Banking and Finance Disputes Resolution Monthly

12 April 2017


It is not uncommon for a bank to enter into a deed with its customer during the early stages of enforcement action to record the arrangement reached by the parties to resolve the repayment of the debt without resorting to further enforcement action. Often this occurs after the bank issues a formal demand but before commencement of recovery proceedings in Court.

In the event a customer subsequently defaults under the deed, careful attention ought to be given to whether the default to be pleaded in the Statement of Claim, in formal recovery proceedings, should be the default under the deed or the default under the loan agreement and mortgage.

The deed will often allow the customer a period of time to pay out the debt owing under the facilities in consideration of the bank agreeing to forbear further enforcement action during that period. Invariably, the deed will contain Recitals acknowledging the amount of indebtedness under each facility and acknowledgements by the customer of the default, the proper service of demands and the enforceability of the bank’s security.

In Australia and New Zealand Banking Group Ltd v Bragg (No. 3) [2017] NSWSC 208 the customer alleged, amongst other things, that the loan was entered into under duress and ought to be set aside.

The customer entered into a letter of offer with the bank on 12 May 2011 for a business loan of $1,530,000 and an overdraft facility of $135,000. The funding was for the customer to purchase land at 485 Lake Conjola Entrance Road in Lake Conjola, NSW (“the Property”) and to complete the construction and development of 71 cabins. It was anticipated that the development would be completed in 7 months on 30 September 2011 and the facilities repaid on 31 December 2011. Those deadlines were not met.

Delays ensued and numerous extensions were given on the payment of the loan. A deed was entered into on 13 June 2014 by which the total debt was to be paid by 13 September 2014. The deadline was not met and the bank commenced recovery proceedings in Court.

The bank sought to rely on recitals in the deed by which the customer acknowledged the relevant loan agreement, with further acknowledgments of the customer’s indebtedness under each facility, in answer to the customer impugning the loan on the grounds of duress.

The bank relied on the principle of “estoppel by deed” which prevents a party to a deed from denying the truth of facts stated in the deed.

The Court observed that the bank had not pleaded in its Statement of Claim the default under the deed, but instead elected to plead the default under the loan agreement. Accordingly, the bank was not entitled to rely on the recitals in the deed, acknowledging the customer’s indebtedness, to prevent the customer denying the validity of the loan agreement and the indebtedness.

Although the customer’s duress defence failed in any event, the lesson to be learned is that pleading a default under a deed may be a more effective strategy in recovery proceedings, as the principle of “estoppel by deed” can operate to prevent the other party to the deed denying the salient facts and acknowledgments outlined in the deed. It is also an easier case for the bank to run and to succeed on a summary judgment application if a deed can be relied upon.

This article was written by Simon Crawford, Partner and Thomas Li, Solicitor. 

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