In a decision handed down yesterday by the Supreme Court of NSW (click here to read the judgement) the Court rejected a contention by a borrower that she received no benefit from a loan advance of $3.6m.
The assertion was made in circumstances where funds advanced under the loan agreement were not advanced directly to the borrower but rather to the benefit of corporate entities associated with the borrower.
ANZ Bank advanced the sum of $3.6 million to the borrower in 2009. The loan was secured by a mortgage over the borrower’s residential property at Warrawee.
Of the funds advanced, the sum of $3.2 million was used to refinance an earlier loan given to the borrower and her husband by Challenger in 2003. The balance of the loan funds, being the sum of $588,000, were paid to a corporate entity of which the borrower was a shareholder and director for the purpose of capital expenditure.
The Challenger loan had been secured by a mortgage over the Warrawee property. Challenger’s mortgage was discharged when the loan was refinanced by ANZ.
The 2009 loan was procured by the borrower’s husband and there was no personal contact between the borrower and the Bank’s representatives regarding the loan. Further the borrower did not receive independent legal or financial advice regarding the 2009 loan.
The ability of the borrower to pay the loan was assessed by the Bank by reference to the income available to a corporate group of companies associated with the borrower. These were essentially family companies of the borrower and her husband. The corporate group’s income was the only income available to the borrower to meet the mortgage debt.
The borrower defended the Bank’s possession proceedings and sought to have the loan and mortgage set aside or varied under the Contracts Review Act and in equity.
The Bank had also brought a claim against the borrower seeking to step into the shoes of Challenger as previous mortgagee of the property. The basis of this claim was that the Bank had paid out the borrower’s indebtedness to Challenger in the 2009 loan.
As a consequence of the borrower contending that the Challenger loan and mortgage were also unenforceable, the Bank joined Challenger to the proceedings. The claim in the proceedings against Challenger was an alternative claim in which the Bank sought compensation from Challenger on the basis that ANZ had mistakenly paid out the Challenger mortgage in the belief that the mortgage was enforceable.
The Court found that the Bank’s loan transaction was not unjust within the meaning of the Contracts Review Act or under equitable principles.
In reaching its decision the Court noted that:
- Even though the “benefit” of the loan went to corporate entities, the borrower’s family income was substantially, if not wholly, derived from rental returns from properties owned by the family group of companies. It followed therefore, that the borrower derived a real benefit from the loan, not merely an incidental one.
- The failure of the Bank to meet with the borrower did have any material consequence for the borrower because she understood the nature of a loan and mortgage and the consequences of default under a mortgage, being the Bank’s right to take possession of the security property.
- The Bank’s assessment of the borrower’s ability to pay the mortgage debt was reasonable in all of the circumstances.
- The borrower understood the nature of a loan and mortgage. This was in circumstances where the borrower did not receive independent legal or financial advice regarding the loan and mortgage. Further, even if the borrower had been given independent financial advice there was no reason to assume the advice would have resulted in anything more than confirmation that the family group of companies would be capable of meeting the mortgage debt on behalf of the borrower. At the time of entry into the loan the companies were capable of meeting the borrower’s obligations to the Bank.
The decision reinforces the position that it is difficult for borrowers to maintain an argument that the borrower did not obtain the benefit of a loan even where the benefit of the loan appears, on a prima facie basis, to have been to a third party, such as a corporate entity. In circumstances where the borrower derives a benefit from the conduct of the business of the corporate entity the Court will be reluctant to accept a volunteer argument.
As the Bank was successful against the borrower, the Court did not consider the remaining issues regarding the Bank’s entitlement to step into the shoes of Challenger or the question of the Bank’s entitlement to recover the amount of the refinanced debt from Challenger. These issues remain unsettled by the Courts.