Blackbird default interest rate struck down as penalty

The Supreme Court of New South Wales has ruled that a secured lender cannot recover interest at a default rate of 4% per month, finding that the doubling of an already substantial commercial lending rate was an unenforceable penalty. The decision provides a warning to private lenders and insolvency practitioners that contractual default rates must be supported by a credible commercial rationale, particularly where loan documents separately permit the recovery of enforcement, professional and legal costs.

Justice Muston held that Blackbird First Mortgage Corporation Pty Ltd remained entitled to recover the unpaid principal advanced to Cam Engineering & Construction Pty Ltd, together with interest at the ordinary rate of 2% per month and possession of a residential property securing the loan. However, the court rejected Blackbird’s attempt to recover default interest equivalent to 48% annually, before monthly compounding, as well as more than $145,000 in investigating accountant and solicitor fees that the Court found had not been adequately substantiated.

Blackbird advanced approximately $290,000 to Cam Engineering in December 2023 to refinance an earlier loan made by a related Blackbird entity. The loan was supported by guarantees, a general security agreement and a registered mortgage over a residential property owned by director Craig Bateman.

The facility carried interest of 2% per calendar month and was due to be repaid in June 2024. Cam Engineering failed to repay the advance, although interest payments continued at the ordinary rate until August 2024.

Blackbird later issued demands and a notice under section 57 of the Real Property Act 1900, claiming that the secured money exceeded $464,000 as of November 2024. Enforcement action under the general security agreement subsequently produced recoveries of approximately $132,000 in March 2025 and $140,000 in May 2025.

The borrowers did not seriously dispute Blackbird’s entitlement to the remaining principal or possession of the property. The contest centred on the amount of the judgment, including whether Blackbird had proved additional professional fees and whether its default interest regime was enforceable.

Blackbird relied on an affidavit from director Stewart Wilkinson and two loan account statements, one calculated using the default rate and the other using the standard rate. It argued that the documents amounted to a conclusive certificate under a “Dobbs clause” in the mortgage.

Justice Muston rejected that argument. The statements included debits of $101,892.76 described as investigating accountant fees and $44,000 described as solicitor fees, but the evidence did not establish what work had been performed or what amounts Blackbird had actually paid or incurred.

An engagement letter estimated investigating accountant fees of between $40,000 and $50,000, but there was no evidence of the work ultimately completed or the fees charged. The evidence was similarly silent regarding the legal work underlying the solicitor fee entries.

The affidavit and account statements also did not conclusively state a single amount owing. Instead, they presented alternative calculations based on competing assumptions about the applicable interest rate.

Justice Muston said that was not the type of certificate contemplated by the mortgage. The Court also refused a late attempt by Blackbird to reopen its case and tender a more formal certificate, finding that doing so after the borrowers’ submissions had concluded would have unfairly altered the forensic landscape.

On default interest, the Court noted that the loan rate rose from 2% to 4% per month following default. Monthly compounding meant the balance could increase by approximately 60% over 12 months.

Although higher prospective interest rates are not automatically penal, Justice Muston found that the increase was not a modest adjustment reflecting a deterioration in credit risk. The scale of the uplift shifted the evidentiary burden to Blackbird to explain its commercial basis. However, Blackbird did not provide evidence about comparable lending rates, its cost of funds, risk-based pricing, lost lending opportunities, increased administrative expenses or any other financial basis for doubling the rate.

The Court also noted that the loan already required the borrowers to indemnify Blackbird for a broad range of enforcement, professional and legal expenses. Those costs therefore could not justify the interest increase.

The loan itself refinanced an earlier facility that was already in default, meaning the borrowers presented a weak credit risk when the replacement loan was entered into. In those circumstances, Justice Muston found that the borrowers’ later default did not explain a further doubling of the interest rate. “In the absence of any other explanation”, the Court concluded that the real purpose of the increase was to deter non-compliance and that the default rate operated in terrorem.

The Court nevertheless upheld the provision requiring monthly compounding after default. Because interest was payable monthly in advance, unpaid interest deprived Blackbird of money it could have reinvested or lent elsewhere. Compounding therefore reflected a reasonable estimate of that loss and was not inherently penal.

The offending reference to the 4% default rate could be severed without invalidating the rest of the clause. Interest consequently continued to accrue at the ordinary 2% monthly rate and compounded monthly after the borrowers stopped making interest payments. The parties were directed to calculate the amount of the judgment based on those findings and agree on orders.

Read the decision here.

Nicholas Simpson and Mathew Short, both of 13th Floor St James Hall, and Alvaro Edwards Solicitors acted for Cam Engineering and Construction Pty Ltd, Craig Bateman, Sarah Bateman, and CMB and SSB Investments Pty Ltd.

Andrew Berriman of 9th Floor Selborne Chambers and Gadens acted for Blackbird First Mortgage Corporation Pty Ltd.