Arab Bank of Australia Ltd v Jeitani

1. [1]

   In these proceedings the Plaintiff sought possession of two properties being units 1 and 2, 94 Buist Street, Bass Hill as a result of defaults under a mortgage dated 30 May 2007. The units were owned by the Defendants who guaranteed loans to two companies they controlled being S Jeitani Pty Ltd and M Gittany Pty Ltd (the companies). An order for possession was made. The bank’s debts have been cleared.

2. [2]

   However, the Second Defendant, Mouhsen Gittany, makes a claim against the bank in relation to some of the monies received by and retained by the bank from the sale of those properties and others.

3. [3]

   The First Defendant is now bankrupt and takes no part in the proceedings.

The loans

1. [4]

   On 6 February 2007 the companies entered into a loan agreement with the Bank to borrow $600,000. The loan refinanced a loan from St George Bank. The loan was secured by mortgages over 39 Chetwynd Road, Merrylands, 8 Boronia Street, Merrylands both of which properties were owned by the companies, and over 1 & 2/94 Buist Street, Bass Hill. The Bass Hill property was owned by the Defendants who, with another company, were to be guarantors of the loan.

2. [5]

   On the same day the Defendants entered into a loan agreement with the Bank to borrow $482,000. This was also to refinance a loan from the St George Bank. The loan was secured over the Bass Hill property as well as both of the Merrylands properties. There were various guarantees including from the companies.

3. [6]

   On 9 September 2008 Mr Gittany entered into a loan agreement with the Plaintiff whereby the Plaintiff agreed to lend $482,000 to assist with the purchase of a residential property being 8 Ibex Street, Earlwood (“the Earlwood loan”). On 9 October 2008 Mr Gittany executed a mortgage over the Earlwood property to secure that loan. The Earlwood property was the only security given or required to be given for that loan.

4. [7]

   On 17 November 2008 the companies entered into a further loan agreement with the Plaintiff for the Plaintiff to lend the companies up to $600,000 to construct four two bedroom townhouses on the land at 39 Chetwynd Road, Merrylands. The same security was to be provided as for the earlier loan to the companies and the same guarantors, including the Defendants, were to guarantee it. The townhouses were constructed. The companies did not sell the town houses but rented Units 1, 3 and 4 out for residential occupation.

Default and sale

1. [8]

   By February or March 2010, as Mr Gittany accepts, he was in default under the Earlwood loan.

2. [9]

   On 18 February 2010 Mr Gittany’s domestic partner, Georgia Nicolaou, agreed to purchase the Earlwood property for $620,000. Mr Gittany submitted that what he would receive from that purchase would have enabled the discharge of the Earlwood loan. The Plaintiff refused to discharge the Earlwood mortgage to permit the sale of the property to her claiming that the Earlwood property was security for the companies’ liabilities including guarantees given by the companies.

3. [10]

   In the meantime, the companies encountered financial difficulties and between December 2009 and February 2010 they contracted to sell the four town houses. The companies defaulted and on 23 March 2010 the Bank entered into possession as mortgagee. The companies were wound up and are now in liquidation.

4. [11]

   On 3 August 2010 the Bank as mortgagee in possession contracted to sell unit 3, an earlier contract entered into by the companies having been rescinded. All four contracts settled between 1 and 18 October 2010. Unit 1 sold for $360,000. Unit 2 sold for $299,000. Unit 3 sold for $318,000 and unit 4 sold for $330,000. The first loan to the Companies was paid out in full but there was a shortfall on the 2008 loan to the companies of $71,177.31.

5. [12]

   On 18 February 2011 the bank paid GST in the sum of $116,644 to the ATO. That sum is equal to 1/11 of the total sale price of the Merrylands town houses. The result was that the shortfall on the 2008 loan was increased to $192,131.11.

6. [13]

   In or about October 2013 orders were made giving the Bank possession of the Bass Hill properties. Those properties have now been sold and the Bank’s debt cleared other than in respect of enforcement expenses.

Mr Gittany’s claims

1. [14]

   In his Defence Mr Gittany effectively admitted the claim made by the Plaintiff but defended the proceedings in reliance on the matters in his Cross-Claim. The Cross-Claim raised three separate matters which he asserted should be set-off against what is otherwise owed by him to the Bank. They were:

(a) The GST claim

1. [15]

   The first of the matters raised in the Cross-Claim concerns GST gross up clauses in the contracts to sell units 1, 3 and 4. They were clauses by which the purchasers agreed to indemnify the vendor in the event that GST was or became payable on the sale.

2. [16]

   In the contracts of sale for units 1 and 4 the relevant term was clause 37 of the Special Conditions. It provided:

3. [17]

   Mr Gittany claimed that the effect of these clauses was that, to the extent that GST was payable on the sales of the units, the Bank as mortgagee in possession was entitled to demand a gross up for GST from the respective purchasers under those contracts of sale in accordance with the terms of the respective contractual provisions. The Bank did not avail itself of that right despite an entitlement to do so even in relation to the contract of sale for unit 3 which was entered into by the Bank.

4. [18]

   Mr Gittany claims that because the Bank did not avail itself of the obvious entitlement to the GST gross up, the Bank had sacrificed the interests of the mortgagors and the guarantors by failing to obtain the best price reasonably obtainable for those three units.

5. [19]

   The matter is put alternatively that the Bank failed to avail itself of the GST margin scheme on the sale of those town houses. Mr Gittany submitted that it was open to the Bank to apply the margin scheme from the time it went into possession in March 2010 up until the time of supply, namely, completion of the contracts of sale on the various dates between 1 and 18 October 2010. Mr Gittany said in his affidavit that it was always his intention to apply the margin scheme and claim input tax credits to reduce the GST payable.

