Integrated Securities No 3 Pty Ltd v Creatrix Web Development & Online Marketing Solutions Pty Ltd

1. [1]

   The Plaintiff (“Integrated”) loaned money to the First Defendant (“Creatrix”) pursuant to a loan agreement dated 26 February 2018 (“the Loan Agreement”) to which the Second and Third Defendants (“Ms Pejkic” and “Mr Valerio” respectively) are parties. The amount loaned was initially $530,000 but approximately six months later, a further amount of $93,295.46 was lent by Integrated pursuant to a Deed of Variation. Mr A Djurdjevic of Counsel appeared for Integrated and Mr David Cacciola (“Mr Cacciola”), the sole director and shareholder of Integrated. Mr P Horobin of Counsel appeared for the Defendants.

2. [2]

   There is no dispute that the money lent by the Plaintiff has not been repaid. By the terms of the Loan Agreement interest has accrued at a default rate of 4.5% per month, compounding monthly, which is an annual interest rate of 69.588% (the non-default rate being 3% per month, which is an annual interest rate of 36%).

3. [3]

   The Loan Agreement included an agreement by Ms Pejkic to give Integrated a mortgage over a property owned by her. That mortgage document signed by Ms Pejkic (see CB 304-305) was never registered. Another mortgage is registered on the title and that is an earlier mortgage granted by Ms Pejkic to RAMS. Ms Pejkic and Mr Valerio are also described in a schedule to the Loan Agreement as “Guarantors”. Whilst the Loan Agreement is sometimes referred to as “the Mortgage”, I shall, in these reasons, refer to it as the Loan Agreement.

4. [4]

   Creatrix is a company all the shares in which are owned by Mr Valerio. He is also its sole director and secretary. Creatrix conducts a design and development business with an emphasis on marketing.

5. [5]

   Mr Valerio and Ms Pejkic are de facto partners. They bought a property in Ms Pejkic’s name with funds supplied by Bankwest and resided (and continue to reside) at that property, which is located in Yowie Bay, NSW (“the Property”). In 2014, they decided to demolish the existing house on the Property and build a duplex with the intention of subdividing the Property, renting one half of the duplex and residing in the other half.

6. [6]

   For the purpose of the proposed demolition and new construction of the duplex and refinancing of the existing loan, Ms Pejkic and Mr Valerio obtained a loan of $2,380,000 from RAMS. As costs escalated, and following the departure of the builder from the site, Mr Valerio and Ms Pejkic sought an additional loan or refinancing from RAMS but RAMS was not prepared to lend any further amount, Mr Valerio and Ms Pejkic having failed to meet repayments due under the RAMS loan.

7. [7]

   Mr Valerio and Ms Pejkic sought assistance from a mortgage broker called Tim Haynes of Highland Financial Services. An application was made through Mr Haynes to National Commercial Funding Pty Ltd (“NCF”). Mr Haynes enquired whether Mr Valerio (and Ms Pejkic) could utilise a company as borrower and Creatrix was proposed by Mr Valerio as the borrower. NCF declined to lend any money to Creatrix and Mr Haynes then mentioned the possibility of another lender controlled by Mr Cacciola. Mr Haynes and Mr Cacciola were friends of longstanding.

8. [8]

   On 30 January 2018, Mr Haynes lodged an application signed by Mr Valerio with Credit Solutions Group Pty Ltd (another company owned and controlled by Mr Cacciola) (“Credit Solutions”) completed by Mr Valerio as “Borrower” (see CB 258-259) and on 31 January 2018 Integrated, through Mr Cacciola, indicated approval for the requested loan, but the loan was to be made to Creatrix: see CB 275-276. The funds sought were paid on or about 26 February 2018, save that a significant portion of the monies lent went to Integrated and Credit Solutions as prepaid interest, fees and charges. In fact, of the $530,000 lent, only $410,384.45 was actually received into the bank account of Creatrix. In about August 2018, Mr Valerio sought additional funds of $30,000 from Integrated (see CB 72) and a loan of $93,295.46 was approved, which was effected via a Deed of Variation of the Loan Agreement, dated 24 August 2018. Of the $93,295.46 loaned, only $30,000 was actually advanced to the Defendants; prepaid interest (including additional accrued interest for the first loan), fees and charges again having been deducted from the monies advanced. Thus, the Defendants were required to pay $93,000 for a further loan of $30,000 even without the application of default interest. The $30,000 actually paid out was paid into the account of Mr Valerio and Ms Pejkic, rather than Creatrix’s account.

9. [9]

   In or around November 2018, the Defendants completed the construction of the duplex. One half of the duplex (“Lot B”) subsequently sold for $1,900,000. Mr Valerio, Ms Pejkic and their children reside in the other half of the duplex (“Lot A”). Save for minor miscellaneous disbursements, the entire proceeds of sale of Lot B was paid to RAMS. The debt to RAMS was accordingly reduced but it is still owed approximately $1,000,000. If Lot A yields a similar amount to Lot B on sale, there is a strong likelihood that there will be nothing left for Ms Pejkic and Mr Valerio, and now given the passage of time and the extremely high default rate of interest on the Integrated loans, there is a strong possibility that the proceeds of sale will not even be sufficient to pay out the entire debt of Integrated.

10. [10]

    There is no dispute that, subject to the two defences put forward by the Defendants, Integrated is entitled to judgment against each of them for $1,061,523.48, plus further interest. Nor is there any dispute, again subject to determination of the two defences, that Integrated is entitled to sell Lot A and after payment to RAMS of the balance of its debt, retain such of the proceeds as will satisfy the Integrated debt.

11. [11]

    I have referred to two defences advanced by the Defendants. The first is that the Defendants assert that the Loan Agreement is should be declared void by the National Credit Code (“the Code”) which has been enshrined in legislation by the National Consumer Credit Protection Act 2009 (Cth) (“the NCCP Act”). The second defence is a claim that the Loan Agreement was obtained by, and amounts to, unconscionable conduct on the part of Integrated and Mr Cacciola. I shall deal with these two matters separately, but first, reference needs to be made to the undisputed fact that Mr Cacciola was made, in 2014, the subject of a ban by the Australian Securities and Investments Commission (“ASIC”) pursuant to s 80 of the NCCP Act. The notice relating to the ban is found at CB 104 and states:

12. [12]

    It is accepted by the Defendants that the ban on Mr Cacciola is relevant only to credit activities that are covered by the Code.

The Code and the NCCP Act

1. [13]

   The relevant provisions of the Code are:

2. [14]

   Section 17 of the Code is also relevant, as it imposes significant requirements on a credit contract covered by the Code including, for example, a requirement for clear statements of the charges, fees and interest rates, and warnings required by the regulations made under the Code.

3. [15]

   The relevant provisions of the NCCP Act are:

4. [16]

   The Defendants contend that:

   1. (1)

      Mr Valerio and Ms Pejkic were seeking a loan for themselves (which was to be in Mr Valerio’s name only) and not Creatrix but that Integrated approved a loan to Creatrix in order to avoid the consequences of the Code (and the NCCP Act).

   2. (2)

      The Loan Agreement, whilst it specifies that Creatrix is the borrower, provides that Ms Pejkic and Mr Valerio are not only “guarantors” but also “debtors”, and that Ms Pejkic is also a mortgagor, and that thereby, the Loan Agreement is a credit contract to which the Code applies.

   3. (3)

      Mr Cacciola did not tell Mr Valerio and Ms Pejkic (or Creatrix) that if Creatrix was the borrower, the Code would not apply and that the requirements of the Code were not met.

5. [17]

   There is a factual issue concerning both [16(1)] and [16(3)] above. Integrated contends that the application was made by Creatrix. Mr Valerio and Ms Pejkic claim that the application was made by Mr Valerio. In relation to [16(3)] above, Mr Valerio in his Affidavit (see paragraph 39) claims that Mr Cacciola told him that the loan would have to be made to Creatrix because Mr Valerio did not have enough income to meet the loan. Mr Cacciola in his Affidavit claimed that he told Mr Valerio (at CB 89):

6. [18]

   The issue which is encapsulated in [16(2)] raises a number of sub-issues with which I shall deal below.

7. [19]

   Integrated does not dispute that if the Loan Agreement is a credit contract within the meaning of the Code, it held no licence (and nor did Mr Cacciola) permitting it to enter the Loan Agreement and, on that assumption, that it would have breached the Code and the ASIC ban by arranging the transaction. Integrated asserts, however, that the borrower and also therefore the debtor under the Loan Agreement was Creatrix, and since Creatrix was the borrower and it is a corporation and not a natural person or strata corporation, the Loan Agreement is not a credit contract to which the Code applies.

8. [20]

   The Defendants accept that under the Loan Agreement, Creatrix is named as the borrower, but they assert that the Loan Agreement is nevertheless one caught by the Code because, by its terms, Ms Pejkic and Mr Valerio were defined as “Debtors” in the Loan Agreement and there was imposed on them obligations which went beyond obligations of a guarantor and mortgagor. The reference to guarantors is important because guarantors are, by the definition in s 204 of the Code, excluded from the definition of “debtor” for the purposes of the Code. The defendants also rely on the express provision in s 13(1) of the Code that where a party in proceedings “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”.

