FEDERAL COURT OF AUSTRALIA

Devon v Thirteenth Kaysan Pty Ltd [2016] FCA 357

ORDERS

THE COURT ORDERS THAT:

1.    Judgment be entered for the First, Second, Third and Twelfth Respondents against the Applicant pursuant to s 31A(2) of the Federal Court of Australia Act 1976 (Cth).

2.    The Applicant pay the First, Second, Third and Twelfth Respondents’ costs of the proceedings.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

1    Application has been made by the First, Second, Third and Twelfth Respondents for an order pursuant to s 31A(2) of the Federal Court of Australia Act 1976 (Cth) (“the Act”) and/or r 26.01(1) of the Federal Court Rules 2011 (Cth) (“the Rules”) dismissing the whole of the Applicant’s claims against them. Alternatively, they seek an order pursuant to r 16.21(1)(b)–(f) of the Rules that the claims against them be struck out in their entirety and ancillary orders pursuant to s 37P(2) of the Act in relation to the filing and serving of an amended statement of claim by the Applicant. As the First and Second Respondents were only recently served with the Originating Process, they made their application orally.

2    The Applicant, who at the time was self-represented, filed an originating process on 3 September 2015 seeking relief against 27 named respondents supported by an affidavit sworn by him. The application was said to be made under the National Consumer Credit Protection Act 2009 (Cth), the National Consumer Credit Protection Regulations 2010, the National Credit Code, ss 12AC–12ED and s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth), s 18 of the Competition and Consumer Act 2010 (Cth) (presumably intended to be a reference to s 18 of the Australian Consumer Law, Sch 2 to the Competition and Consumer Act), s 1041H and Chapter 5C of the Corporations Act 2001 (Cth), the Consumer Credit Legislation Amendment (Enhancements) Act 2012 and the Australian Consumer Law and Fair Trading Act 2012 (Vic). Pursuant to orders made by the Court on 16 October 2015, the Applicant also filed a statement of claim. Neither the grounds supporting the originating process or the affidavit in support are easy to follow, nor do they articulate an intelligible claim. The statement of claim is also largely unintelligible but as best can be understood, the allegations against the 27 respondents relate to two loan transactions, although the loan transactions themselves are not specifically identified.

3    Nonetheless, it is uncontroversial that one of the loan transactions relates to an amount of $1.5 million advanced by the First and Second Respondents to Southco Enterprises Pty Ltd (“Southco”), a company of which the Applicant was the sole director at the relevant time (“the first loan”). The Applicant guaranteed the loan and also gave a first mortgage over the property at 11 Cromwell Road, South Yarra (“the property”), of which the Applicant is the registered proprietor, as security for the loan. The First and Second Respondents were clients of the Third Respondent, a legal firm which procured the finance for Southco.

4    The other loan transaction involved the Twelfth Respondent which is also a firm of solicitors. The particulars of that loan are not easily identified in the evidence before the Court as the Twelfth Respondent did not file any supporting material itself but instead relied wholly upon the material filed on behalf of the Third Respondent. That material incorporates some documentation in relation to a second mortgage over the property to secure a loan of $1.1 million from the Fourth to Eleventh Respondents, which the Applicant also guaranteed, although it is unclear whether that loan was made to Southco or to another company also associated with the Applicant, namely Cambray Place Pty Ltd (“Cambray Place”) (“the second loan”). The Applicant has alleged that the loan was a “managed investment pool” of the Twelfth Respondent.

5    The Applicant’s pleaded case against the First, Second, Third and Twelfth Respondents, in essence, is that the loan transactions were credit contracts to which the provisions of Sch 1 of the National Consumer Credit Protection Act 2009 (Cth) (“National Credit Code” or “Code”) applied and the respondents were credit providers under those contracts. It is alleged that the respondents did not comply with the licensing requirements or the responsible lending requirements imposed under the National Consumer Credit Protection Act 2009 (Cth) (“Credit Act”). It is further alleged that the respondents “knowingly contracted to avoid the provisions of the National Credit Code for consumer protection”. No material facts are pleaded in support of this allegation nor are any particulars provided. The grounds of the Originating Process do, however, contain the allegation that the credit contracts were “structured, knowingly, into a company solely for the purpose of providing to [the Applicant] as an individual consumer, home refinancing of an existing consumer credit contract with the Delphi Bank”.

