Smithson & Baye Pty Ltd and Australian Securities and Investments Commission (Taxation)

[2019] AATA 3405

Smithson & Baye Pty Ltd and Australian Securities and Investments Commission (Taxation) [2019] AATA 3405 (12 September 2019)

Division:TAXATION AND COMMERCIAL DIVISION

File Number:           2015/4721

Re:Smithson & Baye Pty Ltd

APPLICANT

AndAustralian Securities and Investments Commission

RESPONDENT

DECISION

Tribunal:Deputy President I Molloy

Date:12 September 2019

Place:Brisbane

The orders are:

(a)  The respondent’s decision cancelling the applicant’s Australian credit licence is affirmed.

(b) The applicant’s application for a notice under s 62 of the National Consumer Credit Protection Act 2009 (Cth) (NCCPA) or an exemption under s 109 of the NCCPA is refused.

(c) The respondent is directed to consider any further application (or applications) for an exemption under s 109 of the NCCPA lodged with the respondent by the applicant in respect of the credit contracts the subject of the review.

..............................[SGD].........................................

Deputy President I Molloy

Catchwords

TAX AND COMMERCIAL – ASIC – Loan agreements – code-regulated loans – cancellation of Australian credit licence – National Consumer Credit Protection Act (NCCPA) – whether a notice or exemption under the NCCPA should be granted – whether conditions or undertakings are appropriate – remittal – decision under review affirmed – notice or exemption under the NCCPA refused – ASIC to consider further application(s) for exemption if lodged.

Legislation

Corporations Act 2001 (Cth)

National Consumer Credit Protection Act 2009 (Cth)

Cases

Rent to Own (Aust) Pty Ltd and Australian Securities Investment Commission [2011] AATA 689

REASONS FOR DECISION

Deputy President I Molloy

12 September 2019

INTRODUCTION

1. On 29 March 2018 I affirmed the decision of the respondent (“ASIC”) made on 11 August 2015 to cancel the Australian credit licence (“ACL” or “licence”) held by the applicant (“Smithson & Baye”).

2. On 7 November 2018 the Federal Court made orders allowing an appeal, setting aside the decision, and remitting the matter to be determined according to law. The orders included a notation that:

   6.   The Decision is set aside on the agreed basis that the Tribunal failed to give reasons, or failed to give adequate reasons, for rejection of the Applicant’s submission that the Tribunal should decide:

   a.to grant the Applicant an exemption under s 109 National Consumer Credit Protection Act 2009 (Cth) (“NCCPA”); and

   b.to grant the applicant a notice under s 62 NCCPA.

3. This is the decision on whether I should set aside ASIC’s decision to cancel the applicant’s ACL and substitute that decision with another decision having regard to the basis of the remittal.

4. In addition to the evidence already before the Tribunal the parties lodged and served further material. The further material relied on by the applicant consisted of two affidavits of Anthony David Wynd lodged on 1 March 2019 and 2 August 2019.

   APPLICANT’S CONTENTIONS

5. Smithson & Baye’s position, as summarised in its written submissions, is as follow[1]:

   (a)The concerns arising out of the Tribunal’s decision revolved around the conduct and practices of Mr [Ricardo] Viana, who is no longer in control of the applicant’s affairs;

   (b)Cancellation of the applicant’s ACL with no other decision, leads to the undesirable result that neither the applicant nor the individual borrowers may enforce the terms of the loan agreements;

   (c)The applicant should not be relieved of its obligations under those loans and borrowers should not be relieved of their obligation to repay;

   (d)Either a notice under section 62 of the NCCPA or an exemption under section 109 of the NCCPA would overcome those undesirable consequences while at the same time ensuring that the applicant’s lending activities do not continue beyond collection of the amounts outstanding under the present loan book.

   [1]     Applicant’s Submission, dated 23 August 2019, paragraph 3.

6. The applicant submitted that I should consider the exemption or notice under the NCCPA as options to supplement a cancellation decision, assuming I remained of the view that the cancellation should be affirmed. I confirm I do remain of that view. It is fair to say that the arguments on behalf of both parties were advanced on that assumption.

7. Smithson & Baye submitted there was no justification for the borrowers receiving a windfall from the cancellation of the applicant’s ACL. It was submitted there was no evidence, much less any finding, that the terms of the code-regulated loans are oppressive or depart from ordinary commercial terms in any way. No complaint, it was submitted, had been raised by ASIC that, for example, the interest rates applied to the loans were excessive.

8. The applicant placed reliance on the decision in Rent to Own (Aust) Pty Ltd and Australian Securities Investment Commission (“Rent to Own”)[2] where the Tribunal took into account that cancelling a licence would deprive both the lender and the borrowers of the rights to enforce or perform the loan agreements. The Tribunal said[3]:

   The consequence would be windfall benefits for consumers. Worse, consumers who had made contracts with Rent to Own would not be able to enforce them.…

   The decision under review will be set aside and a decision substituted that a licence be granted to Rent to Own limited to performing and enforcing contracts already made.