6. [20]

   The claim relies on a duty owed by the Bank to Mr Gittany on one or more of the following bases:

7. [21]

   Mr Gittany submitted that the application of the GST margin scheme required the agreement of the purchaser in each case under s 75(5) of the Goods and Services Tax Act 1999 (Cth). He submitted that, having regard to the inclusion of the GST gross up clauses in the contract of sale, there was every reason why a purchaser would have agreed to the application of the margin scheme if asked because of the economic incentive to do so. The result was an overpayment of GST in the order of $54,189.56 being an amount that could and should have been applied in reduction of the debt owed to the Bank and thus the amount to be enforced under the guarantee.

8. [22]

   Mr Gittany submitted that after the contracts for the sale of the Merrylands units became unconditional there was no reason the Bank should not have availed itself of the GST clauses to recover the amount of GST that it was required to pay to the ATO. Mr Gittany submitted that Mr Reitano, in accordance with whose recommendations as Manager Recoveries the Bank would act, was aware in the period up to December 2010 of the GST gross-up clauses and he notified the Bank of that fact. The Bank’s obligations were not to sacrifice the interests of the mortgagors and those under the mortgagors such as the guarantors by failing to act on those GST gross up clauses.

9. [23]

   Mr Gittany relied on the general equitable duty of a mortgagee to act conscionably towards the mortgagor and persons under the mortgagor and submitted that the duty would be breached where there was a failure to take an obvious step or precaution: Upton v Perpetual Trustees [2007] FCAFC 57; (2007) 158 FCR 118 at [86(g)(i)].

10. [24]

    Mr Gittany also relied on s 420A of the Corporations Act 2001 (Cth). He accepted that the duty under that section was not owed directly to him as a guarantor. However, the guarantor had the right to avail itself of any defences available to a mortgagor and to have an accounting or equitable damages where there is a breach of the duty to the mortgagor: GE Capital Australia v Davis [2002] NSWSC 1146; (2002) 180 FLR 250 at [56]; Ultimate Property Group Pty Ltd v Lord [2004] NSWSC 114; (2004) 60 NSWLR 646 at [75]-[78].

11. [25]

    The Bank submitted that, in the first instance, Mr Gittany had no standing to raise this matter. That was because the Bank had not called on the guarantee in relation to the Merrylands loan. Further, at the outset of the hearing the Bank gave an undertaking that it would not enforce any amounts against Mr Gittany under guarantees that he has given. It became clear that the purpose of that undertaking was to deny Mr Gittany standing to contest the issue concerned with the GST gross up. The Bank submitted that the only parties who had standing to complain about that matter were the companies themselves and, because the companies are now in liquidation, the only person who might have a claim would be the liquidator.

12. [26]

    The Bank initially submitted that, with the exception of the contract for unit 3 where the Bank sold as mortgagee in possession, the Bank was not in a position to pursue the purchasers for the GST. That was because the contracts were entered into by the companies as vendors. Those companies are now in liquidation and it would be the liquidators alone who would be in a position under the contract to pursue the purchasers for the money. However, in final submissions the bank accepted that it had the right to pursue the matter relying on a Power of Attorney clause in the mortgage.

13. [27]

    The Bank submitted that the margin scheme under the GST Act could not have been employed without there being a renegotiation of the contracts. This was because it was a requirement that a choice be made if the margin scheme was to be used at the time the contract was entered into. In respect of units 1 and 4 no election was made to use the margin scheme.

14. [28]

    The Bank initially submitted that if it had attempted to enforce the GST clauses by requiring payment of the GST at settlement the purchasers may have rescinded the contracts. The bank submitted that the purchasers had a right to do so notwithstanding the registration of the plan. This was because a right to rescind had become available to the purchasers when the plan was not registered within the stipulated period. The purchasers did not lose that right to rescind even when the plan was registered. Alternatively, if the bank made such demand on the purchasers there was a risk that they would claim a right to rescind. In that way it can be seen that any attempt to renegotiate the arrangement to the margin scheme might have resulted in the purchasers claiming the right to rescind.

15. [29]

    Subsequently, the Bank accepted that the purchasers’ right to rescind was lost on registration of the plan. However, the Bank submitted that it was not certain that the purchasers could have been held to the terms of the GST gross-up clauses if, for example, it sought to recover the amount of the GST in a suit for specific performance.

16. [30]

    The Bank submitted that it was under no obligation to make demand on or sue the purchasers, particularly after settlement. Reliance was placed on Westpac Banking Corporation v Kingsland (1991) 26 NSWLR 70 at 705-707.

17. [31]

    The Bank submitted that any shortfall on the Merrylands facilities, including the amount of $116,644 remitted to the ATO for GST, was paid from the proceeds of the Bass Hill sale. Another secured creditor, Messrs Padovan and Bale, ranked ahead of Mr Gittany and his other creditors in relation to the proceeds of the Bass Hill sale. The amount of their debt at 15 January 2015 was $504,635.72. There is no proof that the debt to Messrs Padovan and Bale would be discharged prior to the payment of any monies payable by the Bank. In that way, Mr Gittany has not suffered any loss.

18. [32]

    In reply Mr Gittany said that he had standing because the monies owed by the companies in relation to the Merrylands town houses were also secured by the Bass Hill property of which he was an owner. Any shortfall from the sale of Merrylands would next be charged against Bass Hill and any surplus would not go to the liquidators of the companies. Further, although Messrs Padovan and Bale were next in line on the sale of Bass Hill the failure of the bank to collect the GST from the purchasers meant that Mr Gittany’s indebtedness to Messrs Padovan and Bale was thereby increased. The Bank’s answer to that was that if any monies were recovered from the purchasers they would not benefit the Bass Hill property, rather, they would have gone into the companies which were in liquidation.

19. [33]

    The Bank submitted in the alternative that any claim by Mr Gittany in relation to the GST amount was a loss of chance case. That was because it could not be certain what attitude the purchasers would take if the Bank claimed against them under the GST clauses. If the Bank sought to have the purchasers vary the contracts to apply the Margin Scheme the contingency was how those purchasers would react, that is, whether they would agree to vary the contracts in that way. The Bank submitted that Mr Gittany led no evidence to establish that any action on the Bank’s part would have yielded a benefit.