6    Claims of unconscionable conduct and misleading and deceptive conduct are also alleged against the respondents. As best can be understood, it is alleged that the respondents “entrapped” the Applicant to obtain finance from them by lodging caveats over the property to prevent the Applicant from selling the property or refinancing with other lenders and used “inflated internal valuations” to over lend and charge increased fees. The Applicant seeks orders setting aside the “finance contracts” and compensation and damages.

the statutory scheme

7    For the purposes of the National Credit Code, a “credit contract” is a contract under which credit is or may be provided, being the provision of credit to which the Code applies: s 4. One of the requirements for the Code to apply is that the debtor is a natural person or a strata corporation: s 5(1)(a). Section 5(1)(b) imposes another requirement, namely that the credit is provided or intended to be provided wholly or predominantly for the following purposes (“a Code purpose”):

(1)    for personal, domestic or household purposes; or

(2)    to purchase, renovate or improve residential property for investment purposes; or

(3)    to refinance credit that has been provided wholly or predominantly to purchase, renovate or improve residential property for investment purposes.

8    Section 5(3) provides that for the purposes of the section, investment by the debtor is not a personal, domestic or household purpose.

9    Section 5(4) relevantly provides that for the purposes of the section the predominant purpose for which credit is provided is the purpose for which more than half of the credit is intended to be used.

10    Section 7 provides that the National Credit Code applies to a mortgage if the mortgage secures obligations under a credit contract or a related guarantee and s 8 provides that the Code applies to a guarantee if it guarantees obligations under a credit contract.

11    Section 13(1) provides that in any proceedings (whether brought under the Code or not) in which a party claims that a credit contract, mortgage or guarantee is one to which the Code applies, it is presumed to be such, unless the contrary is established. The effect of s 13(1) is to place the onus on a party who claims that a credit contract, mortgage or guarantee is not subject to the Code to prove that the Code does not apply. However, s 13(2) provides that it is presumed for the purposes of the Code that credit is not provided or intended to be provided under a contract wholly or predominantly for a Code purpose if the debtor declares, before entering the contract, that the credit is to be applied wholly or predominantly for a purpose that is not a Code purpose, unless the contrary is established. In those circumstances, the onus is upon the debtor to show that the credit was in fact to be applied for a Code purpose. Section 13(3) provides that such a declaration is ineffective:

if, when the declaration was made, the credit provider…:

(a)    knew, or had reason to believe; or

(b)    would have known, or had reason to believe, if the credit provider…had made reasonable inquiries about the purpose for which the credit was provided, or intended to be provided, under the contract;

that the credit was in fact to be applied wholly or predominantly for a Code purpose.

the parties’ submissions

12    In short compass, each Respondent’s case for summary judgment is that neither loan is a “credit contract” to which the National Credit Code applies because the loans were made to companies, not to a natural person (s 5(1)(a)). In addition, the Respondents also contend that the first loan is not a “credit contract” to which the National Credit Code applies because that loan was not provided wholly or predominantly for a Code purpose (s 5(1)(b)).

13    Mr Levine of counsel appeared for the Applicant. Mr Levine contended that there is a triable issue as to whether the “main purpose, if not the true purpose” of the loans was to provide funds to the Applicant to refinance the property and the “interposition” of the corporate entity “was a sham, pretence or absolutely unnecessary” and was done in order to avoid the application of the Code. Mr Levine contended that there is also a triable issue as to whether the first loan was to be applied wholly or predominantly for a Code purpose. In the alternative, Mr Levine contended that the mortgage of the Applicant’s property constitutes a credit contract for the purposes of the Code.

summary judgment principles

14    The power of the Court to grant summary judgment is contained in s 31A of the Act. That section provides as follows:

31A Summary judgment

(1)    The Court may give judgment for one party against another in relation to the whole or any part of a proceeding if:

(a)    the first party is prosecuting the proceeding or that part of the proceeding; and

(b)    the Court is satisfied that the other party has no reasonable prospect of successfully defending the proceeding or that part of the proceeding.

