Following
a Court of Appeal hearing, George Kerr’s Torchlight Fund was ordered to pay over
$A31 million penalty interest for defaulting on a short-term loan made by
wealthy Australian businessman John Grill.
Torchlight took out a
sixty day loan of $A37 million in 2012 to bridge a liquidity crisis, agreeing
to extra payments of $A500,000 per week for any late repayment. Torchlight turned to Mr Grill, with his
estimated personal net wealth of $A780 million, as lender of last resort to
complete its purchase of distressed debt from Bank of Scotland. Major financial institutions were unwilling
to deal with Mr Kerr. He was then
subject of a Financial Markets Authority investigation.
The Court of Appeal was
told Torchlight was 19 months late in making final repayment. It refused to pay penalty interest saying a
late payment fee at $A500,000 per week was exorbitant and unconscionable. This fee was enforceable, the Court
ruled. It supported the legitimate
commercial interests of Mr Grill, encouraging due performance by Torchlight.
While an excessively
high interest rate would likely be struck down as exorbitant in a commercial
transaction, these were unusual circumstances, the Court ruled. Mr Grill was not normally in the position of
making commercial loans. Torchlight knew
he was looking for a better return than a commercial lender would require. It was unlikely any bank or commercial lender
would provide Torchlight the level of finance sought. The transaction was very high risk.
The Court was told cost
of credit for the original sixty day loan had an effective annual interest rate
of 87.46 per cent. The effective
interest rate for late payment at $A500,000 per week was lower. This late payment fee was enforceable. The fee recognised Mr Grill’s legitimate
interests as reflected by market realities, the level of risk and potential
costs of recovery, the Court said. Mr
Grill also took a charge over all Torchlight assets as further security for the
loan. Enforceability of this security is
now before the courts. Torchlight’s secured
assets disappeared in late 2012, transferred to a new Cayman Islands entity.
The size of the $A31
million penalty on top of the original loan is the direct result of Torchlight’s
decision to argue over payment, the Court said.
Wilaci
Pty Ltd v. Torchlight Fund No.1 – Court of Appeal (2.05.17)
17.037