9. [21]

   As I have noted, the Defendants also assert that Integrated engaged in unconscionable conduct within the meaning of s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) (“ASIC Act”). There was no dispute by Integrated and Mr Cacciola that they provided financial services to Creatrix, Ms Pejkic and Mr Valerio in connection with the Loan Agreement for the purpose of the ASIC Act. However, they deny any conduct on their part that amounts to unconscionable conduct within the meaning of s 12CB or the general law, which general law is imported into the section by subsection 12CB(4)(a). I shall deal with the “unconscionability claim” separately to the Code issue.

Credibility of Witnesses

1. [22]

   I did not find Mr Cacciola to be an impressive witness and there were a number of matters which undermined his credibility:

   1. (1)

      He asserted that financial documents relating to Creatrix were provided to him and that “we went through the company financials to see if it could service the debt if it went into default for two to three months because that’s what normally happens on these type of transactions” (see T27.18-20), that he did conduct due diligence (T26.44-47), and that he had information about Creatrix (T28.41-44) but, in fact, he had no financial documents in respect of Creatrix: see T29.34-35, T30.20-40, T31.31 and T36.40.

   2. (2)

      He had asserted that inquiries were made about Creatrix’s financial circumstances but then said he could not confirm whether those inquiries actually took place: T32.8. There is no evidence of any inquiries having been made.

   3. (3)

      He asserted, notwithstanding [22(1)], that he assessed that Mr Valerio could meet the loan repayments because his income (inferentially from Creatrix) was stated to be approximately $330,000 per annum (see T30.6-18 and T31.20-27), but at T41.45-48 he said:

   4. (4)

      He avoided answering the question as to the importance of the value of the land: T32.20-T33.10, T33.40-42.

   5. (5)

      In his Affidavit of 29 March 2021, he sets out a conversation with Mr Valerio in which Mr Valerio asked him why the loan had to be to a company, in which, on his version, he told Mr Valerio that Integrated “only provides loans to other companies for short term periods, which are non-coded facilities”: see CB 89. Mr Horobin put to him that the supposed response to Mr Valerio’s question was a recent invention designed to deal with Mr Valerio’s version of that conversation in his Affidavit in October 2020. Mr Cacciola’s explanation for its late inclusion was (at T39.45-47):

   6. (6)

      He was asked questions about the importance of the mortgage and seemed reluctant to provide a direct answer: T47.45-T48.45.

   7. (7)

      He professed ignorance of matters pertaining to the loan (see T27.35-42 and T31.45-T32.11) although he is the only deponent for the Plaintiff/Cross-Defendants.

2. [23]

   Mr Valerio’s version of the conversation on the 12th of February, to which Mr Cacciola was responding, is found at paragraph 39 of Mr Valerio’s Affidavit and I will set it out in full:

3. [24]

   As Mr Horobin conceded, however, there were some admissions in Mr Cacciola’s cross-examination which are of some significance and reduced the area of factual dispute:

   1. (1)

      That he knew that neither Integrated nor Credit Solutions could provide credit if that credit constituted credit activities within the meaning of the Code: T26.13-14.

   2. (2)

      That he knew that RAMS had refused to extend further credit to Mr Valerio and Ms Pejkic: T26.49-T27.1.

   3. (3)

      That he knew that NCF had refused to provide funding to the Defendants: T27.3-6.

   4. (4)

      There is the following evidence (at T32.15-24):

   5. (5)

      The following (at T46.45-T47.2):

4. [25]

   I approach Mr Cacciola’s evidence with considerable caution unless it involves an admission on behalf of himself and/or his companies.

5. [26]

   Ms Pejkic was not subject to any cross-examination. I therefore accept her evidence.

6. [27]

   Mr Valerio was cross-examined. I do not think that he was shown to have been an untruthful witness. He appeared to me overall to be honest in his answers although at times confused as Mr Horobin contended, and there were aspects which I shall detail which induce some caution. Mr Horobin submitted that Mr Valerio failed “to recognise what was being asked of him, or just poor attention to it” (see T109.5-6) on the topic of his conversation with Mr Cacciola on 12 February 2018, which was a topic on which his evidence diverged from that of Mr Cacciola.

7. [28]

   I take into account that the part of the conversation as put to him by Mr Djurdjevic was not put in the precise terms of Mr Valerio’s Affidavit so that literally, his denial of having asked the question in the terms as put to him at T67.31-36 was not inaccurate. Mr Djurdjevic did not explore the discrepancy and did not put to Mr Valerio that his version of the conversation as recorded in his Affidavit was false or incorrect.

8. [29]

   I should refer to one further factual matter on which Mr Valerio was cross-examined. In support of the application to NCF (to which reference was made in [7] above) Mr Valerio signed a document in which he declared that the purpose of the loan was to “Finish off construction of Duplex Build”: see CB 225. On CB 227, as part of that application to NCF, he and Ms Pejkic signed a declaration that “the credit to be provided to the applicant by the credit provider will be applied wholly or predominately for business or investment purposes (or for both purposes)”.

9. [30]

   It was put to Mr Valerio that the purpose of the loan sought from NCF was the same purpose as was sought from Integrated (put at T62.13-21, i.e. to finish off construction of the duplex build) and he agreed that it was to finish the construction of the duplex build: at T62.23-24. It was also put to Mr Valerio that he had signed a document for the application to NCF and that the purpose of the loan from NCF was in truth “predominately for investment purposes other than investment in residential property or business purposes” (see T64) and he said this was not for a business purpose but then said he was not saying that what he had said to NCF was untrue. There was thus an inconsistency in his evidence that was not explored with him and there was no challenge to his evidence to which I refer at the end of [32] below or to Ms Pejkic’s evidence that there was no joint venture with Creatrix. I should also note that there were draft minutes which Integrated required Creatrix to complete and sign (and which Mr Valerio did complete and sign) as part of the documentation required by Integrated (see CB 360), which included a statement in the terms detailed at [42(8)] below.

10. [31]

    Although potentially relevant to Mr Valerio’s credibility, these aspects do not assist the Defendants because Mr Cacciola was well aware that the loan was sought by Mr Valerio and Ms Pejkic to enable them to complete the duplex, sell half to repay their debt and keep the other half as their residence and no declaration complying with regulation 68 of the National Consumer Credit Protection Regulations 2010 (Cth) (“NCCP Regulations”) was sought or obtained by Integrated from the Defendants.

11. [32]

    Where the evidence of Mr Valerio differs from that of Mr Cacciola and notwithstanding that fact that Mr Valerio was willing to complete documents that falsely gave the impression that Creatrix had an interest in the duplex development and the matters to which I have referred, I prefer the evidence of Mr Valerio and I am not persuaded that Mr Cacciola told Mr Valerio that the loan would be “non-coded”. I am strengthened in this conclusion by Mr Cacciola’s concession at T46.45-48 as to the reason he gave Mr Valerio (which was the same as deposed to by Mr Valerio) and in any event, I should note that Integrated and Mr Cacciola in their Defence to the Cross-Claim admitted that they had not told the Defendants that the Code would not apply: see [29(e)] of the Defence to the Cross-Claim. I also find on the basis of Mr Valerio’s evidence that he told Mr Cacciola that he needed up to $500,000 to finish the building work and that Creatrix “has got nothing to do with the duplex. Me and Mili are living in one side with our family and we are selling the other side to pay the arrears to RAMS and to pay you back”: see CB 70.

Was the Loan Agreement a “Credit Contract”?

1. [33]

   The first issue is whether the Loan Agreement (see CB 307-374) was a credit contract within the meaning of the Code. The borrower named in the Loan Agreement is Creatrix. As it is not an individual, the Code would appear to have no application. The Defendants, however, contend that the Loan Agreement made Mr Valerio and Ms Pejkic “Debtors” and that by the terms of the Loan Agreement, they were “persons liable to pay (or to repay) credit”, or alternatively, that Ms Pejkic was such a person.

2. [34]

   Schedule A to the Loan Agreement (which, for present purposes, is identical to the table found in the Substitute Schedule to the Deed of Variation dated 24 August 2018, which replaces Schedule A: see CB 395-397) contains the following relevant extracts:

3. [35]

   The following definitions are found in the Loan Agreement:

4. [36]

   The following definitions of the Deed of Variation, which are found in a table at clause 1.1 of that document, are also relevant:

5. [37]

   It will be observed that Schedule A (set out at [34] above) refers to Mr Valerio, Ms Pejkic and Creatrix as “Debtor(s)”, but unlike “Borrower”, “Debtor” is not, in the body of the Loan Agreement, defined by reference to the Schedule.

6. [38]

   “Debtor” is defined in clause 1.1 of the Loan Agreement as “the Borrower and/or the Mortgagor as the case may be…”. Thus, the “Debtor”, at least pursuant to clause 1.1 of the Loan Agreement, does not include a “Guarantor”.

7. [39]

   The following clause is of critical importance:

8. [40]

   The following clauses are also of potential relevance:

9. [41]

   As a commercial document, the Loan Agreement must be given “a businesslike interpretation on the assumption ‘that the parties … intended to produce a commercial result’” and one that avoids “it ‘making commercial nonsense or working commercial inconvenience’”: see Electricity Generation Corp v Woodside Energy Ltd (2014) 251 CLR 640 at [35] per French CJ, Hayne, Crennan and Kiefel JJ (as her Honour then was) (“Electricity Generation”), quoting Re Golden Key Ltd [2009] EWCA Civ 636 at [28] per Arden LJ (“Re Golden Key”) and Zhu v Treasurer (NSW) (2004) 218 CLR 530 at [82] per Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ (“Zhu”).