(2)    The Court may give judgment for one party against another in relation to the whole or any part of a proceeding if:

(a)    the first party is defending the proceeding or that part of the proceeding; and

(b)    the Court is satisfied that the other party has no reasonable prospect of successfully prosecuting the proceeding or that part of the proceeding.

(3)    For the purposes of this section, a defence or a proceeding or part of a proceeding need not be:

(a)    hopeless; or

(b)    bound to fail;

for it to have no reasonable prospect of success.

(4)    This section does not limit any powers that the Court has apart from this section.

(5)    This section does not apply to criminal proceedings.

15    The applicable principles to apply in determining the application for summary dismissal were not in dispute and are set out in Spencer v Commonwealth (2010) 241 CLR 118; [2010] HCA 28. Chief Justice French and Gummow J stated at [24]–[25] (footnotes omitted):

24.    The exercise of powers to summarily terminate proceedings must always be attended with caution. That is so whether such disposition is sought on the basis that the pleadings fail to disclose a reasonable cause of action or on the basis that the action is frivolous or vexatious or an abuse of process. The same applies where such a disposition is sought in a summary judgment application supported by evidence. As to the latter, this Court in Fancourt v Mercantile Credits Ltd said:

"The power to order summary or final judgment is one that should be exercised with great care and should never be exercised unless it is clear that there is no real question to be tried."

    More recently, in Batistatos v Roads and Traffic Authority (NSW) Gleeson CJ, Gummow, Hayne and Crennan JJ repeated a statement by Gaudron, McHugh, Gummow and Hayne JJ in Agar v Hyde which included the following:

"Ordinarily, a party is not to be denied the opportunity to place his or her case before the court in the ordinary way, and after taking advantage of the usual interlocutory processes. The test to be applied has been expressed in various ways, but all of the verbal formulae which have been used are intended to describe a high degree of certainty about the ultimate outcome of the proceeding if it were allowed to go to trial in the ordinary way."

    There would seem to be little distinction between those approaches and the requirement of a "real" as distinct from "fanciful" prospect of success contemplated by s 31A. That proposition, however, is not inconsistent with the proposition that the criterion in s 31A may be satisfied upon grounds wider than those contained in pre-existing Rules of Court authorising summary dispositions.

25.    Section 31A(2) requires a practical judgment by the Federal Court as to whether the applicant has more than a "fanciful" prospect of success. That may be a judgment of law or of fact, or of mixed law and fact. Where there are factual issues capable of being disputed and in dispute, summary dismissal should not be awarded to the respondent simply because the Court has formed the view that the applicant is unlikely to succeed on the factual issue. Where the success of a proceeding depends upon propositions of law apparently precluded by existing authority, that may not always be the end of the matter. Existing authority may be overruled, qualified or further explained. Summary processes must not be used to stultify the development of the law. But where the success of proceedings is critically dependent upon a proposition of law which would contradict a binding decision of this Court, the court hearing the application under s 31A could justifiably conclude that the proceedings had no reasonable prospect of success.

In applying s 31A of the Act, the Court does not conduct fact finding but must assess the strength of the allegations made by reference to the pleadings, affidavits and any other evidence adduced, in order to determine whether the claim is sufficiently strong to warrant a trial. Although the test for summary judgment does not require the respondents to show that the Applicant’s claims against them are hopeless or bound to fail, the Court must consider whether there are any real, as opposed to fanciful, issues of fact or law that require proper determination at a trial. The Court should be cautious to dismiss a claim summarily where questions of fact or law arise.

