First Mortgage Managed Investments Limited v Dial-A-Blind (Australia) Pty Ltd

On 30 August 2022, Dial-A-Blind (Australia) Pty Ltd, the defendant, and its director Nikitas Livisianos entered into a loan agreement with First Mortgage Managed Investments Limited, the plaintiff, to borrow $1,830,000. The loan was for the purpose of refinancing an existing loan with a company called Omicron Mortgages. The loan was for a 12 month period with a higher rate of interest of 15.25% and a lower rate of 10.25%.

By 30 October 2022, the borrowers had defaulted by failing to make an interest payment. They thereafter continued to default up to and including June 2023, by which time an amount exceeding $246,000 was outstanding under the loan.

The plaintiff commenced these proceedings on 25 July 2023 naming Dial-A-Blind (Australia) Pty Ltd as the defendant. The plaintiff sought possession of land at 1/365-369 West Botany Street, Rockdale (“the land”) which had been provided as security pursuant to a mortgage in respect of the loan. The plaintiff also sought judgment for what was then outstanding of $2,050,267.53.

Service was effected of the statement of claim on the defendant on 1 August 2023. When no defence was filed to the claim, the plaintiff obtained default judgment on 7 September 2023 for possession of the land and for $2,050,267.53. A writ of possession was issued on 20 September 2023.

On 3 November 2023, the defendant in a notice of motion filed that day sought that judgment be set aside pursuant to r 36.16 of the Uniform Civil Procedure Rules 2005 (NSW) (“UCPR”). On 7 December 2023, an amended notice of motion was filed seeking judgment be set aside pursuant to rules 36.15 and 36.16 of the UCPR.

In addition to the land, Unit 5 at the same address was provided as security for the loan. Prior to commencement of the present proceedings, on 19 January 2023, the plaintiff commenced proceedings against Mr Livisianos seeking possession of Unit 5 and judgment for what was outstanding to the plaintiff at that time.

Mr Livisianos, through his solicitors sought a period of time to enable him to refinance. On 23 February 2023, the plaintiff and Mr Livisianos entered into a Heads of Agreement which provided that the plaintiff would not take any further action to recover Unit 5 for six weeks and, if the amount owing under the Heads of Agreement was not repaid in full by 22 March 2023, Mr Livisianos would provide vacant possession to Unit 5 by 22 April 2023.

No refinance occurred and vacant possession was not provided.

On 6 April 2023, the plaintiff obtained judgment for possession of Unit 5 and judgment against Mr Livisianos for the amount of $1,900,659.14.

On 1 November 2023, the plaintiff entered into a contract to sell Unit 5 for $870,000. The sale settled on 13 December 2023. After payment of expenses associated with the sale, $772,500 was paid to the plaintiff in reduction of the amount owing.

The affidavit in support of the present notice of motion by Mr Livisianos says that prior to July 2022 Mr Livisianos wanted to obtain finance to replace his then current finance over the two properties. He approached a broker, Global Capital Commercial, seeking a loan. He said prior to approaching the broker, the company had not been profitable and he himself had been making a very small income. He provided financial statements including his tax returns to the broker. He also said:

Mr Livisianos said that within a month of the loan being taken out, the company was unable to afford the repayments and stopped making them. He lodged an AFCA complaint on 2 November 2023, but because judgment has been entered, the AFCA complaint has been closed. Mr Livisianos said he is attempting to obtain a loan from members of his family.

He attached a draft defence that he seeks to file. In that defence he admits the loan agreement but says (at para 3(c)) that he was under a special disadvantage by reason of his advanced age, being 88 years of age at the time of the loan agreement, with a taxable income of $34,204. He says also (at para 3(d)) that the company was in a position of special disadvantage because it had made a loss of $150,000 in the 2022 tax year, and did not have the means to repay the loan. He says that the loan agreement was unconscionable and was based on impermissible asset-based lending of the type discussed in Stubbings v Jams 2 Pty Limited [2022] HCA 6; (2022) 96 ALJR 271. He says that the rate of interest charged by the plaintiff was unconscionable within the meanings of ss 12CA and 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) (“the ASIC Act”). He admits that a registered mortgage was given over the land, but says that it is unconscionable also in the same way.

