Supreme Court New South Wales Medium Neutral Citation: Australian Capital Financial Management Pty Ltd v Australian Financial Complaints Authority Limited [2021] NSWSC 1577 Hearing dates: 28 October 2021 Decision date: 07 December 2021 Jurisdiction: Equity - Commercial List Before: Ball J Decision: See paragraphs [78]–[79] Catchwords: CONTRACTS — Breach of contract — Wednesbury unreasonableness — Whether the first defendant's determination was so unreasonable that no reasonable decision maker could have made it CONTRACTS — Interpretation of the Australian Financial Complaints Authority's rules — The relevant point in time for determining whether a property is the applicant's principal or primary place of residence — The meaning of "principal place of residence" —Whether interest to be included in calculating jurisdictional limit — Whether Australian Financial Complaints Authority required to conduct a hearing — Whether legal costs incurred in connection with court proceedings were a direct financial loss or an indirect financial loss Legislation Cited: Contracts Review Act 1980 (NSW) Corporations Act 2001 (Cth) Cases Cited: Commissioner of State Revenue v Burdinat [2012] WASC 359 Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd (2008) 19 VR 358 Investors Exchange Limited v Australian Financial Complaints Authority Limited [2020] QSC 74 Mickovski v Financial Ombudsman Service Ltd (2012) 36 VR 456; [2012] VSCA 185 Patersons Securities Ltd v Financial Ombudsman Service Ltd [2015] WASC 321; 108 ACSR 483 Re the Will and Estate of Hood [2004] VSC 328 Category: Principal judgment Parties: Australia Capital Financial Management Pty Ltd (Plaintiff) Australian Financial Complaints Authority Limited (First Defendant) Benyu Bai (Second Defendant) Wenhua Yang (Third Defendant) Representation: Counsel: E Cox SC with S Lees (Plaintiff) P Herzfeld SC with J Burnett (First Defendant) S Thomas (Second and Third Defendants) Solicitors: Mills Oakley (Plaintiff) Becketts Lawyers (First Defendant) DSS Law (Second and Third Defendants) File Number(s): 2021/90220 Judgment Introduction 1. In these proceedings, the plaintiff, Australian Capital Financial Management Pty Ltd (ACFM), seeks to set aside a determination of the first defendant, the Australian Financial Complaints Authority Limited (AFCA), by which AFCA determined that: 1. Guarantees provided by the second defendant, Benyu Bai (Mr Bai) and his wife, the third defendant, Wenhua Yang (Ms Yang), in respect of a loan made by ACFM to Australian Sheepskin & Hide Pty Ltd (now in liquidation) (ASSH) were invalid and unenforceable; 2. Mortgages executed over a property owned by Mr Bai (Property 21) and a property owned by Mr Bai and Ms Yang (Property 23) were unenforceable with the consequence that (1) ACFM was required to execute a discharge of mortgage form for Property 21 and remove any caveat registered on the title of that property and (2) ACFM was required to repay the sum of $254,646 with interest at 2.05 percent per annum paid by Mr Bai and Ms Yang from the proceeds of the sale of Property 23; 3. ACFM should pay Mr Bai and Ms Yang $88,194 compensation for legal costs they had incurred and $5,000 compensation each for non-financial loss. AFCA and the nature of the Determination 1. AFCA is a company limited by guarantee and is the operator of the 'AFCA scheme', which is a financial services external dispute resolution scheme authorised under s 1050 of the Corporations Act 2001 (Cth) (the Act). Pursuant to s 912A(1)(g)(i) of the Act, a financial services licensee that provides financial services to persons as retail clients is required to have a dispute resolution system complying with s 912A(2) of the Act, which relevantly requires membership of the AFCA scheme. 2. AFCA's Constitution cl 3.2(g) provides that each member of AFCA agrees to be bound by the AFCA Complaint Resolution Scheme Rules (AFCA Rules). Once a complaint is made to AFCA, the AFCA Rules form a binding tripartite contract between the complainant, AFCA and the member the subject of the complaint (referred to in the Rules as the 'financial firm'): see AFCA Constitution, cl 12.1(d); AFCA Rules, r A.1.2. 3. A determination by AFCA is not susceptible to judicial review. AFCA's jurisdiction, powers and obligations are governed solely by the contract set out in the AFCA Rules; and any challenge to a determination by AFCA depends largely on whether the determination was made in accordance with the terms of that contract: Mickovski v Financial Ombudsman Service Ltd (2012) 36 VR 456; [2012] VSCA 185 at [32]–[33]; Patersons Securities Ltd v Financial Ombudsman Service Ltd [2015] WASC 321; 108 ACSR 483 at [61]; Investors Exchange Limited v Australian Financial Complaints Authority Limited [2020] QSC 74 at [12]. 4. The AFCA Rules contain extensive provisions setting out the circumstances in which AFCA will make a determination and how it will go about doing so. It is not necessary to set out all the relevant rules. The following, however, took on particular significance in this case: 1. Under r A.2.1(c), AFCA is required to consider complaints submitted to it in a way that is: (i) independent, impartial, fair, (ii) in a manner which provides procedural fairness to the parties (iii) efficient, effective, timely, and (iv) cooperative, with the minimum of formality; 1. Under r A.10.2, AFCA must provide the parties to the complaint: a) with access to relevant information; and b) an opportunity to make submissions. 1. Under r A.12.1, AFCA may, after collecting relevant information and obtaining submissions from the parties, choose to provide the parties with a preliminary assessment of the complaint. If the Financial Firm fails to accept AFCA's preliminary assessment within the timeframe specified by AFCA, the complaint must proceed to a determination: r A.12.3. When determining a complaint at the request of a party, the AFCA decision maker must consider the party's reasons for disagreeing with the preliminary assessment, but is not limited to those reasons: A.12.5. 2. Rule A.14.2 provides: When determining any other complaint, the AFCA Decision Maker must do what the AFCA Decision Maker considers is fair in all the circumstances having regard to: a) legal principles, b) applicable industry codes or guidance, c) good industry practice and d) previous relevant Determinations of AFCA or Predecessor Schemes. An AFCA Decision Maker is not bound by the rules of evidence or previous AFCA or Predecessor Schemes decisions: r A.14.3. 1. Under r C.1.2(e), AFCA must exclude "[a] complaint where the value of the Complainant's claim when the complaint is submitted to AFCA exceeds $1 million …" However, that jurisdictional limit does not apply relevantly to "a complaint to set aside a guarantee supported by security over the guarantor's primary place of residence": r C.1.2(e)(iii). 