20. [34]

    The Bank submitted that the evidence demonstrated that it had acted in good faith in relation to the sales. It pointed out that Mr Gittany acknowledged in his evidence that the prices obtained for the units were record prices. Further, he agreed that the Bank acted at all times prudently and appropriately in relation to the contracts.

21. [35]

    The Bank pointed further to the evidence that Mr Gittany had been advised by his accountant that no GST was payable on the Merrylands contracts. The email of 13 October 2010 sent by Mr Reitano to Mr Gittany showed that the common assumption of the Bank and Mr Gittany at that time was that no GST was payable. After the units had settled the Bank received advice that GST was payable. The Bank settled the sale while this matter was unresolved. Mr Reitano’s evidence was that the Bank needed to complete the contracts as soon as possible with as few difficulties as possible to avoid the risk of loss on the sales.

22. [36]

    The Bank submitted that it was not obvious that the Margin Scheme was the appropriate way to deal with GST. If the Bank had commenced negotiations with the purchasers to vary the contracts that would inevitably have caused delay and might have led the purchasers to seek to rescind their contracts to take advantage of the fact that the sales process was then in the hands of the Bank as a mortgagee.

23. [37]

    The Bank in the present case was able to claim the GST that it paid from the purchasers pursuant to clause 37 for units 1 and 4 and clause 14 for unit 3. The Bank became responsible for the payment of GST after completion of the contracts. Clause 38.1 of the Memorandum incorporated into the Merrylands Mortgage appointed the bank and its employees as the companies’ attorney and in clause 38.2 provided:

24. [38]

    Mr Reitano at the bank was aware of these clauses and understood that if he called on the purchasers to pay the GST they would be obliged to do so. However, he said that he did not consider enforcing them.

25. [39]

    Those GST clauses expressly provided that they would not merge on completion. No issue could have arisen after completion about any right on the part of the purchasers to rescind the contract if demand had been made to them under those clauses.

26. [40]

    However, even if demand had been made prior to or at completion for the payment of the GST there would have been no basis for the purchasers to claim a right to rescind the contract. Even though the registration of the plan took place beyond the time stipulated in the contract the purchasers did not, when they had the opportunity to do so after that date but before the registration of the plan, move to rescind the contract.

27. [41]

    The Bank does not now contend that the purchasers would have had a right to rescind at the time of settlement by reason of non-registration of the plan by the date stipulated. The Bank accepts that clauses 28 and 29 of the standard form contract constitute an answer to any claim by the purchasers for a right to rescind.

28. [42]

    The Bank’s submission was ultimately that it was not certain that the purchasers could have been held to the GST gross up clauses “having regard to other available legal defences that could be argued by them in relation to the GST issue” either in answer to an action for specific performance if brought before settlement or in an action to enforce the clauses after settlement. Quite what those legal defences might be was not specified.

29. [43]

    However, in the circumstances of this case, it is difficult to see how the bank was under any duty to Mr Gittany to enforce those clauses nor how any failure on the bank’s part to do so provides any relief to Mr Gittany. Mr Gittany points to what was said by Young CJ in Eq (as his Honour then was) in Ultimate Property Group Limited v Lord at [38]:

30. [44]

    Mr Gittany was not the mortgagor of the properties. At best he had two potential bases for claiming against the Bank in that regard. The first was that he was a guarantor of the loans secured on the Merrylands properties. As a guarantor he could be regarded as being a “person under the mortgagor”. However, his guarantee has not been called upon and the Bank has given an undertaking to the Court that it will not do so. In any event, it is difficult to see what rights he would have to avail himself of the mortgagor’s rights if he had not acquired an actual liability under the guarantee and had paid out that liability.

31. [45]

    The general rule is that a guarantor who has not paid the principal debt cannot require the creditor to proceed against the principal debtor or a co-guarantor or to enforce any securities held for the debt before having recourse to the guarantor: China and South Sea Bank Ltd v Tan [1990] 1 AC 536; Jones v Bank of New South Wales (Unreported – Supreme Court of Queensland – 19 April 1979).

32. [46]

    The other possible basis for a claim by Mr Gittany is that the Bass Hill properties were cross-collateralised as security for the Merrylands loans with the result that, if the Bank made the GST claims on the purchasers of the Merrylands properties, resort would have been unnecessary to the Bass Hill properties. That in turn would mean that Mr Gittany would not suffer loss by recouping less from the Bass Hill properties than would otherwise have been the case.

33. [47]

    The difficulty with a claim on that basis is that after any claims of the Bank to the proceeds of Bass Hill Messrs Padovan and Bale were next in line by virtue of a judgment and a caveatable interest in the Bass Hill properties. Their interest was second in line after the bank’s interest, as Mr Gittany acknowledged. The amount of that interest meant that Mr Gittany would not receive anything on the sale of those Bass Hill properties.

34. [48]

    Mr Gittany’s reliance on s 420A of the Corporations Act was misconceived for two reasons. He submitted that that section required the mortgagee to obtain the best price reasonably obtainable. The section imposes upon a mortgagee such an obligation but in the present case the evidence was that the best price for the properties had been obtained. Mr Gittany’s own evidence was to that effect. Further, clauses such as 14 and 37 concerning GST in the contracts for sale only serve to emphasise that the mortgagee had obtained the best price for unit 3 being the contract that it entered. Submissions on behalf of Mr Gittany that recovery of the GST pursuant to clauses 14 and 37 was somehow governed by s 420A should be rejected. Whether amounts were recovered pursuant to such clauses says nothing about the price that was obtained for the properties. Moreover, as Mr Gittany accepted, s 420A gave him no rights as a guarantor: GE Capital Australia v Davis; Permanent Custodians Ltd v AGB Developments Pty Ltd [2010] NSWSC 540 at [27]-[30].