THE SECTION 5(1)(b) CLAIM

16    It is convenient to start with the submission for the Applicant that there is a triable issue as to whether the first loan was to be applied wholly or predominantly for a Code purpose.

17    Mr Gronow of counsel for the Third Respondent submitted that there is no factual issue capable of being disputed in respect of the purpose of the first loan which, it was submitted, was not a Code purpose but a business loan for a commercial property development. Mr Gronow’s submissions were supported by Mr Mattin of counsel for the First and Second Respondents. Reliance was placed on the following documentary evidence:

(a)    The letter of offer from the Third Respondent, the terms of which provided that the offer was conditional upon the loan “not being for personal, domestic or household purposes or otherwise not being regulated under the National Consumer Credit Protection Act 2009”. The letter of offer required the “precise purpose for which this loan is being taken out” to be completed at the foot of the letter, which the Applicant completed as “property investment”.

(b)    The mortgagor’s declaration to the First and Second Respondent given by the Applicant in the following form:

I, HUGH JOHN DEVON of 11 Cromwell Road, South Yarra in the State of Victoria declare that the credit to be provided to me by the credit provider is to be applied wholly or predominantly for business or investment purposes (or for both purposes).

(c)    The Certificate of Independent Financial Advice by an accountant instructed by Southco to explain the financial risks of the loan and debenture charge to be given by Southco. The Certificate stated, amongst other things, that “the loan herein is for business purposes”. The purpose of the loan was also specified in Item 2 of the Schedule to that Certificate as “investment property”.

(d)    The Certificate of Independent Financial Advice by the same accountant who was also instructed by the Applicant to explain the financial risks of the loan and first mortgage which was to be registered on the title to the property. The Certificate stated, amongst other things, that “the loan herein is for business purposes”. The purpose of the loan was also specified in Item 2 of the Schedule to that Certificate as “property investment”.

18    Mr Gronow also referred to an email from the Applicant in his capacity as director of Southco to the Third Respondent which, it was submitted, shows it was “plainly a business loan”.

19    It was submitted by Mr Levine that there is also evidence to show that the loan was for a Code purpose, namely the refinance of residential property. Mr Levine referred to evidence that showed that the loan moneys were used to pay out a loan from the Delphi Bank (formerly known as the Bank of Cyprus), which had been secured by a mortgage over the property. Mr Levine also referred to evidence that pointed to the property being used for residential purposes at the time. Reliance was also placed on the Applicant’s affidavit in opposition to the summary judgment application in which the Applicant deposed that:

…the Respondents either personally inspected or had their agents inspect and were are aware that the loan was for the refinance of the family home and the Applicant and wife (and in the first attempted loan The wife and Applicant) lived in the financed property as their principal residence and that the loan was a consumer loan with the Delphi Bank.

20    In response, Mr Gronow submitted that there was no evidence about the purpose of the loan from the Delphi Bank or evidence to show that the Third Respondent knew, should have known, or had reason to believe, contrary to the mortgage declaration signed by the Applicant, that the real purpose of the loan was other than business purposes.

21    It cannot presently be said that the evidence is all one way in support of the Third Respondent. There is some evidence which lends some support for the Applicant’s case as to the purpose of the loan, notwithstanding the mortgage declaration and, without testing the evidence, it is difficult to reach a definitive conclusion about the purpose of the loan. The documentary evidence does not unequivocally support the Third Respondent’s case as it variously describes the purpose of the loan as “investment” as well as “business”. Moreover, the email to which Mr Gronow referred requires context to understand it and without that context I am not prepared to deduce from it that the loan in fact was a business loan for a commercial development. Bearing in mind the terms of s 5(1)(b) of the Code, the present state of the evidence does not enable me to conclude that there is not a real issue of fact as to whether the loan was made for a Code purpose.