10. [42]

    I note the following matters:

    1. (1)

       There is, in this case, unlike Electricity Generation, Re Golden Key and Zhu, an important additional element to be taken into account; namely, the statutory presumption that is mandated by s 13(1) of the Code – i.e. that the credit contract is one to which the Code applies “unless the contrary is established”.

    2. (2)

       Although a declaration of the kind referred to in s 13(2) of the Code introduces its own presumption in relation to the purpose for which credit is provided or intended to be provided, any such declaration is required to be in the form specified by regulation 68 of the NCCP Regulations, which form includes a warning in the terms specified (an example of which is found in the NCF form at CB 241): see regulation 68 of the NCCP Regulations. Integrated did not assert that it had obtained a declaration compliant with s 13(2) and it did not advance any argument based on s 13(2) of the Code.

    3. (3)

       The consequence of [42(1)] and [42(2)] is that Integrated bears the onus of persuading the Court that the Loan Agreement is not a credit contract to which the Code applies: see Ozzy Loans Pty Ltd v New Concept Pty Ltd & Zhong [2012] NSWSC 814 at [39]-[41] per S G Campbell J; see also Bahadori v Permanent Mortgages Pty Ltd (2008) 72 NSWLR 44 [183] (“Bahadori”) per Tobias JA (with whom Giles and Campbell JJA agreed) viz-a-viz the Consumer Credit Code (NSW) (“Consumer Credit Code”), and this includes the presumption that the credit to which the contract relates was intended to be provided was for a purpose specified in s 6(1)(b) of that Code: see Bahadori at [183].

    4. (4)

       Normally, when money is lent by a lender, the party to whom the money is lent – the borrower – is the person (or entity) with the primary obligation to repay the debt. The guarantor, if there is one, has only a secondary obligation to pay the debt if the borrower defaults and the mortgagor provides security that can be called on if the debt is not repaid. If the property to be given as security is owned by the borrower or the guarantor, then the borrower and guarantor may incur two different species of obligations.

    5. (5)

       Whilst a borrower can give a mortgage in support of a loan (and often does) there can be no sense in which a borrower can be both a debtor and a guarantor of the same debt. Indeed, the very nature of a guarantee, subject of course to the specific terms of the contract of guarantee, is that one person or entity has agreed to answer for the debt or default of a third party who is, or will become, liable to the person to whom the guarantee has been proffered. In Jowitt v Callaghan (1938) 38 SR (NSW) 512 (“Jowitt”), Jordan CJ appositely explained the nature of a guarantee thus (at 516-7):

    6. (6)

       The provisions of the Loan Agreement which the Court is called on to construe in this case are found in a document entitled “Mortgage Common Provisions” prepared by Summer Lawyers, the solicitors for Integrated. These common provisions, referred to as “MCP”, have been considered in a number of cases and it appears that the terms of the Loan Agreement in this case are identical or very similar to the MCP considered in some of those other cases. I shall make reference to those other decisions below, but it should be noted that in some of those cases, the presumption to which I have referred has not been relied on, and the arguments put by those resisting lenders’ claims include arguments that are not raised here. In two of those cases, Winau Aust Pty Ltd & Ors v LCC Property Development Pty Limited & Ors [2020] NSWSC 434 (“Winau”) and Nicola Properties Pty Ltd v Vie De L’eau Pty Ltd [2020] VSC 728 (“Nicola Properties”), the Code, or an earlier version of it, did not feature at all.

    7. (7)

       The purpose of this loan, according to Mr Cacciola’s and Mr Valerio’s (and Ms Pejkic’s) evidence, was to enable Mr Valerio and Ms Pejkic to complete the duplex construction and, Mr Valerio accepted, to sell one half of the duplex to pay off the debt owed to RAMS.

    8. (8)

       There is in evidence a minute of meeting and resolution of directors of Creatrix (at CB 360) in which the directors of Creatrix state that:

    9. (9)

       By clause 3.1, “the Debtor” covenanted to “pay the Secured Money… to the Lender in accordance with the terms of this Mortgage” and to pay any amount due to be paid under this Mortgage. Secured Money is the “aggregate of all monies which the Debtor is, or at any time may become, actually or contingently liable to pay to the Lender”: clause 1.1 of the Loan Agreement.

    10. (10)

        Thus, the Debtor is obliged, by clause 3.1 of the Loan Agreement, to pay monies due under the terms of “this Mortgage”. It will be observed that neither the definition of Secured Money nor the person on whom the obligations to pay imposed by clause 3.1 is expressly stated to be “the Borrower”.

    11. (11)

        On the application form (see CB 252) Mr Valerio is shown as the applicant (and see CB 258) and on CB 259 he is shown as the “Borrower”. The document at CB 256 filled out for Creatrix by Mr Valerio does have filled in “01” next to the question “which applicant are you” but “01” is also used on documents for Mr Valerio: see CB 254, 257, 258.

    12. (12)

        Most of the documents annexed to or signed at the same time as the Loan Agreement, other than Schedule A, only refer to Creatrix as the “Debtor” (see, eg, CB 353, 355, 356, 359) but CB 366 and 367 describes Mr Valerio as “Debtor” and CB 372 and 373 similarly describe Ms Pejkic as “Debtor”.

11. [43]

    The Court is required to determine:

    1. (1)

       whether Mr Valerio and Ms Pejkic are “Debtors” under the Loan Agreement for the purpose of clause 3.1; and

    2. (2)

       whether, if the answer to (1) is yes, the consequence is that the Loan Agreement is a credit contract to which the Code applies in respect of Mr Valerio and Ms Pejkic.

12. [44]

    I note that I have received helpful written submissions from Mr Djurdjevic (Plaintiff’s Closing Submissions, which I shall refer to as “PCS”) and from Mr Horobin (Defendants’ Closing Submissions, which I shall refer to as “DCS”), both supplemented by oral submissions.

13. [45]

    In relation to the definition of Debtor referred to in [35], the words “and/or” and “as the case may be” have been utilised. These are words that have been the subject of previous consideration in various cases, including in KRM (Vic) Pty Ltd v Classicbet Pty Ltd [2019] NSWSC 1773 (“KRM (Vic) v Classicbet”) and the Court of Appeal’s decision in Kay v KRM (Vic) Pty Ltd; Classic Bet (NSW) Pty Ltd v Kay & Ors [2020] NSWCA 92. I received helpful additional written submissions from both Mr Djurdjevic and Mr Horobin in relation to these cases, but I do not think that it is necessary to devote time to that issue because the two alternative cases for “Debtor” within the Loan Agreement are set out within the definition of that term. The first case clearly does not apply because the Borrower and the Mortgagor are not the same person. The second case appears not to proffer a definition, so much as an indication that the obligations of the Guarantors are to be joint and several. Mr Djurdjevic in the PCS (at paragraph 76) accepted that neither sub paragraph of the definition was relevant here.

14. [46]

    It follows, in my view, that the definition within clause 1.1 provides no assistance in determining to whom the word “Debtor” is intended to refer whenever it appears in the Loan Agreement. Schedule A does provide a definition of “Debtor(s)” and it does not include the phrases “and/or” or “as the case may be”, nor is it qualified by “unless the context otherwise requires”.

15. [47]

    Clause 3 of the Loan Agreement imposes on the “Debtor” a primary obligation to pay the Secured Money. Integrated contends that in clause 3, the “Debtor” should be read as imposing an obligation only on the Borrower, Creatrix, principally because, in effect, it ought to be assumed that only the Borrower would ever be liable to repay the debt and this, it was contended, is supported by an examination of clauses 1.1 and 28 of the Loan Agreement. Integrated does refer to authority which appears to provide support for that approach, and I will deal with those cases below.

16. [48]

    There have been several cases in which wording identical or very similar to that used in the Loan Agreement has been considered. In Winau, Kunc J had to consider whether mortgages given to lenders were effective to enable the lenders to sell the properties the subject of the mortgages. A person purporting to act as a director of the mortgagor (a Mr Chan) had applied for a $4,000,000 loan and had the proceeds paid into an account that he controlled. The registered owner of the property (183 Eastwood Pty Ltd) had no involvement or knowledge of Mr Chan’s activities. Kunc J held that as the monies advanced had not in fact been advanced to 183 Eastwood Pty Ltd (“Eastwood”), the mortgages, although effective by virtue of registration, did not secure those monies. One of the grounds advanced by the mortgagees was that the Loan Agreement named Mr Chan as guarantor and was signed by him as guarantor, and that the definition of debtor included Mr Chan. Since he had received the funds, it was contended he was liable to repay them and the mortgage covered that liability even though the named mortgagor was not, in truth, a party to the Loan Agreement.

17. [49]

    Kunc J noted that the words “in the Mortgage, unless the context otherwise requires” are “generally to be understood as a strong contractual indication that the definition is to be applied in almost all circumstances”: Winau at [127], citing Sir K Lewison, D Hughes "The Interpretation of Contracts in Australia", Law Book Co, 2012, 199-200. His Honour pointed out that “the collocation of ‘and/or’ and ‘as the case may be’ makes it clear that what ‘Debtor’ means in any particular clause of the mortgage depends upon its context… [the] meaning is ‘X or Y or both’”: Winau at [128], quoting Edmund-Jones Pty Ltd v Australian Women's Hockey Association Inc [1999] NSWSC 1014 at [211]-[214] per Santow J. His Honour held that neither of the subparagraphs (a) or (b) were relevant to the case before him because the borrower and the mortgagor were not the same person and (b) did not apply because Mr Chan was the only guarantor. It will be observed that in Winau, Schedule A described as the “Debtor” the company and Mr Chan. Schedule A defined “Mortgagor(s)” to be the Company and Mr Chan: see Winau at [79].