35. [49]

    It is not necessary to discuss Mr Gittany’s alternative submission which involved negotiating with the purchasers to apply the GST Margin Scheme. There was no need for the Bank to do that because of its rights under the GST clauses. Further, recovery of the lower amount if the Margin Scheme was applied would not, for the reasons already given, provide any benefit to Mr Gittany.

36. [50]

    Nor is it necessary to deal with the bank’s alternative submission that any claim by Mr Gittany is a loss of a chance claim other than to say that I have considerable doubts that it is a claim for a loss of a chance. Even if it were, the contingency the bank asserts relating to the approach taken by the purchasers when asked for the GST would scarcely reduce the likely recovery. The clauses are abundantly clear. Even if demands were resisted the purchasers would be unlikely to be successful if the matter came to a contest.

37. [51]

    Mr Gittany’s claim in relation to the GST fails.

(b) Discharge of Earlwood

1. [52]

   Mr Gittany had received an indicative letter of offer of a loan to purchase Earlwood in December 2007. In about late May or early June 2008 he met with the relationship managers of the Bank, Maroun Dib and Richard Mansour at the Campsie branch and told them that he wanted to change the home loan for Earlwood into the names of himself and his girlfriend Georgia because they were selling their house in Newtown and moving in together at Earlwood. He was told that if he wanted to change the home loan into both names the Bank would have to reassess it. Subsequently he was told that there was not sufficient time to change the arrangement before the settlement which was due.

2. [53]

   Mr Gittany said that when he signed the loan agreement he did not read the pages that he signed. That page contained a Business Purpose Declaration. He said that no one explained the effect of that Declaration to him before he signed it. He said that he signed the loan documents in the belief that the Earlwood home loan was just an ordinary home loan.

3. [54]

   The purchase of Earlwood settled on 9 October 2008. The purchase price was $682,000 and the property was transferred into Mr Gittany’s name.

4. [55]

   At about that time Ms Nicoloau lent Mr Gittany $78,396.84. The loan was evidenced in a signed Loan Agreement dated 10 October 2008. There was no evidence of the purpose of the loan in the Loan Agreement. On 19 January 2010 Ms Nicoloau lent Mr Gittany an additional $58,002.16. A signed agreement of that date consolidated the two amounts. No purpose was stated. Mr Gittany’s evidence suggested obliquely that the loans were related to the purchase and rebuilding of the Earlwood property. The date for repayment of the loan was 18 July 2010.

5. [56]

   After he fell into default in respect of the Earlwood loan in February 2010 he said that he entered into a contract to sell the Earlwood property to Ms Nicoloau on 18 February 2010 at a purchase price of $620,000. In February or early March he requested from the Bank a copy of the discharge authority form to request a discharge of the Earlwood mortgage. In May 2010 his then lawyers Advance Legal faxed the executed discharge authority forms for the Earlwood mortgage and the Bass Hill mortgage.

6. [57]

   In July or August 2010 Mr Gittany said that he had a meeting with Joseph Rizk, another officer of the bank, and Mr Jeitani to discuss the financial position of Mr Jeitani, the companies and himself. During the course of the meeting he mentioned that he had forwarded discharge authorities for the properties at Earlwood, Sefton and Bass Hill. He asked if they could book in settlement for those properties. Mr Rizk said they would not do so. Mr Gittany then asked:

7. [58]

   Mr Rizk replied:

8. [59]

   Mr Gittany then said to Mr Rizk that there was enough equity in Bass Hill to cover any shortfall on the company loans but Mr Rizk said that they could not discharge any of the properties.

9. [60]

   Following that meeting Mr Gittany sent an email on 4 August 2010 to Mr Rizk which relevantly said:

10. [61]

    In fact on 19 August 2010 Ms Nicolau filed a Statement of Claim against Mr Gittany claiming the monies that she had lent him. Subsequently, judgment was entered against him in the sum of $145,686.27.

11. [62]

    On 20 September 2010 Mr Gittany sent an email to Mr Rizk in these terms:

12. [63]

    On 22 September 2010 Mr Gittany sent another email to Mr Rizk asking him amongst other things for a discharge of the mortgage over 8 Ibex Street, Earlwood on 1 October 2010.

13. [64]

    Sometime in August or September 2010 Mr Gittany had a meeting with Mr Rizk, Mr Reitano, Mr Jeitani and Mr Gittany’s uncle Charlie to discuss the financial position of both Defendants and the companies. During the meeting Mr Gittany asked them what was happening with the discharges of Earlwood, Sefton and Bass Hill. Mr Rizk said that there needed to be a guarantee on any shortfall, to which Mr Gittany replied that that was what Bass Hill was there for. Mr Reitano said that they did not know what Bass Hill was worth. The following conversation then ensued:

14. [65]

    At about this time Mr Gittany provided a letter from the liquidator of the companies, Roderick Sutherland, which said that he did not have any objection to the Bank releasing any security held over the personal properties of either of the Defendants in respect of the borrowings by the companies.

15. [66]

    On 28 September 2010 George Hadchiti, a solicitor acting for Mr Gittany, sent an email to Mr Rizk and Mr Reitano. It relevantly said:

16. [67]

    Mr Reitano responded by saying that he had referred the email to the Bank’s solicitors, MacGillivrays, for attention.

17. [68]

    On 30 September 2010 Mr Sam Pearlman from MacGillivrays sent an email to Mr Hadchiti in these terms:

18. [69]

    On or about 1 October 2010 Mr Gittany said that he recalls having a discussion with Mr Rizk about discharging Earlwood, during which conversation Mr Gittany said words to this effect:

19. [70]

    Mr Gittany sent such an email on 2 October 2010.

20. [71]

    On 6 October 2010 Mr Gittany said that Mr Rizk said to him:

21. [72]

    On 7 October 2010 Mr Reitano sent an email to Mr Gittany saying that the Bank had no problem with organising a discharge of Earlwood with settlement expected on 14 October provided that:

22. [73]

    Mr Gittany replied to Mr Reitano by asking him to book a valuation the next day (8 October) for Bass Hill and he said that he would get his solicitor to book in settlement for 14 or 15 October.

