This case concerned whether agent of a lender in the short term bridging loan market was implicated with sufficient knowledge of a breach of duty by the directors of the borrowing companies to justify setting aside the loan and mortgage under the second limb of Barnes v Addy. Also whether the loan at 72% pa with a default rate of 102% pa infringed the Consumer Credit (New South Wales) Act 1995 and the Consumer Credit (New South Wales) Code.
Roxo carried on business in the short term bridging loan market. In June 2003 he was approached for a short term loan to the second plaintiff, Yeshiva Properties No 7 Pty Ltd for the subdivision of a property in Dover Heights. Roxo said he was acting on behalf of his sister Joan Marshall, the defendant. Documentation for a loan of $520,000 was executed by Yeshiva and some others as borrowers and Marshall as lender. That documentation was subsequently changed to substitute the first plaintiffs, Yeshiva Properties No 1 Pty Ltd, Yeshiva Properties 2, Yeshiva Properties 3, Yeshiva Properties 4, Yeshiva Properties 5 and Yeshiva Properties 6 for Yeshiva 7.
The loan was for a term of four months at an interest rate of 6% per month, or 72% per annum and a default interest rate of 8.5% per month, or 102% per annum. The documentation included a second mortgage over the Dover Heights property. After payment of stamp duty and fees, the loan moneys were paid by direction to Vageta Pty Ltd, the directors and shareholders of which were the Feldmans. A caveat was registered over the property in favour of Marshall stating her interest as lender.
The Yeshiva companies sought orders that the loan transaction and the mortgage be set aside and the caveat be withdrawn. They also sought a declaration that the interest provisions were void. By cross claim, Marshall sought an order that the Yeshiva companies pay her $520,000 plus interest, costs and expenses.
The Yeshiva companies alleged that Marshall did not exist or that Roxo was not her agent and, in consequence, there was no loan by or mortgage to Marshall to be set aside. Alternatively, the Yeshiva companies argued that the Feldmans breached their duties to the companies as directors, Marshall participated in those breaches and the loan and mortgage should be set aside. In the further alternative, the Yeshiva companies argued that the loan was not for business or investment purposes and the interest charges should be reduced under the Consumer Credit (New South Wales) Act 1995.
Existence of Ms Marshall
Marshall did not give evidence however the Court found that she existed.
The agency of Mr Roxo
Roxo said it was his belief that Marshall transferred funds into the accounts of other sisters in Australia. Roxo said he believed that the majority of the funds in the accounts belonged to Marshall.
It was submitted that the Court should not accept Roxo’s evidence in the absence of corroboration that the monies came from Marshall and also from her sisters accounts. It was submitted that Marshall should have been called as a witness as should the solicitors for the borrowers and the sisters. It was submitted that the Court should draw the inference, in terms of Jones v Dunkel (1959) 101 CLR 298, that their evidence would not have assisted Marshall.
This submission was rejected. Roxo gave evidence of his belief as to Ms Marshall’s instructions. As a result of that belief, moneys were transferred from the accounts of Ms Macedo and Ms Thomas to fund a loan to the Yeshiva companies. The rule in Dunkel does not require a party to give cumulative evidence. It does not compel time to be wasted in calling unnecessary witness (Cubillo v Commonwealth (No 2) (2000) 103 FCR 1 at 120).
The Court held it is clear that the source of the funds for the loan came from someone other than Roxo. It was clear that the funds came from the Australian accounts of two of his sisters. There was no reason to reject Mr Roxo’s asserted belief that the funds had originated with Ms Marshall.
Held the appropriate inference to be drawn from the evidence is that Roxo’s belief was the fact and he had been constituted the agent of Marshall to invest funds held by her in the names of two of her sisters and his execution of the loan documentation on behalf of Marshall was authorised. Marshall subsequently made a loan of $520,000 to the Feldmans and to Yeshiva 1 to Yeshiva 6.
Breach of directors’ duties
The original cheque directions were that the loan fund after payment of stamp duty and fees should be paid to Yeshiva 7. Subsequently, Roxo was instructed by the directors and secretary of the other Yeshiva companies to pay the net loan funds to Vageta. The bank cheque drawn on the funds in Mr Roxo’s account was made payable to Vageta.
The significance of a breach of duty by the directors of Yeshiva 1 to Yeshiva 6 only arises if Marshall, through her agent Roxo, was implicated in the breach of duty to an extent sufficient to enliven the second limb in Barnes v Addy (1874) LR 9 Ch App 244. The Court was not satisfied that that principle was enlivened.
The participation of Mr Roxo in any breach of duty
In Barnes v Addy, Lord Selborne LC said that the responsibility of a trustee extended in equity to others who were not properly trustees if they were found either making themselves trustees de son tort or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust
- Trustee de son tort = a person who is not regularly appointed trustee but because of interference with the trust can be held by court as constructive trustee which entails liability for losses to the trust
- cestui que trust = “the one who trusts” or the person who will benefit from the trust and will receive payments or a future distribution from the trust’s assets.
