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Saafin Constructions Pty Ltd (in liq) & Ors v MAG Financial and Investment Ventures Pty Ltd & Ors [2021] VSC 489 (13 August 2021)

Last Updated: 16 August 2021

AT MELBOURNE

COMMERCIAL COURT

TECHNOLOGY, ENGINEERING & CONSTRUCTION LIST

S CI 2018 01685

COMMON LAW

PROPERTY LIST

S ECI 2018 02987

COMMERCIAL COURT

COMMERCIAL LIST

S ECI 2019 03648

S ECI 2021 00968

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CREDIT LAW – Whether loan agreement unenforceable under s 39 of the Consumer Credit (Victoria) Act 1995 (Vic) – Whether loan agreement a ‘credit contract’ as defined in the National Credit Code – Whether credit provided to improve residential property – Principles for determining the purpose for which credit was provided – Whether credit provided in the course of or incidentally to business – Whether relevant purpose of the provision of credit was to on-lend to a company.

CREDIT LAW – Whether security void under s 40 of the Consumer Credit (Victoria) Act 1995 (Vic) – Whether security provided was a mortgage that related to the relevant credit contract – Whether later agreement superseded the relevant credit contract – Whether the meaning of mortgage in s 40 of the Consumer Credit (Victoria) Act 1995 (Vic) should be limited by the definition of mortgage in the National Credit Code.

LOAN AGREEMENTS – Whether company a party to loan agreement – Whether validity of purportedly executed loan agreement proved – Whether amount due under loan agreement had been repaid – Application of Clayton’s Case [1816] EngR 677; (1816) 1 Mer 529 considered.

UNCONSCIONABLE CONDUCT – Whether mortgagee’s conduct in effecting the mortgagee’s sale was unconscionable within the meaning of s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) – Principles of statutory unconscionability considered – Assessment of damage under s 12GF of the Australian Securities and Investments Commission Act 2001 (Cth).

MORTGAGES – Whether sale by mortgagee was in breach of its duty of good faith under s 77 of the Transfer of Land Act 1958 (Vic) and at common law – Whether mortgagor entitled to have sale set aside.

MORTGAGES – Whether mortgagor effectively tendered the amount due under the mortgage – Whether mortgagee’s conduct showed tender would not be accepted – Whether proffering of cash dispensed with – Whether mortgagor ready, willing and able to tender – Presumption against wrongdoers in assessing past hypotheticals – Whether equity of redemption extinguished by mortgagee entering into contract of sale – Principles of tender considered – Consequences of refusal of tender on mortgagee’s entitlement to continuing interest considered.

MORTGAGES – Whether proceeds of mortgagee’s sale had been allocated in accordance with s 77 of the Transfer of Land Act 1958 (Vic).

SECURITIES – Secured credit facility included an ‘all moneys’ clause – Whether unsecured debts assigned to creditor became secured under the secured credit facility – Principles in the interpretation of ‘all moneys’ clauses considered.

GUARANTEES – Whether guarantor discharged by creditor’s refusal to accept tenders.

RECEIVERS – Whether appointment was invalid – Whether it was necessary for opinion as to material adverse change to be formed prior to appointment – Whether trespass by receivers caused damage to the company – Whether the Court should grant relief to receivers under s 419 of the Corporations Act 2001 (Cth).

RECEIVERS – Duties of privately appointed receivers to subject company considered – Whether receivers breached fiduciary duties – Whether receivers liable to account for their fees received.

EQUITABLE INTERESTS – Priority between competing equitable interests – Whether earlier loan agreement had been superseded by subsequent security agreement – Principles of replacement contracts considered.

PRACTICE AND PROCEDURE – Whether default judgment should be set aside.

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TABLE OF CASES

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Kennedy v de Trafford [1897] UKLawRpAC 13; [1896] 1 Ch 762

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Kinnaird v Trollope [1889] UKLawRpCh 88; (1889) 42 Ch D 610

Kitson v Goodge (1997) 7 BPR 15,173

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PGA Group Pty Ltd v Idameneo (No 789) Ltd (formerly Symbion Health Ltd); Gunn v Idameneo (No 789) Ltd  [2011] VSC 382

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CONTENTS

GLOSSARY

The following abbreviations are used in these reasons:

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HIS HONOUR:

INTRODUCTION

1 These four proceedings arise out of the partly completed development of a four storey building containing 25 dwellings and two commercial tenancies (‘the Development’) at 65-67 Arden Street, North Melbourne, being the land described in Certificate of Title Volume 8614 Folio 340 (‘the Arden Street Property’) by Saafin Constructions Pty Ltd (‘the Company’), and the financial arrangements relating to the Development.

2 Proceeding S CI 2018 01685 (‘the Derivative Proceeding’) is a claim brought on behalf of the third plaintiff (the Company) by the Company’s directors, being the first plaintiff (‘Hassan’)^[1] and the second plaintiff (‘Mohamed’), pursuant to leave granted by Lyons J on 28 July 2020.^[2] The fourth plaintiff (‘Wael’), a shareholder of the Company, was joined to the proceeding pursuant to the same order. Mohamed, Hassan and Wael (collectively, ‘the El Saafin Brothers’),^[3] together with the Company (hereafter referred to collectively as ‘the Plaintiffs’) seek relief principally relating to:

(a) the appointment of the second and third defendants (‘the Receivers’) as receivers of the Company;

(b) the sale of the Arden Street Property to the seventh defendant (‘AAGG’) by the fourth defendant (‘MAG Financial’) as assignee of a mortgage executed by the Company in favour of Balanced Securities Ltd (‘Balanced Securities’) on 28 October 2016 (‘the Balanced Mortgage’);

(c) debts and security interests claimed against the Company by:

(i) the first defendant (‘Mr Franek’);

(ii) MAG Financial;

(iii) the eighth defendant (‘Mr Mekkya’);

(iv) the ninth defendant (‘Mr Sacca’); and

(v) the tenth defendant (‘the Builder’),

(together with AAGG, hereafter referred to collectively as ‘the MAG Parties’).

3 By counterclaim, the Receivers seek relief principally by way of declarations relating to their rights to indemnity, remuneration and expenses claimed against the Company and Wael.

4 By counterclaim, MAG Financial, AAGG and the Builder seek relief principally by way of enforcement of debts and security interests claimed against:

(a) the El Saafin Brothers (the first to third defendants by counterclaim);

(b) the fourth defendant by counterclaim (‘Lobna’) and the fifth defendant by counterclaim (‘Bayda’), being two further members of the El Saafin family; and

(c) the Company (the sixth defendant by counterclaim).

5 Proceeding S ECI 2019 03648 (‘the MAG Proceeding’) is a claim brought by MAG Financial for relief against Wael and Bayda by way of enforcement of an equitable charge over 1 Nairne Terrace, Greensborough, being the land described in Certificate of Title Volume 09671 Folio 924 (‘the Nairne Terrace Property’).

6 Proceeding S ECI 2018 02987 (‘the Trustworthy Proceeding’) is a claim brought by the plaintiff (‘Trustworthy Nominees’) for relief against Wael and Bayda by way of enforcement of a security interest over the Nairne Terrace Property, and a declaration of priority over the equitable interest claimed by MAG Financial.

7 By counterclaim, Wael and Bayda seek relief principally by way of declarations that MAG Financial’s loan agreements are unenforceable and security interests are void insofar as they relate to the Nairne Terrace Property.

8 Proeeding S ECI 2021 00968 (‘the Mekkya Proceeding’) was a claim originally brought by Mr Mekkya in the County Court for relief against the Company by way of enforcement of an agreement between the parties. Judgment was entered in default of appearance in favour of Mr Mekkya on 18 May 2018. Relevantly, the Company seeks to have that default judgment set aside.

SUMMARY

9 Generally, the above proceedings arise out of disputes between the Company, being the developer of the Arden Street Property, and its financiers. In summary, (adopting the abbreviations in the Glossary), I have decided as follows:

(a) The Second Franek Loan Agreement is unenforceable under s 39 of the Consumer Credit Act.

(b) The Franek GSA Mortgages and the Franek Settlement Deed Mortgage are void under s 40 of the Consumer Credit Act insofar as each relates to the Second Franek Loan Agreement.

(c) As a result of the findings in sub-paras (a) and (b) above, the appointment of the Receivers under the Franek GSA was invalid.

(d) The Company was not a party to the Sacca Loan Agreement.

(e) The Company did not enter into the Mekkya Loan Agreement; and even if it did, the Mekkya Debt was repaid in any event.

(f) The MAG Parties entered into an arrangement pursuant to which:

(i) entities related to Mr Sacca and Mr Mekkya paid for the assignment of the Balanced Facility Agreement, the Franek GSA and the Franek Settlement Deed to MAG Financial; and in consideration

(ii) MAG Financial transferred the Arden Street Property, under the assigned Balanced Mortgage, to AAGG, an entity related to Mr Sacca and Mr Mekkya, for illusory consideration.

(g) Principally, as a result of circumstances surrounding the arrangement, the sale of the Arden Street Property should be set aside because it was:

(i) in breach of MAG Financial’s duty as mortgagee under s 77 of the Transfer of Land Act 1958 (Vic); and

(ii) unconscionable under s 12CB of the ASIC Act.

(h) Prior to the transfer of the Arden Street Property, MAG Financial refused to accept proposed tenders of the amounts due under the Balanced Facility Agreement and the Second Franek Loan Agreement from the Company.

(i) As a result of the refusal of the proposed tenders:

(i) the Company’s obligation to pay interest under the Balanced Facility Agreement is limited;

(ii) the El Saafin Brothers are discharged from liability as guarantors under the Balanced Facility Agreement; and

(iii) the Company is discharged from liability as guarantor under the Franek Settlement Deed.

(j) The equitable interest of Trustworthy Nominees in the Nairne Street Property has priority over the equitable interest of MAG Financial as assignee of the Second Franek Loan Agreement.

CHRONOLOGY

10 Facts material to particular issues are set out below, prior to consideration of those issues. The facts generally material to the surrounding circumstances are as follows.

11 On 13 July 2001, the Company was registered as a corporation with the Australian Securities and Investments Commission (‘ASIC’). As at registration, the directors relevantly included Mohamed and Hassan, both of whom were also shareholders (each holding 17 shares), with Wael, the other shareholder, holding 16 shares.

12 On 21 August 2008, Wael and his wife Bayda, were registered as proprietors of the Nairne Terrace Property.

13 By Loan Agreement dated 13 December 2011 between Trustworthy Nominees as lender, the Company and Mr Fadl El Saafin as borrowers, and the El Saafin Brothers as guarantors, Trustworthy Nominees agreed to loan the Company and Mr Fadl El Saafin the sum of $250,000, secured (among other things) by a second mortgage over the Arden Street Property.

14 On 20 December 2011, the Company was registered as proprietor of the Arden Street Property.

15 On 17 December 2013, the City of Melbourne issued Planning Permit No TP-2012-176 to New Concept Design, a trading name of Mr Mekkya, for the construction of the Development.

16 By an alleged email of 19 March 2014 to New Concept Design (copied to Wael), Mr El-Hissi of NOH Legal attached an allegedly signed Investment Loan Agreement dated 1 March 2012 between the Company as developer, and Mr Mekkya as investor (‘the Mekkya Loan Agreement’). The Mekkya Loan Agreement recorded that Mr Mekkya had agreed to loan the Company the sum of $750,000.^[4]

17 By Investment Loan Agreement dated 8 August 2014 between the Company as developer, and Dr Hegazy as investor, Dr Hegazy agreed to loan the Company the sum of $406,000 for a period of 18 months, at which time the Company would transfer to Dr Hegazy apartment 201 of the Development as consideration.

18 By an undated Investment Loan Agreement executed in or about August 2014 between the Company as developer, and Dr Atalla as investor, Dr Atalla agreed to loan the Company the sum of $350,000 for a period of 18 months, at which time the Company would transfer to Dr Atalla apartment 202 of the Development as consideration.

19 By Loan Agreement dated 15 April 2015 between Wael and Bayda as borrowers, and Mr Franek as lender (‘the First Franek Loan Agreement’), Mr Franek agreed to loan Wael and Bayda the sum of $100,000, secured by a charge over the Nairne Terrace Property.

20 By Loan Agreement dated 17 September 2015 between Trustworthy Nominees as lender, the Company as first borrower, and Wael, Bayda and Hassan as second, third and fourth borrowers (‘the Trustworthy Loan Agreement’), the borrowers agreed to provide additional security for the previous loan (referred to in paragraph 13 above), which included a charge over the Nairne Terrace Property.

21 By building contract dated 19 October 2015 between the Company as proprietor, and the Builder as contractor (‘the Building Contract’), the Builder agreed to construct 25 dwellings and two commercial units at the Arden Street Property between 1 December 2015 and 1 June 2017 for a price of $4.4 million. Mr Mekkya was the sole director and shareholder of the Builder.

22 On 28 October 2015, Trustworthy Nominees lodged a caveat over the Nairne Terrace Property on the basis of the Trustworthy Loan Agreement.

23 By Loan Agreement dated 15 January 2016 between Wael and Bayda as borrowers, and Mr Franek as lender (‘the Second Franek Loan Agreement’), Mr Franek agreed to loan Wael and Bayda the sum of $311,000, secured by a charge over the Nairne Terrace Property.

24 On 20 April 2016, Mr Franek lodged a caveat over the Nairne Terrace Property on the basis of the Second Franek Loan Agreement.

25 By written acknowledgment signed 30 May 2016, the El Saafin Brothers declared that they had received an amount of $1.9 million as a loan from Mr Sacca and that ‘we are liable to return it back to him within one year from the date of this statement with any cost related to it’ (‘the Sacca Loan Agreement’).

26 By Facility Agreement dated 28 October 2016 between Balanced Securities as lender, the Company as borrower, and the El Saafin Brothers and Lobna as guarantors (‘the Balanced Facility Agreement’), Balanced Securities agreed to provide finance to the Company to assist with the refinance of, and the construction at the Arden Street Property, on the following terms:

(a) The facility limit was $6.2 million.

(b) The interest rate was 11.95% per annum.

(c) The facility expired on or about 28 April 2018, being 18 months after the earlier of:

(i) seven days after the despatch of mortgage documents to the borrower; or

(ii) the date of the initial drawdown.

(d) The securities relevantly included:

(i) a first registered mortgage over the Arden Street Property;

(ii) a second registered mortgage over 3 Ball Court, Bundoora, being the land described in Certificate of Title Volume 10885 Folio 322 (‘the Bundoora Property’); and

(iii) a general security deed granted by the Company and the El Saafin Brothers.

27 By the Balanced Mortgage executed on the same day as the Balanced Facility Agreement, the Company mortgaged the Arden Street Property to Balanced Securities to secure the Balanced Facility Agreement.

28 On 18 May 2017, Mr Franek, Wael, Bayda and the Company entered into two related agreements, being:

(a) a General Security Agreement dated 18 May 2017 (‘the Franek GSA’); and

(b) a Deed of Release and Settlement dated 18 May 2017 (‘the Franek Settlement Deed’).

29 By the Franek GSA, Wael, Bayda and the Company agreed to grant certain securities to Mr Franek, as set out at paragraph 92 below, to secure obligations under the Franek Settlement Deed.

30 By the Franek Settlement Deed, Wael, Bayda and the Company agreed to terms including the following:

(a) The Company would execute a standard form LIV Contract of Sale of Real Estate and transfer to Mr Franek ‘Commercial/Office Space marked 002’ (‘Commercial Unit 002’) of the Development.

(b) Subject to Wael, Bayda and the Company complying with that obligation, Mr Franek would pay the sum of $50,000 on execution of the Franek Settlement Deed, and a further sum of $50,000 on completion of the transfer and registration on the title.

(c) Upon full compliance with the Franek Settlement Deed, Mr Franek, Wael, Bayda and the Company would mutually release and discharge to each other matters relating to the Second Franek Loan Agreement. The Franek Settlement Deed is described in greater detail at paragraphs 93 to 95 below.

31 On 14 June 2017, AMGS Properties Pty Ltd (‘AMGS’) was registered as a corporation with ASIC, with Mr Sacca and Mr Mekkya as the sole directors and shareholders, each holding 50 shares.

32 On 15 June 2017, Trade On International Pty Ltd (‘Trade On’) was registered as a corporation with ASIC, with Mr Sacca and Mr Mekkya as the sole directors and shareholders, each holding 50 shares.

33 By letter dated 29 December 2017 to Wael and Bayda, Mr El-Hissi stated that, in breach of the Franek Settlement Deed, Wael had failed to procure the Company to execute a contract of sale for Commercial Unit 002. On behalf of Mr Franek, Mr El-Hissi claimed $883,000 (being $311,000, plus interest of $26,000 per month for 22 months) as compensation for the breach, plus a refund of the $50,000 paid under the Franek Settlement Deed.

34 On 26 February 2018, Mr Mekkya lodged a caveat over the Arden Street Property claiming an interest under the Mekkya Loan Agreement.

35 In or about March 2018, there was a meeting at the Greenvale Shopping Centre that was attended by Mr Mekkya, Mr Sacca, Dr Hegazy and Dr Atalla in which there was a discussion about how the participants would be able to recover the amounts that they had invested in the Development.

36 By emailed letter dated 22 March 2018 to the Builder, the Company provided notice of various contractor’s defaults and of its intention to terminate the Building Contract in the event that the defaults were not remedied within 14 days. The default notice was issued substantially on the basis of the Builder’s alleged failure to complete the Development.

37 On 28 March 2018, a quantity surveyor certified that, as at 28 February 2018, the gross value of works performed was $1,057,084 and the gross cost to complete was $3,462,493. Accordingly, the Development was approximately 25% complete.

38 Between 29 January and 31 March 2018, there were a number of communications between Mr El-Hissi and the Receivers regarding their potential appointment as receivers and managers of the Company. The communications resulted in a meeting on 4 April 2018 between Mr El-Hissi, Mr Franek, the Receivers and their solicitor (Mr Koroneos of Capstone Koroneos Legal) regarding the potential appointment.

39 By email of 5 April 2018, Mr Nair of Hicks Oakley Chessell Williams (the Company’s solicitor) served a termination notice on the Builder.

40 On 5 April 2018, Mr Franek signed a deed of appointment of the Receivers as joint and several receivers of the Company.

41 By email of 6 April 2018 at 4:36 pm to Mr El-Hissi, Mr Koroneos stated that his clients, the Receivers, would execute the appointment documents subject to the sum of $50,000 being paid into his trust account. At 5:53 pm, Mr Mekkya and Mr Sacca’s company, Trade On, paid $50,000 into the trust account of Capstone Koroneos Legal.

42 On 6 April 2018, Sloss J adjourned an application by the Builder for an urgent interlocutory injunction against the Company, and relevantly noted the following agreement:

2. The Plaintiff agrees to allow the Defendant and its servants and agents to inspect the site at 65-67 Arden Street, North Melbourne (Site) on Wednesday, 11 April 2018 and Thursday, 12 April 2018, or at such other time reasonably notified to the Plaintiff’s solicitors in advance.
3. Until 23 April 2018 or further order:
(a) neither party will carry out any work at the Site, other than any emergency repairs;
(b) the Defendant agrees not to interfere with the Plaintiff’s works, plant, materials or equipment at the Site; and
(c) the Plaintiff shall maintain a supervisor at the Site between 7:30am and 4pm each day.

(hereafter referred to as the ‘Standstill Agreement’).

43 By email of 10 April 2018 to Mr Nair, Mr Koroneos attached various documents including an ASIC Form 504, which recorded that the Receivers were appointed on 9 April 2018 pursuant to the terms of the Franek GSA.

44 By emailed letter dated 17 April 2018 to Mr Nair, Mr El-Hissi set out the non-exhaustive list of the breaches relied upon by Mr Franek in appointing the Receivers, being:

(a) failure to provide an off-the-plan contract in accordance with the Franek GSA despite repeated requests from Mr Franek’s solicitors;

(b) material adverse change, being the Supreme Court proceeding between the Builder and the Company;

(c) material adverse change in the Company’s financial position, including the granting of security interests to Mr Mekkya and Mr Sacca; and

(d) failure to disclose the existence of the Balanced Securities loan.

45 By Deed of Assignment of Debt and Securities dated 18 April 2018 between Balanced Securities as assignor, and Mr Franek and/or nominee as assignee (‘Balanced Assignment Deed’), Balanced Securities assigned its interests under the Balanced Facility Agreement and the Balanced Mortgage to Mr Franek for the sums of $300,000 payable on 18 April 2018 and $2,493,079.80 payable on 18 May 2018. The Balanced Assignment Deed recorded the amount owing by the Company to Balanced Securities under the Balanced Facility Agreement as at 18 May 2018 to be $2,998,649.30.

46 On 26 April 2018, MAG Financial was registered as a corporation with ASIC, with Mr Franek as the sole director and shareholder, holding 12 shares.

47 By facsimile transmission dated 26 April 2018 to the Company, Balanced Securities provided notice of its intention to assign its debt and securities under the Balanced Facility Agreement and the Balanced Mortgage to MAG Financial, with the proposed assignment expected to take place on 4 May 2018.

48 By writ filed 27 April 2018 in County Court proceeding CI-18-01786 (‘the Sacca Proceeding’), Mr Sacca claimed repayment of $1.9 million pursuant to the Sacca Loan Agreement.

49 By writ filed 27 April 2018 in County Court proceeding CI-18-01795 (‘the Mekkya Proceeding’), Mr Mekkya claimed repayment of $975,000 pursuant to the Mekkya Loan Agreement.

50 On 3 May 2018, Balanced Securities was paid $2,474,991.71 by a Commonwealth Bank of Australia bank cheque. This amount was funded by a transfer from the Commonwealth Bank of Australia bank account of AMGS.

51 By Deed of Assignment of Contracts and Securities dated 3 May 2018, Mr Franek assigned his rights under the Second Franek Loan Agreement, the Franek GSA and the Franek Settlement Deed to MAG Financial.

52 By Notice of Assignment of Mortgages and Security dated 4 May 2018 to the Company as borrower, and the El Saafin Brothers and Lobna as guarantors, MAG Financial provided notice of the assignment from Balanced Securities to MAG Financial pursuant to the Balanced Assignment Deed.

53 On 4 May 2018, Mr Franek instructed the Receivers to resign their appointment pursuant to the Franek GSA and, on behalf of MAG Financial, requested that they be appointed pursuant to the Balanced Facility Agreement.

54 On 7 May 2018, the Receivers resigned their appointment under the Franek GSA. On the same day, MAG Financial appointed the Receivers as joint and several receivers of the Company pursuant to the terms of the Balanced Facility Agreement.

55 By originating motion filed 8 May 2018 in what became the Derivative Proceeding, Hassan and Mohamed applied for an injunction restraining Mr Franek from appointing receivers and managers in respect of the Company and restraining the Receivers from acting as receivers of the Company.

56 By email of 8 May 2018 to Mr Nair, Mr Koroneos acknowledged receipt of the originating motion and stated that the Receivers had been appointed receivers and managers of the Company by:

(a) Mr Franek during the period of 9 April to 7 May 2018; and

(b) MAG Financial from 7 May 2018, as assignee of the Balanced Facility Agreement.

57 By five emails from 9 May to 25 June 2018 to Mr Koroneos and Mr El-Hissi, Mr Nair repeatedly requested the payout figure necessary to discharge the amount owing under, relevantly, the Balanced Facility Agreement and to terminate the appointment of the Receivers. These emails are set out at paragraphs 303 to 313 below.

58 On 15 May 2018, Mr Mekkya entered judgment in default of appearance (‘the Default Judgment’) in the Mekkya Proceeding against the Company in the sum of $982,848.22, being $975,000 plus interest of $4,808.22 and costs of $3,040 pursuant to the Mekkya Loan Agreement.

59 On or about 27 May 2018, there was a meeting between Dr Atalla, Mr Sacca, Mr Mekkya and Dr Hegazy at Tullamarine with respect to the repayment of their amounts invested in the Development.

60 By email of 29 May 2018 to Dr Atalla, Mr Mekkya attached a copy of the Default Judgment and stated that he was appointing a liquidator soon.

61 By Valuation Report dated 6 June 2018, Rann Property AdVal, on the instructions of MAG Financial, valued the Arden Street Property at $4.4 million.

62 On 8 June 2018, Hassan made a report to Victoria Police alleging that the Default Judgment was based on a ‘forged contract’, being the Mekkya Loan Agreement.

63 On 14 June 2018, the sum of $1,310,628.08 was paid out of the Commonwealth Bank of Australia bank account of Trade On with the transaction description ‘Wdl Branch Fountain Gate’. On the same day bank cheques in the sums of:

(a) $1,150,600 payable to Mr Franek; and

(b) $159,998 payable to Mr El-Hissi’s firm, NOH Legal, for Mr Franek’s legal fees,

were issued out of the Fountain Gate branch of the Commonwealth Bank of Australia.

64 By letter of approval dated 19 June 2018 to the Company, Mr Keith Blackney stated that Black Arrow Mortgages was prepared to provide a loan advance of $4 million to the Company subject to the conditions set out therein.

65 By four deeds of assignment, each dated 20 June 2018, it was agreed that the following debts would be assigned to MAG Financial on payment of the assignment price which, in each case, was the full amount of the debt, being:

(a) debt owed by the Company to Mr Mekkya in the sum of $982,848.22 (‘the Mekkya Debt’) pursuant to the Default Judgment;

(b) debt owed to Mr Sacca in the sum of $1.9 million (‘the Sacca Debt’) pursuant to the Sacca Loan Agreement;

(c) debt owed by the Company to Mr Mekkya trading as New Concept Design in the sum of $174,907.59 (‘the New Concept Design Debt’) purportedly pursuant to attached invoices (but no invoices were attached to the tendered copy); and

(d) debt owed by the Company to the Builder in the sum of $521,349.22 (‘the Builder Debt’) pursuant to invoices issued under the Building Contract.

66 By four notices of assignment, each dated 25 June 2018, the Company was notified of each of the assignments to MAG Financial referred to in the preceding paragraph.

67 By correspondence of 25 and 26 June 2018 between Mr Nair and Mr Halse, Mr Halse provided the payout figure, being the sum of $8,250,990.83, together with a breakdown of such figure. Mr Nair contested the calculation of the payout figure, substantially on the basis that it incorrectly included amounts not owing. This correspondence is set out at paragraphs 314 to 316 below.

68 By five letters to the Company, the El Saafin Brothers and Lobna, each dated 26 June 2018, MAG Financial served default notices and demands pursuant to s 76 of the Transfer of Land Act 1958 (Vic) (‘Transfer of Land Act’). MAG Financial demanded payment of $8,250,990.83, being the amount due as at 25 June 2018 under the Balanced Facility Agreement and the Balanced Mortgage (with MAG Financial being the assignee of the rights of Balanced Securities).

69 By emailed letter dated 27 June 2018 to Mr Halse and Mr Koroneos, Mr Nair stated that he was instructed to tender the amount of $3,265,742.82 in satisfaction of the Company’s liabilities under the Balanced Facility Agreement in respect of which the Receivers had been appointed (‘the June Tender’). By email of the same day to Mr Nair (copied to Mr Koroneos), Mr Halse replied and stated that the amount of the security was $8,250,990.83 and accordingly, the proposed June Tender would not discharge such security. This correspondence is set out at paragraphs 317 and 318 below.

70 On 27 June 2018, on the application of the plaintiffs in the Derivative Proceeding, Lyons J made interim orders restraining the Receivers and Mr Franek (including in his capacity as a director of MAG Financial) from taking steps to realise, sell or otherwise dispose of the ‘Securities’ (as defined in the Balanced Facility Agreement), and the guarantees granted under the Balanced Facility Agreement.

71 By letter of approval dated 28 June 2018 to the Company, Black Arrow Mortgages confirmed that it was prepared to provide finance in the sum of $5 million to ‘80% LVR only of valuation’.

72 On 3 July 2018, in the Derivative Proceeding, Kennedy J dissolved the interim orders of Lyons J on the Receivers giving an undertaking not to sell the ‘Securities’.

73 On 5 July 2018, AAGG was registered as a corporation with ASIC, with Mr Mekkya as the sole director, and Mr Mekkya and Mr Sacca as the only shareholders, each holding six shares.

74 By Contract of Sale of Real Estate purportedly signed by Mr Mekkya on behalf of AAGG on 5 July 2018, and Mr Franek on behalf of MAG Financial on 9 July 2018, MAG Financial agreed to sell the Arden Street Property to AAGG for $4.5 million plus GST.

75 By emails of 9 July 2018 to Black Arrow Mortgages, Wael offered the Nairne Street Property, the Bundoora Property, 2 Lynwood Crescent, Lower Plenty, being the land described in Certificate of Title Volume 8519 Folio 915 (‘the Lower Plenty Property’) and the Arden Street Property as security in support of the application for a loan.

76 By letters dated 16 and 19 July 2018 to Mr Halse, Mr Nair stated that the Company was ready, willing and able to tender the amount of $4,406,742.82 in satisfaction of what he described as the ‘Franek Debt’ and ‘the Balanced Securities Debt’ (‘the July Tender’). Mr Halse did not reply until 25 July 2018, after the settlement of the sale of the Arden Street Property (as set out below). This correspondence is set out at paragraphs 333 to 336 below.

77 On 17 July 2018, in the Derivative Proceeding, the Receivers undertook to the Court not to sell the Arden Street Property or the Lower Plenty Property.

78 By memorandum dated 18 July 2018 and provided to the Court in accordance with the orders of Kennedy J made 17 July 2018 in the Derivative Proceeding, counsel and the solicitor for Mr Franek and MAG Financial identified the precise basis on which the Receivers were entitled to sell the Arden Street Property and the Lower Plenty Property. The memorandum did not disclose that MAG Financial had entered into a contract on 9 July 2018 to sell the Arden Street Property to AAGG.

79 According to an adjustment statement, on 20 July 2018, the sale of the Arden Street Property was settled by the following documents:

(a) a transfer of land dated 22 June 2018 from MAG Financial as mortgagee, to AAGG as transferee, for consideration of $4.95 million (‘the Transfer of Land’); and

(b) an adjustment statement which included the following settlement statement:

80 The date of the settlement is unclear because:

(a) by email of 23 July 2018 at 4:38 pm to Mr Koroneos, Mr Halse stated that his client had ‘today’ completed the sale of the Arden Street Property; and

(b) the settlement was not effected by a cheque to the vendor of $4,453,732.09, as referred to in the settlement statement, but purportedly by a mortgage dated 23 July 2018 from AAGG to MAG Financial over the Arden Street Property securing an ‘Advance’ of $4.5 million.

81 By email of 23 July 2018 at 6:31 pm to counsel and Mr Koroneos, Mr Bise stated that MAG Financial had allegedly sold the Arden Street Property ‘behind the receivers’ backs’.

82 By email of 24 July 2018 to Mr Nair, Mr Koroneos stated that the Receivers had no knowledge of, and were not involved in, the sale of the Arden Street Property.

83 On or about 27 July 2018, Mr Franek resigned as a director of MAG Financial and was replaced by Mr Mekkya. Mr Franek also transferred all of the shares in MAG Financial to Mr Mekkya.

84 By email of 3 August 2018 to Mr Nair, Mr Halse confirmed that the fifth and sixth defendants in the Derivative Proceeding (‘the Administrators’) had been appointed as joint and several administrators of the Company. Accordingly, on the basis of his contention that the legal proceeding could not proceed without the written consent of the Administrators or leave of the Court, he invited the Plaintiffs to discontinue the Derivative Proceeding.

85 By originating process filed 21 December 2018 in the Trustworthy Proceeding, Trustworthy Nominees relevantly sought the following orders:

(a) Wael and Bayda take all reasonable steps and execute all appropriate documents, including a mortgage between Wael and Bayda as mortgagors and Trustworthy Nominees as mortgagee over the Nairne Terrace Property.

(b) MAG Financial not proceed with the registration of mortgage AR674060A over the Nairne Terrace Property until after the registration of Trustworthy Nominee’s mortgage.

86 By originating motion between parties filed 8 August 2019 in the MAG Proceeding, MAG Financial relevantly sought the following orders and declarations:

(a) A declaration that MAG Financial has an equitable charge over the Nairne Terrace Property.

(b) An order pursuant to s 81 of the Property Law Act 1958 (Vic), or in the Court’s equitable jurisdiction, that the Court direct a sale of the Nairne Terrace Property.

(c) A declaration that MAG Financial is entitled to all monies owed to it by Wael and Bayda, together with its costs of an incidental to the proceeding and of the sale of the Nairne Terrace Property, from the proceeds of the sale of the Nairne Terrace Property, after satisfaction of the claims of the Westpac Banking Corporation pursuant to its registered mortgage AK741904L.

ISSUES FOR DETERMINATION

87 The issues for determination arise from the pleadings in each of the four proceedings and, at the conclusion of the evidence, the parties agreed to a list of issues, which is annexed to these reasons. On 3 July 2021 and 12 July 2021, the MAG Parties and the Plaintiffs each filed an addendum to their respective pleadings in the Derivative Proceeding for the purpose of including issues, which had been the subject of argument but not pleadings.

88 The issues for determination fall broadly within the following headings:

(a) Breach of the Consumer Credit Act.

(b) Company debts.

(c) Claims against the Receivers.

(d) Tender.

(e) Sale of the Arden Street Property.

(f) Assignment of debts to MAG Financial.

(g) Trustworthy Proceeding.

BREACH OF THE CONSUMER CREDIT ACT

Material facts

89 The material facts in relation to this issue are not in dispute. The relevant contracts are summarised as follows.

90 By the First Franek Loan Agreement dated 15 April 2015, Mr Franek agreed to lend $100,000 to Wael and Bayda for a term of three months, subject to interest of $12,000 per month payable in arrears, secured by a charge over the Nairne Terrace Property.

91 After the loan was not repaid, by the Second Franek Loan Agreement dated 15 January 2016, Mr Franek agreed to lend $311,000 to Wael and Bayda for a term of three months, subject to interest of $26,000 per month payable in arrears, secured by a charge over the Nairne Terrace Property.

92 After the loan was not repaid, and to secure obligations under the Franek Settlement Deed, by the Franek GSA dated 18 May 2017, Wael, Bayda and the Company as the grantors:

(a) acknowledged that, pursuant to the Second Franek Loan Agreement, Mr Franek had advanced to Wael, Bayda and the Company ‘(or either of them)’ the loaned amount, being the aggregate of $311,000 plus interest accumulated since 16 February 2016 and Mr Franek’s legal costs; and

(b) agreed to grant to Mr Franek as the secured party:

(i) a registered second mortgage over the Lower Plenty Property; and

(ii) a charge over all of their real and personal property.

93 By the Franek Settlement Deed dated 18 May 2017, between Mr Franek as the releasing party, Wael and Bayda as the released party, and the Company as the guarantor/released party, it was recited as follows:

1. [Mr Franek] as lender and Wael as borrower have entered into the Loan Agreement whereby [Mr Franek], at the request of Wael, agreed to lend and Wael agreed to borrow the Loaned Amount.

