The importance of loan documents
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- Published Date
- Written by Simon Ezekiel
Vouzas & Anor v Sibonna Nominees Pty Ltd [2011] VSC 261
In Vouzas & Anor v Sibonna Nominees Pty Ltd [2011] VSC 261 (“Sibonna”), Sibonna lent money to a potential business partner, “Vouzas”. The debt was to be secured by a mortgage over Vouzas’ parents’ property in Albert Park, Melbourne and the terms of the loan was evidenced by emails and correspondence between Vouzas and the director of Sibonna. The mortgage was subsequently registered with the Land Titles Office and Sibonna believed that this together with the correspondence was sufficient to secure the debt.
When Vouzas defaulted on the loan repayments Sibonna exercised its power of sale as mortgagee and the property was subsequently sold at auction. The parents initiated proceedings against Sibonna seeking reimbursement of the sale proceeds. According to the parents the registered mortgage secured “nothing”. They had not signed any agreement or guarantee with Sibonna other than the mortgage of land document and were not parties to the correspondence outlining the terms of the loan.
The Court held in favour of the parents.
Finding
Sibonna argued that the parents could not deny that the debt was due as a Mortgage of Land document (that had the loan amount written on it) had been signed by them. The Court disagreed and held that the Memorandum of Common Provisions (“MCP”), annexed to the mortgage of land document, required the parents to be parties to a credit contract or guarantee before they could be held to be indebted to Sibonna.
It was the failure to document the agreement appropriately that led the Court to find against Sibonna.
In its finding the Court took into account that the parents did not know or understand the purpose of the documents and that they had not intended to provide their property as security.
How Sibonna could have avoided this outcome
- Sibonna should have investigated whether Vouzas had the authority to pledge his parents’ security;
- Prepared a loan contract and/or guarantee for the parents to execute; and
- Requested that the parents obtain independent legal advice before signing any documentation.
If Sibonna had undertaken these steps, the parents would have lost their rights under equity and would not have been able to deny their obligations under the mortgage documents.
If you are in the business of lending monies we strongly suggest that you obtain legal advice to ensure that your position is secure.
This article is intended to provide general information only and is not a substitute for legal advice. To obtain legal advice tailored to your situation please contact the author.
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