26/06/2014

In May 2014, the Supreme Court determined another matter involving a similar geared orchard-based investment where the investor had lost his investment and the lender subsequently sued the investor for the balance of the loan used to pay for the initial investment.

The outcome in this case is, however, that the claim by the lender was dismissed and the investor did not have to repay the balance of the loan (the lender having sued for $4.7million).

The difference to the earlier case is in the wording of the loan documents and the characterisation of the loan, in the recent case as a "limited recourse loan".

The essential facts of this case are set out below:

•    In 1994 the investor entered into two loan agreements to invest in the farming allotments with a combined principal sum of $560,000.
•    The project was not a success and various companies involved were later put into liquidation and the investor lost his investment.
•    The original lender sold the debts owed by the investors to a professional debt recovery firm, which then went about demanding payment of the balance of the loans from the investors despite the investment monies being lost.
•    The new lender commenced court proceedings seeking the outstanding loan including interest in an amount in excess of $4.7million.

The new lender relied on a number of arguments to seek recovery of the loan directly from the investor (despite the loss of the investment).

The investor defended the claims on a number of grounds, including that the wording of the loan documents should be characterised as a "limited recourse loan" and therefore any recovery action by the lender was limited to the benefit the investor received from the investment.  In other words, the lender could only be repaid out of the investment and not the investor’s other assets.

The key terms of the loan documents included:

"subject to the Grower's income from his interest in the Project being made available in its entirety by the Grower to the Representative ….. the Lender shall have no other recourse to the Grower for Principal and Interest …."

and:

"The Principal and Interest shall immediately become payable [if] ….. default be made by the Borrower in the due and punctual payment of the Principal Sum or Interest …."

The lender argued that the investor was in default in not paying the loan when demanded and the loan therefore became immediately repayable.

The investor argued they had not defaulted and the loan remained limited to the funds from the investment.

The Court agreed with the investor and ordered the claim by the lender for $4.7million be dismissed.

The Court found as follows:

"The non-recourse provision in cl 5.2(c) is qualified, in its terms, only by the requirement that the Grower's income from his interest in the Project be made available in its entirety by the Grower to the Representative for the specified purpose. It is not qualified, as it could have been, by any express statement that it ceases to operate when an event of default occurs. From the Borrower's perspective, a non-recourse provision that ceased to have effect when an event of default occurred would be of little benefit, because it is precisely in that situation that the Borrower is likely to have most need of it.

…….

HPM [lender] is not entitled to judgment against Mr Clements [investor] for the balance of the principal and interest on the loans, beyond the amounts he has already paid, by reason of cl 5.2(c) of the Loan Agreements, or interest on that amount. The proceedings should therefore be dismissed."

This is a significant outcome for the investor and could have a broader application to other investors in similar circumstances.

If you or your client is chased or harassed by professional debt recovery firms, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.