In Interim Finance v Bright Beginnings Learning Centre Glendenning [2018] the Court found the lender did not have a caveatable interest in the security property. Further, the Court ordered the removal of the caveat registered over the property.

Background to the short term loan transaction

Interim Finance is involved in short term loan transactions. Bright Beginnings provides child care services. Mena and Romany Ibrahim are brothers with joint shares in the Bright Beginnings’ business.

In June 2016, Bright Beginnings applied to Interim Finance for a $450,000 loan. Interim Finance prepared the Letter of Offer, and the Ibrahims signed this on 22 June 2016. The brothers paid the valuation fee of $660 on the same day.

Letter of Offer

The Letter of Offer identified the borrower as Bright Beginnings and the mortgagor as the Ibrahims. Further, it laid out the borrower’s financial obligations should Interim Finance prepare and issue loan documents, but the loan then failed to proceed.

It outlined three occurrences which could result in the loan not proceeding:

• the borrower decides not to proceed with the offer of finance,
• the borrower is unable to fulfil one or more of the requirements made by Interim Finance,
• Interim Finance becomes aware of an issue which changes its decision to provide the loan.

In the event of one of the above occurrences, the borrower is liable for the Loan Application Fee, legal costs of preparing the loan documents and an administration fee of $1,650.

Also the Letter of Offer stated the borrower had 5 days from the issuing of an invoice to pay the Fees. Thereafter it granted the lender an equitable interest and charge over the security property.

On 28 June 2016 the solicitors acting for Interim Finance completed the loan documents. However, they did not send the documents to the borrowers’ solicitors, OneGroup Legal (OGL). Rather they contacted Mena Ibrahim, who arranged to deliver the package to OGL.

Short term loan transaction seems to falter

Between 1^st and 4^th July communications occurred between the two parties. However, on the 5^th July Andrew Littleford, managing director of Interim Finance, became concerned about possible “shopping around” for better finance options by the borrower. A phone call between Littleford and Ibrahim addressed the issue, but thereafter the borrower did not return signed loan documents to the lender.

Therefore on 8 July 2016, Littleford sent an email to the Ibrahims, stating:

“We take it from the lack of communication and the fact loan documents have not been executed or returned, that you do not wish to proceed with this matter.”

The email claimed a total of $8,100 owing and payable by 15 July 2016, and included an invoice for the amount. It also advised that the lender may register a caveat over the security property to secure the outstanding debt.

Interim Finance instructed its solicitors to go ahead and lodge a caveat over the security property.

Interim Finance received no response to the 8 July 2016 email. Rather, it seems Mena Ibrahim attempted to progress the transaction. Also OGL requested new loan documents, as “the original given to our client has been misplaced”.

Subsequently, on 12 July 2016, in a telephone conversation between Littleford and the Ibrahims, matters came to a head. Littleford confirmed that Interim Finance would not fund the loan.

Evidence provided by lender and borrower

The evidence focussed on the perceived delay in the return of the loan documents by the borrower.

The Interim Finance position, as given by Littleford, turned on his understanding of urgency initially indicated by the borrower. The short term loan transaction arena deals in short timeframes. Therefore, he concluded, the time between the issuing of the loan documents (28 June) and the email (8 July) indicated the borrower’s lack of intent. Bright Beginnings’ delay in returning the signed documentation led Interim Finance to believe that it did not mean to proceed with the loan. Therefore Interim Finance did not proceed.

By contrast the borrower, represented by Mena Ibrahim, claimed that no deadline existed for the return of finance documents. Also, he insisted that he did not understand the email on the 8 July to mean the cancellation of the loan transaction. Further, he argued, at no point did he indicate an intention to not proceed.

Conclusion reached by the Court

The Court considered why the loan transaction did not proceed. Did the borrower reject the deal and was therefore liable for the fees? Or did the lender withdraw from the loan agreement?

A short term loan transaction usually occurs quickly. However, the Court concluded that the Loan Agreement did not have a term requiring the return of the loan documentation within a set timeframe.

The Court found that none of the above three occurrences were the cause of the loan not proceeding. Rather, it concluded, the loan did not proceed because Interim Finance withdrew from the Loan Agreement on the basis of an assumption. In the 8 July 2016 email Interim Finance assumed that the borrower did not intend to proceed with the transaction. This assumption was incorrect.

As a result, the Court found no reason for the borrower to pay the invoiced Fees. It also ordered Interim Finance to remove the caveat lodged on the security property.

Related articles

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Penalty Doctrine: High-Risk Loans Warrant Greater Returns

Late Payment Fee Escapes the Penalty Tag

Short-Term Loans Clamp Down: Rejected.

This publication is for your general information and interest only. It is therefore not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek advice tailored to your specific circumstances. 

The post Short Term Loan Transaction Fails: Is Borrower Liable? appeared first on Elliott May.

A 53% per annum interest rate may seem steep, but the Court declined to label it a penalty. The decision took into account the high-risk nature of the loan.

Background

Quantum is a private financial institution lending money to mainly high-risk borrowers. Generally the loans are short term, often not more than six months. Quantum aims for a 36% per annum rate of return across its portfolio. It argues the reason for this is its exposure to higher risk.

In November 2014 Quantum loaned Love Properties $245,000 for a seven month term. Three later deeds of variation increased the term and principal.

Structure of the Facility Deed

The interest rates were set out as follows.

Provided Love Properties made repayments on the due date the Lower Rate in period A of 9.75% per annum applied. This together with the fees reflected in the Special Conditions section of the Memorandum was the cost of the loan.

