Knowles v Victorian Mortgage Investments Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL COURT LIST C

No. 3210 of 2011

MARY KNOWLES	Plaintiff
v
VICTORIAN MORTGAGE INVESTMENTS LIMITED	First Defendant
THE REGISTRAR OF TITLES	Second Defendant

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JUDGE:	CROFT J
WHERE HELD:	Melbourne
DATE OF HEARING:	29 August 2011 and by written submissions received on 11 October, 25 October and 3 November 2011
DATE OF JUDGMENT:	20 December 2011
CASE MAY BE CITED AS:	Knowles v Victorian Mortgage Investments Ltd & Anor
MEDIUM NEUTRAL CITATION:	[2011] VSC 611	First Revision: 21 February 2012

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CONSUMER CREDIT - Application of the National Credit Code – Whether loan for business or investment purposes – Rafiqi v Wacal Investments Pty Ltd (1998) ASC 155-024; Linkenholt Pty Ltd v Quirk [2000] VSC 166; Dale v Nichols Construction Pty Ltd [2003] QDC 453; Bank of Queensland v Dutta [2010] NSWSC 574; Brott v Shtrambrandt & Ors [2009] VSC 467 – Application for relief under sections 76, 77 and 78 of the National Credit Code for loan application fees - West v AGC (Advances) Ltd (1986) 5 NSWLR 610.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr T. Sowden	Law 554 Solicitors
For the First Defendant	Mr M. Gronow	Aitken Partners Pty Ltd
For the Second Defendant	No appearance	No appearance

HIS HONOUR:

Introduction

These proceedings commenced as an application for removal of a caveat pursuant to s 90(3) of the Transfer of Land Act 1958. The plaintiff, Ms Mary Knowles, sought the removal of the caveat in order to sell her property at 585 Duncans Road, Werribee South (“the Property”) and satisfy her debts. The first defendant, Victorian Mortgage Investments Limited (“VMIL”), lodged a caveat over the Property in order to secure a debt arising out of a proposed loan offered to the plaintiff on 9 June 2010. The money the subject of the proposed loan was never advanced to the plaintiff. The first defendant claims the plaintiff is indebted to it in the sum of $31,696.48, being the loan application fee, which it says is payable under the provisions of the proposed loan, plus legal costs, including for the lodging and removal of the caveat.

On 30 June 2011, I ordered that the first defendant withdraw the caveat upon settlement of the sale of the Property and that the plaintiff place the sum of $35,000 into an interest bearing trust account in the joint names of the plaintiff’s solicitor and the first defendant’s solicitor. I ordered that the sum was not to be released unless by written agreement of the plaintiff and the first defendant to that effect or by order of the Court. The plaintiff has now sold the property and the sum of $35,000 has been paid into an interest bearing trust account.

The remaining issues in controversy in these proceedings are whether the proposed loan falls under the National Credit Code (“NCC”). If the NCC does not apply, then the issue is whether the plaintiff has breached the contract arising from the proposed loan, and, consequently, whether the first defendant is entitled to damages. If the NCC does apply, then the Court has jurisdiction to hear the matter through the general jurisdiction afforded to it under s 187(1) of the National Consumer Credit Protection Act 2009 (Cth) (“NCCP”). A question then arises as to whether the plaintiff should be granted relief under ss 76, 77 or 78 of the NCC, which is schedule 1 to the NCCP.

As is common practice the second defendant, the Registrar of Titles did not participate in the proceedings; therefore all references to the defendant are references to the first defendant unless otherwise indicated.

Background

On 14 April 2004, the plaintiff became the sole registered proprietor of the Property as a result of its transfer from her husband, Mr Bruno Zausa.

The Property has a number of separate addresses and consists of:

(a) a residence (in which the plaintiff and her family reside);

(b) two factories;

(c) a cool-store transport refrigeration warehouse building; and

(d) land leased to a primary producer.

The Property is subject to four leases from which the plaintiff receives rental.

In order to facilitate the transfer of the Property, the plaintiff obtained finance from Ruby Kala Pty Ltd on 7 April 2004 (“the 2004 Loan”). In early 2005, the plaintiff decided to refinance the 2004 Loan with a loan from Challenger Managed Investments Limited as Trustee for the Howard Mortgage Trust. On 4 July 2005, a valuation of the Property was obtained by Challenger Commercial Lending Ltd on behalf of the plaintiff. The Property was valued at $1,770,000. In December 2005, the plaintiff obtained approximately $1,050,000 finance from Challenger Managed Investments Limited (“the Challenger Loan”). The plaintiff signed a statutory declaration and a letter of offer in respect of the Challenger Loan to the effect that the funds advanced were to be applied wholly or predominantly for business or investment purposes.[1]
[1]Statement of agreed facts, paragraph 1 (h).

In 2010, the Property was subject to a number of caveats, the first of which was in favour of Aldo Decorrado (“Decorrado”) claiming an interest payable on a loan, which he claimed to have been made to the plaintiff. In October 2007, the plaintiff brought proceedings against Decorrado in the County Court. On 23 April 2010, Judge Ginnane in the County Court ordered the plaintiff to pay $100,725.54, plus costs to be taxed. His Honour also ordered, by consent, that in the event the Property was to be sold, Decorrado was to provide the plaintiff with a withdrawal of his caveat over the Property on the payment by the plaintiff of $194,410.35 to the Registrar of the County Court, representing the estimate of Decorrado’s costs to be taxed. As security for the plaintiff’s solicitor’s costs in the County Court proceedings, the plaintiff’s solicitor lodged a caveat over the Property.

In early 2010, with the assistance of two finance brokers, the plaintiff sought to obtain another loan. The plaintiff gave evidence that she intended to use the loan to enable her to repay remaining money then owing under the Challenger Loan and the debts due to her solicitor and Decorrado arising out of the County Court proceedings.

On 25 May 2010, the defendant sent a letter of offer to the plaintiff outlining the terms and conditions of a proposed loan advance of $1,150,000 for a period of 12 months (“the May Letter of Offer”). The amount of the proposed loan, $1,150,000, was based on the plaintiff’s estimate that the value of the Property was then $3,500,000; but was expressly subject to a valuation of the Property which was satisfactory to the defendant. The May Letter of Offer stated that the purpose of the loan “was wholly or predominantly for business and commercial purposes”[2] and that “the purpose of the proposed loan did not fall within the definition of a ‘consumer loan’ under the Consumer Credit Code.”[3] The May Letter of Offer provided that if the loan was to be used for a purpose other than that stated in that Letter the plaintiff was required to notify the defendant. The May Letter of Offer stated that by the plaintiff signing and returning the Letter the plaintiff was acknowledging that she understood the purpose of the loan. The May Letter of Offer also stated that the interest on the proposed loan would be 11% per annum. Finally, the May Letter of Offer stated that “a loan application fee of 2% plus GST [was] payable upon the approval of the loan whether the loan proceed[ed] or not”[4] and that “all relevant valuation fees incurred [were] payable by the Borrower/Mortgagor in advance.”[5]
[2]Exhibit JGM 11 to the Original Affidavit of John Glyn Matthies dated 29 June 2011.
[3]Exhibit JGM 11 to the Original Affidavit of John Glyn Matthies dated 29 June 2011.
[4]Exhibit JGM 11 to the Original Affidavit of John Glyn Matthies dated 29 June 2011.
[5]Exhibit JGM 11 to the Original Affidavit of John Glyn Matthies dated 29 June 2011.

As security for the proposed loan, the defendant was entitled to take a charge over the Property. A formal application for completion by the plaintiff was attached to the May Letter of Offer. The application was completed by the plaintiff’s finance brokers and stated that the purpose of the loan was “to refinance existing encumbrances on the title”[6] and identified the plaintiff’s occupation as an “investor”. [7] The application and the May Letter of Offer were signed by the plaintiff and both were returned to the defendant.
[6]Exhibit JGM 11 to the Original Affidavit of John Glyn Matthies dated 29 June 2011.
[7]Exhibit JGM 11 to the Original Affidavit of John Glyn Matthies dated 29 June 2011.

On 4 June 2010, the Property was valued. The estimate of value provided by the plaintiff of $3,500,000 proved to be incorrect as the Property was valued at $2,100,000. As a result, the sum which was to be advanced by way of loan was adjusted to 50% of the valuation, being $1,050,000.

On 9 June 2010, a revised letter of offer reflecting the adjusted amount was prepared and sent to the plaintiff (“the June Letter of Offer”). The June Letter of Offer contained the same terms and conditions as the May Letter of Offer, the only amendment to the June Letter of Offer was the proposed loan amount, which as specified was adjusted to $1,050,000. The June Letter of Offer was signed by the plaintiff and returned to the defendant. The June Letter of Offer provided to the Court did not attach a loan application form. The defendant provided no explanation as to why the June Letter of Offer did not attach an application form. Nevertheless it appears that the parties simply relied on the application form attached to the May Letter of Offer on the basis that the only variation made by the June Letter was as to the proposed principal sum.[8]
[8]And see below, paragraph 30.