23. [74]

    On 12 October 2010 Mr Reitano sent an email to Mr Gittany saying that the valuer was trying to gain access to the Bass Hill property to conduct a valuation. The email said that the Bank would not be in a position to make a decision to release the Earlwood and Sefton properties until such time as the valuation report was in the Bank’s hands.

24. [75]

    Mr Gittany was invited by Mr Reitano to attend a meeting at the Bank on 12 October 2010. Mr Rizk was also present. Mr Gittany said:

25. [76]

    Mr Reitano said:

26. [77]

    On 13 October 2010 Mr Reitano sent an email to Mr Gittany confirming all of those requirements. Mr Gittany responded that day with an email that, although it is marked “without prejudice”, is not a document that in fact has any privilege in that regard. The email said:

27. [78]

    Settlement did not take place on 14 or 15 October 2010 because the Bank would not agree.

28. [79]

    On 2 November 2010 solicitors acting for Mr Gittany wrote responding to each of the seven matters identified at the conference between Mr Gittany and Mr Reitano and confirmed in the email of 13 October (paragraphs [75] – [77] above). The letter concluded by saying that the purchaser’s financier for the Earlwood property would not grant any further extensions to settle the purchase. Their client was in the position that if Earlwood did not settle on the following day he would be exposed to being sued for damages under the contract.

29. [80]

    In response to that letter MacGillivrays wrote to Mr Gittany’s solicitors saying:

30. [81]

    Mr Gittany’s solicitor responded by email on 3 November 2010. He attached documents in answer to paragraphs 2, 3 and 4 of the letter from MacGillivrays. In answer to paragraph 1 he noted that the Bank had not previously requested the documents sought. He said final approval of the subdivision might take a further five weeks to finalise. He noted that a copy of the receipt of payment of the subdivision fees had been forwarded two weeks previously to Mr Reitano but he attached another copy.

31. [82]

    Settlement of Earlwood was booked for 5 November 2010. On 4 November 2010 Amanda Bennett from MacGillivrays forwarded an email to Mr Hadchiti saying that she was instructed that the Bank was not in a position to release Earlwood on 5 November. Mr Gittany had a conversation with Mr Rizk on 5 November and asked why the settlement was cancelled. Mr Rizk said that the contract to sell Bass Hill had been cancelled so that they could not discharge Earlwood.

32. [83]

    On 9 November 2010 MacGillivrays wrote to Mr Hadchiti setting out why the Bank regarded Earlwood as being security not only for the loan taken out to purchase it but also for the construction loan to the companies that had a balance of $71,177.33. In addition, the Earlwood property was regarded as security for the GST incurred by the Bank in relation to the townhouse properties and realisation costs of $106,577.75. The letter went on to say that the loan to Mr Gittany for the Earlwood property was for a commercial and investment purpose because Mr Gittany signed a declaration to that effect. The letter went on to say:

33. [84]

    In June 2011 the Bank finally agreed to settle the Earlwood property and discharge the mortgage. Mr Reitano said that the Bank agreed to the sale without pressing any of the former objections. No other explanation was given. However, I note that the deposited plan relating to the Bass Hill properties was registered at that time. Because of difficulties that the purchaser had at that time the sale was not completed until 15 July 2011. At the settlement a cheque was paid to the Bank in the amount of $537,300.96 and a cheque was paid to MacGillivrays for their legal fees of $27,308.59.

34. [85]

    Mr Gittany relied on s 45 of the Consumer Credit Code then in force which relevantly provided:

35. [86]

    Mr Gittany relied on s 11(3) of the Code on the basis that the Bank knew or had reason to believe at the time the Business Purpose Declaration was signed that the credit was in fact to be applied wholly or predominantly for personal, domestic or household purposes. The Bank was not entitled to refuse to discharge the mortgage and it acted unreasonably in doing so.

36. [87]

    Mr Gittany submitted that a number of matters pointed to knowledge on the Bank’s part that the property was to be his home and not another property simply to be developed. First, the contractual documents in relation to the loan included a separate section headed “Specific Facility Terms – Housing Loan”. Clause 2 of that section of the documents was headed “Occupation of Security Property” and it said this:

37. [88]

    The clause went on to say that the failure by the customer to comply with the clause would be an event of default and that the Bank in its absolute discretion could convert the facility into an investment loan.

38. [89]

    Mr Gittany next pointed to the conversation he had with Mr Maroun before the loan where he sought to have the loan made to him and Ms Nicoloau. He also drew attention to what was contained in the Bank’s valuation of the property obtained to consider the loan he had sought.

39. [90]

    Mr Gittany submitted further in the alternative that it was unreasonable to refuse to release the Earlwood property because the Bank had sufficient security including in the Bass Hill property. Mr Gittany relied on valuation evidence and the Schedule to his written submissions calculating the equity as at 30 March 2010.

40. [91]

    The bank submitted that Mr Gittany had signed a Business Purpose Declaration and prior to doing so had signed a number of other such declarations in respect of other loans made by the Bank to him and the partnership with Mr Jeitani. The Bank submitted that there is no evidence of a contract, relying on s 304 of the Duties Act 1997 (NSW), for the sale of the property to Ms Nicoloau. The Bank submitted that no tender was ever made for the purchase price of Earlwood by Ms Nicolaou and no independent evidence was presented to the Bank in 2010 of her financial capacity to complete the sale transaction. The Bank disputed that Mr Hadchiti was acting for Ms Nicolaou at the time of the email sent to the Bank on 7 October 2010 asserting that she was ready, willing and able to complete the Earlwood purchase.

