Commonwealth Bank of Australia v Renstel Nominees Pty Ltd [2001] VSC 167
In the Supreme Court of Victoria, on a trial of a bank's claims and of liability on the counterclaim, Byrne J held that the bank validly cancelled an overdraft under an express discretionary right, which was not displaced by rectification, implied terms or estoppel [9], [38], [40], [45], [46], [89]. Accepting that the discretion had to be exercised reasonably and in good faith, his Honour found the cancellation not vitiated, because the bank could have regard to its own legitimate commercial interests [47], [96], [99].
What the court decided
The Commonwealth Bank, as successor to the State Bank of Victoria, sued the Stella Group companies and Mr and Mrs Stella for moneys due and possession of mortgaged land [2]. On 16 January 1991 the bank told Mr Stella and other representatives of the defendants at a meeting that Renstel's overdraft facility was withdrawn from 4.30 pm that day [1]. On the following day the bank demanded payment of the overdraft, then overdrawn to $281,393 [1].
The letter of offer of 14 October 1988 created bill and overdraft facilities which were not interchangeable [15]. It reserved to the bank a discretion to cancel the overdraft, while the bill facility was evergreen subject to satisfactory annual review [15].
Rectification for an alleged pre-agreement for one interchangeable evergreen facility failed, as Mr Stella was told of and accepted the changes [11], [36], [38]. A term that the overdraft could not be cancelled until the whole facility expired was contrary to the express term and unnecessary for business efficacy [40].
The bank accepted that the customer was entitled to reasonable notice, meaning time to put in place the mechanics of payment [41]. Applying Bunbury Foods Pty Ltd v National Bank of Australasia Ltd, his Honour said insufficient notice does not affect the demand's validity [41]. On the facts the customer had had abundant time to comply before any enforcement step, so this point failed [41], [92]. The defendants argued that the bank also had to give 12 months' notice of its intention to cancel [42]. That failed because the contract expressly reserved the discretion to cancel and no purpose required the overdraft to be available for a period [42], [44]. As in Williams and Glyn's Bank Ltd v Barnes, the express term was also decisive [46]. The debt became due on cancellation but was not payable, and the security not enforceable, until the customer had time to arrange payment [45].
The estoppel by common assumption failed because Mr Stella knew the overdraft stood apart from the other facilities [85]. No clear and unequivocal representation was shown before the agreement [86]. A letter of 19 March 1990 said nothing about interchangeability, and its statement that the facilities were evergreen was qualified by its reference to the 14 October 1988 letter [87]. Reliance on it to Mr Stella's detriment was not shown, and the right to cancel was unaffected by any estoppel [88], [89].
Faced with the line of authority following Renard Constructions (ME) Pty Ltd v Minister for Public Works, his Honour accepted that the bank's decision whether to cancel was subject to a requirement of reasonableness and good faith, leaving aside what that meant in this contract [47]. In exercising its discretion the bank "was entitled to have regard to its own legitimate commercial interests" even if inimical to Renstel's [96]. Matters the defendants raised as showing a lack of good faith or reasonableness, including the imposition of credit conditions in October 1990, which his Honour found explicable as an effort to keep the Stella Group afloat, and misstatements in internal memoranda, which he found were directed more to the officers protecting themselves from criticism, did not alter that conclusion [94], [97]. The cancellation was not vitiated by any want of reasonableness or good faith [99].
Neither event of default the bank invoked was made out [100], [101]. The possession claims for the Anglesea and Rosanna land rested on separate home loan mortgages outside the facility agreement, and succeeded [104], [105], [107], [108], [110], [111]. Renstel was liable for the amounts due under the overdraft account and the bill facility [112], [114]. Each other defendant was equally liable for those sums under the cross-guarantees and securities [113], [115].
On the counterclaim, the bank had breached the agreement by rolling over bills for only seven days without authority [116]. The other breaches alleged and the remaining counterclaims, including negligent misstatement, were rejected [116], [120], [121], [126], [128], [132], [133]. His Honour would hear counsel on the form of the judgments, present indebtedness, whether and how causation and quantum for that breach should be dealt with and on costs [134].
Why it matters
The decision shows how hard it is to cut down an express reservation of a discretion to cancel an overdraft by implication, estoppel or the evergreen character of other facilities. Even where a duty of reasonableness and good faith is accepted, a bank protecting its legitimate commercial interests against a deteriorating exposure may satisfy it. Following Bunbury Foods, insufficient notice does not invalidate a demand but delays enforcement of security, and on his Honour's conclusion the debt is not payable until then [41], [45].
Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.