The bank indirectly ‘advanced’ funds to a ‘borrower’ to enable them to acquire property at Bondi. However importantly the ‘advance’ was structured as a note issue to the bank, with the note proceeds being on lent to the borrower by the issuer of the notes and not the bank. The notes themselves were then immediately purchased from the bank by the borrower but payment of the purchase price was deferred, with interest capitalised and secured by a charge by the borrower companies. In this way, the bank did not directly lend or provide any funds to the borrower, only the issuer of the notes. The charge, which secured payment of the unpaid purchase price for the notes (not the repayment of the loan made by the issuer of the notes), fell outside the mortgage duty provisions at the time it was executed. The time for payment of the purchase price for the notes was extended by deeds of variation. The Chief Commissioner argued that the forbearance by the bank was an “advance” and assessed mortgage duty on the full amount of the purchase price and capitalised interest. The borrower sought a review of this assessment.
The lower court held that the charge secured payment of an unpaid purchase price rather than repayment of a loan, but when the variation deed was executed there was an advance by forbearance and the amount secured then became the amount of any advances made for which the charge was security. However the lower court did not accept that an obligation to pay interest was converted into an obligation to pay an additional advance and so denied duty on the capitalised interest.
The borrower appealed.
The Court of Appeal held that for a forbearance to be an advance within the mortgage duty provisions, it must result in the provision or obtaining of funds.
The Court of Appeal noted:
The effect of the deeds of variation was not that the borrower actually received any new funds. The proposition that the borrower retained, or had the continued use of, funds that they would otherwise have been required to pay to the bank (and hence in that sense “obtained” funds by reasons of the extension) requires the assumption to be made that the borrower had such funds available to them at the relevant time. The borrower was not the recipient of funds from the bank in the first place (although they had received loan funds from the issuer following the issue of the notes). Retention of funds for a longer period does not, in the ordinary sense of the words, involve the “provision” or “obtaining” of any new funds (even though it may well constitute financial accommodation).
The essence of an advance is not just financial accommodation but an obligation of repayment, missing here. The Court of Appeal found that the variations did not involve any transaction whereby the bank had in effect constructively advanced money when the payment date arrived and payment was not made – all that occurred was that the borrower was given further time to pay the purchase price for the notes. The original transaction and the extension of the date for payment (not repayment) of the purchase price did not involve any loan. However the court noted that if the court had found that the variation operated as an advance, the whole amount including interest would have been subject to duty.
Click here to read the full judgment