41. [92]

    The Bank submitted that the mortgage when properly construed was an all- monies mortgage. It submitted that the Credit Code does not apply to the mortgage but says that even if it does that is not the end of the matter. That is because the Bank held a guarantee from Mr Gittany and an interest in any surplus proceeds after repayment of the secured amount. It was entitled to take the view that he should not enter into an arrangement whereby he alienated property other than for its fair market value because that would work to the disadvantage of the Bank under its guarantee.

42. [93]

    The Bank submitted that its belief at the time was that the property was being sold for an undervalue. The question, the Bank submitted, is not whether it was being sold for an undervalue but whether the Bank believed that it was, because the issue is whether the Bank acted reasonably in refusing to discharge the mortgage.

43. [94]

    Mr Gittany’s claim in relation to the release of the Earlwood property is put on two bases. The first is that the loan in relation to Earlwood was regulated under the Credit Code. In those circumstances it is said that the Bank was not permitted to refuse to discharge the mortgage over Earlwood on the basis that that property was security for other loans. The second and alternative basis was that, in any event, the Bank had sufficient security in the Bass Hill property which made it unreasonable for the Bank to refuse to consent to release Earlwood.

44. [95]

    The Bank’s approach to the claim was to view the matter only as a question of the reasonableness of the Bank’s actions. The primary issue, however, was whether the Bank had the right to regard the Earlwood property as security for other loans. This was also the way the matter was pleaded in the Cross-Claim. This turned on the question of whether the loan was regulated under the Consumer Credit Code. The issue of the reasonableness of the Bank’s approach to the discharge only arises for consideration if the Earlwood loan was not regulated under the Code.

(a) Was the loan regulated by the Credit Code?

1. [96]

   The Credit Code relevantly provides:

2. [97]

   Whether the Code applied relates to the purpose of the loan. Section 11(3) is concerned with the knowledge or belief of the lender about the purpose of the loan. If the evidence discloses that the lender knew or had reason to believe that the credit was in fact to be applied for personal, domestic or household purposes the conclusive presumption in s 11(2) is overcome. It is then necessary to have regard to s 6 to see if the credit is that to which the Code applies.

3. [98]

   Mr Gittany signed a Declaration in relation to the Earlwood loan. Unless Mr Gittany can show that s 11(3) applies there will be a conclusive presumption that the Code does not apply under s 11(2). The issue is, therefore, whether the credit provider knew, or had reason to believe, at the time the Declaration was made, that in this case the loan was to be applied wholly or predominantly for personal, domestic or household purposes.

4. [99]

   The evidence points strongly to the purpose of the loan being wholly or predominantly for personal, domestic or household purposes, and points strongly to the relevant Bank officers as knowing or having reason to believe that that was so. The following evidence supports that:

5. [100]

   It is necessary to say something about Mr Gittany’s evidence concerning the execution of the Declaration. In his affidavit, having given the evidence that none of the bank’s officers explained the effect of the Declaration he said that he signed the documents for the loan in the belief that it was an ordinary home loan. And he did not believe that it would be security for the companies’ other liabilities. In cross-examination he said that he did not read the Declaration before signing it, that he was probably in a rush and that he didn’t know what he signed. In answer to questions from me he gave this evidence:

6. [101]

   He was also taken to the definition of what was owing under the Earlwood mortgage (Clause 37 of the Memorandum incorporated into the mortgage) and asked if he was told that the amount owing included all money which he owed at any time. He said that he was not and that Mr Dib said “it’s a freestanding loan”.

7. [102]

   Mr Gittany accepted that he had signed a number of other Declarations in respect of other loans.

8. [103]

   Mr Castle for the Bank accepted that Mr Gittany did not tell deliberate lies in his evidence. He submitted that he thought Mr Gittany was unreliable in a number of respects in that he remembered things in a way favourable to himself although he believed what he said was true. I consider that this submission should be accepted. An aspect of his evidence that pointed to his honesty was his preparedness to make concessions against his interest. Otherwise my assessment of him was that his interest was in building and developing. Banks, financial and legal matters were a necessary but rather irritating concomitant to enable him to get on with that building and developing. Like many businessman of that type he was likely to sign documents without giving them much or any attention, chiefly because he trusted the Bank to do the right thing by him.

9. [104]

   I accept his evidence that nothing was said about the Declaration at the time he signed it. I accept that he did not read it despite its close proximity to his signature. I accept that he believed, particularly in the light of his earlier discussions with the Bank, that he thought they understood Earlwood was to be his and Ms Nicoloau’s home that he would buy, knock down and build what it ultimately became. I can more confidently accept this evidence because there was no evidence from Mr Dib or any other bank officer involved in making the loan.

10. [105]

    In my opinion, Mr Gittany has satisfied the onus on him under s 11(3) and shows that the Bank at least had reason to believe at the time the Declaration was made that the credit was to be applied wholly for personal, domestic or household purposes. Accordingly, the conclusive presumption in s 11(2) does not operate. It is necessary to have regard to s 6 of the Code to see if the loan falls within that section. The authorities tend to support the view that s 6 of the Code is referring to the actual purpose of the loan and not the lender’s understanding of the purpose: Beckley v Consumer, Trader and Tenancy Tribunal [2009] NSWSC 703 at [57], [58] and [69].

11. [106]

    There is sufficient evidence that the property was used as Mr Gittany’s home, not the least reason being that he gave unchallenged evidence that he did not claim any tax deduction for mortgage payments on the property. In those circumstances the Code applies to the loan.

12. [107]

    The result is that the mortgage secured only the loan on Earlwood and not on the other properties as the Bank continuously asserted during 2010 and early 2011. There was, therefore, no proper basis upon which the Bank ought to have refused to discharge the Earlwood mortgage unless some other legitimate basis was available to it to do so.

