Interest rates and penalties – the importance of proportionality

A decision of the Supreme Court of New South Wales in Bhundia v Sommers (No 4) [2021] NSWSC 455 (Bhundia) considered the applicability of the rule against penalties in the context of an unsecured loan from an overseas lender on short notice. We provide a rundown of the case and its implications for lenders and borrowers generally.

In this case, Justice Adamson held that there was insufficient evidence to conclude that the 30% per annum default interest rate payable under the Loan Agreement (as defined below) was a penalty.


  • Sundip Bhundia (Lender), based in Switzerland, loaned US$500,000 to an Australian company, Propertybay Holdings Pty Ltd (Borrower), under a loan agreement dated 30 December 2018 (Loan Agreement).
  • The Loan Agreement was entered into between the Lender, Borrower, Timothy Sommers and Sean Neylon (both based in Australia) (together, the Defendants), who were the directors of the Borrower and shareholders of 50% of the issued shares in the Borrower. The Loan Agreement was entered into:
    • on short notice; and
    • without the Lender obtaining security.
  • Each Defendant provided the Lender with a personal guarantee in connection with the Borrower’s obligations.
  • On 3 January 2019, the parties executed a variation agreement increasing the loan amount to US$630,000 with a fixed interest amount of at least US$189,000 (the total amount repayable being at least US$819,000).
  • The Lender was permitted to make the principal and any interest immediately due and payable where a default subsisted. Such amounts were to accrue interest at the rate of 30% per annum.
  • The Lender demanded that the Borrower repay all amounts owing under the Loan Agreement (as varied) pursuant to a notice of default dated 1 February 2019, with further letters of demand served on the Borrower on 26 February 2019 and 18 March 2019.
  • Despite this, no amounts were repaid to the Lender, the Borrower was wound up on 22 July 2019, and a statement of claim was filed on 23 July 2019 by the Lender against the Defendants claiming US$925,076.38 (Debt) under the guarantee.
  • At issue was whether the calculation of the Debt, which included interest accruing at the default rate, was a penalty.



Justice Adamson held that the interest provision was not a penalty. In particular, she held that the Defendants did not discharge their onus of proving that the interest rate was ‘out of all proportion’ to a genuine pre-estimate of the Lender’s damages (at [39]) given the time pressure, nature, and risk of the advance.


The key takeaways are that:

  • genuine pre-estimate: where an interest rate is a genuine pre-estimate of damages, or not out of all proportion to the legitimate commercial interests of a lender, a Court is unlikely to intervene and rule the applicable provision a penalty. In this case, given that the loan was requested on short notice from an overseas lender and that the facility was unsecured, the high interest rate was not ‘out of all proportion’ to this pre-estimate or the Lender’s legitimate commercial interests; and
  • onus: the onus is firmly on a party claiming a provision is penal to prove that the provisions are penal.

Legal principles

Justice Adamson also summarised the key legal principles underpinning penalties, being:

If you would like help with any aspect of a loan transaction, please contact our team who can assist you navigating these legal principles and loan transactions more broadly.


Emma Woolley

Partner & Head of Family Office Advisory

Karl Rozenbergs

Partner & Co-Lead, Health & Community

Ben Hamilton

Partner & Technology and Digital Economy Co-Lead

James Deady

Partner & Technology and Digital Economy Co-Lead

Eugene Chen

Partner & Head of China Practice

Oliver Jankowsky

Partner & Head of International Practice

John Bassilios

Partner & Fintech and Blockchain Lead

Matthew Curll

Partner & Insurance National Practice Leader

Melanie Smith

Director – Business Development, Marketing and Communications

Natalie Bannister

Partner & Commercial National Practice Leader

Nathan Kennedy

Partner, Head of Pro Bono & Community and ESG Co-Lead

William Moore

Partner & Head of Private Clients Advisory

Mark Dessi

Partner & Energy Leader

James Bull

Special Counsel & Frank Lab Co-Lead

Melanie James

People & Culture Manager

Jacqui Barrett

Partner & Head of US Desk

Lauren Parrant

Senior People & Culture Advisor

Melinda Woledge

Marketing & Communications Manager

Jasmine Koh

Senior Associate & Frank Lab Co-Lead

Alison Choy Flannigan

Partner & Co-Lead, Health & Community

Jordon Lee


Geoff Benson


Meg Lee

Partner & ESG Co-Lead

John Gray

Partner, Technology & Digital Economy Co-Lead and NSW Government Co-Lead

Harvey Duckett


Luke Denham


Billie Kerkez

Manager – Smarter Recovery Solutions

Jemima Whiteman


Bradley White


Sarah Khan


Audrey Leahy

Special Counsel & Head of Irish Desk

Nicole Tumiati

Partner & Retail & Consumer Goods Leader

Marie Mitilineos


Gloria Tam


Peter Jones

Senior Commercial Counsel

Eden Winokur

Partner & Head of Cyber

Jennifer Degotardi

Partner & NSW Government Co-Lead

Sheldon Fu


Claire Bourke


Chloe Taylor


Silvana Brcina


Daphne Schilizzi


Andrew Banks


Isabella Urso


Jessica Liu


Amelia Spratt


Lisa Ziegert

Director – Client Solutions

Luke Raams


Emma McDonald


Carl Ayers


Maddison Reznik

Senior Associate & Trade Marks Attorney

Rebecca Dodd


Ruby Hunt

Pro Bono & Community Co-ordinator

Rachel Bonic


Samantha Frost


Emma Bechaz


Matt Dolan


Luke Hefferan


Related practices

You might be also interested in...

Financial Services | 26 May 2021

Financial Services in Focus – Issue 54

In this edition, we consider the Budget’s commitments to funds management and foreign financial services providers, a case on defective PDS disclosure, the exposure draft Your Future, Your Super regulations and much more.

Financial Services | 24 May 2021

Implementing the DDO regime: hidden complexities to be aware of

In this article, we look at some of the hidden complexities in the new DDO regime.