   [2] [2011] AATA 689.

   [3] Ibid, [73] & [74].

9. In its further evidence the applicant advanced Mr Wynd as an appropriately qualified and experienced person to take control of Smithson & Baye in place of Mr Viana. Mr Wynd had no hand in the conduct which led to the cancellation of the applicant’s licence.
   Mr Viana was to have no control over the applicant’s activities.

10. A difficulty for Smithson & Baye is that, after Mr Wynd swore his first affidavit, ASIC served him with notices of hearing indicating that ASIC was considering whether he should be banned from engaging in credit activities. On 7 August 2019 shortly after
    Mr Wynd swore his second affidavit, ASIC made banning orders against him under the Corporations Act 2001, and the NCCPA. These decisions were unrelated to Smithson & Baye, but related to a company Financial Circle Pty Ltd and proceedings involving that company in the Federal Court.

11. Smithson & Baye has expressed concerns about the timing and circumstances of
    Mr Wynd’s banning. I am also informed that Mr Wynd has sought a review and is seeking a stay. I have nothing to say on those matters. The fact of the matter is that Mr Wynd cannot take up the proposed position with Smithson & Baye. Meanwhile Mr Viana is left as the applicant’s sole shareholder.

12. It is submitted that notwithstanding these developments, “[t]he applicant has demonstrated an intention to ensure that Mr Viana is no longer involved in the management of the applicant and that an appropriately qualified responsible manager is in place.”[4] It was proposed that an order could be conditional on the appointment of a responsible officer to the applicant capable of taking up that position, and that applicant advise ASIC of that appointment when it is made. I must say I do not think this is a particularly satisfactory situation.

    [4]     Applicant’s Submissions, dated 23 August 2019, paragraph18(c).

13. The applicant submits that of a notice under s 62 of the NCCPA, or an exemption under
    s 109, its preference is for a notice under s 62, allowing Smithson & Baye to enforce its contractual rights under its code-regulated loans notwithstanding cancellation of its ACL. In either case the applicant has offered to submit to conditions (or provide an enforceable undertaking) including, but not limited to, engagement of an independent compliance consultant, notifying borrowers of the Tribunal’s decision in respect of a s 62 notice or
    s 109 exemption, and giving ASIC 30 days’ notice prior to taking, for example, enforcement action against any borrower.

    RESPONDENT’S CONTENTIONS

14. ASIC opposes the granting of a notice under s 62 of the NCCPA or an exemption under
    s 109.

15. Amongst other things, ASIC submits there was evidence before the Tribunal that the circumstances in which consumers entered into the loan agreements were marked by unfairness. It submits there was evidence that consumers were pushed into the “top up” loans after they had already committed to purchasing house and land packages with their superannuation funds and a loan from a “principal lender”. 

16. There is some evidence to support this submission but it was untested at the hearing, mainly, I think, because it was not directly relevant to any of the substantive issues. Again, I think it is fair to say, and this is not a criticism of either party, that during the taking of evidence at the substantive hearing of the review neither party much focused on the issues which are now before me.

    TRIBUNAL’S CONSIDERATION

17. I must say that I think there is much to be said for the Tribunal’s response in the Rent to Own decision. There are, as the respondent submits, facts or circumstances which distinguish that case from the present one, but the general proposition hold true. The result that the parties to existing loan transactions should be deprived of their rights or relieved of their obligations, through the cancellation of the lender’s ACL, thereby resulting in windfall gain to the borrowers, does not on its face seem to me to be the correct and preferable decision.   

18. The difficulty I have in this case is that it is not at all clear that the apparent unfairness of a windfall gain to the borrowers, which influenced the Tribunal’s decision in Rent to Own, is not a preferable result to the possible consequences of allowing Smithson & Baye to enforce its rights under the loan agreements as it proposes. As ASIC submits the term of each loan agreement may by now have expired making the borrowers liable potentially to repay the principal and accrued interest.

19. I have been provided with what has been describes as a sample loan agreement[5]. The term of the loan is expressed to be for a period of twelve months which I am informed is typical. There is, of course, provision for payment of interest. It is not clear, and the applicant was not able to inform me, whether interest is compounding. In consequence of what has occurred, Smithson & Baye has not accepted payments from some of the borrowers since 2015 when ASIC cancelled its licence, and has not received payments from any of the borrowers since my decision in May 2018.

    [5]     Exhibit 1A.