B. Pursuant to the Loan Agreement, amongst others, Wael agreed to:
i. pay the Interest on the Loaned Amount; and

2. repay the Loaned Amount together with Interest within three (3) months of the date of the Loan Agreement.

100. In breach of the Loan Agreement, Wael has failed, refused and/or neglected to repay the Loaned Amount together with Interest on the due date for repayment or at all.

4. At all material times Wael is and was a director and shareholder of [the Company].

E. [The Company] is undertaking the Project.

6. In consideration of [Mr Franek] entering into this Deed, Wael and [the Company] have agreed to the Settlement.
7. In consideration of [Mr Franek], at the request of [the Company], agreeing to enter into this Deed, [the Company] has agreed to guarantee the due and punctual performance of Wael of the Terms and Conditions in accordance with this Deed and has otherwise to the Settlement.

94 In summary, the parties agreed to the following:

(a) Upon full compliance with the provisions of the Franek Settlement Deed, the parties would mutually release and discharge each other from all claims relating to the Second Franek Loan Agreement.

(b) Wael, Bayda and the Company would enter into a standard form LIV Contract of Sale of Real Estate and transfer to Mr Franek Commercial Unit 002 of the Development, and fit out the property in accordance with the fit-out specifications.

(c) Subject to Wael, Bayda and the Company complying with the obligation in sub-para (b) above, Mr Franek would:

(i) pay the sum of $50,000 on execution of the Franek Settlement Deed;

(ii) pay a further sum of $50,000 on completion of the transfer of Commercial Unit 002 and registration on the title; and

(iii) release Wael and Bayda from liability under the Second Franek Loan Agreement.

(d) In the event that Wael, Bayda or the Company defaulted in taking any step necessary to effect the settlement, Mr Franek had the right to issue legal proceedings and obtain judgment for the loaned amount of $311,000 plus interest of $26,000 per month commencing from 16 February 2016.

95 The Franek Settlement Deed contains the following further relevant clauses:

4.1.1 In the event Wael and/or [the Company] fail to take any steps necessary to effect the Settlement (or any part thereof) in accordance with this Deed, then [Mr Franek] shall have the right to immediately issue legal proceedings in any Court of competent jurisdiction and produce this Deed as to Wael’s and [the Company’s] consent (at [Mr Franek’s] option):
(a) obtain judgment for the Loaned Amount together with the Interest (accrued and calculated as at the date of issuing the proceeding); or
(b) a judgment for damages to be assessed; or
(c) an order for specific performance to enforce the Settlement against Wael and/or [the Company], and
5.1 Upon full compliance with the provisions set forth in this Deed, the parties hereby mutually release and forever discharge each other, their heirs, executors, administrators, assigns, servants and agents from all Claims, suits, actions, expenses of any description whatsoever and demands whatsoever or howsoever arising from or touching upon the subject matter of the Loan Agreement which the party may have or may have had but for this Deed against any other party in respect of any expenses or loss of any kind suffered or incurred by them or any of them otherwise for or by reason of, arising out of or in any way connected with any of the facts and circumstances giving rise to the Loan Agreement including but not limited to all Claims for damages, costs charges and expenses which may hereinafter arise out of or in respect of the alleged cause or causes of action the subject of, and/or in any way connected to, the Loan Agreement

Legislative regime

96 Sections 39 and 40 of the Consumer Credit (Victoria) Act 1995 (Vic) (‘the Consumer Credit Act’) provide as follows:

39 Contract unenforceable if rate exceeds 48 per cent
(1) A credit contract (and any mortgage given to a credit provider in relation to that contract) is unenforceable where the annual percentage rate in respect of the contract exceeds 48.
(2) Nothing in this section affects or limits the powers of the Court under section 70 of the Consumer Credit (Victoria) Code or of a court under section 76 of the National Credit Code if the Court or court is satisfied that the annual percentage rate in respect of a credit contract although not exceeding, in the case of a credit contract in relation to which there is a mortgage, 30, and in the case of any other contract, 48, is excessive or that the transaction is unjust within the meaning of that section 70 or section 76, as the case requires, or is such that a court of equity would give relief.
(3) A credit provider must not enter into a credit contract where the annual percentage rate in respect of the contract exceeds 48.
Penalty applying to this subsection: 10 penalty units.
40 Mortgage void if rate under credit contract exceeds 30 per cent
A mortgage relating to a credit contract in respect of which the annual percentage rate exceeds 30 is void in so far as it relates to that contract.

97 Pursuant to s 38AA of the Consumer Credit Act, the words ‘credit contract’ and ‘credit provider’ in the above sections have the same meanings as in the National Credit Code contained in sch 1 to the National Consumer Credit Protection Act 2009 (Cth) (‘the Code’).

98 Section 4 of the Code provides that a credit contract is ‘a contract under which credit is or may be provided, being the provision of credit to which this Code applies’.

99 Section 5 of the Code provides as follows:

(1) This Code applies to the provision of credit (and to the credit contract and related matters) if when the credit contract is entered into or (in the case of precontractual obligations) is proposed to be entered into:
(a) the debtor is a natural person or a strata corporation; and
(b) the credit is provided or intended to be provided wholly or predominantly:
(i) for personal, domestic or household purposes; or
(ii) to purchase, renovate or improve residential property for investment purposes; or
(iii) to refinance credit that has been provided wholly or predominantly to purchase, renovate or improve residential property for investment purposes; and
(c) a charge is or may be made for providing the credit; and
(d) the credit provider provides the credit in the course of a business of providing credit carried on in this jurisdiction or as part of or incidentally to any other business of the credit provider carried on in this jurisdiction.
...
(3) For the purposes of this section, investment by the debtor is not a personal, domestic or household purpose.
(4) For the purposes of this section, the predominant purpose for which credit is provided is:
(a) the purpose for which more than half of the credit is intended to be used; or
(b) if the credit is intended to be used to obtain goods or services for use for different purposes, the purpose for which the goods or services are intended to be most used.

100 Section 7 of the Code provides as follows:

(1) This Code applies to a mortgage if:
(a) it secures obligations under a credit contract or a related guarantee; and
(b) the mortgagor is a natural person or a strata corporation.
(2) If any such mortgage also secures other obligations, this Code applies to the mortgage to the extent only that it secures obligations under the credit contract or related guarantee.
(3) The regulations may exclude, from the application of all or any provisions of this Code, a mortgage of a class specified in the regulations.

101 With respect to presumptions under the Code, s 13 provides as follows:

(1) In any proceedings (whether brought under this Code or not) in which a party claims that a credit contract, mortgage or guarantee is one to which this Code applies, it is presumed to be such unless the contrary is established.
(2) It is presumed for the purposes of this Code that credit is not provided or intended to be provided under a contract wholly or predominantly for any or all of the following purposes (a Code purpose):
(a) for personal, domestic or household purposes;
(b) to purchase, renovate or improve residential property for investment purposes;
(c) to refinance credit that has been provided wholly or predominantly to purchase, renovate or improve residential property for investment purposes;
if the debtor declares, before entering the contract, that the credit is to be applied wholly or predominantly for a purpose that is not a Code purpose, unless the contrary is established.
(3) However, the declaration is ineffective if, when the declaration was made, the credit provider or a person (the prescribed person) of a kind prescribed by the regulations:
(a) knew, or had reason to believe; or
(b) would have known, or had reason to believe, if the credit provider or prescribed person had made reasonable inquiries about the purpose for which the credit was provided, or intended to be provided, under the contract;
that the credit was in fact to be applied wholly or predominantly for a Code purpose.

Is the Second Franek Loan Agreement a ‘credit contract’, as defined in the National Credit Code?

102 There is no dispute that:

(a) the borrowers, being Wael and Bayda, are natural persons, satisfying the requirement of sub-s 5(1)(a) of the Code;

(b) a charge was made for the credit, satisfying the requirement of sub-s 5(1)(c) of the Code;

(c) the interest rates under the First Franek Loan Agreement and the Second Franek Loan Agreement exceeded 48%, as proscribed by s 39 of the Consumer Credit Act; and

(d) the credit advanced under the First Franek Loan Agreement and the Second Franek Loan Agreement was intended to be used, and was in fact used, principally for the Development.

103 Accordingly, it is necessary to decide the following:

(a) whether the credit was provided to purchase, renovate or improve residential property for investment purposes, or to refinance credit that had been provided predominantly for such purposes, as required by sub-s 5(1)(b) of the Code (‘the Residential Loan Purpose’); and

(b) whether Mr Franek provided the credit:

(i) in the course of a business of providing credit; or

(ii) as part of or incidentally to any other business,

as required by sub-s 5(1)(d) of the Code.

Submissions

MAG Parties’ submissions

104 The MAG Parties submitted that the Second Franek Loan Agreement is not a credit contract within the meaning of the Code, for the following reasons:

(a) The credit was not provided to Wael and Bayda as borrowers predominantly for the Residential Loan Purpose. The relevant purchase, renovation and improvements were made by the Company, rather than Wael and Bayda. The most that could be said was that Wael and Bayda on-lent the money to the Company.

(b) Mr Franek did not provide the credit in the course of a business of providing credit. Counsel relied upon the following:

(i) Whilst Mr Franek operated a finance broking business, that business did not have a licence to loan money.

(ii) Mr Franek’s evidence was that these loans were made in his personal capacity to Wael and Bayda.

(iii) Mr Franek had personally provided loans to people on maybe 10 to 12 occasions prior to the making of the First Franek Loan Agreement, which could not constitute a ‘business’.

(c) Mr Franek did not provide the credit incidentally to his other business, being his mortgage broking business ‘212 Degrees’, which was a distinct legal entity.

Plaintiffs’ submissions

105 The Plaintiffs submitted that the Second Franek Loan Agreement is a credit contract within the meaning of the Code, for the following reasons:

(a) The credit was provided for the Residential Loan Purpose, being the Development. Mr Franek’s evidence was that the sole purpose of the loan related to the Development.

(b) The loan was provided in the course of Mr Franek’s business of providing credit, or incidentally to his other business as a finance broker, for the following reasons:

(i) As at April 2015, Mr Franek was operating a brokerage business in which he provided corporate-style debt or construction debt to builders and developers.

(ii) He had advanced loans in his personal capacity ‘maybe 10 or 12 times’ before the First Franek Loan Agreement.

(c) Mr Franek accepted that he would be liable to pay tax on interest received under the Second Franek Loan Agreement.

Consideration

Was the credit provided for the Residential Loan Purpose?

106 Courts have expressed divergent views about whether, in determining the purpose for which credit was ‘provided or intended to be provided’, the Court should have regard to the purposes of the creditor or debtor, subjectively or objectively assessed, or by a combination.^[5]

107 In Commonwealth Bank of Australia v Stephens, Sloss J observed that the initial approach focused on the relevant purpose being determined by reference to the intention of the credit provider.^[6]

108 In Knowles v Victorian Mortgage Investments Ltd,^[7] Croft J adopted the approach of Davies J in Bank of Queensland Ltd v Dutta,^[8] that the relevant intention was that of the borrower.^[9] Croft J stated:

If the credit provider does not obtain a signed declaration in the required form from the borrower then the credit provider is not afforded the protection of the presumption provided under s 11(2) of the CCC, and thereby invites the difficulty of proving that the loan was not intended to be used wholly or predominantly for personal, domestic or household purposes.^[10]

109 In the following cases, intermediate courts of appeal have favoured an approach that the relevant purpose should be assessed objectively, having regard to the substance of the transaction and the surrounding circumstances.

110 In Bahadori v Permanent Mortgages Pty Ltd, in assessing whether the credit provider had rebutted the presumption that the Code applied to the credit contract, Tobias JA (with whom Giles and Campbell JJA agreed) applied the objective approach (on the basis that it was the most favourable to the credit provider), stating:

I accept for the purposes of this exercise that the test most favourable to [the credit provider] is an objective one based upon what a reasonable person would, in all the circumstances, consider to be the purpose for which the loans were intended to be provided. Such a person would be entitled to take into account all the objective circumstances which would otherwise fall for consideration under s 11(3).^[11]

111 In Shakespeare Haney Securities Ltd v Crawford, Muir JA stated that the provisions gave rise to difficulties of construction which it was not necessary to resolve on the appeal.^[12] However, he considered that the ‘preferable’ approach was objective, and stated:

An approach to the construction of s 6(1)(b) which considers the substance of the subject transaction and requires an objective assessment would, in my view, be preferable to one which looks to the actual intention of either the borrower or the lender. Plainly, ‘the purpose’ for which credit is provided or intended to be provided has nothing to do with the lender’s general commercial purposes: the reference is to the use to which the credit is to be put. In the great majority of transactions there would be no difficulty in determining the relevant purpose by reference to the terms of the application for credit and of the approval. If the borrower requests credit for a stated purpose and the lender approves the request and makes the loan, there should be no difficulty in concluding that the purpose for which the loan was made was the purpose for which it was requested.
The focus of s 6(1)(b) is on the provision of credit rather than on the obtaining of credit. That is inconsistent with a construction which looks to the debtor’s state of mind. Also, one would think that if the legislature had in mind that, in determining the purpose for which credit was provided, the debtor’s intention was the governing consideration, s 6(1)(b) would have been worded along these lines:
“The debtor intended to apply the credit wholly or predominantly for personal, domestic or household purposes”.^[13]

112 In Haynes v St George Bank, Kourakis CJ specifically held that the test for assessing the relevant purpose of the provision of credit was objective.^[14] He concluded that the intention of a debtor was not determinative and that the Court must consider ‘the substance of the transaction in the context of its performance’.^[15]

113 I would adopt the objective test, as held by Kourakis CJ, although in this case I do not consider that the result would be affected by adopting the other suggested tests. To apply the words of Muir JA, as set out at paragraph 111 above, to the circumstances of the case before me, because ‘the borrower request[ed] credit for a stated purpose and the lender approv[ed] the request and [made] the loan, there should be no difficulty in concluding that the purpose for which the loan was made was the purpose for which it was requested’.^[16]

114 Accordingly, I find that the parties’ intention was for the credit under the First Franek Loan Agreement to be applied for the Residential Loan Purpose (being the Development), and for the Second Franek Loan Agreement to refinance the credit for the same purpose.

Was the credit provided for the purpose of Wael and Bayda on-lending it to the Company?

115 Despite that general intention, the residual question for determination is, in relation to s 5(1) of the Code, whether the parties’ intention was for the credit to be provided for the purpose of Wael and Bayda on-lending it to the Company (i.e. not for the Residential Loan Purpose)?

116 In determining the purpose of the provision of credit, ‘it is important to consider the substance of the transaction’ and ‘it is appropriate to consider what the money was used for’.^[17] All parties to the Second Franek Loan Agreement intended that most of the money would be used for the Development and most of the money was in fact applied for that purpose.

117 Although there was no evidence on this question, it might be assumed that the loan monies applied to the Development would be shown, for accounting purposes, as loaned by Wael and Bayda to the Company. However, there is an air of unreality about finding that the purpose of the loan was limited to on-lending to the Company, particularly in circumstances where the parties’ accepted intention was that the money should be applied to the Development, and it was so applied.

118 The substance of the transaction, which was known to all parties, was predominately to provide credit for the Development. To find that this ultimate purpose was diverted by the fact that the credit was channeled through the natural persons behind the related corporation would not be consistent with the broad and liberal interpretation of the Code as a piece of beneficial legislation.^[18]

119 The approach of identifying the parties’ intention by reference to the ultimate purpose of loan money, despite such loan money being directed through related parties, is consistent with the authorities that have touched on this issue.

120 In Linkenholt Pty Ltd v Quirk, Gillard J considered the application of the Code in the following circumstances:

(a) The defendant, a natural person, was the guarantor of an original loan taken out by a related company for business purposes.

(b) After the related company was wound up, the defendant entered into a credit agreement with the creditor to satisfy his obligations as guarantor.

(c) The defendant argued that the later loan was regulated by the Code because the defendant and the related company were ‘completely different entities’, and a loan to the defendant to enable him to discharge a personal guarantee was not a loan to any business or a loan for business purposes.^[19]

121 Gillard J rejected the defendant’s argument and stated that, in determining the purpose of the loan, ‘the court must consider the substance and reality of the transaction’.^[20] He found that the Code did not apply because, although the credit was provided to the natural person under the later loan, that did not change the nature and character of the original loan to the related company, which had applied the credit funds for business purposes.^[21]

122 In Jonsson v Arkway Pty Ltd, Shaw J found that the term ‘personal’ purpose should not be given a narrow construction limiting it to the debtor’s personal, domestic or household purposes. He found that a more expansive or liberal reading of the text should be adopted so that the Code covered credit provided to finance a home for the benefit of the borrower’s parents, despite the loan money being channeled through a trust.^[22]

123 This is not a case where the loan money was provided to natural persons to do with as they choose; and they simply chose to on-lend it to a company. I do not consider the fact that the relevant residential property was owned by the Company affects the fact that the credit advanced under the Second Franek Loan Agreement was to refinance a loan applied for the Residential Loan Purpose. Accordingly, in my opinion, the requirement under sub-s 5(1)(b) of the Code was satisfied.

Did Mr Franek provide the credit in the course of a business of providing credit?

124 Mr Franek gave the following evidence with respect to his business as a finance broker and his loan to Wael and Bayda:

(a) Since 2008, he had operated a finance brokerage business under the name of ‘212 Degrees’. In relation to his business, Mr Franek stated:

We specialise in structuring and securing business lending for commercial clients in various industries under an Australian Credit License issued by the Australian Securities and Investments Commission for the purposes of the brokerage business.

(b) Prior to April 2015, he had ‘loaned money to Wael a number of times’. He stated that those loans were ‘all advanced on the same basis, that is, structured to be short term loans with higher rate of interest given the risk associated with the loan’.

(c) The First Franek Loan Agreement and the Second Franek Loan Agreement were both made in his ‘personal capacity’.

(d) In the five years prior to the First Franek Loan Agreement, he had made loans in his ‘personal capacity’ to clients. As to the frequency, he said that ‘it probably would have only been maybe 10 or 12 times’.

125 The expression ‘in the course of a business carried on’ should be given a similar meaning to the commonly used expression ‘carrying on a business’.^[23] In the context of the statutory provisions, for conduct to be in the course of business or in carrying on a business, the conduct must form part of a ‘commercial enterprise, systematically and regularly, with a view to profit, and implicit in this idea are the features of continuity and system’.^[24] Halsbury’s Laws of Australia states that an activity that constitutes a business will normally display one or more of the following characteristics:

(1) System and organisation Businesses are commercial enterprises and as such are usually run in a systematic and organised fashion, although the level of organisation and system expected may vary depending on the taxpayer’s abilities and the nature of the enterprise. The fact that an enterprise is run in an inefficient manner by a taxpayer with poor business acumen will not preclude the activity from being a business. On the other hand, where an enterprise is entirely a vehicle for the pursuit of pleasure, the mere fact that it is systemic or organised will not transform it into a business.
(2) Scale of activity If an organisation and a system are in place, the scale of the enterprise may be a less important factor. However, the smaller the enterprise, the more important system and organisation becomes, because the smaller the scale of the enterprise, the stronger the inference will be that the activity is for pleasure rather than a commercial pursuit.
(3) Commercial character In a business, it would ordinarily be expected that the transactions the enterprise undertakes would be at arm’s length, that is, the enterprise is willing to trade on the open market on the usual terms or conditions operative in that market. A business may be carried on through an agent.
(4) Regularity and frequency Another characteristic of a business is that its transactions would normally be frequent and regular over a reasonable period. The lack of sustained activity may lead to a conclusion that no business is being conducted. Irregular activity may be less significant if there is the willingness to enter into transactions but the market for the service or product fluctuates.
(5) Profit The desire to make a profit in an enterprise generally forms an important element of a business. It is not necessary to show that there is the likelihood of profit in the short to medium term, but there should be at least the likelihood of the enterprise making a profit in the long run. However, the existence of a profit motive alone will not make a venture a business, for example, where the enterprise is primarily a vehicle for pleasure or speculation. The fact that the taxpayer is compelled to undertake the activity does not mean that there is not a profit motive.
(6) Other characteristics Other factors which have been important in determining a business include the type and quantity of goods traded and the vehicle used to conduct the activity. The fact that the activity is illegal, is conducted part-time or is conducted on the taxpayer’s behalf will not prevent a business being found. Conversely, the fact that the activity is the sole source of a taxpayer’s ‘income’ does not make it a business activity.^[25]

126 In my opinion, Mr Franek has not displaced the presumption under s 13(1) of the Code that the Code applied to the credit contract and, more particularly, that the credit was provided in the course of a business of providing credit, for the following reasons:

(a) Mr Franek’s evidence as to the number of loans made up to April 2015 was an estimate and he made no attempt to verify the precise number of loans. Further, he gave no evidence about the quantum of the loans or the income derived from these loans over the years (noting that Mr Franek earned over $1 million of interest on his loans to Wael and Bayda). His evidence as to loans made after April 2015 was similarly unsatisfactory for a party seeking to displace a presumption, being that he made no further loans ‘to my best recollection’. However, on the basis of his concession, his lending practice has extended over at least five years while he has operated a finance brokerage business through his related company. The direct provision of credit to clients of his brokerage business is closely related with the procuring of credit through his brokerage business from third parties.

(b) The loan was made in the context of Mr Franek having provided or proposing to provide Wael with finance brokerage services for a facility of approximately $6.5 million in June 2014 for the purposes of the Development.

(c) The First Franek Loan Agreement and the Second Franek Loan Agreement were each made at extremely high interest rates. In the circumstances, I do not accept his evidence that these loans were in the nature of a personal favour, or otherwise than of a commercial character.

Mr Franek’s failure to give detailed evidence about the characteristics of his lending activity over the years (in particular, the loan amounts and profitability) means that I am unable to infer that his lending activities were done outside the course of a business of providing credit. This is especially so given the close association with Mr Franek’s related brokerage business.

127 I accept the analysis in Dale v Nichols Constructions Pty Ltd that, in determining whether lending occurs in the course of a business, the Court will apply a broad and liberal interpretation appropriate for the Code as a piece of beneficial legislation.^[26] In that case, McGill DCJ distinguished the approach of courts to the interpretation of similar expressions in the context of the Moneylenders Acts,^[27] which ‘are coloured by the penal and sometimes Draconian consequences imposed on those who carry on the business of money lending in contravention of the licensing or other provisions of a statute’.^[28]

Did Mr Franek provide the credit as part of or incidentally to any other business?

128 If I am wrong in concluding that the credit was provided in the course of a business of providing credit, in my opinion, for the reasons set out at paragraph 126 above, it was provided incidentally to Mr Franek’s brokerage business.

129 The word ‘incidental’ is not defined in the Code. Its ordinary English meaning, as defined in the Macquarie Dictionary and adopted in the Federal Court, is ‘happening or likely to happen in fortuitous or subordinate conjunction with something else’.^[29] In Lauvan Pty Ltd v Bega (No 2), Gleeson JA said:

The words ‘incidentally to’ in s 5(1)(d) may be taken to be an expression of wide import but there must be some connection between another business of the credit provider and the particular loan that provides the credit which, in turn, involves questions of degree.^[30]

130 In particular, the conclusion that the Second Franek Loan Agreement was ‘connected with’ and in ‘subordinate conjunction with’ Mr Franek’s brokerage business arises from the fact that, during the course of the Development, Mr Franek:

(a) as the owner and operator of the brokerage business, was dealing with Wael with respect to the provision of loans for the Development; and

(b) made the loan pursuant to the Second Franek Loan Agreement to Wael predominately for the purpose of the Development.

131 I have arrived at the conclusion that the credit was provided at least incidentally to Mr Franek’s business even without the presumption in s 13(1) of the Code, or the liberal interpretation suggested by the authorities. These considerations simply further confirm my conclusion.

Conclusion

132 Accordingly, I find that the Second Franek Loan Agreement is a credit contract, as defined in the National Credit Code. Further, as the annual percentage interest rate exceeds 48, pursuant to s 39 of the Consumer Credit Act, it is unenforceable.

Are the Franek GSA Mortgages void pursuant to s 40 of the Consumer Credit Act?

133 The Franek GSA provided for Wael, Bayda and the Company to grant the following securities under the following clauses:

(a) Clause 3.1 which provides:

In consideration of the Secured Party [being Mr Franek]

• lending the Loaned Amount to the Grantor [being Wael and Bayda and the Company]; and

• entering into the Deed of Release & Settlement,
the Grantor as beneficial owner of the Secured Assets, grants the Security in favour of the Secured Party over the Secured Assets and the Collateral Security and charge in favour of the Secured Party all its present and after acquired personal property as a continuing security for the due and punctual performance by the Granter of its obligations under this Deed.

(b) Clause 16.1 which provides:

The Grantor [Wael and Bayda] and the Guarantor [the Company], for valuable consideration, hereby grant the Security and mortgages, charges and grants as security interest over the Secured Assets to the Secured Party [Mr Franek] for payment of the Secured Money, and the performance of the obligations imposed on the Grantor under this Deed.

(hereafter referred to collectively as ‘the Franek GSA Mortgages’).

134 The Franek GSA contains the following relevant definitions and provisions:

(a) ‘Secured Assets’ is defined to include all real and personal property of the Grantor.

(b) Pursuant to cl 2.1, the parties ‘acknowledge and agree that the Secured Party has advanced to the Grantor (or either of them) the Loaned Amount pursuant to the Loan Agreement’.

(c) ‘Secured Money’ is defined to include the ‘Loaned Amount’.

(d) ‘Loaned Amount’ is defined as follows:

The aggregate of:
(1) $311,000 (Principal); and
(2) the Interest accumulated since 16 February 2016 to the date of this Deed in accordance with the Loan Agreement;
(3) Secured Party’s Legal Costs.

(e) ‘Loan Agreement’ is defined by reference to its definition in the Franek Settlement Deed, which is ‘the document titled “Loan Agreement” and dated 15 January 2016 between Mark [Franek] as lender and Wael as borrower’, being the Second Franek Loan Agreement.

Submissions

MAG Parties’ submissions

135 The MAG Parties submitted that the Franek GSA Mortgages are not mortgages within the meaning of s 40 of the Consumer Credit Act, for the following reasons:

(a) The Franek GSA was granted by the Company in consideration of Mr Franek entering into the Franek Settlement Deed. The Franek Settlement Deed superseded the Second Franek Loan Agreement; and therefore the Franek GSA Mortgages were not security given to Mr Franek in relation to the Second Franek Loan Agreement.

(b) The Franek GSA was given by a corporation (the Company), rather than an individual, and therefore it should not be caught by the Consumer Credit Act as a matter of policy, for the following reasons:

(i) The Consumer Credit Act adopts the definition of ‘credit contract’ in the Code and contains no express definition for the term ‘mortgage’.

(ii) Section 7 of the Code provides that it does not apply to mortgages given by a corporation (other than a strata corporation).

(iii) Accordingly, for the Consumer Credit Act and the Code to operate uniformly, the Consumer Credit Act should not apply to mortgages entered into by a corporation.

136 The MAG Parties further submitted that if the Franek GSA is not enforceable insofar as it relates to the Second Franek Loan Agreement, while cl 10.1 (relating to the charging of interest) may not be enforceable, cl 44.5 provides that each provision of the Franek GSA is severable, and accordingly any such finding would not otherwise affect the operation of the Franek GSA.

Plaintiffs’ submissions

137 The Plaintiffs submitted that the Franek GSA Mortgages are void pursuant to s 40 of the Consumer Credit Act, for the following reasons:

(a) The MAG Parties’ submission that the Franek GSA Mortgages were not security given to Mr Franek in relation to the Second Franek Loan Agreement cannot be sustained, for the following reasons:

(i) clause 3.1 of the Franek GSA states that the security granted was in consideration of Mr Franek ‘lending the Loaned Amount [being the amount loaned under the Second Franek Loan Agreement] to the Grantor’; and

(ii) section 40 of the Consumer Credit Act applies if the mortgage relates to the credit contract and does not require the mortgage to be given as security for such a contract.

(b) The MAG Parties’ submission that, as a matter of policy, the Franek GSA Mortgages do not fall within s 40 of the Consumer Credit Act on the ground that they were given by a corporation, cannot be sustained because the Consumer Credit Act does not define ‘mortgage’ by reference to s 7 of the Code. By contrast, the Consumer Credit Act incorporates the Code’s definition of a ‘credit contract’ in s 38AA.

Conclusion

138 In my opinion, the Franek GSA Mortgages are mortgages within the meaning of s 40 of the Consumer Credit Act that relate to the Second Franek Loan Agreement, because:

(a) the Franek Settlement Deed did not supplant the Second Franek Loan Agreement; and

(b) the meaning of mortgage in s 40 of the Consumer Credit Act should not be limited by the meaning of mortgage in the Code.

The Franek Settlement Deed did not supplant the Second Franek Loan Agreement

139 To fall within the ambit of s 40, the Franek GSA Mortgages must relate to a relevant credit contract, in this case, the Second Franek Loan Agreement. The words ‘relating to’ (or in relation to) are of broad compass but require a direct or indirect connection or relationship between the two subject matters. The closeness of the relationship is ascertained, in any piece of legislation, ‘by reference to the nature and purpose of the provision in question and the context in which it appears’.^[31]

140 The mortgage pursuant to cl 3.1 of the Franek GSA states that the security granted was in consideration of Mr Franek ‘lending the Loaned Amount [being the amount loaned under the Second Franek Loan Agreement] to the Grantor’.

141 The mortgage pursuant to cl 16.1 of the Franek GSA expressly secured, and related to, the ‘Secured Money’, which by a series of definitions included the amounts due under the Second Franek Loan Agreement.^[32]

142 However, the MAG Parties submitted that the Franek GSA Mortgages secure only the Franek Settlement Deed, which had superseded the Second Franek Loan Agreement.

143 I reject this contention. The Franek Settlement Deed was not intended to supersede and replace the Second Franek Loan Agreement. Applying the principles referred to in paragraphs 495 to 502 below, the two agreements do not deal with the same subject matter in inconsistent ways such that it would be impossible for both to be performed. On the contrary, the Franek Settlement Deed discloses no such objective intention, which is demonstrated by the following:

(a) The Franek Settlement Deed, particularly the recitals and cls 4 and 5, demonstrate that the parties’ intention was that Wael and Bayda would remain liable under the Second Franek Loan Agreement; but that such liability could be discharged on performance by Wael, Bayda and the Company of their obligations under the Franek Settlement Deed and, in particular, the ‘Settlement’ (as defined).

(b) Clause 10.1.1 of the Franek Settlement Deed specifically provides that it did not merge with any other agreement ‘including, without limitation, the [Second Franek Loan Agreement]’. Similarly, cl 10.1.2 confirmed that the Franek Settlement Deed did not affect any security to which Mr Franek was entitled ‘by reason of the [Second Franek Loan Agreement]’.

(c) The Franek GSA, which was executed on the same day as the Franek Settlement Deed, similarly provided in the ‘Special Conditions’ contained in item 17 of the Schedule that:

(i) on compliance with the Franek Settlement Deed, Wael and Bayda would be released from any liability under the Second Franek Loan Agreement; but

(ii) on any default under the Franek Settlement Deed, Wael and Bayda were liable to ‘repay the Loaned Amount (calculated in accordance with the [Second Franek Loan Agreement] ...’.

(d) MAG Financial does not plead any allegation of, and the Franek GSA does not impose, any independent liability on Wael, Bayda or the Company to pay the amount due under the Second Franek Loan Agreement.

I accept the Plaintiffs’ submission that this is not a case where ‘the first contract is got rid of ... because, the second dealing with the same subject-matter as the first but in a different way, it is impossible that the two should be both performed’.^[33]

The meaning of mortgage in s 40 of the Consumer Credit Act should not be limited by the meaning of mortgage in the Code

144 The nature and purpose of s 40 of the Consumer Credit Act is to void a mortgage that imposes an interest rate exceeding 30% per annum insofar as it relates to a credit contract. The provision is of a remedial nature and should be construed as liberally as its terms and context permit.^[34]

145 The term ‘mortgage’ is not defined in the Consumer Credit Act. I reject the MAG Parties’ submission that its definition should carry the same limitation as expressed in s 7 of the Code. The fact that the Victorian legislature adopted the definition of ‘credit contract’ in the Code, but did not do so for the term ‘mortgage’, is consistent with a legislative intention not to adopt the definition in the Code.

146 Further, the Code does not define the word ‘mortgage’. Rather s 7 limits the mortgages to which the Code applies. Even if it could be said that s 7 constituted a definition, the meaning to be attributed to a word in a statute is so dependent on context that there may be little benefit in considering the meaning of a word in one statute from its definition in another statute.^[35] The purpose of defining a term is frequently to give it something other than its natural and ordinary meaning.

147 The limited interpretation of the term ‘mortgage’ suggested by the MAG Parties is also not supported by reference to the history of the provision. The voiding of a mortgage relating to a regulated contract, in respect of which the annual percentage rate exceeded 30%, was introduced by s 150B of the Credit Act 1984 (Vic). Section 5 of that Act relevantly included the following definitions:

(a) ‘Mortgage’ was defined to mean:

[A]n instrument or transaction by or under which a security interest is reserved, created or otherwise arises.

(b) ‘Security interest’ was defined to mean:

[A]n interest or power—
(a) reserved in or over an interest in goods or other property; or
(b) created or otherwise arising in or over an interest in goods or other property under a mortgage, charge, lien, pledge, trust or power—
by way of security for the payment of a debt or other pecuniary obligation or the performance of any other obligation but does not include an interest or a power reserved, created or otherwise arising under a lease of goods or under a hire-purchase agreement within the meaning of the Hire-Purchase Act 1959.

148 The Consumer Credit Act, as originally enacted in 1995, adopted the Consumer Credit Code set out in the appendix to the Consumer Credit (Queensland) Act 1994 (Qld) as the law of Victoria. However, the Consumer Credit Act retained, in s 40, the provision voiding mortgages relating to credit contracts in respect of which the annual percentage rate exceeded 30%. As the Attorney-General explained in the Second Reading Speech introducing the Bill:

In the matter of maximum interest rates, the bill contains provisions to the same effect as sections 150A and 150B of the Credit Act 1984, thus continuing the existing maxima of 48 per cent and 30 per cent for unsecured and secured loans, respectively.^[36]

However, the definition of ‘mortgage’ in the Credit Act 1984 (Vic) was not included in the Consumer Credit Act; and the retention of the provisions ‘to the same effect’ was indicative of an intention to retain the provisions as a stand-alone restraint on excessive interest rates, independently of the Consumer Credit Code set out in the appendix to the Consumer Credit (Queensland) Act 1994 (Qld).

