Application of the Uniform Consumer Credit Code (UCCC) – Substance of the Transaction, not Treatment by the Lender
In the recent decision of Slaveska v Commonwealth Bank of Australia (CBA) (Credit)  VCAT 110, the Victoria Civil and Administrative Tribunal (VCAT) (Slaveska) confirmed that it is the substance of a transaction, and not the treatment of the loan by the lender, that determines whether the UCCC applies to a loan contract. In Slaveska, the plaintiff failed to have a credit contract set aside on the grounds that it was unjust pursuant to s70 of the UCCC. VCAT held that it did not have jurisdiction to make the orders because the UCCC did not apply to the credit contracts in question.
CBA provided two loans to Mrs Slaveska and her son. Both were headed “Investment Home Loan”. In respect to the first loan, CBA held a Business Purpose Declaration pursuant to section 11 of the UCCC (which was invalid because it was signed after the loan contract was entered into) and a letter from the tenant of the security property evidencing that it was
leased. The second loan was said to be for the purpose of “refinancing existing loans and to finance home improvements”, and indicated that the debtors were not going to live in the property.
Despite the above, CBA appeared to treat the loans as regulated by the UCCC because it had:
included in the loan documentation an information statement required by the UCCC in regulated credit contracts
obtained a signed consent form from the debtors pursuant to s171 of the UCCC nominating which debtor was to receive notices under the UCCC
served default notices on the loans which referred to the UCCC.
VCAT found that if, pursuant to section 6 of the UCCC, the UCCC does not in fact apply to a loan, a lender cannot make the UCCC apply by mistakenly treating the loan as being regulated by the UCCC.
The VCAT rejected Mrs Slaveska’s argument that, because she and her son were joint and several debtors under the loan contract, the VCAT should look at the purpose of each independently. The result of such an approach would have been that the UCCC applied to Mrs Slaveska (because her purpose was personal – i.e. to help her son) but not to her son (because his purpose was investment).
VCAT did not consider that the UCCC allowed it to reach a conclusion that the UCCC applies to one debtor under a contract but not the other. VACT held that, under sections 5 and 6 of the UCCC, the contract as a whole must be looked at and that the UCCC either applies to the whole contract, or it does not. This is to be contrasted with the case of mortgages and guarantees where sections 8 and 9 of the UCCC clearly contemplate that the UCCC may apply to some obligations but not to others.
The overall purpose of the transaction
VCAT also considered the purpose of the loan contracts under section 6 of the UCCC. Section 6(1)(b) of the UCCC provides that the UCCC applies if, when the credit contract is entered into, the credit is provided or intended to be provided wholly or predominantly for personal, domestic or household purposes. The VCAT noted that the whole substance of the transaction
at the time the contract was entered into must be considered and noted that such an approach is consistent with the way in which section 11 of the UCCC operates.
The VCAT also noted that, under section 11, while a debtor may complete a Business Purpose
Declaration in the appropriate form, if a credit provider or a relevant person knew or ought to have known that the transaction was in fact for predominantly personal, domestic or household purposes, the declaration will not support the statutory presumption that the UCCC does not apply.
Section 6(5) states that predominant purpose means the purpose for which more than half of the credit is intended to be used at the time of entry into the contract. In the VCAT’s view, the proper approach to section 6(1)(b) is to look at the purpose for which the credit was provided as known to both of the parties, or as could by reasonable inquiry have been known to them. If the purpose for which credit is provided or intended to be provided is unclear, then section 6(5) provides further assistance.
VCAT held that, in this case, applying the test in section 6(1)(b) gave an uncertain result as it was accepted that Mrs Slaveska had a personal purpose whereas her son’s purpose was investment. VCAT then turned to section 6(5) and found that more than half the credit was intended to be used to build an investment unit and that, therefore, the overall effect of section 6 was that the loan was not wholly or predominantly for “personal, household or domestic purposes” and, accordingly, the UCCC did not apply.
The decision highlights the importance for lenders to have clear and unambiguous loan documents and procedures so as to avoid confusion as to whether the UCCC applies to a particular credit contract.
Further, if two or more debtors jointly enter into a loan contract it is important for the lender to clearly ascertain and document the predominant purpose of the credit. In this context the lender should have regard to whether more than half of the loan was not to be used for household or domestic purposes.
