New Zealand Credit Law Bulletin - Vol 9, No 4, May 2009
A free, plain English review of recent law and items of interest for creditors, produced by Hattaway & Associates Ltd, Credit Consultants. To subscribe, visit the New Zealand bulletin index and enter your details on the right
Plain language disclaimer:
This bulletin is not legal advice. Do not make decisions on legal matters based on a brief commentary. Instead, get professional legal advice.
In this issue:
- A practical issue for creditors wanting to support customers who are in trouble
Creditors should consider formal security over guarantors’ homes to make sure they don’t transfer their assets - Commerce Commission bully?
High Court appeal tough on the defendant - Why some solicitors will no longer explain guarantees
Why would you face the risk of this sort of problem for a fee of a few hundred dollars?
1. A practical issue for creditors wanting to support customers who are in trouble
Regal Castings Ltd v GM and GN Lightbody and Ors SC 72/2007 [23 October 2008]
Mr Lightbody owned a jewellery business, Capro Three Limited. Its major supplier was Regal Castings Limited. Debt to Regal Castings built up over many years. In 1995, the debt stood at $356,358. At that point, the debt was converted into a term loan repayable by monthly instalments, with the balance owing to be paid in 2000.
In November 1998 Mr Lightbody and his wife transferred their only significant asset, their home, into the ownership of a family trust of which they and their solicitor were trustees. In return, the trust was to pay them $230,000 in one sum on 12 November 2005. However, $54,000 of this debt was immediately forgiven. (Donors could give $27,000 per year without attracting gift duty, so presumably Mr and Mrs Lightbody forgave $27,000 each.) They then progressively forgave the rest of the debt to the trust. The debt was completely cleared by December 2002.
At the date of the transfer in November 1998, the amount of the Regal Castings term loan was approximately $220,000 but the monthly instalment payments had risen to $4,000 per month. In addition, Regal Castings had continued to supply Capro on normal terms and its current account debt to Regal Castings stood at some $90,000, $65,000 of which was in arrears.
Regal Castings was not told of the transfer of the house property or the programme of gifting which effectively stripped him of any compensation for it.
Capro was placed in liquidation in April 2003. At that point, Regal Castings was owed $15,358.57 on the term loan and $149,324 for further supplies. Apparently, it recovered nothing from the company.
It obtained judgment against Mr Lightbody and made him bankrupt. Once he was bankrupt, Regal Castings could then make a claim under s 60 of the Property Law Act 1952, seeking an order setting aside the transfer of the house property as having been made with intent to defraud. It was accepted by the parties that the outcome sought by Regal Castings would be to transfer 50% of the property to the Official Assignee (representing Mr Lightbody's half share after deducting the share acknowledged to belong to Mrs Lightbody). This would be shared for the benefit of all Mr Lightbody's creditors.
The Court considered that the establishment of a family trust and the secret transfer of Mr Lightbody's half interest in his family home in to it was carried out for the sole purpose of protecting the family home from his creditors. Despite Mr Lightbody's insistence that the property was transferred into the trust to protect it for his children, he could not offer the Court a rational explanation about whom or what he was seeking to protect the family home from.
The Court considered that it "beggars belief" that Mr Lightbody had transferred his only significant asset to a family trust without appreciating that by doing so he was exposing Regal to considerable risk of not being paid.
"It is not necessary to show that the debtor wanted creditors to suffer a loss; that it was his purpose to cause loss. It is however, necessary to show the existence of an intention to hinder, delay or defeat them and that the debtor has accordingly acted dishonestly."
"Whenever the circumstances are such that the debtor must have known that in alienating property, and thereby hindering, delaying or defeating creditors' recourse to that property, he or she was exposing them to a significantly enhanced risk of not recovering the amounts owing to them, then the debtor must be taken to have intended this consequence, even if it was not actually the debtor's wish to cause them loss." In such a case, the Court will set aside the gift or transfer.
In this case, "the consequence for the creditors is so obvious that it is really beyond argument that the debtor must be taken to have intended it."
The Supreme Court set aside the transfer of the property to the trust.
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2. Commerce Commission bully?
The Commerce Commission lost an appeal in the High Court this week. It was an appeal on a criminal prosecution on which the defendant finance company was as certain to get off as you can ever be in a court of law, even if it lost the point of law. So in the circumstances, it was very hard on the defendant for the public watchdog to appeal. It's as if they were trying to send a message to the finance industry - "defy us and we'll make it painful and expensive."
However, the finance company didn't lose. The result reinforces the outcome of the District Court case which showed that the Commission was very wrong in its view of the law.