On 17 June 2010, a letter was sent by the defendant’s solicitors to the plaintiff. The letter stated that the defendant had approved the loan, which was to be applied wholly or predominantly for business or investment purposes. The letter attached, amongst other documents, a Consumer Credit Code Business Purposes Declaration, a Mortgage and a Memorandum of Common Provisions. The plaintiff did not, however, proceed with either the May or June loan offers and no money was ever advanced.

As indicated above, the defendant now seeks payment of a loan application fee and costs under the loan approval following on the June Letter of Offer, in the sum of $31,696.48. This sum is made up as follows:

Application fee $23,100.00

Balance of legal costs $ 3,677.08

Legal costs on Caveat and Withdrawal of Caveat $ 1,169.40

Legal costs between the plaintiff and the defendant

for the dispute as at 2 June $ 3,750.00

Total $31, 696.48

Application of the Code

The NCC commenced on 1 July 2010, with the National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009 (Cth) (“the Transitional Act”) providing for the application of the NCC to credit contracts entered into before that date.

Schedule 1, Part 2, Division 1A, of the Transitional Act provides that:

“2A Application of the new Credit Code

(1) The new Credit Code applies from commencement.
Note: The new Credit Code does not apply before commencement. It also does not apply in relation to contracts or other instruments that were made before commencement, unless they are carried over instruments (see item 3).”

The definition of “carried over instrument” is provided for under s 4(1) of the Transitional Act in the following terms:

“’carried over instrument’ means a contract or other instrument that:
(a) was made before commencement; and
(b) was in force immediately before commencement; and
(c) the old Credit Code of a referring State or a Territory applied to immediately before commencement.”

Sub-items 3(1) to (3) of Schedule 1, Part 2, Division 2, of the Transitional Act provides for the application of the NCC to contracts or other instruments made before commencement:

“(1)        The new Credit Code does not apply in relation to a contract or other instrument that was made before commencement.
(2)        Despite subitem (1), the new Credit Code applies in relation to a carried over instrument.
(3)        Despite subitem (2), sections 5, 13 and 172 of the new Credit Code do not apply in relation to a carried over instrument. Instead, sections 6, 11 and 150 of the old Credit Code of a referring State or a Territory, as in force immediately before commencement, apply from commencement in relation to a carried over instrument as if those provisions respectively were sections 5, 13 and 172 of the new Credit Code.”

Consequently, the loan agreement arising out of the June Letter of Offer will be subject to the provisions of the NCC if it is determined to be a “carried over instrument”. It is uncontroversial that the agreement “was made before commencement” and “was in force immediately before commencement” of the NCC. The issue is whether the “old Credit Code of a referring State or a Territory applied” to the agreement immediately before commencement. It follows that, in order to determine whether the NCC applies, it is necessary to consider whether the Uniform Consumer Credit Code (“CCC”) applied. This involves considering section 6 of the CCC, which delimits the provision of credit to which the CCC applies and section 11 of the CCC, which provides for presumptions relating to the application of the CCC. If it is found that the CCC applies to the loan agreement then in accordance with sub-items 3(1) to 3(3) of Schedule 1, Part 2, Division 2, of the Transitional Act the NCC will apply. In summary, questions in relation to the application of the NCC will be determined by reference to these CCC provisions and the questions as to the relief available, if the NCC applies, will be determined by the relevant NCC provisions.

Statutory Presumption

The critical presumption provided for in s 11 of the CCC is in favour of the application of its provisions. Thus s 11(1) provides:

“(1) In any proceedings (whether brought under the Code or not) in which a party claims that a credit contract, mortgage or guarantee is one to which this Code applies, it is presumed to be such unless the contrary is established.”

Section 6 of the CCC specifies the circumstances in which that Code applies to the provision of credit:

“6 Provision of credit to which this Code applies
(1) This Code applies to the provision of credit (and to the credit contract and related matters) if when the credit contract is entered into or (in the case of precontractual obligations) is proposed to be entered into--
(a) the debtor is a natural person ordinarily resident in this jurisdiction or a strata corporation formed in this jurisdiction; and
(b) the credit is provided or intended to be provided wholly or predominantly for personal, domestic or household purposes; and
(c) a charge is or may be made for providing the credit; and
(d) the credit provider provides the credit in the course of a business of providing credit or as part of or incidentally to any other business of the credit provider.

(2) If not all the debtors under a credit contract ordinarily reside, or are strata corporations formed, in this jurisdiction, this Code applies only if credit is first provided under the contract in this jurisdiction.
(3) If this Code applies to the provision of credit (and to the credit contract and related matters)--
(a) this Code applies in relation to all transactions or acts under the contract whether or not they take place in this jurisdiction; and
(b) this Code continues to apply even though the debtor ceases to be ordinarily resident in this jurisdiction.

(4) For the purposes of this section, investment by the debtor is not a personal, domestic or household purpose.
(5) For the purposes of this section, the predominant purpose for which credit is provided is--
(a) the purpose for which more than half of the credit is intended to be used; or
(b) if the credit is intended to be used to obtain goods or services for use for different purposes, the purpose for which the goods or services are intended to be most used.“

It is common ground that ss 6(1)(a) and (d) are satisfied. In relation to s 6(1)(c) the defendant submitted that there was no charge for providing the credit in accordance with s 6(1)(c) and therefore the CCC does not apply. As stated above, s 6(1)(c) states “a charge is or may be made for providing the credit”. As stated above, the May and June Letters of Offer stated that the interest on the proposed loan was 11% per annum.[9] Section 6(1)(c) requires that the charge “may be made for providing the credit”. Therefore in my opinion s 6(1)(c) is satisfied.
[9]See above paragraph 10.

Therefore, in the present circumstances the critical question in relation to the provisions of s 6 of the CCC is whether the credit was provided or intended to be provided wholly or predominantly for personal, domestic or household purposes, within the meaning of paragraph 6(1)(b).

No Provision of Credit

The defendant submitted that regardless of whether the proposed loan is determined to be provided wholly or predominantly for personal, domestic or household purposes within the meaning of s 6(1) of the CCC, the CCC does not apply to this transaction because there was no provision of credit. Section 6(1), as set out above,[10] provides that the “…Code applies to the provision of credit (and to the credit contract and related matters) when the credit contract is entered into or (in the case of precontractual obligations) is proposed to be entered into…”.
[10]See above paragraph 22.

The plaintiff submitted that section 5 of the CCC, provides that:

“Meaning of “Credit Contract”
5. For the purposes of this Code, a ‘credit contract’ is a contract under which credit is or may be provided, being the provision of credit to which this Code applies.”

The provisions of s 5 and s 6(1) of the CCC make it very clear that the legislation applies to credit contracts regardless of whether the proposed loan has been advanced or not. Clear indication is provided that the CCC applies to credit contracts by the reference to a credit contract “proposed to be entered into” and to a contract where “credit may be provided” in these provisions. Further, I accept the plaintiff’s submissions that if the CCC did not apply to loans where the money had not yet been advanced then there would be a significant gap in the legislation. This would not have been the intention of the legislature in remedial or ameliorative legislation of this type.
Declaration

The CCC will not, however, apply to credit contracts where, before entering into the credit contract the borrower has made a declaration that the credit is to be applied wholly or predominantly for business or investment purposes. However, the declaration will be ineffective and thus the CCC will apply, if the credit provider knew or had reason to believe that the credit was in fact to be applied wholly or predominantly for personal, domestic or household purposes. This follows from s 11 of the CCC.

The relevant parts of s 11 of the CCC are ss 11(2) and (4), which provide that:

“(2) Credit is presumed conclusively for the purposes of this Code not to be provided wholly or predominantly for personal, domestic or household purposes if the debtor declares, before entering into a credit contract, that the credit is to be applied wholly or predominantly for business or investment purposes (or for both purposes).

…

(4) A declaration under this section is to be substantially in the form (if any) required by the regulations and is ineffective for the purpose of this section if it is not.”

The provision in the regulations relevant for the purposes of s11(4) of the CCC is regulation 10 of the Consumer Credit Regulation 1995 (“the Regulations”) which provides for the form of the declaration:

“(1) For the purposes of section 11 of the Code, the form of the declaration is as follows--
'I/We declare that the credit to be provided to me/us by the credit provider is to be applied wholly or predominantly for business or investment purposes (or for both purposes).'.
(2) The declaration is to contain (immediately below the above words) a warning in the following form--

IMPORTANT

You should not sign this declaration unless this loan is wholly or predominantly for business or investment purposes.

By signing this declaration you may lose your protection under the Consumer Credit Code.

