Private loans with “stratospheric” interest rates exploited the financial desperation of a novice businessman, it has been argued in Brisbane’s Supreme Court.
Wayne Innes started his earthmoving business in 2010 and by 2013 was looking for short-term funding to service his trade accounts.
Michael King, of the former MFS Group, introduced him to Margaret Carter-Lannstrom as someone who made high interest loans to businesses in financial difficulty without due diligence or credit checks.
From 2013 to 2016 about 20 separate loans totalling $2.5 million were made by Ms Carter or her super fund to Innes or his company, Landfill Logistics.
Some of advances were short-term loans for days or weeks to cover outstanding interest on other loans.
In November 2015 the super fund provided a $300k credit facility in Landfill’s favour that was secured by second mortgage over Innes’ residence at Cashmere that he jointly owned with wife Lisa.
By the end of 2016 when Landfill was put into liquidation, all but $500k of principal and interest was repaid as required.
Loans from the super fund were made pursuant to a “Facility Agreement” that provided for interest at 10% per month (reducing to 7% month for compliant payments) while interest on the personal loans to meet overdue super fund interest payments, ranged from $7k to $10k each day.
According to Innes, the rate charged on the personal loans regularly exceeded 1000% p.a. and at its highest was nearly 15,000% for a loan of $15k repayable in 5 days together with interest of $22k.
To prevent Ms Carter acting on a Notice of Exercise of Power of Sale to sell up the Cashmere home, Innes made application to the Supreme Court in Brisbane for an injunction.
He also applied to set aside the second mortgage and the Facility Agreement on equitable grounds given that the agreements “exploited his desperate financial need”.
Her honour Justice Ann Lyons readily accepted that a lender’s knowledge of borrower’s foolishness could not of itself ground a claim for equitable relief. Neither was a high rate of interest of itself sufficient.
The threshold that Innes needed to clear was she explained, “unconscionable exploitation of necessitous circumstances with exorbitant repayment terms”.
Such “victimisation or exploitation” could be made out – if the transaction affronts reasonable standards – even in the absence of any pressure from the lender; even where the borrower freely and voluntarily agrees to the terms; and even if the borrower receives competent legal advice.
Innes argued his agreement to pay “penalties on penalties” and interest rates in a “different stratosphere” clearly indicated he was at a special disadvantage by being “plainly unable to take care of his own financial circumstances”.
Justice Lyons accepted the borrowers’ contention that all loans should be considered together with no significance accorded to the different lender entities.
Had sufficient a prima facie case been made out for the granting of an injunction?
“This is indeed a case where every loan the borrower took out simply made matters worse,” Justice Lyons concluded, “and where he was objectively blind to the financial consequences of loans he was requesting.”
The injunction preventing the second mortgagee exercising power of sale of the property was granted subject to the borrowers continuing to pay a commercial rate of interest on the balance outstanding.
If not resolved sooner, the trial of the substantive action will likely involve an accounting exercise with a reasonable rate of uncapitalised interest.
Mrs Innes’ arguments that she should be relieved of the consequences of those loans the purpose and extent of which she was not made aware, will also be resolved when the matter reaches trial.