18. [50]

    Having concluded that the definition of “Debtor” in clause 1 was irrelevant, Kunc J then went on to consider which of the three possible meanings of “Debtor” could be derived from the context, i.e.: the company, Mr Chan or both the company and Mr Chan. His Honour rejected Mr Chan as the “Debtor” saying (at [132]):

19. [51]

    Although Kunc J regarded the definition contained in clause 1.1 as having no application to the case before him, his Honour still regarded the words “unless the context otherwise requires” and “and/or… as the case may be” as having significance, and at [126]-[128] and [131]-[132], he appears to have taken the view that Schedule A had little or no significance in determining to whom it was intended “Debtor” referred.

20. [52]

    The mortgagees appealed and the Court of Appeal’s decision is reported as Ippin Textiles Pty Ltd v Winau Aust Pty Ltd [2021] NSWCA 9 (“Ippin”). The principal judgment is that of Macfarlan JA with whom Leeming and Brereton JJA concurred, Leeming JA elaborating on one aspect of the appeal.

21. [53]

    On the appeal, the Court became aware of a fact which was “not immediately apparent from the appeal books or the reasons of the primary judge”; namely, that the unredacted form of Schedule A (on which Kunc J was, in part, basing his views) had not been registered (see [11]-[14] per Macfarlan JA and [55]-[59] per Leeming JA) and the redacted form of Schedule A, which had been registered, had relevant definitions that were different to those in the unredacted form. Given that the mortgage was a forgery, which only obtained force because of the indefeasibility provisions of the Real Property Act 1900 (NSW), the Court of Appeal rejected the position that the mortgagees could rely on the unredacted unregistered form of Schedule A – indeed, the MCP had a special condition which specifically provided that if the unredacted form of Schedule A was void, voidable or unenforceable for any reason, then “this Redacted Schedule A replaces Schedule A”: see Ippin at [13] per Macfarlan JA. Macfarlan JA said (at [30]-[32]):

22. [54]

    After discussing the authorities, his Honour said (at [45]):

23. [55]

    Leeming JA said (at [77]):

24. [56]

    The Court of Appeal concluded, therefore, that there were no monies owing by Eastwood under the mortgage and that the mortgage did not, in terms, secure any debt of Mr Chan, with the consequence that the appeal should be dismissed.

25. [57]

    It will be observed that in Ippin the Court regarded the only relevant definitions as those in the redacted Schedule A and there the mortgagor was defined as Eastwood, the debtor was defined as Eastwood, the borrower was defined as Eastwood and the guarantor was defined as Mr Chan. This was in contrast to the unredacted Schedule A where “the Debtor” was defined as Eastwood and Mr Chan, and the execution page showed Mr Chan as “the Guarantor/Debtor/Mortgagor”.

26. [58]

    The Court of Appeal approached the matter on the basis that because the definition of Debtor in the redacted Schedule A did not include anyone other than Eastwood, there was no scope for “debtor” having a wider meaning than Eastwood. The Court of Appeal expressed no view on whether or not Kunc J’s interpretation of the MCP, including the unredacted Schedule A, was correct, but clearly the Court regarded the contents of the redacted Schedule to have considerable importance.

27. [59]

    The circumstances of the present case are quite different to those in Winau which his Honour described as involving “an entirely familiar and unremarkable transaction”: Winau at [132] per Kunc J. In Winau, what was falsely presented by Mr Chan was a proposed loan to a corporate borrower which owned properties over which it was prepared to grant a mortgage, and which was to be guaranteed by a director of the company. There was no suggestion, on what Mr Chan had presented to the lenders, that the real purpose of the loan was for his own purposes.

28. [60]

    In the present case:

    1. (1)

       Ms Pejkic owned the land and lives there with Mr Valerio – they wanted, by the time of the application to Integrated, to complete the construction of the duplex that had been commenced, sell half to pay off a significant proportion of the debt to RAMS they had incurred and retain and reside in the other half.

    2. (2)

       Creatrix, which was not proposed by Mr Valerio to be the borrower, had no involvement whatsoever in the project and did not have any interest in the Property or its development.

    3. (3)

       The only statement of assets and liabilities provided with the application submitted to Credit Solutions were those of Mr Valerio and Ms Pejkic. No financial documents of any kind relating to Creatrix were provided to or sought by Integrated or Credit Solutions in order to approve the application and none were sought after approval.

    4. (4)

       It is quite surprising that a loan would be made to a corporate borrower without any investigation of its financial position and even more so when it did not own the property that was the subject of the work to be done and security to be provided.

    5. (5)

       On the pleadings, Integrated and Mr Cacciola have accepted that they did not obtain any information regarding Creatrix’s “ability to service” the loans: see paragraph 44(a) of the Cross-Claim and paragraph 29(a) of the Defence to the Cross-Claim.

    6. (6)

       There was no obvious reason for Creatrix to be involved in the transaction at all other than as a means of Integrated lending in a fashion that would preclude the operation of the Code, and I infer that was the reason for the decision by Integrated to lend to Creatrix rather than Mr Valerio and Ms Pejkic. Mr Cacciola did seek to explain the requirement that Creatrix be involved was because the inference to be drawn from Mr Valerio’s statement of assets and liabilities was that he was drawing the stated income from the company (see T34 and T46.45-T47.3) but it is difficult to accept that was the reason for requiring Creatrix to be the borrower when it was asserted to Mr Valerio that Mr Valerio and Ms Pejkic could not service the loan from their incomes and yet no information about Creatrix’s financial position was obtained or sought by Integrated.

    7. (7)

       Integrated and Credit Solutions were aware that Mr Valerio’s application for further funds to complete the construction had been rejected by RAMS and NCF: see T26.49-T27.01 and T27.03-T27.06.

    8. (8)

       Integrated and Credit Solutions carried out no due diligence other than viewing valuation reports (T29.34-35, T30.10-T33.48), and the only one in evidence is that provided by the Defendants showing a prospective valuation on completion of the duplex of $3,700,000.

29. [61]

    The present transaction was not, in my view, “an entirely familiar and unremarkable transaction” to use Kunc J’s words in Winau and I, therefore, would not regard Kunc J’s conclusion in that case as relevant to the present case.

30. [62]

    Another point of distinction is that in the present case, unlike Winau, the Defendants have pleaded that the Code applies thus enlivening the presumption that the Code applies. That is not a matter that Kunc J (or the Court of Appeal) was called upon to consider.

31. [63]

    In Jams 2 Pty Ltd v Stubbings (No 3) [2019] VSC 150 (“Jams 2 v Stubbings”), Mr Stubbings needed finance in connection with the purchase of land. Jams 2 Pty Ltd (“Jams 2”), the lender, would only lend to companies as it wished to avoid the application of the Code: see Jams 2 v Stubbings at [10]. A shell company, Victorian Boat Clinic Pty Ltd (“VBC”), was established with Mr Stubbings as its sole shareholder and director. VBC had no assets and no income. The loan was arranged through an intermediary and an accountant was retained to advise Mr Stubbings on the loan (at the institution of Jams 2). The loan contract had terms that were identical or similar to those in question here.

32. [64]

    Jams 2 sued Mr Stubbings on the loan debt and pursuant to the mortgages given over the properties involved in the transaction. The trial judge, Robson J, held that the Code did not apply to the transaction but found that Jams 2 had engaged in unconscionable conduct in large measure because the loan transaction was very improvident from Mr Stubbings point of view and he was a person with limited education, no acumen and the lender had, through its agent, made sure that it was not aware of the details of Mr Stubbings’ situation and the uncommerciality of the transaction. Robson J said (at [16]):

33. [65]

    His Honour rejected claims against the intermediary based on alleged misleading and deceptive conduct and upheld the claim against the accountant. The lender appealed in relation to the unconscionability finding. There was no cross-appeal to the Victorian Court of Appeal by Mr Stubbings. The Victorian Court of Appeal set aside the judgment against the lender. Special leave to appeal has been granted to Mr Stubbings by the High Court: see Stubbings v Jams 2 Pty Ltd [2021] HCATrans 23.

34. [66]

    On the issue of whether or not the Code applied:

    1. (1)

       Robson J considers this at [226]-[246]. At [232], his Honour said:

    2. (2)

       Mr Stubbings had signed an acknowledgement that the loan and mortgage were not provided for a Code purpose.

    3. (3)

       A deed of 30 September 2015 contained covenants and an agreement that the purpose of the loan was “not for personal, domestic or household purposes” and not “to purchase, renovate, or improve the residential property for investment purposes”: see [243].

    4. (4)

       His Honour noted the reliance of the lender on Equititrust Ltd v SLJM [2010] NSWSC 1059 (“Equititrust”), in which Gzell J had held that guarantors of a loan to a corporation were not debtors within the meaning of the Consumer Credit Code.

    5. (5)

       His Honour concluded (at [245]-[246]):

35. [67]

    It appears that there was no reliance on the presumption required by s 13(1) of the Code and since Mr Stubbings had signed an acknowledgement that the loan and mortgage were not provided for a Code purpose that provides an explanation why that was so. Robson J’s conclusion at [66(5)] above was that although the mortgage provided that it also operated as a loan agreement between the plaintiffs and Mr Stubbings, taken with other documents, it should be construed as a guarantee.