section 5(1)(a) of the code

22    However, to constitute a “credit contract” it is also a requirement of the Code that the loan be made to a natural person or strata corporation: s 5(1)(a). It was not suggested by Mr Levine that either Southco or Cambray Place (if relevant) are strata corporations. To overcome this requirement Mr Levine’s first argument was that the mortgage agreement constitutes a credit contract. It is uncontroversial that the Applicant gave a first mortgage over the property to the First and Second Respondents as security for the first loan. The mortgage is in evidence and it provides that the mortgage “also operates as a loan agreement”. There are two responses to this claim. First it is not alleged in the claims against the First to Third Respondents that the mortgage constitutes a separate credit contract upon which the Applicant’s claims are based. Secondly, and in any event, the answer is s 7(1) and (2) of the Code which provide as follows:

Mortgages to which this Code applies

7(1)    This Code applies to a mortgage if:

(a)    it secures obligations under a credit contract or a related guarantee; and

(b)    the mortgagor is a natural person or a strata corporation.

7(2)    If any such mortgage also secures other obligations, this Code applies to the mortgage to the extent only that it secures obligations under the credit contract or related guarantee.

23    It is clear and unequivocal from the terms of the loan agreement entered into by Southco with the First and Second Respondents (which is also in evidence) that the mortgage was given as security for the loan. Clause 7 of the loan agreement provides:

7.    THE borrower and guarantor further COVENANT that to better secure the loan herein the guarantor has agreed to execute mortgage and associated documentation which will enable a first mortgage to be registered over the aforementioned security property at 11 CROMWELL ROAD, SOUTH YARRA in the said State.

Hence by virtue of s 7(1) and (2) of the Code the Applicant must show that the Code applies to the loan agreement itself. As the loan agreement was with Southco, the Code does not apply to that loan agreement by virtue of s 5(1)(a).

the sham argument

24    Mr Levine’s second argument was that there was a triable issue as to whether the loan transactions were a sham because the monies were never meant to be advanced or disbursed to or for the benefit of Southco (or presumably Cambray Place, if it be relevant) but, so the argument went, “were advanced for the purposes and solely in order to refinance the existing loans upon the property and thus all the benefit went to [the Applicant]”. There are two responses to this claim also. First, sham is neither alleged nor raised by the Applicant’s material, even taking a benevolent view of the claims made against the respondents. Secondly, the claim of sham is misconceived.

25    In Snook v London and West Riding Investments Ltd [1967] 2 QB 786 at 802 Diplock LJ (as his Lordship then was) said:

[Sham] means acts done or documents executed by the parties to the “sham” which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principle, morality and the authorities (see Yorkshire Railway Wagon Co v Maclure and Stoneleigh Finance Ltd v Phillips), that for acts or documents to be a “sham”, with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a “shammer” affect the rights of a party whom he deceived.

(footnotes omitted)

In Raftland Pty Ltd as trustee of the Raftland Trust v Commissioner of Taxation (2008) 238 CLR 516; [2008] HCA 21 in the joint judgment the High Court said at [33]–[35] (footnotes omitted):

33.    …In various situations, the court may take an agreement or other instrument, such as a settlement on trust, as not fully disclosing the legal rights and entitlements for which it provides on its face. If that be so, the parol evidence rule in Australia identified with Hoyt's Pty Ltd v Spencer does not apply.

34.    One such case is where other evidence of the intentions of the relevant actors shows that the document was brought into existence "as a mere piece of machinery" for serving some purpose other than that of constituting the whole of the arrangement…

35.    …as Lockhart J emphasised in Sharrment Pty Ltd v Official Trustee in Bankruptcy the term [“sham”] is ambiguous and uncertainty surrounds its meaning and application. With reference to remarks of Diplock LJ in Snook v London and West Riding Investments Ltd, Mustill LJ later identified as one of several situations where an agreement may be taken otherwise than at its face value, that where there was a "sham"; the term, when "[c]orrectly employed", denoted an objective of deliberate deception of third parties.

It is essential to a sham that all the parties to the transaction must have the “shamming intention”. In Raftland the finding of sham was based upon a finding of a “common intention that was inconsistent with the creation and the enforcement of the entitlement of the E & M Unit Trust as a beneficiary of the Raftland Trust”: at [48].

