Jin Lian Group Pty Ltd (in liq) v ACapital Finance Pty Ltd

1. [1]

   The plaintiff, Jin Lian Group Pty Ltd (in liquidation), was in 2016 a property development company based in Sydney.

2. [2]

   The First Defendant, ACapital Finance Pty Ltd, is a wholly owned subsidiary of Australia Capital Holding Limited.

3. [3]

   Australia Capital Holding is a finance company that lends money to property developers and construction companies to fund commercial property projects, often (as in the present case) in circumstances where the developer or construction company is unable to access bank finance.

4. [4]

   As a wholly owned subsidiary of Australia Capital Holding, ACapital is not a bank or an authorised deposit taking institution. Rather, it is a subsidiary of a finance company supported by funds raised from its shareholders or contributed to by its major shareholder, Mr Owen Chen.

5. [5]

   The Second Defendant, Australia Capital Investment Management Pty Ltd (“ACIM”) is a company wholly owned by entities associated with Mr Chen and his family. In circumstances not necessary to recite, ACIM has only been a party to the proceedings since 17 May 2021. It thus did not participate in the hearing on 22 and 23 April 2021. It did so on 9 June 2021.

6. [6]

   In September 2016, Jin Lian approached Australian Capital Holding concerning the possibility of providing finance for the development of a 120 unit residential apartment complex on a property at Carlingford (“the Development Site”). The project was to involve the demolition of 11 existing dwelling houses and the construction on the Development Site of 3 residential apartment buildings comprising 120 apartments and car parking. In the end, the project did not proceed.

7. [7]

   Jin Lian’s directors aimed ultimately to obtain finance at lower interest rates from a major bank. However, Jin Lian did not have enough presales at the time to meet the requirements of major banks and was in default under a number of the loans it had taken out in order to acquire the Development Site.

8. [8]

   ACapital agreed to make an interest only loan to Jin Lian of $15 million originally for 12 months (“the Facility”).

9. [9]

   On 11 January 2017, Jin Lian and ACapital entered into a number of agreements including:

10. [10]

    On the same date, Jin Lian entered into a “Deed of Financial Guarantee” (“the Guarantee”) and a “Financial Guarantor Fee Deed” (“the Fee Deed”) with ACIM. Under those agreements ACIM agreed to guarantee Jin Lian’s obligations under the Facility Agreement and Jin Lian agreed in return to pay a fee (“the Guarantee Fee”) to ACIM. Jin Lian also granted mortgages in favour of ACIM over the Development Site. Those mortgages ranked behind the Mortgages.

11. [11]

    On about 20 January 2017, Jin Lian drew down $15 million under the Facility Agreement. Over $14 million of that $15 million was remitted to 35 different entities to repay debts Jin Lian owed in relation to its acquisition of the Development Site.

12. [12]

    A year later, on 25 January 2018, Jin Lian and ACapital entered a document which had the effect of amending the Facility Agreement by extending the “Repayment Date” from 12 to 18 months from the “Drawdown Date”.

13. [13]

    It is common ground for the purpose of these proceedings that this is the relevant version of the Facility Agreement.

14. [14]

    On 10 May 2018, ACapital gave Jin Lian notice of an Event of Default which stated that the “Secured Money”, then $17,233,598.41, was “immediately due and payable” and that the Facility was cancelled. It is common ground that by 10 May 2018 Jin Lian had committed Events of Default and that the effect of the default was to cause the Secured Money to be due and payable and to cancel the Facility.

15. [15]

    The following day, 11 May 2018, the directors of Jin Lian resolved to appoint administrators.

16. [16]

    By Deed of Appointment dated 17 May 2018 (“the Deed of Appointment”), ACapital appointed receivers (“the Receivers”) for the purpose of selling the Development Site.

17. [17]

    ACapital then exercised its power of sale and sold the Development Site, in one line, for $21,599,000.

18. [18]

    The sale settled on 12 December 2018.

19. [19]

    ACapital used the proceeds of sale to pay:

20. [20]

    ACapital paid the surplus of $293,200.54 into Court. On 15 August 2019, Kunc J ordered that the surplus (less $19,310.21 on account of legal costs) be paid to Jin Lian’s liquidators (“the Liquidators”).

21. [21]

    The Liquidators now bring these proceedings contending that ACapital has improperly retained part of the proceeds from the realisation of the Development Site.