2. Rule C.2.1 states: AFCA may in its discretion exclude a complaint, if AFCA considers this course of action is appropriate. AFCA will not exercise its discretion to exclude a complaint lightly. The discretion will only be used in cases where there are compelling reasons for deciding that AFCA should not consider the complaint. 1. Rule C.2.2 states: Examples where AFCA may consider excluding a complaint include: a) If there is a more appropriate place to deal with the complaint, such as a court … … g) If the Complainant is represented or assisted by an agent who may receive remuneration for this service and AFCA considers that: (i) the agent is engaging in inappropriate conduct which is not in the best interest of the Complainant, or (ii) the complaint is not accompanied by information required by AFCA. … 1. Rule D.3.1 states: An AFCA Decision Maker may decide that the Financial Firm is to compensate the Complainant for direct financial loss. When calculating the value of such a remedy, monetary compensation and any remedy where the value can readily be calculated, such as the waiving of a debt, are included. D.4 sets out the maximum amount that an AFCA Decision Maker can award for direct financial loss. Under r D.3.2, AFCA may also decide that the Financial Firm is to compensate the Complainant for indirect financial loss, except in certain circumstances. Again, r D.4 sets out the maximum amount that can be awarded in respect of indirect financial loss. 1. Rule D.4.1 states: The table below specifies the maximum amounts that may be awarded by an AFCA Decision Maker for complaints other than Superannuation Complaints, not including costs awarded under rule D.5 or interest under rule D.6 The relevant limits stated in the table are $1 million in the case of a small business loan, an unlimited amount where the claim is "by a guarantor to set aside a guarantee supported by security over … the guarantor's principal place of residence …" and $5,000 in respect of indirect financial loss. Rule D.5.1 states that "[a]n AFCA Decision Maker may decide that the Financial Firm is to contribute to the legal or other professional costs or travel costs incurred by the Complainant in the course of the complaint". Rule D.5.2 states that "[u]nless special circumstances apply, AFCA will not require the Financial Firm to contribute more than $5,000 to these costs". 1. Under r D.3.3, an AFCA Decision Maker may decide that the member is to compensate the complainant for non-financial loss in cases where there is "an unusual degree or extent of physical inconvenience, time taken to resolve the situation or interference with the Complainant's expectation of enjoyment or peace of mind has occurred" up to a maximum of $5,000: r D.4.1. Under r D.6.1, AFCA may also decide that the Financial Firm is to pay interest on a payment to be made by the Financial Firm to the complainant. An award of interest is not to be taken into account for the purpose of determining the maximum value of a remedy: r D.6.3. 1. AFCA's determination (if accepted by the complainant) is final and binding: r A.15.3. The effect of that agreement is that the determination will not be reviewed by a court unless it is affected by fraud or dishonesty or lack of good faith or has not been carried out in accordance with the contract: Mickovski v Financial Ombudsman Service Ltd (2012) 36 VR 456; [2012] VSCA 185 at [41]. 2. It is accepted that, consistently with the rules, AFCA is entitled to reach a decision by reference to what is fair in all the circumstances rather than the existing legal rights and obligations of the parties: Patersons Securities Ltd v Financial Ombudsman Service Ltd [2015] WASC 321; 108 ACSR 483 at [95]. It is also accepted that a decision that no reasonable decision-maker could properly come to on the evidence (often referred to as Wednesbury unreasonableness) is one that does not meet the requirements of the rules: Investors Exchange Limited v Australian Financial Complaints Authority Limited [2020] QSC 74 at [27]. Factual Background 1. Prior to 2014, Mr Bai and Ms Yang carried on a business of importing sheepskins into China. In 2014, they agreed in conjunction with Mr David Lee to establish a sheepskin export business in Australia which was to be conducted through ASSH. Both Mr Lee and Ms Yang became directors of ASSH and each acquired 40 of the 120 issued shares in the company. Prior to that time, Mr Bai and Ms Yang had acquired two adjacent properties at Point Cook in Victoria (referred to earlier as "Property 21" and "Property 23"). Mr Bai and Ms Yang lived in Property 21 when they were in Australia. That property was acquired by Mr Bai alone. 2. On 16 May 2014, ACFM as lender and ASSH as borrower and Mr Lee, Ms Yang and Mr Bai as guarantors entered into a loan agreement by which ACFM agreed to lend ASSH an amount of up to $2 million in connection with ASSH's business and Mr Lee, Ms Yang and Mr Bai agreed to guarantee ASSH's obligations under the agreement. At the same time, Mr Bai and Ms Yang granted mortgages over Property 21 and Property 23, respectively. 3. Clause 15 of the loan agreement provides: As Collateral Security for the due payment of all Moneys Owing in respect of the Loan Facility and for the due performance of all obligations and provisions on the part of the Borrower contained in this Agreement, the Borrower shall provide or cause to be provided to the Lender the securities set out in Item 6 of the Schedule. Default under any of the Collateral Securities shall constitute default under this Agreement. Item 6 of the Schedule lists the following as "Collateral Security": (a) The Borrower agrees to execute a General Security Deed in favour of the Lender; (b) A Deed of Guarantee and Indemnity shall be executed by the Guarantors in favour of the Lender; (c) The mortgages in relation to the Mortgaged Properties noted in Item 6A of the Schedule shall be executed by each Security Provider in favour of the Lender at the specified time; (d) Charges over any present and future personal property owned by: (i) Lee; (ii) Yang; and (iii) Bai. The above securities are to be in a form required by the Lender. 1. The loan agreement and associated documents (including the deeds of guarantee and indemnity) were signed by Mr Bai and Mr Lee. Mr Lee signed on behalf of Ms Yang pursuant to an authority given to him by Ms Yang that was in effect between 16 May 2014 and 20 June 2014, while Ms Yang was in China. Ms Yang signed the documents herself in June 2014 on her return to Australia, by which time ASSH had drawn down $390,000 under the loan. 2. Between 18 June 2014 and 29 August 2014, ASSH drew down a further $800,000 under the loan. 3. It appears that by about July 2014 ASSH had run into financial difficulties. On 15 July 2014, ACFM placed a caveat on the title of Property 23. Contracts for the sale of that property for a price of $625,000 were exchanged on 26 August 2014. On settlement of the sale, ACFM received $254,646.10 from the sale proceeds. 