149 The Consumer Credit Act was substantially repealed by the Credit (Commonwealth Powers) Act 2010 (Vic), which adopted the Code. However, ss 39 and 40 of the Consumer Credit Act were retained; and the intention for the cap on interest rates provisions to operate independently of the Code was explained by the Minister for Consumer Affairs who stated in the Second Reading Speech:

Pending the outcome of the commonwealth review into interest rate caps, Victoria will retain sections 39 and 40 of the Consumer Credit (Victoria) Act, which cap the rate of interest for unsecured consumer credit contracts at 48 per cent and consumer credit-related mortgages at 30 per cent.^[37]

150 In the circumstances, the history of the legislation provides no support for limiting the definition of mortgage to a mortgage granted by an individual.

151 As the interest rates under the Franek GSA Mortgages exceed 30%, the Franek GSA Mortgages are void pursuant to s 40 of the Consumer Credit Act insofar as they relate to the Second Franek Loan Agreement.

Is the Franek Settlement Deed Mortgage void pursuant to s 40 of the Consumer Credit Act?

152 Clause 3.1 of the Franek Settlement Deed (‘the Franek Settlement Deed Mortgage’) provides as follows:

[Wael, Bayda and the Company] hereby agree to charge his/her/its property, both real and personal, and including any future property as security in favour of Mark for the performance of any obligations and any amounts owing to Mark by Wael and authorise Mark to register a caveat in respect of this charge over any such property.

153 For the same reasons that apply to the Franek GSA Mortgages, the Franek Settlement Deed Mortgage is void pursuant to s 40 of the Consumer Credit Act insofar as it relates to the Second Franek Loan Agreement.

Are Wael and Bayda indebted to MAG Financial as assignee of the Franek GSA for the amount due under the Second Franek Loan Agreement?

154 The MAG Parties submitted that Wael and Bayda are jointly and severally indebted to MAG Financial for the amount due under the Second Franek Loan Agreement, for the following reasons:

(a) The Franek GSA defines ‘Secured Money’ as including the amount due under the Second Franek Loan Agreement.

(b) Mr Franek’s rights under the Second Franek Loan Agreement were validly assigned to MAG Financial.

(c) The Secured Money had become due and payable under cl 21.1 of the Franek GSA.

(d) Pursuant to cl 1.2.2 of the Franek GSA, an obligation of two or more parties to the Franek GSA shall bind them jointly and severally.

155 I reject the submissions of the MAG Parties for the following reasons:

(a) As set out at paragraph 143 above, the Franek GSA does not impose any independent liability on Wael and Bayda to pay the amount due under the Second Franek Loan Agreement; and it does not purport to supplant the Second Franek Loan Agreement.^[38]

(b) Accordingly, as I have found that the Second Franek Loan Agreement is unenforceable, the security with respect to it, under the Franek GSA, is similarly unenforceable.

Is the Company indebted as guarantor under the Franek Settlement Deed to MAG Financial for the amount due under the Second Franek Loan Agreement?

Submissions

MAG Parties’ submissions

156 The MAG Parties submitted that the Company is liable to pay the amount due under the Second Franek Loan Agreement pursuant to the guarantee contained in the Franek Settlement Deed.

Plaintiffs’ submissions

157 The Plaintiffs contended that the terms of the Franek Settlement Deed provide an alternative arrangement for:

(a) the repayment of the ‘Loaned Amount’ (as defined); and if not repaid

(b) the enforcement of the obligation to repay the ‘Loaned Amount’.

The Plaintiffs further submitted that the Franek Settlement Deed does not impose upon Wael or the Company a fresh obligation to repay the ‘Loaned Amount’.

Relevant provisions of the Franek Settlement Deed

158 The relevant provisions of the Franek Settlement Deed are as follows.

159 In the definitions:

(a) Clause 1.1.13 provides that ‘Loan Agreement’ means ‘the document titled “Loan Agreement” and dated 15 January 2016 between Mark as lender and Wael as borrower a copy of which appears as Annexure A to this Deed [being the Second Franek Loan Agreement]’.

(b) Clause 1.1.14 provides that ‘Loaned Amount’ means ‘the amount specified in Item 13 [which provides for an amount of $311,000]’.

160 Clause 3.1 provides as follows:

Wael and/or [the Company] hereby agree to charge his/her/its property, both real and personal, and including any future property as security in favour of [Mr Franek] for the performance of any obligations and any amounts owing to [Mr Franek] by Wael and authorise [Mr Franek] to register a caveat in respect of this charge over any such property.

161 Clause 4.1.1 provides as follows:

In the event Wael and/or [the Company] fail to take any steps necessary to effect the Settlement (or any part thereof) in accordance with this Deed, then [Mr Franek] shall have the right to immediately issue legal proceedings in any Court of competent jurisdiction and produce this Deed as to Wael’s and [the Company’s] consent (at [Mr Franek’s] option):
(a) obtain judgment for the Loaned Amount together with the Interest (accrued and calculated as at the date of issuing the proceeding); or
(b) a judgment for damages to be assessed; or
(c) an order for specific performance to enforce the Settlement against Wael and/or [the Company], and
plus costs incurred by that [Mr Franek] to the date of default assessed on an indemnity basis, plus any costs of commencing the action and obtaining judgment (to be fixed by the Court), plus any statutory interest which has accrued from the date of this Deed to the date of the judgment.

162 Clause 6.1 provides as follows:

[The Company] unconditionally guarantees to [Mr Franek] the due and punctual performance by Wael of all obligations pursuant to or in connection with this Deed and the due and punctual observance and performance of Wael of all its other liabilities, obligations and agreements (whether monetary or non-monetary, present or future, actual or contingent) to [Mr Franek] pursuant to or in connection with this Deed.

Conclusion

163 I do not consider that the Company is liable to pay the amount due under the Second Franek Loan Agreement by reason of the provisions of the Franek Settlement Deed, for the following reasons:

(a) On its terms, the guarantee of the Company contained in cl 6.1 does not extend to the amount due under the Second Franek Loan Agreement because:

(i) the guarantee only extends to Wael’s obligations ‘pursuant to or in connection with this Deed’; and

(ii) the Franek Settlement Deed does not purport to impose a liability on the Company to pay the amount due under the Second Franek Loan Agreement.^[39]

Clause 4.1.1 is a facilitative provision which only operates so as to permit a party to enter judgment for an existing outstanding liability, relevantly in this case, the amount due by Wael and Bayda under the Second Franek Loan Agreement.^[40]

(b) For the reasons set out at paragraphs 370 to 371 below, any guarantee of the Company of the amount due under the Second Franek Loan Agreement is discharged by reason of MAG Financial’s refusal of the July Tender of the amount due under the Second Franek Loan Agreement.

COMPANY DEBTS
Is the Company liable for the Sacca Debt?

Material facts

164 The material facts in relation to this issue are as follows:

(a) By written acknowledgment signed 30 May 2016, the El Saafin Brothers declared that they had received an amount of $1.9 million as a loan from Mr Sacca and that ‘we are liable to return it back to him within one year from the date of this statement with any cost related to it’ (‘the Sacca Loan Agreement’).

(b) By writ filed 27 April 2018 in the Sacca Proceeding, Mr Sacca claimed repayment of $1.9 million pursuant to the Sacca Loan Agreement.

165 There is no dispute that:

(a) Mr Sacca agreed to lend, and did lend, to (at least) the El Saafin Brothers the sum of $1.9 million (‘the Sacca Debt’).

(b) The loan was intended to be, and was applied for the purpose of repaying the then first mortgagee of the Arden Street Property, Banner Capital Management Ltd (‘Banner Capital’).

166 Accordingly, the issues for determination are as follows:

(a) is the Company a party to the Sacca Loan Agreement and therefore liable for the Sacca Debt; and if so

(b) is the Sacca Debt subrogated to the secured rights of Banner Capital.

Submissions

Plaintiffs’ submissions

167 The Plaintiffs submitted that the Company is not a party to the Sacca Loan Agreement, for the following reasons:

(a) On Mr Sacca’s own evidence, in the conversations between Wael and Mr Sacca that gave rise to the Sacca Loan Agreement, there was no reference to the Company being a party to the Sacca Loan Agreement.

(b) The written acknowledgment of the Sacca Loan Agreement signed on 30 May 2016 makes no reference to the Company.

(c) Any alleged obligation on the Company to repay the Sacca Debt would be a guarantee, which could not be relied upon by reason of s 126 of the Instruments Act 1958 (Vic) because there was no written evidence recording such an obligation.

(d) The post-contractual conduct is consistent with the Company not being a party to the Sacca Loan Agreement. In particular, on 27 April 2018, Mr Sacca commenced the Sacca Proceeding against the El Saafin Brothers seeking to recover the Sacca Debt. The Company was not a defendant to that proceeding and the statement of claim did not allege that the Company was a party to the Sacca Loan Agreement. Further, by his affidavit sworn 11 June 2018 in support of an application for summary judgment in the Sacca Proceeding, Mr Sacca deposed that ‘[n]either of the defendants have repaid the sum of $1,900,000’. There was no reference to the Company.

168 The Plaintiffs further submitted that the Sacca Debt is not subrogated to the secured rights of Banner Capital by the operation of law, for the following reasons:

(a) The evidence points against an intention that the Sacca Loan Agreement would be secured. According to Mr Sacca’s witness statement, all that Wael said was that Mr Sacca ‘would have the title until the refinance happened’. An oral agreement to provide the title does not give rise to a security interest. In any event, Wael denied this allegation on the basis that he could not provide the title to Mr Sacca because he needed it to fund the construction. Rather, Mr Sacca’s evidence demonstrated that he advanced the $1.9 million in his ‘capacity as an established and respected member of the Arab community in Melbourne to assist Wael’, notwithstanding that this was contrary to his bank manager’s advice, because he was a successful businessman and tried to help people if he could.

(b) The original security in favour of Banner Capital was not ‘kept alive’ for Mr Sacca. The Company was Banner Capital’s debtor; but the El Saafin Brothers were the debtors of Mr Sacca. Therefore, there was no coincidence between the original mortgagor (being the Company) and the subsequent alleged mortgagors (being the El Saafin Brothers).

(c) MAG Financial, as the assignee of the Sacca Loan Agreement, could not be subrogated to the secured rights of Banner Capital because of the third party rights arising when Balanced Securities took a new first mortgage over the Arden Street Property to secure the construction finance.

MAG Parties’ submissions

169 The MAG Parties submitted that the Company is a party to the Sacca Loan Agreement, and is therefore liable for the Sacca Debt, for the following reasons:

(a) Wael accepted in cross-examination that Mr Sacca had advanced the loan to the Company.

(b) A handwritten summary of the financial position of the Company prepared in August 2017 included a loan ‘George Sacca 2.2M’.

(c) By his liquidator’s report to the Court dated 2 August 2019, Mr Caspaney found that the sum of $1.9 million was due and payable by the Company at the time of the settlement of the Arden Street Property.

(d) Mr Sacca’s evidence was that he paid $1.9 million on the understanding that he ‘would have the title until the refinance happened’.

(e) On 30 May 2016, at the time of signing the acknowledgment of the loan:

(i) Mohamed was a director of the Company;

(ii) Hassan had resigned as the Company secretary on 27 May 2016, only a few days prior; and

(iii) Wael had resigned as a director on 3 May 2016.

(f) Mr Sacca lent the funds for the purpose of paying out the Company’s first mortgagee, Banner Capital.

170 The MAG Parties further submitted that the Sacca Debt is subrogated to the secured rights of Banner Capital, for the following reasons:

(a) Where a lender makes an unsecured loan to pay out a secured creditor, there is a rebuttable presumption at equity that the security is kept alive for the lender’s benefit.

(b) The $1.9 million loan from Mr Sacca was used to pay out Banner Capital. The Company and the El Saafin Brothers failed to provide the promised security to Mr Sacca.

Conclusion

171 The determination of whether a particular term was part of an oral agreement made some years ago is often difficult.^[41] As Spigelman CJ explained in County Securities Pty Ltd v Challenger Group Holdings Pty Ltd:

[T]he subject matter and the concomitant terms of the [oral] contract must be inferred from a combination of surrounding circumstances including conversations, documents and conduct none of which provide a definitive form of words. The issue is not one of interpretation, because there are no words to interpret. The issue is one of fact: what did the parties agree?^[42]

172 As the parties’ submissions demonstrate, there are certain objective circumstances pointing to competing conclusions about whether the Company is or is not a borrower under the Sacca Loan Agreement.

173 Although it is common ground that the funds would be used for the purpose of repaying (wholly or partly) the mortgage over the Arden Street Property, I am unable to conclude that the intention of the parties, objectively assessed, was that the Company would be a borrower under the Sacca Loan Agreement, for the following reasons:

(a) The Sacca Loan Agreement was based on conversations between Wael and Mr Sacca in April and May 2016. Neither Wael nor Mr Sacca gave evidence that in those conversations it was agreed that the Company would be a borrower.

(b) The written acknowledgment of 30 May 2016 only referred to the El Saafin Brothers.

(c) In the Sacca Proceeding, including in his affidavit in support of an application for summary judgment, Mr Sacca did not allege that the Company was a borrower under the Sacca Loan Agreement.

(d) I do not consider that the fact that the loan funds were to be applied for the purposes of repaying a mortgage over land owned by the Company leads irresistibly to the conclusion that the Company was a borrower. The evidence is that the loan was based on a personal relationship between Mr Sacca and the El Saafin Brothers. The fact that Mr Sacca would want the El Saafin Brothers personally obligated to repay the debt as borrowers is not inherently unlikely.

(e) I am not persuaded that Wael promised Mr Sacca that he would be provided with the title to the Arden Street Property, for the following reasons:

(i) There was no contemporaneous evidence supporting Mr Sacca’s allegation. In particular, there was no reference to such a term in the 30 May 2016 written acknowledgment, or in Mr Sacca’s pleadings or affidavit filed in the Sacca Proceeding.

(ii) Mr Sacca’s evidence in the witness box about the substance of the conversations with Wael which constituted the Sacca Loan Agreement was nearly incoherent, and I do not believe that he has retained any independent recollection of the substance of those conversations.

(iii) I accept Wael’s evidence that it is inherently unlikely that he would have agreed to provide the title in circumstances where the Company required the title to obtain finance for the completion of the Development.

174 Wael’s alleged acceptance in cross-examination that the Company was a borrower, referred to in the MAG Parties’ submissions, was ambiguous and I do not consider that he intended to make any such admission. Later in cross-examination, Wael specifically denied that the Company was a borrower.

175 Accordingly, I find that the Company is not a party to the Sacca Loan Agreement, and therefore is not liable for the Sacca Debt.

176 The MAG Parties did not contend that the Sacca Debt could be:

(a) subrogated to the secured rights of Banner Capital; or otherwise

(b) secured over the Arden Street Property,

if the Company was not a borrower under the Sacca Loan Agreement.

177 Accordingly, I find that the Sacca Debt is not subrogated to the secured rights of Banner Capital.

Is the Company liable for the Mekkya Debt?

178 By the Mekkya Loan Agreement dated 1 March 2012, between the Company as developer, and Mr Mekkya as investor, it was recorded as follows:

(a) The Company had borrowed the sum of $750,000 from Mr Mekkya ‘to enable the finance of the Development on the Site’, being the Arden Street Property.

(b) The term of the loan was 36 months or the date of completion of the Development (but no later than 48 months from the date of the Mekkya Loan Agreement).

(c) The amount payable was $750,000 plus $225,000.

179 Mr Mekkya alleges that the Company owes him $750,000 pursuant to the Mekkya Loan Agreement, which is comprised of the following:

(a) ‘Capital Sum’ of $450,000 on account of financial support provided by Mr Mekkya; and

(b) the sum of $300,000 for architectural, design, planning and management services provided by Mr Mekkya to the Company in relation to the Development.

180 The Plaintiffs deny that the Company is liable to Mr Mekkya under the Mekkya Loan Agreement on the following bases:

(a) the Company did not enter into the Mekkya Loan Agreement; or alternatively

(b) the Company has repaid the Mekkya Debt.

Did the Company enter into the Mekkya Loan Agreement?

Mr Mekkya’s evidence

181 In summary, Mr Mekkya’s evidence about the agreements underlying the Mekkya Loan Agreement was as follows:

(a) After the Company became the registered proprietor of the Arden Street Property on 20 December 2011, Wael (on behalf of the Company) and Mr Mekkya orally agreed that:

(i) Mr Mekkya would redesign the Development to increase the number of units; and

(ii) the Company would transfer to Mr Mekkya the largest apartment in the Development.

This agreement is not the subject of the current dispute.

(b) From early 2012, Wael (on behalf of the Company) orally requested that Mr Mekkya ‘provide financial support to [the Company] from time to time, and [he] did so’.

This agreement was alleged to be the genesis of the $450,000 ‘Capital Sum’ component of the Mekkya Loan Agreement.

(c) ‘During the period 2012 to 2017 and from time to time, Wael El-Saafin requested [Mr Mekkya] to provide services to [the Company] in the nature of project management services in connection with various construction projects that [the Company] had ongoing from time to time’.

This agreement was alleged to be the genesis of the $300,000 services component of the Mekkya Loan Agreement.

182 In summary, Mr Mekkya’s evidence about the preparation and execution of the Mekkya Loan Agreement was as follows:

(a) In March 2014, Mr Mekkya engaged Mr El-Hissi to draft an investment loan document to record the amounts owing by the Company with respect to the financial support and services provided by Mr Mekkya as at that date. His evidence was that he instructed Mr El-Hissi to draft the Mekkya Loan Agreement after the following discussion with Wael:

I told Wael El Saafin that the balance owing to me from Saafin Constructions Pty Ltd in respect of the financial support provided to date by me was about $350,000 to $400,000. Wael El Saafin told me to ‘call it $450,000’ on the basis that I would continue to provide financial support to Saafin Constructions Pty Ltd on an ongoing basis. Wael El Saafin and I also agreed on a figure of $300,000 in regard to the project management services that I had provided to Saafin Constructions Pty Ltd up until that point.

(b) Mr El-Hissi prepared the Mekkya Loan Agreement, which purports to be dated ‘1 day of March 2012’. Mr Mekkya thought the backdating was Mr El-Hissi’s idea, but he was not sure.

(c) On about 19 March 2014, Mr Mekkya signed the Mekkya Loan Agreement and his signature was witnessed by Mr El-Hissi.

(d) The circumstances surrounding the signing of the Mekkya Loan Agreement were as follows:

(i) the Mekkya Loan Agreement was signed in Mr Mekkya’s office or the Company’s office, which were in the same building;

(ii) Mr El-Hissi and Mr Mekkya went from Mr Mekkya’s office to the Company’s office where it was signed by Wael and Hassan; and

(iii) Mr Mekkya was 90% sure that Mr El-Hissi was there, and he thought Mr El-Hissi would be able to confirm that the Mekkya Loan Agreement was signed in his presence.

(e) The execution clause attached to the original Mekkya Loan Agreement in the possession of the MAG Parties’ solicitor is shown in the following photograph:

(hereafter referred to as ‘the first execution clause’).

183 In support of his claim, Mr Mekkya produced:

(a) A summary sheet recording his hours of services, which he gave evidence was updated by him each time a transaction occurred from 19 September 2011 to 30 October 2016.

(b) A loan statement showing amounts paid to or on behalf of the Company and amounts received from the Company between 20 February 2012 and 27 November 2017. The document shows the outstanding debt as at 19 March 2014 as $404,751.45 and the outstanding debt as at 27 November 2017 as $868,538.11.

Evidence of communications between the parties

184 The evidence of communications between the parties after the alleged execution of the Mekkya Loan Agreement was as follows:

(a) By an alleged email of 19 March 2014 to New Concept Design (copied to Wael), Mr El-Hissi stated:

Dear Amr,
Signed agreement attached as requested.
If you otherwise require anything further, please do not hesitate to contact me.

Attached to the email, which was tendered in its native form, was the Mekkya Loan Agreement with the following execution clause where the purported signatures of Wael and Hassan had a different appearance in that they appear as if partially re-written over the top of an original:

(hereafter referred to as ‘the second execution clause’).

(b) By heads of agreement dated 19 February 2018 signed by Hassan on behalf of the Company, and Mr Mekkya on behalf of ‘New Concept Pty Ltd’,^[43] it was agreed that an independent accountant would ‘work out ... who owes money to the other and how much’.

(c) On 26 February 2018, Mr Mekkya lodged a caveat over the Arden Street Property claiming an interest under the Mekkya Loan Agreement.

(d) By emailed letter dated 9 March 2018 to Mr Mekkya’s solicitors (Indovino’s Lawyers), with respect to the caveat lodged by Mr Mekkya over the Arden Street Property, Mr Nair stated:

[W]e have also been notified by our client that your client has lodged a caveat on the property without consent of our client. On our instructions, there is no valid basis for the lodgment of that caveat. Our client demands that this caveat be withdrawn immediately or we will be forced to take necessary actions to have it removed and produce this letter on the question of cost.

(e) By emailed letter dated 13 March 2018 to Mr Nair, Indovino’s Lawyers stated that the caveat lodged by Mr Mekkya over the Arden Street Property was lodged pursuant to cl 7.4.1 of the Mekkya Loan Agreement.

(f) By emailed letter dated 15 March 2018, Mr Nair replied and stated that the Company denied the existence of any loan agreement between it and Mr Mekkya and requested evidence of the transfer of $450,000 to the Company.

(g) On 27 April 2018, Mr Mekkya filed the Mekkya Proceeding alleging that the Company owed him the sum of $975,000 under the Mekkya Loan Agreement.

Conclusion

185 I am not satisfied that Mr Mekkya and the Company reached an agreement in the terms of the Mekkya Loan Agreement, or that Hassan and Wael signed the document which constitutes the Mekkya Loan Agreement, for the following reasons:

(a) The agreement underlying the Mekkya Loan Agreement is said to be based on an oral agreement made in 2012 for the provision of finance and services. Mr Mekkya’s evidence in support of the relevant conversation or conversations was generalised and brief in the extreme.

(b) There was no document evidencing a claim for repayment of finance or services provided prior to the date on which Mr Mekkya alleged the Mekkya Loan Agreement was executed. In fact, except for the email allegedly sent on the day of signing, no document was produced referencing the Mekkya Loan Agreement prior to Mr El-Hissi lodging the caveat over the Arden Street Property on behalf of Mr Mekkya on 26 February 2018.

(c) Mr Mekkya’s evidence about the circumstances which led to the preparation of the Mekkya Loan Agreement in 2014 was also general and brief. Mr Mekkya’s evidence is to the effect that, in March 2014, without reference to any supporting documentation, Wael:

(i) said ‘call it $450,000’ for finance provided, in response to Mr Mekkya saying to him that ‘financial support provided to date by [him] was about $350,000 to $400,000’; and

(ii) agreed to an amount of $300,000 for services.

In my opinion, this is inherently unlikely.

(d) The evidence of Mr Mekkya about the circumstances which led to the signing of the Mekkya Loan Agreement in 2014 was uncertain and unconvincing. The evidence was first given in cross-examination. He gave no evidence about the relevant circumstances in his witness statement or in his examination in chief. Counsel for the MAG Parties did not open as to the circumstances and nor were they put to Wael or Hassan in cross-examination.

(e) There was no explanation for the failure to call Mr El-Hissi who, according to the evidence of Mr Mekkya:

(i) prepared the document backdated to 1 March 2012;

(ii) witnessed the signature of Mr Mekkya;

(iii) was present when the document was signed by Wael and Hassan; and

(iv) copied Wael to the alleged email of 19 March 2014 which attached the Mekkya Loan Agreement.

(f) Although under the Mekkya Loan Agreement, the Company was obliged to pay Mr Mekkya the sum of $975,000 on 1 March 2016, there is no evidence of any demand for payment of this or any other sum under the Mekkya Loan Agreement prior to the filing of the Mekkya Proceeding on 27 April 2018.

186 I hesitate to conclude that Wael and Hassan did not sign the final page in circumstances which would bind them to the Mekkya Loan Agreement. However, I am not so satisfied because of the following:

(a) The circumstances referred to in the previous paragraph.

(b) The absence of satisfactory evidence explaining how the final page was signed by Wael and Hassan, in particular, the failure to call Mr El-Hissi.

(c) Wael and Hassan gave clear and persuasive evidence and insisted that they had never entered into the Mekkya Loan Agreement.

(d) Mr Mekkya, on the other hand, gave evidence that was inherently improbable in material respects and he was generally not a convincing witness. His credibility was also affected by the fact that, as I find below, he was a central participant in the Arrangement (as defined in paragraph 426 below), a scheme involving documentation relating to the assignment of debts and the transfer of the Arden Street Property, which did not reflect the reality of the transactions. Further, his witness statement failed to disclose the true nature of the Arrangement and the transactions.

187 Counsel for the MAG Parties was critical of Wael and Hassan’s refusal to admit that the signatures on the final page of the document were respectively theirs, until they made that concession in the witness box.

188 I do not consider such criticism to be reasonable. There is no dispute that the copy of the Mekkya Loan Agreement that Wael and Hassan were shown prior to the commencement of this trial contained the second execution clause. These signatures were substantially different from their signatures in the first execution clause. They both readily identified their respective signatures when shown the copy of the final page with the first execution clause.

189 Accordingly, I am not satisfied, on the balance of probabilities, that the Company entered into the Mekkya Loan Agreement.

Has the Company repaid the Mekkya Debt?

190 In case I am wrong in my conclusion as to the validity of the Mekkya Loan Agreement, I propose to deal with the Plaintiffs’ further argument that, even if the agreement was otherwise valid, Mr Mekkya’s own records establish that the Mekkya Debt, being the sum of $982,848.22, has been repaid.

191 There was considerable evidence about the financial dealings between the Company and Mr Mekkya. Issues between them led to the heads of agreement on 19 February 2018 that an independent accountant would ‘work out ... who owes money to the other and how much’.

192 Although the enforceability of the Mekkya Loan Agreement was an issue in this trial, it is common ground that the question of what amount was owing to one party or the other (including their respective related entities) on the running account between the parties, was not to be determined in this trial and no issue of estoppel was to arise with respect to that question. In fact, by paragraph 9 of my order made 10 December 2020, all issues with respect to claims against the Company by Mr Mekkya and his related entities (referred to in paragraphs 17 to 23C of MAG Financial, AAGG and the Builders’ counterclaim filed 14 December 2020) were referred to a special referee for determination.

Submissions

Plaintiffs’ submissions

193 The Plaintiffs submitted that any amount due under the Mekkya Loan Agreement (the existence of which was denied) had been repaid, and relied on the following:

(a) The Mekkya Loan Agreement records a principal sum of $750,000 outstanding as at 1 March 2012 and a liability for the Company to repay that sum, together with $225,000, no later than 1 March 2016.

(b) Mr Mekkya’s ‘draft reconciliation’ of the running account records that he received payments from and on behalf of the Company totalling $1,010,075 between 8 November 2012 and 9 July 2016, as follows:

MAG Parties’ submissions

194 The MAG Parties submitted that the evidence established that the amount due under the Mekkya Loan Agreement had not been repaid, and relied on the following:

(a) The Company’s liquidator, Mr Caspaney, verified the amount due by the Company pursuant to Mr Mekkya’s claim as being $1,004,016.76.

(b) The El Saafin Brothers’ notes from 2017 acknowledged that Mr Mekkya was owed a significant sum of money.

(c) Wael’s evidence conceded a debt, and Hassan gave inconsistent evidence on the issue.

(d) Mr Mekkya’s evidence was supported by contemporaneous records, including the draft reconciliation.

Conclusion

195 On Mr Mekkya’s own evidence, his instructions to Mr El-Hissi were to draw the alleged Mekkya Loan Agreement based on the payments made, and the services provided by him, to the Company as at that date (being March 2014), which were respectively reflected in the draft reconciliation and the various time sheets for work performed for the Company.

196 On the face of the Mekkya Loan Agreement, the amount owing of $750,000 as at 1 March 2012, together with the interest charge of $225,000, should be presumed to have been repaid by the amount of $1,010,075 paid by the Company up to 9 July 2016. This is an application of the principle in Clayton’s Case,^[44] by which payments are presumed to be appropriated to debts in the order in which the debts were incurred.

197 Even if I accept Mr Mekkya’s parol evidence that an amount of $750,000 was outstanding as at 1 March 2014, the amount of any debt should be reduced by the $932,000 paid in the period from 26 May 2014 to 9 July 2016.

198 With respect to the MAG Parties’ submissions:

(a) the fact that Mr Caspaney, in his liquidator’s report, concluded that the Company owed a substantial debt to Mr Mekkya is neither admissible nor relevant to the question of whether the amount owed pursuant to the Mekkya Loan Agreement had been discharged by payments made by the Company up to July 2016; and

(b) although Mr Mekkya’s draft reconciliation records that further debts continued to be incurred by the Company to him in the period up to July 2016, and that amounts may well be due from the Company to Mr Mekkya, that issue is the subject of the reference to a special referee. As I noted above, the question of the current state of the running account between the Company and Mr Mekkya is not an issue in this trial.

199 Accordingly, if the Mekkya Loan Agreement was a valid agreement, I am satisfied that the Company has repaid the Mekkya Debt, being the amount due under the Mekkya Loan Agreement.

Should the Default Judgment relating to the Mekkya Debt be set aside?

Material facts

200 The material facts in relation to this issue are as follows.

201 On 27 April 2018, Mr Mekkya filed the Mekkya Proceeding alleging that the Company owed him the sum of $975,000 pursuant to the Mekkya Loan Agreement.

202 On 27 April 2018, according to an affidavit sworn 14 May 2018 by a legal assistant employed by NOH Legal, the deponent served the writ and statement of claim in the Mekkya Proceeding by posting it to the Company at its registered address, being: ‘c/- Taxline Group, 334 - 347 Sydney Road, Coburg’.

203 On 15 May 2018, Mr Mekkya entered judgment in default of appearance (‘the Default Judgment’) in the Mekkya Proceeding against the Company in the sum of $982,848.22, being $975,000 plus interest of $4,808.22 and costs of $3,040.

204 On 28 May 2018, Mr Nair was informed by the Company directors that they had been notified that the Default Judgment had been entered against the Company.

205 On 8 June 2018, Hassan submitted a report to Victoria Police alleging that Wael and Hassan’s signatures on the Mekkya Loan Agreement had been forged. The allegation of forgery was based on a copy of the document which contained the second execution clause. As referred to above, when Wael was shown the first execution clause in the witness box, he admitted that it was his signature. However, he insisted that, although the last page included his signature, he did not sign the document.

206 By summons filed 5 July 2018, the Company applied for the Default Judgment to be set aside on the basis that it did not receive the writ and that it had a prima facie defence to the claim. The application was supported by an affidavit sworn 4 July 2018, in which Mr Nair deposed that the Company had not been served with the writ at its registered office and that the Receivers had not been aware of the Mekkya Proceeding.

207 By email of 6 August 2018 to Mr Kucianski, Mr Halse noted that the application to set aside the Default Judgment was listed on 10 August 2018. With respect to the underlying debt, he explained as follows:

The consideration under the loan and investment agreement was two fold:
1. cash advances totaling $450k
2. services to the value of $300k in regards to Arden Street
I am instructed that the sum of $450k has been advanced by way of various payments made by my client at the request of the Company. My client has a detailed spreadsheet which he will provide by replying to this email. Secondly, there can be no question the services have been provided as the 65-67 Arden Street development progressed to construction.
Please advise your position in respect of this matter. It is my view that the Summons cannot proceed and my client is prepared to provide any further necessary information to substantiate the claim. I note that the signature on the agreement is identical to other signatures of the Saafins on other documents. For instance, see attached Franek General Security Agreement.

208 The application was listed for hearing on 15 August 2018. However, by letter dated 7 August 2018 to Mr Mekkya, the Administrators advised that they had been appointed as administrators of the Company on 3 August 2018 and accordingly, the Mekkya Proceeding was stayed pursuant to s 440D of the Corporations Act 2001 (Cth) (‘Corporations Act’).

209 On 3 December 2018, Judicial Registrar Burchell ordered that the proceeding be dismissed with no adjudication on the merits, after recording in ‘Other Matters’ as follows:

1. The Plaintiff’s Counsel advised the Court by correspondence dated 30 November 2018 that the Defendant was placed into Liquidation on 12 November 2018.
2. The defendant’s legal representative informed the Court that the application under section 237 of the Corporations Act 2001 was refused by Justice Lyons in a ruling made on 9 November 2018. On 13 September 2018, the defendant requested that orders be made that the proceeding be dismissed with no adjudication on the merits and no order as to costs.

210 On 31 March 2021, following the consent of the parties, it was determined that the Mekkya Proceeding should be transferred to the Supreme Court of Victoria for the purpose of this Court dealing with the application to set aside the Default Judgment.

Submissions

Plaintiffs’ submissions

211 The Plaintiffs submitted that the Default Judgment should be set aside, for the following reasons:

(a) The Company has a prima facie defence on the merits, as previously submitted, because the Company did not enter into the Mekkya Loan Agreement and the alleged Mekkya Debt due under the Mekkya Loan Agreement has been repaid.

(b) The reason for the default in filing an appearance was explained by the fact that the Company was not served with the writ.

(c) The Company promptly filed the application to set aside the Default Judgment, and any delay in the disposition of that application should be attributed to Mr Mekkya’s decision to appoint, and the MAG Parties’ dealings with, the Administrators which resulted in them consenting to abandon the application.

(d) Mr Mekkya has not identified any relevant prejudice which he would suffer if the application were granted.

MAG Parties’ submissions

212 The MAG Parties submitted that the Default Judgment should not be set aside, for the following reasons:

(a) The affidavit filed in support of the application to set aside the Default Judgment alleges that the Mekkya Loan Agreement was fraudulent on the basis that the purported signatures of the directors were not their true signatures. In this regard, the MAG Parties repeated their submissions with respect to the validity of the Mekkya Loan Agreement and further submitted that Wael agreed in cross-examination that it was his signature on the document.

(b) Although Mr Nair deposes that the writ was not served on the Company, this is directly contradicted by the affidavit of service.

(c) There has been undue delay both by:

(i) the five weeks between when Mr Nair was informed about the Default Judgment on 28 May 2018 and the date of the filing of the application to set aside the Default Judgment on 5 July 2018; and

(ii) the Company’s failure to take any steps to press the application until late in this trial.

(d) If the Court was to set aside the Default Judgment, the determination of the Derivative Proceeding may be delayed.

Principles

213 The circumstances relevant to the exercise of the Court’s discretion to set aside a judgment entered in default include the following:

(a) Whether the defendant has a defence on the merits.

(b) The reason for the default of the defendant which resulted in the judgment.

(c) Whether the application to set aside the judgment was made promptly after the judgment came to the knowledge of the defendant.

(d) If the judgment is set aside, whether the plaintiff would be prejudiced in any respect which could not be adequately compensated by a suitable award of costs and the giving of security.^[45]

Conclusion

214 There was no application to cross-examine:

(a) the deponent of the affidavit of service; nor

(b) Mr Nair, the deponent of the affidavit filed in support of the application to set aside the Default Judgment.