26    In the present case there is nothing in the evidence before the Court to support a claim that it was the common intention of all the parties that the loan agreements should not create the legal relations which the agreements on their terms created. To the contrary, the evidence showed (at least in relation to the first loan) that the loan transaction was intended by the parties to have legal effect as a loan to Southco. The Applicant, as the sole director of Southco:

(1)    agreed to, and entered into a, guarantee of the loan “in consideration of the lender…at the request of the [Applicant] having agreed to make the advance referred to in the Loan Agreement”;

(2)    agreed to and gave a charge over the assets of Southco as security for the loan from the First and Second Respondents; and

(3)    sought and obtained independent legal and accounting advice in respect of the loan and security to be provided. In other words, the security provided in respect of the loan was consistent with a loan to the company.

27    The existence of an ulterior purpose on the part of the First to Third Respondents in lending to the company and not to the Applicant himself (as appears to be asserted by the Applicant) does not gainsay that the loan transaction was a genuine transaction which was intended to have effect on its terms. Furthermore, although there is an absence of documentary evidence concerning the second loan, there is no suggestion in the Applicant’s material that it was the common intention of the parties to that loan to create legal rights and obligations different from the actual legal rights and obligations created.

conclusion on code claims

28    Accordingly, I consider that the Applicant does not have reasonable prospects of successfully prosecuting the proceedings in so far as the claims are based upon the Code. For the reasons given, I am not persuaded that there is a triable issue that the Code applies.

unconscionable and misleading and deceptive conduct claims

29    That leaves the claims of unconscionable and misleading and deceptive conduct. These claims are not articulated intelligibly in either the Originating Process or the Statement of Claim and do not disclose the basis of a cause of action against the respondents. I have reviewed the affidavit material filed by the Applicant which makes numerous bald assertions of unconscionable and misleading and deceptive conduct against the respondents which are difficult to follow. I am unable to discern from the material either the factual foundation for the claims made or that there is some real, as distinct from fanciful, factual or legal question for determination.

30    In Dowling v Commonwealth Bank of Australia [2008] FCA 59, Reeves J stated at [30] that the Court would be justified in making orders under s 31A of the Act where “a party completely fails to identify any valid claim or cause of action to the court or fails to provide any factual material that could amount to a valid claim, in the materials he or she places before the court, having been given a reasonable opportunity to do so.” His Honour continued:

The complete absence of an identified and valid claim and, more importantly, the factual materials to found either that valid claim, or some other form of valid claim, along with the likelihood that the applicant has no reasonable prospects of ever being able to produce that material, justifies a conclusion that there is not, and never will be, a valid claim before the court. This obviously cannot be remedied by orders to amend or strike out the pleadings because no amount of pleadings will remedy the fundamental absence of a valid claim. Moreover, the complete absence of a valid claim in this sense i.e. no identification of a claim, no factual foundation for a claim and no prospect of providing either, must lead inexorably to the conclusion that the applicant has no prospects of prosecuting his or her proceedings to a successful conclusion.

31    His Honour gave summary judgment for the respondent on the basis that the applicant had not “been able to delineate the factual foundation for a claim involving a breach of s 52 of the Trade Practices Act, or any other valid claim against the [defendant]…[and] there is no reasonable prospect of her ever being able to do so”: at [57]. See also Mulhern v Bank of Queensland [2015] FCA 44 at [60]–[61].

32    I am conscious that the Applicant prepared his own Court documents and the Court should be cautious to find that he has no reasonable prospect of prosecuting his claims of unconscionable and misleading and deceptive conduct, but no real basis for a triable issue either in fact or law is demonstrated either in the pleadings or on the evidence relied on by the Applicant.

conclusion

33    Accordingly, I find that the Applicant has no reasonable prospects of success in prosecuting his Originating Process against the First, Second, Third and Twelfth Respondents and there should be judgment for those respondents pursuant to s 31A of the Act.

Associate:

Dated:    13 April 2016

SCHEDULE OF PARTIES