The requisite knowledge of such a person to be liable as an accessory to the breach of trust was discussed by the High Court in Consul Development Pty Ltd v DCP Estates Pty Ltd (1975) 132 CLR 373. Stephen J at 412 said of the extent of constructive notice that would enliven the principle, that if a defendant knew of facts that themselves would, to a reasonable man, tell of fraud or breach of trust, the case might well be different as it clearly would be if the defendant had consciously refrained from inquiry for fear lest he learn of fraud. But to go further was, in his Honour’s view, to disregard equity’s concern for the state of conscience of the defendant.
A useful summary of the relevant bases of liability is contained in NCR Australia Pty Ltd v Credit Connection Pty Ltd  NSWSC 1 at . At  Austin J points out that there is no liability if the defendant merely knows facts that would have been investigated by a reasonable person acting diligently, thereby discovering the truth, where the defendant had innocently but carelessly failed to make the appropriate investigations.
The Court held here that the evidence did not establish that Roxo had actual knowledge of any design on the part of the Feldmans that would have constituted a breach of duty on their part to Yeshiva 1 to Yeshiva 6. Nor did it establish that he had deliberately shut his eyes to such a design; nor that he abstained in a calculated way from making such enquiries as an honest and reasonable person would make, where such inquiries would have led to discovery of such a design; nor that he had actual knowledge of facts that to a reasonable person would have suggested such a design.
The second limb of Barnes v Addy was not enlivened with respect to Roxo and his principal, Marshall.
The Consumer Credit (New South Wales) Act 1995.
Evidence was given by affidavit that short term bridging loans were made available in the short term bridging loan market for terms of one to three months with a base interest rate between 4% and 7% per month and a higher default interest rate of 2% to 5% above the lower rate. The deponent swore that there was a significant market in Australia for clients looking for such quick finance and that lenders in the market could charge up to 10% per month depending on commercial risks including whether the loan was on second mortgage and there was a high loan to value ratio. The deponent of that affidavit was not cross examined and no evidence was called in contradiction.
The Consumer Credit (New South Wales) Code, s 6(1) provided that it applied to the provision of credit if, when the credit contract was entered into, the debtor was a natural person ordinarily resident in New South Wales, the credit was provided wholly or predominately for personal, domestic or household purposes, a charge was made for providing the credit and the credit was provided in the course of a business of providing credit. The Feldmans were borrowing parties under the loan documentation.
48 Section 11(1) of the Consumer Credit (New South Wales) Code provided that in any proceedings in which a party claimed that a credit contract, mortgage or guarantee was one to which the Code applied, it was presumed to be such unless the contrary was established. Section 11(2) provided that credit was presumed conclusively not to be provided wholly or predominately for personal, domestic or household purposes if the debtor declared before entering into the credit contract that the credit was to be applied wholly or predominantly for business or investment purposes. Section 11(3) provided, however, that such a declaration was ineffective if the credit provider knew, or had reason to believe, at the time the declaration was made, that the credit was in fact to be applied wholly or predominantly for personal, domestic or household purposes.
Amongst the loan documentation was a Consumer Credit Code declaration executed by the Feldmans declaring that the credit to be provided by Ms Marshall was to be applied wholly or predominantly for business or investment purposes. In addition, the Feldmans stated the purpose of the loan was for business purposes.
Court held that the Consumer Credit (New South Wales) Code s 11(3) was not enlivened. Roxo did not know and had no reason to believe that the moneys were in fact to be applied wholly or predominantly for personal, domestic or household purposes. In those circumstances, s 11(2) applied and any relief under the Consumer Credit (New South Wales) Code was excluded.
The Consumer Credit (New South Wales) Act 1995, s 11(1) provided that regulations might prescribe a maximum annual percentage rate for a credit contract to which the Consumer Credit (New South Wales) Code applied. The Consumer Credit (New South Wales) Special Provisions Regulation 2002, reg 7 prescribed a maximum annual percentage rate for a credit contract to which the Code applied at 48%. Relief under that provision is not, however, available to the Feldmans and was not available to the Yeshiva companies.
The Yeshiva companies have failed to establish sufficient complicity on the part of Roxo as agent for Ms Marshall to entitle them to relief by way of setting aside the loan transaction or the mortgage. It follows that they were not entitled to an order that Marshall withdraw her caveat. Nor were they entitled to an order that the interest provisions under the loan transaction are void in terms of the Consumer Credit (New South Wales) Act 1995.
Marshall did establish an entitlement to repayment of principal and the payment of interest at the default rate of 8.5% per month.
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