Courts and industry consumer groups are increasingly concerned that borrowers are treated fairly by financiers. This brings into sharp focus the language used in loan and security documents. This article looks at the key issues in determining the scope of the all money clause.
- Whether the mortgage secures credit that is regulated by the National Credit Code
- Whether the Code of Banking Practice provision that applies to thirdparty mortgages is relevant.
- The position at general law, which will look to the intention of theparties to ascertain whether it is appropriate for the all money clause tooperate to effectively secure all debts.
Position with respect to Consumer Credit
Credit that is provided to consumers which is regulated by the National Credit Code is required to specifically identify the debts secured by any relevant security.
This includes obtaining the mortgagor’s express written agreement with respect to extending the operation of the security to any further or other advances of credit.
Clause 47 of the NCC is in the following terms:
All accounts mortgages
- In addition to securing credit provided by the credit contract or proposed credit contract, or securing obligations under a related guarantee or proposed related guarantee, to which a mortgage initially applies, the mortgage may contain a provision that secures credit provided under another future credit contract or future related guarantee.
- Any such mortgage is unenforceable in relation to such a future credit contract or future related guarantee unless the credit provider has:
- given the mortgagor a copy of the contract document of the credit contract or proposed credit contract or a copy of the guarantee or proposed guarantee to which the mortgage is to relate; and
- subsequently obtained from the mortgagor a written acceptance of the extension of the mortgage or obtained acceptance in some other form provided for by the regulations.
Accordingly, an all money clause will not be enforceable for all regulated debts, unless those debts are specifically referred to in the relevant loan documents, and the mortgagor consents to the extension of the security in accordance with the NCC.
Code of Banking Practice – third party mortgages
Although the COBP does not prohibit all money mortgages, clause 31.12 of the Code provides that a mortgage by a guarantor will be unenforceable unless the bank has given the mortgagor a copy of the future credit contract document or guarantee, and obtained the mortgagor’s written acceptance of the extension of the third party mortgage.
Unregulated credit – position at general law
Courts have demonstrated a reluctance to enforce all money clauses to secure all debts in relation to unregulated credit.
In 2000, Justice Finkelstein in the Federal Court decision of McVeigh, in the matter of Piccolo v National Australia Bank Ltd read down the operation of an all money clause, despite the fact that the clause, on its face, captured all amounts owing to the Bank.
The following relevant principles emerge from the decision in Piccolo.
- The court will have regard to all documents in relation to a specifictransaction, in determining whether the parties intended the relevant security to secure all debts, or only debts of a certain nature orcharacter.
- Specific terms agreed between the parties will often prevail overgeneral terms and conditions, as they will typically be more reflectiveof the parties’ intentions (this is sometimes referred to as ‘the specificoverriding the general’).
- If, based upon a consideration of all of the relevant documents andcircumstances, the Court determines that it was not the parties’intention that the security secure all debts, any all money clause will beread down.
The decision in Piccolo was relied upon in the subsequent matter of Chacmol Holdings Pty Ltd, where the Court limited an all money clause in a charge to the specific transaction to which the charge related.
These authorities provide little comfort for Banks seeking to rely upon the clause to recover additional amounts owing, as these clauses almost always appear in general terms and conditions which, according to Piccolo, will often be overridden by the parties intentions to confine the operation of the all money clause.
The Courts will still determine the operation of these clauses on a ‘case by case’ basis, and may apply the clause in accordance with its terms if the debt sought to be recovered is not inconsistent with the parties’ intentions that the all money clause operate to secure all debts sought to be recovered.
In the case of Meldov Pty Ltd v Bank of Queensland, His Honour Justice Slattery held that funds made available by the Bank in error were captured by an all money clause in the relevant mortgage provisions.
In this case, given the funds sought to be recovered were advanced in error by the Bank, it could not be argued that the parties intended the advance to be secured by the relevant mortgage (or indeed by any security).
However, His Honour relied upon a number of factors in determining the proper application of the all money clause, including the fact that the borrowers themselves had created the obligation by drawing down the additional funds, and that the funds had been ultimately provided to the commercial entity whose borrowings were originally secured by the relevant mortgage.
His Honour found that the restitution obligations arising as a result of the mistaken advance of funds by the Bank were of the ‘same character’ as the originally secured obligations, and accordingly, fell within the all money clause.
Each of the above decisions highlights that the Courts will determine the proper application of all money clauses based upon an assessment of the parties’ true intentions when entering into the relevant loan agreements and securities.
Where possible, Banks should look to make specific reference to all the debts to be secured and the securities in the relevant loan documents, to avoid potential disputes regarding the scope of the Bank’s security.