are fees which become payable by the applicant on the expiry date of the advances, or earlier in the event of default, or upon the advances made by the first respondent being repaid on a refinancing.  As previously mentioned, the monies were advanced to the applicant over a period of time, because the applicant sought on a number of different occasions, a further advance from the first respondent.  On each of these occasions, the terms on which the further advance was to be made were negotiated, and those negotiations led to a variation in the total amount of the risk fee payable by the applicant.

9                     By way of illustration, in April 2004, in respect of an advance totalling $900,000, the first respondent stipulated for the payment of a risk fee of $700,000.  In November 2004, the total amount of the loan increased to $1.2 million, and the total risk fee increased to $1.87 million ‑ so that the total risk fee substantially exceeded the total amount of the loan.  The risk fee comprised two separate components:  the first was the sum of $1.2 million which was to increase by $50,000 per month for each month that the fee was not paid, once it was due.  The second part of the risk fee was for $670,000.

10                  The first respondent is also entitled to charge interest on the risk fee at the default rate of interest which was 6% above the standard rate of interest of 19.5% for so long as the risk fee, once payable, remained unpaid.

11                  The first respondent contended that the applicant had received the benefit of legal advice in all of its negotiations with the first respondent and that, in those circumstances, its conduct could not be unconscionable.  The first respondent also explained that the stipulation for risk fees could be equated with, in its words, taking an “equity position” in the project.

12                  The first issue is whether there is a serious question to be tried that s 12CC of the Act applies to the transactions in question.  The answer to this question depends upon whether the “price” of the supply of the “financial service” in question was less than $3 million within the meaning of s 12CC(8) and s 12CC(10) of the Act.  Both parties accept that s 12CC had no application to the advance of $3.75 million that was made by the first respondent in July 2006 to permit the applicant to meet its performance bond obligations to the Water Corporation.

13                  As previously stated, the applicant engaged in a number of separate dealings with the first respondent whereby he progressively increased the total amount of the monies he borrowed.  The applicant submitted that in assessing “the price” for the “financial service” supplied, each of the dealings in which the first respondent agreed to lend a further additional amount had to be, in his words, “disaggregated”.  I accept there is a serious question to be tried that such disaggregation had to occur on the proper construction of s 12CC(8) and s 12CC(10) of the Act.  It is the case that on each of the occasions of a further advance, new terms were agreed.

14                  The second issue is whether there is a serious question to be tried, that by stipulating that the applicant agree to a risk fee as a condition of the advance, the first respondent engaged in unconscionable conduct in contravention of s 12CC of the Act.

15                  The authorities distinguish between the nature and quality of unconscionable conduct prescribed by s 12CA of the Act which relies upon unconscionability under the unwritten law, and conduct characterised as unconscionable under s 12CC of the Act.  In respect to the latter conduct, it is accepted that the Act contemplates unconscionable conduct occurring in a wider range of circumstances than contemplated by unconscionable conduct under the unwritten law.  (See, for example, Australian Competition and Consumer Commission v Simply No‑Knead (Franchising) Pty Ltd (2000) 104 FCR 253 at 265, at [31] and [37].)  It is apparent that the list of circumstances referred to in s 12CC(2) of the Act is not exhaustive of the circumstances that can be taken into account in determining whether conduct contravenes s 12CC(1).

16                  In my view, there is a serious question to be tried whether, on the proper construction of s 12CC, conduct may be unconscionable on the basis of the harshness, or the oppressive nature, of the terms which are included in a loan contract.  In other words, there is a serious question to be tried whether substantive unconscionability, as opposed to procedural unconscionability, is capable of giving rise to a contravention of s 12CC(1).  Further, I am of the view that there is a serious question to be tried that, by stipulating for the payment of the risk fees, which on occasions exceeded the amount of the loan by more than 100%, the first respondent engaged in unconscionable conduct in contravention of s 12CC of the Act.

17                  In my view, it is far from clear that a stipulation for a risk fee could be justified on the grounds that it is to be equated with an investment of equity in a project.  Rather than relieving the project developer from the need to incur debt, as is usually the case in relation to an “equity” investment, the “risk fee”, which was repayable on default and thereafter carried interest, had the potential significantly to aggravate the debt burden on the applicant.