4. On 7 November 2014, ACFM sent the first demand to ASSH requiring it to rectify various breaches of the loan agreement by 14 November 2014, including the failure to repay a drawdown of $271,000 made on 28 July 2014. 5. On 3 and 4 February 2015, ACFM commenced proceedings in the New South Wales District Court against Mr Bai and Ms Yang to recover the amount of $742,800 owing under the loan agreement together with interest and costs. On 7 July 2015, Mr Bai and Ms Yang filed cross-claims seeking to have the loan agreement and guarantees declared void under the Contracts Review Act 1980 (NSW) and the general law. 6. On 14 March 2016, Mr Bai and Ms Yang departed Australia voluntarily following an unsuccessful appeal to the Administrative Appeals Tribunal against the Minister's refusal to grant Ms Yang a Business Owner (Residence) visa. 7. The District Court proceedings were due to be heard commencing on 6 June 2016. There was no appearance by Mr Bai and Ms Yang, as a result of which judgment in favour of ACFM was given against each of them in the amount of $738,876.39. 8. On 31 October 2018, the District Court made orders by consent setting aside the judgment given on 6 June 2016 and ordered that Mr Bai and Ms Yang pay ACFM's costs. 9. On 24 January 2019, ACFM was admitted to membership of AFCA and became bound by its constitution and rules. 10. On 15 February 2019, Mr Bai and Ms Yang entered into a litigation funding agreement with Mr Jeffrey Lennon and borrowed $150,000 for costs relating to the District Court proceedings. Subsequently, Mr Lennon lodged a caveat over Property 21. On 3 March 2019, Mr Lennon lodged a complaint with AFCA. Originally, the complaint was lodged in Mr Lennon's own name and named Mr Bai as the other complainant. In response to the question "[w]hat outcome are you seeking", the complaint stated: I am seeking compensation I am not sure how much I am seeking Over $500,000 1. AFCA responded that it had no jurisdiction to hear a complaint by Mr Lennon. Ultimately, however, he was permitted to pursue a complaint in relation to the guarantees given by Mr Bai and Ms Yang, relying on an "Agent Authority Form" signed by them. 2. On 3 June 2019, AFCA informed ACFM that it had decided to reject ACFM's application for AFCA to exclude the complaint and that it did not consent to a continuation of the District Court proceedings. 3. During the second half of 2019 and early 2020, Mr Lennon provided AFCA with supporting material including the relevant agreements, affidavits sworn by Mr Bai and Ms Yang in the District Court proceedings and the court book prepared for the purpose of those proceedings. 4. On 9 April 2020, AFCA issued its preliminary assessment (titled Recommendation) and requested a response within 30 days. AFCA summarised its "key findings" in these terms: The complainants did not understand English at the time the guarantee was signed. The guarantee documents were written in English, and the complainants say the lender pressured them to sign the documents at the time they were provided. The lender refutes this claim but is unable to provide evidence it gave the complainants sufficient time or the opportunity to obtain independent legal or financial advice, or to have the loan contract and guarantee translated into Chinese. The complainants also say the lender did not provide them with copies of the loan contract or guarantee. They say after the guarantee was signed, the lender took all of the loan documents. The lender is unable to provide evidence it gave the guarantors copies of the loan contract or guarantee documents at the time it issued the guarantee documents for signing. … While the lender refutes the complainants' claims [that Mr Bai signed the guarantee in the presence of Mr Lee], it is unable to provide evidence about when, how and to whom the guarantee was provided, when it was returned or when it was signed – it is therefore unable to show it provided the complainants with time to obtain independent advice. The lender's lack of supporting documentation is evidence it has not met good industry practice standards and did not act appropriately when it issued the guarantee. As such, the guarantee and security taken to support it are unenforceable. Furthermore, the lender used the guarantee and the mortgage to demand funds be paid to the loan from the sale of property A. This was a condition imposed upon the complainants by the lender in order to allow the sale settlement to proceed. As the guarantee and the security taken to support it are unenforceable, the funds paid to the lender from the proceeds of the settlement are to be refunded to Mr complainant along with interest on this amount from the date it was paid. 1. AFCA concluded that "[b]ased on the information provided, the lender did not act appropriately when it provided the loan". It then set out the relief that it proposed to give, which substantially corresponds to the relief set out in its final determination. 2. On 26 May 2020, ACFM's then solicitors made extensive submissions in relation to AFCA's preliminary finding. They also supplied AFCA with a statutory declaration made by Mr Lee setting out the circumstances in which he and Mr Bai executed the loan documents. Mr Lee's account differed from that given by Mr Bai. 3. Following further submissions by the parties' solicitors, including submissions by ACFM's solicitors that the complaint should be excluded under r C.2.2(a) because the District Court proceedings were on foot, or under r C.2.2(g) because Mr Bai and Ms Yang were being assisted by Mr Lennon for remuneration, AFCA made its determination on 17 February 2021. It set out its "key findings" in these terms: The guarantees provided by Mr B and Ms Y were unfairly obtained because they did not understand the purport and effect of the guarantee and did not have the benefit of independent legal advice. The guarantees are invalid and unenforceable. The mortgages over Mr B's properties are also unenforceable as they were obtained to secure Mr B's guarantee. 1. AFCA's reasons for reaching that conclusion were extensive. Relevantly, AFCA said: In relation to obtaining guarantees, the lender, having regard to the size and purpose of the proposed loan, and good industry practice at a minimum must meet the following conduct standards: • the lender to provide a prominent notice to the proposed guarantor that: > they should obtain independent legal advice on the effect of the guarantee > there are financial risks to providing a guarantee > they can refuse to enter into the guarantee • the lender must provide to the proposed guarantor a copy of the related loan contract and related security contracts • the lender must permit the proposed guarantor until at least the next day to consider the guarantee and related loan and security contracts, unless the guarantor is legally advised. Where the proposed guarantor is a director of the borrowing entity, the lender must permit sufficient time for the director to consider these documents unless the director waives this requirement • the lender must not give the guarantee to the borrower (or someone acting on behalf of the borrower) to arrange for the signing of the guarantee • the lender must ensure the guarantee is signed by the guarantor in the absence of the borrower. 