22. [22]

    The Liquidators’ contentions give rise to questions as to the proper construction of the various loan documents and as to whether particular provisions in those documents are void as a penalty. A question also arises as to whether ACapital engaged in conduct contravening s 47(6) of the Competition and Consumer Act 2010 (Cth) (“the Act”).

23. [23]

    The parties agreed a Statement of Issues as follows: [1]

24. [24]

    I have been greatly assisted by the written and oral submissions I have received from Dr Birch SC, who appeared for Jin Lian, Mr Hutton, who appeared for ACapital, and Mr Furlan who appeared on the final day of hearing for ACIM. Much of what appears in these reasons, especially as to uncontroversial background matters, is drawn with gratitude from those submissions.

25. [25]

    ACapital accepts that if any of the Liquidators’ contentions are made out, ACapital must make restitution to the Liquidators of any amount improperly retained by it.

Principles concerning construction

1. [26]

   There was no dispute before me as to the principles governing the construction of the documents with which these proceedings are concerned.

2. [27]

   The meaning of the terms of a commercial contract involves consideration of what a reasonable businessperson in the position of the parties would have understood the terms to mean. This enquiry requires consideration of the language used by the parties, the circumstances addressed by the contract and the contract’s commercial purpose. Unless the contract indicates a contrary intention, the approach to be adopted is one that gives an interpretation that would produce a commercial result and avoid it making commercial nonsense or working commercial inconvenience. [2]

3. [28]

   It is also common ground that, as the Facility Agreement and the Mortgages were executed as a suite of documents, they should be read together. Indeed, as Dr Birch pointed out, the instruments are to a degree intermeshed by their own definitions and terminology. [3]

4. [29]

   In fact, the parties' submissions focused on the language used by the parties and it is by reference to that language that the competing contentions must be resolved.

5. [30]

   In that context, it has been correctly observed that:

Principles relevant to penalty

1. [31]

   As the Liquidators contend that provisions of the Finance Agreement and the Mortgages are “void” as penalties, I will set out the relevant principles here.

2. [32]

   It has long been recognised that a clause in a loan agreement establishing a lower interest rate for timely payment, with a higher rate otherwise applicable, does not attract the rule against penalties.

3. [33]

   The parties refer to this as an “O’Dea Clause” in recognition of the fact that, in O’Dea v Allstates Leasing System (WA) Pty Ltd, [5] Gibbs CJ said:

4. [34]

   The distinction between a clause so drawn, and one which provides for payment of interest at a lower rate, but at a higher rate in the event of default, has been described as “a well-known, if not much praised”, distinction. [7]

5. [35]

   The distinction has been recognised in many cases. [8]

6. [36]

   The distinction has survived, and is unaffected by, the recent considerations by the High Court of Australia in Andrews v Australia and New Zealand Banking Group Ltd [9] and Paciocco v Australia and New Zealand Banking Group Ltd. [10]

7. [37]

   There was no dispute before me about these matters.

8. [38]

   The relevant principles were summarised by McDougall J, with whom Gleeson JA and Sackville AJA agreed in Arab Bank Australia Ltd v Sayde Developments Pty Ltd [11] as follows: [12]

9. [39]

   Further, although the Liquidators’ case is that provisions in the Facility Agreement and in the Mortgages are “void” as a penalty, the consequence of a provision being a penalty is not that it is void.

10. [40]

    A penal clause is not void ab initio; rather it is unenforceable. [14]

11. [41]

    It follows that if the party in whose favour the penal collateral stipulation does not seek to enforce it, no relief is required.

Interest rates – relevant provisions in the Facility Agreement and the Mortgages

1. [42]

   Clause 5 of the Facility Agreement provided, relevantly:

2. [43]

   “Principal Outstanding” was defined to mean:

3. [44]

   “Interest Rate” was defined to mean:

4. [45]

   The Facility Agreement thus provided for differential interest rates. A higher rate was specified as the operative rate, and a lower concessional rate accepted if no Event of Default was “subsisting” at the relevant time. The clause was, on the face of it, an O’Dea Clause and thus not penal.

5. [46]

   “Repayment Date” was defined to mean:

6. [47]

   Clause 13.1 of the Mortgages provided, relevantly:

7. [48]

   It is common ground that the Facility Agreement was a “Finance Document” for the purposes of the opening words of cl 13.2.

