FEDERAL COURT OF AUSTRALIA Davies v Australia & New Zealand Banking Group Ltd [1999] FCA 1104 DAVIES v AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED T17 of 1999 HEEREY J 5 AUGUST 1999 HOBART IN THE FEDERAL COURT OF AUSTRALIA TASMANIA DISTRICT REGISTRY T17 of 1999 BETWEEN: BEVERLEY ANN DAVIES Applicant AND: AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED Respondent JUDGE: HEEREY J DATE OF ORDER: 5 AUGUST 1999 WHERE MADE: HOBART THE COURT ORDERS THAT: 1. The applicant's application for an interim injunction is refused. 2. The applicant pay the respondent's costs of the application, including reserved costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA TASMANIA DISTRICT REGISTRY T17 of 1999 BETWEEN: BEVERLEY ANN DAVIES Applicant AND: AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED Respondent JUDGE: HEEREY J DATE: 5 AUGUST 1999 PLACE: HOBART REASONS FOR JUDGMENT 1 The applicant seeks an interim injunction to restrain the respondent Australia and New Zealand Banking Group Limited (the bank) from taking steps to obtain possession of a house at 25 Riverview Parade, Rosetta currently occupied as the matrimonial home by the applicant and her husband, Kenneth Noel Davies. 2 Counsel for the applicant relies on the provision of Part IVA of the Trade Practices Act 1974 (Cth) relating to unconscionable conduct and the recent exposition of the principles of unconscionability by the High Court in Garcia v National Australia Bank Limited (1998) 155 ALR 614. 3 In Garcia the High Court held that enforcement of a guarantee by a bank was unconscionable in circumstances where (i) the appellant did not understand the effect of transaction, (ii) the appellant was a volunteer because she did not obtain any financial benefit from the transaction, (iii) the bank was taken to have understood that, as a wife, the appellant may have reposed trust and confidence in her husband in matters of business and therefore to have understood that the husband may not have fully and accurately explained the effect of the transaction for her and (iv) the bank took no steps to explain the purport and effect of the transaction to her or to ascertain whether the effect of transaction had been explained to her by a competent, independent and disinterested stranger. 4 It will be noted that these factors were treated as conjunctive. An essential element was that the party seeking relief on the ground of unconscionable conduct did not understand the purport or effect of the transaction. To obtain an interim injunction the applicant has to show there is a serious issue to be tried and the balance of convenience favours the grant of an injunction. For reasons hereafter appearing, I am not satisfied that there is a serious issue to be tried in relation to the element of lack of understanding. 5 Both the applicant and her husband swore affidavits and were cross-examined. The applicant and Mr Davies were both born in 1940. Mr Davies and various companies owned by him and the applicant carried on business as wholesalers and retailers of automotive parts. At some stage a company BevAir Pty Limited, in which the applicant held 99 per cent of the issued shares, operated an aircraft charter business. Up until the birth of her child in 1962 the applicant worked in the husband's business. She resumed work in the late 1980s. Her work consisted of attending the office, filing documents, answering the telephone, cleaning and the like. 6 The Rosetta property was bought in 1974 for $60,000; part of that purchase price was borrowed on mortgage. Substantial improvements were carried out subsequently including the installation of a swimming pool. 7 In 1982 the title, previously in the name of the applicant and her husband, was transferred into her name alone. This was done on the advice of their then solicitor, the late Mr Peter Walker. The applicant said in evidence that she had no idea why this was done and that she "would not know" if it was done to avoid creditors. She simply said that Mr Walker "said it was a good idea". 8 It was clear however from the evidence of Mr Davies that at the time he was being pressed by creditors as a result of failure of a company in Sydney and that Mr Walker insisted that the title be transferred into the applicant's name before any further funds were advanced. 9 In 1995 a company controlled by the applicant and her husband purchased a leasehold interest in a hotel at Oyster Cove. The applicant said that at that time she was shown the advertisement in relation to the hotel but did not read it. The applicant and her husband moved into the hotel and conducted the business there. They lived for some five days of the week there, spending the rest of the time in the house at Rosetta. Part of the purchase of the hotel business was funded by a sale of an aircraft owned by BevAir Pty Limited. The hotel business did not prove to be successful and in February 1997 the applicant and her husband were evicted by the landlord. 10 The applicant and her husband had a number of borrowings, and in particular a loan of $350,000 from clients of Clerk, Walker and Stops. In 1997 Clerk, Walker and Stops were pressing for payment. The applicant and her husband re-financed this loan by borrowing, in the applicant's name, from the bank which took security over the Rosetta property. By this time Mr Davies had become bankrupt. There was also a further $50,000 advanced by the bank on security of a property owned by their daughter. 11 All necessary documents were signed at the office of the applicant's husband in Argyle Street. Repayments fell into arrears and the bank sought to enforce its security. There then occurred a sequence of events I regard as significant. 