1. AFCA noted that the documents were in English and that Mr Bai and Ms Yang did not speak or read English. It thought that that conclusion was corroborated by the fact that ACFM provided Mr Bai and Ms Yang with a loan summary, a loan security summary and a loan draw down summary in Mandarin. In AFCA's view, that would have been unnecessary if Mr Bai and Ms Yang understood written English. 2. AFCA concluded that Ms Yang was not offered the opportunity to obtain legal advice and did not understand the purport and effect of the guarantee. In reaching the first of those conclusions, it rejected evidence given by Mr Chen, the sole director of ACFM, in the District Court proceedings that at the time Ms Yang executed the guarantee he and she had a conversation in words to the following effect: Me: "These are the loan documents you authorised Mr Lee to sign on your behalf. I believe your lawyer has explained them to you." Ms Yang: "OK, I understand what those documents are. They have been reviewed by our lawyer." 1. AFCA gave the following reasons for doing so: The panel does not accept Mr C's evidence that Ms Y had told him that she had obtained legal advice because: • the Acknowledgement of Legal Advice by the Guarantor signed by Ms Y is dated 16 May 2014, not June or July 2014 • the parties agree that Ms Y was in China on 16 May 2014 • the Acknowledgement of Legal Advice by the Guarantor is in English and the panel finds that it is more likely than not that Ms Y did not understand the purport of the document she signed • the Certificate of Independent Advice attached to the Acknowledgement of Legal Advice by the Guarantor has not been completed or signed by a solicitor or any other legal practitioner • Mr C says in his affidavit that he had agreed to Mr L signing the loan documents (including the deed of guarantee and indemnity) on Ms Y's behalf under a Power of Attorney on or about 17 May 2014 while Ms Y was in China • at least $390,000 of the $2,000,000 loan limit had been drawn down by Company A before Ms Y's return from China on 9 June 2014. 1. On the question whether Ms Yang understood the guarantee, AFCA reached the following conclusion: The lender also submits that Ms Y would have understood she was providing a guarantee because: • the concept of a guarantee is no different under Chinese law than it is under Australian law, and • Ms Y had prior to 2014 provided guarantees as a director of another company that purchased property in Melbourne. The panel accepts Ms Y would have had a general understanding of what a guarantee was. However, the panel is not satisfied that Ms Y would have understood her actual potential liability as guarantor in this transaction without the benefit of independent advice. The loan transaction in this instance was to provide cash-flow to a cattle and sheep skin exporting business operated by Company A. This is a very different transaction than those for loans to buy real property. 1. AFCA reached similar conclusions in relation to the guarantee given by Mr Bai. It observed that in giving the guarantee he was a volunteer with the result that the standard of conduct required of ACFM was particularly stringent. On the question whether Mr Bai was afforded time to obtain legal advice, it said: The lender says Mr B had time to consider the loan documents and in fact obtained legal advice. It has provided an Acknowledgement of Legal Advice by the Guarantor signed by Mr B and dated 16 May 2014 to support its position. However, the panel is not satisfied this document supports the lender's assertion that Mr B obtained legal advice because: • the Acknowledgement of Legal Advice by the Guarantor is in English and it is more likely than not that Mr B did not understand the purport of the document he [sic] signed it • the Certificate of Independent Advice attached to the Acknowledgement of Legal Advice has not been completed or signed by a solicitor or any other legal practitioner. It is unreasonable for the lender to rely on the Acknowledgement of Legal Advice in circumstances where the Certificate of Independent Advice has not been completed and signed by a solicitor or any other legal practitioner. 1. On the question whether the mortgages granted by Mr Bai were unenforceable, AFCA said: The panel is satisfied the lender intended that the mortgages over the properties were to effectively to [sic] secure Mr B's guarantee as evidenced by the loan security summary which states: Guarantor: 1) guaranteed by [Mr L] and [Ms Y] of the board of the company 2) guaranteed by [Mr B]; collateral 21, 23 [R Ave, Location P] ... Further, the panel notes the mortgages are listed in the guarantee (which was limited to the specific loan transaction) and not in the loan agreement. As the unregistered mortgages were intended to secure Mr B's guarantee and the guarantee is unenforceable, then the mortgages are also unenforceable. 1. ACFM challenges the determination on a number of grounds. As finally put in oral submissions, those grounds were: 1. AFCA lacked jurisdiction to hear the complaint because the complaint exceeded the $1 million limit and did not involve an application to set aside a guarantee supported by security over the guarantors' primary place of residence; 2. AFCA did not accord ACFM procedural fairness in concluding that Mr Bai and Ms Yang did not understand the purport and effect of the guarantees; 3. AFCA's conclusion that the mortgages were unenforceable either amounted to a denial of procedural fairness or was so unreasonable that no reasonable decision-maker would have reached it. That is said to be so because the mortgages were independent securities; 4. AFCA's conclusion that ACFM must repay the $254,646.16 was so unreasonable that no reasonable decision-maker could reach it because the payment was a voluntary one; and 5. AFCA's conclusion that Mr Bai and Ms Yang were entitled to recover certain legal costs and non-financial compensation was so unreasonable that no reasonable decision-maker could reach it. Following a request by the Court for supplementary submissions, ACFM also submitted that AFCA did not have jurisdiction to make the costs order it did. Jurisdiction 1. Mr Bai and Ms Yang submit that it is not now open to ACFM to challenge the jurisdiction of AFCA because they failed to do so at the time. In any event, they submit that the conclusion of AFCA that it did have jurisdiction was not so unreasonable that no reasonable decision-maker would have reached that conclusion, with the result that AFCA conclusion is not open to challenge. Those submissions rest on a misunderstanding. ACFM's submission is that AFCA's decision fell outside the contract by which the parties were bound (that is, the AFCA Rules), with the result that no rights arose from that decision. Whether the decision was one that fell within the contract or not is a question for the Court, not a question for AFCA. And the resolution of that question turns on the facts before the Court, not on what was before AFCA. As Mr Herzfeld, who appeared for AFCA, pointed out, it may be that in certain circumstances ACFM will be estopped from relying on its strict contractual rights and, as a result, may become bound by a decision not taken in accordance with the contract. However, no such claim was made in this case. 2. The question of jurisdiction raises two issues. The first is whether the complaint involved an application to set aside a guarantee supported by security over Mr Bai and Ms Yang's principal or primary place of residence. The second is whether, if it did not, the claim or the value of the determination was more than the jurisdictional limit of $1 million. 