Golden J Wealth Pty Ltd v AC Holdings Co Pty Ltd [2019] NSWSC 1342

The lender advanced $7.21M to the borrower to assist with the purchase of two unrelated properties. Two months after the loan settled, a third party obtained freezing orders against both properties. The lender formed the opinion that the borrower had suffered a material degradation in its ability to comply with the terms of the mortgage. This constituted an event of default under the mortgage and the lender issued a default notice.

The borrower failed to repay the loan within the notice period and the lender commenced proceedings for possession of both properties. The borrower brought a cross-claim in which it claimed that:

  • the opinion formed by the lender was not formed in good faith and/or reasonably
  • the lender was not entitled to be paid interest at the Higher Rate because that rate was a penalty

The Court accepted that the lender needed to form the opinion in good faith. His Honour went on to find that there was no express requirement that the opinion be reasonable and that such a requirement would undermine the certainty for which the terms of the mortgage memorandum strove. Accordingly, if the lender forms such an opinion honestly and genuinely, that is in good faith, then it does not need to show that it has done so reasonably or based on objective available facts.

In relation to whether the higher rate of interest was a penalty, this argument was rejected by the Court because the interest clause was drafted such that the higher rate was the agreed rate of interest payable and that this rate was reducible to the lower rate if payments were made on time and there had been no event of default. The Court referred to previous High Court authority and confirmed that it had no scope to depart from that authority.

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