(3) The declaration is to contain--
(a) the signature of each person making the declaration; and
(b) either the date on which the declaration is signed or the date on which it is received by the credit provider. “

The declaration relied upon by the defendant was the declaration contained in the application form attached to the May Letter of Offer. As indicated above, no application form was attached to the June Letter of Offer and no declaration was contained in the June Letter of Offer.[11] The defendant submitted that the declaration contained in the application attached to the May Letter of Offer can be relied upon for the June Letter of Offer because it is essentially the same loan the only difference is the adjusted loan amount.
[11]See above paragraph 13.

The declaration contained in the application attached to the May Letter of Offer was in the following terms:[12]

“I/we declare that the credit (loan) to be provided to me/us by the credit provider is to be applied wholly or predominantly for business or investment purposes (or for both).”

[12]Exhibit JGM 11 to the Original Affidavit of John Glyn Matthies dated 29 June 2011.

This declaration did not, however, contain the required warning box immediately below the declaration (or for that matter in any other part of this loan agreement).

The defendant acknowledged that the declaration contained in the loan application attached to the May Letter of Offer was not in the form prescribed for the purposes of s 11(4) of the CCC. However, the defendant submitted that the declaration contained in this application needed to be read in conjunction with the contents of the May Letter of Offer, which stated that the loan was conditional upon it being used for business and commercial purposes. Further, it was submitted that paragraph 19 of the May Letter of Offer provided the relevant warning to the plaintiff:[13]

“19. UNREGULATED LOAN: It is necessary that the purpose of the proposed loan does not fall within the definition of a ‘consumer loan’ under the Consumer Credit Code as this would require different procedures and documentation.
If the loan is to be used for a purpose different to that stated in this letter would you please notify us. By signing and returning the copy of this letter you acknowledge that our understanding of the Purpose of this loan is correct.”
[13]Exhibit JGM 11 to the Original Affidavit of John Glyn Matthies dated 29 June 2011.

In my opinion, neither the wording of the May Letter of Offer nor the attached loan application are substantially in the form required by regulation 10 of the Regulations. The CCC is clearly consumer protection legislation and the provision of s 11(4) read with Regulation 10 indicate a very clear intent in this respect. The purpose of the warning box provided for in regulation 10(2) is, patently, to alert the borrower that by signing the declaration they may lose the protection, which would otherwise be afforded to them under CCC. The purpose of paragraph 19 of the May Letter of Offer is, on the other hand, to notify the borrower that the proposed loan does not fall within the CCC as if it did “different procedures and documentation” would be required. Nowhere in paragraph 19 or in any other part of the Letter is there any warning that they may lose protection otherwise afforded under the CCC and certainly nothing remotely resembling the warning provided for under Regulation 10(2). On this basis it is not the case that the contents of the loan application attached to the May Letter of Offer or the contents of that Letter could be regarded as providing a declaration in the form required by the Regulations, for the purpose of s 11(4) of the CCC. As the declaration is ineffective, as it is not substantially in the form required by regulation 10 of the Regulations, it is not necessary for me to determine whether the declaration contained in the application attached to the May Letter of Offer can be applied to the June Letter of Offer.

The defendant further submitted that the declaration was not ineffective because the defendant had no knowledge or reason to believe that the plaintiff intended to use the money for anything other than business or investment purposes.

Section 11(3) of the CCC provides:

“However, such a declaration is ineffective for the purposes of this section if the credit provider (or any other relevant person who obtained the declaration from the debtor) knew, or had reason to believe, at the time the declaration was made that the credit was in fact to be applied wholly or predominantly for personal, domestic or household purposes. For the purposes of this subsection, a relevant person is a person associated with the credit provider or a finance broker (or a person acting for a finance broker) through whom the credit was obtained.”

The provision of s 11(3) of the CCC must be read in the context of the other provisions of that section, particularly ss 11(2) and (4), the operation of which in the present circumstances has been considered - and critically in the context of the primary presumption in favour of the application of the CCC, contained in s 11(1). As I have found that there was no declaration made by the plaintiff for the purposes of ss 11(2) and (4) it follows that there is no “declaration” which s 11(3) can render “ineffective” and consequently, its provisions have no operation. Consequently, it is not necessary for me to consider whether the defendant had the requisite knowledge which would trigger the further consumer provision of s 11(3) in favour of the application of the CCC where a borrower had signed a declaration in accordance with these provisions where the lender knew the factual position was otherwise and that on the basis of that factual position the CCC would apply.

Meaning of purpose

The meaning and effect of paragraph 6(1)(b) of the CCC has been considered by various courts and different views have been taken to the interpretation of these provisions. Focusing on the intention of the credit provider, Brabazon DCJ in Rafiqi v Wacal Investments Pty Ltd said: [14]

“Once a particular purpose can be isolated it must be shown that the intention of the credit provider was that it be provided wholly or predominantly for that purpose … s6(1)(b) allows an objective approach to be adopted to allow the courts to decide that the relevant intention for the purposes of the code will be that which a reasonable person standing in the shoes of the credit provider would have understood the predominant purpose for which the credit is provided.“

Brabazon DCJ also said that any contrary interpretation would place an intolerable burden on the credit provider.[15]

[14](1998) ASC 155-024; [1998] QDC 215, [148].

[15]Rafiqi v Wacal Investments Pty Ltd (1998) ASC 155-024; [1998] QDC 215, [148].

In Park Avenue Nominees Pty Ltd v Boon,[16] Harrison M relying on the decision of Brabazon DCJ in Rafiqi said:[17]

“[38] … the intention for which credit was sought is to be determined by an objective test that is what a reasonable person standing in the shoes of the credit provider would have understood the predominant purpose for which the credit is provided. To apply a subjective test would create a legal fiction that a borrower could claim the protection of the Code by satisfying what he or she subjectively intended to do with the finances.”

[16](2001) ASC 155-052.

[17](2001) ASC 155-052; [2001] NSWSC 700, [38].

The interpretation of these provisions was considered further, with emphasis placed on the use of the word “purpose” in their context, by McKenzie DP in Taylor & Taylor v Third Szable Holdings Pty Ltd & Secretary to Dept of Justice:[18]

“[59] The question is, whose knowledge is relevant for the purposes of the Code? The credit provider’s or the debtor’s or both? Section 6(1)(b) of the code uses the words, ‘The credit is provided or intended to be provided’ for specified purposes. Credit is not of course, provided by the debtor. It is provided by the credit provider. While what the debtor tells the credit provider is clearly relevant, as also is what the credit provider knows from other sources or ought to have known from reasonable enquiry, the knowledge of the credit provider is clearly relevant.
[60] I note that parliament does not speak of the purpose for which credit is obtained. It speaks of the purpose for which credit is provided. I note also that when parliament speaks of the use to which their debtor is to put the credit provided, it uses different words. So where, in s.6(5), parliament is resolving difficulties which may arise where credit is used for more than one purpose or where the money borrowed is used to obtain goods or services that are used for different purposes, parliament chooses the word ‘used’ in this situation.”

[18](2001) ASC 155-050; [2001] VCAT 1841, [59-60].

A contrasting view was expressed by Gillard J in Linkenholt Pty Ltd v Quirk:[19]

“In my opinion, it is appropriate to consider what the money was used for in order to determine the purpose of the provision of the credit. In considering the question it is important to consider the substance of the transaction in the context of its performance.”

[19][2000] VSC 166 at [98].

The approach in Linkenholt was applied by McGill DCJ in Dale v Nichols Construction Pty Ltd.[20] In so doing, his Honour highlighted that the remedial or ameliorating effect of the legislation as, consumer protection legislation, may be negated to a significant extent by focusing on the position of the credit provider. McGill DCJ said:[21]
[20][2003] QDC 453.
[21][2003] QDC 453, [23], [27] and [29].

“[23] … In my opinion whether credit is provided for a particular purpose for the purposes of s 6(1) depends on the intention of the borrower at the time the credit is provided, and not the intention of the lender.

…
[27] … With respect, I do not agree with [the interpretation of Brabazon DCJ]. It seems to me that there are two reasons why such an interpretation is not correct: s 6(1)(b) is not expressed in terms of the apparent purpose of the debtor, or the credit provider’s understanding of the purpose of the debtor, it is expressed in terms of the purpose, and that is, on its natural meaning, the true purpose. The second is that an interpretation of s 6(1)(b) as referring to the purpose of the debtor, rather than what is known by the credit provider of the purpose of the debtor, fits more readily with the operation of s 11 of the Act. Perhaps a third reason is that, if s 6(1)(b) operated by reference to what the credit provider understood, it might be possible for a credit provider to avoid the operation of the Code merely by ensuring that it never became aware of the purpose for which the debtor was borrowing the money. If it never became aware (whether tested subjectively or objectively) of the debtor's purpose, paragraph (b) would not, on that test, be satisfied.
…
[29] …If the purpose was to be determined by reference to what was objectively apparent to the lender, there would be no need for a declaration as to the borrower’s true purpose. Indeed, the wording of subsection (3) is also more consistent with the proposition that the relevant issue is the true purpose of the borrower rather than what is objectively apparent as to the purpose of the borrower.”

