Lets We Forget v Westpac [2005] NSWSC 1165

The plaintiff company (“Lets”) borrowed money from Westpac, with the loan secured by mortgages on two properties owned by Lets. The director of Lets was a guarantor of the loan. Lets applied to the Court for an injunction restraining Westpac and its agents from exercising its power of sale.

Prior to exercising its power of sale as mortgagee in possession the lender had appointed two agents, relying upon the de-registration of Lets as an event of default (Lets was later re-registered).

Lets denied an event of default had occurred and denied that the lender had taken possession of the properties, alleging that the lender’s agents had not been properly appointed. Lets also challenged a particular interest rate charged on its accounts following the event of default.

The lender’s agents were appointed under a deed dated 15 July 2005 which stated that:

  2.1:   Westpac, being entitled under the powers conferred upon it by the Mortgages, appoints the Agents jointly and severally as agents of Westpac in its capacity as mortgagee in the possession of the Properties with all of the powers conferred upon Westpac by virtue of the Mortgages or any other means (Appointment).

  2.2:   The Agents agree to accept the Appointment.

Lets argued that the lender was not mortgagee in possession as at 15 July 2005, and so there was no legal basis for the appointment of its agents

In support of that proposition, the plaintiff points to evidence which it says shows that the first defendant has not taken in relation to the properties any steps which, according to principles perhaps most often associated today with the judgment of Samuels JA in Park v Brady [1976] 2 NSWLR 329, justify a finding that the first defendant as mortgagee has gone into possession either actively or constructively.  The properties are leased, with the result that steps of relevant kind might be expected to relate mainly to rents.

As to whether an event of default had occurred, the lender relied upon a mortgage clause which referred to

any material adverse change in or affecting any Security, or the business, capital, assets or financial condition of … anyone who gives a Security. 

The terms of the mortgage provided that a default occurred if the lender formed the view that there had been any such material adverse change. Security was defined in the mortgage to include a guarantee.

Evidence was put forward by the defendants which showed that on 18 February 2005 the director of Lets had been ordered to pay $1.3 million under the Criminal Assets Recovery Act 1990 to three banks (not Westpac) in respect of fraud. That undercut the director’s financial resources to a degree that there was a material adverse change in the security. Justice Barrett pointed out that, “the circumstances of this case are, in these respects, very similar to those considered by Mandie J in CAI v Westpac Banking Corporation [2005] VSC 317.” The lender also relied on Lets’ failure to make certain payments as events of default.

His Honour held that an event of default had occurred

On the evidence before me, it appears to be open to the first defendant to form the opinion going to material adverse change event of default. Mr Starkey, an officer of the first defendant, deposes that he, himself, has already formed that opinion.  The evidence also shows that non-payment defaults have occurred. In those circumstances, I am not at all satisfied that the plaintiff has shown that there is a serious question to be tried as to the unavailability of the first defendant’s power of sale or that there would be an invasion of some legal or equitable right of the plaintiff if that power were exercised according to the proper and applicable procedures involving the giving of notices and the like.

As to the interest charged, his Honour held that to be an accounting issue and as such it did not stand in the way of a mortgagee’s power of sale
 
If the lender was not a mortgagee in possession at the time it appointed its agents, there was nothing stopping the lender executing a new authority after having gone into possession. As a result, his Honour held (at [19]) that an injunction would be futile and dismissed the application with costs, saying

Vice-Chancellor Kindersley said in New Brunswick and Canada Railway and Land Co v Muggeridge (1859) 4 Drew 686; 62 ER 263 that a court of equity “will not make an order in vain”. In my opinion, for the reasons Mr Dowdy stated, it would be an exercise in futility for this court to make any order precluding the first defendant from taking steps towards exercise of its power of sale through the intermediation or agency of the second and third defendants; or restraining the second and third defendants from taking such steps as the agents of the first defendant.  A narrower order – that is, an order precluding such steps in exercise of the agency created by the deed of 15 July 2005 – might conceivably be made but would also be of no real utility given the obvious power of the first defendant to make a new and uncontroversial appointment at any time.

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