Commonwealth Bank of Australia v MLD Financial Services & Management Pty Ltd

1. [1]

   On 28 November 2007 the Plaintiff and the First Defendant entered into a loan agreement under which the Plaintiff lent $570,050 to the First Defendant. The Second Defendant who was a director and shareholder of the First Defendant provided a guarantee for the loan at or about the same time. In addition, the First Defendant gave a mortgage over land at 1390 Illaroo Road, Illaroo.

2. [2]

   There were defaults throughout the period of the loan. Ultimately, a s 57 notice was served on or about 13 August 2014. Proceedings were commenced on 28 November 2014 seeking possession of the land and claiming a monetary judgment.

3. [3]

   A Defence was filed by the Second Defendant acting for herself and for the First Defendant on 22 December 2014. The Defence, as best as it could be understood, appeared to raise two matters. The first was that the amount said to be owing was disputed because there were said to be incorrectly debited fees, costs, charges and interest. Secondly, it was said that the Plaintiff by its negligence had directly and indirectly impaired the ability of the First Defendant to earn income to pay what was due under the loan agreement and mortgage. The meaning of this second matter will be made clear in the course of the judgment.

4. [4]

   On 13 July 2015 the Plaintiff by Notice of Motion filed on that day sought summary judgment for possession of the land. The Motion came before me as part of case management of the proceedings on a number of occasions during which time the Defendants obtained adjournments because they were endeavouring to obtain legal assistance. Ultimately on 14 August 2015 Mr G M Colman of counsel appeared for the Defendants on a direct access brief.

5. [5]

   On that occasion I sought to ascertain from Mr Colman what the Defendants’ defence was to the claim. He informed me that the Defendants would be alleging an equitable set-off, and sought an adjournment to enable the obtaining of proper instructions which would include the drafting of an amended defence and cross-claim. Accordingly, the matter was adjourned to 11 September 2015 for the hearing of the Plaintiff’s Motion for summary judgment. The Defendants were directed to provide before 11 September the form of the defence and cross-claim on which they would resist the summary judgment Motion and would ultimately seek to rely at a final hearing.

6. [6]

   The Defence which was ultimately served admitted the entry into the loan agreement, the mortgage and the guarantee, admitted that there had been a failure to make repayments but denied that there was default because of the set-off alleged in the proposed Cross-Claim.

7. [7]

   The proposed Cross-Claim pleaded that the Defendants went through a period of revenue deficit during 2012 and the loan payments to the Bank fell into arrears. The pleading further asserted that the First Defendant was about to enter into two contracts for the supply of the First Defendant’s services, being a management, accounting (project, systems and financial) and consulting services business, but that these two potential clients declined to proceed with the proposed arrangements. The pleading went on to say that the reason those companies declined to proceed to contract with the First Defendant was that letters forwarded by the Plaintiff to the Defendants came into their hands by reason of the negligence of the Plaintiff.

8. [8]

   In short, it was asserted that the Plaintiff had forwarded correspondence intended for the Defendants to wrong addresses and that correspondence came into the hands of the two companies concerned. The nature of the correspondence involved assertions by the Bank of defaults by the First Defendant in breach of the terms of the home loan and mortgage. The two companies concerned asserted that they were not prepared to contract with the First Defendant for the provision of business and financial services if the First Defendant could not itself manage its own business and financial matters.

9. [9]

   The principal sum was advanced on 7 December 2007. On 7 January 2008 the first instalment was paid and was dishonoured the following day. It was then paid again on 9 January 2008. A repayment made on 7 July 2008 was dishonoured as were payments made on 7 September and 7 December 2008. The statements thereafter show regular dishonours of payments up to and including 8 March 2012.

10. [10]

    On 29 March 2012 the Plaintiff issued a s 57 Notice claiming arrears of $9,927.96. That appears to have led to the Defendants making an application to the Plaintiff for help in managing their debt as a letter from the Plaintiff to the Second Defendant of 12 June 2012 discloses. At some stage thereafter the Defendants made application to the Financial Ombudsman Service. Negotiations were entered into and the Bank offered a reduction on monthly repayments commencing 7 September 2012 to $1,500 with repayments at $5,000 per month to recommence on 7 November 2012. It is not clear what happened after that time but on 2 October 2012 the Bank made another offer that the repayments for December 2012, January and February 2013 be $4,500 per month.