Accordingly, I proceed on the basis that the judgment was regularly entered; but the writ never came to the attention of the Company’s directors.

215 In my opinion, the Default Judgment should be set aside for the following reasons:

(a) As the defence has been fully canvassed at this trial, I have concluded that:

(i) the MAG Parties are unable to establish the validity of the Mekkya Loan Agreement to the requisite standard; and

(ii) even if the Mekkya Debt referred to in the Mekkya Loan Agreement had been so advanced, it has been entirely or at least substantially repaid.

Accordingly, in the unusual circumstances of this case, I am satisfied that Mr Mekkya’s claim under the Mekkya Loan Agreement should fail. This is a powerful reason in support of my decision to set aside the Default Judgment.

(b) Although I accept that the writ was posted by ordinary mail to the registered office of the Company, I am satisfied that, for whatever reason, the writ did not come to the attention of the Company directors. This conclusion is supported by the fact that, in my opinion, it is likely that if it had come to their attention, they would have filed an appearance because:

(i) the Company, by its solicitors, had denied any entry into the Mekkya Loan Agreement prior to the filing of proceedings; and

(ii) the El Saafin Brothers filed appearances in the Sacca Proceeding, which was filed by Mr Sacca on the same day by the same solicitors.^[46]

(c) In the circumstances of this case, in which the directors were disputing the appointment of the Receivers and attempting to raise funds to repay secured creditors, I do not consider that the delay of five weeks in the filing of the summons is sufficient to justify a refusal of the application to set aside the Default Judgment. Similarly, any delay by the Company in arranging for the transfer of the application to this Court is explicable by the fact that:

(i) the application was put on hold through the intervention of the Administrators appointed by MAG Financial; and

(ii) the Company directors’ application for derivative leave to bring this proceeding included the issue of the validity of the Mekkya Loan Agreement.

(d) The execution of the Mekkya Loan Agreement has been an issue in the Derivative Proceeding from at least the time the application for derivative leave was granted by Lyons J on 28 July 2020. Accordingly, I do not consider that setting aside the Default Judgment will cause any relevant prejudice to the MAG Parties.

CLAIMS AGAINST THE RECEIVERS

216 In the Derivative Proceeding, the Plaintiffs press the following claims against the Receivers:

(a) their appointment as receivers on 9 April 2018 under the Franek GSA was invalid;

(b) their conduct in taking possession of, and denying the Plaintiffs access to, the Arden Street Property constituted trespass until their appointment under the Balanced Facility Agreement; and

(c) they breached their fiduciary duties by failing to accept the June Tender and the July Tender, or alternatively, failing to resign.

Validity of the appointment of the Receivers on 9 April 2018 under the Franek GSA

217 By email of 10 April 2018 to Mr Nair, Mr Koroneos attached various documents including an ASIC Form 504 which recorded that the Receivers were appointed on 9 April 2018 pursuant to the terms of the Franek GSA. On 7 May 2018, the Receivers resigned their appointment under the Franek GSA.

218 On 7 May 2018, MAG Financial appointed the Receivers as joint and several receivers of the Company pursuant to the terms of the Balanced Facility Agreement. The validity of this appointment is not in dispute.

219 In relation to the entitlement to appoint receivers, the Franek GSA contains the following relevant provisions:

(a) Clause 16.10.4 provides that, at any time after an Event of Default, Mr Franek may appoint a receiver of the ‘whole or any part of the Secured Assets’.

(b) Clause 1.1.15 defines an ‘Event of Default’ as ‘any of the matters set out in Clause 21 of this Deed’.

(c) Clause 21.1 provides that ‘Secured Monies’ are immediately due and payable on the happening of certain specified events.

220 In summary, the Receivers and the MAG Parties contended that the appointment of the Receivers was valid on one or more Events of Default under cl 21 of the Franek GSA.

221 The Plaintiffs submitted that the appointment of the Receivers was invalid because the Second Franek Loan Agreement was unenforceable, and there was no other debt existing at the time of the Receivers’ appointment which might have been secured by the Franek GSA. Accordingly, there was no basis to appoint the Receivers to enforce a debt that did not exist.

222 The Receivers and the MAG Parties did not submit that there was any other basis on which the appointment of the Receivers could be valid if the Second Franek Loan Agreement was unenforceable and if the Franek GSA Mortgages and the Deed of Settlement Mortgage were void insofar as they related to the Second Franek Loan Agreement.

223 As I have found that the Second Franek Loan Agreement was unenforceable and that the Franek GSA Mortgages and the Deed of Settlement Mortgage were void insofar as they related to the Second Franek Loan Agreement, I therefore conclude that the appointment of the Receivers under the Franek GSA was invalid.

224 In case I am wrong in these findings, I propose to consider each of the three bases relied upon by the MAG Parties and the Receivers in appointing the Receivers on 9 April 2018 under the Franek GSA.

Was the appointment of the Receivers on 9 April 2018 valid on the basis of a failure by the Company to execute a contract of sale in default of the Franek Settlement Deed?

Material facts

225 The material facts and communications in relation to this issue are as follows.

226 By cl 2.2 of the Franek Settlement Deed, the Company and/or Wael agreed that, on the date of the execution of the Franek Settlement Deed (being 18 May 2017) they would enter into a standard form LIV Contract of Sale of Real Estate prepared by the Company’s lawyers (on terms satisfactory to Mr Franek, in his sole discretion, but acting reasonably) which would contain a special condition with respect to stamp duty (which is not presently relevant to this issue).

227 This obligation was said to be for the purposes of effecting the ‘Settlement’, which was defined to mean, in substance, that the Company, Wael and Bayda would transfer to Mr Franek Commercial Unit 002 on or before 18 November 2018, in accordance with item 9 of the Schedule to the Franek Settlement Deed.

228 By email of 14 June 2017 to Wael, Mr Franek stated:

We were expecting the contract of sale/section 32 and the duplicate mortgage by 26/05.
As per my email sent today, it's imperative that the contract of sale/section 32 be completed and signed off by no later than 30 June 2017 due to the change in stamp duty for investors buying off the plan.

229 By email of 27 June 2017 to Mr Franek, Wael forwarded an email of the same date from the Company’s solicitors (Viclaw Lawyers), which attached a contract of sale with special conditions. The contract of sale was unsigned and did not include the particulars of sale.

230 By email of 30 June 2017 to Viclaw Lawyers, Mr El-Hissi replied and attached a substitute set of special conditions which, relevantly, deleted a number of the special conditions proposed by Viclaw Lawyers. Mr El-Hissi stated:

We have been provided with the Contract of Sale and Section 32.
We are instructed as follows:
1. The attached Special Conditions are to replace the Special Conditions in your version of the Contract;
2. Special Condition 28 must be completed;
3. Particulars of Sale are to be completed;
4. Inclusion List to reflect the fitout agreed between our clients (Wael can advise you of this as he has the Deed of Settlement and Release which specifies the agreed fitout).
We note that our clients are keen to execute the documents tomorrow prior to the stamp duty changes taking formal effect.
If you otherwise require anything further, please do not hesitate to contact me.

The deletions to the special conditions proposed by Mr El-Hissi are referred to in paragraph 237 below.

231 By email of 3 July 2017 to Mr El-Hissi, Viclaw Lawyers stated that they had been unable to contact Wael to seek his instructions but hoped to reply by the next day.

232 By email of 11 August 2017 to Mr Franek, Wael forwarded an earlier email from Viclaw Lawyers, which had provided an updated contract of sale to the real estate agent.

233 By email of 17 August 2017 at 5:59 pm to Viclaw Lawyers, Mr El-Hissi stated:

We refer to our previous email correspondence.
The attached Special Conditions are to be used in our client’s contract.
Please forward the COS with the attached SCs as a matter of urgency.

234 By email of 17 August 2017 at 11:42 pm to Wael, Mr Franek stated:

The COS/Sect32 was incorrect.
[Mr El-Hissi] emailed [Viclaw Lawyers] in May of this year with clear instructions as to what was required for our contract. She simply had to insert the attached special conditions which refers to our agreement.
It’s a very, very simple 5 minute job for her and yet after what has been 4 months, it’s not right.
Can you please follow up with [Viclaw Lawyers] to make sure she follows the instructions. Use the special conditions attached in place of hers. Simple.
We really need to get this covered off before the end of next week. I’m sure you want it done and dusted as much as I do.

235 By email of 29 August 2017 to Wael, Mr Franek stated:

Please see below. I haven’t heard back from you at all and neither Mr El-Hissi or I have had any response from Victoria of VicLaw Lawyers.
I tried to call you today but no return call.
The special conditions were supplied to Victoria. All she had to do is simply insert them in place of hers. Could it be more simple?

236 By emailed letter dated 29 December 2017 to Wael, with respect to the relevant alleged breach, Mr El-Hissi stated:

We refer to the Deed of Release and Settlement dated 18 May 2017 between our client and, amongst others, you [Deed].
In accordance with the Deed you were required to procure Saafin Constructions Pty Ltd to execute a standard LIV Contract of Sale of Real Estate for Commercial/Office Space marked 002 at 65-67 Arden Street, North Melbourne.
In breach of the Deed you have failed, refused and/or neglected to execute the said Contract.
In the circumstances, our client is holding you in breach of the Deed. Pursuant to clause 4 of the Deed our client is entitled to issue legal proceedings in any Court of competent jurisdiction and produce a copy of the Deed as evidence of the consent of you and Saafin Constructions Pty Ltd to, at our client's option:
(a) Judgment for the sum of $311,000 together with interest of $26,000 per month from 16 February 2016 to the date of judgment. As at the date of this letter the total sum due to our client is $883,000 (being $311,000 plus interest of 22 months at $26,000 per month);
(b) Judgment for damages to be assessed; or
(c) An order for specific performance.
...
Our client hereby demands payment of the sum of $933,000 within 14 days from the date of this letter. We are instructed that our client will enforce his rights under the Deed and the General Security Agreement in the event that the payment is not made by the deadline specified herein.
We note that under the General Security Agreement our client is able to appoint a receiver over Saafn [sic] Constructions Pty Ltd. This step, if taken, will cause significant prejudice to Saafin Constructions ability to complete the project at 65-67 Arden Street, North Melbourne. We urge you to take the matters specified herein seriously and satisfy your obligations to our client.

Mr Franek’s evidence was that there was no response to this correspondence.

237 The special conditions proposed by Viclaw Lawyers in their email of 27 June 2017, which the MAG Parties required to be deleted by Mr El-Hissi’s email of 30 June 2017, were as follows:

(a) Special Condition cl 3.2 provided:

3.2 Limitation of Purchaser's Rights
(a) The Purchaser may not make any requisition or objection, claim compensation or refuse or delay payment of the Price for any:
(i) misdescription or alleged misdescription of the Land or inaccuracy in its area or measurements; or
(ii) failure to comply with a law applicable to land or a requirement of any Relevant Authority; or
(iii) minor variations (being variations which will not materially affect the Property) between the Property or the Land as inspected by the Purchaser and the corresponding lot as shown on the Plan of Subdivision as registered; or
(iv) other amendments or variations on the Plan of Subdivision which do not affect the Property; or
(v) works affecting the natural surface level of the Property or any land abutting it or any variations or alterations to those works.
(b) The Purchaser may not call upon the Vendor to amend title, rectify any failure to comply with a law applicable to land or a requirement of any Relevant Authority to bear the cost of doing so.

(b) Special Condition cl 5.1(e) provided:

The Purchaser acknowledges that prior to the registration of the Plan of Subdivision the Vendor may subdivide or consolidate any and all of the lots on the Plan of Subdivision (other than the lots hereby sold except to consolidate them) and make such consequential adjustments to lot entitlement and lot liability provided that the total lot entitlement and total lot liability shall not be altered and the Purchaser agrees to make no requisition nor claim any compensation in relation thereto.

(c) Special Condition cl 8.2 provided:

8.2 Investment of the deposit
(a) In compliance with General Condition 11.1, if the Deposit is paid by cheque, the Vendor and the Purchaser authorise the Vendor’s Estate Agent to invest the Deposit (or that part of it) in an interest bearing trust account with the vendor’s Estate Agent’s Bank, provided that both parties provide their tax file number, until the earliest to occur of:
(i) settlement;
(ii) release of the Deposit to the Vendor under the provisions of section 27 of the Sale of Land Act 1962; or
(iii) termination or rescission of the Contract.
(b) Any interest earned on the money invested under special condition 8.2 (less all proper bank and government charges, fees, and taxes) will be paid to the Vendor.

(d) Special Condition cl 17 provided:

17. GUARANTEE
17.1 Entitlement to Guarantee
If the Purchaser is or includes a company, which is not listed on the Australian Stock Exchange, the Purchaser must deliver to the Vendor together with this Contract the Guarantee executed by all of the directors of the Purchaser.
17.2 Completion of Guarantee
The Purchaser must complete the Guarantee by:
(a) inserting its name, Australian Company Number or Australian Registered Business Number and the address of its registered office in Item 1 of the Schedule to the Guarantee; and
(b) inserting the full names and addresses of the directors of the Purchaser in Item 2 of the Schedule to the Guarantee, and
(c) procuring the execution and dating of the Guarantee by the directors in the manner set out in the Guarantee.

(e) Special Condition cl 18 provided:

18 INDEMNITY
Without limiting Special Condition 16, the Purchaser indemnifies the Vendor for all cost, liability, loss or damage incurred or suffered by the Vendor caused or contributed to by the Purchaser's failure to comply with this Contract including, without limitation, liability incurred under another contract of sale.

Submissions

MAG Parties’ submissions

238 The MAG Parties rely on the Event of Default in sub-cl 21.1.2 of the Franek GSA which provides that Secured Monies are immediately due and payable: ‘If [Wael, Bayda or the Company] defaults under or fails duly to observe and perform ... any Transaction Document ...’. Pursuant to cl 1.1.44 and item 18 of the Schedule to the Franek GSA, the Franek Settlement Deed is a ‘Transaction Document’.

239 The MAG Parties contended that the Company, Wael and Bayda had defaulted under cl 2.2 of the Franek Settlement Deed by failing to execute the contract of sale as required by Mr Franek. In particular, it was submitted that the deletions of each of the following the special conditions proposed by Mr Franek’s solicitor were reasonable, for the following reasons:

(a) Special Condition cl 3.2 limited the purchaser’s rights in the event that the property was misdescribed.

(b) Special Condition cl 5.1(e) entitled the vendor to vary or amend the plan of subdivision prior to registration.

(c) Special Condition cl 8.2 related to the vendor’s right to invest the deposit, which was irrelevant in circumstances where no deposit was paid or payable.

(d) Special Condition cl 17 was an irrelevant clause relating to the provision of a guarantee by an unlisted corporate purchaser, where Mr Franek was an individual.

(e) Special Condition cl 18 was an indemnity for loss arising from the purchaser’s failure to comply with the contract in circumstances in which no further consideration was payable by Mr Franek.

240 The MAG Parties submitted that none of the special conditions provided by Viclaw Lawyers on 27 June 2017, including those which Mr Franek sought to amend, are found in the standard form LIV Contract of Sale of Real Estate.

Receivers’ submissions

241 In relation to this basis for their appointment, the Receivers adopted the MAG Parties’ submissions.

Plaintiffs’ submissions

242 The Plaintiffs submitted as follows:

(a) There had been no failure on the Company’s part to execute the necessary contract of sale which had been provided by Viclaw Lawyers on 27 June 2017.

(b) The special conditions provided by Mr El-Hissi on 30 June 2017 went considerably beyond the stamp duty amendment contemplated in the Franek Settlement Deed.

(c) Any failure to complete the contract arose from Mr Franek’s efforts to re-write the agreement reached in the Franek Settlement Deed.

Conclusion

243 In the circumstances, I am satisfied that the Company failed to enter into a standard form LIV Contract of Sale of Real Estate on terms satisfactory to Mr Franek, in his sole discretion but acting reasonably, for the reasons submitted by the MAG Parties.

244 The deletion of the special conditions, as proposed by Mr Franek’s solicitor, do not appear to be unreasonable in any way, and there was no evidence or submission as to why it could be said that Mr Franek had acted unreasonably in doing so. This conclusion is reinforced by the fact that, at no time following the proffering of the amended contract of sale on 30 June 2017, did Viclaw Lawyers suggest that the special conditions required by Mr Franek’s solicitor were unreasonable or propose any amendments to such terms.

245 Accordingly, if the Second Franek Loan Agreement had been valid and enforceable, the MAG Parties would have established an Event of Default under the Franek GSA giving rise to an entitlement to appoint the Receivers.

Was the appointment of the Receivers on 9 April 2018 valid on the basis of a misrepresentation as to the value of Commercial Unit 002?

Material facts

246 The material facts and communications in relation to this issue are as follows.

247 By the Franek Settlement Deed dated 18 May 2017, in substance it was agreed that:

(a) Wael and the Company would transfer to Mr Franek Commercial Unit 002 and fit out the property in accordance with the fit-out specifications set out in item 11 of the Schedule; and

(b) as consideration, Mr Franek would release and discharge the Second Franek Loan Agreement and pay a further sum of $50,000 at the direction of Wael or the Company.

248 By email of 23 April 2017 to Mr Franek, Wael attached the ‘Project List’ for the Arden Street Property, which provided details of each of the apartments in the Development including the total area and price of each apartment (‘the 2017 Project List’). Relevantly, it recorded the price of Commercial Unit 002 as $610,000.

249 By email of 19 April 2018 to Mr El-Hissi and Mr Franek, Mr Nair confirmed that an attached price list was ‘the most up to date price list’ (‘the 2018 Price List’). Relevantly, it recorded the price of Commercial Unit 002 as $382,200.

Submissions

MAG Parties’ submissions

250 The MAG Parties rely on the Event of Default in sub-cl 21.1.12 of the Franek GSA which provides that Secured Monies are immediately due and payable if:

[T]he Grantor or another person has given incorrect, misleading or untrue information in connection with this Deed, the Secured Assets or a Collateral Security.

251 The MAG Parties submitted that:

(a) the representation in the 2017 Project List that the market value of Commercial Unit 002 was $610,000, which Mr Franek deposed was confirmed to him orally between 23 and 27 April 2017, was a misrepresentation;

(b) the falsity of the representation was demonstrated by the fact that it was inconsistent with the 2018 Price List, which showed the price of Commercial Unit 002 as $382,200; and

(c) the giving of this incorrect, misleading or untrue information was an Event of Default under cl 21.1.12 of the Franek GSA.

252 The MAG Parties further submitted that, if the Court accepted the explanation of Wael (as set out at paragraph 254 below), the $610,000 market value was still grossly overstated as it contemplated a fit-out cost of $228,000 for a single retail space.

Receivers’ submissions

253 In relation to this basis for their appointment, the Receivers adopted the MAG Parties’ submissions.

Plaintiffs’ submissions

254 The Plaintiffs submitted that the difference in price was readily explained by Wael’s evidence that the $610,000 price in the 2017 Project List incorporated the fit-out cost of Commercial Unit 002, while the $382,200 price in the 2018 Price List was without fit-out.

Conclusion

255 The estimate of market value in the 2017 Project List is a representation as to opinion and not a representation as to fact. A statement of an opinion will commonly convey ‘no more than that the opinion expressed is held and perhaps that there is basis for the opinion’.^[47]

256 Accordingly, for the MAG Parties to prove that the price of $610,000 for Commercial Unit 002 was ‘incorrect, misleading or untrue information’, it would be necessary to establish that the opinion was not honestly held or that there was no basis for the opinion.

257 It was not alleged, and I am not satisfied, that Wael did not honestly hold or had no reasonable basis for putting forward the opinion as to the price for Commercial Unit 002 in the 2017 Project List. In particular, I note the following:

(a) There is no evidence as to:

(i) the value of Commercial Unit 002 at or about April 2017; or

(ii) how the 2017 Project List was compiled or how the prices were estimated.

(b) Objectively, there would have been good reason for the value of Commercial Unit 002 that was communicated to Mr Franek to have been estimated on the basis of it being fitted out because Mr Franek was entitled to the unit fitted out, in accordance with item 11 of the Franek Settlement Deed.

(c) It was not put to Wael that he had no such opinion or that the opinion had no reasonable basis.

(d) I do not accept the MAG Parties’ submission that I should infer that the cost of fitting out Commercial Unit 002 could not have been in the order of $228,000. No evidence was led on that question and I have no basis for drawing such an inference.

258 In reaching this conclusion, I had regard to the apparently inconsistent evidence of Wael in further examination as to whether the price of $610,000 was with or without fit-out. Wael’s evidence was:

(a) first, to the effect that the price of $610,000 in the 2017 Price List was including fit-out; and

(b) later, to the effect that the price of $610,000 was a figure negotiated with Mr Franek without fit-out because ‘he wants to finish it off because that needs a permit for what sort of business he going to make, in the finishing – he can employ another builder to finish it’.

259 Apart from the internal inconsistency, the state of the evidence about the negotiations between Wael and Mr Franek in April 2017 is unsatisfactory because:

(a) the later evidence of Wael was that the figure of $610,000 was negotiated with Mr Franek as the cost price and makes no reference to the fact that it was referred to as the ‘Price’ in the 2017 Project List; and

(b) Mr Franek’s evidence was that he was told by Wael that Commercial Unit 002 had a market value of $610,000.

260 Wael was not cross-examined on this issue, and I am not satisfied that either Mr Franek or Wael had any independent recollection of a conversation in April 2017.

261 Accordingly, even if the Second Franek Loan Agreement had been valid and enforceable, the appointment of the Receivers on the basis of a misrepresentation as to the value of Commercial Unit 002 would not have been valid.

Was the appointment of the Receivers on 9 April 2018 valid on the basis of the termination of the Building Contract as a material adverse change under the Franek GSA?

Material facts

262 The material facts and communications in relation to this issue are as follows.

263 By the Franek Settlement Deed, Wael and the Company were required to transfer to Mr Franek Commercial Unit 002 by 18 November 2018.

264 By letter dated 22 March 2018 to the Builder, the Company served a ‘Notice of Contractor’s Default’, providing notice of the Company’s intention to terminate the Building Contract unless the Builder provided clear evidence that it had remedied the contractor’s defaults identified in the notice.

265 By report dated 28 March 2018, Napier & Blakeley assessed the works at the Development as at 28 February 2018, and stated its forecast completion date as 4 December 2018, one month later than its previous forecast completion date, and seven months later than the original date for practical completion of 4 May 2018.

266 By email of 5 April 2018, Mr Nair served a termination notice on the Builder.

267 On 6 April 2018, the Builder and the Company entered into the Standstill Agreement (reflected in the order of Sloss J set out at paragraph 42 above) under which neither party would carry out any works at the Development until 23 April 2018 or until further order of the Court.

268 By email of 9 April 2018 at 9:24 pm to Mr Nair, Mr Koroneos advised that he acted for the Receivers, and with respect to a minute of proposed order which had been provided to the Receivers, stated:

I note that in paragraph 2 of ‘Other Matters’ in the Minute, the plaintiff agreed to allow the Company and its servants and agents to inspect the Site (as defined therein). I hereby put the parties on notice that my clients object to any party on behalf of the Company inspecting the Site without my clients’ prior written approval. My clients will take steps to arrange an inspection of the Site this week.

Submissions

MAG Parties’ submissions

269 The MAG Parties rely on the Events of Default in sub-cls 21.1.22 and 21.1.23 of the Franek GSA which provide that Secured Monies are immediately due and payable if:

21.1.22 the Grantor does or fails to do anything, or permits anything to be done, with the result that, in the Secured Party’s reasonable opinion:

1. The value to the Secured Party of the security conferred on it by this Deed is materially and adversely affected; or

b. Any of the Secured Assets is in jeopardy;
21.1.23 there is a material, adverse change in the assets, financial position or business of the Grantor which, in the Secured Party’s reasonable opinion, might affect the ability of the Grantor or the Guarantor to comply with its obligations under this Deed, Security, Transaction Document or a Collateral Security; ...

270 The MAG Parties submitted that the termination of the Building Contract by the Company on 5 April 2018 was a relevant material adverse change under cl 21.1.23, because:

(a) the construction of the Development was only 22% complete; and therefore

(b) the termination was likely to affect the ability of the Company to transfer the fully completed Commercial Unit 002 to Mr Franek by 18 November 2018, as required by the Franek Settlement Deed.

Receivers’ submissions

271 The Receivers submitted that the termination of the Building Contract on 5 April 2018, the Standstill Agreement and the delay in completing the construction of the Development constituted a material adverse change in the assets and business of the Company which might have affected its ability to comply with its obligations under the Franek Settlement Deed.

Plaintiffs’ submissions

272 The Plaintiffs submitted that the dispute between the Company and the Builder did not constitute a material adverse change, for the following reasons:

(a) Clause 21.1.22 of the Franek GSA was directed to the value of the security being materially and adversely affected by the grantor’s actions.

(b) The MAG Parties have not explained how delays in completing the Development impaired Mr Franek’s security.

(c) There is no evidence that Mr Franek reasonably considered that the delays to the Development were causing an adverse effect to his security.

(d) Such a belief could not be reasonably held because the termination of the Builder’s engagement was taken to secure the efficient completion of the Development.

(e) The Development had not ‘ground to a halt’. The project’s quantity surveyor, Napier & Blakeley, assessed the progress of works as follows:

(i) as at 12 December 2017, 19.1% progressed from 15.8% at the time of the previous report;

(ii) as at 2 February 2018, 21.9% progressed from 18.2%; and

(iii) as at 28 March 2018, 25.2% progressed from 21.9%.

(f) If work did grind to a halt, then that was a result of the Builder’s dilatory process, which was part of the plan devised between Mr Franek and Mr Mekkya.

Conclusion

273 Under sub-cls 21.1.22 and 21.1.23 of the Franek GSA, it is a necessary element of an Event of Default that the secured party forms a relevant opinion being:

(a) for cl 21.1.22, that the value to the secured party of the security is materially or adversely affected, or that any of the secured assets are in jeopardy; and

(b) for cl 21.1.23, that there has been a material, adverse change in the assets, financial position or business of the grantor which might affect the ability of the grantor or the guarantor to comply with its obligations.

274 Mr Franek gave no evidence that he formed the requisite opinion. In the absence of such an opinion, the entitlement to appoint receivers pursuant to either sub-clause is not enlivened. The absence of evidence that Mr Franek (as the representative of MAG Financial) had formed the relevant opinion at the time of the Receivers’ appointment, is an ‘insurmountable hurdle’ confronting MAG Financial in its attempt to support the Receivers’ appointment on this basis.^[48]

275 In fact, it is not clear on the evidence that Mr Franek was even aware of the termination of the Builder at the time of the appointment of the Receivers. It may be inferred that Mr Franek became aware of the termination no later than 9:24 pm on 9 April 2018, when the Receivers’ solicitor sent the email referring to the minute of the proposed order before Sloss J. However, the evidence is silent on whether he was aware of the termination at any point before he signed the deed of appointment of the Receivers on 5 April 2018 or the Receivers accepted the appointment on 9 April 2018.

276 In Vision Telecommunications Pty Ltd v Australia and New Zealand Banking Group Ltd, Pidgeon AUJ came to the conclusion that an event of default which required the formation of an opinion by the lender, could be relied upon if the material circumstances existed at the time of the appointment; but the relevant opinion was formed later.^[49]

277 His Honour stated that this decision was consistent with the approach of Kenny JA in Australia & New Zealand Banking Group Ltd v Pan Foods Company Importers & Distributors Pty Ltd.^[50] With respect, her Honour’s finding in that case was that the bank was entitled to rely upon the event of default based on its relevant opinion, despite not relying upon it in its notice of demand, because the evidence established that the bank had formed the opinion of a material adverse change prior to the giving of the notice. In fact, her Honour said:

It was, of course, for the appellants to establish, first, the existence of these events or circumstances and, secondly, that the bank, through an appropriate officer, had directed its mind to the events or circumstances and had formed the requisite opinion prior to the giving of notice under cl. 11.1(b).^[51]

278 Her Honour’s conclusion was that it did not matter whether the bank relied upon the particular cause to justify the delivery of the notice providing ‘the facts which justified the taking of that step [were] shown to have existed at the time the step was taken, though the bank did not know of the justification at that time’.^[52]

279 Even if the Second Franek Loan Agreement had been valid and enforceable, the MAG Parties have failed to prove that Mr Franek formed the requisite opinion prior to the appointment of the Receivers. Accordingly, the appointment of the Receivers on the basis of the termination of the Building Contract as a material adverse change would not have been valid.

280 If the formation of the requisite opinion had been proved, I would have found that such opinion had a reasonable basis, for the following reasons:

(a) Whether the adverse change is ‘material’, as required by cl 21.1.23 of the Franek GSA, must be determined by reference to the context. An adverse change in the assets, financial position or business of the Company is material if, in the reasonable opinion of Mr Franek, the adverse change significantly affected or had a substantial effect on the Company’s assets, financial position or business.^[53]

(b) The termination of the Builder, the cessation of works and the entry into the Standstill Agreement might each significantly affect the value of a site under construction, particularly in circumstances where the date for practical completion of the Development was forecast to be delayed by seven months shortly prior to the cessation of works.

Did the appointment of the Receivers deprive the Company of the use and enjoyment of the Arden Street Property and cause the Company to lose the interest expenses incurred?

281 As set out above, the Plaintiffs claim that the Receivers’ conduct in taking possession of, and denying the Plaintiffs access to, the Arden Street Property constituted trespass. The Plaintiffs’ primary argument was that by restricting access to the site from the date of their initial appointment on 9 April 2018 until their resignation on 7 May 2018, the Receivers prevented the Plaintiffs from continuing work on the Development and that this delay caused the Company to incur further interest expenses on its loans.

Material facts

282 The material facts in relation to this issue are as follows.

283 On or about 9 April 2018, the Receivers were appointed pursuant to the terms of the Franek GSA.

284 By email of 9 April 2018 to Mr Nair, Mr Koroneos advised that he acted for the Receivers and with respect to a minute of proposed order which had been provided to the Receivers stated:

I note that in paragraph 2 of ‘Other Matters’ in the Minute, the plaintiff agreed to allow the Company and its servants and agents to inspect the Site (as defined therein). I hereby put the parties on notice that my clients object to any party on behalf of the Company inspecting the Site without my clients’ prior written approval. My clients will take steps to arrange an inspection of the Site this week.

285 By email of 10 April 2018 at 7:56 am to Mr Nair, Mr Koroneos stated:

I refer to my email below and confirm that my clients do not authorise any inspection of the Site without their prior written approval. Please do not enter the Site. A representative of my clients will be in contact with you this morning.
I will also contact you later this morning to discuss.

286 By email of 10 April 2018 at 9:52 am to Mr Nair, Mr Koroneos restated the refusal to allow an inspection of the site.

287 By email of 11 April 2018 to Wael (copied to Mr Hodges), Napier & Blakeley stated that the site had been ‘locked up this morning’ and they would ‘need to put our inspection down to an abortive visit’.

288 By a report dated 20 April 2018, the BSS Group recorded that they had inspected the works on 16 and 19 April 2018.

289 On 7 May 2018, the Receivers resigned their appointment under the Franek GSA and, on the same day, they were reappointed pursuant to the terms of the Balanced Facility Agreement.

Submissions

Plaintiffs’ submissions

290 The Plaintiffs submitted as follows:

(a) The taking of possession of the Arden Street Property by the Receivers constituted a trespass until they resigned their first appointment on 7 May 2018.

(b) The fact that the Receivers granted representatives of the Company access to the Arden Street Property on request does not displace the trespass because, in the meantime, the Receivers interfered with the Company’s possession of the Arden Street Property.

(c) The Plaintiffs are entitled to a declaration that the Receivers were trespassers between 9 April 2018 and 7 May 2018, without proof of loss.

(d) As a result of the trespass, the Company sustained loss and damage, being the additional interest expenses the Company incurred under the Balanced Facility Agreement and the Second Franek Loan Agreement from the expiration of the Standstill Agreement on 23 April 2018 until the Receivers’ resignation on 7 May 2018.

(e) The evidence of Hassan was that the Company would have taken steps to see that it was in a position to resume construction work on the Arden Street Property as soon as possible. The Receivers denied the Company the ability to take those steps.

MAG Parties’ submissions

291 The MAG Parties submitted as follows:

(a) At the time of the appointment of the Receivers on 9 April 2018, the Company had just terminated the Building Contract and had not engaged a new builder to continue construction works.

(b) The Receivers facilitated inspections of the Arden Street Property.

(c) On 6 April 2018, Sloss J had noted the Standstill Agreement as effective until 23 April 2018 or further order. Accordingly, the Company was unable to use and enjoy the Arden Street Property for the first 10 days of the Receivers’ appointment in any event.

(d) There was no evidence to establish that the additional interest expenses would not have been incurred but for the Receivers’ trespass because, in circumstances where the Receivers were reappointed under the Balanced Facility Agreement on 7 May 2018, there is no evidentiary basis for finding that construction work could have resumed prior to that date.

Receivers’ submissions

292 The Receivers submitted as follows:

(a) The Plaintiffs have not tendered any evidence regarding:

(i) the steps that the Company would have taken to see that construction work resumed at the Arden Street Property;

(ii) the steps that the Company would have taken pursuant to the Franek GSA;

(iii) the extended period required to complete the Development; and/or

(iv) the dates by which the Company would have been able to complete the Development, to settle the sales of the units, and to repay the money owing pursuant to the Balanced Facility Agreement and/or the Second Franek Loan Agreement.

(b) The alleged trespass did not cause the pleaded interest expenses to be incurred. Rather, the interest expenses were incurred at the date the Company entered into the Balanced Facility Agreement and the Second Franek Loan Agreement, which was prior to the alleged trespass.

Conclusion

293 The MAG Parties and the Receivers did not dispute the proposition that the Receivers asserted control over the Arden Street Property after their appointment on 9 April 2018 until their resignation on 7 May 2018.

294 However, the Company’s liability for interest under the Balanced Facility Agreement and the Second Franek Loan Agreement would have continued during that period, regardless of the appointment of the Receivers. There is no evidence that the progression of the Development was hampered by the receivership and it is most unlikely that it would have been in the following circumstances:

(a) The Building Contract had been terminated and there was no evidence of the availability of any alternative builder.

(b) The Development was subject to the Standstill Agreement from 6 April 2018 to 23 April 2018, and so no work could proceed on the Development during that time in any event.

(c) Any attempts to progress the Development would have come to an end in any event by the appointment of the Receivers under the Balanced Facility Agreement on 7 May 2018.

295 In the circumstances, I find that the Plaintiffs have made out their claim for trespass. However, for the reasons outlined above, they have proved no resulting loss or damage and accordingly, are entitled to nominal damages only.

Should the Court exercise its discretion pursuant to s 419 of the Corporations Act?