Lastly, the VCAT highlighted the need for CBA to rectify the following practices and procedures, if they were still continuing:
a section 11 Business Purpose Declaration must be signed before the relevant loan contract is entered into
if loan contracts are still being drafted to cover both UCCC regulated and non regulated loans, they should be redrafted immediately so that there can be no confusion as to whether or not the UCCC applies
loan applications should be completed and signed by the debtors and not by bank staff or agents as they relate to important relevant matters (e.g. the purpose of the loan).
Emma Hodgman, Partner, Sydney
Who Gets the Money - DOCA Creditors or All Creditors in a Subsequent Liquidation?
Previously, liquidators would be entitled to be somewhat confused when considering how to deal with money that remains held in a deed administration fund after a company goes into liquidation. Case law on this question has to date been somewhat inconsistent. However, a recent Federal Court case has provided some judicial guidance on the issue: Strongest Link Pty Limited ACN 097 973 254 (In Liquidation)  FCA 1007 (3 July 2008).
Mr Robert Parker was the liquidator of Strongest Link. Mr Parker made an application to the Federal Court, seeking guidance as to how he, as liquidator, was to deal with surplus money held in a deed administration fund on the company’s behalf.
In November 2005, Mr Parker was appointed administrator of Strongest Link and in December a deed of company administration was executed. The terms of the deed provided that certain payments were to be made into a fund which was to then be distributed to creditors. The company would continue to trade during the deed period. The deed was to be terminated following full distribution to the deed creditors. Importantly, there was no reference to termination of the deed following liquidation of the company.
In March 2006 the deed administrator paid an initial dividend of approximately 50 cents in the dollar. In May 2007 the company ceased trading and in June 2007 the ATO began proceedings to wind up the company for debts incurred after the execution of the deed. On 5 October 2007 the Federal Court made an order winding up the company and appointed Mr Parker, the previous administrator, as liquidator.
At the time of Mr Parker’s appointment as liquidator, the deed of company arrangement was still on foot as none of the circumstances set out in section 445C of the Corporations Act had been met, namely:
the Court had not ordered the deed’s termination
the creditors had not resolved to terminate the deed
the termination provisions of the deed had not been met
the administrator had not executed a Notice of Termination.
Further, there was sufficient money in the deed administration fund to make a further dividend payment to creditors.
The deed administrator was of the view that his powers as either liquidator or deed administrator were hamstrung by the operation of various provisions of the Corporations Act:
Section 471A of the Corporations Act prevents a person exercising any power as an “officer” of a company whilst the company is being would up in insolvency.
An “officer” includes a deed administrator and a liquidator (s9).
Pre-administration creditors are bound by the terms of any deed of company arrangement (s444D).
A deed binds the company, its officers and deed administrator (s444G)
Curiously, because of this interaction the company was in the awkward position where the administrator could not perform any functions or powers under the deed of company arrangement, since the company was in liquidation. At the same time, however, the creditors and the liquidator were bound by the same deed.
The liquidator applied to the Federal Court to resolve this inconsistency. Orders were sought to determine the practical problem that, with the deed of company arrangement still on foot, should the deed fund be administered in accordance with the deed (ie paid only to the deed creditors), or should it be applied in accordance with the normal provisions of a winding up (and paid to all creditors pro rata)?
Justice Lander of the South Australian Federal Court considered whether the money held in the deed fund was held on trust, either for the company or for the deed creditors. In answer to this question the Court found that there was a conflict in the authorities. For instance, in the case of Dean Willcocks v ACG Engineering Pty Limited (in liquidation) (2003) 45 ACSR 290, Austin J. examined the provisions of a deed of company arrangement and concluded that the plain and natural meaning of the words in the deed created a trust in the amount of the administration fund for the benefit of the participating creditors. In his review of this case, Lander J. noted that:
“The trust arose by reason of the provisions of the deed which created an obligation on the administrator to hold the administration fund in accordance with the terms of the deed. He [Justice Austin] said that section 444G had the effect of binding the company and the deed’s administrators as well as officers and members which meant that the administrator was bound to hold the administration fund in accordance with the terms of the deed of company arrangement, which was also binding on all the relevant parties. He [Justice Austin] said the provisions of the deed gave rise to an express trust to the administration fund for the benefit of the participating creditors as beneficiaries”.
This decision had been followed in Shepard v Sports Mondial of Australia Pty Limited (In Liquidation) (2005) 53 ACSR 746, where it was held (at 748) that “the manner of application of the available funds depends upon the terms of the Deed of Company Arrangement”.