12 An affidavit was sworn on behalf of the bank by Mr Robert Pennell, State Manager, Group Credit Management. Mr Pennell was not cross-examined. He deposed amongst other things to meetings attended by the applicant and her husband and by their accountant, Mr Carl Rooke of Horwath Tas Pty Ltd. 13 The first of those meetings occurred on 8 July 1998. Mr Pennell's account of what occurred at those and subsequent meetings is not disputed and is confirmed by bank diary notes at the time. 14 The diary note for 8 July notes under the heading "Customer Proposal" that Mr Rooke "spoke for our customers". There were some proposals about the disposal of the stock. In relation to the Rosetta property it is noted: "Advise realise that house property/part thereof will have to be sold, but are seeking to ascertain most effective options which will require time to complete." 15 It was agreed that the bank would obtain a valuation. The applicant and her husband gave authority for the bank's valuer to inspect the property. 16 Subsequently the bank received a letter dated 10 July 1998 from Mr Rooke which referred to proposals for the disposal of plant, stock and equipment. The letter also referred to the intention of the applicant and her husband to investigate the possibility of subdividing the Rosetta property. Opinions from local real estate offices were to be forwarded to the bank. As soon as Mr Davies' efforts in relation to the plant, equipment and stock were completed he would "make every endeavour to complete the work that is necessary on the home at 25 Riverview Parade, so that it can be put into a saleable condition". The letter concluded: "We have impressed on Mr & Mrs Davies the need for co-operation in respect [sic] the above items and they have indicated their willingness and accept that it is in their interest to proceed as urgently as possible in order to minimise costs associated with the disposal of the properties and the assets of the company." 17 Mr Rooke also sought $400 a week to be made available by the bank for Mr and Mrs Davies to assist with their living expenses. Under cover of a fax dated 24 July Mr Rooke forwarded to the bank invoices for storage of certain plant and equipment of one of the Davies companies amounting to $2,762.50 "in addition to the weekly living allowance of $400". The bank paid these amounts. 18 On 30 July Mr Pennell on behalf of the bank wrote to the applicant and her husband. The letter relevantly stated as follows: "Dear Mr & Mrs Davies, Re: Banking Proposal … In relation to the Proposal presented to ourselves by Mr. Carl Rooke of Horwath Tas Pty Ltd under date of 10 July 1998 the Bank has now had an opportunity to review this proposition and responds accordingly: As you will understand and appreciate that with the cessation of business activities, non coverage of interest, repayment arrears and the actions taken by Clerk Walker and Stops constitutes events of default in terms of the letters of offer, which have been duly acknowledged by yourselves, over recent times. These defaults effectively allow the Bank to proceed with legal avenues for recovery of the outstanding debts. However, as a last measure of support the bank are prepared to allow you the opportunity to resolve your financial predicament but the bank reserves its rights [emphasis in original] to the exercising of its powers and remedies under it's [sic] security documentation should the bank consider its position to be compromised at any stage. I detail below the following requirements which are in number order to that listed in Mr Rooke's proposal letter: 1. The Director will be allowed to canvass prospective buyers for onsale of stock and componentry. The bank is to receive a copy of the fully priced and itemised stock list. Any offers on the stock from perspective purchasers are to be forwarded to the bank for their prior approval prior to discharge. These items are under the Banks Mortgage Debenture charge No 628827 which necessitates prior approval for release. 2. Plant & Equipment auctioned through Roberts Ltd has now been finalised with appropriate approval provided to allow payment of accounts, Radcliffe Pty Ltd for $2,082.50 and Pace Welding for $700. Residual proceeds from the auction have been credited to the account No 2540.73904. 3. The Bank are agreeable to the proposed disposal of funds to clear up the residual debts of Bearings and Transmission Supplies Pty Ltd, Horseworld and personal housing loan debt. In relation to the $400 per week available to assist with living expenses over the next 4 weeks (expiry 30/8/98) this will be allowable from the Bearings and Transmission Supplies account but will be reviewed again in light of progress at the expiry of this timeframe. 4. All Debtor proceeds from outstanding collections are to be banked upon receipt to the trading account of Bearings and Transmissions Supplies Pty Ltd. As to outstanding creditor (unsecured) payments, the bank does not sanction payments at this stage preferring to wait the outcome of sale of the stock and likely achievable price. Should any creditor become pressing/urgent the bank are to be informed. 5. The ability to sub-divide the Rosetta property is to be progressed with surveyors and real estate agents with the bank to be kept informed of outcomes (provision of correspondence from these engaged agents as intimated in your proposal.) 6. Knight Frank have been engaged to undertake an internal inspection of the Rosetta property to establish its true worth in current climate on 'an as is', 'vacant' and 'sub-division' potential basis. This should also assist yourselves to determine the best possible course. Please give them all due courtesy so that they can complete their task effectively and efficiently. I also advise that it is in your best interest to finalise matters as quickly as possible as interest and repayment arrears continue to escalate thereby eroding equity. It is proposed and suggested that the bank be kept informed on a fortnightly basis of the above issues and would be more than happy to meet at your residence if this is considered desirable. Please note that this offer remains open for acceptance for a period of 10 days from the date of this letter. I stress and reiterate that if in the opinion of the bank that it is being compromised we will immediately commence action for possession of the security property and recovery of the debt without further notice. Arrangements and ongoing action will be reviewed on 31/8/98. I look forward to receiving your response and approval. I trust that arrangements can be concluded amicably. Yours Faithfully R.G.Pennell State Manager Group Credit Management. I the undersigned hereby acknowledge the above terms and conditions and agree to abide by same. For and on behalf of Davies Group of Facilities. … B Davies (sgd) … Davies Beverley Anne cc Mr C. Rooke." 