Interest rates – the Liquidators’ contentions

1. [49]

   Between 11 May 2018 (when ACapital served the Notice of Default) and 12 December 2018 (when sale of the Development Site settled), ACapital charged interest on the whole of the monies outstanding at the rate of 27% per annum. ACapital relied on the “Standard Rate” of 22% specified in the Facility Agreement and a further rate of 5% specified in the Mortgages.

2. [50]

   The Liquidators contend that:

3. [51]

   The Liquidators contend that the amounts that ACapital wrongly retained from the proceeds of sale of the Development Site on account of these matters were:

4. [52]

   For the reasons that follow, I do not accept any of these contentions.

Issue B – were the provisions in cl 5.1 of the Facility Agreement retrospective in effect and thus a penalty?

1. [53]

   I find it convenient to start by dealing with Issue B. It is common ground that when ACapital served the 10 May 2018 Notice, it thereby “cancelled” the Facility and that the Secured Money became “immediately due and payable”. The Repayment Date was thus 10 May 2018.

2. [54]

   As I have said, the Liquidators’ contention that the provisions in cl 5.1 of the Facility Agreement are a penalty, despite being in the O’Dea form, depends on the Liquidators’ further contention that, on the proper construction of the Facility Agreement, upon an Event of Default, ACapital was able to charge the Standard Rate of interest (22%) retrospectively to “the beginning of the Facility” and “to the interest that accrued prior to the event of default”.

3. [55]

   ACapital first charged the Standard Rate on the Principal Outstanding in September 2017 following a prior Event of Default. [16] ACapital did not, as a matter of fact, retrospectively charge the Standard Rate on the Principal Outstanding. The Liquidators accept this but contend that the relevant provisions of the Facility Agreement are nonetheless penal, and void, because on their proper construction, ACapital could have done so.

4. [56]

   Clause 5 of the Facility Agreement dealt with payment of interest on principal: the Principal Outstanding.

5. [57]

   Although this is a point more relevant to the question of whether cl 13.1 of the Mortgage is engaged, cl 5 did not deal with payment of interest on interest; that is, the compounding of interest. Indeed, it provided for “straight line simple interest”.

6. [58]

   The opening sentence of cl 5.1 was the source of Jin Lian’s obligation to pay interest on the Principal Outstanding.

7. [59]

   As this was an interest-only loan, the principal of $15 million was able to remain “outstanding”, in the sense of not yet repayable, until repayment was required; that is, until the Repayment Date.

8. [60]

   Interest was payable on the Principal Amount at the Interest Rate, being the Standard Rate of 22%.

9. [61]

   The effect of the clause was that the Standard Rate applied only when an Event of Default was “subsisting”. The Standard Rate ceased to apply if and when that Event of Default ceased to be “subsisting”. If the Event of Default ceased to be “subsisting”, the Interest Rate would revert to the concessional VIP Rate of 14%.

10. [62]

    I see no room here for an argument that ACapital could have continued to charge the Standard Rate of 22% otherwise than during a period in which an Event of Default was subsisting.

11. [63]

    During any such period, Jin Lian’s obligation under cl 5.1(b) of the Facility Agreement was to pay interest in advance in respect of each forthcoming Interest Period, on each Interest Payment Date. While an Event of Default was subsisting, such interest would be at the Standard Rate. Once the Event of Default ceased to be subsisting, interest would revert to the VIP Rate of 14%.

12. [64]

    The effect of these provisions was not that, once an Event of Default occurred, interest already paid in respect of Earlier Interest Periods at the VIP Rate of 14% would, retrospectively, become liable to be increased to the Standard Rate of 22%.

13. [65]

    The Interest Rate provisions were not retrospective and were not penal.

14. [66]

    Even if they were, ACapital did not seek to extract the penalty and thus did not seek to enforce the provisions, assuming they were penal. In those circumstances, Jin Lian would not be entitled to relief because ACapital had not sought to enforce the putatively penal provision. [17]

Issue A – the 5% interest uplift – was cl 13.1 of the Mortgages engaged?

1. [67]

   The question of whether, on the proper construction of the Finance Agreement and the Mortgages, ACapital was entitled to the 5% interest uplift turns on whether the opening proviso of cl 13.1 of the Mortgages was satisfied and cl 13.1 thereby engaged.

