Darren John Ciavarella v Hargraves Secured Investments Ltd ACN 089 001 267

After hours on the afternoon of 15 June 2015 the plaintiffs (the “Ciavarellas”) moved the Court in its Duty List for urgent interlocutory relief seeking to restrain the defendant, Hargraves Secured Investments Ltd (“Hargraves”), from exercising its mortgagee’s power of sale by selling two properties at auction fixed for 9.00am and 10.30am the next day, 16 June 2015. I commenced hearing the Ciavarellas’ application at 4.50pm. The hearing concluded just over three hours later, at which time I dismissed the application by making these orders:

These are the reasons for those orders. At the hearing the Ciavarellas were represented by Mr A. Cornish of Counsel and Hargraves by Mr R.A.M. Mulquiney, Solicitor.

While the Court was not satisfied that the Ciavarellas' complaints (in particular concerning the validity of the notice given under s 57(2)(b) of the Real Property Act 1900 (NSW) (the “RPA”) dated 2 April 2015 (the “Notice”)) gave rise to a serious question to be tried, even if there were assumed to be a serious question to be tried the Court nevertheless dismissed the application on the balance of convenience and as a matter of discretion because:

The Ciavarellas and other family members are the variously registered proprietors of:

The first plaintiff (to whom I shall refer without disrespect as “Darren”) is a farmer who, with his late father and other family members, farmed and continues to farm the properties referred to in the preceding paragraph. The second plaintiff, Darren’s mother, is the trustee of the estate of his late father who was the registered proprietor of Farm 1863. Farm 1863 remains in Darren’s late father’s estate.

In 2010, for the purpose of running his farming business on Midgee, Darren obtained a business loan of $900,000 and an overdraft facility of $150,000 from the National Australia Bank Limited (“NAB”) secured by a mortgage over Midgee. On or about 30 June 2012 NAB terminated its loans to Darren. The precise circumstances of that termination are not disclosed by the evidence, which does no more than suggest that Darren disputed NAB’s entitlement to do so.

Nevertheless, Darren ultimately refinanced in order to pay out NAB. He did so by entering into a loan agreement on 29 October 2013 with Hargraves (the “Loan Agreement”). The amount advanced to Darren under the Loan Agreement was $1,370,000. Its term was for 12 months with interest payable monthly calculated at 17.25% per annum, except that Hargraves would accept payment of interest at 13.25% per annum if payment was made by the fifth day of the month and Darren otherwise performed his obligations under the Loan Agreement. The Loan Agreement was secured by, among other things, mortgages and charges over the various properties and water licences set out in paragraph [4] above, including Midgee and Farm 1863.

By April 2014 Darren was having considerable difficulties making the interest payments under the Loan Agreement. By arrangement with Hargraves certain of the water rights which were secured to Hargraves were sold. That sale was completed in August 2014 for $300,000. After payment of arrears, commission and other expenses Hargraves received approximately $262,000.

A letter from Hargraves to Darren of 4 September 2014 included:

On 26 November 2014 the parties attended a mediation under the Farm Debt Mediation Act 1994 (NSW). That mediation resulted in an agreement (the “Mediation Agreement”) whereby Darren and other members of the Ciavarella family acknowledged that they were indebted to Hargraves for a principal sum of $1,370,000 and approximately $178,000 in interest. The Mediation Agreement also included:

Midgee had been listed by Darren on an internet farm sales site since April 2014. He had also listed it with a local real estate agent. However, contrary to the terms of the Mediation Agreement, Darren never put Midgee up for auction and did not give vacant possession of Midgee and Farm 1863 to Hargraves by 27 March 2015. Darren’s affidavit evidence about this was:

On 1 April 2015 Mr Mulquiney emailed Darren on behalf of Hargraves. The email noted that there had not been an auction of Midgee, no unconditional contract for sale had been entered into and vacant possession had not been provided. The email demanded immediate vacant possession and notified Darren that enforcement proceedings would be commenced.

On 2 April 2015 Mr Mulquiney sent a further email noting that there had been no response from Darren to the email of 1 April 2015 and enclosed the Notice. Darren received the hard copy of the Notice on 8 April 2015.

The Notice purported to follow the form required by s 52(2)(b) of the RPA. It cited default under Hargrave’s mortgage for failure to repay the principal sum as well as reciting defaults under the Mediation Agreement. The Notice specified that the defaults could be remedied by paying Hargraves $1,444,927 plus $600 in legal expenses. The fact that the amount demanded exceeded the principal owing to Hargraves and apparently included some of the interest provided one of the bases for the Ciavarellas’ attack on the validity of the Notice.

On 18 May 2015 Darren found that Hargraves had taken possession of Midgee and Farm 1863.

On 22 May 2015, while browsing the local newspaper, Darren discovered that auctions of both Midgee and Farm 1863 were to be held on 16 June 2015.

Darren’s affidavit evidence about what he did after receiving the Notice and his endeavours to refinance was as follows:

Hargraves’ evidence was that as at 5 June 2015 the amount owing to Hargraves by Darren was $1,467,612.56.

Hargraves provided valuation evidence that the total value of the assets over which it held security (including Midgee and Farm 1863) was $1,608,000. Its evidence was also that costs of sales and additional interest pending settlement of sales of the other security properties would increase the debt by approximately $200,000.

Darren produced valuation evidence which suggested that the value of the security properties (excluding the various water licences) was approximately $2,100,000.