The Linkenholt interpretation of the relevant purpose was also followed by Shaw J in Jonsson v Arkway Pty Ltd:[22]

“In my opinion, the adjective ‘personal’ in the context of beneficial legislation has separate and independent work to do, that is to say, connotations distinguishable from the other concepts contained in the same section of ‘domestic’ or ‘household’ purposes.
…
It seems to me that insufficient attention has been given to the need to broadly and liberally interpret beneficial legislation of this kind.”

[22][2003] NSWSC 815, [27]-[28].

This issue was again raised in Bank of Queensland Ltd v Dutta.[23] In that instance the borrower told the lender that the loan was required for investment purposes but then spent the majority of the money on living expenses. The Bank obtained a Business Purpose Declaration but did not ensure that the declaration was in the same form as that prescribed under the Regulations and, as a result, was not afforded the conclusive presumption available under section 11(2). In that case Davies J said:[24]
[23][2010] NSWSC 574.
[24][2010] NSWSC 574, [123] and [124].

“[123]In my opinion, the test in Linkenholt should be applied. Given the structure of s 11 of the Code I do not consider there is unfairness to a lender for the Linkenholt test to be applied even in those circumstances. As McGill DCJ said in Dale at [28]:
… Subsection (2) provides a mechanism by which a credit provider can protect itself from a debtor who might not be frank about the true purpose of the loan, which will be effective unless, pursuant to subsection (3), the credit provider has actual knowledge that the declaration given by the borrower is false. If the credit provider does not follow that precaution, the credit provider runs the risk that a court will find that the true intention of the borrower was that the money borrowed be used for personal, domestic or household purposes, regardless of what was apparent to the credit provider.

[124] … In my view, Shaw J was right when he said in Jonsson v Arkway at [28] that the legislation needs to be broadly and liberally interpreted as beneficial legislation. Section 11(2) enables the credit provider to protect itself against all sorts of borrowers including untruthful ones. If the credit provider does not avail itself of that sub-section it takes the risk that the presumption in sub-s (1) will operate against it because it cannot prove that the funds were used for purposes other than the purposes for which the borrower proves they were in fact used.”

The meaning to be ascribed to purpose in the context of paragraph 6(1)(b) of the CCC continues to be the subject of varying judicial views, with the issue also being raised before the Queensland Court of Appeal in ShakespeareHaney Securities Limited v Crawford[25] and the New South Wales Court of Appeal in Bahadoriv Permanent Mortgages Pty Ltd,[26] but no comprehensive statement on the proper construction of these provisions is provided by these or other cases.[27] Muir JA in the Queensland Court of Appeal did, however, provide some further clarification: [28]

“[33]Section 6(1)(b) however cannot be construed in isolation. Section 6(4), in effect, deems an ‘investment’ not to be ‘a personal, domestic or household purpose.’ It is consistent with the view that the ‘purpose’ is to be determined objectively by reference to the substance of the transaction. Sections 6(5) and 11, however, may cast doubt on the correctness of this construction. The focus of s 6(5) is on the use rather than the provision of credit. Section 6(5)(a) deems the predominant purpose for which credit is provided to be ‘the purpose for which more than half of the credit is intended to be used.’ Where ‘the credit is intended to be used to obtain goods or services for use for different purposes’, subsection (5)(b) deems ‘the predominant purpose for which [the] credit is provided’ to be ‘the purpose for which the goods or services are intended to be most used.’”

[25][2009] QCA 85.

[26][2008] NSWCA 150.

[27]Shakespeare Haney Securities Limited v Crawford [2009] QCA 85, [37] (Muir JA with whom Mullins JA and Douglas J agreed); Bahadori v Permanent Mortgages Pty Ltd [2008] NSWCA 150, [182- 186] (Tobias JA with whom Giles JA and Campbell JA agreed).

[28]ShakespeareHaney Securities Limited v Crawford [2009] QCA 85, [33] (Muir JA with whom Mullins JA and Douglas J agreed).

The question as to the meaning of “the purpose for which credit is or is intended to be provided” was also considered in the decision of Beach J in Brott v Shtrambrandt & Ors[29] in which his Honour said:[30]

“…the issue was put beyond doubt by the Queensland Court of Appeal in Shakespeare Haney Securities Limited v Crawford[31] when Muir JA[32] said in relation to s 6(1)(b):[33]
‘Plainly “the purpose” for which credit is provided or intended to be provided has nothing to do with the lender’s general commercial purposes: the reference is to the use to which the credit is to be put. In the great majority of transactions there would be no difficulty in determining the relevant purpose by reference to the terms of the application for credit and of the approval. If the borrower requests credit for a stated purpose and the lender approves the request and makes the loan, there should be no difficulty in concluding that the purpose for which the loan was made was the purpose for which it was requested.”[34]

[29][2009] VSC 467.

[30][2009] VSC 467, [71].

[31][2009] QCA 85.

[32]With whom Mullins and Douglas JJ agreed.

[33]Shakespeare Haney Securities Limited v Crawford [2009] QCA 85, [31].

[34]See further Dale v Nichols Constructions Pty Ltd [2003] QDC 453; Linkenholt Pty Ltd v Quirk (2000) ASC 155 – 040 at [153]; Jonsson v Arkway Pty Ltd (2003) 58 NSWLR 451 at [30] and Beckley v Consumer, Trader and Tenancy Tribunal [2009] NSWSC 703.

In my opinion, on the basis of the provisions of paragraph 6(1)(b) of the CCC and the cases to which reference has been made the purpose, the relevant intention, is that of the borrower. If the purpose could simply be determined by looking only to what is stated in the loan application or by looking to what the credit provider intended the loan to be used for, there would be no need for a declaration as to the borrower’s true intention and it would follow that the operation of the legislation could easily be defeated. The use of the loan application provisions would prove an easy means of doing so and would thereby provide an easy means of effectively contracting out of the legislation. This is at odds with the clear purpose of the CCC as ameliorating, consumer protection legislation; legislation should be strictly construed in favour of the consumer, in this case the borrower.[35] For these reasons I am of the opinion that the weight of the authorities favour the Linkenholt test, particularly as explained and applied by Davies J in Bank of Queensland v Dutta. As has been seen, the structure of the legislation provides the credit provider with the ability to make certain that the credit contract is not one to which the CCC applies by ensuring that the borrower signs a declaration which complies with s 11(4) and Regulation 10. If the credit provider does not obtain a signed declaration in the required form from the borrower then the credit provider is not afforded the protection of the presumption provided under s 11(2) of the CCC, and thereby invites the difficulty of proving that the loan was not intended to be used wholly or predominantly for personal, domestic or household purposes.
[35]See Re Kearney; Ex parte Jurlama (1984) 158 CLR 426; and see Pepperorn Nominees Pty Ltd v Loizou (1997) V ConvR 985-560 at 66, 734 (Smith J).

Predominant Purpose of the Proposed Loan

Section 6(5) of the CCC which is set out above,[36] provides that the predominant purpose for which credit is provided is, relevantly, “the purpose for which more than half of the loan is intended to be used.”[37] The onus in this respect rests on the credit provider in the event that it has not protected itself under the provision of s 11(2) of the CCC. This is the position that the defendant now finds itself.
[36]See above paragraph 22.
[37]See above paragraph 22.

The parties agreed that one purpose of the proposed loan was to discharge the Challenger Loan.[38] In or about June 2010, approximately $550,000 was owing under the Challenger Loan.[39] As a result, it was common ground between the parties that 52% of the proposed loan, being $550,000 of the $1,050,000, was intended to be used to discharge the Challenger Loan. The parties agreed that the Challenger Loan “was itself wholly or predominantly for business or investment purposes”.[40]
[38]Agreed statement of issues, 1(g).
[39]Agreed statement of issues, 1(i).
[40]Agreed statement of issues, 1(h).

However, the plaintiff submitted that some allowance needs to be made for the fact that the Property includes a residence, in which the plaintiff and her family reside. As noted previously, two valuations of the Property were obtained, one in 2005 and one in 2010.[41] In 2005 the Property was valued, for the purposes of the Challenger Loan, at $1,770,000 and the dwelling was valued at $435,000, which is about 25% of the value of the Property. In 2010 the Property was valued at $2,100,000. This 2010 valuation was made up of the value of the land, improvements, ancillary building and site works. The 2010 valuation did not provide a breakdown of the valuation of the land and any improvements, such as the factories and the dwelling. As a result, the percentage of the loan that would have been attributed to the residence cannot be determined with any precision.
[41]See above paragraphs 7 and 12.

Nevertheless, this is not necessary in the present circumstances as it is clear that a percentage of the Challenger Loan related to the residence. It follows that a portion of the proposed loan, was to be used to pay off the remaining mortgage over the residence and therefore was intended to be used for personal domestic or household purposes. Consequently, in the absence of any evidence adduced by the defendant to establish a contrary position, it must mean that on the basis of the likely comparative values of the land and improvements comprising the Property less than 50% of the proposed loan was intended to be used for business or investment purposes. As a result, it is necessary to look to the intended use of the remaining 48% of the proposed loan money.

