Australian Credit Law Bulletin - Vol 6, No 6, November 2005
A free, plain English review of recent law and items of interest for creditors, produced by Hattaway & Associates Ltd, Credit Consultants. To subscribe send a blank email to: aus-bulletin-join@mailman.hattaways.com
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:
- Hardship relief granted under Consumer Credit Code despite breach of contract
Unemployment means debtor "unable to reasonably meet obligations" - Finance broker unable to collect fees
Unsigned documents not sufficient under the Consumer Credit Code - Extension of warrants to seize and sell property rejected
Judge says cheaper to simply apply for new ones - Vital to get purpose-of-credit declarations exactly right
Creditor wins but fails to get costs (and discovers a flaw in its standard form declarations) - Statutory demands – do you serve the original or the copy?
Three appeals needed before common sense finally prevails. - Nine lessons on asking hard questions of overdue customers
Our thoughts on an issue that many credit staff have problems with.
1. Hardship relief granted under Consumer Credit Code despite breach of contract
Foster v GE Automotive Financial Services (Credit) [2005] VCAT 2147
In March 2004 Mr Foster borrowed $14,000 to purchase a Holden Commodore. He was to make repayments of $300 per month over a period of 60 months. His partner moved into his house in June and he took out a personal loan of $3000 to buy furniture. As there were now two people living in the house he began to spend more on utilities and food.
In November his partner became unemployed and Foster had to meet all joint household expenses on his own income. From this time no further car repayments were made. In February he also became unemployed.
In May he found permanent work and his partner found some casual work. Their combined incomes then totalled $3,200 per month with a combined monthly expenditure of $1430. During this time Foster repayed $1800 of prior financial commitments which included a family loan and some arrears in rent.
Under the Consumer Credit Code if a debtor is unable to reasonably meet obligations due to illness, unemployment or some other reasonable cause they can ask their credit provider to change their credit contract, for example, by extending the term and reducing repayments. If the credit provider refuses to make the change the debtor can then apply to the relevant court (in Victoria, VCAT, the Victorian Civil and Administrative Tribunal, Civil Division) who may make the change.
Foster applied to GE for a change. It was refused, primarily on the basis that be had failed to register and insure his car and so was not complying with his contract. He took the matter to VCAT. GE issued a default notice and applied for orders under the Code to enter his property and take possession of his car.
The Tribunal held that Foster’s personal circumstances were sufficient to meet the requirements under the Code to grant a hardship application. On the evidence the tribunal held that he was unable to reasonably meet his loan obligations.
The fact that he had also suggested two alternative payment schedules, both extending the term, meant the tribunal viewed his application more favourably. The tribunal held that Foster must immediately register and insure his car and then commence the new repayment arrangement. Foster was ordered not to drive the car until registration and insurance had been arranged.
The Deputy President of the Tribunal said in her judgment, “I am satisfied that Mr Foster would not reasonably be able to pay for the insurance and registration as well as also paying the additional $200 off loan arrears. Accordingly, the payment of the $200 of loan arrears per month will commence six weeks after the date of this order and will continue until the arrears are brought up to date.” The repossession order was cancelled.
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2. Finance broker unable to collect fees
Alexander v Birch (Credit) [2005] VCAT 2145
In late 2003 Ms Alexander entered into a contract to sell her home and around the same time entered into a contract to buy a block of land. She put down a 10% deposit on the block of land but shortly after that the contract to sell her home fell through.
She decided to try to go ahead with the purchase of the land and approached a finance broker, Mr Birch of AAA Mortgage Money Pty Ltd. She asked Birch to obtain a loan to complete the purchase of the land and he found a law firm which would lend her the money. Her understanding was told that she would be charged $880 for this service by AAA but there was no documentation to this effect.
Just before settlement, Alexander was told that the total fees for the loan would be approximately $10,000. She refused to follow through with the loan.
When Alexander later sold her property she found that a caveat had been placed on her property by Mr Birch. The interest claimed was as chargee under an agreement between Alexander and Birch. Someone with an interest in land (in this case, arguably, the right to put a charge or mortgage on Alexander’s property) can lodge a caveat on the title. This tells other people who might want to deal with the land that they have a claim of some sort which must be satisfied.
As Alexander was keen to complete the sale she contacted Birch and was told that he would take the caveat off if she paid him $4950 which she did. She then applied to the court to have the money she had paid refunded.
AAA Mortgage Money’s instrument of appointment was brought before the court which purported to set out the terms of the arrangement between Alexander and AAA Mortgage. It stated that any fees payable to the finance broker would result in a charge on Alexander's property and a caveat might be lodged to protect that charge.
However, it was unsigned.
It mentioned an amount being loaned but did not give any complete details of either the terms of the loan, interest payable or the breakdown of the fees which were to be payable to AAA and to Mr Birch.
The court held that the loan Ms Alexander sought was consumer credit and thus fell within the Consumer Credit Code. Under the Code there must be a signed instrument of appointment. As the agreement wasn’t signed, all fees paid by Ms Alexander to Mr Birch were refunded in full.
