The recent judgment of Justice Stevenson of the NSW Supreme Court in ANZ v Donnelly will be of interest to lenders.
The Bank commenced proceedings against Mr and Mrs Donnelly for debt owing under the dual currency loan and possession of the security property at Bardwell Valley NSW.
Mrs Donnelly sought to defend the proceedings on the basis, amongst other things, that the Bank’s conduct in respect of the loan was unconscionable.
Mr Donnelly did not defend the proceedings. The Bank obtained default judgment against Mr Donnelly on 6 December 2011.
The loan given to Mr and Mrs Donnelly in 2008 was signed by the parties in Hong Kong for a sum of HKD4,105,056 (equivalent to AUD 600,000) and was secured by Mr and Mrs Donnelly’s property in Bardwell Valley, NSW.
The facility letter provided that if the loan to value ratio (or LVR) exceeded 85% the Bank could, at its absolute discretion, immediately convert the loan into any currency it saw fit to eliminate its foreign exchange risks.
Very shortly after the funds were drawn down, the AUD fell sharply against the HKD. That had a sudden adverse effect on the LVR.
Because of those matters, on or about 18 December 2008, the Bank exercised its right under the facility to convert the loan from HKD to AUD.
The Bank maintained that Mr and Mrs Donnelly defaulted under the facility by, amongst other things, failing to make interest repayments when due. In any event, the facility expired and became repayable in full on 22 August 2013.
Mrs Donnelly alleged unconscionable conduct on behalf of the Bank
Mrs Donnelly alleged, amongst other things, that the Bank engaged in unconscionable conduct.
The matters relied upon included the following:
- The Bank’s facility documents were signed at the “urging and direction” of the Bank officer with whom Mr and Mrs Donnelly dealt;
- The “risks inherent” in the facility were “not addressed or explained” by the Bank officer, particularly in respect of any impact there might be on the LVR “as a result of deterioration by the AUD as against the HKD”;
- No independent financial or legal advice was offered or able to be accessed before the signing of the facility; and
- The Bank officer “misrepresented” to Mrs Donnelly that the HKD loan currency could only be changed at her request or with her consent and did not inform her that the facility letter contained a power to the Bank to unilaterally covert the loan currency to AUD if the LVR exceeded the acceptable limit.
Mrs Donnelly accepted that the amount under the facility had to be repaid, albeit “in HKD at Hong Kong interest rates”. On the evidence before the Court, such amount was lower than the amount claimed by the Bank in the statement of claim.
The Court found no unconscionable conduct on behalf of the Bank
The Court found that the Bank did not engage in unconscionable conduct because:
- Mrs Donnelly was not in a position of special disadvantage to warrant the intervention of equity;
- Even if she was, there was nothing in the evidence to suggest that the Bank officer and thus the Bank, did know, or should reasonably have known, of such a position of disadvantage.
Having rejected Mrs Donnelly’s defence, the Court found that the Bank was entitled to the judgment for debt and possession of the security property.
In making a finding that Mrs Donnelly was not in a position of special disadvantage, the Court found Mrs Donnelly did not have prior experience with dual currency loans and did not fully understand the nature of the facility.
However, the Court found that Mrs Donnelly:
- saw the warning in the email of the Bank officer that “movements in exchange rates can be rapid and severe”;
- must have noticed the risk disclosure statements in the facility letter;
- heard the Bank officer’s explanation of the dual currency loan facility along the lines of the “FX Analysis” template during their initial meeting. In particular, the Court was satisfied that the Bank officer said something to the effect that if LVR exceeded 85%, the Bank could convert the loan to AUD;
- had access to, and could have sought independent legal advice including from her father (barrister), her brother (solicitor) or Mr O’Brien (solicitor acting for her on the purchase of an investment property to be funded in part from the advance under the dual currency loan facility).
The Court noted that the Bank officer (and thus the Bank) could have done more to explain to Mrs Donnelly the risks associated with dual currency borrowing. Further, the sudden drop, almost immediately after draw down of the facility in the value of the AUD against the HKD and the Bank’s decision to override the Bank officer’s recommendation that it defer converting the loan to AUD and allow Mr and Mrs Donnelly time to get the LVR below 75%, showed an element of hardship.
However, even in those circumstances, the Court was unable to conclude that Mrs Donnelly was in a position of special disadvantage sufficient to warrant the intervention of equity.
The benefits and risks associated with the dual currency loans (in particular the impact of the foreign exchange movements on the loan principal balance and LVR) highlight the importance of the processes required to be undertaken by the lenders when offering this product to the market.
The outcome in each case will turn out on the facts.
The Court in this case was assisted by the Bank’s evidence as to the steps taken leading up to the loan being advanced.
Lenders that are looking to recover debts owing under the dual currency loans should take early steps to:
- identify the relevant witnesses (often located overseas);
- obtain contemporaneous records; and
- obtain comprehensive evidence of practice and recollection from those witnesses with respect to their dealings with the borrowers.
The link to the judgment is here for further detail.