A contrary view to this had been taken by Barrett J. in the case of Lombe v Wagga Leagues Club Limited (2006) 56 ACSR 387. In this case, a specific clause in the deed of company arrangement provided that the deed fund was to be held on trust for the benefit of the administrators and participating creditors. Notwithstanding this specific clause, Barrett J. held that no trust was created by the deed. He found that the administrator was like a liquidator who was bound by statute to deal with the club’s assets in a particular way in accordance with the deed of company arrangement. Barrett J. held that:
“The segregation of part of the company’s property (whether or not including property to be
contributed by someone else) so that it becomes a fund to be applied by the deed administrator as the company’s agent in accordance with the deed of company arrangement does not, of itself, give rise to a trust. And where, as in the present case, the segregation is made in a context referring to a “trust” administered by the deed administrator, there is again no trust unless it can clearly be seen that the company has divested itself of the legal and beneficial interests in its property. The fact that the fund is to be applied by reference to creditors’ claims is not sufficient to give them such beneficial interest in the property concerned; nor is it sufficient to justify a conclusion that the deed administrators became the legal owners of the property so as to be capable of holding it on trust.”
In the Strongest Link case, Lander J. preferred the reasoning in Wagga Leagues to that in ACG Engineering and held that:
“There is no reason to impress upon the administrator a trust so that the company is divested of its assets upon the execution of the deed of company arrangement. It is enough that the administrator is obliged to deal with the assets of the company in accordance with the directions given by the company by its execution of the deed… There is nothing in statute which suggests that an administrator is to become the trustee of any fund created by the company pursuant to a deed of company arrangement”.
Lander J. went on to say that if he was wrong about the creation of a trust and the deed of company arrangement could create a trust in favour of the creditors as at the date of the appointment of the administrator, then the particular deed in question was not an arrangement of that type. He found that the relevant clauses of the deed instructed the administrator as to the order in which he could distribute and apply the fund, and that neither of the relevant clauses when considered together, could create a trust whereby the monies were held by the administrator for the benefit of the deed creditors. Accordingly, he concluded that the fund created by the deed remained the property of the company.
It therefore followed that the liquidator must receive the fund as part of the liquidation and distribute those monies in accordance with his obligations as liquidator.
The general conclusion from this decision is that a deed of company arrangement does not create a trust between the creditors and the deed administrator, even if that is what the deed expressly says. In one sense, that is more appropriately the role of the popular “creditors trust.”
It also highlights the importance of ensuring that deeds are carefully drafted to ensure they contain appropriate termination provisions, and that deed administrators keep a watchful eye on the progress of a company that continues to trade under a deed.
Gary Koning, Senior Associate, Sydney
Consumer Credit (Queensland) Special Provisions Regulation 2008
As of 31 July 2008 the Consumer Credit (Queensland) Special Provisions Regulation 2008 took effect so that credit providers can only charge borrowers a maximum interest rate of 48% (inclusive of all credit fees and charges) for Consumer Credit Code regulated loans
This now brings Queensland into line with New South Wales and the ACT where the maximum interest rate (inclusive of all credit fees and charges) is 48%.
In Victoria a maximum interest rate of 48% (exclusive of credit fees and charges) also applies.
The remaining states and territory do not have interest rate caps.
Privacy Law Reform
Over the next 18 months the Australian Government will conduct a review of Australia’s privacy laws on the back of the Australian Law Reform Commission’s (ALRC) report on Australian privacy laws entitled “For Your Information: Australian Privacy Laws in Practice” which was released on 11 August 2008.
Credit reporting is one of the areas that ALRC has identified as requiring reform. ALRC recommends that there should be some expansion of the categories of personal information that can be included in credit reporting information held by credit reporting agencies. The four additional items should be:
the type of each current credit account opened (eg. Mortgage,
credit card, personal loan)
the date on which each current credit account was opened
the credit limit of each current account
the date on which a credit account was closed.
ALRC has also suggested improvements be made to the credit reporting regime in relation to dispute resolution. Professor Les McCrimmon, Commissioner in charge of the Inquiry said “we recommend a greater role for external dispute resolution, by requiring that any credit provider who lists debt defaults on credit information files be part of an external dispute resolution scheme. This will provide a fast, simple process for consumers who wish to dispute a default listing”.
If you would like more information, please contact a member of our Financial Services Team listed on the right hand side of the screen.
The Federal Government has indicated that it will look at the credit reporting provisions in Australia’s privacy laws as part of the review process.
David Carter, Partner & Adam Mazzaferro, Lawyer, Sydney
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