The recent Supreme Court of New South Wales decision of His Honour Bellow J in Gustin Group Pty Ltd and anor. v Phoenicia Trading Pty Ltd and Gilmour [2015] NSWSC 1912 concerned a mortgagor’s application to set aside consent judgment, in circumstances where the mortgagor (in default of the mortgage) entered into a deed of forbearance with the lender and failed to comply with the terms of the forbearance.

Background

The decision deals with a very common factual scenario faced by lenders.

Relevantly, the parties entered into a deed of forbearance to resolve possession proceedings which had been commenced by the lender.  A term of the forbearance was that the mortgagor agreed to provide consent judgment in favour of the lender, to be held in escrow, subject to the mortgagor complying with the terms of the arrangement.

After the mortgagor failed to obtain refinance for the agreed reduced settlement sum and subsequently defaulted under his obligations under the deed of forbearance, the lender took steps to file and enforce the consent judgment and a writ for possession was issued.

The day before the proposed execution of the writ, the mortgagor applied for a stay of the execution of the writ. The stay was granted on the condition that the mortgagor would sell the security property by way of a public auction.

Shortly after the stay was granted, the mortgagor instructed a new solicitor who took steps to cancel the proposed auction for the security property, and then filed a summons seeking to set aside the consent judgment.

Mortgagor’s submissions to set aside the consent judgment

The mortgagor sought to set aside the consent judgment including on the following grounds:

  1. the loan and mortgage was unjust in their terms and liable to be set aside;
  2. the mortgagor was unduly influenced by the majority shareholder of the borrower company, was not a director or shareholder of the borrower company, and was elderly (aged 77); 
  3. the mortgagor’s vulnerability and influence of the majority shareholder led to a material inequality of bargaining power at the time the loan was entered into; and
  4. the terms of the deed of forbearance were accepted by the mortgagor, without any negotiation.

In seeking interim orders, Counsel for the mortgagor submitted that restraining the lender from taking possession of the security property did not deprive the lender of its security, and that any prejudice could be cured by the Court agreeing to list the proceedings for hearing at earliest possible date.

In response, Senior Counsel for the lender pointed to the repeated opportunities the mortgagor had been afforded to sell the security property, in addition Senior Counsel highlighted that the mortgagor had previously received legal advice including, at the time of entering into the loan agreement, when the deed of forbearance was negotiated, and regarding potentially challenging the loan agreement or mortgage.

Senior Counsel submitted that unless and until the deed of forbearance was set aside, there was no ground upon which the mortgagor could attack the consent judgment.

The Court’s finding

In dismissing the mortgagor’s summons, the Court found that the mortgagor had failed to establish a basis necessary to set aside the consent judgment in circumstances where the mortgagor obtained legal advice in relation to:

  1. the terms of the deed; and
  2. consequences of default, including the prospects of an application to set aside the consent judgment.

The Court did not accept that the mortgagor only became aware of the judgment against him when the sheriff’s notice issued.  This was in circumstances where aspects of the mortgagor’s own evidence clearly showed he had obtained legal advice in relation to the consequences of failure to comply with the forbearance arrangement.

In addition, the Court also held that the balance of convenience favoured the lender as:

  1. the value of the security property was sufficient to repay the full debt owing to the lender, and any further delay would prejudice the full recovery of the mortgage debt; and
  2. the consent judgment was entered some 8 months prior the hearing of the mortgagor’s summons.

The key takeaway for lenders

This case reinforces the importance to include in any deed of forbearance an acknowledgment from the borrower or mortgagor that they have been provided with an opportunity to obtain legal advice, and where legally represented, also acknowledge that they understand their obligations under the settlement arrangement.