The remainder of the proposed loan was to be used to pay part of the judgment debt arising out of the County Court proceedings against the plaintiff and the legal fees owing to the plaintiff’s solicitors with respect to those proceedings.[42]
[42]See above paragraph 8.

In relation to the judgment debt arising out of the County Court proceedings, the defendant submitted that those proceedings were commercial in nature and therefore the proposed loan was intended to be used to satisfy a commercial debt to the extent that the funds were to be used to pay this judgment debt. Against this, the plaintiff submitted that the nature of the litigation is irrelevant because, regardless of the nature of the proceedings conducted, the judgment debt is one in which the plaintiff is personally liable to pay and is therefore a personal debt. In my opinion, the plaintiff’s argument is correct and it is consistent with the maxim transit in rem judicatam, meaning “a judgment is regarded as of a higher nature than any cause of action”.[43] This maxim is a convenient reference to the rule that, “[w]hen judgment has been given in a claim…, the cause of action in respect of which judgment is given is merged in the judgment and its place is taken by the rights created by the judgment…”[44] Thus the judgment debt creates a new and personal obligation regardless of how the subject matter of the underlying proceedings may be characterised.
[43]Spencer Bower, Turner and Handley, The Doctrine of Res Judicata, (Butterworths, 3^rd ed, 1996), 393.
[44]Halsbury's Laws of England, 5th ed,. (2009), vol. 12, Civil Procedure, Section 22, Judgments and Orders, 60, [1157].

In relation to the legal fees owing to the plaintiff’s solicitors with respect to the County Court proceedings the defendant relied on the decision of Beach J in Brott v Shtrambrandt Ors.[45] In that case his Honour determined that obtaining credit from one’s solicitor in order to conduct “Family Court proceedings against one’s spouse (or former spouse) falls within the rubric of ‘personal, domestic or household use’”. Thus the characterisation of the nature of the legal proceedings as domestic had the effect of characterising the nature of the expenditure in meeting the costs of those proceedings. The defendant submitted that the same reasoning should be adopted in the present case, hence that obtaining credit to pay legal fees for the purpose of pursuing the commercial proceedings in the County Court falls outside the rubric of a personal, domestic or household purpose.
[45][2009] VSC 467, [72].

Whilst I accept the defendant’s submissions in this respect on the basis of the approach in Brott v Shtrambrandt,[46] the problem for the defendant’s case in the present proceedings is that it bears the onus of displacing the statutory presumption, established by s 11(1) of the CCC, that the provisions of that legislation apply – having failed to take advantage of the provisions of ss 11(2) and (4).[47] As discussed previously it has failed to establish the proportion of the Challenger Loan discharged which was properly characterised as for purposes other than “personal, domestic or household” as it applied to the Property and similarly it has failed to establish the proportion of the proposed loan which was to be expended in meeting the legal fees incurred for the purpose of pursuing the commercial proceedings in the County Court as distinct from meeting the judgment debt in those proceedings – the latter being a personal obligation and the former otherwise, for the reasons already discussed.
[46][2009] VSC 467.
[47]See above, paragraphs 21, and 28 to 37.

The defendant further submitted that the plaintiff only provided evidence as to the intended use of about 70% of the proposed loan money and that, as a result, the Court should infer that the plaintiff intended to use the remainder of the money for business or investment purposes rather than for personal, domestic or household purposes. I do not follow the basis of this argument given the state of the evidence and the onus the defendant bears. In the present circumstances s 6(1) of the CCC, places the onus on the defendant to prove that the proposed loan was wholly or predominantly intended to be used for purposes other than personal, domestic or household. The onus is not on the plaintiff to adduce evidence as to what she intended to use or uses to which she intended to put the proposed loan moneys.

For these reasons, I am of the opinion that, the defendant has failed to establish that the proposed loan was to be used wholly or predominantly for business or investment purposes. It follows that the CCC applies to the loan agreement arising out of the June Letter of Offer.[48]
[48]See above, paragraph 13 and 30.

Relief under the NCC

As the CCC applies the loan agreement arising out of the June Letter of Offer falls within the definition of “carried over instrument” as defined in s 4(1) of the Transitional Act and consequently, as a result of the operation of sub-item 3 of Schedule 1, Part 2, Division 2 of the Transitional Act the NCC applies. Accordingly the question arises whether the plaintiff should be granted the relief sought under ss 76, 77 and 78 of the NCC. The parties agreed that the application fee in question is the application fee arising out of the June Letter of Offer.[49]
[49]Statement of agreed facts, paragraph 1(j).

Section 76 of the NCC provides that the Court may reopen “unjust” transactions, s 77 provides for orders the Court may make if it reopens a transaction under these provisions and s 78 provides that the Court may review “unconscionable” interest and other charges. The parties agreed that the questions with respect to the application and operation of ss 76, 77 and 78 of the NCC were to be dealt with by written submissions only and that no hearing was required. The plaintiff and the defendant provided written submissions in relation to ss 76 and 77 of the NCC; and the plaintiff also provided written submissions in relation to s 78, but the defendant did not.

Section 76(6) of the NCC provides that s 76 does not apply to matters “to which an application can be made under s 78(1).” A recent commentary by Beatty and Smith in relation to s 76(6) includes the observation that:[50]

“an… establishment fee cannot be subject to a reopening application under section 76. This is because of section 76(6) which specifically excludes that change, and those fees which may become the subject of an application under section 78, from the operation of section 76.”

[50]Andrea Beatty and Andrew Smith, Annotated National Credit Code (Lexis Nexis, 4^th ed 2011), 260.

Despite the fact that s 76(6) excludes applications being made under s 76 if they are able to be made under s 78(1), as both parties have made submissions in relation to ss 76 and 77 and the defendant has only made submissions in relation to these sections, I will briefly deal with ss 76 and 77.

Section 76 and 77 of the NCC

Under s 76(1) of the NCC the Court has the power to reopen a transaction:

“if satisfied on the application of a debtor, mortgagor or guarantor that, in the circumstances relating to the relevant credit contract… at the time it was entered into or changed (whether or not by agreement), the contract…was unjust.”[51]

[51]Section 76(1) NCC.

The word “unjust” is defined for the purpose of s 76 of the NCC by s 76(8) as including “unconscionable, harsh or oppressive”. This is however, an inclusive rather than an exclusive definition.

The process of determining whether a transactions is unjust involves a process of weighing and balancing competing considerations, as Beatty and Smith indicate:[52]

“what is involved is a weighing and balancing of competing considerations; the purpose of the Code as a consumer protection statute and the need to hold parties to their bargains (McKenzie v Smith; Lenehan v Smith (1998) ASC 155-025).”

[52]Beatty and Smith, op cit, 235.

Some assistance in this respect may be gained from decisions on the meaning of “unjust” under the provisions of the New South Wales Contracts Review Act 1980, though regard must be had to the different legislative context. In this context in West v AGC (Advances) Ltd[53] McHugh JA said:[54]

“… a contract may be unjust… because its terms, consequences or effects are unjust. This is substantive injustice. Or a contract may be unjust because of the unfairness of the methods used to make it. This is procedural injustice.
...
…. a contract will not be unjust as against a party unless the contract or one of its provisions is the product of unfair conduct on his part either in the terms which he has imposed or in the means which he has employed to make the contract.”

[53](1986) 5 NSWLR 610 (CA).

[54](1986) 5 NSWLR 610 at 621-2 (McHugh JA with whom Hope JA agreed).

