Lender’s power to seek summary dismissal of a claim not straightforward in the case of alleged penalties

The Supreme Court of Victoria has partly granted an application by a financier, Equity-One, for summary dismissal of a claim brought against it by a borrower/guarantor.  The decision considers the principles applicable to summary dismissal of a claim where allegations of Anshun estoppel and the doctrine of penalties are raised.

Stoyanova v Equity-One Mortgage Fund Ltd [2016] VSC 414


The plaintiffs, Joyce Stoyanova (Ms Stoyanova) and M & J Stoyanov Transport Co Pty Ltd (Stoyanov Transport), commenced a group proceeding on behalf of a number of borrowers and guarantors against the defendant, Equity One Mortgage Fund Pty Ltd (Equity One).  The case concerned the enforceability of loans and guarantees given in respect of three refinancing agreements, which were entered into following the business decline of Stoyanov Transport.  Under the refinancing agreements, Equity One provided refinance of $345,500 to Stoyanov Transport as the borrower. Ms Stoyanova and her husband provided personal guarantees and mortgages over two properties in support of the facility. The first facility agreement was secured by a first mortgage over one of the properties (the First Mortgage). The second facility agreement was secured by a second mortgage over that property.

The refinancing agreements subsequently entered default.  In proceedings commenced by Equity One in 2012 and 2014, Equity One (as mortgagee) brought action against Ms Stoyanova, her husband, and Stoyanov Transport seeking, among other things, possession of the two mortgaged properties, and recovery of the monies advanced under the second and third refinancing agreements. Orders for possession of the two mortgaged properties were made.  Equity One sold the mortgaged properties, and applied the proceeds of sale to the debts owed under the refinancing agreements.

In 2016, Ms Stoyanova and Stoyanov Transport commenced a proceeding seeking declarations and associated relief to the effect that:

  • the monthly default fee clauses and higher interest rate clauses in the first, second and third facility agreements constituted penalties and were void; and
  • Equity One was estopped, pursuant to the principles established in Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589, from claiming the amount due under the first facility agreement or asserting rights under the First Mortgage.

Equity One brought an application in the proceeding for summary dismissal of the claims, on the basis they were hopeless or bound to fail.

Was the plaintiffs’ Anshun estoppel claim hopeless or bound to fail?

The plaintiffs contended that Equity One was estopped from exercising its rights under the first facility agreement, or otherwise relying on its rights as mortgagee under the First Mortgage.  It argued that:

  • the conduct of Equity One, by not including its claims under the first facility agreement in the 2012 recovery proceeding, was unreasonable because the two claims were so closely related (on the basis that the first and second facility agreements were on substantially the same terms, entered into on the same date, and secured by the same property); and
  • the failure to include the claim could result in prejudice to the plaintiffs, because a separate action under the first facility agreement would involve additional costs.

The Court held that the plaintiffs’ estoppel claim was hopeless, and dismissed the claim.  The Court accepted the primary submission of Equity One, being that its rights under the second facility agreement and second mortgage were separate and distinct from any claim it had in respect of the first facility agreement and the First Mortgage.

The Court cited the decision of Securrum Finance Ltd v Ashton [2001] Ch 291, relied upon by Equity One, which held that in the circumstances of that case, it was permissible for the bank to selectively rely upon its rights under a mortgage and guarantee in seeking to recover its loan. Such conduct was a ‘perfectly proper course of action’ for a bank to take.  It was not an abuse of process for the bank to bring later proceedings seeking to rely on separate rights under a guarantee.

Was the plaintiffs’ penalty claim hopeless or bound to fail?        

The plaintiffs contended that the higher interest rates under the relevant facility agreements constituted a penalty.  They contended they had a real prospect of success in proving the higher interest rates constituted a penalty.  Alternatively, they contended there were other reasons why the claims should not be summarily dismissed.

The Court noted that there were extensive authorities in favour of the proposition that there is no penalty where there is agreement to charge a certain rate of interest on condition that if payment is made punctually, the interest rate will be reduced (the No Penalty Rule).  However, the Court also accepted that equity requires the Court to look at substance over the form of a particular transaction in determining whether a contractual provision constitutes a penalty.  Accordingly, the Court will look to all the surrounding circumstances existing at the time of the making of the contract, and the contract itself, in determining whether the penalty doctrine applies.

Despite the Court considering, on the basis of the present state of the authorities, that the plaintiffs’ claim that the higher interest rate clauses constituted a penalty would fail, the Court exercised its discretion to not dismiss the claim for the following reasons:

  • the High Court has not affirmed the No Penalty Rule, and there may be a prospect the High Court will reconsider the rule;
  • if the plaintiffs sought to run the case to the High Court, the appellate courts would benefit from the evidence and argument in a trial;
  • the plaintiffs’ claims in relation to the monthly default fee constituting a penalty would proceed, and the determination of the interest rate penalty case would not result in the expenditure of substantial further costs; and
  • consideration of whether the monthly default fee clause constitutes a penalty may require consideration of the effect of the additional interest payable under the higher interest rate clause, consequent on the same default.

Accordingly, while the Court considered that the case would not succeed on the basis of the present authorities, the Court recognised that the discrete point of law regarding the No Penalty Rule was undecided, and permitted the plaintiffs to run their case – despite its opinion (formed in a summary dismissal application) that their prospects of success were low.

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