If Love Properties failed to repay the loan in period A then period B starts and continues until the loan repayment is complete. In this instance the interest rate is 4.43% per month. Period B attracts no fees, only the monthly interest rate which is significantly higher than period A.

Notice of default

Love Properties failed to repay the loan at the end of the term. Therefore Quantum issued a notice of default.

In June 2016 the Court granted summary judgment in favour of Quantum. It ordered Love Properties to pay over $660,000, interest at a daily rate of $952.31 and costs.

Love Properties claimed the amount was excessive and that the interest provision was unenforceable as a penalty. It entered an appeal from summary judgment. This brought the penalty doctrine into focus.

How does the penalty doctrine apply?

When applying the penalty doctrine, each case turns on its own facts. The relevant issues in the current case are:

• Whether the agreed sum is equal to the interest protected by the bargain
• Is the sum exorbitant and out of proportion to the legitimate interest of the party?
• Is the intention only to punish the defaulting party?
• What is the context of the loan?

At common law it is accepted that risky credit will cost the borrower more.

What the Court decided

The Court asked the following questions.

• Did the period B interest rate have a purpose other than to punish Love Properties in the event of default?
• Does Quantum have a legitimate interest that explains the period B rate?

The Court found the answer to be yes to both questions. Here are the reasons why:

• The context of the loan was the short-term money market and high risk
• Both parties were commercially experienced
• Quantum needed to protect its interest in receiving payment, and on time. This included both fees and interest

The period A fees and interest amounted to an annual return of 52.86%. By comparison the period B rate of 53.16% per annum was not exorbitant.

The Court concluded that the purpose of the period B rates were to protect Quantum’s legitimate commercial interests. They were not out of proportion to that interest therefore not acting to punish Love Properties.

The Court dismissed the appeal.

Related articles

Short Term Loan Transaction Fails: Is Borrower Liable?

Late Payment Fee Escapes the Penalty Tag

Avoid Penalty Interest Rates: Pre-Paid vs Retained Interest

Penalty Interest: Higher & Lower Interest Rate Permissible

High Court Clarifies the Operation of the Penalties Doctrine

This publication is for your general information and interest only. It is therefore not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek advice tailored to your specific circumstances.

The post Penalty Doctrine: High-Risk Loans Warrant Greater Returns appeared first on Elliott May.

What are the effects of this key judgment? It certainly issues a warning to commercial borrowers. Escaping late payment fees may not be as simple or clear cut.

The decision in Wilaci Pty Ltd v Torchlight Fund No 1 LP [2017] NZCA is relevant to all businesses using late payment fee clauses in their contracts. Although the case took place in New Zealand, Australian law bound the Courts in reaching a decision.

The key facts

Wilaci lent $37 million to Torchlight, a private equity fund. Torchlight needed urgent short-term funding but failed to arrange a loan from a commercial lender. The loan term was 60 days. Wilaci, not in the business of lending, sought to manage its risks. The key conditions included:

• interest of $320,000
• a lending fee of $5 million to be paid 60 days after the end of the term
• a late payment fee of $500,000 per week

Torchlight did not repay the loan within 60 days. Over a period of almost two years Wilaci unsuccessfully requested payment.  Thereafter Wilaci issued a demand for the late payment fee, which by then amounted to over $28 million.

Torchlight refused, arguing that the fee was an unlawful penalty at common law. Torchlight succeeded in the High Court but the matter came before the Court of Appeal due to an appeal by Wilaci.

The arguments surrounding the late payment fee

Torchlight argued that the fee was excessive compared to the loss Wilaci suffered on delayed payment. Therefore it was a penalty. The fee equalled an 80% return on the $37 million loan.

Wilaci denied that the late payment fee was a penalty:

• Firstly, the fee was not payable on breach of term. Rather Torchlight paid the price for the benefit of using the $37 million after the 60 day term ended.
• Secondly, Wilaci said the fee was not extravagant. It amounted to $2.5 million a month. This was less than the lending fee plus interest, which worked out at $2.66 a month.

The decision reached by the Court of Appeal

The Court of Appeal decided that the late payment fee was not a penalty. It concluded that the intention of the fee was not punitive.

In reaching its decision the Court stressed the commercial context of the two parties. Relevant factors were:

• Wilaci was not a commercial lender therefore could demand more protection than a company involved full time in the lending industry;
• it was a high risk transaction therefore Wilaci needed substantial returns;
• both parties had sophisticated commercial experience;
• the fee payable on breach was lower than the cost of credit before default therefore the Court found that it was not extravagant.

What does the ruling mean?

It seems that the Court is less likely to label a clause as a penalty if negotiated by sophisticated commercial parties. However, in cases where there is not equal bargaining power between the parties, the Court may interpret the penalty doctrine more narrowly.

In conclusion, commercial lenders and businesses should carefully examine late payment fees and other liquidated damages clauses.

Related articles

Short Term Loan Transaction Fails: Is Borrower Liable?

Penalty Doctrine: High-Risk Loans Warrant Greater Returns

Avoid Penalty Interest Rates: Pre-Paid vs Retained Interest

Penalty Interest: Higher & Lower Interest Rate Permissible

High Court Clarifies the Operation of the Penalties Doctrine

This publication is for your general information and interest only. It is therefore not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek advice tailored to your specific circumstances.

The post Late Payment Fee Escapes the Penalty Tag appeared first on Elliott May.