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3. Extension of warrants to seize and sell property rejected
National Australia Bank Limited v Godden & Ors [2005] VSC 450 (17 November 2005)
National Australia Bank was owed money by four defendants. It obtained judgment against each and applied for warrants to seize property. For various reasons the warrants weren’t executed and the NAB applied to extend them. (For example, in one case, an arrangement was made under which the debtor should have paid $50 a week off the debt. In others, the property failed to sell at auction.)
The bank applied to extend the warrants. In respect of each of the defendants the judge concluded that it was cheaper to simply apply for a new warrant and refused to extend the old one.
The judge was of the view that the creditor from the outset should have arranged registration of each warrant against the title to the property immediately and instructed the Sheriff to sell it. He thought that any repayment arrangements only slowed down the decision to proceed to a sale of the property, which was the point of the exercise (although in fact the NAB may have considered that the point was to get its debt paid).
The judge also felt that the failure to procure registration of the warrants on the title of the debtor’s property within a year showed a leisurely approach to the issue by the creditor’s solicitor and the sheriff.
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4. Vital to get purpose-of-credit declarations exactly right
Edwards v South Eastern Secured Investments (Credit) [2005] VCAT 2146
In 2004 Mr Edwards applied for a loan for $270,000 from South Eastern Secured Investments (SESI) in order to build an apartment on top of his 3 flats. The apartment was to be rented out on completion. The flats provided security for the loan.
In order to obtain the loan Edwards signed a declaration purportedly under the Consumer Credit Code. The declaration stated that credit was provided for business or investment purposes.
Later that year Edwards borrowed another $40,000 for the development. The application was in the same form and in similar terms to the previous application. The Consumer Credit Code declaration was in the same form.
In 2005 Edwards applied for hardship relief under the Consumer Credit Code. Mediation was organised but Edwards did not attend so his application was struck out. SESI then asked for costs. The effect of s.109 of the VCAT Act is that each party bears their own costs unless, having regard to a number of listed factors, the Tribunal considers it fair to order otherwise. If Edwards had “made a claim with no tenable basis in fact or law,” costs would be awarded against him. The Tribunal first had to decide whether the Code applied.
The code could only apply to a credit contract if it was wholly or predominantly for personal or domestic or household purposes. Edwards had signed declarations saying that the loans were for business or investment purposes. Were the declarations valid?
The declaration had to be in the form required by the regulations. The Tribunal looked at it and compared it with the form in Regulation 10 of the Code. It held that the declarations signed were not in the form required by Regulation 10 because in the form that Edwards signed, a warning to debtors was in a different position. The warning says that unless a loan is predominantly for business or investment purposes debtors shouldn’t sign as by signing they may lose their protection under the code. The warning on Mr Edwards’ declaration didn’t appear immediately below the loan purpose declaration. Instead there was a further declaration about what the debtor had told the credit provider the loan was for.
The Tribunal felt this was critical as it meant the reader’s eye would be diverted from the warning by the second part of the declaration and the reader would never read the warning. The tribunal also noted that it was unclear whether Mr Edwards signed the declarations before accepting the loan offers and so entering into the credit contract. For these reasons he found that it was not conclusive that the loan was for business or investment purposes.
Despite all this, the Tribunal noted that it was still an effective statutory declaration. Looking at the other documents it was clear that the loans were business or investment loans and that, accordingly, the Code didn’t apply. The tribunal, however, felt that even though the code didn’t apply, due to the very serious variation in its business purposes declaration, he was unwilling to order the rest of the costs in the company’s favour.
The Tribunal commented that the declaration form appeared to be a standard form. It would be unfair to award costs against Mr Edwards in these circumstances apart from the costs relating to the missed mediation.
The Tribunal also said that SESI should urgently amend its loan purpose declaration.
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5. Statutory demands – do you serve the original or the copy?
Emhill Pty Ltd v Bonsoc Pty Ltd [2005] VSCA 239 (7 October 2005)
Bonsoc Pty Ltd, a landlord, filed a complaint in the Magistrate’s Court that his tenant, Emhill Pty Ltd, was in arrears on its rent and outgoings and claimed damages for the cost of reinstatement of the premises. After a number of counterclaims and appeals Bonsoc obtained a judgment.
Bonsoc then issued a statutory demand to Emhill for the payment of the rent. A solicitor acting for Bonsoc handed a statutory demand to the director of Emhill. A statutory demand requires that money be paid to the creditor within 10 days otherwise the debtor will be declared insolvent.
The issue in this particular case was whether there had been good service of the document. The statute states that a ‘copy’ must be served on the debtor, not the original document. In this case it was the original document that was handed to the director of Emhill.
Emhill applied to have the statutory demand set aside. The court held that the demand should be varied but that it would still take effect from when the original demand had been served.
Emhill appealed and lost.
Emhill appealed again… and lost. The judge said that as the document had been served on the sole director, secretary and shareholder of Emhill this could constitute the document being brought to the actual attention of the company.