The defendant submitted that all that was necessary to set aside the default judgment was a bona fide defence and that there is an arguable or triable issue, in addition to an explanation for the delay in seeking to defend. The defendant submitted that the making of the subject loan worsened the defendant’s financial position. The defendant pointed to the advanced age of Mr Livisianos and the parlous state of the defendant’s financial position. It was submitted that there was a clear lack of any objective evidence that would support any capacity for the defendant to service the loan.

The defendant submitted that the loan was asset-based lending which, it was submitted, was impermissible, relying on what was said in Stubbings. The defendant submitted that the delay in bringing the notice of motion was modest and the explanation offered by Mr Livisianos should be accepted.

The defendant submitted that judgment was entered irregularly, contrary to r 36.15 UCPR, because there was no disclosure in the affidavit in support of the ex parte motion for default judgment of the earlier judgment against Mr Livisianos. The defendant submitted that on any ex parte application there is a duty of full disclosure.

The plaintiff opposed the setting aside of the judgment for a number of reasons. First, the plaintiff submitted that no bona fide defence has been established. Secondly, the defendant will be obliged to give credit for the benefit it received by the discharge of the earlier mortgage. Thirdly, no explanation has been provided for the failure to defend the proceedings in the time permitted in the UCPR. Fourthly, the plaintiff submitted that there was no duty on its part on an application for default judgment to disclose the earlier judgment, not the least reason for which was that it was irrelevant to a consideration of the default judgment being sought.

The plaintiff submitted that although the term “unconscionable conduct” was used in a number of places throughout the draft defence, all that the defendant had identified as matters constituting a special disadvantage was the age of Mr Livisianos, his disclosed taxable income, and the fact that the defendant in 2022 made a taxable loss. The plaintiff submitted further that although provisions of the ASIC Act were pleaded, there was no attempt to articulate the basis on which those sections apply or the elements of those sections were engaged. The plaintiff submitted that the pleading was defective and, if filed in time, would have been liable to be struck out as embarrassing and failing to disclose a reasonable cause of action.

The plaintiff submitted that in circumstances where the defendant had defaulted to its prior mortgagee, Omicron, and the monthly repayments on the new loan from the plaintiff were less than the repayments due to Omicron, it could not be said that the loan was unconscionable, especially because of the paucity of particulars of what was said to constitute the unconscionability.

The plaintiff submitted that nothing in Stubbings stands for the proposition for which the defence contends, namely, that the loan agreement constituted impermissible asset lending.

The principles associated with setting aside a default judgment were summarised by McColl JA in Dunwoodie v Teachers Mutual Bank Ltd [2014] NSWCA 24, as follows:

It is first necessary to determine if the judgment was entered irregularly because, if it was, the likely outcome would be that the judgment would be set aside.

The first matter for consideration is whether the duty of disclosure applies to an application for default judgment.

The defendant relied on what was said by Ball J in Principal Financial Group Pty Limited ACN 068 318 507 v Gabriel Joseph Vella [2011] NSWSC 327:

The principle has been applied in a number of different cases beyond the seeking of an injunction at common law. These situations are:

In Aristocrat Technologies, Gageler J (as his Honour then was) said:

Counsel in the present case were not able to point to any case where the principle was applied in respect of an application for default judgment. That is perhaps not surprising because the procedure for obtaining default judgment is governed in detail in the UCPR. Rule 16.3 provides that unless the Court otherwise orders, an application for default judgment may be dealt with in the absence of the parties, and need not be served on the defendant. Rule 16.4 stipulates that when seeking default judgment for possession of land an affidavit must be filed, and what is required to be set out in the affidavit is contained in sub-r 16.4(3). Rule 16.4 is made subject to r 36.8 which also sets out what must be contained in an affidavit in support of an application for default judgment for possession of land. Rule 16.6 sets out the requirements for the affidavit where default judgment on a debt or liquidated claim is sought.