19 The applicant signed this letter to acknowledgement agreement to the terms and conditions. 20 A further meeting was held with Mr Pennell on 25 November. Again the applicant, her husband, and Mr Rooke were present. Mr Pennell's diary note records unsuccessful efforts to dispose of the stock. As to the Rosetta property, it is noted that the Davies have spoken to a number of agents and have determined that the property would be better placed in the hands of a "large multi national real estate agent". Mr Davies wished to complete "a number of minor repairs" before putting the property on the market but "has sought the banks indulgence in deferring this pending a court case against Clerk Walker and Stops". 21 The diary note records details of a valuation of the property by Knight Frank Hobart for $425,000 or $460,000 on a subdivision basis. 22 The diary note also refers to a damages claim of $750,000 against Clerk Walker & Stops for loss of business when possession of the Argyle Street premises was taken earlier during the year. 23 A proposal was put by Mr Rooke that the Davies continue trying to sell the stock and the bank "would allow the Davies to keep the house" while sale of stock was forthcoming and the bank debt not getting any worse. This would allow the Davies to proceed against Clerk, Walker and Stops for damages of $750,000 and any windfall could then be applied to clear ANZ debts. It was suggested that the likely time for Court hearing was February 1999. The home might be sold "as a last resort". 24 The diary note records that Mr and Mrs Davies were advised their proposal was unacceptable and while the bank appreciated the circumstances the legal case against the solicitors could take "a considerable time to resolve". Equity in the property did not allow for much latitude for ongoing time to resolve nor did the Davies have any proof that they would succeed in their endeavours. Interest was still accruing with debt nearing the property's fair market value of $425,000. 25 Mr Pennell advised the Davies that he saw "little option other than placing the property to market". He put a counter proposal to them. That counter offer made certain provisions for the selling of stock, including that by 4 December 1998 an "Agreement for Deed" be signed by the Davies allowing them a period of three months to 26 February 1999 to sell the Rosetta home and finalise Court proceedings, failing which the property must be delivered up to the bank as if judgment for the debt had been obtained and for selling by public option. The Davies would be allowed to reside in the premises until property was sold when they must then vacate. Possession of property was to be handed to the bank by 26 February 1999. In March 1999 marketing appraisals would have to be completed with four-week advertising of the property with an auction programmed for April 1999. The diary note records: "While the Davies do not wish to vacate their marital home they are appreciative of the counter offer before them for consideration. They acknowledge that they are in default of the terms and conditions of the loans and have little options available to themselves. Preliminary discussions indicate that the counter offer will be accepted." 26 Mr Pennell deposes that while the Davies' proposal was being put Mr Davies said to him that if nothing was forthcoming under the proposals, he and his wife would be co-operative and sell the mortgaged properties. Mrs Davies nodded, indicating to Mr Pennell agreement on her part. 27 Mr Pennell further deposes that on the faith of the indications from both Mr and Mrs Davies that they would co-operate with the bank and if necessary sell the house in order to reduce clear the indebtedness to the bank, he allowed Mrs Davies further time rather than immediately instructing the bank's solicitors. 28 The case of the applicant, according to her evidence, is that she does not know what a mortgage is; she has never heard of banks selling people up and that she does not know what a guarantee is. 29 This is notwithstanding that she admitted in cross-examination signing the following documents: guarantee and indemnity in 1996; two guarantees and indemnity in 1996; guarantee in 1994; mortgage in 1996; a mortgage in 1994; a mortgage in 1991; a mortgage in 1994; a mortgage in 1993; a mortgage in 1975; a mortgage in 1997; a mortgage in 1978; a mortgage in 1979; a mortgage in 1988; a mortgage in 1986; a mortgage in 1983; a mortgage in 1980. 30 I frankly do not accept the applicant's evidence as to her knowledge and understanding of the nature of a mortgage and guarantee. 31 The conclusion I draw is that she has been closely associated with the business fortunes of her husband over the years. Her dealings with the bank in recent times are totally inconsistent with somebody not understanding the nature of a mortgage and the consequences of default under a mortgage, which is her present case to the Court. The uncontested evidence is that in meetings with officers of the bank she accepted that the Rosetta property would have to be sold to meet the bank's debt, the only matter for discussion being how and when. I am not satisfied that there is a serious issue to be tried as to a critical element in the relief sought. The application for an interim junction is dismissed. I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey. Associate: Dated: 5 August 1999 Counsel for the Applicant: Mr R Young Solicitor for the Applicant: Ayliffe & Ayliffe Counsel for the Respondent: Mr R Hudson Solicitor for the Respondent: Butler, McIntyre & Butler Date of Hearing: 5 August 1999 Date of Judgment: 5 August 1999