36. [68]

    On the issue of unconscionability, his Honour made reference to Perpetual Trustees Australia Ltd v Schmidt [2010] VSC 67, Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389, Director of Consumer Affairs (Vic) v Scully (No 3) [2012] VSC 444 and the issue of “asset-based” lending – i.e. lending that is not based on the ability of the borrower to repay without recourse to the security provided.

37. [69]

    In Commercial Funds Pty Ltd v Fraval [2020] VCC 1787 (“Commercial Funds”), Judge Woodward was concerned with an application by the lender seeking to strike out the mortgagor/guarantor’s defence and cross-claim and had to consider a transaction in which terms identical or very similar to those in question here were utilised by a lender who, like Integrated, was not prepared to lend to an individual as borrower but only a corporate entity, Rofin Australia Consortium Pty Ltd (“Rofin”). Mr Fraval was the sole director and secretary of Rofin. Mr and Mrs Fraval owned a property in Warrandyte South that had become Mrs Fraval’s sole domestic residence since 2009.

38. [70]

    Mr Fraval was the applicant for a loan of $325,000 for a two-month term. The stated purpose of the loan was to “[p]urchase [a] hotel”: at [14]. A letter of offer was sent naming Rofin as the borrower and Mr and Mrs Fraval as “Guarantor/Mortgagor”. The total amount loaned was $378,000 (the increase accommodated a loan establishment fee and prepaid interest, with a 4% per month rate and 10% per month default rate). A broking firm, Arbitrans Accounting, was the intermediary.

39. [71]

    A solicitor was retained by Mrs Fraval to advise and provide a certificate or advice in relation to the transaction. Mr Fraval and Rofin had a separate solicitor for the same purpose. There were many documents executed by Mr and Mrs Fraval and Rofin. His Honour noted that, importantly, the MCP schedule provided that the “Borrower” was Rofin, “Guarantor 1” was Mr Fraval, “Guarantor 2” was Mrs Fraval and “Mortgagor(s)” was “Borrowers and Guarantor(s)”: see Commercial Funds at [26]. His Honour then said, at [27]:

40. [72]

    Mrs Fraval’s resistance to the lender’s claim was based on three matters:

    1. (1)

       that the loan agreement was a credit contract within the meaning of the Code and unenforceable because the annual percentage rate was in excess of 48% per annum;

    2. (2)

       the loan agreement was unconscionable; and

    3. (3)

       provision for interest at 10% per month constituted a penalty.

41. [73]

    I will focus on the first issue at present – the second issue is very much fact dependent and the third issue has not been advanced in the present case.

42. [74]

    Turning to the reasoning in Commercial Funding, and acknowledging its detail and depth, I will draw out some key features of his Honour’s approach:

    1. (1)

       his Honour accepted “that primary liability for the repayment of the loan and interest” was imposed not only on the “Borrower” as defined in the MCP, but also on the “Guarantors” as defined in the MCP: see Commercial Funds at [42].

    2. (2)

       However, adopting the composite definition of “Debtor” in the MCP does not, by itself, constitute Mrs Fraval as a “debtor” for the purposes of the Code: see Commercial Funds at [43].

    3. (3)

       His Honour thought that the difference between the loans in Devon v Thirteenth Kaysan Pty Ltd [2016] FCA 357 (“Devon v Thirteenth Kaysan”), Jams 2 v Stubbings and Equititrust were “more apparent than real”: Commercial Funds at [60]. At [61]-[62], his Honour said:

    4. (4)

       At [63], his Honour continued:

    5. (5)

       As Judge Woodward noted, in Jams 2 v Stubbings, there was no analysis of whether a person who is a guarantor can also be described as a person who “incurs a deferred debt to another” within the meaning of s 3(1)(b) of the Code. Judge Woodward did point out that Robson J in Jams 2 v Stubbings “appeared to assume that once the immediate recipient of the loan funds was shown to be neither a natural person nor a strata corporation, the Code was excluded by reason of s5(1)(a) of the Code”: Commercial Funds at [65].

    6. (6)

       Judge Woodward accepted that the nature of the primary liability created under the MCP by operation of the definition of “Debtor” in the MCP was more comprehensive than under the documents in Jams 2 v Stubbings.

    7. (7)

       His Honour thought the issues identified in [74(5)] and [74(6)] above would preclude summary dismissal, but he then saw as critical the definition of debtor in s 204 of the Code and the fact that the purpose of the loan was not a purpose within the meaning of s 5(1)(b) of the Code. This was because the loan was to assist Rofin to buy the Lake Bolac Hotel business, which was not a purpose caught by the Code: Commercial Funds at [96]. If that is the ratio of the case, then there is no reason to doubt its correctness.

    8. (8)

       His Honour held that Mrs Fraval was not a debtor within the meaning of s 204 of the Code. He examined the four arguments advanced on behalf of Mrs Fraval to assert that she was. His Honour rejected all four arguments. The first argument advanced is not relevant here.

    9. (9)

       The second argument was that clause 28.5 (which provided that the Guarantor agreed to guarantee and indemnify the payment by the “Debtor” of the “Secured Money”, and the performance and compliance by the “Debtor” with all of the obligations under the MCP) should be disregarded because Mrs Fraval was not only a guarantor, but was also defined as a “Debtor”. Mrs Fraval contended that because of this and reliance on clause 28.19 indicated that clause 28 was not intended to apply to her with the consequence that she was not a “Guarantor” under the MCP or for the purposes of “debtor” in s 204 of the Code. His Honour rejected that argument relying on general principles of construction and said (at [76]):

    10. (10)

        The third argument was that s 209(2) and s 3 of the Code, together, displace the definition of debtor in s 204. His Honour rejected this argument because it assumes that the legislature intended to set up two alternative (and inconsistent) definitions. His Honour held that “debtor” “for the purposes of the Code is a person who incurs a deferred debt other than in their capacity as a guarantor”: see Commercial Funds v Fraval [80]. At [80] his Honour said:

    11. (11)

        The fourth argument was that since Mrs Fraval is not a party to the loan agreement only in the capacity as guarantor, as contemplated by s 204, she had incurred a deferred debt as a “debtor” and s 204 only operated to exclude a person who is a party to the credit contract only as a guarantor not if they are both a guarantor and a debtor. His Honour said of this argument that it was in substance only a slight variation on the third argument and said (at [82]):

43. [75]

    With respect to his Honour, I agree that “debtor” for the purposes of the Code is a person who incurs a debt other than in their capacity as a “guarantor” but I am not able to accept his Honour’s conclusions in relation to the fourth argument. His Honour accepted in relation to the second argument that “Debtor” was a composite definition with the consequence that Mrs Fraval could be both a debtor and a guarantor and that “debtor” for the purposes of the Code “is a person who incurs a deferred debt other than in their capacity as a guarantor”: Commercial Funds v Fraval [80].

44. [76]

    His Honour’s reasoning proceeds on the basis that:

    1. (1)

       the legislature contemplated that a guarantor “does generally incur a deferred debt”;

    2. (2)

       the legislature was intending to exclude from the operation of the Code a person who was both a guarantor of someone else’s debt (see Commercial Funds at [76]) and had a primary liability (see Commercial Funds at [80]); and

    3. (3)

       semble, the legislature was intending to exclude from the Code’s operation a guarantor who also had a primary liability.

45. [77]

    In relation to [76(1)], whilst there are occasions where entry into a guarantee involves incurring a debt: see Hawkins v Bank of China (1992) 26 NSWLR 562 at 568 per Gleeson CJ, his Honour said in the same passage:

46. [78]

    Ironically perhaps, it is Integrated that contends that a person cannot be a guarantor of his or her own debt. Mr Djurdjevic relied on Lakeman v Mountstephen (1874) LR 7 HL 17 at 24-25 (“Lakeman”). Lakeman concerned the question of whether a promise given by Mr Lakeman, chairman of the local board of health, was to himself pay an amount for work to be undertaken by the sewerage contractor or to be liable as a guarantor of the debt of the board. Whilst I do not think that Lakeman supports the proposition for which it is here advanced, the passage from Jowitt quoted at [42(6)] above does provide support. The consequence then might be that although the Loan Agreement describes Mr Valerio and Ms Pejkic as “Guarantors” that nomenclature is inaccurate and they are not “Guarantors” within the meaning of the Code. I note that Judge Woodward regarded clause 28 as meaning that the guarantor was guarantor of each other debtor: see Commercial Funds at [76]. Another approach is to regard the Loan Agreement as imposing obligations on Ms Pejkic and Mr Valerio as both guarantors in the true sense and as debtors. If that is the correct interpretation, then insofar as they owe obligations qua guarantor, that would not infringe the Code but insofar as they owe obligations as debtors, the Code is attracted and entry into the Loan Agreement involves a breach of the Code. I do not accept Integrated’s contention that Ms Pejkic and Mr Valerio could not be debtors because they are guarantors (see PCS [50]-[59]), it is rather similar to the contention in Commercial Funds that Mrs Fraval could not be a guarantor because she was a debtor.

47. [79]

    Mr Djurdjevic propounded as an alternative argument that subclause 28.6 does not make sense if Ms Pejkic and Mr Valerio fall within the definition of Debtor and Debtor must mean the Borrower. Since Debtor includes “Borrower”, a liability as guarantor for the obligations of the Borrower can remain even if that person is not liable as a guarantor of his or her own debt. Further, although generally speaking, a term in one clause should be given the same interpretation throughout a contract, this may be a case in which the term “Debtor” needs to be construed differently in clause 28 to that for clause 3. It does not justify adopting the definition that gives clause 28 meaning in clause 3 where there is no inherent difficulty of interpretation. Also, if the approach taken to construction of clause 28 in Commercial Funds is adopted, there would be no need to resort to a bifurcated interpretation of the word “Debtor”.

