Kellas-Sharpe v PSAL Limited [2012] QCA 94

The borrower sought a stay eviction citing arguing that a stay should be granted because they have an appeal with arguable prospects, success in which will be rendered nugatory without a stay.

The borrower proposed to appeal on the grounds that the following clause was a penalty:

The standard rate of 7.50 per cent per month, but whilst the borrower is not in default under the facility the lender will accept interest at the concessional rate of 4.00 per cent per month.

The trial judge was referred to Lord Eldon’s oft repeated criticism in Seton v Slade [1802] EngR 267; (1802) 32 ER 108 at 111 that the rule prefers form over substance. The trial judge acknowledged that the rule might have unsatisfactory origins and that the time might have arrived for it to be replaced, but held that it was so well-established in Australian law that it was not open to a judge at first instance to alter it. The trial judge cited many decisions in which the rule had been affirmed, although often with an accompanying criticism.

It was submitted to the appeal judge that me that in none of the decisions cited by the trial judge was it necessary to decide whether or not that there was such a rule. It was argued that there was no judicial decision which provided authoritative support for the rule.

The appeal judge disagreed noting that in David Securities Pty Ltd v Commonwealth Bank of Australia (1990) 23 FCR 1 at 29 Lockhart, Beaumont and Gummow JJ held that it was well established that a covenant offering a reduction in the rate for prompt payment does not attract the penalty doctrine. One of the decisions cited by their Honours for that proposition was Brett v Barr Smith [1919] HCA 4; (1919) 26 CLR 87 at 94, where Isaacs J referred with approval to Lord Hardwicke’s judgment in Nicholls v Maynard 3 Atkyns’ Chancery Reports 519 at 520.

Nonetheless, the trial judge accepted that it is arguable, at least in the High Court, and perhaps in the Court of Appeal, that it should now be held that the jurisdiction to relieve against penalties does extend to an interest rate provision in that form. Accordingly the appeal judge turned to consider the balance of convenience.

On the balance of convenience question the appeal judge reasoned as follows:

There will be a shortfall in the repayment of the principal advanced and expenses relating to the loan. Thus prima facie, the lender is entitled to exercise its security rights despite the interest rate argument. If the interest rate provision is void as a penalty, the lender would be entitled to recover as interest at least the cost of its funds. The evidence showed that the cost of external funding to the respondent was 28.5 per cent per annum for this loan. The trial judge held that had he found that the provision of the loan agreement as to the interest rate was void as a penalty, the appropriate rate for interest pursuant would be 25 per cent per annum compounding annually.

Thus the effect of staying the judgment would be to erode the lender’s likely recovery by the respondent’s interest expense of 25 per cent per annum compounding annually applied to the estimated shortfall.

In summary, even if the appeal succeeds there is a risk that granting a stay will result in a reduction in the amount otherwise recoverable by the respondent under the orders that would be made and so much seems inevitable if the appeal fails. In these circumstances, I am not prepared to grant a stay. I refuse the application.

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