Capitalisation of interest rate clause held to be penalty at trial
Sharpe & Ors v PSAL Ltd  QCA 371
The first appellant was an experienced investor and sole director of the second appellant. On 29 October 2009 the second appellant purchased a rural property for $1m payable by a deposit of $100,000 with the balance to be paid on 14 December 2009. The finance for the balance became unavailable. On 15 December 2009 the respondent which had a core business of providing short-term finance to business and investment client borrowers offered finance to the first and second respondents as borrowers and the third respondent, another of the first respondent’s companies, as guarantor. The settlement date was extended to 17 December 2009 when the funds were advanced and settlement occurred. The advance was $1,139,308 for a term of two months at a standard rate of 7.5% per month but while the borrower was not in default 4.00% per month with interest to be capitalised. The borrower failed to repay the loan. On 22 February 2010 the respondent made demand. When a proceeding was filed on 4 May 2011 the debt was $1,745,166.25.
In the proceeding the defence alleged that the provision in the loan agreement requiring the payment of interest at the rates set out in the agreement were a penalty and therefore void and that the respondent had engaged in unconscionable conduct in providing the facility. The appellants sought by way of a counterclaim orders that the interest rate be read as 2% per calendar month and that the provision for capitalisation of interest be deleted.
The trial judge declined to find that the interest rate structure (i.e. standard rate of 7.5% and concessional rate of 4%) was a penalty. He found that the appellants had not proved that interest at 7.5% was not a genuine pre estimate of loss. The trial judge found that interest at 7.5% was not a penalty. The trial judge found that the respondent had acted unconscionably by charging the rate of 7.5% per month capitalised for an extended period when the loan had ceased to be for a short term.
The trial judge made declaration that the provisions in the loan agreement were unconscionable in so far as they provided interest at the rate of 7.5% and capitalisation of the unpaid interest. His Honour ordered that the loan agreement was to be read as if the capitalisation clause was deleted and that the standard rate was to 5% per month and the concessional rate was 4% per month.
The appellants appealed seeking a declaration that the interest rate provision was void as a penalty and an order that the appellants pay the principal sum owing plus simple interest at 2% per month or at a rate determined by the Court.
There were two grounds of appeal:
(1) The trial judge erred when he held that the interest rate provision was not subject to the equitable jurisdiction to relieve against penalties.
The Court of Appeal said that description of the trial judge that he was applying a well established rule in Australian law was correct. That rule in substance being that it is a not a penalty for the loan agreement to provide that on non payment interest was payable at 5% to be reduced in the event of punctual payment to 4%. The Court of Appeal was not willing to accept the invitation of counsel for the appellants to not apply the rule. Apart from the fact that it had been applied in many decisions the Court was not convinced that the rule was plainly wrong.
(2) The trial judge erred in failing to hold that the interest rate provision provided for a penalty and was therefore void. As the Court of Appeal had found against the appellants in the first ground that precluded success on the second ground. If the Court had found in favour of the appellants on the first ground it would have been difficult for the appellants to succeed on the second ground in circumstances where the grounds of appeal did not challenge the finding of the trial judge that the rate of 7.5% per month was not a penalty.
In submissions the appellants made reference to the rate of 7.5% and the Interest Rate provision (namely that the concessionary rate of 4% applies only while the borrower is not in default under the Facility) as being indicative of penalty. Two issues of construction also arose namely the meaning of the word “Facility” and the interpretation of the expression “the Borrower is not in default”.