296 Section 419 of the Corporations Act gives the Court a discretion to relieve receivers who have been wrongfully appointed of liability for their conduct, including wrongful possession, in certain circumstances. Section 419 provides as follows:

(1) A receiver, or any other authorised person, who, whether as agent for the corporation concerned or not, enters into possession or assumes control of any property of a corporation for the purpose of enforcing any security interest is, notwithstanding any agreement to the contrary, but without prejudice to the person’s rights against the corporation or any other person, liable for debts incurred by the person in the course of the receivership, possession or control for services rendered, goods purchased or property hired, leased (including a lease of goods that gives rise to a PPSA security interest in the goods), used or occupied.
(2) Subsection (1) does not constitute the person entitled to the security interest a mortgagee in possession.
(3) Where:
(a) a person (in this subsection called the controller) enters into possession or assumes control of property of a corporation; and
(b) the controller purports to have been properly appointed as a receiver in respect of that property under a power contained in an instrument, but has not been properly so appointed; and
(c) civil proceedings in an Australian court arise out of an act alleged to have been done by the controller;
the court may, if it is satisfied that the controller believed on reasonable grounds that the controller had been properly so appointed, order that:
(d) the controller be relieved in whole or in part of a liability that the controller has incurred but would not have incurred if the controller had been properly so appointed; and
(e) a person who purported to appoint the controller as receiver be liable in respect of an act, matter or thing in so far as the controller has been relieved under paragraph (d) of liability in respect of that act, matter or thing.

Submissions

Receivers’ submissions

297 The Receivers submitted that the Court should afford relief under s 419 of the Corporations Act on the basis that the Receivers believed, on reasonable grounds, to have been properly appointed, for the following reasons:

(a) They undertook appropriate checks to determine whether they had been validly appointed. In particular, they relied on the evidence of Mr Dixon that, at a meeting on 4 April 2018, Mr Franek and his solicitor advised them of:

(i) the general background to the loan and security documents in favour of Mr Franek;

(ii) the various defaults under the loan and security documents by the Company;

(iii) the ongoing dispute between the Company and the Builder engaged to construct the apartment complex on the Arden Street Property;

(iv) the lack of progress of the Development at the Arden Street Property; and

(v) the financial position of the Company and other debts owed by the Company to secured creditors.

(b) Both witnesses gave evidence that ‘they believed their appointment was valid based on, amongst other things, what was told to them at the pre-appointment conference at the RACV Club, the existence and terms of the Franek GSA and the termination of the Building Contract which amount to a material adverse change’.

(c) They were not alerted to anything which might have put them on notice that their appointment was invalid.

Plaintiffs’ submissions

298 The Plaintiffs submitted that the Receivers should not be excused from liability, for the following reasons:

(a) The Receivers have the onus of proving that they believed, on reasonable grounds, that they had been properly appointed.

(b) The Receivers’ evidence merely recounts topics, in general terms, about which Mr Franek and Mr El-Hissi advised them at the meeting on 4 April 2018. No specific information or documents are identified.

(c) Although the Receivers say that they received legal advice, they gave no evidence as to its content.

(d) The extent of the evidence of the Receivers’ due diligence is summarised by Mr Bise during cross-examination as follows:

Well, we had our – I will just go over the background. We had the meeting where we were taken through the history. We took those facts in and we then sought legal advice around that question. And on the basis of that we were then comfortable to take the appointment.

(e) Despite Mr Nair repeatedly requesting that the Receivers identify the basis for their appointment, they identified no such basis. In fact, no basis was identified by anyone until the emailed letter dated 17 April 2018 from Mr El-Hissi setting out a ‘not exhaustive’ list of the breaches relied on by Mr Franek.

(f) The resignation of the Receivers and their reappointment under a different facility was not consistent with Mr Franek having confidence in the validity of the Receivers’ original appointment, and there is no evidence of the Receivers seeking any explanation for their resignation and reappointment.

(g) Correspondence to the Receivers’ solicitor about the time they were appointed should have put them on notice that their appointment was for an ulterior purpose. In particular:

(i) the Receivers were aware that the El Saafin Brothers were seeking to refinance, which was prompting Mr Franek to urgently appoint the Receivers; and

(ii) the initial payment of $50,000 on account of the Receivers’ fees was paid by Trade On, rather than by their appointor.

Conclusion

299 I am not satisfied that the Receivers’ belief that they had been properly appointed was on reasonable grounds, for the following reasons:

(a) I accept the Plaintiffs’ submission that the evidence of the Receivers merely referred to topics covered at the meeting on 4 April 2018. There was no evidence of the documents with which they were provided. Similarly, there was no evidence of the substance of any legal advice relating to the validity of the proposed appointment. I am unable to assess the reasoning that underpinned their asserted beliefs that Mr Franek was entitled to appoint them as receivers.

(b) I am not satisfied that they identified any proper basis for their appointment. The Receivers’ evidence referred to the basis of the Receivers’ appointment being the termination of the Building Contract as a material adverse event; but the relevant meeting took place on 4 April 2018, the day before the termination of the Building Contract. Further, there was no evidence about whether the Receivers received advice about the preconditions for an appointment based on material adverse change or, in particular, the formation of the relevant opinion by Mr Franek prior to their appointment.

(c) The doubts about whether they identified a proper basis for their appointment are enhanced by the following:

(i) The Receivers do not have any contemporaneous notes recording their instructions, their advice, the basis of their appointment or any event of default justifying their appointment.

(ii) Neither they nor their solicitor responded to Mr Nair’s requests for the identification of the basis of their appointment, and ultimately the response was given by MAG Financial’s solicitors, seven days after the first request. This failure is consistent with the Receivers not having formed an independent view as to the basis of their appointment.

(d) The Receivers did not explain whether they read the Second Franek Loan Agreement, which formed the basis of the exercise of security rights in respect of which they were appointed.

(e) If they did read the document, there was no attempt to explain whether they were concerned about the fact that the interest rate substantially exceeded the maximum rate prescribed by the Consumer Credit Act, or whether they sought legal advice about the applicability of the Consumer Credit Act. The Consumer Credit Act is a piece of legislation with which one would expect receivers to be very familiar.

300 In the circumstances, I do not propose to relieve the Receivers of liability pursuant to s 419 of the Corporations Act.

301 The Receivers accept that, if their appointment as Receivers under the Franek GSA was invalid, as I have found it was, they are not entitled to indemnity under cl 18.2.1 or remuneration under cl 22.5 of the Franek GSA.

TENDER
By the June Tender, did the Company effectively tender the repayment of the amount due under the Balanced Facility Agreement?

Material facts

302 The material facts in relation to this issue are as follows.

303 By email of 9 May 2018 to Mr Koroneos, Mr Nair requested the payout figure, stating:

As a matter of urgency could you please provide the pay out figure required to terminate the appointment of your clients.

304 By email of 10 May 2018 at approximately 2:00 pm to Mr Koroneos and Mr El-Hissi, Mr Nair repeated his request, stating:

As a matter of urgency, could you please provide the pay out figure required to finalise the debt leading to the termination of Appointment of Receivers.
Our client intents [sic] to finalise this debt at the earliest as soon as its made available.
Our client reserves all its rights and remedies.

305 By email of 10 May 2018 at 2:04 pm to Mr Nair and Mr Koroneos, Mr El-Hissi responded and stated:

The payout will be provided shortly. You should be aware that MAG has also taken an assignment of the Franek Security and therefore the payout will include all amounts due to MAG.

306 By email of 16 May 2018 at 2:24 pm to Mr Koroneos, Mr Nair again requested a payout figure, stating:

We refer to the above matter and repeat our request for Payout figures as set out in our email dated 14 May 2018.
We have repeated [sic] requested such payout figures by emails on 5 different occasions.
As stated in our pervious [sic] email, our clients are within their rights to seek the payout figure for settling the debt, as they have done. This figure has not been forthcoming from your clients even though we were advised by Mr Omar El-Hissi in his email dated 10 May 2018 at 2.04pm that it would be provided shortly.

307 By email of 16 May 2018 at 6:58 pm to Mr Nair, Mr Koroneos stated:

I am not able to provide the requested payout. The payout will need to be provided by my clients’ appointor (the Appointor).
In the meantime, can you please demonstrate that your clients are in a position to discharge the debt in full. Indicatively, based on the information available to my clients and subject to the actual payouts being provided by the Appointor, the assigned debt due under the:
1. Balanced Securities facility will be greater than $3M by reason of the enforcement costs incurred to date; and
2. Franek facility is now more than $1.45M.
There is no utility in providing a detailed breakdown of the payout figure if your clients cannot demonstrate that they are in a position to discharge the debt in full. Please forward any documents in support of how and when your clients will be in a position to discharge the assigned debt due to the Appointor.

308 By email of 8 June 2018 to Mr El-Hissi and Mr Franek, Mr Bise stated:

Please be informed that the Company’s directors have submitted a request for a payout figure. Can you please provide me with a figure as soon as practicable.

309 By email of 9 June 2018 to Mr Dixon (copied to Mr Koroneos and Mr Franek), Mr El-Hissi requested the Receivers’ costs and disbursements to date ‘[i]n order to calculate the payout figure’.

310 By letter of approval dated 19 June 2018 to the Company, Mr Keith Blackney stated that Black Arrow Mortgages was prepared to provide a loan advance of $4 million to the Company, subject to the conditions set out therein (‘the Black Arrow Letter’).

311 By email of 22 June 2018 at 9:39 am to Mr Koroneos, with respect to the failure to provide a payout figure, Mr Nair stated:

We refer to our numerous email correspondence with your office, Mr El-Hissi and telephone conversations with your client, Mr Ahmed Bise, with regards to the payout figure and its breakdown.
As stated in our pervious [sic] emails, our clients are within their rights to seek the payout figure for settling the debt, as they have done. This figure has not been forthcoming from your office or your appointed receivers, even though we were advised by Mr Omar EI-Hissi in his email dated 10 May 2018 at 2.04pm that it would be provided shortly.
Our client has procured the funds necessary to settle the debt. We hereby request that you provide us immediately with the figures and its breakdown and prepare for settlement.
We wish to settle this debt in the coming week.
We also request that your client cease and desist from any activities that will incur expenses to the company.
If we don’t receive a response in this matter by 10:00am Monday being 25 June 2018 then we will be left with no choice but to seek orders to that effect from the Supreme Court.

312 By email of 22 June 2018 at approximately 10:00 am to Mr Nair, Mr Koroneos replied and stated that the payout was to be provided by his clients’ appointor.

313 By email of 25 June 2018 at 10:16 am to Mr Franek (copied to Mr Koroneos and the Receivers), Mr Nair again requested the payout figure in substantially the same terms as his email of 22 June 2018 to Mr Koroneos. This time, he requested a response by 12:00 am on Tuesday, 26 June 2018.

314 By email of 25 June 2018 at 11:01 am to Mr Nair, Mr Halse requested that his client, Mr Franek, not be contacted directly. With respect to the payout figure, he stated:

I am instructed that the present payout figure due to my client is $8,250,990.83 (includes interest until 30.06.2018 but excludes any costs incurred since 21.06.2018).

315 By email of 25 June 2018 at 11:18 am to Mr Halse, Mr Nair requested a breakdown of the $8,250,990.83 ‘when the principal sum owed by our client does not exceed $2.2 Million’.

316 By emailed letter dated 26 June 2018 to Mr Nair, Mr Halse provided the following breakdown of the payout figure of $8,250,990.83:

1. $3,265,742.82 being principal, interest and lender’s internal cost pursuant to the monies originally advanced pursuant to the Facility Agreement dated 28 October 2016 (includes interest to 30 June 2018). Interest is calculated at a rate of 18.95% per annum and compounded daily.
2. $4,720,105.03 being the principal and interest pursuant to the General Security Agreement dated 18 May 2017, which was also assigned to MAG on 3 May 2018

1. $361,000 being principal (includes $50,000 advanced under the Deed of Release and Settlement);
2. $780,000 interest for 30 months at $26,000 per month up to 14 July 2018;
   100. $3,579,105.03 owed by Saafin Constructions Pty Ltd to MAG as assignee of the debts owed by Saafin Constructions Pty Ltd to George Sacca, Amr Mekkya and New Concept Homes Pty Ltd, notice of which was provided to you yesterday.

3. $265,142.98 being enforcement costs and disbursements incurred up to and including 21 June 2018.

In particular, Mr Halse relied on cl 15.7 of the Balanced Facility Agreement and cl 28 of the Franek GSA in support of the inclusion of debts other than that under the Balanced Facility Agreement.

317 By emailed letter dated 27 June 2018 to Mr Halse and Mr Koroneos, Mr Nair challenged the amount claimed as repayable under the Balanced Facility Agreement. He stated that he was instructed to tender the amount of $3,265,742.82 in satisfaction of the Company’s liabilities under the Balanced Facility Agreement in respect of which the Receivers had been appointed (‘the June Tender’). He requested that he be notified by 12:00 noon on 27 June 2018 whether MAG Financial would accept this tender ‘so the necessary arrangements to effect payment may be made’. He further stated:

The alternative financing arrangements our clients have implemented require that payment of the amount to discharge the Company’s liabilities under the Facility Agreement is made contemporaneously with our clients being provided with the documentation necessary to remove the first registered mortgage over 65-67 Arden Street, North Melbourne.

318 By email of 27 June 2018 to Mr Nair (copied to Mr Koroneos), Mr Halse stated that the ‘part payment of the sum of $3,265,742.82’ would not discharge the liability to his client under the registered mortgage over the Arden Street Property. He further stated:

In case there was confusion, it is my client’s position that the amount which is secured by the Facility Agreement and the registered mortgage is the figure of $8,250,990.83 (yesterday). The definition of Secured Moneys in the Facility Agreement, and the all monies clauses in the registered mortgage encompass not merely the liabilities of Saafin Constructions in respect of the monies originally advanced under the Facility Agreement, but also the other monies comprised in the payout figure. My email did not suggest that the ‘amount payable in respect of the Facility Agreement was $3,265,742.82’. Accordingly while your client can certainly make a part payment of the sum of $3,265,742.82 to my client, such payment will not discharge your client’s liability to my client under, amongst others, the registered mortgage over the property at 65-67 Arden Street, North Melbourne. My client is entitled to rely on amongst others, the all moneys clause in the registered mortgage to support its position.

319 By letter of approval dated 28 June 2018 to the Company, Mr Keith Blackney stated that Black Arrow Mortgages was prepared to provide a loan advance of $5 million to the Company, subject to the conditions set out therein.

Submissions

MAG Parties’ submissions

320 The MAG Parties submitted that the June Tender was not a valid tender, for the following reasons:

(a) It did not involve the proffering of cash or its equivalent in the full amount demanded.

(b) The payment was not proffered unconditionally because it was a requirement of the tender that a discharge of the Balanced Mortgage be provided contemporaneously with the payment.

(c) The Plaintiffs were unable to establish that they were ready, willing and able to proffer the demanded amount as at 26 or 27 June 2018.

321 The MAG Parties further submitted that the Court should not accept that the Company was able to tender payment of $3,265,742.82 on the basis of the Black Arrow Letter, for the following reasons:

(a) The Black Arrow Letter was highly conditional.

(b) The Black Arrow Letter was described as an ‘indicative Letter of Offer’ and was subject to the following conditions:

(i) $223,000 in fees were to be deducted at settlement;

(ii) interest of $60,000 per month was payable in advance;

(iii) any rates, mortgages or caveats were to be paid out of the loan advance;

(iv) due diligence on property debt;

(v) satisfactory title searches; and

(vi) settlement to occur within 21 to 25 working days.

(c) The Black Arrow Letter was subject to the removal of all caveats which, at that time, were as follows:

(i) caveat registered by Mr Franek on 6 October 2017 numbered AQ322523K;

(ii) caveat registered by Mr Mekkya on 26 February 2018 numbered AQ766930S;

(iii) caveat registered by Mr Al-Zubeidi on 17 April 2018 numbered AQ930392G; and

(iv) caveat registered by Property Capital Pty Ltd on 25 May 2018 numbered AR062124N.

(d) The additional properties over which Black Arrow Mortgages was intending to take security had second mortgages and caveats on them.

(e) The amount proposed to be lent under the Black Arrow Letter was not sufficient to satisfy all caveats and second mortgages and, in particular:

(i) the amount due under the Franek GSA of $1,140,000; and

(ii) the Mekkya Debt of $982,848.22, together with interest from the date of judgment being 15 May 2018,

in addition to the amount the Company was purporting to tender to MAG Financial.

Plaintiffs’ submissions

322 The Plaintiffs submitted that the June Tender was a valid tender for the following reasons:

(a) The requirement to tender the amount under the Balanced Facility Agreement was dispensed with because MAG Financial would have refused it, if it had been made.

(b) The fact that it was a requirement of the tender that MAG Financial provide a discharge of the Balanced Mortgage does not invalidate the tender.

(c) The Plaintiffs’ evidence demonstrates that sufficient funds were available to the Company to satisfy the tender of amounts owing under the Balanced Mortgage and/or the Second Franek Loan Agreement (if it was enforceable), for the following reasons:

(i) Mr Keith Blackney of Black Arrow Mortgages, an experienced mortgage broker, had issued letters of offer dated 28 June 2018, 25 July 2018, 5 October 2018, 20 June 2019, 10 March 2020 and 22 April 2020 proposing loans starting from $5 million in June 2018 to $9 million in March 2020.

(ii) Mr Blackney gave evidence that:

(1) the funds could have been applied to remove any existing caveats and mortgages and further funds could have been made available if further security was provided; and

(2) he remained prepared to advance up to $9 million secured by a first registered mortgage over the Arden Street Property.

Receivers’ submissions

323 The Receivers submitted that the June Tender was not a valid tender for the following reasons:

(a) The Plaintiffs did not pay any amount owing under the Balanced Facility Agreement, nor deposit any portion of the debt into Court.

(b) The requirement for cash or its equivalent was not dispensed with because:

(i) a demand for a sum greater than the amount due is not a basis for such a disposition; and

(ii) there was no evidence that MAG Financial would have refused the tender.

Principles

324 A valid tender requires the proffering of cash or its equivalent in the full amount demanded on an unconditional basis.^[54]

325 A tender by a mortgagor, which is made on condition that the mortgagee provide a discharge of the mortgage, does not invalidate the tender.^[55] To hold otherwise would be commercial nonsense because the refinance of a property can often only be achieved if the new financier is able to take security over the secured property on settlement. For a tender to be invalidated, it must be ‘made on terms that would adversely affect the rights of the person to whom the tender is made’.^[56]

326 The requirement that the debtor actually proffer the amount properly due in cash or its equivalent will be dispensed with if the debtor proves that:

(a) the creditor conducted themselves so as to show that the tender of the amount properly due would not be accepted;^[57] and

(b) the debtor was ready, willing and able to perform the tender.^[58]

327 This dispensation arises from the principle that the law will not require a party to perform a futile action. As Brennan J explained in Foran v Wight:

Where the respective obligations of parties to a contract are mutually dependent and concurrent, the primary rule is that neither party who fails to perform his obligation when the time for performance arrives can rescind for the other party’s failure at that time to perform his obligation. Each party’s obligation is conditional on performance by the other; neither can complain of non-performance by the other when the condition governing the other’s obligation goes unfulfilled. But if one party intimates to the other that it is useless for the other to fulfil his obligation and the other acts on the intimation, the party to whom the intimation is given is dispensed from a nugatory tender of performance.^[59]

Conclusion

328 By its failure to provide payout figures from 9 May to 25 June 2018; and its excessive demand for $8,250,990.83 for the discharge of the Balanced Mortgage, MAG Financial demonstrated that it was not prepared to accept a valid tender of the amount due under the Balanced Mortgage of $3,265,742.82. Further, the Plaintiffs’ proposal that MAG Financial provide the discharge of mortgage documentation contemporaneously with the payment of the amount due under the Balanced Mortgage did not excuse MAG Financial from refusing the proposed tender.

329 In my opinion, on the balance of probabilities, I am satisfied that the Plaintiffs were able to borrow the necessary funds for the purpose of refinancing the Balanced Mortgage, for the following reasons:

(a) I accept the evidence of Mr Blackney that he would have been able to broker the refinancing of the Balanced Mortgage. Mr Blackney is an experienced mortgage broker and has been prepared to broker loans for the Plaintiffs as required from June 2018 to April 2020. In particular, by letter dated 28 June 2018, Mr Blackney confirmed the approval of a loan of $5 million at an interest rate of 15% per annum. The terms of the loan offer did contain common conditions, but I accept his evidence that it was likely that these conditions would have been satisfied if MAG Financial had said it was prepared to accept the amount properly due under the Balanced Mortgage.

(b) The conduct of the Plaintiffs from the appointment of the Receivers in April 2018 until disclosure of the settlement of the sale of the Arden Street Property in July 2018, was consistent with a mortgagor which was ready, willing and able to refinance the amount due under the Balanced Mortgage.

(c) The refusal by MAG Financial to provide payout figures, the eventual claim for a grossly excessive payout figure and the subterfuge to circumvent the Plaintiffs’ refinancing are consistent with MAG Financial knowing, or at least being very concerned that, if given the opportunity, the Plaintiffs would have refinanced the secured debt.

(d) Any evidentiary difficulty in determining the hypothetical question of whether the Plaintiffs would have been able to raise the necessary finance is a product of MAG Financial’s unconscionable conduct in:

(i) refusing to provide a payout figure;

(ii) providing a grossly excessive payout figure; and

(iii) engaging in subterfuge to prevent the Plaintiffs from repaying the amount properly due under the Balanced Mortgage.

In these circumstances, the Court adopts a robust approach ‘relying on the presumption against wrongdoers, the onus of proof, and resolving doubtful questions against the party whose actions have made an accurate determination so problematic’.^[60] The presumption against the wrongdoer is more commonly applied in the law of tort, but it is also available in the assessment of equitable remedies.^[61] The presumption against the wrongdoer ‘goes beyond where the wrong has positively made it difficult for the victim to prove its damages, and extends to where the wrong has thrust the victim into a difficult task of proving a past hypothetical’.^[62]

330 Further, to the extent that the caveats lodged by Mr Franek and Mr Mekkya might be relevant to this question, I have already decided that neither party had a valid claim to support a caveat on the Arden Street Property. Accordingly, I do not consider that the Court should presume that these caveats would have had to have been paid out for the refinancing because to do so would be to permit ‘the blameable party ... to take advantage of his own wrong’.^[63] Further, any refusal by the MAG Parties to discharge these caveats would have rendered them liable for damages consequent on such refusal pursuant to s 118 of the Transfer of Land Act.

331 Accordingly, I find that by the June Tender, the Company effectively tendered the repayment of the amount due under the Balanced Facility Agreement.

By the July Tender, did the Company effectively tender the repayment of the amounts due under the Balanced Facility Agreement and the Second Franek Loan Agreement?

Material facts

332 The material facts in relation to this issue are as follows.

333 By letter dated 16 July 2018 to Mr Halse, Mr Nair stated that the Company was ready, willing and able to tender the amount of $4,406,742.82 in satisfaction of what he described as the ‘Franek Debt’ and ‘the Balanced Securities Debt’ (‘the July Tender’). He stated:

[T]he Company is ready, willing and able to tender payment of $4,406,742.82 (‘the settlement sum’) to MAG payable in respect of the Franek Debt and the Balanced Securities Debt (without prejudice to the Company’s rights). In exchange for the Settlement sum, MAG will take all necessary steps, and provide the Company with the documentation necessary, to cancel the Second and Third Defendants’ appointment as receivers in respect of the Company and to discharge the registered mortgages over the Property and 2 Lynwood Crescent, Lower Plenty.
The Company proposes Settlement at 3.00pm on 19 July 2018 where the settlement sum will be handed over to MAG.

334 By emailed letter dated 19 July 2018 to Mr Halse and Mr Koroneos, Mr Nair referred to the calculation of the amounts due under the Franek GSA and the Balanced Facility Agreement and stated:

The Company is ready, willing and able to settle the Franek Debt and the Balanced Securities Debt ... which are said to be owed under the Facility Agreement and the General Security Agreement, and the associated costs.
We therefore advise that the Company proposes to tender to MAG payment of the Franek Debt, the Balanced Securities Debt and the associated costs at 3.00pm on 25 July 2018.
Please could the Defendants make the necessary arrangements and advise of a location for settlement, together with the pay-out figures that will be required to settle these debts and all costs up to and including 25 July 2018. If your clients’ decline to provide the information sought as to further costs then our clients will tender the amount as asserted in Mr Franek’s affidavit.
We would expect MAG to attend settlement with the necessary documents to discharge the first registered mortgage over 65-67 Arden Street, North Melbourne and to provide them in return for the moneys tendered.
We note, for completeness, that, in tendering any such payment, the Company will be doing so under protest and without prejudice to its rights to dispute or tax the quantum of interest and costs.
We also note that, should MAG refused [sic] to accept this tender, then our clients propose to put this letter into evidence in the Proceeding.

335 On or about 23 July 2018, MAG Financial and AAGG completed the sale of the Arden Street Property.

336 By letter dated 25 July 2018 to Mr Nair, Mr Halse rejected the proposed July Tender and stated that the transfer of the Arden Street Property, pursuant to MAG Financial’s exercise of its power of sale, had now been registered.

Submissions

Plaintiffs’ submissions

337 The Plaintiffs submitted that the July Tender was effective for the same reasons that the June Tender had been effective.

MAG Parties’ submissions

338 The MAG Parties submitted that the July Tender was ineffective for the same reasons that the June Tender had been ineffective. The MAG Parties further submitted that any tender would have been ineffective because a valid contract of sale had been entered into with AAGG in relation to the Arden Street Property, and therefore the Company’s right of redemption was lost.

Receivers’ submissions

339 The Receivers submitted that the July Tender was ineffective for the same reasons that the June Tender had been ineffective. The Receivers further submitted that, once a binding contract is entered into by a mortgagee exercising a power of sale, the mortgagor is bound by that contract and is no longer able to exercise the equity of redemption.

Conclusion

340 In my opinion, the July Tender was effective for the same reasons as I have found that the June Tender was effective; and I reject the submissions of the MAG Parties and the Receivers for the same reasons that I rejected their submissions with respect to the June Tender.

341 With respect to the contention that, by the time of the July Tender, the Company’s right to redeem the mortgages had been extinguished, I note the relevant principles as follows:

(a) On the mortgagee entering into a valid contract of sale with respect to the secured property, the mortgagor’s right to redeem the mortgage is extinguished.^[64]

(b) If the mortgagee does not act bona fide in the exercise of the power of sale and the purchaser had knowledge of such impropriety at the date of the contract, the mortgagor does not lose its equity of redemption by the entry into the contract.^[65]

(c) Further, if the purchaser was not aware that the mortgagee had acted in bad faith, the mortgagor would not necessarily lose its right of redemption but the matter would be ‘determined in accordance with the general principles by which disputes as to priority between competing claims are resolved, there is no principle which operates to postpone the right of the mortgagor to that of the purchaser’.^[66]

342 As found in paragraph 432 below, MAG Financial’s conduct in entering into the contract of sale for the Arden Street Property was in bad faith and AAGG colluded in such conduct. Accordingly, I consider that, by the July Tender, the Company effectively tendered the repayment of the amounts due under the Balanced Facility Agreement and the Second Franek Loan Agreement.

Does interest stop accruing on the Balanced Mortgage from the date of tender?

Submissions

Plaintiffs’ submissions

343 The Plaintiffs submitted that, by reason of the exceptional circumstances in this case, interest stopped accruing from the date of the June Tender, which the MAG Parties should have accepted. However, in oral submissions, counsel for the Plaintiffs conceded that the Company would be required to account for the interest that would have been payable on the amount borrowed from Black Arrow Mortgages to refinance the amount due under the Balanced Facility Agreement.

344 The Plaintiffs further submitted that the consequences of the MAG Parties’ failure to accept the Company’s offers to tender are that interest stopped accruing on the amount due under the Balanced Facility Agreement and the Second Franek Loan Agreement (if enforceable) from the dates that MAG Financial should have accepted the Company’s tender, for the following reasons:

(a) the modern principle is that a requirement that a mortgagor set aside the tendered sum is no longer absolute;

(b) a mortgagee may lose its rights to interest after a refusal, if that refusal is considered to be misconduct; and

(c) if interest were to accrue, then MAG Financial would profit from its intervening efforts to stifle the Company’s claims.

MAG Parties’ submissions

345 The MAG Parties submitted that on the authority of McPherson v Summerville,^[67] interest would continue to accrue where the tender had not been accepted by the mortgagee unless the mortgagor set aside the sum tendered.

Principles

346 In Conroy v Mason, Molesworth J found that the mortgagee had refused a valid tender.^[68] With respect to the payment of interest, he said: ‘When a mortgage is overdue there must be some way of paying it, and stopping interest’.^[69] Molesworth J found that, as the money had always been ready to be paid, no interest was payable to the mortgagee from the date of the tender, except to the extent that the money held by the mortgagor for the tender had earned interest.^[70]

347 In Bank of New South Wales v O’Connor, Lord Macnaghten, delivering the opinion of the Privy Council, stated:

[A] proper tender will stop the running of interest if the mortgagor keeps the money ready to pay over to the mortgagee. But there is no authority for saying that refusal to accept a proper tender is a breach of contract, for which an action at law will lie.^[71]

348 In McPherson v Summerville, Simpson CJ in Eq explained that ‘[a]s a general rule interest can only be stopped from running on a mortgage debt by a tender of the amount due and by putting aside the money, if the mortgagee refuses the tender, so as to be ready to hand it to him at any time’.^[72]

349 In Edmondson v Copland, with respect to the liability for interest after refusal of a valid tender, Joyce J said:

On the whole I think that, in order to avoid payment of interest after tender improperly refused, the mortgagor must either pay the money into Court, if there be any proceedings in which that could be done, or keep the money ready, and either make no profit, or, if he make profit, - e.g., if he get interest by placing the money on deposit - he must account for such profit to the mortgagee.^[73]

350 Similarly, in Gardiner v Fitzgerald, Gibbs J stated:

It is perhaps unnecessary to add that if the plaintiffs had made a good tender, interest would not have stopped running unless the sum tendered had been set aside and kept ready for payment at any time.^[74]

351 In Project Research Pty Ltd v Permanent Trustee of Aust Ltd, Hodgson J stated that the refusal of a tender on the basis of a claim for an amount in excess of the amount due under the mortgage would constitute misconduct, which could cause the mortgagee to lose its right to an order for costs.^[75]

352 In Challenge Bank Ltd v Hodgekiss, Young J stated that ‘it is only if the mortgagor shows that it has available the money to pay off the mortgage, which it has held without receiving interest, that it may be entitled to stop paying the interest under the mortgage’.^[76]

353 In Kitson v Goodge, Hodgson J held that there was no ‘fixed rule that interest continues to be payable at the mortgage rate if the sum tendered is not set aside for payment at any time’.^[77] His Honour found that, after the unreasonable refusal of a tender, the mortgagor was liable to pay the lower rate of interest that would have been payable under its proposed refinancing arrangement.^[78]

354 In Coughlan v George, Hamilton J found that the requirements of a valid tender were dispensed with because the creditor, by demanding an amount in excess of that which was properly due under the mortgage,^[79] ‘so conducted himself as to show that a tender of the amount properly due would not be accepted’.^[80] He stated that the ‘general rule’ that the money must be put aside after a refused tender did not apply because the tender had been dispensed with.^[81]

355 In Çukurova Finance International Ltd v Alfa Telecom Turkey Ltd (Nos 3 to 5), the Privy Council stated:

The conclusion ... is that equity can and should respond by a special order as to interest or costs in exceptional situations where the mortgagee has by words or conduct rejected, made impossible or delayed repayment of the mortgage debt, and that such a situation may exist where there is a tender or offer of repayment, particularly one backed by moneys actually paid into court or an account.^[82]

The Board also questioned the statement in Bank of New South Wales v O’Connor, referred to in paragraph 347 above and queried whether, in modern conditions, the wrongful rejection of a tender should still not constitute a breach of a loan agreement.^[83]

356 In Amcor Ltd v Barnes, after a detailed review of the authorities, Sloss J found that the wrongful refusal to accept the tender stopped interest accruing because the debtor could have obtained the funds to repay the debt without interest becoming payable.^[84] Her Honour stated that the circumstances of the case resonated with the observations in Çukurova, that questioned the statement of principle in Bank of New South Wales v O’Connor, that a wrongful rejection of a tender was not a breach of the loan agreement.^[85] With respect, I agree with her Honour. The issue was not argued before me, but in my opinion, in this case, the five criteria identified in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council,^[86] would be comfortably satisfied with respect to an implied term that the creditor would accept a tender of the amount owing by the debtor after it became due.

357 On the basis of the above authorities, I consider the current state of the law is that if a creditor refuses a valid tender, it will not be entitled to interest from the date of the refusal except to the extent that:

(a) the debtor has saved interest it would have been liable to pay under its refinancing arrangements; or

(b) the debtor has earned interest on the money set aside for its repayment.

Conclusion

358 In the circumstances, the refusal of the Plaintiffs’ offers to tender disentitled the MAG Parties to interest under the Balanced Mortgage except to the extent that the Company would have been obliged to pay interest under its refinancing facility.

359 Accordingly, in my opinion the Company remains liable to pay to the MAG Parties the amount of interest which it would have paid under its refinancing facility until that amount would have been repaid from the proceeds of the sale of units in the Development.

360 In my opinion, a fair estimate of the amount of interest that the Company would have paid to the substitute financier prior to repayment after 14 months is $585,000, calculated as follows:

(a) $540,000, being $45,000 per month for 12 months prior to the settlement of the sale of the first four sold units; and

(b) a total sum of $45,000 over the 13^th and 14^th months, during which time the Company could have applied $2 million per month, from the settlement of sale proceeds, in satisfaction of the refinance amount.

361 The allowance of 14 months for the repayment of the refinanced amount is based on the following evidence and findings:

(a) The total amount borrowed under the refinancing facility from Black Arrow Mortgages for the purpose of refinancing the Balanced Mortgage would have been approximately $3.6 million (at an interest rate of 15%) made up as follows:

(i) $3,265,742.82, being the amount payable under the Balanced Mortgage as at 26 June 2018; plus

(ii) $325,600 inclusive of GST, being borrowing costs for the refinancing facility of $296,000 plus GST (including establishment fee of $150,000, legal fees of $10,000, administration fee of $25,000, brokerage fee of $100,000, valuation fee of $5,000, and acceptance fee of $6,000).

(b) The time for the construction of the Development to reach practical completion would have been approximately nine months. This was the time period estimated by Napier & Blakeley to achieve practical completion of the Development, from the time of cessation of works at the end of March 2018 (being the period from 28 March 2018 to 4 December 2018).

(c) An additional three months should be allowed for:

(i) the building work to resume; and

(ii) a period after practical completion, before settlement of the sold units would commence.

