The Court of Appeal has ruled that a lender can issue an acceleration notice without waiting for a Property Law Act (PLA) notice to expire. A lender can also include the acceleration notice in its PLA notice.
The judgment overturns an earlier decision by the High Court and restores a crucial right to bankers and other lenders.
A lender accelerates a loan after a default by requiring all future payments to be paid immediately. Where the loan is secured by a mortgage, a PLA notice is required before any acceleration is effective, except where the lender holds a general security interest over a corporate borrower.
Mr Koroniadis was the guarantor of a commercial loan given by the bank to his company and secured against a mortgage over the company’s property. The company defaulted and the bank took the usual steps as required by the PLA: it served a demand on the company, served PLA notices in respect of its mortgage, and attempted (with some difficulty) to serve PLA notices on Mr Koroniadis in connection with his guarantee.
The bank then sought to bankrupt Mr Koroniadis as a means to recover under the guarantee. Mr Koroniadis went to court to defeat this, representing himself. The Judge in the lower court stayed the bankruptcy application to allow Mr Koroniadis to appeal to the Court of Appeal out of time.
In doing so, the Judge suggested to Mr Koroniadis an additional ground of appeal, namely that the bank had not waited until the expiry of a PLA notice before accelerating the loan by way of a further, separate notice. This was effectively where another lender had run aground in the High Court, in the earlier ANZ v Boyce litigation.
For our commentary on the High Court decision, click here.
The Court of Appeal decision
The Court of Appeal was very clear that a further notice was not required to accelerate the loan after the expiry of the PLA notice, saying:
There is no reason in principle why a notice issued under s 119 to comply with s 120 of the PLA cannot also satisfy the requirement for a demand to call up the principal under the term loan, provided it has that effect. Section 120(1)(d) confirms that the notice can address various consequences.
The PLA notice served by the bank, as drafted, did spell out such a consequence. Accordingly, from the time that it expired, the bank’s loan was payable in full and the bank was entitled to sell the mortgaged property and to pursue Mr Koroniadis under his guarantee.
Responding to another of Mr Koroniadis’s arguments, the Court said that the late service of the PLA notice on Mr Koroniadis (as guarantor) was not a problem for the bank. The fact that the period in the notice had expired by the time the bank could serve Mr Koroniadis did not matter, as the bank had not sold the property at that stage.
Chapman Tripp comments
The Court of Appeal’s approach effectively overrules the ANZ v Boyce decision. In our view it better reflects how the statute is drafted. It is also more pragmatic, and in accordance with usual practice.
Although not expressly referenced by the Court of Appeal, it’s worth noting the policy intention behind the Act is to protect the borrower against the potential hardship and prejudice caused by a lender accelerating a loan. It is not intended to provide a list of technical defences to summary judgment where such prejudice is absent. The key thing is that the guarantor be allowed an opportunity to refinance or negotiate another solution with the bank. On the facts, Mr Koroniadis had not lost that opportunity.
Notwithstanding the Court of Appeal’s approach in Koroniadis, lenders need to be very careful about both drafting and sequencing when preparing enforcement notices. Much can turn on how the loan contract is drafted.
Some loan contracts say that acceleration is automatic, arising without need for further notice or demand. Where this is not the case, lenders will need to consider whether acceleration is required. If so, an acceleration notice will be necessary. While that can form part of the PLA notice, for clarity lenders may be better to issue two notices:
the PLA notice itself (which must still warn that, among other things, acceleration is a forthcoming consequence), and
a separate acceleration notice (as required by the loan contract).
What is now clear - thanks to Koroniadis - is that those notices can be served at the same time.