48. [80]

    In Devon v Thirteenth Kaysan, another summary judgment case, Davies J held that the loan contract was not one caught by the Code. The argument that the Code applied was based, in part, on the assertion that the interposition of a corporation was really a “sham, pretence or absolutely unnecessary”: at [13]. Davies J rejected the “sham” argument and her Honour also rejected the claim that the Code applied because the loan was made to a corporation (see [22]) and the mortgage was security for that loan. There was no reliance on a definition in the loan agreement which made individuals primarily liable for the debt along with the borrower. There is nothing to indicate that the terms of the document were similar to those utilised by Integrated here.

49. [81]

    In Nicola Properties, which did concern the MCP, Derham AsJ had to consider various matters not relevant to the present case but his Honour did say in respect of the MCP (at [31]):

50. [82]

    His Honour clearly regarded the terms of Schedule A as important and I think his Honour adopted an approach similar to that which I think should be taken here.

51. [83]

    In Equititrust, Gzell J held that the loan contract in that case was not caught by the Consumer Credit Code (which preceded the Code), because the loan was made to a corporation (not a strata corporation), not an individual: see Equititrust at [71]-[73]. Mr and Mrs Hakim, who claimed that the Consumer Credit Code applied, were not, therefore, “debtors”, although the loaned funds were needed to enable Mr and Mrs Hakim to complete the purchase of a property. A declaration had been signed by them which stated that the credit was “to be provided wholly or predominantly for business or investment purposes or for both purposes”: see Equititrust at [12]. The loan application by the Hakims stated that “if required the Trustee company SLJM Pty Ltd will be the applicant herein” and that the Hakims could guarantee the loan: see Equititrust at [4].

52. [84]

    No argument was advanced that the Hakims were primarily liable as debtors, rather, the contention was that the transaction was a sham, a contention which Gzell J rejected. I do not regard Equititrust as having any bearing on the present case.

53. [85]

    There are a number of reasons why I am unable to accept the proposition that Debtor should be read as excluding Ms Pejkic and Mr Valerio:

    1. (1)

       Schedule A in the original document defines “Debtor(s)” to include all three and it does so in an unqualified way. Neither the introductory words of clause 1.1 “unless the context otherwise requires” nor “and/or” nor “as the case may be” apply to Schedule A;

    2. (2)

       the definitions in the Deed of Variation are similarly clear;

    3. (3)

       there is nothing surprising in a lender seeking to improve its rights against the other parties to a transaction by ensuring that as many parties as possible are primarily liable;

    4. (4)

       there is no obvious reason why “Borrower” was not utilised in the definition of Secured Money in clause 1.1 if it was intended that only the Borrower would be primarily liable. I accept that Creatrix is defined as the “Borrower”, but it is also defined as one of the “Debtors”. It is Integrated, by the wording of the Loan Agreement and its Schedule, that has expanded “Debtor” from the borrower to include others who would not normally have a primary liability; and

    5. (5)

       I have noted at [51] above that whilst Kunc J regarded the definition in clause 1.1 as having no application to the case before him, his Honour still regarded the words “unless the context otherwise requires” and “and/or… as the case may be” as having significance, and at [126]-[128] and [131]-[132], he appeared to minimise the importance of Schedule A notwithstanding that if the definition in clause 1.1 had no application Schedule A was really all that was available to enable “Debtor” used in clause 3 to be interpreted. Once it is recognised that Schedule A defined “Debtor(s)” as all of Creatrix, Mr Valerio and Ms Pejkic, there is, in my view, no reason why that term, as used in clause 3, should be read to exclude any one of them. As I have already mentioned, Judge Woodward accepted the “composite” quality of the term: Commercial Funds at [42] and [63].

54. [86]

    Whilst I acknowledge that Winau, Jams 2 and Commercial Funds offer some support for the contentions of Integrated, I remain of the view that there is no reason not to regard Ms Pejkic and Mr Valerio as having undertaken a primary liability to repay the debt (i.e. the money lent to Creatrix pursuant to the Loan Agreement and later pursuant to the Deed of Variation) and hence, that the Code applies to the Loan Agreement. The fact that any liability they have as guarantors, in the true meaning of that word, does not attract the Code, does not produce the result that their primary obligation to repay the monies borrowed is not caught by the Code, for reasons I have endeavoured to explain in [77]-[79] above.

55. [87]

    I therefore conclude that Ms Pejkic and Mr Valerio are included within the term “Debtors” under the Loan Agreement.

56. [88]

    If, contrary to the view I have expressed, the position is ambiguous, then Integrated has not discharged the onus of establishing that Ms Pejkic and Mr Valerio are not included in the definition of Debtor for the purpose of clause 3 of the Loan Agreement.

57. [89]

    If I am correct in my conclusion that by the Loan Agreement, Ms Pejkic and Mr Valerio accepted a primary obligation to pay the secured debt, then the question which then needs to be addressed is whether they are persons who meet the criteria of “[are liable to pay] a debt owed by one person (the debtor) to another (the credit provider)” or have they, by the Loan Agreement, incurred a deferred debt to another. A “deferred debt” is a present debt “payable in the future”: see Rafiqi & Thomas v Wacal Investments Pty Ltd (1998) ASC 155-024; Geeveekay Pty Ltd v Director of Consumer Affairs Victoria (2008) 19 VR 512 at [87] per Bell J. No argument was advanced by Integrated raising an issue in relation to the requirement of a “deferred debt”.

58. [90]

    On the interpretation of the Loan Agreement accepted above, Ms Pejkic and Mr Valerio have incurred a deferred debt and they have been made liable to pay the Secured Monies as defined. It follows that the Loan Agreement was entered into in breach of the Code and the Court has open to it the remedies set out in s 180 of the NCCP Act.

Conclusion Re the Code

1. [91]

   I conclude that Integrated has entered into a credit contract which infringes the Code.

2. [92]

   The Defendants by their Cross-Claim seek, in relation to the Code, an order that the Loan Agreement and Deed of Variation are void or alternatively, an order setting aside the mortgage and varying the terms of the Loan Agreement and Deed of Variation to provide that Mr Valerio and Ms Pejkic are not parties to those agreements and that Creatrix is not liable to pay any interest, fees or charges of any kind under the Loan Agreement or Deed of Variation.

3. [93]

   There was raised in the Defendants’ oral submissions an alternative submission; namely, that the Loan Agreement could remain as against Creatrix but set aside viz-a-viz Ms Pejkic and Mr Valerio, with Creatrix to repay the principal of $440,384.45 plus interest at the rate specified in s 100 of the Civil Procedure Act 2005 (NSW) (“CPA”).

4. [94]

   On my findings, the Loan Agreement should never have been entered into. Section 180 of the NCCP Act gives to the Court wide powers and there is a regulatory aspect to credit contracts caught by the Code. I do not think that it would be appropriate to deprive Integrated of the $440,384.45 actually advanced and I accept as appropriate the Defendants’ concession that interest at the Court rate should be paid. In my view, all three Defendants should be required to repay the $440,384.45 plus interest at the Court rate but no more than that. I will return to the form of orders after I have dealt with the unconscionable conduct case.

Unconscionable Conduct

1. [95]

   In considering the issue of unconscionable conduct, I shall assume, contrary to my conclusion set out earlier, that the Code does not apply.

2. [96]

   The relevant provisions of the ASIC Act are:

3. [97]

   There was no dispute between Counsel as to the principles applicable in relation to this aspect of the case. Those principles, which I have taken from the PCS, are:

   1. (1)

      In Gooley v NSW Rural Assistance Authority [2020] NSWCA 156 (“Gooley”), Meagher JA (with whom Macfarlan and White JJA agreed) said (at [36]):

   2. (2)

      The Court may (not must) take into account each of the considerations identified in s 12CC to the extent that those considerations are applicable in the circumstances: ACCC v Quantum Housing Group Pty Ltd [2021] FCAFC 40 at [55] and [56] per curiam (“ACCC v Quantum Housing Group”), citing with approval Australian Securities and Investments Commission v Kobelt (2019) 267 CLR 1 at [87] per Gageler J (“ASIC v Kobelt”), who cited with approval Australian Competition and Consumer Commission v Lux Distributors Pty Ltd [2013] FCAFC 90 at [23] and [41] per curiam.

   3. (3)

      The conduct to be characterised as unconscionable must involve conduct that falls “so far outside societal norms of acceptable commercial behaviour as to warrant condemnation as conduct that is offensive to conscience”: ASIC v Kobelt at [92] per Gageler J.

   4. (4)

      The general law of unconscionability has a significant part to play in considering whether conduct is unconscionable under s 12CB(1): ASIC v Kobelt at [144] per Nettle and Gordon JJ; see also ACCC v Quantum Housing Group at [66] and [67], quoting ASIC v Kobelt at [144] and Paciocco v Australia & New Zealand Banking Group Ltd [2015] FCAFC 50 at [283] per Allsop CJ.

   5. (5)

      The standard of conduct expected of a person in a commercial context is not that of a fiduciary and a contracting party is not required to subordinate its intention to those of the other party: Kenxue Pty Ltd ATF The Susan Investment Trust v Westpro Finance Pty Ltd [2020] NSWSC 1146 at [116]; see also APS Satellite Pty Ltd (formerly known as "SkyMesh Pty Ltd") v Ipstar Australia Pty Ltd [2016] NSWSC 1898 at [127].