(d) After a further two months, the proceeds of sale of sold units would have allowed repayment of the financed amount, because the gross monthly proceeds from the sale of units, after the expiration of 12 months, would have averaged approximately $2 million. This conclusion is based on the following uncontested evidence of the MAG Parties’ expert valuer, Mr Rann:

(i) The realisable value of the sale of the units in the Development net of GST was $12,796,837, which is an average value of $511,873.48 for each of the 25 units (before deduction of sale costs).

(ii) The probable rate of sales of units in the Development would be four units per month commencing three months after practical completion.

This would result in an expected gross average monthly revenue from sales of $2,047,493.92 (before deduction of sale costs). After reduction for sale costs and other expenses, I have allowed the amount of $2 million per month as available to repay the refinanced amount. Therefore, the refinanced amount would be repaid in approximately two months, after the commencement of settlement of sold units.

362 In undertaking this assessment, I have taken into account the unchallenged evidence of Hassan with respect to his experience as a builder and the likely requirements for completion of the Development. Of course, the assessment is necessarily imprecise but that does not relieve the Court from the responsibility of undertaking it. As Mason CJ and Dawson J observed in Commonwealth v Amann Aviation Pty Ltd:

The settled rule, both here and in England, is that mere difficulty in estimating damages does not relieve a court from the responsibility of estimating them as best it can. Indeed, in Jones v. Schiffmann Menzies J. went so far as to say that the ‘assessment of damages ... does sometimes, of necessity involve what is guess work rather than estimation’. Where precise evidence is not available the court must do the best it can.^[87]

363 The parties did not have the opportunity to make submissions about the above calculations and accordingly, I will hear the parties on the question of whether I should make orders based on the above assessment.

364 In my opinion, the reduction in the MAG Parties’ entitlement to interest consequent upon their refusal to accept the tenders arises by ‘a special order’ in equity.^[88]

365 In my opinion, the same result would arise from an award of damages of the amount equivalent to the difference between the amount payable under the Balanced Mortgage less the amount the Company would have paid to the substitute financier but for the wrongful conduct of MAG Financial and AAGG. Such an award could be made:

(a) under s 12GF of the Australian Securities and Investments Commission Act 2001 (Cth) (‘ASIC Act’) by reason of the unconscionable conduct in contravention of s 12CB referred to in paragraph 445 below; or

(b) on the basis that the refusal of the tenders constituted a breach of the Balanced Facility Agreement.^[89]

Does interest stop accruing on the amount due under the Second Franek Loan Agreement?

366 If the Franek GSA and the Franek Settlement Deed were enforceable, the refusal of the tender of the amount owing under the Second Franek Loan Agreement by the MAG Parties would result in a similar reduction in the MAG Parties’ entitlement to claim interest with respect to that debt.

Are the El Saafin Brothers discharged of their obligations as guarantors under the Balanced Facility Agreement?

367 As noted in paragraph 26 above, under the Balanced Facility Agreement, the El Saafin Brothers guaranteed the performance of the Company.

Submissions

Plaintiffs’ submissions

368 The Plaintiffs submitted that the consequences of the MAG Parties’ effective refusal of the Company’s offers to tender discharged the liabilities of the Company’s guarantors under the Balanced Facility Agreement, for the following reasons:

(a) The Balanced Facility Agreement did not provide the lender with a right of refusal and a surety is discharged for breach of a promissory term in the suretyship contract.^[90]

(b) The MAG Parties’ failure to accept the Company’s offers to tender amounted to a breach of an essential condition of the Balanced Facility Agreement.

MAG Parties’ submissions

369 The MAG Parties conceded that there was authority to suggest that the El Saafin Brothers would be discharged from their surety obligations. However, they submitted that they should only be discharged to the extent of the amount held to have been validly tendered.

Conclusion

370 In Amcor Ltd v Barnes,^[91] Sloss J found that guarantors had been discharged from liability by the creditor’s refusal of the effective tender by the debtor, on the following grounds:

(a) The guarantee was not enlivened unless the debtor failed to comply with its obligations under the agreement. The debtor had complied (or was to be regarded as having complied) with such obligations, and so the guarantee had not been enlivened.^[92]

(b) Even if the debtor had not complied with the obligations in accordance with the agreement such that the guarantee was enlivened, the guarantor was nonetheless discharged from his surety obligations for the following reason:

The rejection by [the creditor] of the ‘tender’ made in a timely way by [the debtor], operated to preclude the existence or continued existence of the circumstances in which [the guarantor], as surety, had agreed to be bound. That being so, ... there was no need for [the guarantor] to rescind the contract for repudiation or breach of an essential or fundamental term. Rather, the position is that the circumstances of his liability as surety do not exist.^[93]

371 In my opinion, the same considerations apply in this case, and the MAG Parties’ concession was properly made. Accordingly, the counterclaim against the El Saafin Brothers in the Derivative Proceeding, and the claim against Wael in the MAG Proceeding, based on the guarantee in the Balanced Facility Agreement must be dismissed.

Did the Receivers owe the Company fiduciary duties and if so, did they breach such duties?

Submissions

Plaintiffs’ submissions

372 The Plaintiffs submitted that the Receivers owed fiduciary duties to the Company not to put themselves in a position of conflict, and not to profit impermissibly from their positions as fiduciaries. The Plaintiffs relied on the fact that the Receivers had, in their defence, admitted the Plaintiffs’ allegation that the Receivers owed the Company fiduciary duties.

373 The Plaintiffs further submitted that the Receivers breached these duties by reason of the following:

(a) The Receivers should have accepted the Company’s offers to tender the amounts owing under the Balanced Facility Agreement and the Second Franek Loan Agreement. The Plaintiffs referred to the following:

(i) Despite repeated requests for a payout figure from 9 May 2018, there was an ongoing and unexplained delay in providing it.

(ii) The Receivers made no attempt to obtain the payout figure and then reframed the issue as the Company’s capacity to pay.

(iii) The payout figure provided on 25 June 2018 was inflated and the Receivers had not received legal advice.

(iv) The Receivers were aware that Mr Franek was impatient in his desire for the receivership to proceed quickly, and angry about the Receivers undertaking to the Court not to sell the Company’s properties.

(b) Alternatively, the Receivers should have resigned their appointment because they knew, or should have known, that the ongoing appointment was a means by which MAG Financial sought to achieve its ulterior purpose. It was contended that, by failing to resign their appointment, the Receivers placed themselves in a position of conflict between their fiduciary duties and their personal interests because, by their ongoing appointment, they continued to accrue entitlements, which they would not have received if they had resigned.

Receivers’ submissions

374 The Receivers submitted that receivers who are appointed out of court do not fall within the classes of persons who may be said to be fiduciaries.

375 The relationship between receiver and mortgagor is founded on contract and escapes the imposition of general fiduciary obligations. A receiver appointed out of court is the only genuinely non-fiduciary agent.

376 Although not generally a fiduciary, a receiver may still be subject to fiduciary duties, for example, when dealing with the proceeds of the sale of assets of a company.

Duties of a privately appointed receiver

377 Although in some circumstances, a privately appointed receiver may owe fiduciary duties to their appointor and the company, there is no general fiduciary relationship between a receiver and the company in receivership.^[94]

378 Apart from statutory modifications,^[95] receivers’ duties at general law have been described as:

(a) to the mortgagee, to collect and realise the assets, in order to discharge the secured debt;
(b) to the mortgagee, a duty to keep it informed about the progress of the receivership;
(c) as donee of the power, to exercise the powers and duties in good faith and for proper purposes;
(d) to the mortgagor, to act in good faith in the exercise of the powers of sale, in the same way that a mortgagee owes duties of good faith in that regard; and
(e) to the mortgagor, to hold the balance of the proceeds of sale after discharge of the secured debt, on trust for the mortgagor.^[96]

Conclusion

379 The fiduciary duties, as alleged by the Plaintiffs, are not duties imposed on a privately appointed receiver. Accordingly, the Plaintiffs’ claim against the Receivers for a breach of their alleged fiduciary duties must fail.

380 In my opinion, the Plaintiffs’ claim is not saved by the Receivers’ admission that they owed the Company fiduciary duties by reason of their appointment. Although the admission could have been more carefully crafted, it is not determinative because, as noted above, receivers may become subject to fiduciary duties with respect to aspects of the conduct of a receivership. Further, from their opening submissions, the Receivers made it clear that they contended that no relevant fiduciary duties had arisen in this case and stated:

In this case, the nature of the precise alleged fiduciary duty and breach is unclear. The Receivers contend they could not have breached any alleged fiduciary duty since they did not collect or realise any assets of the Company, they did not receive any trust property and at all times exercised their powers and duties in good faith and for a proper purpose.

381 Further, I do not consider that the Plaintiffs have established that the Receivers breached any duty by failing to accept the Company’s offers to tender the amounts owing under the Balanced Facility Agreement and the Second Franek Loan Agreement, for the following reasons:

(a) Although the Receivers would have been aware that their appointor delayed in providing a payout figure, they were dependent upon the appointor providing any payout figure, and the issue was dealt with between the Plaintiffs and the appointor’s solicitors.

(b) At all relevant times, the Receivers were proceeding to put in place proper arrangements for the sale of the Arden Street Property and resisted any pressure by the appointor to effect the sale with undue haste. They were entirely unaware of the secret sale of the Arden Street Property by MAG Financial to AAGG until after the settlement of the sale.

(c) I am not satisfied that the Receivers were aware of their appointor’s ‘ulterior purpose’.

382 Additionally, I do not consider that the Plaintiffs have established that the Receivers breached any duty by failing to resign as receivers, for the following reasons:

(a) The general proposition that a fiduciary must not make a personal profit from his or her position,^[97] does not affect the entitlement to charge fees for services.^[98]

(b) In making a decision as to whether or not it should resign its appointment, a receiver would usually not be in a position of a conflict between duty and personal interest purely because the continuation of the appointment would result in an entitlement to further fees. It is difficult to distinguish this position from a lawyer retained in a proceeding being asked to advise whether the client should settle. It could hardly be suggested that such a lawyer could not advise because they would be conflicted by the fact that they would continue to earn professional fees if the case did not settle.

(c) At no time did the question of resignation arise. At the material time, it was not suggested by the Plaintiffs or the appointor.

(d) Absent a contractual right to resign in the terms of the contract under which receivers are appointed, it is doubtful that receivers have a right to resign without the consent of the appointor.^[99]

SALE OF THE ARDEN STREET PROPERTY

383 In the Derivative Proceeding, the Plaintiffs press the following claims against the MAG Parties in relation to the sale of the Arden Street Property from MAG Financial to AAGG on or about 20 July 2018:

(a) The sale was completed in breach of MAG Financial’s duties as a mortgagee exercising its power of sale.

(b) The manner in which the sale was effected constituted unconscionable conduct within the meaning of s 12CB of the ASIC Act.

(c) The sale was executed prior to service of the requisite notices under s 76 of the Transfer of Land Act.

Material facts

384 The material facts in relation to this issue are set out below; but should be read in conjunction with the chronology, as set out at paragraphs 10 to 86 above.

385 In or about March 2018, there was a meeting at the Greenvale Shopping Centre that was attended by Mr Mekkya, Mr Sacca, Dr Hegazy and Dr Atalla in which there was a discussion about how the participants would be able to recover the amounts that they had invested in the Development.

386 By email of 4 April 2018 to Mr El-Hissi, Mr Franek stated:

I spoke briefly with Amr who tells me that Saafin met with the dentist and have agreed to sign a 2^nd mortgage over Arden Street. The dentists lawyer is preparing the documents. They could end up signing Friday.
This would complicate matters.
I feels it’s imperative that Stephen meet with the barrister ASAP tomorrow, we meet thereafter, sign the docs and Stephen lodge the appoint with ASIC straight away.
I think it’s imperative that the official appointment be tomorrow.
As per our discussion today, can you please ask Mark to confirm the current amount owed?

387 By email of 5 April 2018 to Mr Koroneos, Mr El-Hissi forwarded the above email and stated: ‘Can we make sure that the appointment proceeds today?’.

388 The appointment of the Receivers was effected on an expedited basis on 9 April 2018. The payment of the Receivers by an advance of $50,000 was made by Mr Mekkya and Mr Sacca on 6 April 2018 through their company, Trade On. The Receivers’ appointment was made without prior notice to the Company.

389 By email of 10 April 2018 to the El Saafin Brothers, Mr Steve Hodges of Balanced Securities stated:

I have now seen the General Security Agreement in favour of Mark Franek who has appointed Grant Thornton as Receiver.
I do not know of Mark Franek and how he came to be involved but Wael mentioned to me on the phone today that he Mr Franek had lent some money to Wael personally quite some time ago and that he was with his barrister trying to resolve the situation.
Subject to any proposals from Mr Franek, I think BSL will now have no option other than to take over the Project.
I am not sure how this is now going to pan out but I obviously don’t need to remind you of the personal guarantees and the mortgage over 3 Ball Court Bundoora we also hold as security.

390 The Receivers did not respond to requests for the identification of the grounds for their appointment. However, by emailed letter dated 17 April 2018 to Mr Nair, Mr El-Hissi set out a non-exhaustive list of the defaults relied upon by Mr Franek in appointing the Receivers.

391 By Deed of Assignment of Debt and Securities dated 18 April 2018, Mr Franek or his nominee agreed to purchase an assignment of Balanced Securities’ rights under the Balanced Facility Agreement and the Balanced Mortgage, subject to payment of the purchase price of $2,793,079.80, which was comprised of a deposit of $300,000 payable on signing and the balance due by 18 May 2018. Mr Franek was unable to say how the $300,000 had been paid although he said it did not go through his account.

392 On 26 April 2018, MAG Financial was registered as a corporation with ASIC. On the same day, by letter to the Company from Balanced Securities faxed at 12:09 pm, MAG Financial was nominated as the assignee of the proposed assignment ‘expected to take place 4 May 2018’.

393 On 3 May 2018, Mr Franek assigned all his rights under the Second Franek Loan Agreement, the Franek GSA and the Franek Settlement Deed to MAG Financial.

394 On 3 May 2018, the settlement of the assignment of the Balanced Facility Agreement was made by a Commonwealth Bank of Australia bank cheque in the sum of $2,474,991.71 payable to Balanced Securities. The funds for this bank cheque were provided from the account of AMGS as trustees for the Mekkya Sacca Unit Trust. Mr Mekkya and Mr Sacca were the sole directors and shareholders of AMGS.

395 On 7 May 2018, the Receivers resigned as receivers under the Franek GSA and were reappointed as receivers under the Balanced Facility Agreement by MAG Financial, as assignee.

396 From 9 May 2018, Mr Nair repeatedly requested the payout figure necessary to discharge the amount owing under the Balanced Facility Agreement.^[100] As referred to above, the Receivers and MAG Financial refused to provide the payout figure until 25 June 2018 when Mr Halse provided the figure of $8,250,990.83 without a breakdown.

397 By emailed letter dated 5 June 2018 to Mr Franek, Mr Bise provided a report on the receivership of the Company. He noted the primary assets of the Company as being the Arden Street Property and the Lower Plenty Property. He advised on ‘managing the realisation process’ for the Arden Street Property. With respect to the valuation process he observed:

The pre-work in connection with obtaining a valuation has been time consuming. I appreciate that progress may seem slow and the rate less than satisfactory, but it is critical that this work is completed correctly as it has a major bearing on the valuation and in the formulation of the correct realisation strategy. This will also ensure that the securities that you have in support of your primary security are not compromised.

398 By email of 8 June 2018 to Mr Bise, with respect to the Arden Street Property, Mr Franek asked:

Are valuations required if we push this property to auction?
I’m currently considering every option to expedite these matters to realise the assets.

399 By email of 12 June 2018 to Mr Franek, Mr Bise replied, and with respect to the Arden Street Property stated:

I appreciate that you seek for this matter to be resolved quickly but patience is required so as to ensure that the Receivers’ duties are met to all stakeholders, particularly to you. In relation to the North Melbourne property the consultant engaged is highly credentialed at dealing with property assets, especially distressed ones. In my view it is best to await the valuation and his recommendation as to the methodology around how best to realise the North Melbourne property.
The process must be rigorous and able to withstand scrutiny. Anything less could potentially compromise the securities that have been created in your favour. Particular reference is made to any personal guarantees.
A valuation is still in [sic] required in an auction scenario as it will allow the Receivers to assess whether any offer that is received is acceptable or not.

400 By email of 13 June 2018 to Mr Bise, Mr Franek stated:

Thanks for your update. Good progress on Lower Plenty.
If you can get a sworn valuation done on an urgent basis. We may have an interested buyer for the property who can affect a quick settlement.
We may be able to sell the property without an agent. Otherwise, before appointing the agent, we need to add our buyer details to be excluded from any exclusive sales contract.
I hope to provide a further update by Thursday of this week.

401 By email of 14 June 2018 to Mr Franek, Mr Bise replied:

Please note that pursuant to Section 420A of the Corporations Act 2001 (‘the Act’) receivers have a statutory duty of care in exercising the power of sale. In exercising the power of sale a receiver must take all reasonable care to sell the property for not less than its market value. The only way to satisfy this duty is to advertise the Property publicly and to have an agent properly market it. Please note that this requirement has been previously tested in the Courts and the precedents are clear.
Once an agent has been appointed I will let you know.

402 By Commonwealth Bank of Australia bank cheque dated 14 June 2018 in the sum of $1,150,600 payable to Mr Franek, MAG Financial paid the purchase price payable pursuant to the assignment dated 3 May 2018. The bank cheque was issued out of the Fountain Gate branch of the Commonwealth Bank of Australia, and the funds were provided by Mr Mekkya and Mr Sacca through their company, Trade On’s account.

403 By four deeds of assignment, each dated 20 June 2018, it was agreed that the following debts would be assigned to MAG Financial:

(a) the Mekkya Debt ($982,848.22) (being the amount of the Default Judgment);

(b) the Sacca Debt ($1.9 million);

(c) the New Concept Design Debt ($174,907.59); and

(d) the Builder Debt ($521,349.22).

The assignment price for each of these debts was stated to be the face value of the debt. In fact, as Mr Franek said in evidence, the assignment price was not paid for any of the debts, and it was always agreed that no payment would be made.

404 By email of 21 June 2018 to Mr Franek, Mr Bise provided an update, and with respect to the Arden Street Property stated:

I understand that progress has not being [sic] as swift as you’d like. But please note that it is critical that a process is followed that ensures that the Receivers meet their common law and statutory duties. In doing that it ensures that the securities that you have are preserved and not compromised in any way. Having said that progress has also been frustrated by the delay in third parties providing information.
As you’re aware JLL has appointed to prepare a valuation. It has been pointed out to the property consultant engaged by the Receivers that time is of the essence. Notwithstanding that there are some gaps in the information in the Receivers’ possession JLL is proceeding and any qualifications will be fully enunciated in the valuation report. Please note that the valuation and recommendation for the appointment of an agent is expected to be received by no later than 6 July 2018.

405 By five letters to the Company, the El Saafin Brothers and Lobna, each dated 26 June 2018, MAG Financial served default notices and demands pursuant to s 76 of the Transfer of Land Act. MAG Financial demanded payment of $8,250,990.83, being the amount due as at 25 June 2018 under the Balanced Facility Agreement and Balanced Mortgage (with MAG Financial being the assignee of the rights of Balanced Securities).

406 By emailed letter dated 26 June 2018 to Mr Nair, Mr Halse provided the following breakdown of the claimed amount:

(a) $3,265,742.82, being amounts due under the Balanced Facility Agreement;

(b) $4,720,105.03, being amounts due under the Franek GSA and assigned debts; and

(c) $265,142.98, being unspecified enforcement costs and disbursements.

407 On 27 June 2018:

(a) By emailed letter to Mr Halse and Mr Koroneos, Mr Nair disputed the amount claimed to be due under the Balanced Facility Agreement but stated he was instructed to tender the amount of $3,265,742.82 (being the amount claimed to be due under the Balanced Facility Agreement absent the additional assigned debts).

(b) By email to Mr Nair, Mr Halse refused the offer to discharge the Balanced Mortgage on the ‘part payment of the sum of $3,265,742.82’.

408 On 5 July 2018:

(a) AAGG was registered as a corporation with ASIC, with Mr Mekkya as the sole director, and Mr Mekkya and Mr Sacca as the only shareholders; and

(b) AAGG executed the Contract of Sale of Real Estate for the Arden Street Property as purchaser for a purchase price of $4.5 million plus GST.

409 On 9 July 2018, MAG Financial executed the Contract of Sale of Real Estate for the Arden Street Property as vendor. The contract noted a deposit of $1,000 and the balance payable on 20 July 2018.

410 On 17 July 2018, the Receivers undertook to the Court not to sell the Arden Street Property or the Lower Plenty Property. They had not been told that their appointor, MAG Financial, had entered into the contract of sale for the Arden Street Property on 9 July 2018.

411 By memorandum dated 18 July 2018 and provided to the Court in accordance with the orders of Kennedy J made 17 July 2018 in the Derivative Proceeding, counsel and Mr Halse (as the solicitor for Mr Franek and MAG Financial) submitted the basis on which Mr Franek and MAG Financial contended that the Receivers were entitled to sell the Arden Street Property and the Lower Plenty Property. The memorandum did not disclose that the Receivers were no longer able to sell the Arden Street Property because MAG Financial had entered into a contract of sale on 9 July 2018.

412 By email of 19 July 2018 to Mr Franek, with respect to the proposed sale of the Arden Street Property, Mr Bise stated:

Please be informed that I have received the valuation from JLL. The reserve to be set for the auction can be set at a later date. It does not need to be set now and I’d prefer to have CBRE commence its preparation for the auction.
I do feel compelled to make a number of matters clear to you. As receiver I have a number of duties and obligations to various stakeholders; principally to MAG Financial and Investment Ventures Pty Ltd (‘MAG’) but also to the mortgagor, other creditors and to the general public. To that end whilst the process that has been followed has taken longer than you would prefer the aim is to ensure that MAG’s interests are safeguarded and any exposure to it and risk minimised. I am certain that this is MAG’s overriding expectation. The length of time taken by JLL does not mean that it has done anything wrong. Given the status of the development, the fact that a number of parties are locked in disputes in connection with the Development and the lack of cooperation from the builder, which caused delay and was outside of JLL’s control, it was compelled to be as thorough as it could be and to derive as much comfort as it could prior to finalising its valuation. To my mind it isn’t unreasonable and I reiterate that at the forefront of the work that has been completed has been the concern for MAG’s best interest and to ensure that as Receiver I am best served in meeting my duties. Put simply there are valid reasons behind the manner in which a receivership is conducted.

413 On 20 July 2018, the sale of the Arden Street Property was settled purportedly for a total price of $4.95 million inclusive of GST. The Transfer of Land was executed by Mr Halse as solicitor for both MAG Financial as transferor, and AAGG as transferee.

414 Mr Mekkya’s evidence was that the proceeds of sale from the settlement were distributed as follows:

(a) $1.9 million in respect of the Sacca Debt;

(b) $521,349.22 in respect of the Builder Debt;

(c) $174,907.59 in respect of the New Concept Design Debt;

(d) $371,055.52 in respect of enforcement costs and disbursements; and

(e) $1,487,419.76 in respect of part payment of the debt under the Balanced Facility Agreement.

In fact, no money was paid by AAGG on settlement, and no money was distributed.

415 By email of 23 July 2018 at 6:31 pm to counsel and Mr Koroneos, Mr Bise stated:

Absolutely. Our appointor has allegedly sold the Nth Melbourne property behind the receivers’ backs. I’m not joking.

On the same day at 7:01 pm, Mr Dixon replied and stated that the sale was ‘pursuant to a power of sale pursuant to their mortgage’ and that he did not understand how it could happen without their knowledge or consent.

416 By unregistered mortgage dated 23 July 2018, AAGG mortgaged the Arden Street Property to MAG Financial to secure an advance of $4.5 million for a term of 10 years with interest of 7% per annum payable on each anniversary of the date of the advance. The mortgage states that it ‘secures all of the Secured Moneys as defined in the Loan and Security Deed’. The mortgage produced as an exhibit at trial was not stamped and has not been registered. On 20 November 2018, Mr Halse lodged a caveat on the Arden Street Property on the basis of a mortgage purportedly dated 20 July 2018.^[101]

417 By email of 24 July 2018 to Mr Nair, Mr Koroneos stated:

My office was informed at approximately 4.39pm yesterday by the solicitor for my clients’ appointor, Mark Halse, that his client had completed a sale of the Arden Street Property. Prior to then, my clients had no knowledge of the actual sale of the Arden Street Property nor were they involved in any way with the sale of same. ...
I have also been urgently obtaining instructions and information in relation to the sale. My clients are still seeking details of the sale of the Arden Street Property from their appointor and have requested an updated payout figure. My clients will not take any further step in the receivership of Saafin Constructions including any potential sale of the Lower Plenty property until they have obtained the aforementioned information.

418 By emailed letter dated 25 July 2018 to Mr Nair, Mr Halse stated that MAG Financial was under no obligation to accept less than the amount secured under the securities. However, he said:

My client remains ready and willing to provide a discharge of the securities (save for the Arden Street mortgage, which no longer exists, as set out below) in exchange for payment of the amounts due and secured by the various securities.
...
In any event, MAG has exercised its power of sale in accordance with section 77 of the Transfer of Land Act and has sold the property at 65-67 Arden Street, North Melbourne for a sum of $4,500,000, to AAGG Developments Pty Ltd. The transfer of land has now been registered.

419 On 27 July 2018, Mr Franek resigned as a director of MAG Financial and was replaced by Mr Mekkya. Mr Franek also transferred all of the shares in MAG Financial to Mr Mekkya. There was no consideration paid for the shares. Mr Franek’s evidence was that the payment of the assignment fee to Balanced Securities by AMGS on 3 May 2018, and the payment to Mr Franek by Trade On on 14 June 2018, were the only real money that changed hands.

420 On 3 August 2018, MAG Financial appointed the Administrators as administrators of the Company.

421 On 7 August 2018, Lyons J restrained the defendants (being, Mr Franek, the Receivers and MAG Financial) from taking further steps to enforce any ‘Securities’ (as defined in the Balanced Facility Agreement), and restraining AAGG from dealing with the Arden Street Property. He adjourned the further hearing of the Derivative Proceeding to enable the Administrators to consider whether they wished to pursue the proceeding and, if not, whether they would consent to the Plaintiffs pursuing the proceeding under s 440D of the Corporations Act.

422 By emailed letter dated 30 August 2018 to the Plaintiffs’ solicitors, the Administrators’ solicitors said, among other things, as follows:

Absent any responses, please be advised that our clients have determined that:

1. They do not consent to your clients proceeding with the Proceeding.
2. They do not wish to pursue the Proceeding in their capacity as the Company’s administrators.

100. They wish to accept an offer from a third party, Trade On International Pty Ltd, to purchase the Proceeding Rights subject to conditions, including court approval.

423 On 9 November 2018, Lyons J declined the Administrators’ application, pursuant to s 90–15 of sch 2 to the Corporations Act, for a direction that the Administrators may properly and justifiably enter into and give effect to the following deeds:

(a) a Deed of Assignment and Release dated 7 September 2018; and

(b) a Deed of Release dated 24 October 2018.^[102]

424 His Honour summarised the effect of these deeds as follows:

[T]he Administrators assigned to Trade On International Pty Ltd, whose directors and shareholders are Mekkya and Sacca (‘Trade On’), for $100,000 all claims made in this proceeding available to the Company and all claims now or in the future available to the Company against MAG, AAGG or Trade On. Releases were also given in respect of claims not able to be assigned.^[103]

425 The only reason for MAG Financial appointing the Administrators was to try and stop the Derivative Proceeding. Mr Mekkya conceded as much in cross-examination.

Conclusion

426 In my opinion, the above evidence establishes that in or about March 2018, Mr Franek, Mr Mekkya and Mr Sacca agreed that they would take action to recover debts owed to them by the Company and the El Saafin Brothers. The agreement was, or evolved into, an arrangement under which:

(a) Mr Mekkya and Mr Sacca would fund the assignment of the Balanced Mortgage to a special purpose vehicle, being MAG Financial;

(b) Mr Franek, Mr Mekkya and Mr Sacca would assign their alleged debts and those of associated entities to MAG Financial without consideration;

(c) Mr Mekkya and Mr Sacca would pay Mr Franek the amount due under the Second Franek Loan Agreement;

(d) MAG Financial would take possession of the Arden Street Property under the Balanced Mortgage and transfer it to a company associated with Mr Mekkya and Mr Sacca, being AAGG, for no real further consideration;

(e) the purported further consideration of $4.5 million, being a debt to MAG Financial secured over the Arden Street Property, was illusory because after the settlement, all of the shares in MAG Financial were transferred to Mr Mekkya for no consideration; and

(f) contrary to s 77 of the Transfer of Land Act, the purported consideration for the sale of the Arden Street Property was not applied to repay the amount due under the Balanced Facility Agreement, which enabled that security to be used to appoint the Administrators over the Company and to attempt to prevent the Derivative Proceeding continuing,

(hereafter referred to as ‘the Arrangement’).

427 The material facts, referred to above, demonstrate that Mr Mekkya, Mr Sacca and Mr Franek entered into the Arrangement and, pursuant to it, effected the transfer of the Arden Street Property to interests associated with Mr Mekkya and Mr Sacca. In evidence, Mr Franek conceded the Arrangement and the conclusion is supported by the following:

(a) There is no explanation for the fact that, in the email of 4 April 2018 (set out at paragraph 386 above), Mr Franek said to Mr El-Hissi that the proposed second mortgage would ‘complicate’ matters other than that it would be used to discharge the securities under the Franek GSA and frustrate the Arrangement.

(b) After Balanced Securities stated in its email of 10 April 2018 that it ‘will now have no option other than to take over the Project’, I infer that Mr Mekkya, Mr Sacca and Mr Franek decided not to rely on the terms of the Franek GSA, because they recognised that they would not be able to control the sale of the Arden Street Property under this security if:

(i) Balanced Securities took possession of the Arden Street Property under its first mortgage;

(ii) the Company repaid the amount due under the Second Franek Loan Agreement; or

(iii) there was a successful court challenge to the appointment of the Receivers under the Franek GSA (as the solicitor for the Company had threatened).

(c) The delays in the provision of a payout figure, first with respect to the Franek GSA and second with respect to the Balanced Facility Agreement, was consistent with Mr Mekkya, Mr Sacca and Mr Franek wanting to complete the Arrangement rather than being repaid.

(d) A grossly excessive demand for a payout of the Balanced Mortgage based on the false proposition that MAG Financial was entitled to include the amounts of other assigned debts in the claim under the Balanced Mortgage. MAG Financial did not press this proposition at trial.

(e) The secret sale of the Arden Street Property to a related party without disclosure to the Receivers or to the Court.

(f) The transfer of the Arden Street Property for illusory consideration. Although there was a purported mortgage to MAG Financial by AAGG of the Arden Street Property, it was effectively gifted back by the transfer of all of the shares in MAG Financial without consideration to Mr Mekkya, a shareholder of AAGG.

(g) The purported distribution of the proceeds of the sale contrary to s 77 of the Transfer of Land Act, which required payment first to be made in satisfaction of the Balanced Mortgage.

Was MAG Financial in breach of its duty under s 77 of the Transfer of Land Act and at common law to exercise the power of sale in good faith?

428 Historically, the only duty imposed on a mortgagee exercising its power of sale is to act in good faith.^[104]

429 Section 77(1) of the Transfer of Land Act relevantly provides:

If within one month after the service of such notice or demand or such other period as is fixed in such mortgage or charge the mortgagor grantor or other persons do not comply with the notice or demand the mortgagee or annuitant may, in good faith and having regard to the interests of the mortgagor grantor or other persons, sell or concur with any other person in selling the mortgaged or charged land or any part thereof, together or in lots, by public auction or by private contract, at one or several times, and for a sum payable in one amount or by instalments, subject to such terms and conditions as the mortgagee or annuitant thinks fit, with power to vary any contract for sale and to buy in at any auction or to rescind any contract for sale and to resell without being answerable for any loss occasioned thereby and with power to make such roads streets and passages and grant and reserve such easements as the circumstances of the case require and the mortgagee or annuitant thinks fit, and may make and sign such transfers and do such acts and things as are necessary for effectuating any such sale.^[105]

430 In MBF Investments Pty Ltd v Nolan, the Court of Appeal stated that the words of s 77(1) must be interpreted against the background of equitable principles, which they summarised as follows:

(a) a mortgagee is not a trustee of the power of sale, which is given to the mortgagee to enable the realisation of the security interest;
(b) a mortgagee must act in good faith, that is conscionably, and cannot sell for a purpose other than that for which the power of sale is conferred;
(c) a mortgagee is not required to place the interests of the mortgagor above the mortgagee’s interests in recovering the debt. For example, the mortgagee can sell the property at a time of the mortgagee’s choice, even though the property might realise a higher price if the sale were postponed;
(d) the mortgagee cannot disregard the interests of the mortgagor by simply selling for a price which will cover the amount of the loan. The mortgagee must take reasonable steps to obtain the best price consistently with its right to enforce its security interest. This requires the mortgagee to consider how the property should be advertised and to allow an appropriate time between the advertisement and the sale;
(e) the mortgagee must also have regard to the interests of subsequent security holders; and
(f) if there is no doubt that the sale of the lots preferred by the mortgagor would be sufficient to discharge the debt owed to the relevant mortgagee and of any other security holders whose interest the mortgagee is required to consider, a failure to sell the preferred lots may breach the mortgagee’s duty to sell in good faith.^[106]

431 For the purpose of determining whether the mortgagee has breached its duty to act conscionably towards the mortgagor, ‘the duty is not to be considered in some mechanical way, but the whole of the mortgagee’s conduct with respect to the sale is to be considered’.^[107]

432 In my opinion, MAG Financial did not act conscionably and in good faith, and sold for a purpose other than that for which the power of sale was conferred, being to allow the mortgagee to recover amounts due to it under the mortgage. This conclusion arises from the fact that the sale of the Arden Street Property was effected pursuant to the Arrangement, the features of which included:

(a) MAG Financial would prevent the mortgagor from repaying the amount due or competing for the purchase of the Arden Street Property by:

(i) delaying the provision of a proper payout figure and then demanding a grossly excessive payout figure;

(ii) refusing to accept a tender in the amount of $3,265,742.82 in satisfaction of the Balanced Facility Agreement, which was the figure that MAG Financial’s solicitor claimed was due under that agreement by email of 26 June 2018; and

(iii) entering into and settling the contract of sale for the Arden Street Property without disclosure to the mortgagor, the Receivers or the Court.

(b) MAG Financial agreed to effect the transfer of the Arden Street Property to interests associated with Mr Mekkya and Mr Sacca, in consideration of those interests paying out the debt due to Mr Franek under the Second Franek Loan Agreement and the Franek GSA, which was not recoverable under the Balanced Mortgage.