20. It seems to me, although I cannot say because of an absence of evidence in respect of individual transactions, that simply allowing Smithson & Baye to enforce the loan agreements may be quite devastating to some of the borrowers, and may have the effect of shifting the apparent windfall from the innocent borrowers to the applicant. I am also concerned that the borrowers in these proceedings are not being given an opportunity to be heard in respect of a decision which may directly and adversely affect them.

21. ASIC has also raised a number of queries concerning the individual transactions. From the evidence previously adduced it is unclear whether any of the loans are secured. Under the terms of the loan agreement there is a question whether the borrowers can be required to provide security, including registered mortgages, in the future. There is uncertainty about the current interest rates under the loan agreements, and whether interest rates have been adjusted in the past (as the loan agreement provided, in accordance with the Reserve Bank of Australia official interest rate) or whether borrowers have been over-charged interest. There is a query about clause 4 of the loan agreement, which provides that the borrowers “must on demand pay all costs and outlays of the Financier on an indemnity basis” and how Smithson & Baye will interpret or apply this term.

22. In the result I am not willing to include a term under s 62 of the NCCPA in respect of the cancellation of the applicant’s licence specifying that the licence continues in force as though the cancellation has not happened for the purposes of any provisions of the Act in respect of any matter or period. Nor am I, on the evidence, prepared to make an order granting an exemption pursuant to s 109 of the NCCPA.

23. If I were minded to grant either application it would be pursuant to s 109 of the NCCPA principally because of its focus on individual contracts in the following terms (underlining added):

    Exemptions and modifications

    (1)  ASIC may:

    (a)exempt:

    (i)a person; or

    (ii)a person and all of the person's credit representatives; from all or specified provisions to which this Part applies; or

    (b)exempt a credit activity that is engaged in in relation to a specified credit contract, mortgage, guarantee or consumer lease from all or specified provisions to which this Part applies; or

    (c)declare that provisions to which this Part applies apply in relation to a person, or a credit activity referred to in paragraph (1)(b), as if specified provisions were omitted, modified or varied as specified in the declaration.         

    …

    Conditions on exemptions

    (4)  An exemption may apply unconditionally or subject to specified conditions. A person to whom a condition specified in an exemption applies must comply with the condition. The court may order the person to comply with the condition in a specified way. Only ASIC may apply to the court for the order.

    …

24. Whilst I accept the strength of the applicant’s argument that it is generally undesirable simply to cancel a credit licence, and thereby put an end to the rights and obligations of the parties under their loan agreements, with the likely delivery of a windfall to the borrowers, I am not satisfied in this case that an exemption (or exemptions) can be granted which will not have the opposite effect. That is, an exemption may have the effect of imposing sudden and unfair obligations on the borrowers, and shift the windfall to the applicant.

25. I am also concerned, as I have indicated, that Mr Viana remains the applicant’s sole shareholder. No-one else is currently proposed and able to act as Smithson & Baye’s responsible manager should it be permitted to engage in any credit activities. ASIC, as I have said, has also raised a number of issues which are not answered in the evidence.

26. I am also concerned that none of the borrowers have been given an opportunity to be heard on an issue which may result in a decision which adversely affects them. Notwithstanding Smithson & Baye’s offer to submit to conditions (or provide undertakings) I do not think these options provide a satisfactory solution when dealing with over thirty different transactions and individual borrowers. The conditions or undertakings almost certainly will not suit the circumstances of every borrower.

27. ASIC submitted that Smithson & Baye may apply for a fresh licence or apply to ASIC for an exemption under s 109 of the NCCPA once it has its “house in order”. ASIC rejected any suggestion that it has a policy not to grant an exemption. It submitted that it would treat any application on its merits and indicated that it would give the consumers liable to be adversely affected by any decision a reasonable opportunity to be heard. ASIC also submitted that it is open to me to direct that it consider an exemption pursuant to s 109 of the NCCPA . In the result I think this is the correct and preferable decision.

    DECISION

28. The orders are:

    (a)The respondent’s decision cancelling the applicant’s Australian credit licence is affirmed.

    (b)The applicant’s application for a notice under s 62 of the National Consumer Credit Protection Act 2009 (Cth) (NCCPA) or an exemption under s 109 of the NCCPA is refused.

    (c)The respondent is directed to consider any further application (or applications) for an exemption under s 109 of the NCCPA lodged with the respondent by the applicant in respect of the credit contracts the subject of the review.

29.     I certify that the preceding 28 (twenty-eight) paragraphs are a true copy of the reasons for the decision herein of Deputy President I Molloy

.......................[SGD]..................................

Associate

Dated: 12 September 2019

Dates of hearing:

30 August 2019

Counsel for the Applicant:

Mr N Shaw

Solicitors for the Applicant:

Ms A Arbuckle

McCullough Robertson Lawyers

Counsel for the Respondent:

Mr S Cleary

Solicitors for the Respondent:

Mr M Stockfeld

Australian Securities & Investments Commission