18                  In my view, therefore, there is a serious question to be tried as to whether in the circumstances set out above, an injunction would be issued at trial precluding the first respondent from acting upon the demand of 3 May 2007, because a significant component of the monies demanded thereunder were arguably the product of unconscionable conduct.

19                  It is unnecessary, therefore, to make any findings in relation to the applicant’s case based on what were said to be the excessive interest rates charged and the unconscionable conduct under s 12CA of the Act.

20                  The next question is whether the balance of convenience favours the grant of an injunction.  The applicant submits that the balance of convenience favours the grant of the injunction.  He contended that if the injunction is not granted, the first respondent would be entitled to exercise the power of sale under the mortgage or facility agreements, with the consequence that the applicant would lose control of the development, and suffer irreparable damage.  Further, the applicant said that the first respondent would not be prejudiced because, on the evidence of the Frank Knight valuation, the value of the land which was unsold exceeds the amount of the debt, even in the sum of $15 million as claimed in the notice of default by the first respondent.

21                  The applicant also referred to the evidence of Mr Tilenni, an accountant, who deposed that of the amount claimed by the first respondent in its default notice, $3.3 million of that sum comprises risk fees.  He also deposed that if risk fees were eliminated from the amount claimed and interest was charged at 12.5%, the total amount owing under the second mortgage would be around $8 million, and not $15.5 million as claimed.

22                  The applicant also complained that the respondents had refused to give their consent to the settlement of a number of sales of lots comprising the development and this had prevented the applicant from further reducing the amount of the debt.

23                  The first respondent contended that the balance of convenience did not favour the grant of an injunction.  The first respondent accepted that the valuation evidence showed that the value of the land and unsold lots was approximately $17 million to $18 million.  Mr Trevor Wilson of the respondents deposed in an affidavit of 15 June 2007, that over an eight week period the amount of fees and interest that would accrue on the amount claimed was $597,047.  However, in a subsequent affidavit sworn on 18 June 2007, Mr Wilson deposed that the interest and additional risk fees were accruing at a rate of $508,097 per month, and that the previous calculation was wrong.  He said the total amount then due was approximately $17 million.  Mr Wilson did not explain the basis of this second calculation and why the first calculation was wrong.  Nor did the evidence of Mr Wilson explain how the sum of approximately $15.5 million claimed in the default notice had escalated in a period of about six weeks to a total of approximately $17 million.  In any event, there was no challenge to Mr Tilenni’s evidence that a substantial component of the increase in the sum due is derived from a progressive increase in the amount of the risk fee, and also from interest being charged at the higher default rate.

24                  In my view, the balance of convenience favours the applicant.  The evidence shows that the value of the land is sufficient at this time to cover an outstanding amount of $17 million.

25                  Further, the evidence shows that there are 74 lots comprising stages 2A and 2B in respect of which titles have been issued with a total value of $13.35 million.  It is, therefore, within the power of the respondents to enhance their position by approving the settlement of the sales of these lots which would then permit a reduction in the debt.  However, these considerations are, in my view, not a sufficient basis upon which to determine this application.

26                  In my view, the applicant should be required to do equity.  There is no dispute that the applicant owes a very substantial amount of monies to the respondents.  On the applicant’s best case, the amount is approximately $8 million.  However, the applicant has not been paying interest on the outstanding amount of the loan, even in respect of the sum which, on his best case, he accepts that he owes.  In my view, for the applicant to do equity, he should be required to start paying interest, at the very least, in respect to the amount that he accepts that he owes.

27                  The evidence is that interest at 12.75% on $8 million will be $85,000 per month.  As previously mentioned, there is uncertainty in the evidence as to the amount now said to be due to the first respondent.  Nevertheless, in my view, in determining the monthly amount that the applicant should pay pending trial, that amount should take into account the fact that the first respondent claims that an amount significantly higher than $85,000 per month, is due to be paid each month.

28                  Accordingly, I will require that as a condition of the grant of the interim injunction the applicant pays the sum of $150,000 to the first respondent, monthly, until further order.  In setting this amount, I take into account the fact that the means of substantially reducing the principal is available to the first respondent in the form of approving settlement in respect of the lots which are available for sale.

Associate:

Dated:         7 November 2007