It can be accepted that a plaintiff is not entitled, as of right, to obtain a judgment where a defendant is in default. In Wily v King [2010] NSWSC 352 Barrett J said:

Justice Barrett made clear the underlying basis in an ordinary case for the right of the plaintiff to seek default judgment. His Honour said:

Wily v King was, however, an unusual case arising under the Corporations Act 2001 (Cth). The requirement for the way proceedings were to be commenced in that case (an originating process under r 2.2(3) of the Supreme Court (Corporations) Rules 1999 (NSW)) meant that the failure to file a defence in that case did not result in deemed admissions of the case the plaintiff was bringing.

In the present case, it is difficult to see what injustice there might be by giving a default judgment where the requirements of the UCPR were satisfied in terms of the material to be included in the affidavit in support of the application, in circumstances where the proceedings were correctly commenced by statement of claim, and where deemed admissions result from the failure to file a defence to that statement of claim.

In an application for default judgment, “all facts known to the applicant which that absent person could be expected to have sought to place before the Court had the application for the order been contested” (Aristocrat Technologies at [15]), would ordinarily be the facts required by rr 16.4, 16.6 and 36.8 UCPR.

The defendant submitted in the present case that what ought to have been notified was the fact that an earlier judgment had been obtained, not against the defendant in the present proceedings, but against a co-borrower. In addition, the defendant submitted that the Court should have been made aware of the fact that a writ of possession had been executed and it was anticipated that the property would be listed for sale, with the result that the judgment debt would, at some future time, be reduced.

Of some significance, however, in terms of a judgment for the liquidated sum, the applicant in its affidavit must give particulars on any reduction of the amount due to the plaintiff as a consequence of payments made since the originating process was filed.

Even applying the test of materiality on an application for default judgment set out by Ball J in Principal Financial Group at [17], although the defendant may have wanted to bring that information to the Court’s attention on the application for default judgment, I do not consider that the Court would have wanted to consider that evidence before making an order. It was not relevant let alone material.

During the course of submissions, counsel for the defendant conceded that the non-disclosure submission was not made as far as the judgment for possession was concerned. The submission was only made in relation to the judgment for the liquidated sum. The concession was properly made. If two or more properties form part of the security, the fact that possession has been obtained of one of them could have no bearing on the right of the mortgagee to obtain any form of judgment, whether default or otherwise, of a second or subsequent property, provided the defendant was still in default under the mortgage. Further, as far as the judgment for possession was concerned, the fact that the debt owing might be reduced at some future time would not deprive the plaintiff of the right to possession under the terms of the loan agreement and mortgage. Some money was outstanding, as the defendant accepted.

As far as the judgment for the liquidated sum was concerned, the plaintiff was entitled to a judgment for what was outstanding at the time the application for default judgment was made. If, subsequently, monies were paid in reduction of that debt, the plaintiff would not be entitled to execute any judgment for a sum greater than what was owing at the time execution was sought. Rule 39.3(2A)(a)(iii) requires evidence of payments made after judgment was entered. Rules 39.35 and 39.45 require similar information.

Although there may be, in reasonably rare cases, a need for an applicant for default judgment to provide more information than rr 16.4, 16.6 and 36.8 UCPR require in the affidavits in support, the present application was not such a case. There would be no basis for the exercise of any discretion in the granting of default judgment for the application to be refused, had the information which the defendant now suggests should have been provided, been provided. No injustice was occasioned by the failure to provide that information to the Court. The defendant had defaulted under the loan agreement and the same amount of money (if not more by virtue of interest accruing) was still outstanding to the plaintiff. Under the terms of the loan agreement and the mortgage, the plaintiff was entitled to possession of the land. At the time judgment was sought, the amount alleged to be outstanding was outstanding. At the time default judgment was applied for, no contract had been entered into to sell Unit 5.

The default judgment was not entered irregularly.