2. [68]

   Clause 13.1 applied “unless” another Finance Document “already” obliged Jin Lian to pay interest on an unpaid amount that was due and payable. That is, cl 13.1 did not apply if another Finance Document did “already” so provide.

3. [69]

   The question is whether the Facility Agreement “already obliged” Jin Lian to pay interest “on an unpaid amount that [was] due and payable by it” under the Facility Agreement; being “interest on that overdue amount”.

4. [70]

   As I have said, cl 5 does not purport to deal with interest on “due and payable” interest; compounding of interest. That is dealt with in the parenthetical expression, “(including on unpaid interest under this clause)” in cl 13.1 of the Mortgages.

5. [71]

   The question is whether cl 5 of the Facility Agreement provided for interest on “due and payable” principal, that is on the Principal Outstanding, once that Principal Outstanding was itself “due and payable”.

6. [72]

   In my opinion, it did not.

7. [73]

   The words in cl 5 set out the manner in which Jin Lian was obliged to pay interest on the Principal Outstanding.

8. [74]

   Interest was calculated as simple interest and was “payable in advance” and “in respect of each forthcoming Interest Period, on each Interest Payment Date”.

9. [75]

   The effect of cl 5.2(b)(ii) of the Facility Period was that an Interest Period that would otherwise end after the Repayment Date would end on the Repayment Date.

10. [76]

    The Repayment Date was 10 May 2018. [18]

11. [77]

    Therefore, there could be no further Interest Periods for the purposes of the Facility Agreement after the Repayment Date. What might otherwise have been an Interest Period ending after the Repayment Date was deemed by cl 5.2(b)(ii) to have ended on the Repayment Date.

12. [78]

    The effect of this was that, once the Repayment Date had occurred, whether by effluxion of time or, as here, because ACapital cancelled the Facility and the Principal Amount became due and payable, cl 5 of the Facility Agreement ceased to operate.

13. [79]

    Thereafter, the only provision that provided for both the interest on “due and payable” interest and on “due and payable” principal was cl 13 of the Mortgage.

14. [80]

    That interest rate was specified in cl 13.1(b) of the Mortgages as the higher of the rates specified in cl 13.1(b)(i) and (ii).

15. [81]

    So far as concerns interest on “due and payable” principal, the higher of the rates specified in cl 13.1(b)(i) and (ii) was that specified in cl 13.1(b)(ii) being 5% plus 22%, the latter being “the rate applicable to the overdue amount immediately before the due date”.

16. [82]

    Dr Birch submitted that this construction of cl 5 would render the definition of “interest rate” in the Facility Agreement misleading. However, that submission assumes the correctness of Dr Birch’s submission that cl 5 of the Facility Agreement had work to do after the Repayment Date. In my opinion, it did not. It must follow that there is nothing misleading about the definition of “interest rate” merely by reason of the fact that the operation of cl 13 of the Mortgage is to entitle ACapital to add the interest rate uplift of 5% after the Repayment Date.

Issue C – the 5% uplift – were the provisions in the Mortgage providing for the 5% uplift a penalty?

1. [83]

   Dr Birch submitted that cl 13.1(b) was “in effect a surcharge on top of a rate already intended to compensate for untimely payment”. The “rate” that Dr Birch was referring to was evidently the Standard Rate. But as the Standard Rate was included in an otherwise unimpeachable O’Dea Clause, I cannot see how this takes the question of whether cl 13 itself is a penalty any further.

2. [84]

   Assuming that the provision should be seen as a collateral stipulation, I cannot see how it could be said that the 5% interest uplift provided for by cl 13.1 upon default could be said to be “extravagant” or “out of all proportion” to the detriment ACapital suffered by reason of Jin Lian’s default. Indeed, Dr Birch did not seek to develop any submission to this effect.

3. [85]

   I do not accept that the provisions in cl 13.1 of the Mortgages were a penalty.

Issue D – was ACapital entitled to compound interest?

1. [86]

   There is no dispute that ACapital charged compound interest from 10 May 2018 onwards.

2. [87]

   The Liquidators’ challenge to ACapital’s entitlement to charge compound interest depended on the correctness of their contentions as to Issue A, because ACapital’s entitlement to charge compound interest could only arise under cl 13.1 of the Mortgages.

3. [88]

   As I have rejected the Liquidators’ contentions concerning Issue A, it follows that their challenge to ACapital charging compound interest also fails.