   6. (6)

      An allegation of unconscionability is a serious allegation and the relevant standards of conduct required should be recognised: ACCC v Quantum Housing Group at [88] and [91].

   7. (7)

      It is not necessary to show predatory conduct: ACCC v Quantum Housing Group at [91].

4. [98]

   In ASIC v Kobelt, the majority (Kiefel CJ, Bell (in a joint judgment with Kiefel CJ), Gageler and Keane JJ (in separate judgments)) held that the conduct in question did not infringe s 12CB whereas the minority comprising Nettle, Gordon (in a joint judgment) and Edelman JJ (in a separate judgment) held that it did. Gagler J drew attention to the difference between s 12CA which linked “unconscionable conduct” to the meaning of “the unwritten law” and s 12CB (dealing with financial services) which was not so limited, saying “[s]ection 12CB of the ASIC Act does something more”: ASIC v Kobelt at [83] per Gageler J. What that something more is reflected the divergence of opinion between the majority and the minority, but it can be seen that the Chief Justice and Bell J regarded the determinative factor in dismissing the appeal “the absence of unconscientious advantage obtained by Mr Kobelt from the supply of credit to his Anangu customers”: ASIC v Kobelt at [19]. Justice Gageler J based his decision to dismiss the appeal on this (at [111]) and Keane J (at [118]-[121]) in dismissing the appeal certainly regarded it as an essential characteristic of a finding of unconscionability within the meaning of s 12CB.

5. [99]

   Whilst it is not necessary for the borrowers to establish that they were vulnerable in the sense of being uneducated, illiterate, mentally incapacitated or that they were the subject of undue influence or the like, the borrowers must establish, having regard to all the circumstances of the matter, that the lender has taken unconscientious advantage of them, having regard to their position, for example of weakness or vulnerability.

6. [100]

   There are some factual matters relevant to the question of unconscionability which are not in dispute:

   1. (1)

      The loan was intended to be a short-term loan of 6 months in duration.

   2. (2)

      The purpose of the loan was to assist Mr Valerio and Ms Pejkic with their construction of the duplex on the Property and the sale of one half of the duplex to occur after completion of construction.

   3. (3)

      Each of the Defendants received legal advice from Mr Bruce Rexstraw, a solicitor independent of Integrated. Importantly, he signed a certificate that he had advised the Defendants of the nature and effect of the Loan Agreement: CB 356, 363, 369.

   4. (4)

      Mr Valerio signed, on behalf of Creatrix, a Debtor’s Advice Declaration in which he confirmed that he had executed “this Mortgage” voluntarily and without undue influence or pressure from any third party and that he had obtained independent legal advice: CB 355.

   5. (5)

      Mr Valerio knew the interest rate to be paid under the proposed loan was to be very high and he gave evidence that he had been warned by Mr Rexstraw that he was “doing a deal with the devil”: CB 71; T69.10-12.

   6. (6)

      Neither Mr Valerio nor Ms Pejkic claim to suffer from any special disability or vulnerability, although it seems that they found the Integrated forms confusing (see CB 260-261 and CB 271) and left it to Mr Haynes to complete the documents for them (and see paragraph 33 of Mr Valerio’s Affidavit at CB 69).

   7. (7)

      The loan application did not include any financial statement for Creatrix, and the only assets listed were those of Mr Valerio and Ms Pejkic.

   8. (8)

      Relevantly, clause 9 of the letter of offer from Credit Solutions dated 31 January 2018 reads:

7. [101]

   I make the following further factual findings relevant to this aspect of the case:

   1. (1)

      The application to Integrated (via Credit Solutions) was by Mr Valerio and Ms Pejkic.

   2. (2)

      The assets and liabilities that were disclosed were those of Mr Valerio and Ms Pejkic. Mr Cacciola’s assertion (T27.18-50) that he went through Creatrix’s financials to see if it could service the debt if it went into default for 2 or 3 months was not supported by the evidence.

   3. (3)

      As at December 2017, Mr Valerio and Ms Pejkic owed RAMS $2,627,000 and Mr Valerio told Mr Haynes that in his conversation in December 2017 and there is no suggestion that this was not passed onto Mr Cacciola by Mr Haynes.

   4. (4)

      Mr Valerio and Ms Pejkic were conscious that the cost of completion of the duplex was closer to $500,000 than $400,000 (see CB 66) and Mr Cacciola was aware of that estimate.

   5. (5)

      The Property had a current market gross realisation value as if complete (as at 16 November 2017) of $3,700,000.

   6. (6)

      Mr Valerio and Ms Pejkic had combined assets including motor vehicles, home and contents, and savings said by them in the application to Credit Solutions to have a value of $560,000.

   7. (7)

      Mr Valerio and Ms Pejkic had liabilities (excluding the RAMS loan and its repayment) in the approximate amount of $65,000.

   8. (8)

      Mr Valerio had an income of $334,736 from Creatrix (as disclosed in the application).

   9. (9)

      Interest on the loan of $530,000 for 6 months at the non-default rate was $88,080.90 (of which $50,315.55 had been prepaid).

   10. (10)

       Interest on the further amount loaned of $93,295.46 for 4 months at the non-default rate was prepaid in the amount of $11,195.46 and Integrated required the Defendants to pay a further $47,000 on account of interest accrued on the amount loaned pursuant to the Loan Agreement.

8. [102]

   There is a factual dispute as to whether Mr Cacciola informed Mr Valerio of the reason that the loan was to be made to Creatrix, which I have dealt with earlier and as I have noted, on the pleadings, it is admitted by Integrated that it did not inform Mr Valerio, Ms Pejkic or Creatrix of the loan to Creatrix falling outside the Code. I also think there is force in Mr Horobin’s point that even if Mr Cacciola did say “non-coded”, it would not have been obvious as to what was meant. Mr Cacciola’s answer to that was that Mr Haynes had told Mr Valerio what that meant, but there is no evidence of that occurring – rather, there is evidence of Mr Haynes asking Mr Valerio in the context of the application to NCF “if he had a company” that could act as the borrower. It was not suggested to Mr Valerio in cross-examination that he knew what “non-coded” meant either as a phrase or for the purposes of the transaction. I am satisfied that neither Mr Valerio nor Ms Pejkic appreciated that the Loan Agreement would not be caught by the Code.

9. [103]

   Whilst I have concluded that the Defendants were not made aware of the fact that by virtue of a loan to Creatrix, rather than to Mr Valerio and Ms Pejkic, the Loan Agreement would not be a credit contract covered by the Code (assuming, and contrary to my findings in relation to the Defendants’ argument based on the Code, that conclusion is correct), Mr Valerio’s evidence was that he had no understanding of the significance of that fact or of what difference it would have made to entry into the Loan Agreement. Rather, it seems, on the balance of probabilities, that even if Mr Valerio had been aware that the loan was not caught by the Code, he would have proceeded with it because, as he admitted in his oral evidence, he felt he had no choice: T69.6-70.3. It is clear that Mr Valerio saw himself and Ms Pejkic as being in a desperate situation – he had tried unsuccessfully to complete the building work himself, he had been unable to earn income for Creatrix, he and Ms Pejkic could not meet payments to RAMS and they could not complete the building work without the further injection of up to $500,000 of funds.

10. [104]

    First, I need to determine whether “asset lending” was involved here and then to determine whether other aspects of the matter point to unconscionable conduct on the part of Integrated.

11. [105]

    “Asset lending” has been described as lending “without regard to the ability of the borrower to repay by instalments under the contract, in the knowledge that adequate security is available in the event of default”: Perpetual Trustee Company Limited v Albert and Rose Khoshaba [2006] NSWCA 41; (2005) 14 BPR 26,639 at [128] per Basten JA, which was quoted with seeming approval in Gooley at [35] per Meagher JA in the following terms:

12. [106]

    Basten JA did state (at [128]) that “asset lending” of itself was insufficient to render the lender’s conduct unconscionable.

13. [107]

    In Violet Home Loans Pty Ltd v Schmidt [2013] VSCA 56, which has since been affirmed in Jams 2 Pty Ltd v Stubbings [2020] VSCA 200 (at [93] per Beach, Kyrou and Hargrave JJA), Warren CJ, Cavanough and Ferguson AJJA (as her Honour then was) said (at [59]):

14. [108]

    Although it might seem that there is a tension between the approach taken by Basten JA (and the Court of Appeal in Gooley) there is in fact agreement that asset lending is, on its own, insufficient.

15. [109]

    The critical question in relation to asset lending in this claim is: did Mr Cacciola have a legitimate basis for thinking that Mr Valerio (including Ms Pejkic and Creatrix) had the means to repay the $530,000 and then the further $93,295.46 in addition to meeting his debt to RAMS, without both sides of the duplex having to be sold?

16. [110]

    At the time that Integrated decided to advance funds to Creatrix the financial position of Creatrix was, I have found, unknown to Mr Cacciola, and Mr Valerio and Ms Pejkic together had assets totalling $4,260,000. This figure is made up as follows:

    1. (1)

       the Property – valued at $3,700,000 on the basis of a current market gross realisation value as if complete and $3,350,000 on the basis of a forced sale value (both as at 16 November 2017); and

    2. (2)

       personal property and other miscellaneous assets – estimated by Mr Valerio at $560,000.