3. ACFM submits that the limit must apply because Property 21 was not Mr Bai and Ms Yang's principal or primary place of residence. That submission raises two issues. The first is when the question whether Property 21 was Mr Bai and Ms Yang's principal or primary place of residence is to be determined. The second is whether Property 21 was Mr Bai and Ms Yang's principal or primary place of residence at that time. 4. In my opinion, it is natural to read both r C.1.2(e)(iii) and r D.4.1 and the associated table as requiring the question whether a property is the applicant's principal or primary place of residence to be determined at the time the claim is made. The subject of both r C.1.2(e)(iii) and the table that forms part of r D.4.1 are claims that have particular characteristics. Absent any indication to the contrary in the rules, it is logical in those circumstances to ask whether the characteristics were present when the claim was made. That conclusion is supported by the evident purpose of the exception. The exception means that the beneficial provisions of the scheme are available to anyone who has given a guarantee supported by security over the person's principal or primary place or residence. No doubt that was considered appropriate because of the particular importance attaching to a person's principal place of residence. But unless the question whether a claimant meets those criteria is tested at the time a claim is made, there is a risk that claimants who might be thought deserving of that special protection (because the property over which a mortgage was granted was not the person's principal place of residence at the time the mortgage was granted but has since become so) will miss out. Conversely, it is unclear why a person who has given a mortgage over a property that is no longer the person's principal place of residence should be entitled to the benefits of the scheme irrespective of the value of the guarantee. It is the consequences for the individual who has given the mortgage that are important. But those consequences depend on the circumstances that exist at the time the claim is made, not on the circumstances that existed at the time the mortgage was granted. 5. There does not appear to be any significant difference between "principal place of residence" and "primary place of residence". The fact that both expressions are used in the AFCA Rules appears to be the result of poor drafting rather than a deliberate intention to draw a distinction between the two relevant rules. 6. The parties referred to a number of authorities on the meaning of the expression 'principal residence' and similar expressions, including Re the Will and Estate of Hood [2004] VSC 328 and Commissioner of State Revenue v Burdinat [2012] WASC 359. As the authorities recognise, the meaning of that and similar expressions depends on the context in which the expressions are used. However, on any view, it seems clear that Property 21 was neither Mr Bai nor Ms Yang's principal or primary place of residence at the time the claim was made. They departed Australia on 14 March 2016. Apart from two brief visits by Mr Bai, they have not been back since. The complaint was made on 3 March 2019, almost three years after Mr Bai and Ms Yang left Australia. Neither Mr Bai nor Ms Yang has 'resided' in Australia, let alone at Property 21, since the time of their departure. There is no suggestion that they will return in the foreseeable future. Consequently, there is no basis for saying that Property 21 was Mr Bai and Ms Yang's principal or primary place of residence at the time the complaint was made. 7. The jurisdictional limit of $1,000,000 applies in two ways. First, under r C.1.2(e), it operates on what is claimed. AFCA cannot hear a complaint where what is claimed exceeds the limit. Second, under r D.3.1, it operates as a limit on the orders that AFCA can make. 8. The original complaint did not exceed the jurisdictional limit. What was claimed was 'monetary compensation' of an unspecified amount that was said to exceed $500,000. Plainly, a claim in those terms did not exceed the jurisdictional limit. The ultimate remedy granted by AFCA appears to have been fashioned by it. But that does not alter the fact that what was claimed fell within the jurisdictional limit and that therefore AFCA was entitled to entertain it. 9. Rules D.3.1 and D.4 (together with the table referred to in r D.4) set out the maximum amount of monetary compensation AFCA can award for "direct financial loss", which does not include interest or costs. Nor does it include compensation for non-financial loss that may be awarded under rr D.3.2 and D.4.1. In calculating the value of such an award for the purpose of the application of the limits set out in r D.4, the value of any remedy where the value can be readily calculated is to be included. In addition, rr D.3.2 and D.4 (together with the table) set out the maximum amount of monetary compensation AFCA can award for "indirect financial loss". That amount is $5,000. Again, that amount is in addition to the amount that can be awarded for direct financial loss. 10. ACFM submits the value of the remedies given in this case is at least $1.28 million, consisting of the value of the outstanding loan as at 31 January 2019 of $938,051 together with the order that ACFM repay the sum of $254,646. I do not accept that submission. The submission depends on including interest on the loan to a date not identified by ACFM but which presumably is the date on which the determination was made. ACFM appears to have chosen the date of 31 January 2019 because that was a convenient date for which information on the amount of the loan (including interest) was available. However, in my view, interest should not be included in calculating the value of the remedy declaring the guarantees invalid and unenforceable. That is because the amount of interest cannot "readily be calculated" within the meaning of that phrase as used in r D.3.1. The amount of interest is variable, with the result that it would only be possible to know the value of a remedy that involved release of an obligation to pay interest once the precise date of the determination was known. Before that date is known, the value of the remedy cannot be calculated at all. 11. The conclusion of the previous paragraph could be avoided by reading the phrase "readily be calculated" as meaning "readily be calculated at the time the determination is made". However, there is no reason to add those words, and the addition of the words would lead to impractical results. It would mean that the availability of the remedy to set aside a transaction would depend on the precise date on which the determination was made. That is not what the parties should be taken to have intended. Moreover, interest awarded by AFCA is specifically excluded in calculating the value of a determination for the purpose of applying the jurisdictional limit. There is no reason to distinguish between interest awarded by AFCA and interest payable under the agreement the subject of the complaint in applying that limit. It is more logical to treat both types of interest in the same way. 12. There is no suggestion that the principal claimed by ACFM together with the amount awarded by AFCA (leaving aside interest and costs) exceeded $1,000,000. The principal owing was $742,800 and the amount that ACFM was required to repay was $254.646.10, totalling $997,446.10. It follows that ACFM had jurisdiction to make the orders that it did. That does, however, leave the question of costs, to which it will be necessary to return. Procedural fairness 1. ACFM submits that it was denied procedural fairness because AFCA failed to adopt appropriate procedures to resolve the conflicts in evidence between Mr Bai and Ms Yang on the one hand and Mr Chen and Mr Lee on the other, or if it was not practical for it to adopt those procedures, to decline to hear the complaint and allow the matter to be resolved by the District Court. According to ACFM, an appropriate procedure would have involved some form of hearing in which cross-examination was permitted. ACFM also submits that it was denied procedural fairness because AFCA did not adequately test Mr Bai and Ms Yang's unconscionability claims and their claims that they did not understand the guarantees that they signed. 2. In my opinion, those contentions must be rejected. 3. AFCA was not required to conduct a hearing, although it was required to give the parties an opportunity to make submissions, which it plainly did. In this case, having made a preliminary assessment of the complaint that was adverse to ACFM, it was bound to consider ACFM's reasons for disagreeing with its preliminary assessment. It was required to consider complaints with the minimum of formality. It was not bound by the rules of evidence and, when determining a complaint, it was required to do what it considered to be fair in all the circumstances having regard to legal principles, applicable industry codes or guidance and good industry practice. It did have a discretion to exclude a complaint, but that discretion was not to be exercised lightly. 4. AFCA appreciated that there was a conflict in the account of what happened given by the lender and the guarantors. Conflicts of that type are not uncommon in disputes between lenders and guarantors. As will become apparent, the only real conflict was between the evidence given by Ms Yang and the evidence given by Mr Chen. AFCA chose to resolve that conflict by reference to the objective facts derived from the material presented to it. I cannot see why in taking that approach AFCA denied ACFM procedural fairness. The approach that it took is an orthodox one for resolving conflicting accounts of oral conversations. It was particularly appropriate where a procedure that involved a formal hearing and cross-examination would place undue burdens on the parties, particularly Mr Bai and Ms Yang. They are the types of burden that the system of dispute resolution established by the AFCA Rules was designed to avoid. AFCA had a discretion to decline the complaint. But its own rules required it to exercise that discretion sparingly. This was a case in which individual guarantors who said that they did not understand English and who were resident in China were seeking relief in respect of guarantees that they had signed. It could not be said that the decision not to decline the complaint in those circumstances was so unreasonable that no reasonable decision-maker would have made it. 5. In its preliminary assessment, AFCA indicated the relief that it was proposing to give. Its reasons for doing so were as follows: 1. The complainants did not understand English at the time the guarantees were signed; 2. The guarantees were in English; 3. The lender was unable to provide evidence that it gave the complainants sufficient time or the opportunity to obtain independent legal or financial advice on the guarantees; 4. The lender did not act appropriately in failing to give the complainants that time; 5. Therefore, the complainants should be relieved of their obligations arising from the guarantees. 1. ACFM was given an opportunity and did make submissions in relation to those preliminary findings. It is apparent from its final submissions that AFCA considered those submissions. In particular: 1. it observed that Mr Bai and Ms Yang denied that they understood English. That evidence was consistent with the objective fact that they had been provided with a summary of the transaction in Mandarin. AFCA accepted that Ms Yang had a general understanding of guarantees, but absent independent legal advice, it was not satisfied that she would have understood her actual potential liability as a guarantor in the transaction in question; 2. it referred to Mr Chen's evidence of his conversation with Ms Yang and gave reasons for rejecting it, including the fact that it was to be expected that if Ms Yang had obtained advice from a lawyer then the lawyer would have signed the certificate of independent legal advice. However, the certificate was unsigned; 3. it observed that Mr Bai was a volunteer and that good industry practice in those circumstances required Mr Bai to be given a prominent notice in Mandarin that he should obtain independent legal advice on the effect of the guarantee, that there were financial risks and that he could refuse to enter into the guarantee, which he was not given. AFCA referred to the fact that ACFM relied on a certificate signed by Mr Bai that he had obtained legal advice. However, it did not accept that Mr Bai understood that certificate because it was in English; 4. it accepted Mr Chen and Mr Lee's evidence that Mr Bai received the loan documents on 17 May 2014 and Mr Lee's evidence that he returned all loan documents to the lender on 18 May 2014 (and in doing so did not accept Mr Bai's evidence). However, AFCA concluded that that was insufficient time to allow Mr Bai to consider the documents and to obtain legal or financial advice. 