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In Parker Wells Pty Ltd v Lenn Financial Services Pty Ltd, Justice Hindman found the contractual default rate of 5.65 per cent per month, equivalent to 67.8 per cent per annum, was a “penalty” and ruled the standard rate of 2.15 per cent per month must apply during default instead.
The court found the higher rate was out of proportion to the lenders’ interests, particularly because the loan documents separately allowed them to recover costs and losses associated with a default.
The lenders involved were identified in the judgment as Lenn Financial Services Pty Ltd, Alen Gajic as trustee for SRSG Trust, and Steven Rentoul.
“The increased risks associated with borrowers in default also cannot justify a more than doubling of the interest rate from 2.15 per cent to 5.65 per cent per month,” Justice Hindman said.
“Translating those rates to yearly rates might make the point more obvious: the standard rate is 25.8 per cent per annum whilst the default rate is 67.8 per cent per annum – an increase of 42 per cent. And those rates may compound due to the Capitalisation Clause.
“That gross disproportionality between the default rate and the interests sought to be protected is sufficient to infer a predominantly punitive purpose; a threat ensuring the obligors do not default.”
Justice Hindman therefore declared the clause imposing the default rate void, with the standard interest rate to apply during default. The court did not strike down the separate clause allowing interest to be capitalised.
The loan dispute
Parker Wells, a newly established earthmoving business, obtained the loan in June 2020 to buy a bulldozer. The financing was arranged through finance broker Entire Finance and intermediary Balance Lending, after more traditional lending was unavailable because the company had no trading history and one director had an outstanding debt affecting his credit file.
The loan was for an initial six months, with an option to extend for up to another six months. It was secured by personal guarantees and mortgages over properties belonging to the directors and family members.
The borrower failed to make the required interest payments and could not refinance the loan. By early 2022, it had sold the bulldozer and made about $231,000 in partial repayments, but the debt remained outstanding.
The court found the loan documents provided for the standard rate of 2.15 per cent per month to be added to a higher rate of 3.5 per cent per month during default, producing the 5.65 per cent rate.
The judge said the default rate produced an additional $165,900 in simple interest per year compared with the standard rate, calculated on the entire principal.
Guarantor’s claim rejected
The court, however, rejected one of the plaintiffs, David Wells’ claim that the lenders had engaged in unconscionable conduct by entering into the transaction and enforcing his guarantee and mortgage.
Wells was described in the judgment as “financially unsophisticated and nearly illiterate”. However, Justice Hindman found his case had not properly pleaded that the lenders knew of his alleged disadvantage, a necessary element of the claim.
Justice Hindman said: “Even if Mr Wells had a special disadvantage arising from his illiteracy and general lack of financial nous, there is no pleading that the lenders had knowledge of that special disadvantage.”
The judge also found the evidence did not establish the necessary knowledge on the lenders’ part. The parties had dealt primarily through the intermediary, and the court did not find that the intermediary’s knowledge could be attributed to the lenders.
As a result, Wells remained bound by his guarantee and the security he had provided.
The judgment left the final terms of orders concerning possession of the mortgaged properties and costs to be determined after further submissions from the parties.
The broker and intermediary were not parties to the proceedings, and the judgment made no adverse finding against either.
[Related: Brokerage fined for ‘exploitation of vulnerable workers’]
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