Emhill appealed yet again. The court agreed with the previous judge’s decision that there had been proper service but came to the conclusion on different grounds. The judge saw the issue as one of statutory interpretation. He said, “the task of the Court is to give effect to Parliament’s intention as conveyed by the words of the relevant statutory provision. The statutory words are to be construed, of course, in the context of the legislation as a whole.” The lawyers for Emhill conceded that “it was not possible to discern any reason why Parliament might have sought to distinguish … between an original and a copy of a statutory demand.” The judge said it was “universally absurd” to contend that if an original was served rather than a copy of the original this would not constitute good service.
Serving the original was proper service of the statutory demand. The appeal was dismissed.
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6. Nine lessons on asking hard questions of overdue customers
Some credit staff are very resistant to the idea of asking customers for “private” financial information. In a recent seminar we were talking about asking customers about their financial situation in the course of collecting debts – asking for financial statements or asking questions such as “how much do you earn?” and “what other debts do you have?” and “what payments are you expecting from your customers?” Someone said, as someone often does, “I couldn’t ask my customers that!” Here are 9 points to consider on this issue.
The first point, and I think it’s an obvious one, is that we’re not talking about asking these sorts of questions in every collection situation. You would only consider asking them if you think it will help for you to know more about the situation. For example, if the customer has already broken a promise to pay and acknowledges financial problems, why wouldn’t you want to ask some questions about their situation? The further along the collection process you are and the more money they owe, the more you can justify. But if you know your customer is a huge, wealthy multinational which can afford to pay your $500 account, you don’t need to ask about their financial situation. If your customer is two days past due and has promised a bank transfer of the full $20 this afternoon, you don’t bother. If the unpaid account appears to be just an oversight, you don’t bother.
A second point to note is that these questions are not impossible to ask. Some people do ask their customers this sort of thing. They find that it’s useful information and they find ways that work for them to ask these questions or variations of them. If they didn’t work regularly enough, they wouldn’t ask them.
Thirdly, you are bound to offend someone, sometime, when asking hard questions, so there is always the risk of losing customers. No-one ever said credit management was always going to be easy. The easy option, certainly, is just not to ask them at all, but in credit management you need the ability to say all sorts of difficult things in situations which are often stressful and delicate. You need the courage to face up to doing so.
These “difficult things” are not necessarily just questions. I know of people who have been successful at persuading debtors to borrow from a finance company, cut down on their cigarette expenditure, or borrow from family. The trick is to be able to say these hard things without having all your customers swear at you and slam the phone down. If you can’t say those hard things well, you either don’t make the calls, or you take a soft line on your customers, or you offend everyone.
Fourthly, you will be able to judge most of the customers from whom you have no chance of getting an answer to one of these hard questions. If your customer is someone who is in a prickly state because of embarrassment or guilt, you don’t bother. If you can tell that the customer hates you for calling them about their account and is on the verge of exploding, you don’t bother.
Fifth, you don’t necessarily just jump straight in with your toughest question. A lot of the “secret” of successful telephone collection lies in your ability to build rapport. You have a customer who has a problem so you ask a series of questions that are clearly designed to help you understand the problem so you can help to find a solution. The first questions are easy and non-threatening. (What day do you get paid? Do you have other accounts that you have to pay ahead of ours?) Remember that many consumer and small business debtors are in a very difficult position. They want to pay their debts but they can’t, and they have lots of creditors ringing them and saying simply, “you have to pay me or else.” If you appear to be trying to help them find a plausible way out of their problems, many of them will play ball.
(Another approach is to be an authority figure, something like a stern headmaster. Some people can pull this off; most can’t. It’s not an approach that works with all debtors.)
Sixth, even when customers do object to answering questions, these objections may be able to be overcome. After all, when someone has breached their contract and failed to pay the money they owe – and especially if they then break further payment arrangements or acknowledge that they are in trouble – why shouldn’t the creditor have some more information about the situation? That’s not an unreasonable argument and will overcome some objections. The other obvious argument is that you’re trying to help and in order to help you need some information.
Seventh, your tone is vital. Find a tone and an approach that works for you. As a broad rule, sincere and non-threatening are adjectives to keep in mind.
Eighth, it’s unlikely that your customers are a special breed who simply can’t be asked hard questions. Let’s take the example of a credit manager who’s dealing with senior managers, say financial controllers, in big corporations, over very large accounts? I’ve had people in seminars tell me that you couldn’t ask hard questions of these sorts of people because you don’t want to lose their business. I disagree. See my first point: if they owe you enough money and the debt’s old enough, you (or someone in your business) must ask the hard questions that need to be asked. Their bankers will be.
The last point, of course, is that you may be right. Let’s say you’re 18 and your customers are all experienced businesspeople, most of them 20 to 40 years older than you. Or perhaps you just don’t have the personality or people skills to build rapport with people over the phone. In such a case, perhaps you’re right – you shouldn’t try to say these things to your customers. But perhaps you should consider that you might be in the wrong job.
This article first appeared in the New Zealand Mercantile Gazette in July 2005.