11. [11]

    In his affidavit read at the hearing of the Notice of Motion the Second Defendant’s husband, Rodney John Macaulay, who said he was responsible for the daily office administration of the day to day clerical affairs of the First Defendant, asserted that the company went through a period of revenue deficit during 2012 and loan payments fell into arrears. They concentrated their efforts to obtain new work and at the beginning of 2013 had negotiated service and management consulting agreements with two businesses being Select Cellars International Pty Ltd and PMO Global Consulting Pty Ltd.

12. [12]

    Mr Macaulay thereafter gave evidence of what was pleaded in the proposed cross-claim including annexing correspondence from those two companies showing first their intention to enter into contracts with the First Defendant and thereafter declining to proceed because information had come to their attention about the First Defendant’s financial problems with the Plaintiff.

13. [13]

    The agreement with Select Cellars was for a minimum fee of $1000 per day. The agreement with PMO Global Consulting Pty Ltd was for a fee of $1000 per day with an additional hourly rate of $175. The agreement with Select Cellars entitled Select to terminate the agreement at any time on four weeks’ notice. Similarly, the agreement with PMO Global Consulting permitted either party to terminate on one months’ notice after the expiry of the initial term which was defined as being two weeks from the commencement date.

14. [14]

    The First Defendant submitted that at least since Tournier v National Provincial and Union Bank of England [1924] 1 KB 461 it has been accepted that a bank owes a duty of confidentiality to its customers, breach of which even if inadvertent, will sound in damages. The First Defendant submitted that in the present case the Bank had breached its duty of confidentiality by sending the correspondence to the wrong addresses, and as result the First Defendant suffered damage in that it became unable to meet its commitments under the Loan Agreement and mortgage.

Summary judgment

1. [15]

   Summary judgment is sought only for possession of the land and concerns, therefore, only the First Defendant.

2. [16]

   The Court of Appeal has recently summarised the principles relevant to applications for summary judgment in O'Brien v Bank of Western Australia Ltd [2013] NSWCA 71. Macfarlan JA (with whom Beazley P agreed) said:

3. [17]

   Ward JA (with whom Beazley P also agreed) said:

4. [18]

   In the present case any proposed defence involving a dispute about the amount owing cannot provide a defence to the claim for possession. The only defence put forward to resist the claim for possession is what is said to be the equitable set-off that arises from the Plaintiff’s negligence that led to the inability of the First Defendant to make the payments under the home loan and mortgage. In terms of the principles relevant to summary judgment applications, the issue to be determined is whether there is an arguable case that an equitable set-off is established and is capable of providing a defence to the Plaintiff’s claim. It must be asked whether the set off has a real or more than a fanciful prospect of success.

The Plaintiff’s claim

1. [19]

   The Plaintiff’s evidence establishes the Plaintiff’s right to possession subject only to any defence by the First Defendant. The First Defendant admits that payments were not made although it disputes that default has occurred.

2. [20]

   Clause 9 of the loan agreement relevantly provides:

3. [21]

   Clauses A21 and A22 in the mortgage deal with what can happen if the mortgagor is in default. They relevantly provide:

4. [22]

   On the proper construction of the Loan Agreement and the mortgage default has occurred by reason of the failure to pay what was due and owing.

5. [23]

   The First Defendant argued that by reason of the Bank’s wrongdoing a default did not occur under the loan agreement and the mortgage. That submission cannot be accepted.

6. [24]

   Under clause 9.1(a) of the loan agreement the borrower is in default if they did not pay on time any amount payable under the contract. Although the clause goes on to deal with the service of notices nothing in that clause suggests that default only arises either when a notice is served or if no legitimate reason can be offered for the failure to pay on time any amount payable.

7. [25]

   The mortgage bears this out in clause 21 which contains a similar provision.

8. [26]

   The loan agreement provided that the security for the loan was a registered mortgage over the property at 1390 Illaroo Road, Cambewarra West. There is no dispute that that is the alternative description of Illaroo.

9. [27]

   Clause A4 of the mortgage relevantly provided:

10. [28]

    The terms “Amount Owing” and “Secured Agreement” were defined as follows:

11. [29]

    Subject, therefore, to any defence, the Plaintiff is entitled to possession of the property.