The Guarantee Fee paid to ACIM

1. [89]

   In its letter of offer of 30 November 2016, ACapital stated that it would consider providing finance in the “Finance Amount” of $15 million on terms that included the provision of a guarantee by three named individuals associated with Jin Lian and one named company (evidently associated with one or more of those individuals) and that:

2. [90]

   Further, cl 12.3 of the Facility Agreement provided:

3. [91]

   On 11 January 2017, ACapital, Jin Lian and ACIM entered into the Guarantee pursuant to which ACIM agreed to guarantee Jin Lian’s obligations under the Facility Agreement.

4. [92]

   On the same day, Jin Lian and ACIM entered the Fee Deed.

5. [93]

   Clause 4 of that document provided:

6. [94]

   Jin Lian paid ACIM the “upfront fee” of $165,000 referred to at cl 4.1(a) of that document at the time of the drawdown of the loan.

7. [95]

   ACapital retained the “conditional fee” of $660,000 referred to at cl 4.1(b) (the “Conditional Fee”) from the proceeds of sale of the Development Site and paid it to ACIM.

Issues E and F – third line forcing?

1. [96]

   At the relevant time, January 2017, ss 47(1) and (6) of the Act provided:

2. [97]

   The Liquidators allege that ACapital contravened s 47(6) of the Act by offering to provide, and providing, the Facility to Jin Lian on the condition that Jin Lian acquire services from ACIM, namely the Guarantee.

3. [98]

   The Liquidators contend that the effect of s 4L of the Act is that cl 12.3 should be severed from the Facility Agreement as being void and that cl 4.1(b) should likewise be severed from the Fee Deed.

4. [99]

   For the reasons that follow, I do not agree.

5. [100]

   It is common ground that ACIM is not a “related” body corporate to ACapital for this purpose.

6. [101]

   Jin Lian’s third line forcing claim is a “special federal matter” for the purposes of the Jurisdiction of Courts (Cross-vesting) Act 1987 (NSW) (“the Cross-vesting Act”).

7. [102]

   Section 6(1) of the Cross-vesting Act provides that if a matter is a special federal matter, the Court must transfer the proceedings to the Federal Court of Australia unless the Court makes an order under s 6(3).

8. [103]

   Section 6(3) of the Cross-vesting Act provides that:

9. [104]

   Section 6(4) provides that, before making an order under s 6(3) the Court must be satisfied that notices have been sent to the Attorney-General of the Commonwealth and the Attorney-General of the State where the proceeding is pending and that reasonable time be allowed since the giving of such notices for the Attorneys-General to consider whether they wish to make submissions to the Court.

10. [105]

    Notices have been sent to the Attorneys-General who have indicated that they do not wish to participate in the proceedings.

11. [106]

    When considering whether there are “special reasons” for the purposes of s 6(3) of the Cross-vesting Act, the following principles emerge from the cases: [19]

12. [107]

    Regard must also be had to the “general rule that special federal matters should be heard by the Federal Court”. [29]

13. [108]

    It is common ground that I should find that there are “special reasons” why I should determine this issue rather than refer it to the Federal Court.

14. [109]

    Those reasons are: [30]

15. [110]

    I find, for the purpose of s 6(3) of the Cross-vesting Act, that there are special reasons why I should determine this issue and order, pursuant to s 6(3), that the issue be determined by this Court.

16. [111]

    The first question is whether ACapital provided the facility to Jin Lian “on the condition” that ACIM guarantee Jin Lian’s obligations under the Facility.

17. [112]

    As I have set out, one of the “terms” on which ACapital offered the Facility to Jin Lian was that ACIM “will provide an additional guarantee” to ACapital.

18. [113]

    It was also a term of the Finance Agreement that ACIM do so.

19. [114]

    ACapital’s initial offer of finance was contained in its letter of 21 October 2016 to Jin Lian.

20. [115]

    In that letter ACapital offered to lend Jin Lian $10,938,000 on various terms including that three named individuals, Linfa Jin, Huiju Jin and Qindi Shen guaranteed the loan.

21. [116]

    The offer was also on the basis of a loan to valuation ratio of “60% of the value of the Carlingford Property”.

22. [117]

    Special Condition 7 provided:

23. [118]

    On 28 October 2016, a meeting took place between Mr Chen, Mr Kun Fang, the Deputy General Manager of ACapital, Mr Li, Mr Zhu and Mr Jin from Jin Lian.

24. [119]

    The following conversation took place:

25. [120]

    On 15 November 2016, ACapital wrote to Jin Lian saying that there were “two options for you to consider” one of which was a loan of $16 million and:

26. [121]

    This led to Jin Lian agreeing to engage ACIM to provide the Financial Guarantee.

27. [122]

    In these circumstances, Mr Hutton submitted:

28. [123]

    I do not agree. It is true that ACapital was prepared to lend at a loan to valuation ratio of 60% or less without a “financial guarantee”. But its agreement to lend at a loan to valuation ratio higher than 60% was on the condition that such a guarantee be obtained.

29. [124]

    But this is not unusual conduct. Every day of the week, banks and finance companies agree to lend funds to corporations on the condition that the loan is guaranteed by “another person not being a body corporate related to the [borrower] corporation”. [31]

30. [125]

    Here, if ACapital was engaging in third line forcing by making it a condition of the loan that Jin Lian procure ACIM to guarantee the loan, the same would apply to its requirement that Linfa Jin, Huiju Jin and Qindi Shen guarantee the loan, as set out in ACapital’s letter of offer of 21 October 2016 and repeated in its letter of offer of 30 November 2016.

31. [126]

    This cannot be right.

32. [127]

    And the reason it is not right is that s 47(6) is, as Mr Hutton submitted, directed to circumstances where a corporation requires another corporation to use the discrete services of a third party in the future, a matter emphasised by the use of the words “will acquire” in s 47(6).

33. [128]

    The section is not directed to circumstances where there is a single supply of services.

34. [129]

    Thus, in Australian Competition and Consumer Commission v Bill Express Ltd (in liq) [32] Gordon J said [33] :

35. [130]

    As Mr Hutton submitted, that is not what has occurred here. The making of a loan and the guarantee of that loan were not discrete goods or services. The only service that was provided by ACapital to Jin Lian was the giving of a guaranteed loan.

36. [131]

    The authorities to which Gordon J referred in Australian Competition and Consumer Commission v Bill Express provide support for Mr Hutton’s submission. [35]

37. [132]

    For those reasons, my conclusion is that the Liquidators have not established that ACapital acted in breach of s 47(6).

38. [133]

    The facts of these cases may be contrasted with those in SST Consulting Services Pty Ltd v Rieson, [36] a case on which Dr Birch placed particular emphasis. In that case, the third line forcing arose because it was a condition of the loan by SST that the borrower “direct all work of [a particular nature] to the corporations that the lender shall direct”. [37]

39. [134]

    But the lender in SST lent money expressly on condition that the directors of the borrowers be named as guarantors. [38] There was no suggestion that this conduct amounted to third line forcing.

40. [135]

    Assuming, contrary to my conclusions, that ACapital’s conduct did contravene s 47(6) of that Act, the question arises as to the consequence of such contravention.

41. [136]

    As developed in final submissions, Dr Birch relied upon s 4L of the Act to argue that cl 12.3 of the Facility Agreement and cl 4.1(b) of the Fee Deed ought to be severed as void.

42. [137]

    Section 4L of the Act provided:

43. [138]

    Section 4L is only engaged if:

44. [139]

    Section 4L is not engaged merely because the contract “involves” a contravention of a section of the Act. [40]

45. [140]

    In its Amended Points of Claim, the Liquidators alleged the following breach of s 47(6):

46. [141]

    The effect of s 4L is to require the severance of the “particular provisions” that offend the Act. [41] Assuming there has been a contravention of s 47(6), the “particular provision” the inclusion of which caused the contravention of the Act, is cl 12.3 of the Facility Agreement.

47. [142]

    Thus if, contrary to my conclusions, that “particular provision” should be severed, I can see no reason why it follows that cl 4.1(b) of the Fee Deed should also be severed, as that clause is not the “condition” complained of in the Amended Points of Claim.

48. [143]

    As Mr Furlan for ACIM submitted, what the Liquidators sought to do was to impugn the provision of a different contract to that in which the “particular provision” is contained. Clause 4.1(b) of the Fee Deed is not that “condition” for the purposes of s 47(6), nor for the purposes of the allegation in the Liquidators’ Amended Points of Claim.