As was made clear in Dunwoodie at [43], the fundamental principles guiding a court whether to set aside a default judgment are whether the applicant has a bona fide ground of defence and an adequate explanation for the failure to defend, together with the length of the delay.

In the present case, the only explanation provided for the failure to file a defence is the statement of Mr Livisianos in his affidavit:

The explanation is very unsatisfactory, but the delay between default judgment and the application to set aside the judgment was not extensive. The relationship between the explanation for delay and whether a defendant demonstrates a bona fide defence on the merits was discussed by Priestley JA in Cohen v McWilliam (1995) 38 NSWLR 476. In that decision, Cole JA, following the trial judge Bryson J (as his Honour then was), had stressed the importance of court efficiency and compliance with court rules and procedures.

On the other hand, Priestley JA said at 478:

Although the emphasis has now moved towards the greater significance of court efficiency (see, for example, ss 56-58 of the Civil Procedure Act 2005 (NSW) and what was said in Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175; [2009] HCA 27), if a defendant demonstrates an arguable defence on the merits, it would be an unusual case where the defendant was not permitted to be let in to defend the proceedings simply because time limits had not been complied with and the explanation for the failure was somewhat inadequate.

In circumstances where judgment was entered shortly after the due date for the filing of a defence (and there is no criticism of the plaintiff or its lawyers in that regard), and where the motion to set aside the judgment was filed within two months of the judgment, I do not consider that the defendant should be shut out from defending the claim if it can show an arguable defence on the merits.

It is necessary, therefore, to examine the question of whether the defendant demonstrates an arguable defence on the merits.

The defence appears to rely on unconscionability, seemingly based on three different matters. The first is said to be the fact that the defendant was under a special disadvantage. That, in turn, was based on both the co-borrower, Mr Livisianos, and the defendant itself being under a special disadvantage. In relation to Mr Livisianos, his advanced age and minimal income are relied on. The defendant was said to be under a special disadvantage because it had made a loss of $150,000 in the 2022 tax year and did not have the means to repay the loan. The second basis for unconscionability was said to be the fact that the loan agreement was based on what was said to be impermissible asset lending of the kind discussed by the High Court in Stubbings. The third basis concerned the interest rate charged under the loan agreement.

In relation to the assertion in the draft defence that the defendant was in a position of special disadvantage because of the loss it made in the 2022 tax year, it seems clear that nothing about the defendant’s position in that tax year was provided to the plaintiff. The documents annexed to the affidavit of Michael Boyce, the director of the plaintiff, show only that the tax returns provided to the plaintiff were the defendant’s tax return for the 2021 tax year and Mr Livisianos’s tax returns for the 2020 and 2021 tax years. It is difficult to see how the plaintiff could have taken unconscientious advantage of the company based on its 2022 tax year position if the plaintiff did not know of it.

It must then be asked if the general law equitable concept of special disadvantage applies to a corporation. What was said in Blomley v Ryan (1956) 99 CLR 325 at 405 and 415 would suggest not, although Mason J’s emphasis in Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 462 that the situations mentioned by Fullagar J and Kitto J were no more than particular exemplifications of an underlying general principle, might suggest that a company might be able to be a party that is placed at a special disadvantage.

The matter was discussed by Wheeler J in Commonwealth Bank of Australia v Ridout Nominees Pty Ltd [2000] WASC 37, a case that dealt only with general equitable principles, and did not involve statutory unconscionability.

Hoho Property Pty Ltd v Bass Finance No 37 Pty Ltd [2023] NSWSC 411 was a case involving both general equitable as well as statutory unconscionability. In that case, Rees J said:

That discussion concerned unconscionability under the general law.

The proposed defence in the present matter relies on statutory unconscionability under ss 12CA and 12CB of the ASIC Act. Statutory unconscionability is a wider concept than the equitable principle.

Whilst the defendant in the present case was not incorporated simply for the purpose of the loan which was obtained (as some lenders require to take the matter outside of the National Credit Code), the evidence tends to suggest that the controlling mind of the company was, and always had been, Mr Livisianos. Both Ridout and HoHo leave open the possibility that a company may be able to rely on unconscionability by reason of its position of special disadvantage.