The Defence

1. [30]

   The Plaintiff submits that the Defence is simply a cross-claim which cannot defeat the Plaintiff’s right to possession because that right arises under the loan agreement and mortgage. The Plaintiff submits that if the matters raised by the First Defendant are arguable they are caught by the principle discussed in Inglis v Commonwealth Trading Bank of Australia (1972) 126 CLR 161 at 165-167 and 169. The Plaintiff points to a number of other cases which it says clearly establish that a cross-claim or a set-off cannot amount to a defence to a claim for possession. The Plaintiff submits that the attempts to bring such a set-off or counter claim is contrary to cl 11.21 of the loan agreement.

2. [31]

   It is necessary first to determine if the Defence and Cross-Claim sought to be relied upon by the First Defendant amounts to an equitable set-off. It is then necessary to see whether that set-off is capable of being raised when the contractual arrangements between the parties are considered.

3. [32]

   In Murphy v Zamonex Pty Ltd (1993) 31 NSWLR 439 Giles J said at 465:

4. [33]

   Bryson J, having set out that passage in GE Capital Australia v Davis [2002] NSWSC 1146 at [81], went on to say:

5. [34]

   However, it must be remembered that in Davis Bryson J was considering the right of a guarantor to raise an equitable set-off when the guarantor was being sued for the amount guaranteed rather than for possession of the land.

6. [35]

   In Inglis v Commonwealth Trading Bank of Australia (1972) 126 CLR 161 Walsh J said:

7. [36]

   As the learned authors of Meagher, Gummow and Lehane’s Equity Doctrines and Remedies (5th Edition 2015 Lexis Nexis) make clear, for the claim to amount to an equitable set-off the claim must impeach the Plaintiff’s claim or, in the case of a mortgage, impeach the Plaintiff’s title to the mortgage. They say at [39-060(g)]:

8. [37]

   In Lord v Direct Acceptance Corporation Ltd (Receiver And Manager Appointed) (In Liq) (1993) 32 NSWLR 362 Sheller JA with whom Kirby P and Meagher JA agreed said at 367:

9. [38]

   In the present case, the wrongdoing on the Bank’s part is said to postdate significantly the entry into the loan agreement and the mortgage. It is not suggested that there was any wrongdoing at the time of the entry into the contractual arrangements. This is not a case where, for example, misrepresentation or misleading and deceptive conduct leading to the making of the agreement is alleged nor where there is unconscionablity or an unjust contract is made. Such matters, if established, can be said to impeach the Plaintiff’s title to the land because of the way that title was obtained.

10. [39]

    The present complaint is independent of the entry into the contractual arrangements. It arises from subsequent conduct of the Bank which is said to have impeded the ability of the mortgagor to observe the terms of the contractual arrangements. In that way it cannot be said to impeach the title of the Plaintiff to the mortgage on which the Plaintiff now seeks possession of the land. Again, the complaint about the Plaintiff is not directly connected with the claim, that is, the right to obtain possession as a result of the default under the mortgage.

11. [40]

    The need to impeach the title to establish an equitable set-off is made most clear in cases where mortgagees are seeking possession only of the property. In Westpac Banking Corporation v Corry [2011] NSWSC 1014 the defendants attempted to resist summary judgment for possession by asserting that they relied on the bank manager’s advice not to sell some properties at a price which would have substantially reduced their indebtedness to the bank. They contended that reduction of the level of indebtedness at that stage would enable them to continue meeting other loan repayments and would have put them in a better position to refinance and protect the property of which possession was now sought by the bank.

12. [41]

    Johnson J said:

13. [42]

    In National Australia Bank Ltd v C & O Voukidis Pty Ltd [2014] NSWSC 384 Campbell J came to a similar conclusion where the defence said to amount to a set-off asserted:

14. [43]

    Campbell J said:

15. [44]

    Again, in Australian & New Zealand Banking Group v RQA Accountants Pty Ltd [2013] NSWSC 165 one of the defendant’s complaints in seeking to resist possession was that the Bank fraudulently transferred money from one account to another rendering it unavailable as working capital. It was alleged that the Bank behaved unconscionably in that way and others. Adamson J held at [51] that even if the Bank were in breach, that would not prevent it from relying on the mortgagors’ breaches to found its right to possession of the property.