49. [144]

    In any event, as Mr Furlan pointed out, SST v Rieson provides no support for the Liquidators’ submissions. The High Court did not there conclude that the making of the contracts between the borrower and the persons to whom the lender gave the relevant direction contravened s 47(6) so as to attract the operation of s 4L to those contracts.

50. [145]

    Were that not correct and cl 4.1(b) was to be severed under s 4L, there is no reason why cl 4.1(a) should not also be severed; a proposition for which the Liquidators did not contend.

51. [146]

    For all these reasons, my conclusion is that the Liquidator’s case under s 47(6) of the Act fails.

Issue G – was the Conditional Fee refundable and not payable in any event

1. [147]

   Because ACapital recovered its debt from the proceeds of sale of the Development Site, it did not call on ACIM to make any payment under the Guarantee.

2. [148]

   In those circumstances, the Liquidators suggested, albeit only faintly, that on the proper construction of cl 4.1, the Conditional Fee of $660,000 was not payable to ACIM.

3. [149]

   I do not accept that submission.

4. [150]

   Clause 4.1 makes payment of the Conditional Fee contingent on there being an Event of Default. It does not also provide that payment of the Conditional Fee is contingent on a demand being made on ACIM under the Guarantee nor on any payment being made by ACIM under the Guarantee. I can see no basis on which any such contingency could be implied into cl 4.1.

5. [151]

   The Liquidators submitted that, if that were so, cl 4.1(b) was a penalty, a question to which I now turn.

Issue H – was the provision for the Conditional Fee a penalty?

1. [152]

   The Liquidators contend that the provision in cl 4.1(b) of the Fee Deed is void as a penalty.

2. [153]

   By cl 4.1(a), an “upfront” Guarantee Fee of $165,000, calculated as 1% of the Principal Amount, was payable on the Drawdown Date.

3. [154]

   By cl 4.1(b), a “conditional” Guarantee Fee of $660,000, calculated as 4% of the Principal Amount, was payable “upon the occurrence of an Event of Default”.

4. [155]

   The question is whether, as a matter of substance, that provision is a collateral stipulation that imposed on Jin Lian a detriment upon failure of a primary stipulation, Jin Lian’s obligations to ACapital under the Facility Agreement.

5. [156]

   In considering this question, it is permissible to take into account extrinsic evidence, including evidence of precontractual negotiations.

6. [157]

   Further, it is permissible to have regard to extrinsic evidence of a kind that would not be admissible to construe the agreement. [42]

7. [158]

   In this case, the genesis of the Deed of Financial Guarantee was in the 28 October 2016 meeting to which I have referred. [43]

8. [159]

   A further meeting took place between Mr Chen, Mr Fang and Mr Jin on 30 November 2016. At that meeting this conversation took place:

9. [160]

   The “financial guarantee documents” to which Mr Chen referred, included a document called Financial Guarantor Fee Guideline which was in the form attached (Financial Guarantor Fee Guideline (31241, pdf)).

10. [161]

    Mr Jin signed that document on behalf of Jin Lian on 2 December 2016.

11. [162]

    It is clear that cl 4.1(b) makes payment of the 4% component of the Financial Guarantor Fee conditional on an Event of Default and that the 4% component of that fee would not have been payable if there was no Event of Default.

12. [163]

    Nonetheless, Mr Hutton submitted that:

13. [164]

    Similarly, Mr Furlan, for ACIM, submitted:

14. [165]

    If regard were had only to the terms of the Financial Guarantor Fee Guideline document, and the conversation of 30 November 2016, I could see substance in these submissions.

15. [166]

    But I find them impossible to reconcile with the words that the parties have used in cl 4.1 of the Fee Deed.

16. [167]

    It is true that cl 4.1 provides that Jin Lian must pay “a” fee. But the clause then goes on to say that 4% of that fee is payable only on an Event of Default.

17. [168]

    To reflect what Mr Hutton and Mr Furlan submitted should be found as the “better characterisation of the parties’ agreement”, it would be necessary to read cl 4.1 as if it said something to the effect:

18. [169]

    I cannot see how cl 4.1 can be read this way.

19. [170]

    My conclusion is that cl 4.1(b) should be seen as a collateral stipulation that imposes a detriment on Jin Lian upon its failure to comply with the primary stipulations in the Facility Agreement.