Whilst noting the suggested limitations on being able to impute a special disadvantage suffered by a director to the corporation that Rees J discusses in HoHo, I do not think it is unarguable that the defendant in the present case might be found to be at a special disadvantage by reason of Mr Livisianos’s situation when he was the controlling mind of the company. However, I do not consider that the defendant should be entitled to rely on a special disadvantage based on its loss in the 2022 tax year when no such information was available to the plaintiff. Nor is it unarguable that what was known by the plaintiff of the defendant’s financial position meant that it was in a position of special disadvantage. The defendant submitted that the fees charged by the plaintiff worsened the defendant’s financial position.

In Stubbings, the joint judgment of Kiefel CJ, Keene and Gleeson JJ said at [34]:

Further, nothing said by Basten JA in Perpetual Trustee Company Limited v Albert and Rose Khoshaba [2006] NSWCA 41 suggests that asset lending in itself was unconscionable or unjust – see at [128] and [131]. Ordinary principles concerned with whether one party is at a special disadvantage and whether the other party unconscientiously exploited that disadvantage must still be considered.

On the face of the evidence the present lending appears to be asset-based lending, because the financial information concerning the defendant and Mr Livisianos would suggest that they would not be able to repay this loan out of income. Rather, there would need to be, as the loan agreement contemplated, the sale of a significant asset within a short time of the loan being made. That requirement appears to be a partial exit strategy with the result that interest payments would be significantly reduced after the sale.

Whilst I cannot find without any doubt that the interest rates charged were not unconscionable, the defendant will struggle with this aspect of unconscionability in the light of cases such as Takemura v National Australia Bank Ltd [2003] NSWSC 339; Guardian Mortgages v Miller [2004] NSWSC 1236; Driat Pty Ltd v Thomas [2012] NSWSC 683 and Kaji Australia Pty Ltd v Glover (No. 4) [2019] NSWSC 1779.

There is a strong argument to suggest that the entry into this loan was beneficial for the defendant. It was under threat from its existing lender, Omicron, the monthly repayments were lower than those due to Omicron, and the arrangement requiring the sale of Unit 5 provided some time for the defendant to put its affairs into order (see Mizzi v Reliance Financial Services Pty Ltd [2007] NSWSC 37 at [42] – [44]). However, it does not seem to me to be unarguable that the loan from the plaintiff was unconscionable when regard is had to the fees and interest to be charged and when, even on the 2021 tax return of the defendant, there might have been a difficulty in servicing the loan. Further, as the High Court made clear in Stubbings at [152], whether asset-lending is unconscionable must be judged in the light of all of the facts.

Although the defendant correctly submitted that the Court has a wide variety of orders available to it if a breach of the ASIC Act is established, it would be a rare case where a borrower would not need to repay the principal sum lent. That is the more so where all or part of the loan has been used to discharge an earlier mortgage on the property. Ordinarily, it would be condition of any relief to the defendant that the borrower repays the benefit it has received by the discharge of the earlier mortgage: Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102 at 114; Collier v Morlend Finance Corporation (Victoria) Pty Ltd (1989) 6 BPR 13,337 at 13, 342. The defendant makes no such offer.

Whatever the outcome of defended proceedings in the present case, the defendant will be in default under the loan agreement and mortgage. A finding of unconscionability will not mean that the principle referred to in the preceding paragraph will not apply. In those circumstances, the only judgment which should be set aside is the judgment for the liquidated sum. The trial should be confined to the matters pleaded in the proposed defence annexed to the affidavit of Nikitas Livisianos sworn 3 November 2023 excluding reliance on the reference to the defendant’s 2022 tax return in para 3(d) of the proposed defence. The defendant is permitted to rely on its financial position as disclosed to the plaintiff as a matter going to special disadvantage.

The defendant has sought, and been granted, an indulgence in having the judgment set aside. Although it has succeeded in doing so, it should pay the plaintiff’s costs of the motion.

I make the following orders: