New South Wales Supreme Court CITATION : Yes Home Loans Pty Ltd & Anor v AFIG Wholesale Pty Ltd & Anor [2008] NSWSC 1017 HEARING DATE(S) : 19/09/08, 22/09/08, 23/09/08, 24/09/08 JUDGMENT DATE : 26 September 2008 JURISDICTION : Equity Division JUDGMENT OF : Einstein J DECISION : Mandatory injunctive relief to be granted on terms. Short minutes of order to be brought in. Security for costs to be provided. CATCHWORDS : EQUITY - Mandatory interlocutory injunctive relief - Principles - SECURITY FOR COSTS - CONTRACT - Construction - Penalties - Entitlement to trailer commission - Mortgage managers - Wholesale funder - Origination of and management of loans and mortgages LEGISLATION CITED : Corporations Act 2001 (Cth) CATEGORY : Procedural and other rulings A v Hayden (No 1) (1984) 59 ALJR 1 Australian Broadcasting Corp v O'Neill (2006) 227 CLR 57 American Cyanamid Co v Ethicon Ltd [1975] AC 396 Appleton Papers Inc v Tomasetti Paper Pty Ltd [1983] 3 NSWLR 208 Beecham Group Limited v Bristol Laboratories Pty Limited (1968) 118 CLR 618 Bosun Pty Ltd (in liq) v Makris (2003) 21 ACLC 666 Businessworld Computers Pty Ltd v Australian Telecommunications Commission (1988) 82 ALR 499 Bysouth v Shire of Blackburn and Mitcham [1928] VLR 562 Chartspike Pty Ltd (in liq) v Chahoud [2001] NSWSC 585 Eng Mee Yong v Letchumanan [1980] AC 331 CASES CITED : Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 Great North of England Railway Co v Clarence Railway Co (1844) 63 ER 520 Green (in his capacity as liquidator of Arimco Mining Pty Ltd (in liq) v CGU Insurance Ltd) [2008] NSWSC 449 Hession v Century 21 South Pacific Ltd (in liq) (1992) 28 NSWLR 120 Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 Idoport Pty Ltd v National Australia Bank Ltd (No1) [1999] NSWSC 828 Integral Home Loans Pty Limited v Interstar Wholesale Finance Pty Limited [2007] NSWSC 406 Integral Home Loans Pty Limited v Interstar Wholesale Finance Pty Limited (No 2) [2007] NSWSC 592 Kloeckner Co AG v Gatoil Overseas Inc [1990] I Lloyds Rep 177 Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 KP Cable Investments Pty Ltd v Metglow Pty Ltd (1995) 56 FCR 189 TEXTS CITED : R P Meagher, J D Heydon & M J Leeming, Equity: Doctrines and Remedies, 4th ed (2002) Butterworths R P Meagher, W M Gummow & J R F Lehane, Equity Doctrines and Remedies, 2nd ed (1984) Butterworths Yes Home Loans Pty Ltd (First Plaintiff) PARTIES : Mortgage Management Corp Pty Ltd (Second Plaintiff) AFIG Wholesale Pty Ltd (First Defendant) Australian Mortgage Securities Pty Ltd (Second Defendant) FILE NUMBER(S) : SC 4011/08 COUNSEL : Mr B McClintock SC, Ms E Collins (Plaintiffs) Mr J Svehla (Defendants) SOLICITORS : Kennedys (Plaintiffs) Hicksons (Defendants) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION Einstein J Friday 26 September 2008 4011/08 Yes Home Loans Pty Ltd & Anor v AFIG Wholesale Pty Ltd & Anor JUDGMENT The proceedings 1 The proceedings which give rise to the current notices of motion are brought by the plaintiffs: Yes Home Loans Pty Ltd ("YHL") and Mortgage Management Corporation Pty Ltd ("MMC"). The plaintiffs are mortgage managers, who develop loan products and sell those products to the general public [using funds provided by wholesale funders], and then manage the loans throughout the life of the loan. 2 The plaintiffs' relationship with the second defendant, Australian Mortgage Securities Pty Limited ("AMS"), dates back to 1 September 1999 when they executed a Correspondent Deed. 3 The defendants [AMS and AFIG Wholesale Pty Ltd trading as GE Money] are wholesale funders who since approximately 2006 have formed part of the multi-national GE Group of companies ("the GE Group"). 4 In broad terms the Correspondent Deed sets out the terms and conditions upon which the plaintiffs as 'the Correspondent' agree to exercise certain powers and discretions and to perform certain obligations in relation to the origination and management of loans and mortgages. The Correspondent Deed runs for 30 pages and includes numerous obligations of the first and second plaintiffs together described as "the Correspondent". 5 In the case of wholesale funds provided by the defendants prior to late 2006, the "lender" or mortgagee was Permanent Custodians Ltd ("PCL") in its capacity as trustee of a securitisation programme known as ARMS II. Since that time the lender has been another company within the GE Group, GEL Custodians Pty Limited ("GEL Custodians") in its capacity as trustee of a securitisation programme known as ARMS III. 6 The defendants are the appointed trust managers of the securitisation programmes. 7 On an overview basis the proceedings concern the respective rights and obligations of the parties in relation to the Correspondence Deed and a number of ancillary instruments including charges. 8 The claims pursued include claims for relief against penalties and forfeiture, breach of contract, and breach of s12CC of the Australian Securities and Investments Commission Act 2001 ["ASIC Act"] and s51AC of the Trade Practices Act 1974 ["TPA"] . The present state of the proceedings 9 Currently the plaintiffs' summons has been served but no statement of claim or equivalent has been served. The plaintiffs having commenced the proceedings as Equity proceedings have indicated that at an appropriate time they may well seek to have the proceedings transferred to the Commercial List. 10 The orders sought include: i. A declaration that the defendants have, in trade and commerce, in connection with the supply or possible supply of financial services to another person, engaged in conduct that is in all the circumstances unconscionable, in breach of s12CC of the Australian Securities and Investments Commission Act 2001. ii. In the alternative, a declaration that the defendants have, in trade and commerce, in connection with the supply or possible supply of services to a person, engaged in conduct that is in all the circumstances unconscionable, in breach of s51AC of the Trade Practices Act 1974. iii. A declaration that the first defendant is in breach of the implied term to act in good faith in the Correspondent Deed dated 1 September 1999 executed by the plaintiffs and the first defendant ("the Correspondent Deed"). iv. A declaration that clause 13.2 of the Correspondent Deed, either alone or in combination with clause 15.10 of the Deeds of Charge executed by the plaintiffs and the first defendant dated 25 August 2004 ("the Deeds of Charge"), is void on the grounds that it constitutes a penalty. v. An order that the plaintiffs be relieved against the forfeiture of their accrued right to receive commission payments from the first and/or the second defendant. vi. An order pursuant to s12GM of the ASIC Act alternatively s87 of the TPA varying the Correspondent Deed so as to delete the requirement for the plaintiffs to indemnify the first defendant for all Costs and Expenses which the first defendant may suffer in connection with a breach by the plaintiffs of the Correspondent Deed and provide in lieu that the plaintiffs indemnify the first defendant for all Costs and Expenses which the first defendant has suffered as a result of a breach by the plaintiffs of the Correspondent Deed. vii. An order pursuant to s12GM of the ASIC Act alternatively s87 of the TPA varying the Deeds of Charge so as to provide that the Charged Property is charged as security for payment of monies and amounts which are presently owing and payable and not as security for monies and amounts which may become owing or which may be reasonably foreseeable as likely to become owing. viii. An order directing the first defendant to provide to the plaintiffs a memorandum in the prescribed form acknowledging that the debt the subject of the Deeds of Charge has been paid or discharged in whole and that the property charged is released from the charges, pursuant to s269 of the Corporations Act 2001. ix. Damages pursuant to s12GF and/or s12GM of the ASIC Act. x. In the alternative, damages pursuant to s82 and/or s87 of the TPA. xi. Damages for breach of contract. 11 The defendants have served a cross summons seeking 30 declarations and a number of orders. The notices of motion 12 By their amended notice of motion the plaintiffs relevantly seek the following orders: 5 The Defendants be restrained until the final hearing of the action or further order from applying any servicing or other fees owed to the plaintiff towards satisfaction of all or any moneys claimed to be owing to the Defendants . 5A The Defendants be restrained by the Court to not take any steps consequent upon: a. the issue of Certificate of Indebtedness and Notices under Deed of Charge dated 25 August 2004 to the Plaintiffs and to Lee Boueri on 2 and 3 September 2008; b. the issue of the Notices under Deed of Charge dated 25 August 2004 to the Plaintiffs on 3 September 2008; or c. the issue of Notices of Termination to the Plaintiffs on 3 September 2008 until the final hearing of the action or further order [the restraint injunctive relief seeking to prevent the defendants from acting upon the notice of termination has three sub components: 1. that which requires that the fees be paid; 2. that which requires that the management of the loan portfolio be returned to the plaintiffs; 3. that which involves the mandatory injunction restraining the exercise of rights under the charges]. 13 By their notice of motion the defendants seek an order for security for costs. The defendants contend that on the evidence the Court should infer that the plaintiffs are 'on the brink' financially. Plaintiffs' corporate tree diagram 14 The diagram below illustrates the structure of the plaintiff companies, YHL and MMC. As seen in the diagram below, Mr Lee Boueri indirectly controls the shareholding in both of the plaintiff companies. Mr Boueri is also the Chief Executive Officer of both companies. 15 The first plaintiff, YHL, is the sole shareholder in the second plaintiff, MMC. Mr Boueri gave evidence that the financial affairs of YHL and MMC have been prepared in a consolidated fashion, as if they were one entity. 16 Mr Boueri is also the director and ultimate shareholder of Jessie James Pty Ltd. Jessie James Pty Ltd is in turn is the trustee of a family trust in favour of the Boueri family. Correspondent Deed 17 Without being exhaustive the following in overview terms seeks to paraphrase some of the provisions of the Correspondent Deed: i. The Correspondent Deed provides that the Correspondent may from time to time give to AMS Mortgage Proposals. Upon the presentation of a Mortgage Proposal by the Correspondent, AMS may, but is not obliged to, accept it. In the event that a Mortgage Proposal is accepted the plaintiffs' must ensure that all mortgage documents are in the form required by the Operations Manual. ii. In managing each mortgage the Correspondent must use the same degree of skill and care as would be used by a responsible and prudent mortgagee. If the Correspondent becomes aware that an Event of Default under a mortgage has occurred, they must promptly give notice to AMS. Following the occurrence of an Event of Default the Correspondent must take such action as it reasonably considers necessary to remedy the Event of Default, including lodging a claim under the Mortgage Insurance Policy and appointing valuers and solicitors (although this "arrears management" function was assumed by the defendants in late 2004). iii. AMS must use its reasonable endeavours to procure that the relevant mortgagee reimburses the Correspondent for all Costs and Expenses incurred in the performance by the Correspondent of its obligations under those clauses, and remits any interest received by the mortgagee from the mortgagor in respect of those sums. "Costs and Expenses" means any costs, expenses, liabilities, damages, claims, losses or disbursements, direct or indirect. iv. Clause 12 contains certain representations and warranties by the plaintiffs, including that they have complied with the Operations Manual in carrying out their functions, and that to the best of their knowledge all representations and warranties made by the mortgagor in the mortgage documents are true. Clause 13.2 provides that the Correspondent must indemnify AMS on demand for all Costs and Expenses which AMS may suffer or incur as a result of, or in connection with, inter alia, any negligence or breach by the Correspondent of any of the provisions of the Correspondent Deed, or the liability of a mortgage insurer being reduced, limited or avoided as a result of any act or omission of the Correspondent. v. The fees payable by the second defendant to the Correspondent are those fees as agreed between them from time to time. [The practice has been for the defendants to write to the plaintiffs setting out a fee proposal and requesting the plaintiffs' acceptance of that proposal. Such a proposal was provided by AMS to the plaintiffs on 20 June 2001, and a more recent proposal is the proposal provided to the plaintiffs' on 20 March 2006. The fees payable to the plaintiffs fall into three broad categories – first, an establishment fee charged upon entry into the relevant loan; second, margin or "trail commission payments"; and third, upfront payments of margin or "upfronts".] vi. AMS may terminate the Correspondent Deed so far as it relates to the origination of mortgages at any time by not less than 30 days notice in writing. Additionally, AMS may terminate the Correspondent Deed (as to both origination and management of mortgages) immediately by notice in writing to the Correspondent in the event of, inter alia, a breach of any of the Correspondent's obligations under the Deed or an Event of Insolvency (defined as meaning, relevantly, the Correspondent is unable to pay all of its debts as and when they fall due). Upon termination immediately by notice in writing, the Correspondent must deliver up to AMS its books and records and will no longer be entitled to receive any servicing or other fees referred to in clause 15.1. However clause 16.4 provides that upon termination becoming effective, "retirement or removal" will not affect any of the rights, obligations or liabilities of the Correspondent accruing or arising before termination becomes effective. 18 It has to be said that the cross-contentions traverse a complex structure, conveniently summarised by Mr Svehla appearing for the defendants as follows: When one looks at the structure coming down from the trustee structure, the obligations in substance are upon the defendants to restore the trust: the trust is a trust in respect of lending money secured by registered first mortgages and in respect of which the trustee is the lender and the mortgagee and in respect of which the terms of the provisions of the loan agreement with individual borrowers and the mortgage with individual borrower mortgagors determine the loss of the trust, and so in terms of the tiered structure the obligations to restore are channelled down through the Correspondent Deed. [transcript 63] The guarantee 19 Mr Boueri, the Chief Executive Officer and sole director of the plaintiffs, guaranteed the obligations of the plaintiffs under the Correspondent Deed. Professional Indemnity Insurance 20 In the relevant period the plaintiffs were required to obtain and in fact obtained professional indemnity insurance with QBE, with a limit of indemnity of $2 million. 21 The plaintiffs' case is that at the time the Correspondent Deed was executed the defendants represented to them that if a borrower defaulted and there was no recourse against the mortgage insurer, the solicitor or the valuer, the plaintiffs would be liable to make good the default but that the defendants would give the plaintiffs the opportunity to claim on their PI insurer. The plaintiff central contention as to the critical significance of their notice of motion Margin or 'trail' 22 The plaintiffs presently receive most of their remuneration in the form of margin payments from those wholesale funders with whom they are accredited, including the defendants. Margin payments [or "trail" commission] are payable by the wholesale lender to the plaintiffs throughout the life of each individual loan, and are calculated as a percentage of the amount of the outstanding debt of the borrower on a daily basis. The plaintiffs claim that in reliance on various representations the defendants made to them, in the period between approximately June 2001 and June 2007 the plaintiffs obtained up to 70% of their wholesale funding from the second defendant. The consequence of this is said to be that the margin payable each month by the defendants to the plaintiffs amounts to more than 50% of the plaintiffs' total margin entitlements. 23 While since October 2007, the plaintiffs have not arranged any new loans using wholesale funds provided by the defendants, the portfolio of loans placed with the defendants prior to that date ("the GE portfolio"), is substantial. It appears that there are more than 889 such loans – 569 originated by YHL and 320 originated by MMC, and that the total outstanding loan funds in relation to those loans amounts to $228,176,179.33. It follows that the trail commission is calculated with reference to loan funds in that order. 24 While it varies from month to month, the plaintiffs' entitlement to trail commission from the GE portfolio is claimed to be in the order of $80,000 per month. The amount actually paid by the defendants to the plaintiffs (pursuant to undertakings given to the Court) in August 2008 in respect of the month of July 2008 was $69,124.61, and the amount paid to the plaintiffs on 9 September 2008 in respect of 75% of their entitlement for August 2008 was $60,000. 25 On 6 June 2008 the defendants advised the plaintiffs that they proposed from July 2008 to withhold 75% of the plaintiffs' trail pending actual PI claim payments. Despite the plaintiffs' protestations, on 9 July 2008 the defendants withheld 75% of the plaintiffs' June 2008 trail commission "as per legal advice". While it is clear from the three Notices to Indemnify issued that it is only in respect of the Kontos claim that the defendants claim that MMC has breached the Correspondent Deed, it appears that 75% of each of YHL and MMC's trail was withheld. 26 These proceedings were commenced on 31 July 2008 and as a consequence of certain undertakings to the Court by the defendants, the plaintiffs have been paid 100% of their trail commission for the month of July 2008 (in two instalments on 10 August 2008 and 27 August 2008) and 75% of those entitlements for the month of August 2008. The next payment date is on 10 October 2008 and no undertaking has been forthcoming from the defendants in respect of that payment and future payments. 27 The amounts concerned are not trifling – Ms Leckovski's estimate is that future servicing and other fees payable to the plaintiffs by the defendants amount to between $1,901,848 and $2,054,119, although two days later she revised downwards that estimate to between $1,627,978 and $1,962,794. 28 Mr Boueri's evidence is that the trail commission is necessary in order to meet the plaintiffs' operating expenses. The estimate provided by Mr Boueri in his second affidavit of the plaintiffs' expenses for the month of September 2008 demonstrates that if the plaintiffs receive 100% of their commission entitlements from the defendants, then the plaintiffs' income will exceed their anticipated expenses. 29 If, however, the defendants refuse to pay the plaintiffs' commission entitlements then the plaintiffs' anticipated expenses will exceed the plaintiffs' income for the month. The plaintiffs do not have a loan facility which can be used for the payment of their operating expenses in the period leading up to the trial of these proceedings. The amounts already loaned by Mr Boueri and his family interests to the plaintiffs are considerable, and the evidence is that there is significant doubt about whether any further funds will be advanced. 30 The evidence of Mr Boueri is that the withholding of trail commission on an indefinite basis will have a devastating impact upon the plaintiffs' business. The plaintiffs' evidence led on the notice of motion was to the effect that its entitlement to trail commission from the defendants represents more than 50% of its expected revenue, which is necessary to meet its day to day operating costs. 31 The contention is that the plaintiffs are likely to suffer injury for which damages will not be an adequate remedy if relief is not granted, as the trailer commission is necessary to discharge the plaintiffs' ordinary operating costs. The contention is that the grant of the relief sought would not be akin to final relief, because the order sought is for a limited time, that is, until final hearing or other order of the Court, and the plaintiffs have a substantial claim for damages in the proceedings. Accrued right to trailer commission Integral Home Loans Pty Limited 32 In Integral Home Loans Pty Limited v Interstar Wholesale Finance Pty Limited [2007] NSWSC 406 at [74], Brereton J held that: "According… a penalty is a contractual liability to pay or forfeit or suffer the retention of a sum of money or property which is agreed in advance to be payable (or forfeited or retainable), by one party to the other, upon or in default of the occurrence of an event which can be seen, as a matter of substance, to have been treated by the parties as lying within the area of obligation of the first party, in the sense that it is his or her responsibility to see that the specified event does or does not occur, and where the stipulated payment is out of all proportion or unrelated to the damage which might be sustained by the other party by reason of the particular occurrence or default." 33 Integral establishes that a contractual provision that purports to forfeit a right to receive monies earned by performance of the contract prior to the termination may be a penalty, and void: at [14]; citing Irvine CJ in Bysouth v Shire of Blackburn & Mitcham (No 2) [1928] VLR 562 at 573-4. 34 The plaintiffs contend that the contractual provision that purports to forfeit the plaintiffs' accrued rights to trailer commission is clause 13.2 of the Correspondent Deed, either alone or in combination with clause 15.10 of the Deeds of Charge. As a result, the plaintiffs contend that they have a strong case for arguing that clause 13.2, alone or in combination with clause 15.10, is an unenforceable penalty. 35 During his submissions Mr Svehla submitted as follows: The decision of Justice Brereton in Integral v Interstar on the way that we perceive it is relevant to the exercise of the right of termination under clause 16.2, which was done on 3 September, giving rise to the right under clause 16.3(b). We concede that because of his decision that there is a triable issue on that matter. However, that does not mean that the fees should be paid. We say that it is triable both ways as to whether in the complex of agreements here the Integral and Interstar approach applies or ought be followed….. [Transcript 61 - 62] Understanding the document thicket 36 Understanding the complex of documents, arrangements and obligations set up by the ARMS II programs in 1999, 2003 2004 and 2005 and by the May 2006 transition to the ARMS III program requires very close attention to matters of detail. The exercise is facilitated by a number of diagrams conveniently produced by the defendants and set out below. 37 On an overview basis the original structure set up before the subject Correspondent Deed was entered into, involved a number of trusts, the original trustee being Permanent Custodians Ltd [PCL]. The second defendant [AMS] was the trustee manager and master servicer. The relevant rights and obligations at that level were contained in three documents: i. That which has been described as the MTD being the master trust deed to the ARMS II fund; ii. the master origination and servicing agreement ["MOSA"] for the program; iii. the AMS agreed procedures. 38 Mr Svehla explained the overview position as follows: In substance various documents were created of which PCL was the trustee and of which AMS was the trust manager. Then in a separate document which operates together with the MOSA, AMS incurred obligations with the master servicer. Within that structure you then have delegation by AMS as the trust manager and master servicer of rights and obligations to correspondents: in particular we are concerned with the Correspondent Deed which the plaintiffs YHL and MMC entered into. Together with that you then have two other documents at the correspondent level, apart from the Correspondent Deed. You have the AMS operations manual and you have various fee agreement letters. That is the structure that was originally created and it is within that structure that one needs to consider relevant terms in the Correspondent Deed and operations manual, including the construction put forward by the plaintiffs of clauses such as 13.2. 39 Effectively what has been set up are investor trusts where persons are able to acquire bonds in different trusts, some of which have different purposes. Relevantly to the instant proceedings is the trust where persons acquire bonds of minimum amounts of $10,000 which pool of money is then available for investment on registered first home mortgages. The money invested is held in a fund and protected in the following way: The fund lends money to persons wishing to acquire a home in respect of which there will be: i. a registered first mortgage in favour of the trustee of the relevant fund; ii. 100 per cent lenders mortgage insurance; iii. a host of procedures that have to be complied with in relation to a prospective application by a borrower : this being the level at which the plaintiffs come in. 40 The money received by the trustee is interest income plus the repayment of principal. The interest income is dependent upon the terms of the specific loan and mortgage between the trustee and the borrower. Each loan and mortgage can only go ahead if there is 100 percent Lenders Mortgage Insurance. The intent is to seek to replenish the trust if the borrower defaults and there is a relevant sale and shortfall. If the Lenders Mortgage Insurance fails to attach, one still has a relevant loss of principal and interest income from an impecunious borrower. That is a loss that has to be restored to the trust. The trust manager's obligation at clause 11.18 of the Master Trust deed requires that manager [subject to clause 10.4] to be liable for the acts or omissions of any officer, employee, attorney, agent, sub delegate or sub agent to whom any delegation is made and the fees and expenses of any such person. The trust manager has a separate obligation under the MOSA. Those obligations are in turn mirrored in the Correspondent Deed in the operations manual. 41 In the result it is important to be clear that the proper construction of the Correspondent Deed and other associated instruments requires one to understand the relationships set up by the whole of the complex of arrangements. There are many places within the Correspondent Deed where cross-references are given to the master trust deed and to the operations manual. One is dealing with an interlocking set of arrangements necessary to be carefully understood when dealing with the realistic construction of the indemnity and other provisions in those instruments. 42 The parties to the Master Trust Deed [MTD] made on 7 March 1995 were PCL and the second defendant. 43 The parties to the Master Origination and Service and Agreement [MOSA] were PCL as the trustee and the second defendant [AMS]. One has to keep in mind that the early situation involved the master servicer being the same entity as the trust manager. The general intent was to identify a number of particular obligations of the master servicer. When the Correspondent Deed is examined with care it becomes plain that the deed contains an admixture of the Master Trust Deed and the MOSA. 44 For present purposes sufficient has been outlined of the general manner in which the subject trusts were entered into, to permit the diagrammatic representation of the changing picture to be included. Diagrammatic representation of the ARMS II and later ARMS III programs 45 The following diagrams represent the structure of the ARMS II and ARMS III programs at various stages: Diagram 1: The structure in place at the time the Correspondent Deed was entered into in September 1999. Diagram 2: The structure after the re-statement and amendment of the terms of the MTD on 9 December 2003. Diagram 3: The structure after the first AFIG Operations Manual is introduced in March 2004. Diagram 4: The structure after YHL and MMC are introduced to the super partnership program in 2005. Diagram 5: The structure after GEL Custodians replaces PCL as the trustee of the ARMS II funds in May 2006, and the new ARMS III program is created. Diagram 6: The structure from December 2006, when AFIG replaced AMS as the trust manager and master servicer under the ARMS II and ARMS III programs. Obligations of the plaintiffs 46 It is next convenient to examine a number of the more specific obligations of the plaintiffs Obligations of YHL and MMC under the Correspondent Deed 47 Clause 2.2 of the Correspondent Deed requires YHL and MMC, in exercising their powers and performing their obligations thereunder, to comply, and act in accordance, with the Operations Manual in all respects (TB, tab 7, p 316). 48 Clauses 2, 4.1, 4.2, 7.2, 12.1(f), 12.1(g), 12.1(h), and 12.1(l) of the Correspondent Deed contain obligations upon YHL and MMC to originate (including Mortgage Purchase Applications), administer, manage and service Loans and Mortgages (including in respect of the Breach Loans), in accordance with the Operations Manual: (a) clause 4.1 of the Correspondent Deed provides (TB, tab 7, p 317): "Making of Mortgage Proposals The Correspondent may from time to time give to AMS Mortgage Proposals. Each Mortgage Proposal must be in the form, contain the information, be accompanied by the documents required by, and otherwise be made in accordance with: (a) the Operations Manual; and (b) any relevant Mortgage Insurance Policy."; (b) clause 4.2 of the Correspondent Deed provides (TB, tab 7, p 317): "Correspondent to Provide Information The Correspondent must give AMS all information requested by AMS in relation to a particular Mortgage Proposal which is reasonably required by AMS to give consideration to and process in accordance with its usual practices and procedures the Mortgage Proposal."; (c) clause 7.2 of the Correspondent Deed provides (TB, tab 7, p 320): "The Correspondent must keep: (a) accounting and other books and records which correctly record and explain: (i) the origination and settlement of each Mortgage; (ii) … (b) copies of all documents relating to any Mortgage (including any Mortgage Proposal or Loan Application). These accounting and other books must be kept in such form and using such data storage, access and retrieval methods as are set out in the Operations Manual"; (d) clause 12.1(f) of the Correspondent Deed provides (TB, tab 7, p 327): "Mortgage Insurance: (i) the Mortgage is covered by a Mortgage Insurance Policy with a mortgage insurer approved by AMS and all of the requirements of the relevant mortgage insurer, the Operations Manual and the relevant Mortgage Insurance Policy with respect to the application for and taking out of that Mortgage Insurance Policy have been complied with; and (ii) all information provided to the insurer under the relevant Mortgage Insurance Policy was, to the best of the knowledge of the Correspondent true and correct in all material respects, when provided, was not misleading (including by omission) and was verified by the Correspondent in accordance with the procedures set out in the Operations Manual;"; (e) clause 12.1(g) of the Correspondent Deed provides (TB, tab 7, p 327): "(Loan Application): the Mortgagors Loan Application has been fully investigated by the Correspondent in accordance with the Operations Manual, and the Correspondent is satisfied that all statements and information contained in it are correct in all respects;"; (f) clause 12.1(h) of the Correspondent Deed provides (TB, tab 7, p 327): "(Origination): the Mortgage (and each Loan secured by that Mortgage) has been assessed and originated in accordance with the Operations Manual."; (g) clause 12.1(l) of the Correspondent Deed provides (TB, tab 7, p 328): " ( Operations Manual): the Operations Manual has been fully complied with in relation to that Mortgage." 49 Clause 14.4 of the Correspondent Deed provides that if there was any inconsistency between the Correspondent Deed and the Operations Manual, the Operations Manual prevailed to the extent of the inconsistency (TB, tab 7, p 330). Obligations upon YHL and MMC in the Operations Manual in relation to Origination 50 The Operations Manual contains obligations upon YHL and MMC in relation to the origination (including Mortgage Purchase Applications), administration, management and servicing of Loans and Mortgages (including in respect of the Breach Loans), which, amongst other matters, encompassed obligations concerning: (a) valuation of the property to be the subject of the Mortgage; (b) the proposed Loan to Value ratio; (c) material particulars of the borrower, including interviewing and verification of the borrower; (d) credit analysis; (e) income verification and evidence of the borrower's income; (f) verification and evidence the borrower's employment; (g) verification and evidence of the borrower's equity; (h) the purpose of the proposed Loan and its acceptability; (i) creation and keeping of the Mortgage Purchase Application; (j) LMI; (k) creation and keeping of the Correspondent's file. Representations and Warranties by YHL and MMC in the Correspondent Deed 51 In addition the subject matter of clauses 12.1(f) (Mortgage Insurance), 12.1(g) (Loan Application), 12.1(h) (Origination) and 12.1(l) (Operations Manual) were representations and warranties given by YHL and MMC in respect of each Loan and Mortgage (including the Breach Loans) which they originated. They were also continuing representations and warranties. 52 Additional representations and warranties in clause 12.1 included: (a) clause 12.1(k) (Advance Circumstances) provided: "The Correspondent represents and warrants to AMS that except as disclosed to AMS in writing, and approved or waived by AMS on or prior to the settlement or acquisition of a Mortgage, the following matters will be true and correct in all material respects in relation to that Mortgage: … (Adverse Circumstances): the Correspondent is not aware of any circumstances relating to the Mortgage, the Property, the Mortgagor or any Guarantor which could reasonably be expected to cause a prudent investor to: (i) regard the Mortgage as an unacceptable investment; (ii) expect the Mortgagor to default under the Mortgage; or (iii) diminish the value or marketability of the Property from that stated in the Valuation". (b) clause 12.1(b) (Approved Valuer): "the Correspondent instructed an Approved Valuer in accordance with clause 4 and the Operations Manual to act for the relevant Mortgagee in relation to that Mortgage"; (c) clause 12.1(m) (Representations and Warranties): "(Representations and Warranties ) : to the best of the Correspondent's knowledge, all representations and warranties made by the Mortgagor and any Guarantor in the Mortgage Documents relating to that Mortgage are true." Obligations upon YHL and MMC not to engage in misleading and deceptive conduct 53 Further, clause 7.5(a) of the Correspondent Deed provided: "Compliance with Laws The Correspondent must comply with all Laws in performing its obligations under this Deed, including (without limitation): (a) those relating to or regulating the engaging in of misleading, deceptive and unconscionable conduct …" . 54 In addition, YHL and MMC had obligations impressed upon them under the Trade Practices Act and the Australia Securities and Investments Act . Acknowledgements given by YHL and MMC in the Correspondent Deed 55 In clause 13.1(a) of the Correspondent Deed, YHL and MMC acknowledged that in reliance on the representations, warranties and undertakings made and given by YHL and MMC in that Deed, inter alia: (a) AMS entered into the Correspondent Deed; (b) AMS had made or given and would make or give representations, warranties and undertakings to or in favour of PCL, and then GEL, as mortgagee, in relation to the Loans and Mortgages (including in respect of the Breach Loans). 56 In clause 13.1(b) of the Correspondent Deed, YHL and MMC acknowledged that an insurer may accept the Mortgages (including those in respect of the Breach Loans) for insurance under a Mortgage Insurance Policy (LMI) on the basis that, in relation to that Mortgage, YHL and MMC has complied with its obligations under the Correspondent Deed, and that the representations and warranties given by YHL and MMC are true and correct. Indemnities given by YHL and MMC 57 Clause 13.2 of the Correspondent Deed provided that YHL and MMC must indemnify AMS on demand for " any costs, expenses, liabilities, damages, claims, losses or disbursements, direct or indirect " (see the definition of " Costs and Expenses " in clause 1.1 of the Correspondent Deed), which AMS may suffer or incur as a result of, or in connection with: (a) any negligence, fraud or breach of duty by YHL and MMC; (b) any breach by YHL and MMC of the Correspondent Deed; (c) any breach by YHL and MMC of any representation and warranty contained in the Correspondent Deed; or (d) the liability of an insurer with respect to a Mortgage insured (including those relating to the Breach Loans), or required by the Operations Manual to be insured under a Mortgage Insurance Policy (LMI) (which includes those relating to the Breach Loans) being reduced, limited or avoided as a result of any act or omission of YHL and MMC. 58 In addition, YHL and MMC provided a further "S pecific Indemnity " to AMS on the terms of clause 3.3 of the Correspondent Deed: "[YHL and MMC] must indemnify AMS for all costs, losses, damages, claims and expenses suffered or incurred by AMS (including any liability which AMS incurs or may incur to any Mortgagee) as a result of [YHL and MMC] or any employee, agent or other person engaged by [YHL and MMC] being, or being held to be, the agent, partner or employee or AMS or any Mortgagee". 59 Further, clause 4 of the APSonline Indemnity contained an indemnity by YHL and MMC in favour of AMS and AFIG in the following terms: "The Correspondent must indemnify AMS and AFIG Wholesale on demand for all Costs and Expenses which AMS or AFIG Wholesale may suffer or incur as a result of, or in connection with: (a) any negligence, fraud or breach of duty by the Correspondent or any Authorised User; (b) … (c) the liability of a Mortgage Insurer with respect to a Mortgage insured, or required by the Operations Manual to be insured, under a Mortgage Insurance Policy being reduced, limited or avoided as a result of any act or omission of the Correspondent or any Authorised User under this Deed. The facts on the ground 60 It is next necessary to return to some of the detail of the facts 'on the ground'. 61 In August 2004 AMS agreed to lend to the plaintiffs the sum of $1.5 million ("the AFIG Loan"). As security for the AFIG Loan, the plaintiffs executed a Loan Agreement and also (separately) a Deed of Charge. 62 Prior to the execution of the Deeds of Charge Mr Boueri corresponded with the defendants in relation to the terms upon which the defendants proposed to make those funds available. In the course of that correspondence, the plaintiffs requested that an amendment be made to the clause providing for a lenders right of set-off in the draft Loan Agreement. The defendants agreed to amend that clause and provided further drafts of the Loan Agreement and Deeds of Charge in mark-up, which cannot now be located by the plaintiffs. On 19 August Mr Boueri executed on behalf of the plaintiffs two Deeds of Charge and a Loan Agreement. He claims to have done so on the basis of an understanding that the set-off clause in the Loan Agreement and the Deeds of Charge was in the same form, and that the charge was security for the AFIG loan. 63 The Deeds of Charge charge all of the plaintiffs' assets and undertaking to AMS as security for payment of the "Moneys Owing". The definition of "Moneys Owing" in the Deeds of Charge includes monies and amounts which are contingently or prospectively owing; moneys and amounts which may become owing or for which the second defendant may become liable by reason wholly or partly of past events or by reason of anything done or omitted by the second defendant or the plaintiffs'; or moneys and amounts which may be reasonably foreseeable as likely to become owing on any account or in any manner whatever by reason of the relationship between banker and customer or lender and borrower or by operation of law or equity or otherwise by reason of anything done by the second defendant with the consent or at the express or implied request of the plaintiffs'. 64 Clause 15.9 of the Deeds of Charge provide that AMS agrees, at the plaintiffs' request, to execute a discharge of the Charged Property from the charge on payment of all of the Moneys Owing. 65 Clause 15.10 is in the following terms: "15.10 Set-off The Chargee, at is discretion, may at any time and from time to time, without notice to the Chargor, deduct from and retain out of any credit balance in any currency in any account of the Chargor or the Borrower with the Chargee or any of the Chargee's Related Bodies Corporate any amount as the Chargee thinks fit and apply it towards satisfaction of all or any amounts falling within the definition of "Moneys Owing". 66 At the time these proceedings were commenced, Mr Boueri was unable to locate a copy of the Loan Agreement he executed in 2004. The draft Loan Agreement provided to him by the defendants on 30 July 2004 included a lender's right of set-off clause in substantially the same terms as the clause in the Deeds of Charge executed on 25 August 2004. 67 The Loan Agreement executed by Mr Boueri on 25 August 2004 was subsequently produced by the defendants pursuant to a Notice to Produce. The lenders right of set off clause (clause 17.7) in the final form of the Loan Agreement is different to clause 17.7 in the draft Loan Agreement. The final form provides as follows (with the changes from the draft underscored): "17.7 Lenders Right of Set-Off Subject to clauses 6.1(b), 7.2(b) and 7.3(a) and in the event where the Lender exercises its rights under clause 9.2, 12.2 or 13.2 , the Lender, at its discretion, may at any time and from time to time, without notice to the Borrower or any Guarantor, deduct from and retain out of any credit balance in any currency in any account of the Borrower or any Guarantor or both with the Lender any amount as the Lender thinks fit and apply it towards satisfaction of all or any monies or amounts falling within the description of "Principal Outstanding" or "Guaranteed Obligations". The Lender agrees to notify the Borrower or the Guarantor (as the case may be) after any set-off and application, but failure to give notice does not affect the validity of set-off and application. The rights of this Lender under this clause 17.7 are in addition to other rights and remedies (including, but not limited to, other rights of set-off) which the Lender may have." 68 While it is clear that the defendants agreed to (and did) amend the set off clause in the Loan Agreement, no amendment was made to the equivalent provision in the Deeds of Charge. Mr Boueri claims that he did not notice that the set-off clauses were different, and proceeded to execute the Deeds of Charge and the Loan Agreement. The difference between the set-off clause in the Loan Agreement and the set-off clause in the Deeds of Charge is that under the Loan Agreement AMS has only a qualified right to set-off funds standing to the credit of the borrower against monies said to be outstanding. 69 Mr Boueri's evidence is that at the time he executed the Deeds of Charge he understood that the charge was security for the AFIG Loan. Had he known that the defendants would seek to set-off the plaintiffs' margin payments against monies allegedly owing by the plaintiffs under the Correspondent Deed or against any loss the defendants may suffer in the future as a consequence of loans arranged by the plaintiffs going into default, he asserts that he would not have executed the Deeds of Charge. 70 The loan funds of $1.5 million were advanced in 6 instalments and 'repayments' were made by way of the defendants deducting principal and interest from the trail otherwise payable to the plaintiffs. This practice continued up until around 10 April 2008. 71 According to documents provided to the plaintiffs by the defendants in late 2007, the AFIG Loan was due to be paid off after the "repayment" on 10 April 2008. On 1 May 2008 Mr Boueri requested that the charge be released on the basis that the AFIG Loan had been repaid in full. On 12 May 2008 the defendants confirmed to Mr Boueri in writing that the AFIG Loan had been repaid in full. Up until the commencement of these proceedings the parties both acted on the assumption that the AFIG loan had been repaid in full on or about 10 April 2008. 72 However subsequent to the commencement of these proceedings the defendants changed their position and now maintain that principal of $50,000 plus $9,619.13 in interest remains outstanding under the AFIG loan. The defendants' change of position is said by the plaintiffs to be significant because it is common ground that despite Mr Boueri's request on 1 May 2008 that AMS execute a discharge of the charged property, AMS has not done so and now purports to exercise various powers granted to it under the Deeds of Charge. AMS is obliged under clause 15.9 of the Deeds of Charge to discharge the Charged Property on the plaintiffs' request if there are no "Moneys Owing". 73 It is clear that the task of reconciling deductions made from trail by way of 'repayment' is a complex one. The defendants' financial controller, Mr Burge, annexes 1000 pages of documents to his affidavit to explain the defendants' change of position, and the plaintiffs have to date been unable to satisfy themselves one way or another. However Mr Boueri gave evidence that had he been told in April - May 2008 by the defendants that an amount of approximately $59,000 was still owing under the AFIG Loan he would have repaid it so that the charge could be released. He claims to have assumed until after the commencement of the proceedings that the AFIG loan had been repaid in full. Notices to Indemnify 74 On 30 April 2007 the defendants issued a Notice to Indemnify ("the First Notice to Indemnify") to YHL and MMC in relation to a loan made to a borrower known as Mr J Kontos. The First Notice to Indemnify asserts that in arranging the loan to Kontos, YHL and MMC breached certain of the representations and warranties specified in clause 12.1 of the Correspondent Deed, as a result of which the liability of the lenders mortgage insurer, Genworth Financial Inc ("Genworth"), is being avoided. The First Notice to Indemnify sought pursuant to clause 13.2 of the Correspondent Deed that the plaintiffs' indemnify the defendants for all Costs and Expenses which the defendants will or have suffered as a result of and in connection with those defaults in the amount of $224,838.53 by paying that amount within 30 days into a Westpac account in the name of GEL Custodians Warehouse. 75 Shortly after the issue of the Notice to Indemnify Ms Meade of the defendants is said to have assured the plaintiffs that it was "just a formality" and that the plaintiffs should not worry about it. The plaintiffs claim to have relied upon this statement and took no action. However at a meeting in June 2007 the defendants told the plaintiffs that by reason of their failure to pay the Kontos sum the defendants considered that there had been a "technical default" which entitled them to appropriate for their own benefit monies belonging to the plaintiffs. 76 On 8 May 2008 a second Notice to Indemnify was issued to YHL in respect of 8 additional loans and on 29 May 2008 a third Notice to Indemnify was issued to YHL in respect of two further loans. In the second and third Notices to Indemnify the defendants required that YHL indemnify them for all Costs and Expenses which the defendants will suffer or have suffered as a result of and in connection with breaches of the Correspondent Deed and the liability of the lender's mortgage insurer being reduced, limited or avoided. The defendants also contended that they had incurred costs and expenses as a result of the negligent performance by YHL of its duties and by certain breaches of the Trade Practices Act 1974 ("the TPA") and the Australian Securities and Investments Commission Act 2001 ("the ASIC Act"). 77 The total amounts claimed in the three Notices to Indemnify in respect of the 11 loans is $1,353,206. The amounts claimed are not the subject of any adjudication by a court. The defendants have been reluctant to provide to the plaintiffs any details of the "claims" or the documents relating to the borrowers' defaults. Additionally, where information has been provided by the defendants they have done so on a without prejudice basis, for reasons which remain unexplained. 78 In the period since June 2007 the plaintiffs' requested on a number of occasions that the defendants provide them with the relevant correspondence from their loans department as well as a breakdown of costs that had been charged (both legal and internal) in relation to the 11 loans and any other "bad" loans. However the defendants declined to provide that information. As at the date these proceedings were commenced the plaintiffs' had not been provided with any details of how those figures were derived. As the general manager of the plaintiffs' articulated the position to Ms Meade of the defendants on 19 September 2007: "I am really concerned as to why we cannot get the information I have requested for both the Kontos and Foka loans. … It is after all GE Money that is demanding reimbursement of the shortfall. … It is hard to believe that GE can expect us to hand over hundreds of thousands of dollars without all the facts." 79 The defendants' position was confirmed by the defendants' solicitors on 10 September 2008. On that date the solicitors noted that the defendants had up to that time informed the plaintiffs that the collections and LMI (lender's mortgage insurance) claims documentation was "not relevant". 80 Subsequent to the commencement of these proceedings, the defendants have produced in response to Notices to Produce certain documents in relation to the losses claimed for the 11 loans. Those documents include (in most cases) a loan account reconciliation statement, the claim form submitted to the lenders mortgage insurer (which is in all cases Genworth), and a notice from Genworth to the defendants declining the claim. 81 Those documents demonstrate that the "Costs and Expenses" the defendants contend they have suffered in relation to the loans includes a significant proportion of interest payable by the borrowers under the loan contract but unpaid. The loan statements also demonstrate that interest has been capitalised. It is not clear whether interest at the default rate (2% above the annual percentage rate) has also been charged, pursuant to the lenders contractual right to do so. 82 Taking the Foka loan as an example, the documents produced by the defendants demonstrate the following: (a) the loan (which was arranged by MMC) settled on 26 April 2005. At settlement funds totalling $346,750 were advanced to or at the direction of the borrower; (b) following default by the borrower, the property was seized and on 31 August 2006 resold, with an amount of $259,709.50 being received by way of proceeds of sale; (c) on 27 October 2006 a claim in the amount of $121,897.18 was submitted to Genworth. The claim form and the loan account statement demonstrates that the claim amount was arrived at by taking the balance of the loan account as at the date of settlement of the second sale of the property ($380,871.75), then deducting the gross proceeds of sale, rates adjustments and payment dishonour fees charged; (d) on 8 May 2008 the Second Notice to Indemnify was issued to YHL and claimed an amount in respect of the Foka loan of $139,811.60 (an increase of $17,914.42 from the claim amount); (e) on 16 June 2008 Genworth advised the defendants that the claim had been denied – " We are of the view that material misrepresentations have been made in connection with the process of validation of the loan application details, and the compliance of the loan the subject of the Policy with AFIG lending guidelines, operations manual and related policies and procedures" . 83 It is apparent from the documents referred to above that the amount claimed in the Notice to Indemnify in relation to the Foka loan ($139,811.60) includes the amount of the capital loss on the resale of the property, the costs associated with that resale and interest both up to the date of settlement in respect of the amount outstanding, plus interest accruing after settlement. It seems clear that the amount of interest claimed pre-settlement is substantial – the statement of account records interest charged between 26 April 2005 and 1 July 2005 of $4,659.90, interest charged between 1 July 2005 and 26 June 2006 of $27,842.67, interest of $2,408.67 charged on 26 July 2006 and interest of $2,685.76 charged on 28 August 2006, a total of $37,597. The sum of $37,597 (interest pre-settlement) and $17,914.42 (interest post issue of the Notice to Indemnify), is $55,511.42. In other words, approximately 39.7% of the amount claimed in the Notice to Indemnify ($139,811.60) is referable to interest. 84 It also appears that a significant amount of interest has also been claimed in relation to the other 10 loans. As discussed below this raises various issues, including whether interest is a "Cost and Expense" as that term is defined in the Correspondent Deed. Sale of Resimac book 85 In mid 2007 the plaintiffs conducted negotiations with an arms length purchaser in respect of a part of its loan book known as the Resimac book. As a condition of the defendants' consent to that sale, an agreement was reached between the parties whereby 100% of the sale proceeds were to be provided to the defendants at settlement. That agreement is recorded in an email sent by Mr Rice of the first defendant to Ms Bonser of the plaintiffs on 27 June 2007 in the following terms: "We agree to the Resimac sale on the following basis. 1. 100% of proceeds are provided to GE at settlement. 2. GE will pay the superannuation accounts on presentation of the appropriate information. 3. Remaining proceeds will be placed in a trust a/c, pending the resolution of the remaining outstanding issues – Kontos, partial/total sale of AFIG book. We will hold over a decision on where the proceeds are paid until these items are resolved." 86 The reference to the "superannuation accounts" is a reference to a liability to the Australian Taxation Office ("ATO"). In October 2007 the plaintiffs sent a statement received from the ATO in respect of a liability to make superannuation contributions of its wholly owned subsidiary, Yes Group Pty Limited ("Yes Group"), in the amount of $157,007.92, and requested that the defendants discharge that liability from the funds held in trust. 87 On 15 October 2007 Mr Dwyer of the first defendant acknowledged that the defendants had received sums totalling $336,308.51 by way of 100% of the proceeds of the sale of the Resimac book. However he denied that the outstanding superannuation guarantee payment for Yes Group was a liability they were contractually or legally bound to make. He asserted (erroneously) that Yes Group was a company outside the corporate group headed by YHL. Further, Mr Dwyer asserted that the first defendant had a legal entitlement to retain on trust the amount of $224,838.53 (representing the sum sought in the first Notice to Indemnify), but agreed to release the balance of $52,591.52. 88 As a consequence of the first defendant's failure to pay the Yes Group superannuation account the plaintiffs had to enter into an arrangement with the ATO to discharge that superannuation liability. The monthly income generated by the Resimac book, namely approximately $20,000, was also forfeited. 89 While the arrangement between the parties was to pay the superannuation accounts and place the remaining funds in a trust account pending resolution of outstanding issues, the funds were in fact paid initially into an account in the name of GEL Custodians and subsequently into a general operating account of AMS. It is common ground that those funds were then applied by AMS for their own benefit. The defendants seek a declaration in the proceedings that "AMS and/or AFIG, as they were entitled to do, discharged YHL's and MMC's liability for the Kontos Amount from the Resimac Amount." The plaintiffs' dispute that they had such an entitlement. It would seem at the very least that in "discharging YHL/MMC's liability for the Kontos amount" the defendants have appropriated monies representing interest payable by the borrower but unpaid, which the plaintiffs have no liability to pay. Notices under Deeds of Charge 90 On 2 September 2008 AMS issued a Certificate of Indebtedness and Notice under Deed of Charge to both YHL and MMC. The Certificate of Indebtedness asserted that under clause 15.12 of the Charge the amount of the Moneys Owing as at 31 July 2008 was $2,932,486.27, comprising: (a) $59,699.13 under the Loan Agreement; (b) $1,255,725.98 under "defaulting mortgages"; and (c) $1,617,061.16 under "Working Capital Loans". 91 The Certificates also asserted that each of those amounts fell within the definition of "Moneys Owing" in the Deeds of Charge. 92 On the same date AMS gave notice to the plaintiffs that it converted the floating charge to a fixed charge in relation to all rights or entitlements to servicing and other fees payable by the defendants ("the Proceeds") under clause 3.3 of the Deeds of Charge, and directed under clause 3.6(a) that any Proceeds received by the defendants be paid into an account in the name of GEL Custodians Warehouse. 93 On 3 September 2008 AMS issued further Notices under the Deeds of Charge to the plaintiffs converting the floating charge to a fixed charge in respect of all rights and entitlements which the plaintiffs have as insureds under any insurance contract with QBE Insurance (Australia) Limited ("QBE") and directed that any payment made by or on behalf of QBE for the benefit of the plaintiffs be paid into the account in the name of GEL Custodians Warehouse. 94 The amount of $59,699.13 said to be owing under the Loan Agreement relates to the AFIG Loan. As set out above, it represents a change of position on the defendants' part after the commencement of these proceedings. The amount of $1,255,725.88 said to be owing under "defaulting mortgages" is unparticularised and its' make up is unclear. Even if one accepts that the defendants have applied $224,838.53 of trust funds towards the Kontos claim the amounts do not marry. 95 The first time the defendants claimed that monies were payable to them by the plaintiffs in respect of "Working Capital Loans" was when the third affidavit of Mr Burge (sworn on 29 August 2008) was served. Mr Burge asserts that as at 31 July 2008, the plaintiffs owed AMS $1,617,061.16 in respect of all Working Capital Loans ("WC Loans"). The total amount of $1,617,061.16 is said to comprise $1,111,699.03 owing by YHL and $505,362.13 owing by MMC. 96 There is no dispute that one of the categories of remuneration the plaintiffs have received from the defendants over many years is in the form of a lump sum paid at the time an individual loan was taken out, described by Mr Boueri as "upfronts". That amount was calculated as a percentage of the loan amount and was effectively an upfront payment of margin as the subsidy account was "repaid" by the plaintiffs receiving a smaller margin over the life of the loan than would otherwise be payable. However there is a dispute between the parties as to whether the total amount of upfronts paid to the plaintiffs are repayable to the defendants by the plaintiffs, and whether they can be characterised as "Moneys Owing" under the Deeds of Charge. 97 The pricing structure provided by AMS to YHL on 20 June 2001 provides that the subsidy account is closed upon the earlier of repayment of the outstanding balance in the subsidy account, discharge of the loan or 5 years from the anniversary of settlement of the loan. Mr Burge accepts that a write off occurs where the borrowers' loan is discharged prior to the full amount of the related WC Loans to the plaintiffs being repaid together with interest charged thereon. 98 In other words, while the defendants now seek to characterise the upfronts as "loans", the plaintiffs contend that they are not loans because the plaintiffs are under no legal liability to repay those amounts. Rather the plaintiffs have agreed to accept a lesser amount of margin in respect of those borrowers for a fixed period of time. If at the expiry of that period an amount is still outstanding, the "loan" is written off. If the loan is discharged by the borrower within the first 5 years then the borrower must pay a deferred establishment fee and the subsidy account is closed. Notice of termination 99 At 8.09pm on 3 September 2008 (the night before the plaintiffs' Notice of Motion was returnable in the Duty Judge list) the defendants served a Notice of Termination on the plaintiffs. The Notice of Termination purports to terminate the Correspondent Deed (as to both origination and management of mortgages) immediately, pursuant to clause 16.2. 100 The Notice of Termination asserts that the plaintiffs have breached their obligations under the Correspondent Deed, have engaged in misleading and deceptive conduct and have made false representations in breach of the TPA and the ASIC Act, have failed to comply with their obligation to indemnify AMS pursuant to the second and third Notices to Indemnify, have committed fraudulent and deliberate breaches of the Correspondent Deed, and by the occurrence of an Event of Insolvency. These allegations (even the allegation that the plaintiffs have engaged in fraudulent activity) are unparticularised. 101 The Notice of Termination directed that the books and records of the plaintiffs be delivered up to the defendants, and notified the plaintiffs that pursuant to clause 16.3(b) of the Correspondent Deed, the plaintiffs would not be entitled to receive any further servicing and origination or other fees referred to in clause 15.1 of the Deed. The Notice of Termination also provided that in the event that it was determined by a Court that (contrary to clause 16.3(b)) that the plaintiffs were entitled to receive further servicing and other fees, notice was given that AMS was entitled to and would set off against such further servicing and other fees the claims which the defendants have or may have against the plaintiffs in respect of the breaches of the Correspondent Deed and such other claims as the defendants may have against the plaintiffs including but not limited to those arising under the APSonline Indemnity dated 12 December 2005, the Loan Agreement and the Deeds of Charge. Applications for mandatory injunctive relief - the principles 102 I turn to briefly examine the principles applicable to the grant of mandatory injunctions. 103 Meagher, Gummow and Lehane, Equity Doctrines and Remedies , 4th Edition by Meagher, Heydon and Leeming at [21-395] comment as follows: "Seventhly, mandatory injunctions are comparatively rare. There are even dicta suggesting they should issue only in the most exceptional circumstances, and that this applies to final injunctions. The interlocutory mandatory injunction is a particularly rara avis. This is partly because a mandatory injunction is usually more onerous for a defendant to comply with than a prohibitory one; moreover, the usual purpose of an interlocutory injunction is to preserve the status quo, a consideration inapplicable to mandatory injunctions. But there is nothing to prevent a court from issuing an interlocutory mandatory injunction… In truth, a judge hearing an application for an interlocutory mandatory injunction must apply exactly the same tests as he would in the case of an application for an interlocutory prohibitory injunction, not some different or more exacting test; nor is the fact that the relief sought is mandatory, a ground for refusing relief; but in the application of the normal tests, often but not always, the fact that the relief sought is mandatory will tilt the balance of convenience in the defendant's favour". 104 In approaching the grant of an interlocutory mandatory injunction the Court must inquire as to the balance of convenience. In Idoport Pty Ltd v National Australia Bank Ltd (No1) [1999] NSWSC 828 I observed as follows at [44]: "The plaintiff's entitlement to ultimate interlocutory relief being necessarily uncertain at an interlocutory stage, the Court, in deciding to grant or refuse an interlocutory injunction, must consider what course is best calculated to achieve justice between the parties in the circumstances of the particular case, pending the resolution of the uncertainty, bearing in mind the consequences to the defendant of the grant of an injunction in support of relief to which the plaintiff may ultimately be held not to be entitled, and the consequences to the Plaintiff of the refusal of an injunction in support of relief to which the Plaintiff may ultimately be held to be entitled: see eg Appleton Papers Inc v Tomasetti Paper Pty Ltd [1983] 3 NSWLR 208 at 216; A v Hayden (No 1) (1984) 59 ALJR 1 at 4-5; Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 at 535." 105 Ultimately, as it seems to me, the jurisdiction to make mandatory interlocutory orders: "may be one not fit to be exercised without particular caution, but certainly it is one fit and necessary, under certain circumstances, to be exercised. Under what circumstances it should be exercised must be a matter for judicial discretion, in each several case." [per Knight VC in Great North of England Railway Co v Clarence Railway Co (1844) 63 ER 520 at 526-7; Cf Businessworld Computers Pty Ltd v Australian Telecommunications Commission (1988) 82 ALR 499 where Gummow J properly described the proper approach in administering interlocutory mandatory relief] Dealing with the application for mandatory interlocutory relief 106 An important concession from the defendants was to the effect that it was seriously arguable that clause 16.3(b) was a penalty provision. That concession notwithstanding, Mr Svehla submitted that: i. there was no question that the balance of clause 16.3 could be characterised as a penalty provision; ii. nor could the termination of the contract under clause 16.2 be invalid. 107 It is important to keep in mind the whole of clause 16 which was in the following terms: 16. TERMINATION 16.1 Termination of Origination AMS may terminate this Deed so far as it relates to the origination of Mortgages at any time by not less than 30 days notice in writing. Any such termination does not affect the rights and obligations of the parties under this Deed with respect to: (a) Mortgages the subject of Mortgage Proposals which have been accepted in accordance with clause 4.3 before such termination becomes effective; or (b) the management of Mortgages settled before such termination becomes effective. 16.2 Termination by AMS AMS may, subject to clause 16.4, terminate this Deed (as to both origination and management of Mortgages) immediately, by notice in writing to the Correspondent if: (a) the Correspondent breaches clause 7.1; (b) the Correspondent commits breaches of any provision of clause 4 or 5 or any of the representations and warranties given by it in this Deed, and such breaches are, in the opinion of AMS acting in good faith, of such nature and frequency as to demonstrate that the Correspondent is unable or unwilling to comply with those provisions to a standard and with the consistency required by AMS for the efficient administration, operation and management of any Programme; (c) the Correspondent breaches any of its obligations under the Deed (other than those referred to in paragraphs (a) or (b)), and (if the breach is capable of remedy) does not remedy that breach within 10 Business Days of a notice from AMS requiring the same to be remedied; (d) without limiting paragraphs (b) or (c), the Correspondent commits any fraudulent or deliberate breach of this Deed; (e) without limiting paragraph (b), any representation or warranty made by the Correspondent in this Deed is or proves to be untrue in any respect and (in the case only of a representation and warranty in clause 12.1) the Correspondent does not comply with its obligations to repurchase the relevant Non-Complying Mortgage in accordance with clauses 12.2 and 12.3; or (f) an Event of Insolvency occurs in relation to the Correspondent. 16.3 Effect of Termination Upon termination of this Deed under clause 16.2, the Correspondent: (a) must immediately: (i) deliver to AMS or as AMS directs all books, records, accounts, registers, computer files, documents and records of any kind kept or brought into existence by the Correspondent under, for the purposes of or in connection with this Deed; and (ii) execute all documents and do all things which AMS reasonably requires to transfer the management of all Mortgages to AMS or such person as AMS nominates; (b) will no longer be entitled to receive any servicing or other fees referred to in clause 15.1… 108 Mr Svehla submitted that two separate concepts required to be kept in mind: the first was the management of the mortgage and loans which had been originated; the second was the entitlement to the continuing fees. 109 Hence his further proposition that, even if clause 16.3(b) were found to be invalid as a penalty, the obligation [provided in clause 16.3] that upon termination of the deed under clause 16.2, the Correspondent must immediately deliver to AMS or at its direction all books, records, accounts, registers & etc, and must also execute all documents and do all things which AMS reasonably required to transfer the management of all mortgages to it or to its nominee, would continue to operate. Thus a finding that 16.3(b) was a penalty would simply mean that the Correspondent would continue to be entitled to receive servicing or other fees referred to in clause 15.1, albeit that AMS would thereafter manage all of the mortgages. 110 Mr Svehla's submission in this regard may ultimately on the final hearing be accepted, but it presents as a somewhat awkward construction. To my mind there must at least be a reasonably arguable issue going to whether or not, if clause 16.3 (b) be void as a penalty, any, and if so which part of clause 16.3 (a) may also be struck down as either: i. inextricably interwoven with clause 16.3 (b) and or ii. as affected in some fashion by the striking down of clause 16.3 (b). 111 Of course where a contractual provision is void as a penalty, it is absolutely void , and there is no room for its enforcement on a limited basis: cf Integral 2 at 7. Whilst I accept that clause 20.3 of the Correspondent Deed would be contended by the defendants to be engaged [in terms of its provision that if any provision of the Correspondent Deed is unenforceable that provision would be ineffective to the extent of such unenforceability under the Deed without invalidating the remaining provisions of the deed], the precise ramifications of a finding that clause 16.3(b) was void as penalty raises to my mind, a serious question to be tried in the final hearing. 112 Mr Svehla in his submissions outlining the position relating to whether or not any and if so what matters raised serious questions to be tried, included the concession that whether the plaintiffs' right to fees was an accrued right was a serious question to be tried. Under the column headed "Serious question to be tried" appeared the following: Whether clause 13.2 of the Correspondent Deed either alone or in combination with clause 15.10 of the Deeds of Charge is void as a penalty. 113 At the same time, Mr Svela submitted that, other than this issue, there was no other serious question to be tried. In relation to the potential for clause 13.2 to be found to be a penalty, Mr Svela made the following submissions: i. One cannot combine 2 clauses in 2 separate deeds to contend for a penalty. ii. Clause 13.2 of the Correspondent Deed does not create or effect a penalty. It creates an obligation to indemnify for losses in respect of shortfalls on the sale of the mortgage properties where there has been relevant conduct of YHL and MMC or for which YHL and MMC are liable. AMS and/or AFIG have a liability to restore the trust and seek indemnity from the Correspondent (YHL and MMC). iii. There is nothing penal in this. The indemnity is not disproportionate to the loss, it is an obligation to make good the actual loss. iv. The indemnity under clause 13.2 gives rise to rights of set-off under s21 of the Civil Procedure Act 2005 and in equity. v. Clause 15.10 of the Deeds of Charge is an independent contractual right of set-off. vi. The law of penalties does not operate to avoid rights of set-off. vii. AMS and/or AFIG also have a right to seek an order staying any right of YHL and MMC to enter, alternatively enforce, judgment for unpaid Fees as and when they become due and payable, so that AMS and AFIG only have to pay a net amount if any after bringing to account YHL's and MMC's liability to them. The law of penalties does not operate to defeat such rights. viii. The obligation to indemnify only arises if there is an actual shortfall on the sale of the mortgage property and YHL and MMC have breached their obligations under the Correspondent Deed, including the Operations Manual. The claim that there is a serious question to be tried concerning clause 15.10 of the Deeds of Charge 114 The plaintiffs have contended as follows: i. The defendants contend that they are entitled to set-off trail commission otherwise payable to the plaintiffs against various amounts said to be owing to the defendants by reason of clause 15.10 of the Deeds of Charge. The plaintiffs contend that there is a serious question to be tried as to whether the defendants are entitled to rely upon the Deeds of Charge and a serious question to be tried about whether the defendants are required by section 269 of the Corporations Act 2001 to provide to the plaintiffs a memorandum in the prescribed form acknowledging that the debt the subject of the Deeds of Charge has been paid or discharged in whole and that the property charged is released from the charges. The plaintiffs' put their case in this respect in various ways. ii. First, the correspondence leading up to the execution of the Loan Agreement and the Deeds of Charge suggests that the defendants agreed to change the set-off clause in at least the Loan Agreement at the plaintiffs' request. As events transpired, the final form of those documents presented to Mr Boueri for signature contained the agreed amendment to the set-off clause in the Loan Agreement but did not amend the equivalent provision in the Deeds of Charge. Mr Boueri assumed at the time he executed the Loan Agreement and the Deeds of Charge that the set-off clause in both the Loan Agreement and the Deeds of Charge had been amended and was in substance the same. iii. The loan of $1.5 million from AMS to the plaintiffs was a transaction outside the ordinary course of dealings between the parties. Mr Boueri assumed that the AFIG Loan had nothing to do with the parties' usual commercial dealings. This is significant, particularly as the plaintiffs did not obtain legal advice prior to executing the Deeds of Charge and were never told by the defendants that they should obtain such legal advice. At the time Mr Boueri executed the Deeds of Charge he understood that the Charge was security for the AFIG Loan. Had he known that after the AFIG Loan had been repaid the defendants would refuse to deregister it and would seek to set-off the plaintiffs' margin against monies allegedly owing by the plaintiffs' under the Correspondent Deed he never would have executed the Deeds of Charge. Further, had Mr Boueri known that the defendants would seek to set-off the plaintiffs' margin against any loss the defendants may suffer in the future as a consequence of loans arranged by the plaintiffs going into default, he would not have executed the Deeds of Charge. iv. The critical difference between the set-off clause in the Loan Agreement (clause 17.7) and the set-off clause in the Deeds of Charge (clause 15.10) is the addition of the following words in the Loan Agreement - : subject to clauses 6.1(b), 7.2(b) and 7.3(a) and in the event where the Lender exercises its rights under clause 9.2, 12.2 or 13.2 …" Clause 6.1(b) provides that the Lender may effect repayment amounts by deducting that amount from amounts payable by the Lender to the Borrower under the Correspondent Deed. Clause 7.2(b) provides that the Lender may similarly deduct interest payable from amounts payable to the Borrower under the Correspondent Deed. Clause 7.3(a) provides that if any amount deducted under clauses 6.1(b) or 7.2(b) is insufficient to cover the required payment, the Lender may deduct the amount from any future payment to be made by the Lender to the Borrower under the Correspondent Deed. v. On any view of it, the Deeds of Charge purport to grant to the defendants wide ranging powers which the defendants did not otherwise have. In particular, the definition of "Moneys Owing" in the Deeds of Charge is extremely broad. As discussed below, there is a serious question to be tried about whether clause 15.10 of the Deeds of Charge in combination with clause 13.2 of the Correspondent Deed is a penalty and hence is void. At the very least, at the trial the Court will read down the provisions of the Deeds of Charge given their extraordinary breadth. vi. At the trial there will be exploration of the reason why on the one hand the defendants represented to the plaintiffs that they had amended the set-off clause, and on the other hand made an amendment only to the set-off clause in the Loan Agreement. Whether this was inadvertent or not, there is a serious question to be tried about whether in those circumstances and given Mr Boueri's understanding of the documents he was executing equity will permit the defendants to rely upon the set-off clause in the Deeds of Charge. vii. Second, clause 15.10 of the Deeds of Charge provides that AMS may "deduct from and retain out of any credit balance in any currency in any account of the Chargor or the Borrower with it or any of its related bodies corporate any amount as the second defendant thinks fit and apply towards satisfaction of all or any amounts falling within the definition of "Moneys Owing"" (emphasis added). The plaintiffs have sought the production of all documents evidencing the existence of an account of YHL or MMC with AMS or its related bodies corporate however the defendants have not produced any such documents, asserting that the request is "oppressive". Such documents, if they exist, will eventually have to be discovered by the defendants and hence this issue will be explored at trial. viii. Third, clause 15.10 permits AMS to deduct any amount it thinks fit from any account of YHL or MMS with the GE Group and apply it towards satisfaction of any amounts falling within the definition of "Moneys Owing". The definition of "Moneys Owing" extends to monies and amounts which are contingently or prospectively owing to AMS, and monies and amounts which may become owing or for which AMS may become liable by reason wholly or partly of past events or by reason of anything done or omitted by the second defendant or the plaintiffs, or which may be reasonably foreseeable as likely to become owing on any account or in any manner whatever by reason of the relationship between banker and customer or lender and borrower or by operation of law or equity or otherwise by reason of anything done by the second defendant with the consent or at the express or implied request of the plaintiffs. Its extraordinary breadth suggests that it may be invalid or at the very least read down by the Court at trial. ix. The "deduction and retention" pursuant to clause 15.10 by AMS in the present case is a deduction from an amount representing the plaintiffs' accrued rights to trailer commission each month. The retention and subsequent application by AMS is towards monies said to be owing pursuant to first, the Second and Third Notices to Indemnify (as the defendants now say the trust monies have discharged the Kontos claim), second, the AFIG Loan, and third, the WC Loans. x. The first of those amounts represents both costs incurred by the lender and interest, including possibly at the default rate payable by the borrower under the loan agreements but unpaid. The latter amounts are not amounts which the plaintiffs are contingently or prospectively liable to pay and they represent amounts in excess of damages for breach of warranty. Further, interest is not within the definition of "Costs and Expenses" in the Correspondent Deed. There is a serious question to be tried about the validity of the Notices to Indemnify. xi. The first time that moneys were said to be owing under the AFIG Loan was on 18 August 2008 (subsequent to the commencement of these proceedings). This followed an acknowledgment in writing by the defendants that the AFIG Loan had been repaid in full and was consistent with the loan statements provided by the defendants to the plaintiffs' in respect of the August 2007 – December 2007 inclusive period. Mr Boueri's evidence is that had he been told in April – May 2008 that moneys were outstanding under the AFIG Loan, he would have repaid them in order to have the charge released. It follows that there is a serious question to be tried that the plaintiffs have relied to their detriment upon the representations and conduct of the defendants, and the defendants are estopped from relying upon any amount outstanding under the AFIG Loan as a basis for setting off the plaintiffs' trail commission. xii. The "WC Loans" or "upfronts", similarly, were raised by the defendants only after the commencement of these proceedings. All of the dealings between the parties over many years, including the defendants' representations to the plaintiffs, suggest that the upfronts are not appropriately characterised as "Moneys Owing" for the purposes of the Deeds of Charge. xiii. Fourth, clause 15.9 of the Deeds of Charge obliges AMS to execute a discharge of the charged property at the plaintiffs' request on payment of all of the "Moneys Owing". There is a serious question to be tried about whether as at 1 May 2008 (the date of Mr Boueri's request) AMS was obliged to release the charge. If AMS was so obliged, its failure to do so is in breach of contract and the defendants will not be permitted to rely upon the set off clause in the Deeds of Charge. 115 In my view there is a serious question to be tried in relation to these matters. Unconscionable conduct 116 It is unnecessary to do more than to observe that the plaintiffs' causes of action claiming unconscionable conduct, breaches of section 12CC of the ASIC Act and/or of section 51AC of the Trade Practices Act rely on many of the plaintiffs' complaints already outlined in these reasons. In the circumstances, these are matters appropriate to be determined on a final basis at trial. The defendants' application for security for costs 117 It is unnecessary to do more than to briefly mention the principles which inform an application for security for costs. The principles were exhaustively reviewed in Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744. 118 Suffice it to say that: i. The purpose of a security for costs order is protective, so as to ensure that the primary purpose of an award of costs, that is, indemnification of the successful party, is achieved: "The jurisdiction to award security for costs should thus be seen as protecting the efficacy of the exercise of the jurisdiction to award costs. The discretion should be exercised with the same rationale in mind, namely, that, to the extent it can be provided, the court should not permit a situation where a party's success is pyrrhic." Idoport Pty Ltd v National Australia Bank Limited [2001] NSWSC 744 at [33]. "The system of justice under which we operate assumes that the interests of justice are best served if a successful litigant will receive his litigation costs and that the unsuccessful party will pay them: Kloeckner Co AG v Gatoil Overseas Inc [1990] I Lloyds Rep 177, CA Transcript 250 Bingham LJ. This is one reason why courts have assumed jurisdiction to require security. It also explains why s 1335 and its predecessors were enacted." Bosun Pty Ltd (in liq) v Makris (2003) 21 ACLC 666 at [14]. 119 It is plain that there are real questions as to the plaintiffs' financial position. I accept that they are currently experiencing some significant cash flow difficulties in the current environment and given the existence of this litigation are unlikely to be able to raise further funds. They contend that they need the trailer commissions in order to pay the anticipated expenses of the business each month, the trail commissions payable in respect of the GE portfolio representing the majority of their income. 120 The parties are at issue as to whether or not the evidence before the court supports a finding that the plaintiffs are or are likely to become insolvent. 121 As the plaintiffs submit: i. the forensic accountants appointed by the defendants to examine the plaintiffs' books and records have reconstructed a profit and loss account for the period 1 June 2008 to 31 August 2008; ii. this demonstrates that the plaintiffs have been able to pay their debts as and when they fell due; iii. while Mr Sutherland asserts that the plaintiffs are "severely stressed" this evidence is meaningless in the context of the present application before the Court; iv. Mr Sutherland claims that if the loan to YGL is not recoverable then the plaintiffs on a consolidated balance are balance sheet insolvent; v. he attributes no value to the loan books which are clearly the plaintiffs' most significant assets and which include the GE portfolio and the Origin portfolio; vi. Mr Boueri's belief is that the underlying value of the GE portfolio is more than $1.5 million and the value of the other loan books is approximately $1.4 million; vii. the defendants' accounting expert's suggestion that the evidence of Mr Boueri should be discounted because it is not possible to value them without undertaking a "formal valuation" is rejected; vii. if the GE portfolio is truly worthless, then the defendants would presumably not be interested in taking over the management of it; viii. the defendants' own evidence is that the GE portfolio carries with it an entitlement to trailer commission in the vicinity of $1.545 million to $1.824 million. 122 In my view there are high question marks as to the plaintiffs' financial position which in the current environment does appear to be stressed. However the existence of this litigation and the defendants' actions in enforcing what it believes to be its contractual rights have likely contributed if not exclusively, at least significantly, to the straightened circumstances of the plaintiffs. 123 The defendants' own conduct and their own evidence is corroborative of Mr Boueri's belief that the GE portfolio may conceivably have an underlying value of more than $1.5 million. 124 The plaintiffs have sold two of their loan books in the past 18 months for an amount totalling approximately $700,000. The evidence is that the industry values a loan book according to its annualised trail. The loan books are likely a valuable commodity. 125 The other loan books have not been beset with large numbers of claims declined by the mortgage insurer. Since 1999, other than in relation to the 11 loans the subject of these proceedings only two claims had been denied by a mortgage insurer in respect of the plaintiffs' portfolios. In circumstances where the other loan books comprise approximately 600 loans and the GE portfolio approximately 1000 loans, the disparity between the claims experience arising out of the GE portfolio and the claims experience arising out of the other portfolios is remarkable. 126 It has to be recalled that the plaintiffs have had the benefit of insurance policies with QBE each with the Policy limit of $2,000,000. The insurer's recent grant of indemnity to the plaintiffs in respect of the 11 loans as well as a number of other claims notified in the policy period provides an indemnity which extends to the plaintiffs' costs of these proceedings. This indemnity also extends to any amount the plaintiffs are ordered to pay in respect of the defendants' costs of the proceedings. Of course the grant of indemnity remains conditional on the claims not being excluded by reason of specific policy conditions. 127 To the extent that a party asserts that an order that security be provided would stultify the proceedings, it must satisfy the Court that those who stand behind it or stand to benefit from its success in the proceedings are unable to provide security for costs: Idoport Pty Ltd v National Australia Bank Limited [2001] NSWSC 744 at [66]. "A proceeding cannot be regarded as stultified unless those who stand behind the impecunious plaintiff are unable (not unwilling) to provide the requisite security for costs." Green (in his capacity as liquidator of Arimco Mining Pty Ltd (in liq) v CGU Insurance Ltd) [2008] NSWSC 449 at [12]. 128 Evidence has been adduced in the proceedings from Mr Lee Boueri that: i. he has assets available to him, which he could sell in order to provide security for costs, including an investment property in Queensland, a share portfolio and a half interest share in a residential property in Cremorne; ii. his wife and children are the beneficiaries of a discretionary family trust, of which JJL is trustee, and of which the value of the plaintiffs, YHL and MMC, flows through to Lee Boueri (who is sole shareholder of JJL) who ultimately determines how to allocate that value amongst the beneficiaries; and iii. JJL (the sole shareholder of YHL) has, in its capacity as trustee of the discretionary family trust, equity in the plaintiffs' business premises at Chatswood and an investment property in Parramatta. 129 One then turns to the extent to which it is reasonable to expect those standing behind the plaintiffs to satisfy an order for security. As stated in KP Cable Investments Pty Ltd v Metglow Pty Ltd (1995) 56 FCR 189, the Court typically takes into account in determining an application for security for costs whether " there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security ." 130 This principle has been applied in a number of cases, including: Hession v Century 21 South Pacific Ltd (in liq) (1992) 28 NSWLR 120 at 123: "… a company in liquidation against whom an order for security for costs is sought cannot successfully resist such an order merely by proving that it cannot fund the litigation from its own resources if an order for security is made; it must prove that it cannot do so even if it relies on the other resources available to it (the company's shareholders or creditors)…" Green (in his capacity as liquidator of Arimco Mining Pty Ltd (in liq) v CGU Insurance Ltd) [2008] NSWSC 449 at [12]: "An important factor informing the exercise of the discretion is the existence of persons who stand behind an impecunious plaintiff who seek to take the benefit of our system of justice (ie share of the proceeds of victory) without the corresponding burden (ie, a potential adverse costs order)." Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 at [83]: "It would be unrealistic for the court to decline to order security on the ground that to do so would stultify the litigation, if it took into account only the financial ability of the plaintiff and disregarded the financial ability of those who would benefit from the plaintiff's success and who would therefore have an economic incentive to bear the burden of a security order. More broadly, it is fair for the courts to proceed on a basis which reflects the proposition that those who seek to benefit from litigation should bear the risks and burdens that the process entails. That notion appealed to Young CJ in Eq in Chartspike Pty Ltd (in liq) v Chahoud [2001] NSWSC 585 at [5], where his Honour observed that where a plaintiff contracts to have the litigation funded by a third party, in return for the third party receiving a share of the verdict, "it is appropriate that the third party bear part of the risk."" Section 1335(1) of the Corporations Act 2001 131 The propositions stated above are relevant to the statutory discretion under section 1335(1) of the Corporations Act 2001 to order security against a corporation that is likely to be unable to pay a costs order in favour of the defendant, but in addition, the policy behind section 1335(1) is that: "[the jurisdiction under section 1335] is designed to prevent a successful defendant from being substantially out of pocket and parliament must have assumed that this is precisely the circumstance in which the jurisdiction will be exercised." Bosun Pty Ltd (in liq) v Makris (2003) 21 ACLC 666. Dealing with the matter 132 The vigorous fashion in which both parties litigated the respective motions pointed up the significance which they attached to the interlocutory applications. The amount of material which was tendered and the extent to which the parties had provided affidavit evidence is further testimony to the level of heat which the parties have succeeded in generating on their claimed respective rights. 133 Clearly a number of serious questions for trial exist: as the defendants have conceded. At the same time to my mind a number of the suggested serious questions put forward by the plaintiffs are relatively weak. 134 It is unnecessary to repeat the detail of the serious questions which the defendants have conceded do arise. 135 I have already indicated the awkwardness which inheres in Mr Svehla's contention that even if clause 16.3 (b) be void as a penalty, Clause 16.3 (a) must be quarantined so as to remain unaffected by such a holding. To my mind there is a reasonably arguable issue going to this issue. 136 I am further of the view that there is a reasonably arguable issue raised by the plaintiffs' contention that the indemnity demanded is out of proportion or unrelated to the damage suffered by the defendants. 137 The plaintiffs have also established an arguable case generally speaking to make good the following propositions: i. It is clear that clause 13.2 has the potential for the indemnity amount to be out of all proportion or unrelated to the damage which might be sustained by the defendants by reason of the particular occurrence or default. ii. AMS is permitted to make an assessment of the Costs and Expenses it may in the future suffer in circumstances where it has the benefit of an indemnity from trust assets. iii. Those Costs and Expenses need not be Costs and Expenses suffered or incurred as a result of the Correspondent's actions but need only be "in connection with" the Correspondent's actions. In the event that AMS' assessment proves to be excessive or it is established that AMS has suffered no loss the Correspondent has no recourse. iv. An analysis of how clause 13.2 of the Correspondent Deed and clause 15.10 of the Deeds of Charge has operated in practice in the present case is instructive. v. The three Notices to Indemnify provide that in each case the representations and warranties given by the plaintiffs pursuant to clause 12.1 of the Correspondent Deed were not true and correct in all material respects in relation to the 11 Loans. vi. The representations and warranties set out in clause 12.1 of the Correspondent Deed include a representation and warranty that the mortgagor's loan application has been fully investigated by the Correspondent in accordance with the Operations Manual and that the Correspondent is satisfied that all statements and information contained in it are correct in all respects. vii. The second and third Notices to Indemnify also assert that there has been negligence and breaches of the TPA and the ASIC Act. viii. If AMS is entitled to damages for breach of warranty, negligence, or breach of the TPA/ASIC Act, those damages are the amount that will restore it to the position in which it would have been had it not made the relevant loans, as distinct from the position it would have been had the relevant loans been fully performed. ix. The measure of that amount is not the outstanding balance of the loan account relating to the 11 loans, especially insofar as it includes interest at the default rate, and the recoverable damages do not include the contractual interest payable by the borrower but unpaid – since AMS would not have been entitled to receive any interest from the borrower if the advances had not been made: Integral Home Loans Pty Limited v Interstar Wholesale Finance Pty Limited (No 2) [2007] NSWSC 592 at [34]. The balance of convenience 138 There are a number of factors to be taken into account in assessing the balance of convenience. The defendants' first open offer 139 Towards the end of the defendants final submissions [on 22 September 2008] an open offer was made by them in the following terms: We refer to the Plaintiffs' Notice of Motion filed 31 July 2008 seeking an order, inter alia, that the Defendants be restrained until the final hearing of the action or further order from applying any servicing or other fees owed to the Plaintiffs towards satisfaction of all or any moneys claimed to be owing to the Defendants ("the Motion"). We are instructed to offer to resolve the Motion on the basis that: A. the Defendants pay to the Plaintiffs 30% of the servicing and other fees referrable to loans originated and managed by the Plaintiffs until the final hearing of the proceedings. B. the Defendants take over management and servicing of the loans originated and managed by the Plaintiffs forthwith; and C. costs of the Motion be costs in the cause. This offer is made on an open basis. In the event that this offer is not accepted, the Defendants propose to rely on this letter in respect of the determination of the Motion. 140 In announcing this offer Mr Svehla made clear that the approach being taken by the defendants was that if and only if the court was minded to grant the plaintiffs some form of relief, then the offer represented an appropriate form of relief. As the offer makes clear, the defendants would take over management and servicing the loans originated and managed by the plaintiffs forthwith but would of course have to pay to the plaintiff 30% of the servicing and other future fees referable to the loans originated and managed by the plaintiffs pending the conclusion of the proceedings. 141 As will appear from what follows: i. this offer produced a counter-offer from the plaintiffs; ii. the defendants then revised their own offer; iii. the plaintiffs responded to the revised offer from the bar table. QBE confirms indemnity to the plaintiffs 142 During final address Kennedys [acting on behalf of QBE] wrote to the plaintiffs in the following terms: YES HOME LOANS – VARIOUS CLAIMS 1 We refer to the claims notified to QBE and are now instructed to confirm indemnity to your company in respect of the claims set out in the attached schedule on the basis of the facts presently known and subject to the terms and conditions of the policy. 2 Under the terms of the policy, your company has a deductible of $20,000 inclusive of legal expenses and a limit of indemnity of $2million inclusive of Legal Expenses (including any liability for an adverse costs order). This claim was notified to QBE along with other claims and a separate deductible of $20,000 inclusive of costs would ordinarily apply to each of these claims. QBE has agreed however to impose a $20,000 excess in respect of each policy year; that is $20,000 for the 2006/2007 policy period and $20,000 for the 2007/2008 policy period. The total excess payable by your company is $40,000. QBE will require this to be paid as soon as possible. 3 We bring to your attention two specific terms of the policy. If your company is held liable for breach of contract or breach of warranty alone, and would not otherwise be liable as a result of negligence, the claim may be excluded under Clause 4.1 of the policy. 4 To the extent necessary, indemnity is provided under the Extension in the policy for fraud and dishonesty (Clause 2.2) subject to specific provisos namely that: (a) the indemnity is not provided to any person committing or condoning any acts of fraud or dishonesty in this case; (b) your company must take, or cause to be taken, all reasonable steps to obtain reimbursement from any person who has acted dishonestly or fraudulently, at your company's expense; and (c) your company shall cause reimbursement so obtained to be paid to QBE after deducting any expenditure reasonably incurred by your company in obtaining the reimbursement. 5 Please confirm that the terms of the indemnity are accepted by your company. 6 We look forward to hearing from you. The undertaking by the plaintiffs 143 Towards the end of the taking of submissions the plaintiffs offered the following undertakings to the Court: Undertaking by the plaintiffs The plaintiffs undertake to the Court and to the defendants as follows: 1. They will pay to the defendants any monies received by them from QBE in respect of the liability said to arise under the claims set out in the attached schedule ("the insurance proceeds") within 7 days of receipt of such a sum(s). 2. In the event that the defendants are found at final hearing to be entitled to monies ("the judgment sum") which is in excess of the insurance proceeds and any amounts paid by QBE directly to the defendants they will pay to the defendants within 28 days the difference (if any) between the insurance proceeds and the amount of the trail commission paid to the plaintiffs on and after 1 October 2008, provided always that such amount does not exceed the judgment sum. And Lee Boueri undertakes to the Court and to the defendants as follows: 3 In the event that the plaintiffs do not satisfy any obligation which arises by reasons of paragraph 2 above, he will pay to the defendants the amount (if any) necessary to discharge that obligation within 28 days. Returning to the counter-offer world 144 The plaintiffs' counter- offer to the defendants' 22 September 2008 offer was in the following terms: We refer to your letter dated 22 September 2008. We are instructed to reject the defendant's offer. Our client is prepared to resolve the notice of motion on the following terms: (a) The defendants pay to the plaintiffs $50,000 per month representing the service and other fees referable to the loans originated and managed by the plaintiffs up to and including the final hearing of the proceedings or by order of the Court. (b) The plaintiffs maintain the management and servicing of the loans originated and managed by the plaintiffs up to and including the final hearing of the proceedings or by order of the Court. (c) The defendants to provide an undertaking to the Court to the effect that they, their servants and agents will not contact the plaintiffs' customers and make any adverse comment about the plaintiffs or in any way attempt to persuade the plaintiffs' customers to refinance their loans. (d) The defendants' motion for security for costs be dismissed. (e) Costs of the motion be costs in the cause. In the event that this offer is accepted please contact us so that we can discuss the form of a suitable undertaking. The plaintiffs will rely on this letter in respect of the notices of motion in relation to any issue of costs should the need arise. 145 This provoked the defendants' final offer which was in the following terms: We refer to our letter dated 22 September 2008 in respect of the Motion ("the Letter") and to your response of 24 September 2008. YHL's and MMC's counter offer in your letter dated 24 September 2008 is rejected. In addition to the offer to resolve the Motion at A to C of the Letter, we are instructed to make an alternate offer to resolve the Motion on the following basis: A. AFIG and/or AMS pay to YHL and/or MMC 35% of the servicing and other fees referrable to loans originated and managed by YHL and/or MMC ("Loans") until the final hearing of the proceedings; B. YHL and/or MMC retain management and servicing of the Loans until the final hearing of the proceedings; C. the management and servicing of the Loans by HYL and/or MMC be on the basis that the Correspondent Deed dated 1 September 1999 ("the Correspondent Deed") was not terminated on 3 September 2008 and without prejudice to the respective rights of YHL and/or MMC and AFIG and/or AMS to content at the final hearing whether the Notice to Termination dated 3 September 2008 issued by AFIG and/or AMS to YHL and/or MMC was valid and effective; D. the following undertakings be provided to the Court and to AFIG and/or AMS: (i) YHL and MMC to executed under seal and deliver to QBE Insurance (Australia) Pty Ltd ("QBE"), their professional indemnity insurer, within 7 days of this offer being accepted an irrevocable Authority and Direction ("the Authority and Direction") that QBE pay to AFIG and/or AMS all monies in respect of the indemnity contained in the letter from Kennedys dated 23 September 2008, being exhibit P3, save for any amount in payment of YHL's and /or MMC's legal costs ("Insurance Proceeds"), together with a request ("the Request") that QBE confirm in writing within 7 days thereafter its receipt of the Authority and Direction and that QBE will comply with the Authority and Direction ("the QBE Confirmation"); (ii) YHL and MMC deliver to Hicksons Lawyers, on behalf of AFIG and AMS: (a) a certified copy of each of the Authority and Direction and the Request within 2 business days of sending it to QBE; and (b) the QBE Confirmation within 2 business days of receipt by YHL and/or MMC of the QBE Confirmation; (iii) in the event that AFIG and/or AMS obtain an order that YHL and/or MMC pay AFIG and/or AMS monies ("the Judgement Sum") which is for an amount greater than the Insurance Proceeds received by AFIG and/or AMS from QBE, Lee Boueri ("Boueri) will pay to AFIG and/or AMS the difference between the Judgment Sum and the Insurance Proceeds received by AFIG and/or AMS ("the Differential Amount") within 42 days if YHL and /or MMC do not pay the Differential Amount within 28 days. (iv) YHL and/or MMC will not transfer, assign or otherwise dissipate their interest in or charge, mortgage pledge or otherwise encumber their rights or entitlements, including but not limited to the receipt of trails, margins, fees, commissions or other payments, which YHL and/or MMC has or may have in relation to: (a) the loans which were originated under the Correspondent Deed; (b) loans and/or mortgages which were originated under the terms of any deed or agreement which YHL and/or MMC had or have with any one or more of Origin, Challenger, Resimac, Bluestone; (v) Boueri will not transfer, assign or otherwise dissipate his interest in or charge, mortgage, pledge or otherwise encumber his rights or entitlements to or in any: (a) real property; (b) share; (c) other asset whose realisable value is greater than $10,000.00, save that Boueri may as a joint tenant together with his wife sell their residential home located at Cremorne and Boueri may use his interest or share in the net proceeds of such sale ("Boueri Proceeds") to purchase another residential family home together with his wife as joint tenants, but until and in the event that no such residential home is acquired, Boueri shall place the Boueri Proceeds in an interest bearing account which shall be not be dissipated. E. Costs of the Motion be costs in the cause. This offer is made on an open basis. In the event that this offer is not accepted, AFIG and AMS propose to rely on this letter in respect of the determination of the Motion. 146 When explaining the defendants' 24 September 2008 offer, Mr Svehla made clear that on an approximation, the plaintiffs' offer to accept the sum of $50,000 from the defendants per month had to be compared with the defendants' initial offer to pay to the plaintiff 30% of the servicing and other fees [which in dollar terms would be approximately $21,000 per month] . 147 Mr Svehla made clear that the defendants were concerned that the fees were reducing each month because of the pay down or discharge the borrowers were engaging in and because of the delinquency and arrears rates which were being experienced for borrowers who were not paying. His proposition was that the way in which the court, if it was disposed to grant all or some of the mandatory injunctive relief claimed, should deal with the matter was not to make an order for specific sums because of the reducing fees. 148 As we have seen from the defendants' final offer it contemplates: i. the defendants paying to one or both of the plaintiffs 35% of the servicing and other fees preferable to loans originated and managed by the plaintiffs until the final hearing; ii. the plaintiffs retaining management and servicing of the loans until the final hearing; iii. provisions to the effect that the management and servicing of the loans by the plaintiffs be on the basis that the correspondent deed was not terminated [without prejudice to the respective rights of the parties in the fashion set out in sub Paragraph C of Exhibit D2]. iv. a number of undertakings it provided to the court and to the defendant as set out in sub paragraph D of Exhibit D 2. The plaintiffs' response to the defendants' final offer 149 Broadly speaking the response to the defendants' final offer was as follows: i. The plaintiffs rejected the proposition that payment to them of 35% of the servicing and other fees referable to loans originated and managed by the plaintiffs was sufficient: they pressed for a fixed monthly figure of $50,000; ii. They pointed out that there had been no decrease in the relevant figure between August and September 2009 and that, in fact, the figure had increased: also that liberty to apply could always be availed upon if there was a radical change in position; iii. They did not wish to be heard in relation to sub-paragraphs B and C of the defendants' final offer; iv. They did not seem to have any particular problem with sub- paragraph D1 (i): although submitting that one should take into account the effect of section 6 of the Law Reform Miscellaneous Provisions Act and the statutory charge over the proceeds there provided for; v. They had no problem with sub-paragraph D1 (ii); vi. They contended that the matters provided for in sub- paragraph D1 (iii) appeared to be already provided for in the undertakings offered by Mr Boueri in exhibit P4; vii. They opposed the terms proposed in sub-paragraph D1 (iv) and (v). Decision 150 Notwithstanding the exchanges of counter offers the Court naturally approaches the principled exercise of its discretion by focusing upon the two main enquiries: The first is whether the plaintiff has made out a prima facie case, in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to relief … the second enquiry is … whether the inconvenience or injury which the plaintiff would be likely to suffer if an injunction were refused outweighs or is outweighed by the injury which the defendant would suffer if an injunction was granted". [ Beecham Group Limited v Bristol Laboratories Pty Limited (1968) 118 CLR 618 at 84 per Kitto, Taylor, Menzies and Owen JJ; cited in ABC v O'Neill (2006) 227 CLR 57 at 81 [65] per Gummow and Hayne JJ; referred to with approval by Gleeson CJ and Crennan J at 68 [19]] 151 McLelland J in Appleton Papers Inc v Tomasetti Paper Pty Ltd [1983] 3 NSWLR 208 at 214 quoted from Eng Mee Yong v Letchumanan [1980] AC 331 at 337 where the Privy Council had expressed the relevant principle in terms derived from the American Cyanamid Co v Ethicon Ltd [1975] AC 396 case as follows: "The court's power to grant an interlocutory injunction … is discretionary. It may be granted in all cases in which it appears to the court to be just and convenient to do so … the guiding principle in granting an interlocutory injunction is the balance of convenience; there is no requirement that before an interlocutory injunction is granted the plaintiff should satisfy the court that there is a "probability", a "prima facie case" or a "strong prima facie case" that if the action goes to trial he will succeed; but before any question of balance of convenience can arise the party seeking the injunction must satisfy the court that his claim is neither frivolous nor vexatious; in other words that the evidence before the court discloses that there is a serious question to be tried …" 152 The proper approach was also put shortly by R P Meagher, W M Gummow & J R F Lehane, Equity Doctrines and Remedies, 2nd ed, 1984 Butterworths, Sydney at para 2168: "What the plaintiff must prove is that he has a serious, not a speculative, case which has a real possibility of ultimate success and that he has property or other interests which might be jeopardized if no interlocutory relief were granted. Then it becomes a matter of seeing if, in all the circumstances of the case, the court should none the less exercise its discretion by declining to issue an interlocutory injunction." 153 At the same time it has been necessary to carefully take into account the proper approach to an application for the grant of a mandatory injunction as reflected in the following observations made in Businessworld Computers Pty Ltd v Australian Telecommunications Commission (1988) 82 ALR 499 at 502-503 per Gummow J: "[M]andatory injunctions generally carry a higher risk of injustice if granted at the interlocutory stage [because]: they usually go further than the preservation of the status quo by requiring a party to take some new positive step or undo what he has done in the past; an order requiring a party to take positive steps usually causes more waste of time and money if it turns out to have been wrongly granted than an order which merely causes delay by restraining him from doing something which it appears at the trial he was entitled to do; a mandatory order usually gives a party the whole of the relief which he claims in the writ and makes it unlikely that there will be a trial .… An order requiring someone to do something is usually perceived as a more intrusive exercise of the coercive power of the state than an order requiring him temporarily to refrain from action. The court is therefore more reluctant to make such an order against a party who has not had the protection of a full hearing at trial". 154 The finding is that the plaintiffs have shown a degree of probability of likelihood of success as is sufficient to warrant the interlocutory regime outlined below. In my view the plaintiffs have discharged the onus upon them of demonstrating the requisite degree of likelihood of success: namely " that which the Court thinks sufficient in the particular case to warrant consideration of where the balance of convenience lies ": cf McLelland J in Appleton Papers Inc at 214. 155 Naturally the Court always strains, wherever possible, to ensure that a party be permitted to have a final hearing if the serious case and balance of convenience factors are seen to be satisfied. 156 I am satisfied that the principled exercise of the discretion is to grant the form of relief outlined in the defendants' final offer, save that the amounts to be paid by the defendants to the plaintiffs [of the servicing and other fees referable to loans originated and managed by the plaintiffs] are to be the fixed monthly figure of $40,000. Each of the other conditions defined by the defendants' final offer [including each of the undertakings sought in sub clause D] will require to be included. Decision in respect of security for costs 157 The principled exercise of the relevant discretion is heavily influenced by QBE's confirmation of indemnity to the plaintiffs. However the Court must also pay due regard to the express terms set out in paragraphs 3 and 4 of Exhibit P 3. 158 Another matter which requires to be taken into account concerns the part which the defendants had themselves played in the general perception of the plaintiffs' financial position, by their role in withholding percentages of the plaintiffs' trail commission. 159 Yet another consideration inheres in the fact that as yet neither of the combatants have properly pleaded: hence the difficulties for the Court in ascertaining what types of amount of legal costs the defendants are likely to incur, bearing in mind also that the defendants are cross claimants in their own right. 160 I have already made clear that Mr Boueri will be required to give undertakings to the Court [in terms of the undertaking sought by the defendants in exhibit D2]. Those undertakings and in particular that referred to in clause D (V) are calculated to further ensure that the defendants are not out of pocket in terms of their reasonable fees incurred in the litigation. 161 In addition the plaintiffs are, on or before January 10 2009, to provide $40,000 by way of security for costs paid into Court by bank guarantee or monetary deposit. 162 Subject to those matters no further security for costs orders are presently appropriate. Short minutes of order 163 The parties are to bring in short minutes of order. ****************** 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.