20. [171]

    However, the Liquidators must show more than this. They must show that the detriment thereby imposed is grossly disproportionate to ACIM’s commercial interest in Jin Lian’s performance of its obligations under the Facility Agreement, such as to make it unconscionable for ACIM to rely upon the provision. [44]

21. [172]

    The Liquidators must also show what the commercial risk was to ACIM attendant on Jin Lian committing an Event of Default because:

22. [173]

    It is true, as Dr Birch submitted, that the Facility Agreement provides for a large number of Events of Default and that the effect of cl 4.1(b) is that the 4% component of the Financial Guarantor Fee is payable irrespective of the duration or seriousness of the Event of Default or whether it led to a call being made on the guarantee.

23. [174]

    In that regard, Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [46] said:

24. [175]

    But that presumption has been said to be a “weak” one [47] and that the invariable nature of the penalty compared to the amount overdue or the length of delay, although it cannot be ignored, is “only weakly indicative of the character of the late payment fee as a punishment”. [48]

25. [176]

    The presumption will be displaced if there is evidence of additional risk.

26. [177]

    There are many Events of Default prescribed in the Facility Agreement which, if they occurred, would bespeak Jin Lian’s inability to repay and a likelihood that ACIM’s obligations under the Fee Deed would be enlivened.

27. [178]

    It may be that it is not possible to quantify the additional risk with any precision but such “insusceptib[ility] of evaluation” tends against the conclusion that the relevant provision was a penalty, in which event “the parties are left to their legal rights and obligations”. [49]

28. [179]

    As it turns out, Jin Lian committed multiple Events of Default, none of which are suggested to have been trifling.

29. [180]

    In these circumstances, I am not persuaded that the Liquidators have discharged the onus of showing that cl 4.1(b) was imposed predominately to punish Jin Lian, rather than to protect ACapital against the additional risk it faced were Jin Lian to default.

Issues I and K – interest on advances to the Receivers and for legal costs

1. [181]

   In the exercise of its powers of sale under the Mortgages, ACapital paid advances to the Receivers, to its legal representatives and to other agents engaged in the exercise of those powers.

2. [182]

   ACapital borrowed money from a related body corporate in order to pay those advances and paid interest on that borrowing at the rate of 5% per annum. The Liquidators do not dispute that the 5% interest paid by ACapital was an expense that ACapital was entitled to recover from the proceeds of sale of the Development Site.

3. [183]

   ACapital charged interest to Jin Lian on the advances paid to the Receivers and legal representatives and other agents of ACapital at the rate of 27% per annum.

4. [184]

   The Liquidators dispute ACapital’s entitlement to charge such interest to the extent it exceeded the 5% paid by ACapital in respect of its borrowings.

5. [185]

   Clause 12.4 of the Facility Agreement provides:

6. [186]

   “Power” was defined to mean:

7. [187]

   Further, cl 13 of the Facility Agreement provides that:

8. [188]

   These provisions provide the basis on which ACapital was entitled to recover the undisputed 5% on its borrowings.

9. [189]

   The amounts paid by ACapital to the Receivers et al, and the 5% borrowing expenses, were monies that were “due and payable under a Finance Document” for the purposes of cl 13.1 of the Mortgages.

10. [190]

    Accordingly, interest on those amounts accrued at the rate prescribed in cl 13.1(b)(ii) of the Mortgages: 27 %.

Issue L – Receivers’ fees

1. [191]

   ACapital paid the Receivers $345,213.73 and deducted this sum from the proceeds of sale of the Development Site.

2. [192]

   The Liquidators do not dispute that the Receivers’ fees were incurred, nor that they were reasonable.

3. [193]

   The Receivers were appointed pursuant to the Security Deed and the Deed of Appointment. The sale of the Development Site was thus within the scope of the Receiver’s appointment.

4. [194]

   In any event, ACapital’s obligation in s 58(3) of the Real Property Act 1900 (NSW) was to apply the proceeds of sale to the “expenses occasioned by such sale”.

5. [195]

   In my view, Mr Hutton was correct to submit that no matter what the basis of their appointment, the Receivers’ fees were “expenses occasioned by such sale”.

Conclusion

1. [196]

   The Liquidators’ claims fail. The proceedings are dismissed.

2. [197]

   If there is to be a dispute as to costs, the parties should confer and agree on a timetable for written submissions. I will deal with the question on the papers.