In determining whether the transaction is “unjust” s 76(2) of the NCC does, however, provide for a number of factors to which the Court may have regard. The transaction may, nevertheless, still be found to be unjust even if the Court finds that any or none of the factors are applicable. Section 76(2) provides:

“(2) In determining whether a term of a particular credit contract, mortgage or guarantee is unjust in the circumstances relating to it at the time it was entered into or changed, the court is to have regard to the public interest and to all the circumstances of the case and may have regard to the following:
(a) the consequences of compliance, or non-compliance, with all or any of the provisions of the contract, mortgage or guarantee;
(b) the relative bargaining power of the parties;
(c) whether or not, at the time the contract, mortgage or guarantee was entered into or changed, its provisions were the subject of negotiation;
(d) whether or not it was reasonably practicable for the applicant to negotiate for the alteration of, or to reject, any of the provisions of the contract, mortgage or guarantee or the change;
(e) whether or not any of the provisions of the contract, mortgage or guarantee impose conditions that are unreasonably difficult to comply with, or not reasonably necessary for the protection of the legitimate interests of a party to the contract, mortgage or guarantee;
(f) whether or not the debtor, mortgagor or guarantor, or a person who represented the debtor, mortgagor or guarantor, was reasonably able to protect the interests of the debtor, mortgagor or guarantor because of his or her age or physical or mental condition;
(g) the form of the contract, mortgage or guarantee and the intelligibility of the language in which it is expressed;
(h) whether or not, and if so when, independent legal or other expert advice was obtained by the debtor, mortgagor or guarantor;
(i) the extent to which the provisions of the contract, mortgage or guarantee or change and their legal and practical effect were accurately explained to the debtor, mortgagor or guarantor and whether or not the debtor, mortgagor or guarantor understood those provisions and their effect;
(j) whether the credit provider or any other person exerted or used unfair pressure, undue influence or unfair tactics on the debtor, mortgagor or guarantor and, if so, the nature and extent of that unfair pressure, undue influence or unfair tactics;
(k) whether the credit provider took measures to ensure that the debtor, mortgagor or guarantor understood the nature and implications of the transaction and, if so, the adequacy of those measures;
(l) whether at the time the contract, mortgage or guarantee was entered into or changed, the credit provider knew, or could have ascertained by reasonable inquiry at the time, that the debtor could not pay in accordance with its terms or not without substantial hardship;
(m) whether the terms of the transaction or the conduct of the credit provider is justified in the light of the risks undertaken by the credit provider;
(n) for a mortgage—any relevant purported provision of the mortgage that is void under section 50;
(o) the terms of other comparable transactions involving other credit providers and, if the injustice is alleged to result from excessive interest charges, the annual percentage rate or rates payable in comparable cases;
(p) any other relevant factor.”

In relation to these provisions, Beatty and Smith comment:[55]

“Section 76 (and in particular s 76(2)) in effect obliges a credit provider to find out about their customer and their circumstances. However, when considering whether a term of a contract …is unjust, a court is not obliged to have regard to any particular criteria listed in section 76(2). The court must consider the public interest and all the circumstances of the case, and then have regard to the criteria listed.”

[55]Beatty and Smith, op cit, 238.

In considering the factors provided for in s 76(2) of the NCC, the Court is also to have regard to the public interest. While public interest is not defined in the NCC, the case law suggests that “public interest may represent the underlying consumer protection purpose of the [NCC] or the need to keep parties to their bargains.”[56]
[56]Beatty and Smith, op cit, 235; see also, W Cavanagh and S Barnes, Consumer Credit Law in Australia, Butterworths, Sydney, 1988, Custom Credit Corp Ltd v Lupi [1992] 1 VR 99; (1991) ASC 56-024 (Murphy J) and Dale v Nichols Constructions Pty Ltd [2003] QDC 453 at 105.

In relation to the factors listed in s 76(2) of the NCC the plaintiff made submissions in relation to and relied upon paragraphs (b), (c), (e), (f), (g), (h), (i) and (k).

The plaintiff submitted that the Court should have regard to the relative bargaining power of the parties under sub-s 76(2)(b). The plaintiff gave evidence, that the plaintiff is illiterate and that no one assisted the plaintiff with understanding the contents of the May and June Letters of Offer and the loan application attached to the May Letter of Offer. The plaintiff submitted that as the plaintiff is illiterate the parties were in a position of unequal bargaining power. Against this the defendant responded from a merely procedural perspective, submitting that if the plaintiff were illiterate then her affidavits should have been made in accordance with Rule 43.02 of the Supreme Court (General Civil Procedure) Rules 2005 (“the Rules”). Rule 43.02 requires an affidavit made by an illiterate person to contain a certificate in accordance with the Rules. The plaintiff, Ms Mary Knowles, filed two affidavits in this matter, an affidavit in support of the application sworn on 21 June 2011, which did not contain the certificate, and a second affidavit sworn on 13 July 2011 which contained the relevant certificate in accordance with the Rules. In order to clarify this issue, on 30 June 2011 Ms Emma Claire Jeans, solicitor for the plaintiff, filed an affidavit which stated that Ms Jeans witnessed Mr Gerard Anthony Conlan, the principal of the solicitors for the plaintiff, read the affidavit to the plaintiff. In her affidavit Ms Jeans stated that the plaintiff seemed to perfectly understand the contents of the affidavit and that she witnessed the plaintiff sign the affidavit. On the evidence, I am satisfied that the affidavit was read to the deponent and that the deponent understood the contents of the affidavit. Consequently the defendant’s procedural objection falls away.

The defendant did not, however, seek to address the fact of the plaintiff’s illiteracy in the context of the plaintiff’s submission with respect to unequal bargaining power. The significance of this fact seemed to be ignored entirely and no attempt was made to address it in the context of any loan offer or other agreement. Rather than seek to address this substantive matter or to seek to adduce evidence to the contrary the defendant merely sought to attack the plaintiff’s credit as a result of her not having complied with the requirements of the equivalent of Rule 43.02 in the County Court proceedings. In response the plaintiff submitted that evidence of non-compliance with the equivalent rule in the County Court proceedings was not sufficient to support an assertion that her evidence in the proceedings in this Court should be disregarded. Further the plaintiff relied on s 102 of the Evidence Act 2008 which renders credibility evidence about a witness inadmissible, subject to certain exceptions. Section 103 of that Act provides an exception where evidence adduced in cross examination “could substantially affect the assessment of the credibility of the witness.” As the plaintiff submitted, she could have been cross examined on her affidavit evidence but the defendant never chose to do so. Consequently the matters going to credit were never put to her and so she never had a chance to respond. It follows that on the basis of ss 102 and 103 of the Evidence Act and on the basis of considerations of fundamental procedural fairness this collateral attack on her credit by the defendant should be disregarded and the plaintiff’s evidence accepted.

In relation to s 76(2)(c) the plaintiff submitted, that the contract was a standard form contract which was not the subject of negotiations. The defendant submitted that negotiations were conducted on the plaintiff’s behalf by her credit brokers. However no evidence was provided by the defendant to demonstrate that the plaintiff’s credit brokers conducted negotiations with regard to the contract on the plaintiff’s behalf or that, if they did, the defendant’s position was at all responsive with respect to any amendments or changes sought.

In relation to s 76(2)(e) the plaintiff submitted that the transaction imposed an establishment fee which was not reasonably necessary “for the legitimate interests of the” defendant. The defendant made no submissions in relation to sub-s 76(2)(e) however, the defendant gave evidence by which it sought to establish the reasonableness of and components of the establishment fee. As s 78(1) deals specifically with the establishment fee, the reasonableness of the establishment fee is dealt with below.[57]
[57]See below paragraphs 80-96.

In relation to s 76(2)(f) and (g), the plaintiff submitted that her illiteracy should be considered a disability for the purposes of these provisions. Against this, the defendant submitted that the plaintiff’s illiteracy was not a relevant disability and that the plaintiff should have requested that her finance brokers read the contract to her.

In relation to s 76(2)(h) and (i), on the evidence provided by the parties the plaintiff did not obtain independent legal advice nor did anyone explain the nature of the relevant documents, the loan offers and application to her. The defendant submitted, however, that the plaintiff had the opportunity to obtain legal advice but did not and the plaintiff’s brokers should have explained the documents to her.

In relation to s 76(2)(k), the plaintiff submitted that there was no evidence that the credit provider took any measure to ensure that the plaintiff understood the nature and implications of the transaction. The defendant submitted that the defendant did take measures to ensure the plaintiff understood the implications of the transactions by dealing with her only through her credit brokers. Apart from this, no other measures were identified.

In my opinion, considering all the circumstances, including the factors provided for in s 76(2) and the defendant’s and the plaintiff’s submissions in this respect, I am of the opinion that the loan agreement arising out of the June Letter of Offer is unjust in terms of s 76 of the NCC and this loan agreement should be reopened. More particularly, in the present circumstances, there was unequal bargaining power between the parties as the plaintiff was illiterate and the defendant did not itself take any measures to ensure that the plaintiff understood the nature and effect of the documents with regard to the proposed loan, including the effect they may have on her rights under the consumer credit legislation. Further, there were no negotiations between the parties as to the loan agreement or letter of offer and there was no legal advice obtained by the plaintiff; a matter which, in all circumstances, I infer was something about which the defendant was aware, given its assertion that the various factors provided for under s 76(2) did not apply as the defendant had dealt through the plaintiff’s finance broker. In this respect, the basis of the defendant’s submissions on the application of s 76(2)(f) and (g) were that as the defendant dealt with the plaintiff through her brokers the defendant could rely on the finance brokers to read and explain the contract to the plaintiff and rely on the finance broker to negotiate the terms of the contract on her behalf. In my view, s 76(2) of the NCC clearly places the onus on the credit provider to familiarise themselves with their potential borrower and to ensure that their potential borrower understands the contract they are entering into. A principal purpose of the NCC is to provide consumer protection for the borrowers; it is not enough for the credit provider to rely on the plaintiff’s finance brokers to ensure that the plaintiff understands the contents of the documentation.