(c) MAG Financial did not take reasonable steps to obtain the best price for the Arden Street Property, for the following reasons:

(i) The consideration for the sale of the Arden Street Property was illusory.^[108]

(ii) Even if MAG Financial had recovered the amount for which it purported to sell the Arden Street Property in the contract of sale and the Transfer of Land, it deliberately sought not to offer the property to any other person for the purpose of obtaining a higher price. Persons associated with the El Saafin Brothers would likely have been prepared to pay a higher price for the Arden Street Property, but MAG Financial never offered it to them or anyone else because that would have been contrary to the Arrangement. The fact that Mr Mekkya, Mr Sacca and Mr Franek believed that the El Saafin Brothers would likely have been prepared to pay a higher price is demonstrated by the fact that they actively prevented the El Saafin Brothers from getting an opportunity to buy the Arden Street Property.

433 Accordingly, I find that the sale of the Arden Street Property was in breach of MAG Financial’s duty under s 77 of the Transfer of Land Act and at common law to exercise the power of sale in good faith.

Was MAG Financial in breach of its duty under s 420A of the Corporations Act?

434 For the reasons set forward in the previous paragraphs, I further consider that the sale of the Arden Street Property was also in breach of MAG Financial’s duty under s 420A of the Corporations Act to take all reasonable care to sell the Arden Street Property for not less than its market value, or otherwise, for the best price reasonably obtainable, having regard to the circumstances of the property.

Was MAG Financial’s conduct unconscionable under s 12CB of the ASIC Act?

Legislative provisions

435 Section 12CB of the ASIC Act proscribes unconscionable conduct in relation to financial services in the following terms:

(1) A person must not, in trade or commerce, in connection with:
(a) the supply or possible supply of financial services to a person; or
(b) the acquisition or possible acquisition of financial services from a person;
engage in conduct that is, in all the circumstances, unconscionable.
...
(3) For the purpose of determining whether a person has contravened subsection (1):
(a) the court must not have regard to any circumstances that were not reasonably foreseeable at the time of the alleged contravention; and
(b) the court may have regard to conduct engaged in, or circumstances existing, before the commencement of this section.
(4) It is the intention of the Parliament that:
(a) this section is not limited by the unwritten law of the States and Territories relating to unconscionable conduct; and
(b) this section is capable of applying to a system of conduct or pattern of behaviour, whether or not a particular individual is identified as having been disadvantaged by the conduct or behaviour; and
(c) in considering whether conduct to which a contract relates is unconscionable, a court’s consideration of the contract may include consideration of:
(i) the terms of the contract; and
(ii) the manner in which and the extent to which the contract is carried out;
and is not limited to consideration of the circumstances relating to formation of the contract.

436 For the purposes of s 12CB, s 12CC(1) provides that the Court may have regard to the following matters:

Without limiting the matters to which the court may have regard for the purpose of determining whether a person (the supplier) has contravened section 12CB in connection with the supply or possible supply of financial services to a person (the service recipient), the court may have regard to:
(a) the relative strengths of the bargaining positions of the supplier and the service recipient; and
(b) whether, as a result of conduct engaged in by the supplier, the service recipient was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; and
(c) whether the service recipient was able to understand any documents relating to the supply or possible supply of the financial services; and
(d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the service recipient or a person acting on behalf of the service recipient by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the financial services; and
(e) the amount for which, and the circumstances under which, the service recipient could have acquired identical or equivalent financial services from a person other than the supplier; and
(f) the extent to which the supplier’s conduct towards the service recipient was consistent with the supplier’s conduct in similar transactions between the supplier and other like service recipients; and
(g) if the supplier is a corporation—the requirements of any applicable industry code (see subsection (3)); and
(h) the requirements of any other industry code (see subsection (3)), if the service recipient acted on the reasonable belief that the supplier would comply with that code; and
(i) the extent to which the supplier unreasonably failed to disclose to the service recipient:
(i) any intended conduct of the supplier that might affect the interests of the service recipient; and
(ii) any risks to the service recipient arising from the supplier’s intended conduct (being risks that the supplier should have foreseen would not be apparent to the service recipient); and
(j) if there is a contract between the supplier and the service recipient for the supply of the financial services:
(i) the extent to which the supplier was willing to negotiate the terms and conditions of the contract with the service recipient; and
(ii) the terms and conditions of the contract; and
(iii) the conduct of the supplier and the service recipient in complying with the terms and conditions of the contract; and
(iv) any conduct that the supplier or the service recipient engaged in, in connection with their commercial relationship, after they entered into the contract; and
(k) without limiting paragraph (j), whether the supplier has a contractual right to vary unilaterally a term or condition of a contract between the supplier and the service recipient for the supply of the financial services; and
(l) the extent to which the supplier and the service recipient acted in good faith.

Submissions

Plaintiffs’ submissions

437 The Plaintiffs submitted that MAG Financial’s conduct in exercising the power of sale was unconscionable within the meaning of s 12CB of the ASIC Act, for the following reasons:

(a) The sale was made to prevent the Company from exercising its equity of redemption.

(b) The MAG Parties systemically delayed providing the Company with the payout figure.

(c) The MAG Parties attempted to inflate the purported payout figure by including other assigned debts, a position which they abandoned at trial.

(d) The sale was made despite the MAG Parties knowing that the Receivers had undertaken to the Court not to dispose of the Arden Street Property.

(e) The sale was made to secure the ultimate objective of transferring the Arden Street Property to Mr Mekkya and Mr Sacca.

(f) The majority of the proceeds of sale were applied towards debts other than the debts secured by the Balanced Mortgage.

(g) The independent valuations relied upon by the MAG Parties to argue that the Arden Street Property was sold for $100,000 higher than valued did not correctly value the property as at June 2018.

(h) No funds physically changed hands between MAG Financial and AAGG on the sale of the Arden Street Property.

MAG Parties’ submissions

438 The MAG Parties submitted that MAG Financial’s conduct was not unconscionable within the meaning of s 12CB of the ASIC Act, for the following reasons:

(a) The Arden Street Property was sold at a price $100,000 higher than the independent valuation.

(b) Because the debts assigned to MAG Financial on 20 June 2018 were captured by the Franek GSA, the Arden Street Property would have had to have been sold for an amount greater than $8 million for there to be an excess of funds available to other creditors.

(c) The fact that no funds physically changed hands between MAG Financial and AAGG is not relevant because AAGG incurred a $4.5 million liability to MAG Financial in respect of the sale, as evidenced by AAGG’s Balance Sheet for the financial year ending 30 June 2020.

(d) The Plaintiffs’ contention that the independent valuations obtained by the MAG Parties when selling the Arden Street Property were not correct should be rejected. The Plaintiffs did not cross-examine either of the MAG Parties’ valuation experts. Further, the Plaintiffs’ expert, Mr Zamora, was a real estate agent and not a licensed valuer.

Principles

439 In determining whether conduct is unconscionable under s 12CB, the Court will undertake an evaluative process having regard to the factors referred to in s 12CC(1) and all of the circumstances.^[109] Of course, this process would not be properly undertaken by simply focussing on whether each of the separate factors enumerated in the section existed.^[110]

440 Section 12CC identifies a non-exhaustive list of factors to which the Court may have regard. The factors to be considered under s 12CC(1) may be broadly divided into the following categories:^[111]

(a) the vulnerability of the service recipient relative to the supplier;^[112]

(b) any bad faith or unfair dealing of the supplier to the service recipient in the transaction;^[113] and

(c) the standard of conduct of the supplier measured against its own conduct in similar transactions and industry codes.^[114]

441 In ASIC v Kobelt, the Judges of the High Court made reference to the values and standards which may be considered in determining whether conduct should be found to be unconscionable:

(a) Kiefel CJ and Bell J stated that the values informing the standard of conscience under s 12CB were:

(i) certainty in commercial transactions;

(ii) honesty;

(iii) the absence of trickery or sharp practice;

(iv) fairness when dealing with customers;

(v) the faithful performance of bargains and promises freely made; and

(vi) the protection of the vulnerable.^[115]

(b) Gageler J described the conduct proscribed by s 12CB as ‘conduct that is so far outside societal norms of acceptable commercial behaviour as to warrant condemnation as conduct that is offensive to conscience’.^[116] He explained the role of the Court as follows:

The correct perspective is that s 12CB operates to prescribe a normative standard of conduct which the section itself marks out and makes applicable in connection with the supply or possible supply of financial services. The function of a court exercising jurisdiction in a matter arising under the section is to recognise and administer that normative standard of conduct. The court needs to administer that standard in the totality of the circumstances taking account of each of the considerations identified in s 12CC if and to the extent that those considerations are applicable in the circumstances.^[117]

(c) Keane J said that the term ‘unconscionable’ imports the higher level of moral obloquy associated with the victimisation on the vulnerable.^[118]

442 However, in Australian Competition and Consumer Commission v Quantum Housing Group Pty Ltd, after considering the judgments in ASIC v Kobelt, the Full Federal Court held that vulnerability was not an essential feature of a contravention of s 12CB.^[119] Their Honours explained:

Whilst some form of exploitation of or predation upon some vulnerability or disadvantage of people will often be a feature of conduct which satisfies the characterisation of unconscionable conduct under s 21, such is not a necessary feature of the conception or a necessary essence in the embodied meaning of the statutory phrase.^[120]

443 Further, the Full Court doubted the value of quibbling over words to express the notion of unconscionability and identified the task as:

[A]n evaluation of the impugned conduct to assess whether it is to be characterised as a sufficient departure from the norms of acceptable commercial behaviour as to be against conscience or to offend conscience and so be characterised as unconscionable.^[121]

444 As Beach J observed in ASIC v AGM Markets Pty Ltd (in liq) (No 3):

[T]he statutory language should not simply be restated by substituting words or a phrase that Parliament did not choose. At most, the statutory concept of unconscionable may accommodate a flavour of moral obloquy in the sense that it means more than ‘unjust’, ‘unfair’ or ‘unreasonable’, but it is to divert the relevant normative inquiry to specifically seek to identify its existence or to clothe the relevant conduct with such a conclusory label.^[122]

Conclusion

445 In all the circumstances, I consider that by entering into the Arrangement and transferring the Arden Street Property to AAGG, MAG Financial did engage in conduct that was unconscionable, within the meaning of s 12CB of the ASIC Act. Apart from the fact that MAG Financial did not act in good faith, and sold the Arden Street Property for a purpose other than that for which the power of sale was conferred (for the reasons referred to in paragraph 432 above), in reaching my conclusion on unconscionability, I have also had regard to the following circumstances:

(a) For the purpose of depriving the Company of the opportunity of redeeming the mortgage, Mr Franek, on his own behalf and as the then director of MAG Financial, failed to respond to numerous requests for a payout figure for the Franek GSA and then the Balanced Mortgage.

(b) MAG Financial wrongfully stated that it would not accept the amount due under the Balanced Facility Agreement in discharge of the Balanced Mortgage.

(c) MAG Financial engaged in subterfuge to achieve the purpose of transferring the Arden Street Property to interests associated with Mr Mekkya and Mr Sacca by:

(i) entering into the contract of sale and settling the sale of the Arden Street Property without allowing the Company, the El Saafin Brothers or any other person the opportunity to bid;

(ii) allowing the Receivers to commence a proper sale process for the Arden Street Property, without disclosing that it had already entered into the contract of sale with AAGG and effected an expedited settlement of the sale of the Arden Street Property;

(iii) filing submissions with the Court as to why the Receivers should not be restrained from selling the Arden Street Property without disclosing that, in fact, it had already entered into, and was about to settle, a contract of sale for the Arden Street Property;

(iv) purporting to enter into assignment agreements with Mr Mekkya, Mr Sacca and the Builder on the basis that the full face value of the debts were immediately payable when, in fact, no consideration was paid or payable; and

(v) purporting to enter into an agreement to accept an assignment of debt from Mr Franek for the full face value of the debt when, in fact, the true transaction was that Mr Mekkya and Mr Sacca paid the full face value of the debt to Mr Franek in consideration of him arranging for MAG Financial to transfer the Arden Street Property to interests associated with Mr Mekkya and Mr Sacca.

(d) MAG Financial transferred the Arden Street Property to AAGG with illusory consideration.

(e) The purported distribution of the proceeds of the settlement of the sale of the Arden Street Property to disputed creditors, rather than to fully repay the amount due under the Balanced Mortgage, contrary to s 77 of the Transfer of Land Act. One effect of purporting not to repay the amount secured by the Balanced Mortgage was that MAG Financial was in a position to, and did appoint, the Administrators over the Company for the purpose of preventing any claims of the Company being brought or continued against MAG Financial, AAGG or Trade On.

Was the Transfer of Land executed prior to service of the s 76 notices?

446 The Transfer of the Land Act contains the following relevant provisions:

(a) Section 76 provides that, where there is a default in payment of any amount secured under a mortgage or charge, the mortgagee may serve a default notice or demand.

(b) Section 77 provides that, if the person served with the default notice or demand fails to comply within one month, then the mortgagee has the power to sell the mortgaged or charged land.

Material facts

447 The material facts in relation to this issue are as follows:

(a) The Transfer of Land was dated 22 June 2018 and was executed by Mr Halse as solicitor for both MAG Financial as transferor, and AAGG as transferee.

(b) By five letters to the Company, the El Saafin Brothers and Lobna, each dated 26 June 2018, Mr Halse, as solicitor for MAG Financial, served default notices and demands pursuant to s 76 of the Transfer of Land Act in relation to unpaid amounts under the Balanced Facility Agreement. The notices listed the total amount owing as $8,250,990.83.

(c) On 5 July 2018, AAGG was registered as a corporation with ASIC.

(d) By contract of sale executed by AAGG as purchaser on 5 July 2018, and by MAG Financial as vendor on 9 July 2018, MAG Financial agreed to sell the Arden Street Property to AAGG. Mr Halse is noted on the contract as the solicitor for MAG Financial. The contract did not note a legal practitioner or conveyancer acting for AAGG.

(e) On or about 20 July 2018, the sale of the Arden Street Property between MAG Financial and AAGG was settled.

448 The uncontested evidence of Ms Summers was, relevantly, as follows:

(a) She is the principal of SP Legal which attends to the lodgement of various instruments with government agencies such as the Land Registry of Victoria.

(b) On 20 July 2018, Mr Halse requested that she lodge the Transfer of Land between MAG Financial and AAGG.

(c) On 23 July 2018, she received the Transfer of Land from Mr Halse, which was signed but not dated, and she then instructed an employee to attend the Land Registry Office to lodge the transfer.

Submissions

Plaintiffs’ submissions

449 The Plaintiffs submitted that the default notices and demands issued under s 76 of the Transfer of Land Act were issued after the Transfer of Land was executed. The Plaintiffs argued that the Transfer of Land was therefore deficient, and referred to the following:

(a) AAGG was not registered as a corporation until 5 July 2018, and therefore it could not have signed, or given instructions to its solicitor to sign, the Transfer of Land on 22 June 2018.

(b) The default notices were dated 26 June 2018, after the execution of the Transfer of Land. The title is therefore impeachable.

MAG Parties’ submissions

450 The MAG Parties submitted that the evidence of Ms Summers established that the Transfer of Land was not executed prior to 23 July 2018 and the only reasonable inference was that the document was incorrectly dated 22 June 2018.

Conclusion

451 I accept the MAG Parties’ submission. Ms Summers was not cross-examined and accordingly, I find that the date was not inserted on the Transfer of Land prior to 23 July 2018.

Is the Company prima facie entitled to have the sale of the Arden Street Property set aside and reconveyed to the Company?

452 It is common ground between the parties that, on the improper exercise of the power of sale, the Court will either:

(a) rescind the sale on terms that the mortgagor pay the mortgage debt;^[123] or

(b) treat the purchaser of the property, in equity, as only taking a transfer of the mortgage in respect of which the mortgagor retains its right of redemption.^[124]

Are there any discretionary reasons for the Court to decline that relief?

453 The MAG Parties contended that, if the Court finds that the sale of the Arden Street Property was not conducted in a manner which complied with MAG Financial’s duties as mortgagee, the relief sought ought not be granted for the following reasons:

(a) the form of relief sought by the Plaintiffs is futile and has the capacity to result in significant further costs being incurred without any benefit to the Company or its creditors; and

(b) the El Saafin Brothers lack clean hands.

454 In particular, it was submitted as follows:

(a) With respect to futility:

(i) there is no evidence of available funding to exercise the equity of redemption; and

(ii) the Company is in liquidation, yet the Plaintiffs assert that ‘it will be open to the Company’s creditors to prepare a deed of company arrangement for consideration of its creditors as a whole’.

(b) With respect to the lack of clean hands:

(i) the Company, while under the control of the El Saafin Brothers, failed to pay deposit monies paid with respect to purchase of units in the Development into trust, contrary to the Sale of Land Act 1962 (Vic);

(ii) the Company entered into two contracts of sale with respect to apartment 207 of the Development; and

(iii) Wael provided instructions to his lawyers in the Derivative Proceeding, and information to third parties, which he knew to be false.

455 In my opinion, in the circumstances of this case, it is not appropriate for the Court to refuse relief in the exercise of its discretion, for the following reasons:

(a) The Court should not be seen to turn a blind eye to the unconscionable conduct of the MAG Financial.

(b) By implementing the Arrangement, the MAG Parties:

(i) diverted the major asset of the Company, being the Arden Street Property, to themselves; and

(ii) purported to pay out:

(1) unsecured debtors as secured; and

(2) other persons, who I have found are not debtors or are otherwise not entitled to be repaid by the Company.

(c) I do not accept that the setting aside of the sale of the Arden Street Property will be futile. There is a real prospect that the creditors of the Company may benefit from a proper sale of the Arden Street Property.

ASSIGNMENT OF DEBTS TO MAG FINANCIAL
Did the assignment of each of the Debts have the effect of securing such Debts under cl 8.1.7 of the Franek GSA?

Material Facts

456 The material facts in relation to this issue are as follows:

(a) By Deed of Assignment of Contracts and Securities dated 3 May 2018, Mr Franek assigned his rights under the Second Franek Loan Agreement, the Franek GSA and the Franek Settlement Deed to MAG Financial.

(b) By four deeds of assignment, each dated 20 June 2018, it was agreed that the following debts would be assigned to MAG Financial on payment of the assignment price which, in each case, was the full amount of the debt, being:

(i) the Mekkya Debt ($982,848.22) pursuant to the Default Judgment;

(ii) the Sacca Debt ($1.9 million) pursuant to the Sacca Loan Agreement;

(iii) the New Concept Design Debt ($174,907.59) purportedly pursuant to attached invoices (but no invoices were attached to the tendered copy); and

(iv) the Builder Debt ($521,349.22) pursuant to invoices issued under the Building Contract,

(hereafter referred to collectively as ‘the Debts’).

(c) By four notices of assignment, each dated 25 June 2018, the Company was notified of the assignments of the Debts to MAG Financial.

457 The Franek GSA contains the following relevant provisions:

(a) ‘Secured Money’ is defined as being ‘the aggregate of the amounts specified in Clause 8 of this Deed’.

(b) Clause 8.1.7 provides:

The Secured Money is all amounts at the date of this Deed or at any later time falling within any of the following categories:
...
8.1.7 Any amounts which at that time the Secured Party is entitled to recover or claim from the Grantor for any reason (including any assignment, transfer or disposition by any person to the Secured Party of any Property);

Submissions

MAG Parties’ submissions

458 The MAG Parties submitted that the combined effect of the assignments of the Debts and cl 8.1.7 of the Franek GSA was to secure the Debts under the Franek GSA, for the following reasons:

(a) The effect of cl 8.1.7 is that debts secured under the Franek GSA include:

any amounts which at that time [which included any later time after entry into the Franek GSA pursuant to the chapeau of clause 8.1] the Secured Party [which includes assigns pursuant to clause 1.2.4] is entitled to recover or claim from the Grantor for any reason (including any assignment, transfer or disposition by any person to the Secured Party of any property).

(b) The natural and ordinary meaning of cl 8.1.7 is that the security will extend to any amounts due by Wael, Bayda and/or the Company to Mr Franek/MAG Financial following the assignment from a third party to Mr Franek/MAG Financial.

Plaintiffs’ submissions

459 The Plaintiffs submitted that cl 8.1.7 of the Franek GSA did not result in the Debts being secured under the Franek GSA after assignment to MAG Financial, for the following reasons.

460 First, in the ordinary case, an ‘all obligations’ mortgage does not secure any debt which a third party may assign to a secured creditor.

461 On application of the applicable principles for the interpretation of commercial contracts, cl 8.1.7 does not include debts assigned to MAG Financial for the following reasons:

(a) Clause 8.1.7 uses the term ‘Secured Party’, which does not capture debts originally owing to unrelated third parties. The fact that cl 1.2.4 generically provides that a reference to a ‘person’ includes that person’s assigns is displaced by the context in which cl 8.1.7 must be construed. In this context, the expression ‘Secured Party’ was intended to be confined to Mr Franek and/or his companies.

(b) The relevant context is as follows:

(i) The recitals demonstrate that the purpose of the Franek GSA was to secure the ‘Grantor’s obligations arising out or in any way connected with the Deed of Release & Settlement on the terms and conditions set forth in this Deed’.

(ii) Its genesis was the original loan of $100,000 advanced by Mr Franek in circumstances where:

(1) Mr Franek had previously loaned funds to assist the Company and Wael personally;

(2) Mr Franek’s company, 212 Degrees, had offered to assist in securing finance for the Development; and

(3) Clause 8.1.3 of the Franek GSA reserved the possibility of Mr Franek making further advances.

Accordingly, the context and purpose of cl 8.1.7 was directed towards capturing debts owing to Mr Franek and his corporate entities involved in providing construction finance, and it did not encompass debts which had no prior connection to Mr Franek or his entities through which construction finance activities were conducted.

(c) This narrow interpretation of ‘Secured Party’ is supported by cl 8.4, which gives the term ‘Grantor’ a broad construction for the purposes of determining ‘Secured Money’, but makes no corresponding provision with respect to ‘Secured Party’.

462 Secondly, cl 8.4 requires consideration of ‘events occurring up to that time and all reasonably foreseeable events’, in determining whether money falls within the definition of ‘Secured Money’. Accordingly, in construing cl 8.1.7, the Court must consider whether a consequence of an assignment is not reasonably foreseeable which would allow it to prevent a broad interpretation of the clause being wielded capriciously or for an improper purpose, as it is being in this case.

463 Thirdly, to the extent that cl 8.1.7 captures an assignment, it only captures an assignment ‘of any property’. The word ‘property’ is used throughout the Franek GSA in a manner which limits its application to real or personal property, for example:

(a) clause 1.1.36 defines ‘Secured Assets’ as meaning ‘all real and personal property’, and includes ‘all tangible and intangible personal property’; and

(b) clause 3.1 refers to a charge being granted over all of the Grantor’s ‘present and after acquired personal property’.

Real and personal property does not include a chose in action.

Principles of construction of ‘all moneys’ clauses

464 It is common ground that the resolution of this question is to be determined by applying the usual principles of construction of commercial contracts to cl 8.1.7 of the Franek GSA.

465 The usual principles require the Court to determine the meaning of the terms of a commercial contract by asking ‘what a reasonable businessperson would have understood those terms to mean?’^[125] For the purpose of answering that question, ‘the reasonable businessperson [is] placed in the position of the parties’,^[126] and the Court applies the following principles:

(a) The terms are construed objectively, and the subjective intentions of the parties are irrelevant.^[127]

(b) The Court will consider not only the text and the ordinary meaning of the contract, but also:

(i) the context, being the entire text of the contract including matters referred to in the text of the contract; and

(ii) the commercial purpose and object of the contract.^[128]

466 The identification of the commercial purpose and object of a contract ‘presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating’.^[129] For this purpose, the Court may have regard to the surrounding circumstances known to the parties.^[130]

467 A court is entitled to assume ‘that the parties intended to produce a commercial result’,^[131] and will avoid a construction that renders it ‘commercial nonsense or working commercial inconvenience’.^[132]

468 In Re Clark’s Refrigerated Transport Pty Ltd (in liq), Brooking J found that the sum secured by an ‘all moneys’ clause did not extend to assigned debts and liabilities.^[133] He appeared to consider this to be the commercially sensible construction of the clause, observing:

In the first place, considering the matter generally and without regard to the detailed provisions of the particular instruments here in question, I cannot help thinking that when a person gives an “all obligations” mortgage or debenture he does not ordinarily contemplate that the property the subject of the security will secure not only his present and future obligations to the mortgagee or debenture holder but also any debt or liability of his which may be assigned by a third person to the secured creditor. It does seem strange that a man may lock up his counting-house and go home for the night, in the comfortable knowledge that his only secured creditor is his banker, to whom he owes a trifling sum secured by the usual boundless bank instrument, and unlock the door in the morning to find that, by virtue of assignments of the large but unsecured debts owed by him to his fellow merchants, and indeed to the butcher, the baker and the candlestick maker, all his unsecured debts have gone to feed his banker’s insatiable security, so that every one of his debts is now secured.^[134]

469 However, this observation does not detract from the fact that an ‘all moneys’ clause is not subject to any special principles of construction and there is no predisposition that a security instrument is not intended to secure pre-assignment unsecured indebtedness of:

(a) a mortgagor to an assignee of the original mortgagee; or

(b) a mortgagor to a third party, which is assigned by the third party to the mortgagee after the execution of the mortgage.^[135]

470 In Katsikalis v Deutsche Bank (Asia) AG, Thomas J concluded, with respect to the interpretation of ‘all moneys’ clauses, that in the end it is a matter of construction.^[136] His Honour observed:

If a mortgagor stipulates clearly enough in his mortgage that he is transferring to the mortgagee (and the mortgagee’s assigns) certain present and future rights or that he is agreeing to make himself and his property liable for certain states of account between himself and other persons who are not named but who may in due course be identified, then upon the fulfilment of those events his liability to the mortgagee (or the mortgagee’s assignee) may be enforced against him. In short, if he does so in clear enough language, a mortgagor may grant rights which, if certain events happen, may produce extreme and unforeseen disadvantages.^[137]

471 In Re Bankrupt Estate of Murphy, Donnelly v Commonwealth Bank of Australia Ltd, Hill J set out the principles applicable to the interpretation of ‘all moneys’ clauses.^[138] His Honour concluded that the ‘accepted law’ is as follows:

(1) There is no principle of law that an all moneys clause should be read down merely because it is to be found in a document prepared by a bank. In particular there is no contra proferentem rule to be adopted.
(2) A bank mortgage is traditionally drawn to cover a multitude of possible situations and intended to secure the bank as effectively as possible. The question is whether the situation falls within the contemplation of the clause as written.
(3) Particularly, notions of fairness, justice or reasonableness are matters relevant to questions which might arise under the Contracts Review Act, or in equity where unconscionability is suggested. They are not notions as such relevant to the question of construction.
(4) An all moneys clause is to be construed having regard to the context in which the mortgage came to be executed and by reference to the commercial purpose it was intended to serve. But otherwise the intention of the parties is to be ascertained from the language which they have used.^[139]

472 In Olympic Holdings Pty Ltd v Windslow Corporation Pty Ltd (in liq), the Western Australian Court of Appeal considered an ‘all moneys’ clause that included a provision that the definition of ‘Secured Money’ applied irrespective of:

[W]hether the Bank is the original obligee or an assignee of the Secured Money and whether or not the assignment took place before or after the delivery of this mortgage or the Mortgagor consented to or was aware of the assignment or the assigned obligation was secured.^[140]

473 Buss JA considered that this clause would have the effect of securing an otherwise unsecured debt after it was assigned by a third party to the bank (although that was the converse of the circumstance before that Court).^[141]

474 Buss JA undertook a detailed comparison of the approaches by courts to the construction of ‘all moneys’ clauses,^[142] which he said could ‘be reconciled on the basis that each of them involved the construction of particular instruments of security “by reference to the context in which they appear and by reference to the commercial purpose which they were intended to serve”’.^[143] He concluded as follows:

The ambit or reach of an ‘all moneys’ clause in an instrument of security is to be determined according to ordinary principles of contractual construction ... The task of construing an ‘all moneys’ clause is not to be approached with a ‘predisposition’ as to its intended ambit or reach. So, there is no ‘predisposition’ that an instrument of security is not intended to secure pre-assignment unsecured indebtedness of a mortgagor to an assignee of the original mortgagee, and is not intended to secure an unsecured indebtedness of a mortgagor to a third party which is assigned by the third party to the mortgagee after the execution of the instrument. In any case, whether or not indebtedness of the kind I have just mentioned is secured by an ‘all moneys’ clause depends on the language of the clause, construed in the context of the instrument of security as a whole, any admissible evidence as to the surrounding circumstances, and the apparent purpose and object of the transaction.^[144]

Conclusion

475 The critical question is whether, on the true construction of the Franek GSA, the assigned Debts fell within the definition of Secured Money in cl 8.1.7.^[145]

476 In my opinion, the words of cl 8.1.7 are clear and unambiguous. A reasonable businessperson placed in the position of the parties would understand the following:

(a) Clause 8.1.7 states that any amounts which the ‘Secured Party’ was entitled to recover from Wael, Bayda and/or the Company for any reason are included within the definition of Secured Money.

(b) The rights to ‘Secured Money’ assigned by Mr Franek as the original Secured Party, to MAG Financial, were to be all of the rights held by Mr Franek under the Franek GSA.

(c) Clause 1.2.4 of the Franek GSA provides that, unless the context otherwise requires, a reference to a person includes the assigns of that person. Accordingly, the reference in cl 8.1.7 to ‘Secured Party’ includes MAG Financial, as Mr Franek’s assignee. The context does not otherwise require. On the contrary:

(i) clause 8.4.3 provides that, in interpreting ‘Secured Money’, the ‘Secured Party’ is ‘the original obligees or ... assignees of the Secured Money’; and

(ii) clause 37.1.1(m) provides that the ‘Grantor’s liability under the [Franek GSA] and the rights of the Secured Party ... are not affected by anything ... including ... [a]n assignment of the Secured Party’s rights in connection with the Secured Money’.

It is unlikely that it would be intended for the rights to ‘Secured Money’ to be diminished on an assignment by Mr Franek as the original obligee.

(d) ‘Secured Money’ would include amounts assigned to the Secured Party after the date of the Franek GSA, for the following reasons:

(i) The opening words of cl 8.1 make clear that ‘Secured Money’ may include amounts in respect of which the entitlement to recover arose at a time after the date of the Franek GSA.

(ii) Clause 8.1.7 expressly contemplates the relevant entitlement arising from an assignment of property. A chose in action is a personal right of property, albeit intangible property, that can only be enforced by action.^[146] In fact, a reasonable businessperson would understand that a reference to an assignment of any property, as opposed to a transfer or a disposition, would most likely refer to the assignment of a debt or other chose in action.

(e) In circumstances where the purpose of the Franek GSA was patently to provide as broad a security as possible, I do not consider that other parts of the text or the context support a construction, which contradicts the plain meaning of the words used by the parties. To paraphrase Hill J in Re Bankrupt Estate of Murphy; Donnelly v Commonwealth Bank of Australia Ltd, cl 8.1.7 was ‘drawn with great width and deliberately so, no doubt to ensure as far as is possible that any moneys owing to [Mr Franek] are secured, howsoever the obligation may arise’.^[147]

477 Accordingly, I find that the assignment of each of the Debts to MAG Financial would have had the effect of securing such Debts under cl 8.1.7 of the Franek GSA. However, as I have found that the Sacca Debt and the Mekkya Debt were not debts of the Company and I have not yet determined liability with respect to the New Concept Design Debt or the Builder Debt, I will not declare that any of the Debts were secured under cl 8.1.7 of the Franek GSA.

Did MAG Financial allocate the proceeds of sale from the Arden Street Property in accordance with s 77 of the Transfer of Land Act?

478 The MAG Parties contended that the proceeds of sale from the Arden Street Property were allocated as follows:

(a) the amount of $1,487,419.76 to pay down the debt due under the Balanced Facility Agreement;

(b) the amount of $1.9 million in respect of the Sacca Debt;

(c) the amount of $521,349.22 in respect of the Builder Debt;

(d) the amount of $174,907.59 in respect of the New Concept Design Debt; and

(e) the amount of $371,055.52 in respect of enforcement costs.

479 Under s 77(3) of the Transfer of Land Act, the purchase money received from a mortgagee sale shall be applied as follows:

(a) firstly in payment of all costs charges and expenses properly incurred incidental to the sale and consequent on such default;
(b) secondly in payment of the moneys which are due or owing on the mortgage or charge;
(c) thirdly in payment of moneys owing under or in respect of subsequent mortgages and charges in the order of their respective priorities;
(d) fourthly in payment of the residue (if any) to the mortgagor or into the Supreme Court ... .

480 The amount due under the Balanced Mortgage at the time of the settlement of the Arden Street Property was at least $3,249,774.30.

481 It is common ground between the parties that the sale proceeds should have been applied to fully discharge the amount due under the Balanced Mortgage.

482 However, as I have already found, no funds were transferred on settlement. Further, I am not satisfied that, in fact, any allocations were effected as alleged by book entry or otherwise, for the following reasons:

(a) the evidence of the allocations was limited to hearsay statements by:

(i) Mr Mekkya in his witness statement; and

(ii) Mr Franek in cross-examination; and

(b) despite a number of requests for production, the purported book entries were not produced.

483 Accordingly, I find that MAG Financial did not allocate the proceeds of sale from the Arden Street Property in accordance with s 77 of the Transfer of Land Act.

TRUSTWORTHY PROCEEDING

Material facts

484 The material facts in relation to the issues in the Trustworthy Proceeding are as follows.

485 By Loan Agreement dated 13 December 2011 between Trustworthy Nominees as lender, the Company and Mr Fadl El Saafin as borrowers, and the El Saafin Brothers as guarantors, Trustworthy Nominees loaned the sum of $250,000 to the Company and Mr Fadl El Saafin. The purpose of the loan was described as ‘investment in Saafin Constructions’ and was secured by:

(a) a first mortgage over 30 Spence Avenue, Roxburgh Park, being the land described in Certificate of Title Volume 10479 Folio 459;

(b) a fixed and floating charge over the Company; and

(c) a second mortgage over the Arden Street Property.

486 By the First Franek Loan Agreement dated 15 April 2015, between Wael and Bayda as borrowers, and Mr Franek as lender, Mr Franek agreed to loan the sum of $100,000 to Wael and Bayda for a term of three months, subject to interest of $12,000 per month payable in arrears. The loan was repayable in full, together with outstanding interest, by 12 July 2015. As security for the loan, Mr Franek was granted a charge over the Nairne Terrace Property.

487 By the Trustworthy Loan Agreement dated 17 September 2015, between Trustworthy Nominees as lender, the Company as first borrower and Wael, Bayda and Hassan as second, third and fourth borrowers, it was recited that:

(a) Trustworthy Nominees had previously advanced the sum of $250,000 to the Company on or about 13 December 2011;

(b) the Company wished to refinance the Arden Street Property without repayment of the amount due under the previous loan; and

(c) the outstanding balance due under the previous loan was $292,985.38.