13. [108]

    The Bank submitted, however, that in 2010 and 2011 during the period of the refusal the position was that the conclusive presumption operated because it is only overcome when a court declares that the Bank has the knowledge or belief referred to in s 11(3). That submission should be rejected. As with most matters where a court is called upon to determine rights of persons in contractual matters, the effect of the judgment is retrospective. Analogies abound but orders under the Contracts Review Act are a prime example. The present case might be thought to be stronger since what is being determined is the state of knowledge or belief of the credit provider at the time the Declaration was signed. Because the credit provider (here, the Bank) has been held to have had reason to believe that the credit was to be applied wholly or predominantly for personal, domestic or household purposes, the presumption in s 11(2) never operated on the arrangement. The submission only has some relevance if the Credit Code does not govern the loan and the issue is solely the reasonableness of the Bank’s actions.

(b) No contract and no tender

1. [109]

   Mr Gittany claimed to have entered into a contract to sell Earlwood to Ms Nicolaou on 18 February 2010. The purchase price was $620,000 with a deposit of $62,000. Mr Gittany sought to tender a copy of the front page of the contract for sale as part of the exhibit to his affidavit. Objection was taken to the tender in reliance on s 304 of the Duties Act.

2. [110]

   It appears that that contract must have been mutually rescinded because Mr Gittany gave evidence that he entered into another contract to sell Earlwood to Ms Nicolaou on 18 October 2010 for a purchase price of $595,000 with a deposit of $124,000. He sought to tender a copy of the front page of that contract. It was similarly objected to because it was not stamped.

3. [111]

   Section 304 of the Duties Act provides:

4. [112]

   The Bank did not object to the receipt of copies of the front pages of the contracts on the basis that they should not be regarded as contracts but merely as documents which give rise to an inference of an intention to enter a contract.

5. [113]

   The evidence discloses that stamp duty was not paid on a contract for the sale of Earlwood until 15 July 2011. That came about because the date on the contract was altered from 18 October 2010 to 18 June 2011. The Bank was prepared to admit that stamp duty had been paid on that contract. That contract does not seem to be the relevant one for the purposes of this case because Mr Gittany puts forward, and the Bank disputes, the fact that he had entered into a contract to sell the Earlwood property on two dates in 2010 and it was in the ensuing months that the Bank refused to discharge the mortgage to allow him to complete those contracts.

6. [114]

   The Bank’s submission that the documents cannot be received into evidence as contracts is correct. Nothing in s 304 enables that result to be avoided in circumstances where no offer was made by Mr Gittany to comply with sub-s (2). The result must be that the evidence discloses only that there was an intention on the part of Mr Gittany and Ms Nicolaou to enter into a contract in all likelihood on the terms that appear in those documents.

7. [115]

   A matter associated with the unstamped contracts raised by the Bank was whether Ms Nicolaou was ready, willing and able to purchase the property. The submission that she was not ready seemed to flow on the one hand from the failure to demonstrate that there was more than an unstamped front page of a contract for sale form and also from the fact that neither Mr Gittany nor Ms Nicolaou tendered to the Bank the amount due to discharge the Earlwood mortgage.

8. [116]

   In the first place, it is not clear to me why it was ever necessary for the Bank to know or to receive proof of the reason Mr Gittany wanted to discharge the Earlwood loan. The only requirement, on the assumption that the loan was regulated by the Consumer Credit Code, was that Mr Gittany be in a position to pay out what was due to the Bank in return for a discharge of the mortgage. In that way, the fact that there is no proof of a stamped contract is irrelevant to a determination of the issue.

9. [117]

   What is clear is that from the time Mr Gittany sought to discharge the mortgage the Bank thwarted him, wrongly relying on the fact that the property was security for other loans and in particular the loan in relation to the Bass Hill properties. Further, the history shows that the Bank kept imposing more and more requirements on Mr Gittany notwithstanding that he had fulfilled the earlier requirements. Finally the Bank agreed to discharge the mortgage in June 2011 when the deposited plan on the Bass Hill properties was registered. Those matters are significant in relation to the assertion that the Bank was never obliged to discharge the mortgage because the payout figure was never tendered. It is clear from the history that until June 2011 the Bank made it perfectly clear that it was not prepared to discharge the Earlwood mortgage because it regarded its continued existence as necessary for security for loans in relation to other properties.

10. [118]

    In Fisher & Lightwood’s Law of Mortgage (3rd Australian Edition, Lexis Nexus Butterworths, 2014) the following appears:

11. [119]

    In Challenge Bank Ltd v Hodgekiss (1995) 7 BPR 14, 399; [1996] ANZConvR 364 Young J said:

12. [120]

    I am satisfied, to a high degree of certainty, that if tender had been made by Mr Gittany at any time until June 2011 the tender would have been refused because of the Bank’s erroneous belief that the Earlwood property was security for the Bass Hill and other loans.

13. [121]

    The Bank’s further claims that the contracts between Mr Gittany and Ms Nicolaou were not at arms’ length and that the prices had been achieved relative to what Mr Gittany owed Ms Nicolaou and what was owed to the Bank are irrelevant considerations.

14. [122]

    The Bank’s submission that it was entitled to reject the application to discharge the mortgage because the purchase price was less than the market value in circumstances where Mr Gittany was a guarantor for other loans should also be rejected. If that proposition were correct it would effectively give control to the Bank over a guarantor’s dealings with his or her assets generally, notwithstanding those assets were unsecured. A refusal to discharge a mortgage regulated under the Consumer Credit Code on that basis might also be thought to be perilously close to an effective breach of s 45 of that Code.

15. [123]

    The Bank was not entitled to refuse to discharge the Earlwood mortgage because that mortgage secured only the loan on Earlwood. It was a breach of the mortgage and of the Bank’s duty as mortgagee not to have discharged the Earlwood mortgage. Mr Reitano’s evidence was that the Bank received the discharge authorities in May 2010. Although, by reason of s 304 of the Duties Act, I have no evidence of a binding contract by Mr Gittany to sell Earlwood, the evidence satisfies me that Mr Gittany and Ms Nicoloau intended to enter a contract to sell to her. It was that which was to enable Mr Gittany to discharge the mortgage. In those circumstances it would be reasonable to hold, and I do so hold, that the Earlwood mortgage should have been discharged by 31 July 2010. The extent of Mr Gittany’s damage is, therefore, interest and fees charged from that date until the date of the Bank’s agreement to discharge in June 2011 together with a reasonable period thereafter to effect settlement.