1. None of this involves an absence of procedural fairness. The decision in relation to the mortgages 1. ACFM contends that AFCA's conclusion that the mortgages secured Mr Bai's obligations under the guarantees rather than operated as independent securities in respect of the loan was so unreasonable that no reasonable decision-maker could have reached that decision. It also submits that in reaching that conclusion AFCA denied ACFM procedural fairness. In making those submissions, it points to the fact that under the loan agreement, the mortgages and guarantees were identified as separate and independent securities. 2. There are a number of points to be made about this submission. 3. First, submissions made by ACFM's then solicitors on 26 May 2020 proceeded on the basis that the guarantees and mortgages stood or fell together. 4. Second, that approach is hardly surprising. It would be unrealistic to treat the mortgages and guarantees as entirely separate. Clause 2.1 of each of the mortgages provides: The Mortgagor charges the Mortgaged Property in favour of the Mortgagee with the payment to the Mortgagee of the Secured Money and the performance of the Mortgagor's obligation under this mortgage, any of the Collateral Agreements and any other Collateral Security or agreement entered into where the Mortgagor and Mortgagee are parties. "Collateral Agreement" is defined to include the guarantees executed by Mr Bai and Ms Yang. Consequently, the mortgages did secure Mr Bai and Ms Yang's obligations under the guarantees. Moreover, as is obvious, the mortgages and guarantees were given by the same people — that is, Mr Bai and Ms Yang — at the same time to secure the same obligations. 1. Third, AFCA was not required to reach a decision strictly in accordance with the law. It was required to consider what was fair in all the circumstances. Those circumstances included the fact that the mortgages were third party mortgages given by the guarantors. 2. Having regard to those matters it could not be said that a conclusion that the guarantees and mortgages should stand or fall together was so unreasonable that no reasonable decision-maker could have made it or that it involved a denial of procedural fairness. Repayment of the sum of $254,646.16 1. ACFM submits that no reasonable decision-maker could have concluded that the $254,646.16 was repayable because the sale of Property 23 was voluntary and was made at a time before any amount was payable under the guarantee. 2. However, that submission focusses on the wrong issue. The question is not whether the sale was voluntary. The question was whether the payment of the $254,646.16 could properly be characterised as a payment in respect of Mr Bai and Ms Yang's obligations under their respective guarantees. 3. In my opinion, it was reasonably open to AFCA to conclude that it was. The payment was made to ACFM in order to secure a discharge of the caveat which itself was lodged relying on the unregistered mortgage over Property 23. But for the mortgage, the payment would not have been made. Once AFCA took the view that the mortgage and guarantees were connected and were unenforceable, it was reasonably open to it to conclude that any money paid in respect of the mortgage should be refunded. Legal costs 1. AFCA concluded that ACFM must pay Mr Bai and Ms Yang compensation for reasonable litigation costs they incurred in connection with the District Court proceedings. That issue was addressed in the preliminary assessment in these terms: As the guarantee and the security taken to support it are enforceable [scil unenforceable], the lender is not entitled to recover the outstanding loan amount from the complainants. The complainants are therefore entitled to be compensated for reasonable legal and court costs incurred as a result of the lender's enforcement action. However, as the complainants did not take appropriate actions to ensure they were represented in court in the first proceedings, they are not entitled to costs relating to the first proceedings or costs thrown away. The complainants are entitled to compensation for reasonable costs relating to the second proceedings. AFCA has completed a review of the costs incurred by the complainants. A breakdown of the legal and court costs the complainants are entitled to be compensated for, are outlined in section 3.2 of the recommendation. Section 3.2 sets out a summary of the invoices that AFCA concluded Mr Bai and Ms Yang were entitled to recover. In the case of an invoice dated 19 December 2018, it only allowed a portion of that invoice. 1. Mr Bai and Ms Yang made no submissions in relation to that preliminary assessment. In its final determination AFCA observed: They [Mr Bai and Ms Yang] are, however, entitled to their reasonable litigation costs incurred after 19 December 2018 up until 31 March 2020 as a direct financial loss. These are not costs related to the conduct of their complaints to AFCA which are subject to the limits in Rule D.5. AFCA adopted the figure set out in the preliminary assessment as the figure it allowed. 1. There is a question whether the legal costs incurred by Mr Bai and Ms Yang can properly be described as "direct financial loss" or whether they are properly classified as "indirect financial loss". That question was not addressed by the parties at the time of the hearing. The Court invited supplementary submissions on that issue following the conclusion of the hearing. 2. I have concluded that the legal costs incurred by Mr Bai and Ms Yang were indirect financial loss. They did not fall within the cap of $1 million. However, they were the subject of a cap of $5,000. 3. One submission advanced by AFCA was that the classification of legal costs as direct or indirect was a matter within jurisdiction so that AFCA's conclusion could only be disturbed if no reasonable decision-maker could have come to the conclusion that AFCA did. I do not accept that submission. Rule D.4 sets out the financial limits on the awards that AFCA may make. It is a question for the Court whether those limits have been exceeded. In answering that question, the Court must determine whether the relevant amount is properly classified as direct or indirect financial loss. In principle, the question is no different from the question whether a property over which security is taken is a guarantor's primary place of residence. 4. The expressions "direct financial loss" and "indirect financial loss" are not terms of art, and their meaning depends on the context in which the issue arises. The expressions invite consideration of the question whether there is a sufficiently clear and direct connection between the breach and the loss that it can be said that the loss is a direct consequence of the breach or whether the connection falls short of that requirement. As Mitchell J explained in Patersons Securities Ltd v Financial Ombudsman Service Ltd [2015] WASC 321 "the essence of the distinction evoked by that meaning is, in general terms, between direct loss which flows naturally from the breach without other intervening cause and indirect loss which does not so flow. Whether particular loss - including loss of profits - is direct or indirect depends on all the circumstances of the particular case": at [132] (citations omitted). 5. In the present case, there is a question whether there is a sufficient connection between ACFM's conduct in failing to provide adequate information to the guarantors and the legal costs they ultimately incurred to say that one is a direct consequence of the other. In my opinion, there is not. The obligation to pay legal costs did not arise from the guarantees. The obligation that arose under the guarantees was the obligation to pay the amounts that became payable under them. It was those obligations that were a direct consequence of the guarantees and consequently a direct consequence of the conduct that caused Mr Bai and Ms Yang to enter into the guarantees. Whether legal costs would be incurred and their nature depended on the attitude the parties took once ACFM decided to call on the guarantees and the relief that Mr Bai and Ms Yang sought in respect of them. They were not a ""normal loss" … [being] loss that every plaintiff in a like situation will suffer …" to quote from the judgment of Nettle JA in Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd (2008) 19 VR 358 at [87], [93]. (emphasis added) 6. It follows that AFCA exceeded its jurisdiction in awarding the amount that it did in respect of legal costs. 7. ACFM also takes issue with the inclusion of a number of invoices in AFCA's calculation principally on the basis that the invoices covered amounts not directly related to the District Court proceedings, such as costs related to the financial administration of the matter, including costs incurred by the solicitors in recovering their fees, costs related to the arrangement of litigation funding and costs related to travel for a mediation, including costs of flights from Sydney to Melbourne via New Zealand. In view of the conclusion I have reached on jurisdiction, these issues do not arise. I should, however, say something about them in the event I am wrong on the question of jurisdiction. 8. Two points may be made. First, the question for AFCA was whether the relevant costs were reasonably connected to the District Court proceedings, not whether they were properly recoverable on assessment, which appears to be the test adopted by ACFM in its submissions. Second, AFCA was entitled to take a broad-brush approach, provided the conclusion it reached was not so unreasonable that no reasonable decision-maker would have made it. ACFM's submissions fall well short of establishing that AFCA failed to meet that standard. 9. The question remains what order should be made in the light of the conclusions I have reached. Plainly, the conclusion I have reached does not affect the principal relief granted by AFCA. On the conclusion I have reached, AFCA exceeded its jurisdiction by awarding Mr Bai and Ms Yang more in respect of their legal costs that it was entitled to. The only question is whether Mr Bai and Ms Yang should each be entitled to recover $5,000 in respect of their legal costs or whether they should be entitled to recover nothing. 10. In my opinion, they should each be entitled to recover $5,000. Although some administrative law concepts apply to AFCA's determination by analogy, it is important to bear in mind that the relationship between the parties is governed by a contract. AFCA breached that contract by awarding more than it was entitled to under the contract. However, it had the power to order ACFM to pay each of Mr Bai and Ms Yang $5,000 in respect of their legal costs. It appears plain that AFCA would have done so on the basis of the conclusions that it reached. Consequently, the result of AFCA's breach of contract constituted by the rules was that it awarded too much compensation. The breach does not arise from the fact that it decided to award compensation at all. In those circumstances, it seems appropriate to measure ACFM's loss arising from that breach of contract by reference to the amount of costs awarded in excess of the contractual limit. Non-financial compensation 1. AFCA decided that each of Mr Bai and Ms Yang were entitled to non-financial compensation of $5,000. It gave the following reasons: The failure of Company A has led to the cancellation of the business immigration visas held by Mr B and Ms Y. The lender's loan to Company A had played a significant role in the company's failure (the lender was the petitioning creditor in the winding-up of Company A). The cancellation of the visas and their inability to secure a new visa to return to Australia has no doubt caused stress and significant inconvenience for Mr B and Ms Y. The litigation commenced by the lender would have also added significantly to their stress. In the circumstances, the panel is of the view that it would be fair and reasonable for the lender to pay $5,000 compensation each to Mr B and Ms Y for their non-financial loss. 1. It is difficult to see how the failure of ASSH could provide a ground for awarding Mr Bai and Ms Yang compensation. Even if the failure arose from action taken by ACFM, there is no suggestion that ACFM was not entitled to take that action. However, as Mr Bai and Ms Yang point out, that was not the only basis for the award of non-financial compensation. The award was also based on the stress that the litigation was likely to have caused Mr Bai and Ms Yang. It could not be said that the amount awarded was so disproportionate to that stress that no reasonable decision-maker would have reached that conclusion. Accordingly, this ground must also be rejected. Decision and orders 1. It follows that with one qualification the proceedings must be dismissed. The qualification is that the award in respect of legal costs must be reduced to an amount of $5,000 for each of Mr Bai and Ms Yang. I will give the parties an opportunity to make submission on costs if costs cannot be agreed. 2. Accordingly, the orders of the Court are: 1. Direct that within 14 days of the date of this judgment, the parties bring in short minutes of order to give effect to this judgment and dealing with the question costs if costs can be agreed; 2. If agreement cannot be reached on the terms of the order (including costs), direct that within 21 days of the date of this judgment the parties provide my Associate with submissions not exceeding five pages setting out the orders they seek and the reasons for those orders; 3. Direct that any outstanding questions be determined on the papers. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 07 December 2021