In recent times consumer borrowers who pay off their fixed-rate mortgages early have been disappointed (outraged in some cases) to find that they are charged "break fees" or "full prepayment" fees. The rules on these fees were set in the Credit Contracts and Consumer Finance Act 2003 (CCCFA). The CCCFA says in section 54 that a lender is entitled to recover "a reasonable estimate of its loss", but that gives no-one any useful guidance, so the Ministry of Consumer Affairs put in the Regulations to the Act a "safe harbour" formula. Lenders who used this formula would know that they were acting within the law. The safe harbour formula assumes that:
" a lender will immediately re-lend the money,
" there will be no loss at all if interest rates have risen; and
" if interest rates have dropped since the loan was made, the difference between the two rates will be the cause of the only loss that the lender can recover. So banks which lent money at a fixed rate of say 10% and are now lending at, say, 7%, a charging a break fee which, broadly speaking, allows them to recover the 3% difference.
Now clearly, the lender may in fact not re-lend the money for some time. Why should the law assume that the next borrower gets the money that was just repaid, rather than some of the many millions more which are were sitting waiting to be loaned? The Ministry wanted to make it harder to sting borrowers when they repaid early, but anyone could see that the safe harbour formula wasn't really "a reasonable estimate of loss."
Of course lenders didn't have to stick to the safe harbour formula, but the Commerce Commission, which enforces the CCCFA, frowns on other options. The threat of action by the Commission persuaded Allied Nationwide Finance Ltd "to refund approximately $173,000 to more than 1200 customers who had been charged an unreasonably high prepayment fee when they repaid their loan early between April 2005 and August 2007… The affected customers were charged a prepayment fee that equated to 31 days' interest on the outstanding balances of their loan at the time of full repayment." The quote comes from a press release by the Commission.
However, Avanti Finance stuck to its guns on its "unsafe harbour" method. The Commission therefore charged Avanti in the District Court with 50 criminal offences relating to 50 credit contracts which were repaid early.
The key issue was whether the lender had to assume the money was re-lent immediately. The judge said no.
Avanti was exonerated. Not to put too fine a point on it, the Commerce Commission was made to look foolish, and the obvious flaws in the "safe harbour" formula were revealed for all to see.
The Commission appealed, seeking, Paula Rebstock claimed, "clarity on principles of law."
Here's the thing: this is a criminal prosecution and therefore not something to be taken lightly. But it was simply no longer possible for a court to say that Avanti was guilty beyond reasonable doubt because a District Court judge thought Avanti was in the right, so there was clearly reasonable doubt. The appeal seemed very tough on Avanti, given that the Commission couldn't hope for a conviction.
Anyway, they now have clarity on the key issue. "As the [District Court] Judge found, if there is excess lending capacity, then a reasonable estimate [of loss] does not require the assumption that funds will immediately be re-lent, and here Avanti did have such excess lending capacity," said Asher J in the High Court. So there! It will be interesting to see what costs are awarded against the Commerce Commission.
And of course, lenders will now be abandoning the safe harbour in droves. Expect finance company break fees on new loans to go up.
Peter Hattaway - www.hattaways.com - is a director of Hattaways, specialists in credit management training and consulting. This article is not legal advice.
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3. Why some solicitors will no longer explain guarantees
Beverley Rawleigh v Derek Maxwell Tait [2009] NZSC 11 (17 February 2009)
Mr Rawleigh was a director and shareholder of a company. A creditor required him and his wife, Beverley, to sign guarantees. They went to a solicitor, Derek Tait, for advice. Neither had previously consulted him.
Tait advised both of them against signing the guarantee and repeated that advice to the wife, the present applicant, when he saw her alone. She executed the guarantee after signing an acknowledgement to the solicitor recording his negative advice and confirming that she wished to proceed "whether you witness it or not, by obtaining another witness if necessary."
Mrs Rawleigh suffered a substantial loss when the guarantee was enforced. She claimed that she signed the guarantee because of the undue influence of her husband. She claimed that this would have become apparent if the solicitor had explained that he had a conflict of interest, because he was also acting for her husband. She made no claim against Tait in negligence but said that she suffered loss as a result of this breach of fiduciary duty (essentially the duty he had to do the right thing because she had placed her trust in him).
Tait admitted the breach of duty but successfully argued in both the High Court and the Court of Appeal that it didn't cause her loss. She would have given the guarantee even if the nature of his conflict of interest had been pointed out to her. Mrs Rawleigh applied for leave to appeal to the Supreme Court.
The Supreme Court said there was no appearance of a miscarriage of justice and dismissed the application.
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