(c) Did the Bank act unreasonably?

1. [124]

   If I am wrong in holding that the loan was subject to the Credit Code it is necessary to see whether the Bank acted unreasonably even although Earlwood could be regarded as security for the other loans.

2. [125]

   The position with regard to the Bass Hill property was as follows:

   1. (1)

      The amount of the Bass Hill debt shown on the bank statement as at 30 March 2010 was $500,827.06;

   2. (2)

      To that figure there needed to be added the surplus outstanding on Merrylands of $71,177.31 and the amount paid for GST of $116,644 making a total of $688,648.37 secured on Bass Hill;

   3. (3)

      Although Mr Gittany sought to discharge Earlwood at least by March 2010 the Bank took no steps to obtain a valuation of Bass Hill until 7 October 2010 when it required Mr Gittany to obtain one. That was despite Mr Gittany maintaining throughout the negotiations for the discharge of Earlwood that there was sufficient equity in Bass Hill to cover the other debts to the Bank. Despite the email from Mr Reitano to Mr Gittany on 12 October 2010 ([74] above) it does not appear that the Bank ever obtained a valuation of Bass Hill.

   4. (4)

      A retrospective valuation as at 30 March 2010 valued the Bass Hill property between $735,000 and $775,000. There was, on the basis of that valuation, sufficient equity left in Bass Hill to meet the Bank’s concerns during 2010.

3. [126]

   The following matters appear to me to amount to the Bank having acted unreasonably in relation to the discharge:

   1. (1)

      The matter referred to at [125(3)] above. On the basis of the retrospective valuation, there was sufficient equity in Bass Hill to cover any shortfall from Merrylands. There was no evidence challenging that valuation and it should be taken to demonstrate the value of Bass Hill at that time. I accept that the Bank did not have that valuation at the time nor any valuation at all but it did not obtain one. There was an evidentiary onus on the Bank, if it wished to demonstrate that the equity in Bass Hill was insufficient at the time, to point to some material that contradicted the retrospective valuation.

   2. (2)

      The continual addition of requirements before it would discharge and the Bank’s changes of mind as set out at [64] to [82] above;

   3. (3)

      The Bank prepared a diary note of the meeting with Mr Gittany and others ([57] to [59] above) which recorded Mr Risk as saying that the Bank had information that Earlwood was worth between $800,000 and $900,000. Mr Reitano’s evidence was that the Bank did not have a valuation in that range. Rather it had a price estimate of $714,000 about which Mr Gittany was not told, and the Bank assumed the true value of the property was $800,000 to $900,000 given that the document containing the price estimate contained an old photo. What was said by Mr Rizk in the conference was at best misleading and unreasonable.

   4. (4)

      The Bank did not need to await settlement of the sale of the Merrylands units because they knew from the contract prices what would be obtained on settlement. It may be accepted that the Bank needed to await the registration of the plan of subdivision because from that date the Merrylands contracts became unconditional. That occurred on 8 September 2010. Further, even if it was reasonable to wait until the contracts had settled so that the Bank had the money in its hand, the last sale settled on 18 October 2010. The shortfall was relatively small ($71,177.31).

   5. (5)

      In the conference between Mr Gittany, Mr Jeitani, Mr Charlie Gittany and the bank officers including Mr Reitano on 28 July 2010, Mr Gittany had asserted that the Earlwood property was “a stand-alone”. Mr Rizk then drew Mr Gittany’s attention to the all-monies clauses in the loan documents and guarantees. There was evidence that Mr Reitano was advised by McGillivrays August 2010 that there may be a problem with the all-monies clause in the Earlwood mortgage. Although that concern stayed in Mr Reitano’s mind throughout 2010 it does not appear that he attempted to clarify the matter. He said that he reported the advice to Mr Rizk but they considered it and rejected it. I found that evidence somewhat unsatisfactory because on a number of occasions elsewhere in his evidence Mr Reitano was quick to say that any legal matter was not for him but for the Bank’s lawyers. No reasons were given for rejecting the solicitors’ advice about the all-monies clause.

   6. (6)

      Although it can be seen that the deposited plan was registered on Bass Hill in June 2011, which may explain the Bank’s consent to the discharge of Earlwood at that time, that was not the explanation offered by Mr Reitano. His evidence was simply that the Bank agreed to the sale of Earlwood in July 2011 without pressing any of its former objections. The Bank submits that an inference should be drawn that the former objections were not pressed because of that registration. When Mr Reitano gave the evidence he did, but nothing more, I do not think I should draw that inference. The result is that there is no explanation for the Bank’s change of heart in July 2011.

4. [127]

   In my opinion, if Earlwood secured other debts owed to the Bank because the loan agreement was not regulated, the position was that there was adequate equity in Bass Hill that made it unreasonable for the Bank to have refused to discharge the Earlwood mortgage from the date of settlement of the final Merrylands townhouse. By that date the Bank knew exactly any shortfall position that had to be recouped from Bass Hill.

(c) Legal fees

1. [128]

   The third matter raised in the Cross-Claim concerned what were said to be excessive legal fees charged by the Bank when exercising its rights under the three mortgages. This was a matter that I was informed during submissions has been resolved between the parties.

Conclusion

1. [129]

   The precise amount of any damages should be agreed between the parties in the light of my holding at [123] above. The parties should bring in Short Minutes to reflect these reasons generally, and including the agreement in relation to legal costs.

2. [130]

   I will hear the parties on costs. My prima facie view is that each party has succeeded on one ground and failed on another with the result that there should be no order as to costs to the intent that each party should bear his and its own costs of the proceedings.