Consumer Credit – defective notices and the meaning of ‘substantial hardship’

Introduction

The Supreme Court of Victoria recently held in Silberman v Citigroup Pty Ltd [2011] VSC 514 that: 

• a default notice which failed to comply with s80(3) of the Consumer Credit (Victoria) Code (Code) (now see section 88(3)of the National Credit Code), by failing to state that a subsequent default of the same kind that occurred in the period given to remedy the default might be the subject of enforcement proceedings without further notice, did not affect the validity of the notice. The omission was inconsequential as the borrower had no intention of paying any amount. Leave to commence proceedings was granted retrospectively by the court
• the term ‘substantial hardship’ in s70(2)(1) of the Code (now see section 76(2)(l) of National Credit Code) meant something more than “mere hardship” and was to be given its ordinary meaning. 

First Instance

Citigroup commenced proceedings to recover a debt from Mr Silberman. Mr Silberman commenced proceedings against Citigroup seeking a variety of relief under the National Credit Code (although the proceedings were heard on the basis that the Code was the applicable legislation).

Judgment was given in favour of Citigroup at first instance.

On Appeal

The issues on appeal were:

• whether Mr Silberman had suffered ‘substantial hardship’ within the meaning of s70(2)(1) of the Code such that the contract was unjust and should be reopened
• whether the default notice issued by Citigroup was valid pursuant to s80 of the Code, and
• whether Citigroup had complied with s85 of the Code. Pursuant to section 85 an acceleration clause in the contract operated only if Mr Silberman was in default under the credit contract or mortgage and: 

(a)     Citigroup had given Mr Silberman a default notice under section 80, and

(b)     the default notice contained an additional statement of the manner in which the liabilities of Mr Silberman under the contract or mortgage would be affected by the operation of the acceleration clause, and also the amount required to pay out the contract (as accelerated), and

(c)     Mr Silberman had not remedied the default within the period specified in the default notice.

Mr Silberman maintained that ‘hardship’ meant that a borrower who incurs payment obligations which cannot be satisfied from the income remaining after deduction of their expenses is, prima facie, unable to make the necessary payments without hardship; and where the shortfall is substantial, the hardship will be substantial. 

The court disagreed and said that such an interpretation would mean that an asset rich but income poor individual may establish ‘substantial hardship’. ‘Substantial hardship’ in s70(2)(1) of the Code meant something more than mere hardship, and was to be given its ordinary meaning.

In relation to the default notice, it had been accepted on appeal that it did not comply with s80(3) of the Code. Despite this, the court followed the NSW Supreme Court decision in Bank of Queensland v Dutta [2010] NSWSC 574 by holding that it had power to give Citigroup leave to commence proceedings retrospectively.

In Bank of Queensland v Dutta it was held that failure by a credit provider to serve notice prior to commencement of the proceedings will not result in that proceeding being dismissed. Subsection 80(4)(c) of the Code must allow the court to authorise the credit provider to commence proceedings retrospectively. 

Mr Silberman maintained that as the s80 notice was defective, the acceleration clause could not operate by virtue of s85 of the Code.

The court noted that there is a power under s85(2)(c) of the Code to authorise the bringing of an acceleration clause into operation without the required notice, and the court at first instance must be taken to have provided that authorisation as the orders made were consistent with such an authorisation having been given.

Conclusion 

Depending upon the nature of the error in a notice issued pursuant to the Code, it may not necessarily render the notice invalid, however errors can cause significant additional costs and delay, including in relation to appeals.

In this case the borrower did not remedy the original default and had no intention of doing so. The result may have been different had the original default been remedied but there was a subsequent default that occurred in the notice period which the lender sought to rely.