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Wilaci argues $A33.6m sought from PGC was not a penalty fee

Justice Kos questioned why George Kerr had not taken a loan elsewhere.

Sophie Boot
Wed, 05 Oct 2016

Lawyers for Australian businessman John Grill's Wilaci investment unit have argued that $A33.6 million in late payment fees it wants from Pyne Gould Corp subsidiary Torchlight Fund No 1 LP was not a penalty fee in the Court of Appeal yesterday.

Last October, Justice Matthew Muir in the High Court ruled the Torchlight unit didn't have to pay the fee on a $A37 million loan from Wilaci, which "so significantly exceeds the loss likely to be caused by the breach that it qualifies as extravagant and therefore unenforceable," saying the $A2.17 million per month fee "was undoubtedly extravagant in relation to any such loss."

Wilaci lent the funds to Torchlight on August 22, 2012, to help the Pyne Gould entity through what managing director George Kerr described as "a very tight liquidity situation" when Bank of Scotland International was leaving Australasia and calling for repayment from its debtors, including Torchlight's Australian real estate investment, RCL Group. A high-profile dispute with the Financial Markets Authority made it more difficult for Mr Kerr to recapitalise Torchlight.

The loan was due to be repaid by October 26, a deadline Torchlight missed, although Wilaci didn't immediately call on the loan. Rather it managed the repayment through seven tranches between October 2013 and May 2014.

Justice Stephen Kos, president of the appeal court, said he had summarised Wilaci's appeal case in five points. Wilaci has relied on the Australian Federal Court's 2015 decision in Paciocco v ANZ Banking Group, where it was found that late fees charged by the bank on credit card payments weren't penalties and therefore were enforceable, in its arguments in the High Court and the appeal court yesterday.

"The first is that in Paciocco, to be a penalty, the sole purpose of the provision must be functional," Justice Kos said. "The test is not simply whether the provision is designed to incentivise payment on the due date. Third, the relevant interests of the innocent party go beyond simply breaching damages otherwise payable. That may be particularly in the case where the parties are substantial, sophisticated commercial entities. The trend seems to be to constrain the doctrine rather than to expand it, and it is easier to justify the doctrine in a consumer context than a commercial one."

Wilaci is also arguing that to be a penalty, the fee charged "would need to be out of all proportion to the innocent party's legitimate commercial interests," Justice Kos said, which the appellant's Sydney-based lawyer, David Jackson QC, agrees with.

Justice Forrest Miller grilled Bruce Stewart QC, one of Pyne Gould's lawyers, on whether Grill's capital had been placed at risk.

"Now we're talking about $37 million being at risk, and we're gauging the reasonableness of this fee against that context. Isn't this your essential problem? We're not talking about damages on the assumption that $37 million has been repaid, we're talking about $37 million being at risk," Justice Miller said.

Mr Stewart said that didn't affect whether the payment was a penalty or not but Justice Miller said it was important to the question of whether the payment was "extravagant or unconscionable."

Justice Kos questioned why Mr Kerr had not taken a loan elsewhere when the fund couldn't pay back the money within the 60-day loan period.

"Sixty-one days into the transaction, he could have taken this to another banker and got a presumably more expensive funding option," Justice Kos said. "Instead he has essentially gained the prospect of being able to set aside the continued financing effect on the basis it's a penalty. He gets the money on that basis – 1.5% above market – that's a very cheap rate in the circumstances."

Stephen Hunter, the other lawyer for the respondent, said the capital wasn't necessarily at risk despite the fund not meeting the payment obligations as Torchlight had assets but not cash.

"When we're talking about a fee for late repayment, you have the damages recoverable in law, which in this case is either the cost of getting the money elsewhere or the interest costs Wilaci itself was incurring from Credit Suisse, which was $1.8 million – measure that against the penalty, which is $31 million," Mr Hunter said.

The hearing is set down for two days and is continuing.


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Sophie Boot
Wed, 05 Oct 2016
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Wilaci argues $A33.6m sought from PGC was not a penalty fee