IN THE COURT OF APPEAL OF
THE REPUBLIC OF VANUATU
(Appellate Jurisdiction)

CIVIL APPEAL CASE No.09 OF 2008

BETWEEN:

NATIONAL HOUSING CORPORATION
Appellant

AND:

HENRY TOKON
Respondent

Coram:	Chief Justice Vincent Lunabek
Justice John von Doussa
Justice Oliver Saksak
Justice Ronald Young

Counsel:	Mr George Nakou for the Appellant 
Mr Stephen Joel Tari for the Respondent 

Date of hearing:	4th December 2008
Date of judgment:	4th December 2008 

JUDGMENT

Introduction

The National Housing Corporation (NHC) lent 1,450,437 Vatu to Mr Tokon to build a house on a leasehold title in Port-Vila. The Loan Agreement required Mr Tokon to pay to the Appellant 16,000 Vatu per month being principal and interest on the loan. He fell into arrears of payment. The NHC sued Mr Tokon seeking an order for sale of the property and payment of the arrears under the loan. 

Justice Bulu dismissed the claims on a preliminary point finding the Loan Agreement breached Section 4 of the National Housing Corporation Act [CAP.188] in that the interest rates charged on the loan meant the Appellant would make a prohibited profit on the loan transactions.

Facts

In 1998 Mr Tokon had a partially built house. He applied to NHC for a loan to complete the house. The house was on the leasehold land of the NHC. The NHC agreed to lend 1,460,433 Vatu to Mr Tokon. Eventually the NHC transferred the lease hold interest in the land to Mr Tokon. A mortgage was signed noting that the Appellant had lent Mr Tokon 1.4 million Vatu. The mortgage was registered against the title to the land securing the advance. 

Mr Tokon agreed to repay the principal and interest at 16,000 Vatu per month. The interest rate was 10% and if the loan was in default for more than one month the default interest rate was 14%. 

Unfortunately, after some years, the Respondent’s payments became erratic. By March 1994 he still owed 1,391,196 Vatu to the NHC. His monthly payments did not even cover the interest payment due on the loan (now in default). From 1998 to 2007, Mr Tokon made no payments under the mortgage. The amount owing has been steeply increasing. At trial the amount said to be owed was almost 4,800,000 Vatu. 

Judgment appealed against

In his Judgment of May 2008, Justice Bulu identified a preliminary issue for a resolution as: 

"Is the National Housing Corporation making a profit through interest rates and surcharges under the Loan and Mortgage Agreements?" 

We consider, by framing the question for consideration in this way, the Judge fell into error. To identify why we turn firstly to the National Housing Corporation Act. The NHC was established as a body corporate (s.2) to be responsible for carrying out Government policy in housing. It is subject to the direction of the Minister to execute the policy of the Government in relation to housing: s.3. 

Section 4 provides for the functions of the corporation. S.4(3) states: 

"4(3)	In exercising its functions, the Corporation shall endeavour so far as is practicable with the need to provide housing at a minimum cost to purchasers to balance its income and expenditure taking 1 year with another. It shall not be an object of the Corporation to make a profit."

The Respondent’s argument before the Supreme Court was deceptively simple. He claimed that the final sentence of section 4(3) instructed the Corporation not to make a profit. Counsel submitted that it was clear from the appellant’s claim that it was making profit from Mr Tokon’s loan. He said the original loan had been for just over 1.4 million Vatu. In the 19 years of the loan Mr Tokon had made payments of approximately 1.1 million Vatu and therefore should only have owed 300,000 Vatu at the end of the 19 years. 

Thus the respondent said the Appellant’s claim now for 4.8 million Vatu had a profit portion of at least for 4.5 million Vatu (4.8 million Vatu less the 300,000 Vatu). This, the respondent said, was prohibited by s.4(3) of the Act. 

The Judge accepted, on the basis of this calculation that the Corporation must be making a profit which he said s.4(3) specifically prohibited. The Judge concluded therefore that the "main proceeding in my view must fail". He invited counsel to identify what money was outstanding under the loan.

Discussion

Section 4 sets out in a general sense what the Corporation is to do. Subsection 3 is concerned with the exercise of those functions. The Corporation is to provide access to inexpensive housing. In doing so it is to balance income and expenditure from year to year. As to a profit, it is "not to be an object of the Corporation". 

The first point to note is ss.3 does not say the Corporation cannot make a profit. It simply says that it is not to be an object of the Corporation. The Judge was wrong when he said ss(3) prohibited the Corporation making a profit.

Secondly, the "profit" direction in ss.3 can have no application to individual transactions undertaken by the Corporation. It is a general expression addressed to the Corporation itself; that profit is not to be an object of its functioning. The subsection is not a direction to the Corporation that it must not make a "profit" in any individual contract. The Judge was wrong therefore to apply the statutory object (or absence of it) to a particular client of the Corporation.

Thirdly, even if ss.3 were able to be applied to an individual case, in practice it would be impossible to determine whether in each such case the Corporation had made a profit.

There is no definition of "profit" in the Act. In this case the Judge seemed to accept that any requirement that a borrower make any payment beyond a capital payment was making a profit. That cannot be correct. Even for the Corporation to balance the income and expenditure, and therefore not make a profit, the Corporation would have to be able to charge the borrower the same cost of capital they incur, plus a risk factor, and a share of the administrative costs of running the Corporation. Where, as here, the borrower is in arrears the Corporation will have extra costs including an increase in the cost of capital and an increase in administration costs. This illustrates that the mere fact the Corporation charged interest and default interest on the loan does not mean the Corporation made a profit. There was no evidence which would enable an assessment of whether a "profit" was made on Mr Tokon’s loan in any event. The Judge was therefore wrong to assume payment of interest and penal interest meant the Corporation made a "profit" on MrTokon’s loan.

In summary therefore:

(a)	Section 4(3) does not prohibit the corporation from making a profit. It merely provides that making a profit is not an object for the Corporation;

(b)	Section 4(3) is a general direction to the Corporation. It cannot apply to an individual transaction;

(c)	In any event there is no evidence the Corporation did or will make a profit with respect to Mr Tokon’s loan.

Result

For these reasons therefore the appeal is allowed. We set aside the decision of the Judge.

The original proceedings sought judgment for 1.8 million Vatu in the appellant’s favour together with an order for sale of the property. The amount sought was increased at trial to 4.8 million Vatu. Because the issue in this appeal was decided as a preliminary issue the Judge did not consider whether the quantum claimed by the NHC was accurate nor whether an order for sale was appropriate. The appropriate course therefore is to refer the matter back to the Supreme Court to assess the accuracy of the sum claimed by the NHC. Clearly a significant sum remains owing by Mr Tokon. Without payment it is difficult to see how he can resist a sale of his interest in the property. However that is properly left for enforcement proceedings.

The Supreme Court Judge’s costs order is set aside. The appellant is entitled to costs against the respondent on this appeal to be agreed or taxed.

DATED at Port-Vila this 4th day of December 2008

BY THE COURT

Hon. Vincent LUNABEK CJ
Hon. John von DOUSSA J
Hon. Oliver SAKSAK J
Hon. Ronald YOUNG J