Consequently, I determine to reopen the transaction constituted by the loan agreement arising out of the June Letter of Offer under s 76 of the NCC. Once the Court has determined that the transaction is unjust, and the transaction is reopened under 76 of the NCC the Court may make a variety of orders. In this respect, s 77 provides:

“The Court may, if it reopens a transaction under this Division, do any one or more of the following, despite any settlement of accounts or any agreement purporting to close previous dealings and create a new obligation:
(a) reopen an account already taken between the parties to the transaction;
(b) relieve the debtor and any guarantor from payment of any amount in excess of such amount as the court, having regard to the risk involved and all other circumstances, considers to be reasonably payable;
(c) set aside either wholly or in part or revise or alter an agreement made or mortgage given in connection with the transaction;
(d) order that the mortgagee takes such steps as are necessary to discharge the mortgage;
(e) give judgment for or make an order in favour of a party to the transaction of such amount as, having regard to the relief (if any) which the court thinks fit to grant, is justly due to that party under the contract, mortgage or guarantee;
(f) give judgment or make an order against a person for delivery of goods to which the contract, mortgage or guarantee relates and which are in the possession of that person;
(g) make ancillary or consequential orders.”

As a result of my consideration of the factors referred to in s 76(2), I have determined that the transaction as a whole is unjust. In these circumstances, and having regard to both the basis upon which the transaction has been reopened and to the absence of any evidence that the defendant has incurred any, or any significant, expenses or lost the use of potential loan moneys, which in any event where never advanced, I am of the view that plaintiff should be relieved from payment of the whole of the $23,100 application fee. This is starkly the case in the present circumstances as the evidence establishes that all the fees and expenses associated with the establishment of the proposed loan – apart from those associated with sourcing the money – were separately and additionally paid by the plaintiff. These latter issues are discussed in more detail in the course of considering the operation and application of s 78 of the NCC.[58] The same applies to the legal fees claimed for lodgement and withdrawal of the caveat, which was inextricably linked with the “tainted” application fee.[59]
[58]See below, paragraphs 80 to 96.
[59]See below, paragraph 95.

Section 78 of the NCC

I turn now to the relief sought under s 78 of the NCC. Section 78 provides that the Court may annul or reduce an establishment fee or charge if it is satisfied that the fee or charge is “unconscionable”. Section 78(3) of the NCC in the following terms:

“(3) In determining whether an establishment fee or charge is unconscionable, the court is to have regard to whether the amount of the fee or charge is equal to the credit provider’s reasonable costs of determining an application for credit and the initial administrative costs of providing the credit or is equal to the credit provider’s average reasonable costs of those things in respect of that class of contract.”

The NCC does not provide a definition of establishment fee. However, Beatty and Smith helpfully comment that “[p]resumably it extends to any fee charged in connection with an application fee for credit, assessment of an application, establishment of an account or actual provision of the credit, regardless of the name actually given to the fee.”[60] In my view this statement is in conformity with the provisions of the NCC now under consideration and well understood commercial practice with respect to the provision of credit.
[60]Beatty and Smith, op cit, 256.

In particular, s 78(3) of the NCC requires the court to consider whether the establishment fee is equal to the credit provider’s reasonable costs of determining the application for credit. This requires an examination of the components of the establishment fee. Thus Beatty and Smith note:[61]

“This may necessitate an examination by credit providers of the components of their establishment fees, both internal and external, to ascertain their relationship to the actual cost of establishing the loan. An establishment fee will not be unconscionable merely because it exceeds the credit provider’s reasonable costs of establishment, although section 78(3) does require such a comparison to be made as part of considering whether the fee is unconscionable (Director of Consumer Affairs Vitoria v City of Finance Loans (2006) ASC 155-080).”

[61]Beatty and Smith, op cit, 257.

As indicated previously, the defendant did not make any submissions in relation s 78.[62] However, the defendant did provide the following evidence by way of the affidavit of Mr John Glyn Matthies dated 16 September 2011 (“Mr Matthies’ September Affidavit”). Mr Matthies is a director of the defendant, principal of John Matthies & Co, who acted as the solicitor for the defendant up until May 2011, and who, from May 2011 has been a consultant with Aitken Partners the solicitors for the defendant.
[62]See above paragraphs 59 and 61.

Mr Matthies deposes in his September Affidavit that the defendant obtains its business income primarily from application fees. Mr Matthies says that the defendant is subject to strict compliance and reporting requirements imposed by ASIC and that without charging application fees the defendant would not remain in business. The plaintiff submitted that this evidence is vague and imprecise and ought not to be accepted. I accept the plaintiff’s submissions in this respect and observe that in any event, this evidence does not provide evidence as to the reasonableness of the application fee. It only goes to the importance, from the defendant’s perspective, of a steady flow of application fees.

Additionally, Mr Matthies says, in his September Affidavit, that in his experience an application fee will commonly be between 1% and 2.5% of the proposed total loan amount. In response to Mr Matthies’ September Affidavit the plaintiff’s solicitor, Emma Claire Jeans provided an affidavit, dated 23 September 2011. In Ms Jeans’ affidavit she says that the defendant’s website states the defendant’s lending criteria and pricing with respect to first mortgage loans is as follows:

“a. Preferred loan size: $100,000.00 to $1,500,000.00
b. Loan Purpose: Property acquisition, debt consolidation, refinance, working capital and a wide range of business purposes.

c. Loan to value ratio: Up to 70%
d. Loan Term: One month to three years.
e. Pricing: Application fee 1.1% (GST inclusive)”

The plaintiff exhibited to the affidavit a copy of the form obtained from the defendant’s website titled First Mortgage Loan.

In response to Ms Jean’s affidavit, the defendant provided a further affidavit of Mr John Matthies, dated 11 October 2011 (“Mr Matthies’ October Affidavit”). In Mr Matthies’ October Affidavit he says that “the Premium First Mortgage Fund [referred to by the plaintiff] does not and has never operated” and that “no fund investor has ever deposited funds into the Premium First Mortgage Fund”. In Mr Matthies’ October Affidavit he also says that the plaintiff would not, in any event, have been eligible for a loan from the fund because the plaintiff would not have satisfied the lending criteria for the Premium First Mortgage Fund as the Property was not acceptable security. In his October Affidavit Mr Matthies says that on the defendant’s website there is further information, titled Short Term Loans, which he exhibited to his affidavit. Mr Matthies says that the Short Term Loan information specifies lending criteria identical to the criteria applicable to and provided for in the June Letter of Offer. The loan application criteria set out in the Short Term Loan form exhibited to the affidavit is as follows:

a. Preferred loan size: $100,000.00 to $1,500,000.00
b. Loan Purpose:         Property acquisition, debt consolidation, refinance, working capital and a wide range of business purposes.
c. Loan to value ratio:   Up to 70%
d. Loan Term:              One month to six months.
e. Pricing:Application fee 2.2% (GST inclusive)

Mr Matthies also gave evidence that the only difference between the terms of the June Letter of Offer and the lending criteria outlined in the Short Term Loan form was that the loan to value ratio in the June Letter of Offer was 50% and the loan term was 12 months. In explaining the difference in the loan terms in the letter of offer and the Short Term Loan form Mr Matthies stated that during the loan application procedure the plaintiff’s finance brokers advised Mr Matthies that the plaintiff was negotiating the sale of the Property and that the plaintiff expected the Property to settle within 6 months. Therefore the loan repayment would be likely to be by way of sale of the Property. However, the offer made to the plaintiff was not for a short term loan, within the meaning of loan term as defined in the Short Term Loan form, the offer was for 12 months as outlined in the First Mortgage Loan form. Further the subject of the June Letter of Offer was stated as “First Mortgage Loan” and the application form attached to the May Letter of Offer completed by the plaintiff, stated:

“Loan Product – Please tick: 1^st Mge R 2^nd Mge £ Short Term Mge £”

In Mr Matthies’ September Affidavit, Mr Matthies gave evidence that from the defendant’s perspective the proposed loan to the plaintiff was at the higher end of the risk spectrum as:

· the Property was a “specialised commercial [P]roperty which, while of substantial value, would only attract a limited purchaser market”;

· “there was little positive evidence of a capacity to service the loan (hence a special condition in the loan offer letter that she provide such evidence)”; and

· “there was insufficient detail as to a satisfactory ‘exit’ strategy to repay the loan at its expiration.”[63]

As a result, Mr Matthies deposed that there would be significantly more investigation required by the defendant in relation to the higher risk associated with the proposed loan and that the application fee reflected this. The defendant did not, provide any evidence of the nature and extent of any further investigations, the time involved, the individuals engaged in such investigations (their skills and fees) or of the basis of the assessment of the risk level associated with the proposed loan – hence the need for such investigations.

[63]Affidavit of John Glyn Matthies dated 16 September 2011, 5-6.