The primary final relief sought in the Ciavarellas’ summons filed in Court at the hearing of their application on the afternoon of 15 June 2015 is a declaration that the Notice is invalid. At the hearing before me they sought the following interlocutory relief:

Having given notice to Mr Mulquiney that they would be approaching the Court, Hargraves was able to be represented at the hearing by Mr Mulquiney, who had prepared evidence in anticipation of the application. The application was therefore dealt with on a contested basis.

With no disrespect to the thorough way in which Mr Cornish put the legal arguments on behalf of the Ciavarellas, because the Court was ultimately able to resolve the application by reference to matters of discretion it is unnecessary for me to set out those arguments in detail. However, in the short time available during the course of the hearing I came to the view that while arguable (in the sense they would not be liable to being struck out) those arguments were not particularly strong and therefore did not give rise to a serious question to be tried. However, the Court ultimately acted upon its firm view that, even assuming in favour of the Ciavarellas that there was a serious question to be tried, matters going to the balance of convenience and the exercise of the Court’s discretion meant that the application should be rejected.

It was, correctly, submitted for the Ciavarellas that because their application to restrain the exercise of the power of sale was based upon the absence of a power of sale, it was not necessary for them to offer to redeem. However, Mr Cornish candidly accepted that the Ciavarellas were not in a position to redeem the mortgages but were making efforts to refinance. The evidence concerning their refinancing efforts is set out in paragraph [17] above.

The arguments then put on behalf of the Ciavarellas may be summarised as:

As stated in paragraph [23] above, even assuming in the Ciavarellas’ favour (contrary to the Court’s view) that there was a serious question to be tried as to the validity of the Notice and the absence of the s 92 Notice, four balance of convenience or discretionary considerations led to the conclusion that the application should be dismissed. Those considerations arise against the backdrop conceded by the Ciavarellas that the principal sum of $1,370,000 was owed to Hargraves, the Ciavarellas had no capacity to redeem the mortgages securing the Loan Agreement and that their efforts to refinance had thus far been unsuccessful. The Court will now consider the four decisive matters.

First, on the basis of the evidence set out in paragraph 17 above, the Court finds that the Ciavarellas had not acted in a timely fashion in bringing the application. Nor was there any adequate or proper reason for their failure to do so. Having received the Notice by email on 2 April 2015 and in hard copy on 8 April 2015, Darren took no steps to obtain legal advice until 22 May 2015. Thereafter Darren allowed two weeks to pass before being contacted by the solicitor who he intended to retain and even then did not appear to press that solicitor with the urgency of the matter. Darren did not treat the matter with the urgency or proactivity it clearly required, ultimately not instructing solicitors until two business days before the auction, being one business day before the application was brought before me.

Darren’s evidence offers no explanation for the delays referred to in the preceding paragraph. Equity expects applications of this kind to be brought as quickly as possible, not least to give an adequate opportunity for all parties to be heard and their arguments to be properly considered. In the events which happened, the application was brought at the last possible moment.

Second, the lateness in the bringing of the application may well have been overcome if there was evidence that refinancing had been arranged or, less persuasively, was likely to be able to be obtained within a reasonably short time. As was the case in relation to obtaining legal advice, Darren did nothing between when Hargraves issued the Notice at the start of April 2015 and when he became aware on 22 May 2015 of the auctions planned for mid-June. No explanation was offered for this delay. Furthermore, the evidence (set out in paragraph [17] above) reveals that Darren has not been particularly assiduous in following up such leads for refinance as he had. That evidence also demonstrates that at least two banks have made it clear that they would not advance funds to Darren to refinance.

Darren’s history of default with both NAB and now Hargraves suggests that any prudent, properly informed lender would approach the question of advancing funds to Darren extremely cautiously. The evidence of rejection by two banks also supports the conclusion that it will be very difficult for Darren to obtain refinancing. Taken together, all of the available evidence suggests that the likely outcome is that finance will not be available and the various properties securing the Loan Agreement will have to be sold in any event.

Third, the Ciavarellas had already had the benefit of the forbearance provided by the Mediation Agreement. That forbearance included an arrangement whereby Darren would be permitted to sell Midgee in his own right, only in default of which then would possession of Midgee and all the other secured properties have to be delivered up to Hargraves. The Mediation Agreement did not give Darren any discretion about whether or not he would put Midgee up for sale. Notwithstanding that, Darren breached the Mediation Agreement for the reasons set out in paragraph [11] above. Those reasons do not reflect any entitlement which he had under the Mediation Agreement but rather support the conclusion that Darren deliberately breached the terms of the Mediation Agreement.

Even if he did not have a valid legal reason to act as he did the Court, for the purposes of exercising its discretion, might take into account why such a breach occurred. However, the reasons given by Darren are entirely unsatisfactory. Equity will be slow to assist mortgagors such as the Ciavarellas against their mortgagee when the mortgagors have already breached an agreement such as the Mediation Agreement.

Fourth, at least on the basis of Hargraves’ evidence there was a serious risk that the value of Hargraves’ security would, if matters were delayed further, be exceeded by the amount of the debt owed by the Ciavarellas. The Court did not overlook the more optimistic figures provided in the Ciavarellas’ valuation evidence. However, while it is not possible for the Court to resolve the valuation issues in the context of an urgent interlocutory hearing such as occurred in this case, the Court can and does take into account credible evidence of a real possibility that the value of Hargraves’ security would be completely eroded if there was further delay. Furthermore, even if the Ciavarellas’ valuations ultimately prove to be more accurate, given the Court’s conclusions about the possibility of refinancing (see paragraphs [29] and [30] above), it is difficult to see what benefit there would be for the Ciavarellas to have their equity in the various properties, including Midgee and Farm 1863, further eroded by delaying the auctions.