17. [111]

    Mr Valerio and Ms Pejkic had debts totalling $3,222,000 which amount was made up of:

    1. (1)

       the loan from RAMS – $2,627,000;

    2. (2)

       the amount loaned by Integrated pursuant to the Loan Agreement – $530,000;

    3. (3)

       credit card liabilities - $65,000,

18. [112]

    Since it was Mr Valerio’s hope that he could retain half the duplex and, assuming, as seems to be accepted, that the two halves were equal in value, he would only have received close to $1,850,000 from the sale of half the duplex. Mr Valerio was nevertheless confident, at the time of his entry into the Loan Agreement, that the duplex construction could be completed and Lot B sold within six months: see T72.6.

19. [113]

    Mr Valerio was not only overly optimistic as to how quickly he could complete the construction work, sell Lot B and receive the proceeds of that sale, he seems not to have appreciated that even if he could complete the whole process in six months, sale of Lot B would only reduce the RAMS debt and not stave off sale of Lot A unless RAMS was prepared to refinance, a refinancing that would have had to see RAMS not only refinancing its existing debt remaining after sale of Lot B and payment of costs of sale (such as advertising, agents fees and legal costs) (i.e. $800,000 plus the unpaid interest from January 2018 until the sale of Lot B in, say, August 2018) but also, the full amount of the Integrated debt of $530,000 (i.e. before the additional refinance with Integrated) plus further interest. Given that Mr Valerio and Ms Pejkic would only have Lot A as security (valued at $1,850,000 as at 16 November 2017) and that they would be repaying a minimum of $530,000 plus interest to Integrated to be added to the remaining RAMS debt, the prospect of refinancing with RAMS not only the balance of its existing debt, but also the Integrated debt, was minimal. If there was no realistic prospect of RAMS or an alternative mainstream bank refinancing, or even only a limited prospect, the likely consequence was, therefore, default under the Loan Agreement, following which interest at the default rate would have commenced accruing on the Integrated debt.

20. [114]

    It must be noted that the foregoing analysis takes Mr Valerio and Ms Pejkic’s financial position at its highest – that is, the analysis assumes that Mr Valerio and Ms Pejkic would have sold (and received the proceeds from the sale of) Lot B within 6 months and further, that they would not incur additional liabilities.

21. [115]

    As matters transpired, the situation was far worse. Following settlement of the sale of Lot B on 31 May 2019, the RAMS debt was reduced to $1,008,450.11: see CB 450. By 24 June 2019, the Integrated debt was $825,147.11, a significant amount of interest having accrued on the principal amounts loaned: see CB 457. Thus, by the time that the proceeds of sale of Lot B were received and paid to RAMS, Mr Valerio and Ms Pejkic had liabilities in excess of $1,800,000, which encumbered an asset (Lot A) the value of which was approximately $1,900,000. There was no prospect of Mr Valerio and Ms Pejkic refinancing with RAMS to discharge the Integrated debt (as Mr Cacciola agreed at T49.19-37); the only realistic outcome being to sell Lot A to discharge both the RAMS and Integrated debts.

22. [116]

    When this material is added to the findings I have made earlier concerning the lack of material concerning the financial position of Creatrix and the focus on the sale of the duplex when completed, I am not satisfied that Integrated had a genuine basis to conclude that Mr Valerio and Ms Pejkic could pay back the loans from Integrated without sale of the whole of the asset that they were borrowing to protect (i.e. Lot A) and see also my further comments at [118(7)] below. Thus, the claim of “asset lending” is made out.

23. [117]

    I accept that there are aspects of the matter which point to an absence of unconscionability; namely:

    1. (1)

       the fact that Integrated required the Defendants to obtain legal advice which they did obtain and that the Defendants were able to negotiate some minor alteration of the terms of the Loan Agreement: see CB 287 and 292;

    2. (2)

       the fact that they were warned by the solicitor who gave them advice that they were doing “a deal with the devil”;

    3. (3)

       that they suffered from no cognitive or physical impairments;

    4. (4)

       that no pressure was applied by Integrated to force them into the loan; and

    5. (5)

       that any commercial lender would be keen to see the risk of non-payment without recourse to security reflected in a higher than usual interest rate.

24. [118]

    However, I regard as most significant the fact that this was asset lending by Integrated and that there were the following additional matters:

    1. (1)

       the purpose of the loan was to finish building the duplex – there was no joint venture between Ms Pejkic and Creatrix to make a profit from the duplex: Affidavit of Milijana Pejkic at [19]. Creatrix had no genuine connection with the duplex project and no proprietary interest in the Property, and yet was required by Integrated to become a borrower;

    2. (2)

       that the involvement of Creatrix was required by Integrated to avoid the Defendants obtaining protection from the Code and to permit Integrated to enter into the transaction;

    3. (3)

       that Mr Valerio and Ms Pejkic were in a desperate situation since they were unable to meet their commitment to RAMS and could not complete construction of the duplex without further funds: see T68.28-T69.38. Mr Rexstraw recognised this when he said words to the effect “[y]ou are doing a deal with the devil… but if you are as desperate as you say you are, you will probably need to agree to their terms”: CB 71. Mr Valerio believed that he and Ms Pejkic could avoid paying $15,900 per month by completing the build by August 2018, and he was prepared to execute a document on behalf of Creatrix that did not reflect the true position. He also did not take into account, it seems, that it would take time to sell Lot B, that the proceeds of Lot B would be insufficient to pay off the RAMS debt and that to repay the Integrated debt he could only avoid sale of Lot A by obtaining RAMS’s agreement to expand the debt to include what was required to repay Integrated;

    4. (4)

       the Defendants appear not to have appreciated that the incurring of further debt to Integrated would not assist them to retain half the duplex but would potentially remove any prospect of them recovering even some portion of the proceeds of sale;

    5. (5)

       that the interest rates, even at the non-default rate, were exceptionally high;

    6. (6)

       that the terms of acceptance of the Loan Agreement and Deed of Variation required them to pay a significant portion of interest up front (in excess of $100,000). They also required payment of very substantial fees; namely, a total of $73,700. Whilst the total loan was expressed as $530,000 and $93,295.46 (i.e. $623,295.45), all that was made available to the Defendants was $440,384.45 (i.e. not even enough to meet the projected $500,000 for anticipated further building costs);

    7. (7)

       they had no financial advice as to the benefits and disadvantages of the transaction. Indeed, Integrated did not require (or recommend) the Defendants obtain financial advice concerning the loan, and the Defendants did not obtain such advice. There is no evidence before the Court that had such advice been sought, it would have recommended the expenditure of $623,295.45 to obtain, in real terms, a loan of $440,384.45 even on the non-default rate of interest, and the complete erosion of any equity in the Property, should there be a delay in sale as the RAMS loan debt continued to mount and the Integrated default rate kicked in. This is all in a context where the prospect of Mr Valerio and Ms Pejkic being able to obtain refinancing of the balance of their debt after payment out of the proceeds of sale of Lot B to RAMS and of the Integrated loan, would appear to be slim and unrealistic; and

    8. (8)

       they were, I find, in a desperate situation of their own making but nevertheless thereby vulnerable.

25. [119]

    In relation to [118(2)] I think it is important to bear in mind that the legislature has endeavoured to ensure that people are protected from highly disadvantageous loans and in doing so it has been recognised that corporations engaged in business are not in need of the protection bestowed by the Code. It is clear that Integrated and other lenders engaged in lending on onerous terms are very much aware of the loophole that seemingly permits them to escape the operation of the Code – i.e. the ability to insist on the introduction of a company as the borrower even where, as in Jams 2 v Stubbings and here, for example, there really is no existing business or venture of the corporation for which the loan is sought. If I am wrong in my conclusion that the Code applies, then the loophole is effective and in my view, the use of it is a relevant additional factor to be taken into account in considering whether the behaviour of Integrated and Mr Cacciola is unacceptable commercial behaviour.

26. [120]

    I conclude that Integrated and Mr Cacciola have engaged in unconscionable conduct and the orders that I regard as appropriate to prevent the loss to the Defendants as a result of the unconscionable conduct are set out in [122] below.

Further Matter

1. [121]

   In [119] above, I make reference to the requirement of the interposition of a corporation by lenders such as Integrated who lend at extremely high interest rates as a mechanism to avoid the effect of the Code. I think ASIC’s attention should be drawn to this potential means of avoiding the Code for consideration by its relevant officers as to whether steps should be taken to seek to have the legislation extended to cases where a company borrows for no purpose genuinely connected to its normal business. I will therefore direct the Equity Registrar to forward a copy of these reasons to ASIC. An additional reason for doing so is that on my findings it may need to consider whether Mr Cacciola has by his conduct breached the s 80 ban imposed upon him by ASIC and take whatever action it deems fit should it conclude that he has done so.

Conclusion

1. [122]

   The orders that I propose to make are:

   1. (1)

      the Loan Agreement, Deed of Variation and mortgage given by the Second Defendant over the Property be set aside; and

   2. (2)

      the Defendants to repay to the Plaintiff the amount actually received of $440,384.45 with interest to accrue as follows:

   3. (3)

      on the amount of $410,384.45, from 26 February 2018, such interest to be calculated at the rate of interest prescribed by section 100 of the Civil Procedure Act 2005 (NSW); and

   4. (4)

      on the amount of $30,000, from 24 August 2018, such interest to be calculated at the rate of interest prescribed by section 100 of the Civil Procedure Act 2005 (NSW).

2. [123]

   The Defendants should prepare a proposed form of orders, including calculations, reflecting the conclusions in [122] and I will hear the parties on whether any consequential orders need to be made and on the issue of costs.