48% and Void: When “Default Interest” Becomes an Unenforceable Penalty

Blackbird First Mortgage Corporation Pty Ltd v Cam Engineering & Construction Pty Ltd [2026] NSWSC 876

Chamberlains Insolvency & Strategic Advisory | Case Note

Private and non-bank lenders live and die by two things: watertight security documentation and the ability to prove, quickly and conclusively, exactly what they are owed. A recent decision of the Supreme Court of New South Wales is a pointed reminder that both can fail at the worst possible moment, and that an aggressive default interest rate can be struck out as a penalty even where the borrower has clearly defaulted.

In Blackbird First Mortgage Corporation Pty Ltd v Cam Engineering & Construction Pty Ltd [2026] NSWSC 876, Muston J entered judgment and ordered possession for the lender, but slashed the amount recoverable, disallowing more than $145,000 in claimed fees and voiding a 48%-per-annum default interest rate as an unenforceable penalty.

Here is what happened, and what it means for anyone lending on security.

The facts in brief

In late 2023, Blackbird advanced funds to refinance an earlier loan that Cam Engineering had already defaulted on. The refinance was documented by a Deed of Secured Loan, a General Security Agreement, personal guarantees, and a registered mortgage over a director’s Central Coast home. The advance of $290,148.47 was drawn down in December 2023 and fell due six months later.

The commercial terms were steep: a standard interest rate of 2% per calendar month (24% p.a.), doubling to a default rate of 4% per calendar month (48% p.a.), compounding monthly. The borrowers paid interest at the standard rate until August 2024, then stopped. Blackbird’s receivers issued demands, served a default notice under s 57(2)(b) of the Real Property Act 1900 (NSW), recovered some funds through the security, and sued for the balance plus possession.

The borrowers did not seriously contest the lender’s entitlement to judgment or possession. The fight was about quantum, and it turned on two issues that should concern every secured lender.

Issue 1: The “Dobbs certificate” that was not

Most well-drafted facility and mortgage documents include a conclusive evidence clause, often called a “Dobbs clause” after Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643, allowing the lender to certify the amount owing and have that certificate treated as binding, avoiding a line-by-line evidentiary contest over the debt.

Blackbird had exactly such a clause (cl 16.1 of the mortgage). But instead of issuing a certificate that conformed to it, the lender relied on a director’s affidavit exhibiting two “loan account statements.” The Court held that this did not satisfy the clause, for three reasons:

• The material did not state the amount owing at all. It quantified the debt on two alternative interest assumptions, which is not what a conclusive certificate does;
• Simply labelling line items “IA Fees” (investigating accountant) and “Solicitor Fees”, without evidence the costs were actually incurred or how they fell within the security, was not enough to bring them home; and
• A belated attempt to tender a properly drafted certificate mid-hearing was refused on procedural fairness grounds, as it came too late for the borrowers to meet.

The result: Blackbird could not recover the disputed fees (two “IA Fees” of roughly $102,000 and two “Solicitor Fees” totalling $44,000) as part of its judgment. As Muston J observed, echoing Hoho Property v Bass Finance, the validity of a Dobbs certificate depends on whether it conforms to what the parties stipulated. Form matters.

The lesson: a conclusive-evidence clause is only as good as the certificate you actually issue under it. An affidavit “in substance” is not a substitute, and you cannot fix the defect on the run at the hearing.

Issue 2: When does default interest cross the line into a penalty?

The more significant holding concerns the doubling of the interest rate on default. The penalty principles were not in dispute (Dunlop, Ringrow, Andrews and Paciocco), and neither was the starting point: the onus of proving a provision is a penalty sits on the party asserting it. But where a clause is “sufficiently heinous on its face,” the evidentiary burden shifts to the lender to justify it.

The borrowers argued the jump from 24% to 48% p.a., around 60% p.a. once monthly compounding is factored in, did exactly that, and pointed to eight matters peculiarly within the lender’s knowledge that Blackbird had simply not addressed in evidence: the market for comparable lending, any risk-based pricing model, whether its cost of funds actually rose on default, opportunity cost, enforcement-cost escalation, any genuine pre-estimate of loss, and any rationale for compounding only on default.

Muston J agreed. A doubling of an already-substantial rate is not the “small rateable increase” that Lordsvale Finance v Bank of Zambia treats as commercially benign. It was disproportionate enough to shift the evidentiary burden, and Blackbird, having led almost no evidence, failed to discharge it. Critically:

• The lender’s costs of default were already covered by separate indemnity clauses, so the uplift was not explained by expense recovery; and
• Because this was a refinance of a loan the borrowers had already defaulted on, they were a poor credit risk at origination, so the “worse credit risk on default” rationale carried little weight.

The Court concluded the only real purpose of the doubling was to deter default, imposed, in Lord Dunedin’s language, in terrorem. The Default Interest Rate was therefore an unenforceable penalty.

The compounding twist, and the power of the blue pencil

Two features of the decision make it especially useful for lenders.

Compounding survived. Muston J found nothing inherently penal in compounding unpaid interest monthly. It reflects a reasonable pre-estimate of the lender being kept out of its money (consistent with B&G Properties v Fayad). It was the rate uplift, not the compounding mechanism, that offended.

Severance saved the rest of the clause. Rather than voiding the entire default-interest clause, the Court used the contract’s own severability provision (cl 16.6) to blue-pencil only the offending sentence imposing the 4% default rate. The borrowers’ argument that the whole clause must fall was rejected, as was the suggestion that no interest was payable. Interest therefore continues to run at the standard 2% rate, and continues to compound monthly, from the date of default.

The lender won possession and judgment, just not on the punitive terms it had written.

Key takeaways for lenders and their advisers

1. Draft, and actually issue, a conforming Dobbs certificate. Do not rely on an affidavit that merely reproduces a ledger. The certificate must state the amount owing and match the clause’s form.
2. Evidence your default line items. “IA Fees” and “Solicitor Fees” will not be recovered on the strength of a label. Keep records that prove the cost was incurred and falls within the security.
3. A big rate uplift needs a business case. If your default rate is a material multiple of the standard rate, be ready to justify it with evidence: cost of funds, credit-risk repricing, market comparables. Silence shifts the burden to you, and you may lose.
4. Compounding is defensible; punitive uplifts are not. The mechanism that keeps you whole for lost use of money is fine. The mechanism designed to punish is vulnerable.
5. Include a robust severability clause. It may be the difference between losing one sentence and losing your entire default-interest regime.
6. Fix problems before the hearing. Courts will refuse late attempts to re-cast your case where it is unfair to the other side.

How Chamberlains can help

Our Insolvency & Strategic Advisory team acts for lenders, borrowers, receivers and insolvency practitioners across secured lending, enforcement and recovery. We review facility and security documentation before it is deployed, prepare enforcement evidence that stands up in court, and advise on penalty risk and recovery strategy when a loan turns bad. If your default-interest and conclusive-evidence provisions have not been stress-tested against decisions like Blackbird, now is the time.

This article is general information only and is not legal advice. It summarises Blackbird First Mortgage Corporation Pty Ltd v Cam Engineering & Construction Pty Ltd [2026] NSWSC 876 (Muston J, 23 July 2026).