The borrowers agreed to pay interest of 12.25% per annum and to repay the loan in six months. By cl 7 of the Trustworthy Loan Agreement, the borrowers agreed to provide additional security for the previous loan (as set out at paragraph 485 above), including a charge over the Nairne Terrace Property, as follows:

To better secure the principal sum the Borrowers agree in consideration of and as from the date of this Agreement to HEREBY CHARGE in favour of the Lender all of their interests in any real estate legal and equitable in all land including the land specified as the Security Interest during the currency of the loan and FURTHER UNDERTAKE at their cost when called upon to execute such mortgages and other assurances and instruments in respect of the said real estate or in respect of the said land as the Lender may require.

488 On 28 October 2015, Trustworthy Nominees lodged a caveat over the Nairne Terrace Property on the basis of the Trustworthy Loan Agreement.

489 By the Second Franek Loan Agreement dated 15 January 2016, between Wael and Bayda as borrowers, and Mr Franek as lender, Mr Franek agreed to lend Wael and Bayda the sum of $311,000 on the following terms:

(a) the period of the loan was three months;

(b) interest was payable at $26,000 per month; and

(c) the Nairne Terrace Property was charged with repayment of the loan.

490 On 20 April 2016, Mr Franek lodged a caveat over the Nairne Terrace Property on the basis of the Second Franek Loan Agreement.

Does the equitable interest in the Nairne Street Property under the First Franek Loan Agreement have priority over the equitable interest under the Trustworthy Loan Agreement?

491 It was common ground that the order in which the equitable interests were created were as follows:

(a) first, under the First Franek Loan Agreement;

(b) second, under the Trustworthy Loan Agreement; and

(c) third, under the Second Franek Loan Agreement.

492 Neither party contended that, if the other was found to be the prior equitable interest holder, it had acted in such a way that it would be unconscionable for its interests to prevail.^[148] Accordingly, it was common ground between the parties that the priority between the competing equitable interests held by Trustworthy Nominees and Mr Franek respectively should be determined by reference to the interest created first in time. Accordingly, priority was dependent upon whether the Second Franek Loan Agreement had supplanted the First Franek Loan Agreement, or as stated by the MAG Parties:

[T]he relevant inquiry is whether the equitable security granted under the First Franek Loan Agreement was discharged or released by virtue of the parties entering into the Second Franek Loan Agreement.

Submissions

Trustworthy Nominees’ submissions

493 Trustworthy Nominees submitted that the Second Franek Loan Agreement superseded the First Franek Loan Agreement for the following reasons:

(a) The Second Franek Loan Agreement makes no reference to the First Franek Loan Agreement.

(b) The Second Franek Loan Agreement was dated 15 January 2016 and provided as follows:

(i) The loan sum was $311,000.

(ii) The loan sum was calculated by rounding up the amount due under the First Franek Loan Agreement ($285,000) and adding one month’s interest at the new rate of $26,000 per month.

(iii) Interest was $26,000 per month payable in arrears, rather than the $12,000 per month plus default interest of $3,500 per month (totalling $15,500 per month) which applied under the First Franek Loan Agreement.

(c) By cl 5, Wael acknowledged that the ‘Loan in full’, being the full $311,000 was to commence on 15 January 2016.

(d) By cl 7, Wael acknowledged that Mr Franek was entitled to enforce the loan and recover the full amount and any outstanding interests or costs. Such a clause was not included in the First Franek Loan Agreement.

(e) The caveat lodged by Mr Franek over the Nairne Terrace Property on 20 April 2018 purported to be pursuant to the Second Franek Loan Agreement only.

MAG Parties’ submissions

494 The MAG Parties submitted that the Second Franek Loan Agreement demonstrated no intention to discharge the security provided by the First Franek Loan Agreement, for the following reasons:

(a) The fact that the First Franek Loan Agreement contained a fresh charge over the Nairne Terrace Property does not provide any evidence of the necessary intent to discharge the equitable charge under the First Franek Loan Agreement. Rather, it demonstrates that at all relevant times, the parties intended for Mr Franek to have an equitable charge over the Nairne Terrace Property.

(b) The purpose of the Second Franek Loan Agreement was to formalise the existing loan which had not been repaid, and equity should not release a grantor of an equitable interest from its obligations merely because the terms of the loan were restated.

Principles

495 In Commissioner of Taxation (Cth) v Sara Lee Household & Body Care (Australia) Pty Ltd, the High Court considered the distinction between:

(a) a variation of a contract; and

(b) the replacement of a contract by a new contract without a change of parties.

Gleeson CJ, Gaudron, McHugh and Hayne JJ said:

When the parties to an existing contract enter into a further contract by which they vary the original contract, then, by hypothesis, they have made two contracts. For one reason or another, it may be material to determine whether the effect of the second contract is to bring an end to the first contract and replace it with the second, or whether the effect is to leave the first contract standing, subject to the alteration. For example, something may turn upon the place, or the time, or the form, of the contract, and it may therefore be necessary to decide whether the original contract subsists. ^[149]

496 In Hillam v Iacullo, the New South Wales Court of Appeal considered whether the lenders could enforce the second of three loan agreements which they had entered into with a borrower.^[150] At first instance, Ball J held that:

(a) the lenders could not insist upon a payment due under the third loan agreement because they had failed to perform their obligations under that agreement;^[151] but

(b) the lenders could enforce the second loan agreement because it had remained on foot.^[152]

497 On appeal, Leeming JA said that the question of whether the lenders could enforce their rights under the second loan agreement depended on ‘discerning the (objective) intention of the parties’.^[153] His Honour noted the difference in the provisions made under the third loan agreement and concluded that it fell within the following description given by Lord Dunedin in Morris v Baron & Co:

[T]he first contract is got rid of ... because, the second dealing with the same subject-matter as the first but in a different way, it is impossible that the two should be both performed.^[154]

498 Leeming JA concluded that the ultimate analysis was:

[W]hether the legal rights generated by the second loan agreement were inconsistent with those resulting from the third. The third loan agreement, being a more recent, formally executed distillation of the parties’ rights and obligations, which was inconsistent with those arising under the second loan agreement, brought the second loan agreement to an end.^[155]

499 In Schreuders v Grandiflora Nominees Pty Ltd, the Court of Appeal said that:

Where the parties enter into an agreement and then enter into a second agreement which varies the first agreement, it may be necessary for the court to determine whether the second agreement brings an end to the first agreement and replaces it with the second, or whether the effect is that the first agreement remains, subject to the variation.
The question whether an amending agreement supersedes rather than varies the principal agreement depends on the objective intention of the parties to the amending agreement as disclosed by the wording of that agreement.^[156]

500 As the Court of Appeal observed in Balanced Securities Ltd v Dumayne Property Group Pty Ltd:

The critical factor in determining that issue in Hillam v Iacullo was the fact that the third loan agreement expressly dealt with the very same advances for which provision had been made in the second loan agreement. The second loan agreement had to be treated as being discharged because the third agreement dealt with the same subject matter but in a different way and it was impossible that both should be performed. This conclusion was reached by consideration of the terms of the two agreements.^[157]

501 After reviewing the relevant authorities, the Court of Appeal set out the relevant principles as follows:

(1) The relevant issue is whether the subsequent agreement amends the earlier agreement or brings it to an end and replaces it.
(2) The earlier agreement may be brought to an end either expressly or by implication.
(3) The issue is to be resolved by ascertaining the manifest intention of the parties.
(4) The manifest intention of the parties is to be ascertained objectively by the construction of the subsequent agreement, having regard to the relevant context of that agreement where it is permissible to do so in accordance with the ordinary principles of contractual construction.
(5) A potentially critical factor militating in favour of a conclusion that the manifest intention of the parties, objectively ascertained, was to bring the earlier agreement to an end and replace it, is where the terms of the two relevant agreements deal with the same subject matter in different and inconsistent ways.^[158]

502 In summary, I consider the above authorities to stand for the proposition that, if two relevant agreements deal with the same subject matter in inconsistent ways, such that it would be impossible for both be performed, it should be inferred that the latter was intended to supersede the former.

Conclusion

503 In my opinion, a review of the First Franek Loan Agreement and the Second Franek Loan Agreement demonstrates that the latter agreement was intended to be a comprehensive agreement which would supersede and replace the former agreement. It would not have been possible for both agreements to have been performed. In particular:

(a) the amount of the loan under the Second Franek Loan Agreement was calculated by rounding up the amount due under the First Franek Loan Agreement and adding a month’s interest at the new higher rate; and

(b) the interest payable under the Second Franek Loan Agreement was significantly higher than that payable under the First Franek Loan Agreement.

504 The inference is also supported by the fact that the Second Franek Loan Agreement is expressly said to commence on 16 January 2016.

505 The objective intention was plainly that the borrowers were required to comply with the obligations under the Second Franek Loan Agreement, and the obligation to perform the First Franek Loan Agreement was discharged.

506 In contrast, in the Franek GSA and the Franek Settlement Deed:

(a) it is specifically agreed that the Second Franek Loan Agreement does not merge with the Franek GSA and the Franek Settlement Deed; and

(b) specifically contemplates Mr Franek being entitled to enforce his rights under the Second Franek Loan Agreement if there is a default under the Franek GSA and/or the Franek Settlement Deed.

507 Accordingly, I find that the equitable interest of Trustworthy Nominees was created first in time and has priority over Mr Franek’s charge under the Second Franek Loan Agreement.

Was the First Franek Loan Agreement assigned to MAG Financial?

508 Trustworthy Nominees submitted that if any of Mr Franek’s rights under the First Franek Loan Agreement survived the execution of the Second Franek Loan Agreement, such rights were not assigned to MAG Financial. In view of my finding that Trustworthy Nominee’s charge has priority over Mr Franek’s charge, it is not necessary for me to decide this question.

509 However, in case I am wrong in this finding, I would accept Trustworthy Nominees’ submission, for the following reasons:

(a) Under the terms of the Deed of Assignment of Contracts and Securities dated 3 May 2018, Mr Franek assigned to MAG Financial the ‘Contracts’, which was defined to mean:

(a) Deed of Settlement and Release;
(b) Loan Agreement;
(c) General Security Deed; and
(d) Any document referred to as a transaction document in any of the above.

(b) Under the Franek Settlement Deed, ‘Loan Agreement’ was defined as:

[T]he document titled ‘Loan Agreement’ and dated 15 January 2016 between [Mr Franek] as lender and Wael as borrower a copy of which appears as Annexure A to this Deed.

Clause 1.1.24 of the Franek GSA adopts the same meaning of ‘Loan Agreement’ as in the Franek Settlement Deed.

(c) The First Franek Loan Agreement is not referred to in any of the Franek GSA, the Franek Settlement Deed or the Second Franek Loan Agreement.

Are Wael and Bayda entitled to set aside any security interest over the Nairne Street Property under the Franek GSA?

510 By their counterclaim in the Trustworthy Proceeding, Wael and Bayda allege that:

(a) Mr Franek’s solicitor falsely represented that the Franek Settlement Deed, which was sent to Wael for execution on 18 May 2017, was a full release of all alleged loans and only granted a mortgage over the Lower Plenty Property;

(b) the representation arose from emails of 15 and 16 May 2017 from Mr Franek’s solicitor setting out the terms of the settlement; but

(c) in fact, the Franek Settlement Deed was a conditional release of all alleged loans and granted a mortgage over the Nairne Terrace Property in addition to a second mortgage over the Lower Plenty Property.

511 The MAG Parties submitted that Wael and Bayda’s claims must fail for the following reasons:

(a) Wael and Bayda have failed to prove that the settlement did not in fact set out the agreement reached between Wael and Mr Franek.

(b) In respect of the claim under the Australian Consumer Law contained in sch 2 to the Competition and Consumer Act 2010 (Cth) (‘ACL’), ss 18 and 21 of the ACL do not apply to conduct relating to credit contracts.

(c) Wael and Bayda were not under a special disadvantage which would compromise their capacity to protect their own interests. A mere failure to obtain legal advice is entirely insufficient to give rise to a special disadvantage. In fact, Wael and Bayda were expressly directed by Mr Franek’s solicitor to seek independent legal advice, but apparently elected not to do so.

(d) In respect of the claim under s 12CB of the ASIC Act, the taking of security cannot be said to be so against conscience that a court would intervene.

(e) None of the factors enumerated in s 12CC of the ASIC Act operate on the facts of this case to indicate a presence of unconscionability.

512 No submissions were made on behalf of Wael and Bayda in support of these claims, and I accept the submissions of the MAG Parties. I also note that neither Wael nor Bayda gave evidence that they relied on the alleged misrepresentations in entering into the Franek GSA and the Franek Settlement Deed. Further, there was no evidence or submission as to the counter factual position of Wael and Bayda, if they had not entered into those agreements.

513 I will dismiss these counterclaims of Wael and Bayda based on allegations of misrepresentation and unconscionability.

ORDERS

514 I will hear the parties with respect to the appropriate orders consequent of these reasons.

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SCHEDULE OF PARTIES

S CI 2018 01685

_BETWEEN:

S ECI 2018 02987

_BETWEEN:

S ECI 2019 03648

ANNEXURE – LIST OF AGREED ISSUES

Trespass claim

1 Was the appointment of the Receivers on 9 April 2018 valid on the basis of:

(a) a failure by the Company to execute a contract of sale in default of the Franek Settlement Deed;

(b) a misrepresentation as to the value of the relevant apartment;

(c) termination of the building contract as a Material Adverse Change under the Franek Settlement Deed; or

(d) by reason of the other grounds detailed in the notice of default dated 17 April 2018?

2 If no to question 1, did the appointment of the Receivers deprive the Company of the use and enjoyment of the Arden Street property?

3 If yes to question 2, did such deprivation cause the Company to lose the interest expense particularised in paragraph 36 of the further amended statement of claim (‘FASC’)?

4 If yes to question 3, should the Court exercise its discretion pursuant to s 419 of the Corporations Act 2001 to relieve the Receivers in whole or in part of a liability that they have incurred but would not have incurred if the Receivers had been so properly appointed?

5 If no to questions 1 to 4,

(a) Is the Company and Wael liable to indemnify the Receivers against all liabilities, losses and costs incurred pursuant to clause 18.2.1 of the Franek GSA?

(b) Is the Company and Wael responsible for the Receivers’ remuneration pursuant to clause 22.5 of the Franek GSA?

(c) Are the Receivers liable for any loss causes by the non-exercise or exercise or attempted exercise of their powers pursuant to clause 40.1 of the Franek GSA?

Company debts

6 Is the Company liable for the Sacca Debt?

(a) Was the Sacca Loan Agreement entered into with the Company or was the Sacca Debt an obligation of the Company? Alternatively, was the Sacca Debt a personal obligation of Mohamed, Hassan and Wael?

(b) Is the Sacca Debt subrogated to the secured rights of Banner Capital Management Ltd?

(c) Was the Sacca Loan Agreement terminated and novated by the Investment Loan Agreements and associated Contracts of Sale for Units 307, 306, 206 and 207?

7 Is the Company liable for the Mekkya Debt?

(a) Did the Company and Mekkya enter into the Loan Investment Agreement dated 1 March 2012?

(b) If so, has the Mekkya Debt been repaid?

8 Is the Company liable for the New Concepts Design Debt?

- Referred to special referee.

9 Is the Company liable for the Builder Debt?

- Referred to special referee.

Assignment of debts to MAG

10 If yes to questions 4, 5 or 6, did the assignment of each of:

(a) the Sacca Debt;

(b) the Mekkya Debt;

(c) the Builder Debt; and

(d) the New Concepts Design Debt,

have the effect of securing the debt under cl 8.1.7 of the Franek GSA?

Tender

11 On or about 27 June 2018, did the Company validly tender the repayment of the Balanced Securities Debt (‘the June Tender’) to:

(a) MAG; and

(b) the Receivers?

12 Did the Receivers have an obligation or were they compelled at law to accept the June Tender?

13 If yes to question 11, was the June Tender refused by:

(a) MAG; and

(b) the Receivers?

14 On or about 25 July 2018, did the Company validly tender the repayment of the Balanced Securities Debt and/or the Franek Debt (‘the July Tender’) to:

(a) MAG; and

(b) the Receivers?

15 Did the Receivers have an obligation or were they compelled at law to accept the July Tender

16 If yes to question 15, was the July Tender refused by:

(a) MAG; and

(b) the Receivers?

17 If yes to questions 13 or 16:

(a) Are Hassan, Mohamed and Wael discharged of their obligations under the Balanced Securities Facility guarantees?

(b) Does interest stop accruing on:

(i) the Balanced Securities Debt; or

(ii) the Franek Debt?

(c) Did the Receivers improperly remain in possession from the relevant tender until 23 July 2018?

(d) If yes to part (c) above:

(i) Are Franek, the Receivers and/or MAG liable to account to the Company for the amounts particularised in paragraph 52(c) of the FASC?

(ii) Did the improper possession cause the damage particularised in paragraph 52(d) of the FASC?

(iii) Are the Receivers liable by reason of them entering into possession of the Security Property pursuant to clause 17.2 of the Balanced Securities GSA?

(iv) Are the Receivers entitled to be indemnified by the Company, and out of the Secured Property, in respect of all liability and expenses incurred by them pursuant to clause 18 of the Balanced Securities GSA?

Sale of the Arden Street property

18 Was the sale of the Arden Street property:

(a) in breach of MAG’s duty under s 420A of the Corporations Act 2001 (Cth) to take all reasonable care to sell the property for:

(i) not less than its market value; or, otherwise,

(ii) the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold;

(b) in breach of MAG’s duty under s 77 of the Transfer of Land Act 1958 (Vic) and at common law to exercise the power of sale in good faith; or

(c) unconscionable at common law, or under ss 20 or 21 of the ACL or ss 12CA or 12CB of the ASIC Act?

19 Was the Transfer of Land executed prior to service of the s 76 Notice?

20 If yes to question TBA [sic], is the Company prima facie entitled to have the sale of the Arden Street property set aside and reconveyed to the Company or does AAGG hold the property on a constructive trust for the Company?

21 If yes to question 10, are there any discretionary reasons for the Court to decline that relief?

Breach of fiduciary duties

22 Did the Receivers owe the Company fiduciary duties:

(a) not to profit from their appointment as Receivers; and

(b) not to put themselves in a position of a conflict of interests?

23 If yes to question 22, did the Receivers breach their duties by:

(a) failing to appoint a time to receive the tender; and

(b) resigning as receivers?

24 If yes to question 23, are the Receivers liable to account for the amounts particularised in paragraph 88 of the FASC?

Misallocation of the proceeds of sale

25 Did MAG allocate the proceeds of sale as follows:

(a) the amount of $1,487,419.76 to pay down the Balanced Securities Debt;

(b) the amount of $1,900,000 to Sacca in respect of the Sacca Debt;

(c) the amount of $521,349.22 to the Builder in respect of the Builder Debt;

(d) the amount of $174,907,59 to Mekkya in respect of the New Concept Designs Debt; and

(e) the amount of $371,055.52 in respect of enforcement costs?

26 If yes to paragraph 25, was the allocation in breach of:

(a) the Balanced Securities Facility Agreement;

(b) the Balanced Securities Facility Mortgage;

(c) the GSA; and/or

(d) section 77 of the Transfer of Land Act 1958 (Vic)?

27 If yes to question 26, did the breach:

(a) cause the damage particularised in paragraph 97 of the FASC; or

(b) mean that the payment of $1,203,957.79 is held by MAG as money had and received or constructive trust?

Breach of Consumer Credit Act

28 Was the 2016 Franek Loan Agreement a ‘credit contract’ as defined in Schedule 1 of the National Credit Code and, in particular:

(a) were the debtors natural persons;

(b) was the credit provided predominately to purchase, renovate or improve residential property for investment purposes, or to refinance credit that had been provided predominantly to purchase, renovate or improve residential property for investment purposes; and

(c) did Franek provide the credit in the course of business or incidentally to his other business?

29 If yes to question 28:

(a) is the Franek mortgage void; and

(b) is the 2016 Franek Loan Agreement unenforceable?

30 If yes to question 28, what does this means for the rights assigned to MAG pursuant to the notice of assignment found at TB1123?

31 Does s 80 of the National Credit Code apply to the relief sought by the Company?

32 If yes to question 31, was the claim brought more than 2 years after the relevant credit contract is rescinded or discharged or otherwise comes to an end?

Trustworthy proceeding

33 With respect to the Nairne Street property, was the equitable interest of Trustworthy under the loan agreement dated 17 September 2015 created prior to any security interest of Franek?

34 Was the security interest of Franek under the 2015 Franek Loan Agreement superseded by the 2016 Franek Loan Agreement?

35 Are Wael and Bayda El Saafin entitled to set aside any security interest on the Nairne Street property under the Franek GSA on the basis of:

(a) misleading and deceptive conduct; or

(b) unconscionable conduct at common law, or under ss 20 or 21 of the ACL or ss 12CA or 12CB of the ASIC Act?

MAG proceeding

36 Are Wael and Bayda El Saafin, as guarantors of the Balanced Securities Facility, indebted to MAG as assignee for any and what amount due under the Balanced Securities Facility?

37 Are Wael and Bayda El Saafin indebted to MAG as assignee of the Franek GSA for any and what amount?

38 Is MAG entitled to orders for a judicial sale under the terms of the Franek GSA?

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^[1] With no disrespect intended, I will refer to members of the El Saafin family by their first names.

^[2] See El-Saafin v Franek (No 4) [2020] VSC 389.

^[3] In the documents tendered in this trial, the spelling of the family name ‘El Saafin’ was also spelt ‘El-Saafin’ and ‘Elsaafin’. I have adopted the spelling used by members of the El Saafin family in their witness statements.

^[4] The circumstances surrounding the Mekkya Loan Agreement, including its execution and the sending of this email, are the subject of dispute in these proceedings.

^[5] Vella v Permanent Mortgages Pty Ltd [2008] NSWSC 505; (2008) 13 BPR 25,343, 25,381 [342] (Young CJ in Eq); Bank of Queensland Ltd v Dutta [2010] NSWSC 574, [117]-[118] (Davies J); Commonwealth Bank of Australia v Stephens [2017] VSC 385, [454]-[459] (Sloss J); Knowles v Victorian Mortgage Investments Ltd [2011] VSC 611, [38]-[47] (Croft J).

^[6] [2017] VSC 385, [455], citing Knowles v Victorian Mortgage Investments Ltd [2011] VSC 611, [38]-[47] (Croft J). See also Rafiqi & Thomas v Wacal Investments Pty Ltd (1998) ASC 155-024, [148] (Brabazon DCJ); Park Avenue Nominees Pty Ltd v Boon [2001] NSWSC 700; (2001) ASC 155-052, [38] (Harrison M); Taylor v Third Szable Holdings Pty Ltd [2001] VCAT 1841; (2001) ASC 155-050, [59]-[60] (McKenzie DP).

^[7] [2011] VSC 611, [47].

^[8] [2010] NSWSC 574, [123]-[124].

^[9] Ibid, adopting Dale v Nichols Constructions Pty Ltd [2003] QDC 453, [28] (McGill DCJ).

^[10] Knowles v Victorian Mortgage Investments Ltd [2011] VSC 611, [47].

^[11] [2008] NSWCA 150; (2008) 72 NSWLR 44, 81 [184].

^[12] [2009] QCA 85; [2009] 2 Qd R 156, 167 [37] (‘Shakespeare’).

^[13] Ibid 166 [31]-[32] (with whom Mullins and Douglas JJ agreed).

^[14] (2018) 130 SASR 551, 562-3 [44], quoting and adopting the approach referred to by Muir JA in Shakespeare [2009] QCA 85; [2009] 2 Qd R 156, 166 [31]-[32]: at 563 [46].

^[15] Haynes v St George Bank (2018) 130 SASR 551, 563 [45], quoting Linkenholt Pty Ltd v Quirk [2000] VSC 166, [98] (Gillard J).

^[16] Shakespeare [2009] QCA 85; [2009] 2 Qd R 156, 166.

^[17] Linkenholt Pty Ltd v Quirk [2000] VSC 166, [98] (Gillard J).

^[18] Jonsson v Arkway Pty Ltd [2003] NSWSC 815; (2003) 58 NSWLR 451, 456 [28] (Shaw J); Bank of Queensland Ltd v Dutta [2010] NSWSC 574, [124] (Davies J); Knowles v Victorian Mortgage Investments Ltd [2011] VSC 611, [41]–[47] (Croft J).

^[19] Linkenholt Pty Ltd v Quirk [2000] VSC 166, [120].

^[20] Ibid [121].

^[21] Ibid [132].

^[22] [2003] NSWSC 815; (2003) 58 NSWLR 451, 453 [10], 455-6 [27].

^[23] Lauvan Pty Ltd v Bega (No 2) [2018] NSWSC 155, [262] (Gleeson JA).

^[24] Hyde v Sullivan (1956) 56 SR (NSW) 113, 119 (Street CJ, Roper CJ in Eq and Herron J), cited with approval in Shakespeare [2009] QCA 85; [2009] 2 Qd R 156, 168 [43] (Muir JA, with whom Mullins and Douglas JJ agreed); Lauvan Pty Ltd v Bega [2018] NSWSC 154; (2018) 330 FLR 1, 51 [263] (Gleeson JA); TCL Airconditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd, Re TCL Airconditioner (Zhongshan) Co Ltd (No 2) [2019] FCA 257; (2019) 369 ALR 192, 196 [19] (McKerracher J).

^[25] LexisNexis, Halsbury’s Laws of Australia (online at 31 May 2021) 405 – Taxation and Revenue, II Income and assessable Income ‘(5) Income from Businesses’ (last update 19 August 2013) [405-2575] (citations omitted).

^[26] [2003] QDC 453, [59] (McGill DCJ), applying the approach of Shaw J in Jonsson v Arkway Pty Ltd [2003] NSWSC 815; (2003) 58 NSWLR 451.

^[27] Dale v Nichols Constructions Pty Ltd [2003] QDC 453, [56].

^[28] Ibid [58], quoting Marshall & Brougham Pty Ltd v Commissioner of Taxation (1986) 45 SASR 571, 576 (Jacobs J).

^[29] Macquarie Dictionary (online at 13 April 2021) ‘incidental’, quoted in Saga Holidays Ltd v Commissioner of Taxation [2006] FCAFC 191; (2006) 156 FCR 256, 269 [49] (Stone J, with whom Gyles and Young JJ agreed).

^[30] [2018] NSWSC 155, [264] (citations omitted).

^[31] PMT Partners Pty Ltd v Australian National Parks & Wildlife Service [1995] HCA 36; (1995) 184 CLR 301, 313 (Brennan CJ, Gaudron and McHugh JJ). See also Zweck v Town of Gawler (2015) 124 SASR 319, 334 [82] (Blue J, with whom Kourakis CJ and Nicholson J agreed).

^[32] ‘Secured Money’ is defined to include the ‘Loaned Amount’, which is defined by reference to the amount due under the ‘Loan Agreement’, which is ultimately defined as ‘the document titled “Loan Agreement” and dated 15 January 2016 between Mark as lender and Wael as borrower a copy of which appears as Annexure A to [the Franek Settlement Deed]’.

^[33] Morris v Baron & Co [1918] AC 1, 26 (Lord Dunedin), cited with approval in Hillam v Iacullo [2015] NSWCA 196; (2015) 90 NSWLR 422, 435 [62] (Leeming JA, with whom Basten and Ward JJA agreed).

^[34] Jonsson v Arkway Pty Ltd [2003] NSWSC 815; (2003) 58 NSWLR 451, 456 [28] (Shaw J); Bank of Queensland Ltd v Dutta [2010] NSWSC 574, [124] (Davies J); Knowles v Victorian Mortgage Investments Ltd [2011] VSC 611, [41]–[47] (Croft J).

^[35] M Collins & Son Pty Ltd v Bankstown Municipal Council (1958) 3 LGRA 216, 220 (Sugerman J).

^[36] Victoria, Parliamentary Debates, Legislative Assembly, 4 May 1995, 1236, Jan Wade, Attorney-General.

^[37] Victoria, Parliamentary Debates, Legislative Assembly, 24 February 2010, 508, Tony Robinson, Minister for Consumer Affairs.

^[38] If it did give rise to an independent liability, it would have been unenforceable under s 39 of the Consumer Credit Act for the same reasons as the Second Franek Loan Agreement is unenforceable.

^[39] If it did give rise to an independent liability on Wael, Bayda and the Company, it may have been unenforceable under s 39 of the Consumer Credit Act.

^[40] See the definitions in cls 1.1.13, 1.1.14 and item 13 of the Schedule to the Franek Settlement Deed, as set out in paragraph 159 above.

^[41] See, eg, Curnow Consulting Pty Ltd v JPD Media and Design Pty Ltd [2017] NSWSC 1171, [235] (Slattery J).

^[42] [2008] NSWCA 193, [7].

^[43] New Concept Pty Ltd was not the name of a registered corporation.

^[44] Devaynes v Noble; Clayton’s Case [1816] EngR 677; (1816) 1 Mer 529, 572; [1816] EngR 677; 35 ER 767, 781 (Chancery) (‘Clayton’s Case’).

^[45] Rosing v Ben Shemesh [1960] VicRp 28; [1960] VR 173, 176 (Herring CJ, O’Bryan and Dean JJ).

^[46] That claim was required to be served personally on the named individuals.

^[47] Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82, 88. See also Forrest v Australian Securities Investments Commission [2012] HCA 39; (2012) 247 CLR 486, 525 [102] (Heydon J).

^[48] Canberra Advance Bank Ltd v Benny (1992) 38 FCR 427, 438 (Neaves, Miles and O’Loughlin JJ).

^[49] [2001] WASC 139, [87].

^[50] Ibid [88], discussing Australia & New Zealand Banking Group Ltd v Pan Foods Company Importers & Distributors Pty Ltd [1999] 1 VR 29, 44 [45].

^[51] Australia & New Zealand Banking Group Ltd v Pan Foods Company Importers & Distributors Pty Ltd [1999] 1 VR 29, 44 [45].

^[52] Ibid 45 [46] (citations omitted). The finding that the bank had formed the relevant opinion was upheld in Pan Foods Company Importers & Distributors Pty Ltd v Australia & New Zealand Banking Group Ltd [2000] HCA 20; (2000) 170 ALR 579, [4] (Gleeson CJ, McHugh and Hayne JJ), [63] (Callinan J).

^[53] Kupang Resources Ltd v International Litigation Partners Pte Ltd [2015] WASCA 89, [132], [135] (Buss JA, with whom McLure P and Newnes JA agreed).

^[54] Australian Mid-Eastern Club Ltd v Yassim (1989) 1 ACSR 399, 403 (Meagher JA, with whom Samuels and Priestley JJA agreed).

^[55] Graham v Seal (1918) 88 LJ Ch 31, 35-6 (Swinfen Eady MR), 38 (Warrington LJ), 39 (Duke LJ); Amcor Ltd v Barnes [2016] VSC 707, [1215]-[1217] (Sloss J).

^[56] PGA Group Pty Ltd v Idameneo (No 789) Ltd (formerly Symbion Health Ltd); Gunn v Idameneo (No 789) Ltd  [2011] VSC 382 , [35] (Davies J).

^[57] Scarfe v Morgan [1838] EngR 253; (1838) 150 ER 1430; Kerford v Mondel (1859) 28 LJ Ex 303, 306; AVS Property Pty Ltd v McMaster [2010] FCAFC 81; (2010) 79 ACSR 89, 95 [23]-[24] (Sundberg, Stone and Edmonds JJ).

^[58] AVS Property Pty Ltd v McMaster [2010] FCAFC 81; (2010) 79 ACSR 89, 96 [25]-[26] (Sundberg, Stone and Edmonds JJ); Jones v Barkley (1781) 99 ER 434, 439-40 (Lord Mansfield), referred to in Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd [1954] HCA 25; (1954) 90 CLR 235, 246-7 (Dixon CJ).

^[59] [1989] HCA 51; (1989) 168 CLR 385, 417 (emphasis added).

^[60] Houghton v Immer (No 155) Pty Ltd [1997] NSWSC 608; (1997) 44 NSWLR 46, 59 (Handley JA, with whom Mason P and Beazley JA agreed), citing LJP Investments Pty Ltd v Howard Chia Investments Pty Ltd (No 2) (1990) 24 NSWLR 499, 508 (Hodgson J in Eq). Quoted with approval in Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681, 725-6 [138] (Ribeiro PJ); Blong Ume Nominees Pty Ltd v Semweb Nominees Pty Ltd (2019) 135 SASR 385, 408-9 [99]-[101] (Kourakis CJ, Stanley and Lovell JJ); Pitcher Partners Consulting Pty Ltd v Neville’s Bus Service Pty Ltd [2019] FCAFC 119; (2019) 271 FCR 392, 419-20 [124] (Allsop CJ, Yates and O’Bryan JJ). Discussed in Berry v CCL Secure Pty Ltd [2020] HCA 27; (2020) 381 ALR 427, 441-2 [34] (Bell, Keane and Nettle JJ), 455 [74] (Gageler and Edelman JJ). See also Murphy v Overton Investments Pty Ltd (2004) 216 CLR 388, 415-6 [74] (Gleeson CJ, McHugh, Gummow, Kirby, Hayne, Callinan and Heydon JJ).

^[61] Blong Ume Nominees Pty Ltd v Semweb Nominees Pty Ltd (2019) SASR 385, 408 [99], citing J D Heydon, M J Leeming and P G Turner, Meagher, Gummow and Lehane’s Equity Doctrines and Remedies (LexisNexis Butterworths Australia, 5th ed, 2015) 829 [23-275]; Houghton v Immer (No 155) Pty Ltd [1997] NSWSC 608; (1997) 44 NSWLR 46, 59 (Handley JA).

^[62] Tyco Australia Pty Ltd v Optus Networks Pty Ltd [2004] NSWCA 333, [246] (Giles JA) (citations omitted), approved in McCartney v Orica Investments Pty Ltd [2011] NSWCA 337, [149]-[155] (Giles JA, with whom Macfarlan and Young JJA agreed).

^[63] Suttor v Gundowda Pty Ltd [1950] HCA 35; (1950) 81 CLR 418, 441 (Latham CJ, Williams and Fullargar JJ).

^[64] R v Registrar of Titles; Ex parte Watson [1952] VicLawRp 32; [1952] VLR 470, 476–7 (Herring CJ).

^[65] Forsyth v Blundell [1973] HCA 20; (1973) 129 CLR 477, 499 (Walsh J), discussed in McKean v Maloney [1988] 1 Qd R 628, 635 (McPherson J); Rockett v Evans [2008] QSC 227, [12]–[14] (Martin J).

^[66] Ibid.

^[67] [1905] NSWStRp 54; (1905) 6 SR (NSW) 1.

^[68] (1871) 2 W A’B & W Eq 93.

^[69] Ibid 95.