In explaining the components of the application fee, in his September Affidavit, Mr Matthies gave evidence as to the work undertaken prior to sending the June Letter of Offer, the work carried out from the time of acceptance of the June Letter of Offer and the usual process performed when the loan proceeds and when it does not proceed. Mr Matthies’ evidence was as follows:

“[15]. … I examined the documents submitted by the broker and approached a number of VMIL’s potential investors to ascertain their interest in providing funds to VMIL for lending by way of a First Mortgage over the property at 585 Duncans Road Werribee South I also obtained a copy of the John Matthies & other documentation and confirming that such loan was a ‘non Consumer Credit Code’ loan. I discussed the plaintiff’s present loan proposal with these potential investors at some length. This was necessary as the VMIL Mortgage Fund is a Contributory Mortgage Fund and the advance would be made up of monies from a number of investors who were clients of or known to VMIL. It was only after I had spoken and provided details to such investors to ascertain the availability of funds that VMIL was in a position to be able to issue a Letter of Offer, which VMIL then did.
…
[17]. From the time of acceptance of the Letter of Offer, VMIL must (as it did in the present case) undertake various further actions including:

(a) arranging for the Privacy Act Authorities;

(b) undertaking credit searches, locating specialist valuers for specialist properties;

(c) obtaining quotes from valuers as to the costs of the potential valuation;

(d) obtaining title searches of the proposed security [P]roperty;

(e) giving detailed instructions to valuers, liaising with valuers as to return of valuation;

(f) perusal of valuation and assessment of the same;

(g) in this case renegotiating with the broker of the borrower for a reduced loan advance on the basis that the valuation would not support the requested loan;

(h) approaching and re-approaching a substantial number of individual investors or investor companies and discussing the availability of funds for the possible investment in the proposed mortgage advance;

(i) providing further information and valuations to projected mortgage investment lenders;

(j) ascertaining from in-house records persons who have sufficient funds and a risk profile who may be interested in such proposed advance;

(k) arranging for Investment Authorities to be forwarded to projected lenders, and perusal of same upon return and filing same;

(l) providing instructions to the solicitors for VMIL as to preparations of security documentation;

(m) perusal of the initial security documentation prepared by the solicitors;

(n) perusal of advices from the solicitors for VMIL as to return or otherwise of security documents; and

(o) giving general advices to the proposed investors regarding progress of the matter.”

[18]. In the case where the matter proceeds, VMIL must also:

(a) arrange for execution of security documents by VMIL;

(b) arrange for funds to be available by and from investors;

(c) arrange calculations of net funds available for advance;

(d) arrange for blank cheques to be available for settlement;

(e) peruse the solicitors certificate, perusal of certificate, perusal of certificate of title and registration of mortgage; and

(f) provide Certificates of Investment to underlying investors.

[19]. In the case where the matter does not proceed (as in the present case, VMIL must attend to:

(a) notification to underlying investors that matter shall not proceed;

(b) repayment of funds deposited to underlying investors (if appropriate);

(c) taking advices from solicitors of VMIL as to further action to be taken;

(d) authorising lodgement registration of caveats protecting the interest of VMIL pursuant to its equitable charge for its application and other fees; and

(e) liaising with solicitors for VMIL as to correspondence with solicitors as to any disputes or queries as to liability for expenses of VMIL.”

In relation to the components of the work performed, the plaintiff submitted that the defendant failed to provide sufficient evidence to demonstrate that the application fee was a reasonable reflection of the costs involved in assessing the credit application. The plaintiff submitted that the defendant did not provide evidence as to the cost involved in approaching potential investors and that the defendant did not provide evidence as to the number of investors that were approached and whether the same investors were approached for the May Letter of Offer and the June Letter of Offer and attached loan application. Further, and in my view significantly, the plaintiff submitted that, the defendant did not provide evidence as to whether the work carried out by Mr Matthies was in his capacity as director of the defendant or as the defendant’s solicitor. It follows that it is not possible to assess whether there is any overlap between the work done and charged by John Matthies & Co as claimed legal fees and if there is an overlap, the extent of that overlap.

In relation to the defendant’s September Affidavit, the plaintiff submitted that in relation to paragraph 18, no evidence was provided as to what the actual cost of that work would be. In respect of paragraph 17(i) to (o) the plaintiff submitted that the defendant did not provide evidence as to whether that work was carried out by the defendant or the defendant’s solicitors. Further, the plaintiff submitted that the defendant did not provide evidence of whether or what amount the defendant was charged for the legal work performed – which, as indicated previously, also goes to issues of overlap.

In relation to paragraph 19 of Mr Matthies’ September Affidavit, the plaintiff submitted that the defendant did not provide evidence as to the cost of the work performed or that any funds were actually deposited by potential investors in readiness for use for the purposes of the proposed loan. Finally, in respect of paragraph 19, the plaintiff submitted that the defendant is already claiming costs in relation to the legal costs of the dispute and the legal costs of the caveat and withdrawal of the caveat and therefore these costs should not be included in the calculation of the establishment fee.

In my opinion, the plaintiff’s submissions in this respect are correct. The defendant has failed to demonstrate that the establishment fee – the loan application fee - is a reasonable reflection of the costs (the evidence suggesting that it is not) and has provided little or no evidence of its “average reasonable costs”. The defendant has only provided categories of work that it says must be completed to facilitate the provision of the loan, however no information has been provided to establish that this work was performed or the costs involved in the work or that there was no overlap with other charges which have been paid by the plaintiff, legal or otherwise.

Further, the defendant claims $3,677.08 in legal fees for the legal work performed in relation to the proposed loan to the plaintiff. The plaintiff has accepted that the defendant is entitled to the $3,677.08 legal fees for the work performed in relation to the proposed loan.[64] A tax invoice from John Matthies & Co was provided to the Court, as evidence of the $3,677.08 legal costs claimed. The tax invoice stated that the “costs on Mortgage” were $2,200, the “costs in relation to attendances required by the Consumer Credit Code” were $220, the “costs in relation to the specialised nature of the transaction” were $1,100 and disbursements and searches were $157.08. The defendant has provided no evidence as to how the work performed, for which the legal fees are claimed, is different from the work as set out in paragraphs 17 to 19 of Mr Matthies’ September Affidavit. Further, as indicated above, the defendant has failed to provide evidence of the costs involved in performing the work claimed in paragraphs 17 to 19 of Mr Matthies’ September Affidavit or evidence as to how that work is different from the work claimed in the tax invoice of John Matthies & Co Therefore, I am of the view that an inference can be drawn that all the work performed in relation to preparing the proposed loan is that claimed as legal costs for the proposed loan.
[64]Transcript, 79-80.

In my opinion, all these factors support the view that the defendant has not shown that an establishment fee – loan application fee of $23,100 - is reasonable in all the circumstances. On this basis and for the preceding reasons I find that the establishment fee is unconscionable within the meaning of s 78(1) of the NCC. On this basis, I am of the opinion that, the establishment fee of $23,100 should be annulled. It follows that the claim for legal costs on the caveat and the caveat withdrawal fee in the sum of $1,169.40 should also be annulled as they are inextricably linked with the “tainted” establishment fee. Whether in such circumstances a party in the position of the plaintiff would have an action for damages under s 118 of the Transfer of Land Act 1958 as a result of the lodgement of such a caveat is a matter not raised in these proceedings but one which may yet arise for determination in other proceedings. Finally, I think I should note the dogged determination on the part of the defendant to recover an establishment fee in circumstances where it failed to utilise the important consumer protection provisions under the relevant credit legislation and was unable to provide satisfactory evidence in support of the fee, particularly in circumstances where the loan moneys were never advanced and where the borrower is illiterate and the plaintiff borrower did not deny liability to pay reasonable expenses otherwise claimed. The fact that a borrower is illiterate should, obviously, be a matter of concern to a lender and a fact that one would hope and expect good lending practices to identify. The approach of the defendant was, however, to cast responsibility on the finance brokers and her solicitor and to take procedural points in the proceedings and to attack the plaintiff’s credit. None of this reflects well on the defendant.

Additionally, I have decided that having regard to the provision of s 79 of the NCC I should forward a copy of all the papers in this matter, together with a copy of these reasons, to the Australian Securities and Investment Commission with a recommendation that they review them with a view to taking such further action as thought appropriate.

Summary and conclusions

For the preceding reasons, as I have indicated, I find that the claim for the establishment fee – the application fee - in the sum of $23,100 and the claim for legal costs on lodgement and withdrawal of the caveat should be relieved against and annulled.

On that basis, I will make an order that, the sum of $35,000 placed into an interest bearing trust account in the joint names of the plaintiff’s and the first named defendant’s solicitors pursuant to paragraph 8 of my order dated 30 June 2011 together with any interest earned be paid to the plaintiff or at the plaintiff’s direction.

I will hear the parties in relation to the form of final orders, as indicated above and on the basis of these reasons, and on the question of costs.

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Citations

Knowles v Victorian Mortgage Investments Ltd [2011] VSC 611

Most Recent Citation

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[2011] VSC 611

20 December 2011