LM Investment Management Limited (In Liquidation) (Receivers Appointed) v BMT & Assoc Pty Limited (No. 2)

The plaintiffs in this proceeding agreed to provide a loan to Greystanes Projects Pty Limited (Greystanes) for the acquisition of a property at Greystanes and the development on it of a mixed warehouse and office complex. Under the terms of the relevant loan agreement, the plaintiffs agreed to advance funds in stages reflecting the value of the work that had been completed at the time the advances were made. The plaintiffs engaged the defendant, who is a firm of quantity surveyors, to prepare an assessment of each progress claim made by the builder in respect of which money was to be advanced. The plaintiffs took a mortgage over the property and a fixed and floating charge over Greystanes’ assets together with guarantees from the directors of Greystanes to secure repayment of their loan.

At the time of its purchase, the land with development approval was valued at $10,800,000 and the completed project was valued at $35,000,000. On the basis of those valuations, the plaintiffs agreed to advance a total amount of $23,335,000 plus one month’s interest.

Work started on the project in August 2007 and was the subject of substantial delays. The project was re-valued in about November 2008. At that time, the completed project was valued at $31,414,152 and, as a result, the plaintiffs were no longer willing to advance the amount necessary to complete the project and building work ceased. On 28 April 2010, the plaintiffs demanded repayment of their loan. They also served notices of demand on the guarantors and, on 14 September 2011, they took possession of the development site as mortgagees in possession. Nothing was recovered from the guarantors. Greystanes was placed into liquidation on 8 June 2012 and the land was sold on 30 May 2014 for $7,397,044.27. At that time, the plaintiffs were owed approximately $46 million (including accumulated interest at contractual rates).

In this proceeding, the plaintiffs claimed from the defendant the sum of $2,136,149 on the ground that the defendant had negligently over certified that amount as being payable in respect of certain identified trades and the plaintiffs would not have advanced that amount but for the over certification.

In a judgment I delivered on 18 December 2015 (LM Investment Management Limited (In Liquidation) (Receivers Appointed) v BMT & Assoc Pty Limited [2015] NSWSC 1902), I concluded that the plaintiffs were entitled to succeed for the amount that they claimed. It is common ground that the plaintiffs are entitled to pre-judgment interest on that amount. However, there is a dispute concerning the date from when interest should run. It is the plaintiffs’ contention that interest should run from the date the loan fell due, but was not repaid, which was 1 August 2009, or at the latest, when the guarantors failed to pay in response to the demands served on them, which was 5 May 2010. It is the defendant’s contention that interest should only run from the date the property was sold and the loss was crystallised, which was 30 May 2014. It is with that issue that this judgment is concerned.

The power of the court to award pre-judgment interest is conferred by s 100 of the Civil Procedure Act 2005 (NSW). Section 100(1) provides:

It is plain from this section that interest cannot be awarded in respect of the period before the date on which the cause of action arose. The purpose of an award of interest is to compensate a plaintiff for actual loss the plaintiff suffers by being kept out of his or her money from the time when the loss was suffered until the date of judgment: see MPB (SA) Pty Ltd v Gogic [1991] HCA3; (1991) 171 CLR 657; Grincelis v House [2000] HCA 42; (2000) 201 CLR 321.

In the present case, the plaintiffs’ loss was their inability to recoup the amount they had advanced. The question is when that loss arose. That raises a factual question of when recoupment became impossible. As Gaudron J explained in Kenny & Good Pty Limited v MGICA (1992) Limited [1999] HCA 25; (1999) 199 CLR 413 at [16]:

Mr Hicks, who appeared for the defendant, submitted that recoupment only became impossible once the property was sold. Before that time, the loss was contingent on the price that would be obtained for the property. In support of that submission, Mr Hicks relied on the decision in Wardley Australia Limited v The State of Western Australia (1992) 175 CLR 514. In that case, the plaintiff was induced to grant an indemnity as a result of misleading and deceptive conduct of the defendant. It was a condition of the indemnity that (at 524):

The High Court held that the plaintiff did not suffer a loss until the condition of the indemnity was fulfilled. As the plurality explained (at 532):

I do not accept that the principle for which Wardley stands is as broad as Mr Hicks suggests. In Wardley, no amount became payable under the indemnity until the contingency was satisfied. Consequently, it could not be said that a loss occurred before that time. However, in the present case the question is when it became apparent that recoupment became impossible. “Impossible” in this context means practically impossible. It raises a factual question of when realistically the plaintiffs were not going to recover the amount that they had advanced.

On the material before the court, I am not satisfied that that date was a date before the property was sold. There is no evidence before the court concerning the value of the project as it was at the time the loan fell due for repayment (that is, 1 August 2009). As I have said, there is evidence that the value of the completed development was estimated to be $31,414,152 in about November 2008. There is no direct evidence that the value of the completed development deteriorated further after that time. There is also evidence from the last progress drawdown report prepared by the defendant that the cost to complete the work as at the date of the report (19 March 2009) was $3,838,288. As at that date, the total amount of the loan according to the loan statement issued by the first plaintiff was approximately $18.2 million. By 1 August 2009, it had increased to approximately $22.2 million. It is not possible to infer from those figures that there was no possibility of recoupment of the amount that had been lent from the sale of the property at that time.

It may be inferred from the service of default notices on Greystanes and the guarantors and the fact that nothing was paid in response to those notices that there was no possibility of recoupment from those sources. That, however, left the property itself. Mr Einfeld SC, who appeared for the plaintiffs, submitted that the court could infer that the global financial crisis would have had a substantial impact on the value of the project and that with compounding interest on the amount of the loan it was obvious that the amount of the loan would not be recouped from the sale of the property, which turned out to be the fact when the property was sold in 2014.

No doubt at some point, as the amount of the loan increased, it would have become apparent that the plaintiffs would not be able to recoup the amount of their loan from the sale of the property. However, the difficulty is that, on the evidence, it is not clear when that point was. Similarly, it may be inferred from the sale price of the property and the costs to complete that the value of the work that had been done, and most likely the value of the project as completed, had also decreased. However, again on the evidence it is not possible to say when that was. For the reasons I have given, it could not be said that it was apparent that recoupment was impossible at the time of default. On the evidence, the only date when it can be said that it was apparent that recoupment was impossible was the date on which the property was sold – that is, 30 May 2014. Consequently, prejudgment interest should run from that date.

The parties should bring in short minutes of order to give effect to this judgment. I will hear the parties in relation to costs if costs cannot be agreed.