16. [45]

    In each of Corry, Voukidis and v RQA Accountants summary judgment for possession was sought and obtained notwithstanding the claims that were sought to be made. In each case those claims amounted to alleged wrongdoing on behalf of the Bank which somehow prevented the mortgagors from meeting their commitments under the mortgage and loan agreement. In that way they are indistinguishable from the complaints in the present case.

17. [46]

    The First Defendant placed some reliance on cases involving competing disputes between landlords and tenants such as British Anzani (Felixstowe) Ltd v International Marine Management (U.K.) Ltd [1980] 1 QB 137, and Beasley v Darcy (1800) 2 Sch. & Lef. 403 which is referred to in British Anzani. Mr Colman took me in particular to a passage concerning Beasley set out in British Anzani (at pp 150-1) where Lord Redesdale LC had said in O’Mahony v Dickson (1805) 2 Sch. & Lef. 400 at 412:

18. [47]

    However, there is no analogy here between landlords and tenants on the one hand, and mortgagees and mortgagors on the other. Landlords and tenants owe mutual ongoing obligations. In many cases a tenant may be able to set off rent against a claim for damages for a failure to repair, for example. There is no issue about impugning the landlord’s title as there is in relation to a mortgagee’s right to possession.

19. [48]

    The First Defendant submitted in reliance on McDougall J in RHG Mortgage Securities v BNY Trust [2009] NSWSC 1011 at [75] to [80] that it cannot be said on an a priori basis that relief against forfeiture would not be available, and that it was arguable that equity would intervene here when all the facts were exposed at a final hearing. However, as McDougall J made clear at [5], the first issue he had to decide was whether there was a serious question to be tried as to whether an Event of Default had occurred. The remarks concerning relief against forfeiture must be viewed in that context. In the present case there is no dispute that a default has occurred. The issue here is whether the cause of the default can be raised as a set-off to the claim for possession including a consideration of the contractual terms between the present parties.

20. [49]

    The matters raised by the First Defendant in the present case do not impeach the title of the Plaintiff, nor can they be said to so directly connected with the claim that it would be unjust to allow the Plaintiff to recover without taking into account the First Defendant’s counterclaim.

21. [50]

    However, even if the matters raised by the First Defendant could be said to amount to a set off the First Defendant would not be entitled at this stage to raise the matters by virtue of clause 11.21 of the loan agreement.

22. [51]

    Clause 11.21 provides as follows:

23. [52]

    Bryson J had to consider a similar clause in a guarantee in GE Capital Australia v Davis. That clause provided:

24. [53]

    Bryson J said:

25. [54]

    In answer to this the First Defendant pointed to the absence in the mortgage of a clause similar to clause 11.21 of the loan agreement. This was said to be significant on a summary judgment application because it was a matter that formed part of the factual matrix for argument at the final hearing.

26. [55]

    This submission should not be accepted. It is a matter of law on the construction of the documents whether clause 11.21 of the loan agreement operates although there is no corresponding provision in the mortgage. There is no challenge to the circumstances of the entry into the loan agreement and mortgage. In that way there is no factual matrix to which this argument could be relevant. Nothing in the mortgage suggests in any way that clause 11.21 of the loan agreement does not operate with full effect. A clause limiting any right of set-off would not be expected to be found in a mortgage which is ultimately a document of title. It is a clause ordinarily found in loan agreements and guarantees. The mortgage is a security for the obligations in the loan agreement and any guarantee.

27. [56]

    There were certain deficiencies in the evidence to make out the defence raised. It was apparent, for example, that the inability of the First Defendant to meet the requirements under the loan agreement and mortgage predated the alleged wrongdoing of the Bank in forwarding mail to wrong addresses. Moreover, there was little evidence of the First Defendant’s financial position so that a link could be made between the inability to pay the instalments due under the loan agreement and the loss of the contracts with Select Cellars and PMO Global Consulting.

28. [57]

    However, for the purposes of the summary judgment application I have assumed in favour of the First Defendant that the First Defendant had established the link between the inability to pay the instalments and the loss of the contracts. I have also assumed in the First Defendant’s favour that the acts of the Bank in forwarding the correspondence to the wrong addresses was done negligently and in breach of other duties which existed between the Bank and the First Defendant.

Conclusion

1. [58]

   The First Defendant has no defence to the claim for possession of the land. I am satisfied of the other matters required to be proved under r 36.8 UCPR. The Plaintiff is entitled to summary judgment for possession.

2. [59]

   I make the following orders: