Australian Securities & Investments Commission v Cash King Pty Ltd - [2005] FCA 1429 - FCA 2005 case summary — Zoe

CTHFCA

Australian Securities & Investments Commission v Cash King Pty Ltd

[2005] FCA 1429

Federal Court of Australia|2005-10-12|Before: Stone J

View original source

At a glance

Source facts

Court

Federal Court of Australia

Decision date

2005-10-12

Before

Stone J

Source

Original judgment source is linked above.

Judgment (69 paragraphs)

[1]

Background 1.1 Cash King Pty Limited ("Cash King") has in the period from about February 2002 to date, supplied the following services as part of the business conducted by it: (a) Cash King has acted as a mortgage broker, broking business or investment loans financed by private lenders and secured over the borrower's real property ("Broking Business"); (b) Cash King has acted as a lender who supplied customers with finance, which was secured by an equitable mortgage over the borrower's real property ("Lending Business"). 1.2 The Lending Business involved the advance of funds to borrowers secured by a mortgage over the borrower's property. The loans advanced by Cash King in the Lending Business were specifically for business and or investment purposes only and were for short periods of 3 to 12 months. 1.3 Daniel Swart ("Mr Swart") has been the managing director of Cash King since 16 March 1999. Prior to Cash King commencing its real property Broking and Lending Business in February 2002, Mr Swart had limited experience in this type of business. 1.4 On 18 May 2005 ASIC commenced proceedings against Cash King and Mr Swart in the Federal Court (proceedings no 767 of 2005) ("Court Proceedings") alleging in substance that: (a) Cash King engaged in misleading or deceptive conduct in relation to its Broking Business and its Lending Business in contravention of section 12DA of the ASIC Act; (b) Cash King made false or misleading representations in relation to its Broking Business and its Lending Business in contravention of section 12DB of the ASIC Act; and (c) Mr Swart was the managing director and was responsible for and supervised the day-to-day activities of Cash King. 1.5 The conduct which is the subject of the Court Proceedings includes the following.

[2]

[12]

Letter to affected borrowers 2.13 Cash King will within 21 days of the execution of this Enforceable Undertaking send by ordinary pre-paid post to the last address known to Cash King for each borrower entitled to a refund pursuant to paragraphs 2.1 to 2.11, including those borrowers listed in column 1 of Annexures A, B, D and E of the Statement of Agreed Facts, a letter: (a) in the form annexed at Annexure A to this Undertaking except in the circumstances set out in (b) and (c) below; or (b) in the form annexed at Annexure B to this Undertaking if Cash King intends to rely on paragraph 2.12 and paragraph 2.17 applies; or (c) in the form annexed at Annexure C to this undertaking where Cash King intends to rely on 2.11 below and paragraph 2.18 applies. 2.14 Cash King will, in the case of any of: (a) the letters sent in accordance with the undertaking given at 2.13 above that are returned to the First Defendant; and (b) the people referred to the undertaking given at 2.13 above who have not contacted Cash King within one month of the letters being sent in accordance with the undertaking given at 2.13 above update the addresses they have for these people by conducting the searches set out in 2.15 below within 14 days of, in the case of (a) above, the letter being returned or, in the case of (b) above, the period of one month from the sending of the letter expiring. 2.15 Unless they have already done so in the six months prior to the execution of these undertakings, Cash King will update the addresses for the people referred to in 2.13 above by conducting the following searches ("Searches"): (a) access Australia Post's "National Change of Address" database; (b) an Internet search of the Telstra White Pages On-Line at the domain name www.whitepages.com.au.; and (c) Commonwealth electoral roll searches in relation to each of those persons 2.16 If the Searches reveal a different address for any of the people referred to in 2.13 above, Cash King shall, within 7 days of becoming aware of the different address, send by ordinary pre-paid post to that different address a letter in the form annexed at Annexure A, B or C.

[13]

Referral of claims to an independent claims reviewer 2.17 If Cash King intends to rely on 2.12 above to reduce in part or entirely a refund payment otherwise due to a borrower pursuant to the terms of this Undertaking, it must, subject to 2.18 below, refer any request for review ("Claim") received from that borrower in response to the letter sent to that person pursuant to 2.13(b) above to the independent claims reviewer ("Reviewer") appointed in accordance with paragraphs 2.22 to 2.26 below within 14 days of receiving the Claim. 2.18 If the total amount of payments, including payments made towards interest, enforcement costs and expenses and other fees and charges, made by a borrower pursuant to their loan agreement with Cash King does not exceed the principal loaned by Cash King, then Cash King will not be obliged to refer any claims to the Reviewer prior to relying on 2.12 above. 2.19 Cash King will not be entitled to reduce any payment by the Offset Amount to the extent that the Reviewer is satisfied, having considered the Claim, any written material that Cash King submits to the Reviewer, and Cash King's files, that: (a) the Offset Amount is not, on the proper construction of the loan agreement, owed by the borrower; or (b) that Cash King has by its actions or conduct waived its right to, or released the borrower from any obligation to pay, the Offset Amount; or (c) that Cash King incorrectly charged the borrower any other fees or charges in relation to the loan agreement. 2.20 Cash King undertakes to make available to the Reviewer all of its files relating to the loan which is the subject of the Claim. 2.21 The Reviewer may make one of the following decisions only in relation to each Claim: (a) reject the Claim in full and uphold Cash King's right to reduce the payment due by the Offset Amount; (b) accept the Claim in full and refuse to allow Cash King to reduce the payment due by the Offset Amount; or (c) accept the Claim in part and allow Cash King to reduce the payment due by a part of the Offset Amount.

[21]

How this affects you Cash King's enforceable undertaking included an agreement that Cash King would make a payment to you of $## because *Cash King represented to you that you had to pay an establishment fee of $## when in fact the lender initially requested that you pay an establishment fee of $##/charged you enforcement costs and expenses that were $## higher than the enforcement costs and expenses Cash King incurred/charged you $## for a brokerage fee when no brokerage services were provided to you by any third party/represented that you were in default on your loan when you were not and incorrectly charged you $## default interest and/or enforcement costs. **According to our records we paid you $## on …/…/……and accordingly this finalises our obligations to you under the enforceable undertaking./ Please contact Janet on (02) 9630 4866 so that she can arrange to make this payment to you of $##. You may choose the option of a direct payment into your account or a cheque in the mail made out to your name, if so complete and return the attached refund form. Payments will be made after receipt of 100 points of identification and signed address or payment into account details have been received. If you would like further information about the Federal Court case you may wish to look at ASIC's website [insert ASIC website for Cash King matter] or consult with your solicitor. Yours faithfully Cash King

include only those phrases which apply to this customer. ** include one of the following paragraphs only. Refund Acceptance Form I, #### of ##### hereby acknowledge receipt of Cash King's letter dated ##/#/####, and hereby direct Cash King to pay the amount of $## into the following account: Bank: __________________________ Name of Account: __________________________ BSB No: __________________________ Account No: __________________________ Account Type __________________________ OR Direct Cash King to post a cheque in the amount of $## to the following address:

[58]

The ASIC Act 4 It is appropriate to set out the relevant provisions of the ASIC Act and the Australian Securities and Investments Commission Regulations 2001 (Cth) ('the Regulations'). 5 Subdivision D of Division 2 of Part 2 of the ASIC Act concerns consumer protection in relation to financial services. Section 12DA, which is contained in Subdivision D, relevantly provides that: '12DA Misleading or deceptive conduct (1) A person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive. (1A) … (2) Nothing in sections 12DB to 12DN limits by implication the generality of subsection (1).' 6 Section 12DB relevantly states: '12DB False or misleading representations (1) A person must not, in trade or commerce, in connection with the supply or possible supply of financial services, or in connection with the promotion by any means of the supply or use of financial services: (a) falsely represent that services are of a particular standard, quality, value or grade; or (b) … (c) … (d) … (e) make a false or misleading representation with respect to the price of services; or (f) … (g) make a false or misleading representation concerning the existence, exclusion or effect of any condition, warranty, guarantee, right or remedy. (2) … (3) …' 7 Section 12BAA defines a 'financial product' for the purposes of Division 2 of Part 2 of the ASIC Act. A credit facility (within the meaning of the Regulations) is a financial product: s 12BAA(7)(k). Regulation 2B(1)(a) provides that, for the purposes of s 12BAA(7)(k), the provision of credit for any period, with or without prior agreement between the credit provider and the debtor and whether or not both the credit and debit facilities are available, is a 'credit facility'. 8 Section 12BAB provides the definition of 'financial service'. Pursuant to s 12BAB(1)(b) a person provides a financial service if they 'deal in a financial product'. In this context, 'dealing' includes, among other things: (i) applying for or acquiring a financial product; (ii) issuing a financial product; (iii) varying a financial product; and (iv) disposing of a financial product. Further, arranging for a person to engage in such conduct is also dealing in a financial product, unless the actions concerned amount to providing financial product advice: s 12BAB(8). 9 Section 12BAB(1)(g) states that a person provides a financial service if they 'provide a service that is otherwise supplied in relation to a financial product'.

[60]

Increase of establishment fees 13 As noted above at [11], Cash King was involved both in arranging credit facilities for borrowers pursuant to which credit was provided by a third party, and providing credit facilities directly to borrowers. Cash King referred applications made by Cash King's customers for credit to be provided by third parties to Bleier Mortgage Corporation Pty Ltd ('BMC'). 14 BMC assessed such applications for credit to be provided by various lenders ('BMC Lenders'). One of the BMC Lenders was a firm of solicitors, RL Kremnizer & Co. When BMC was prepared to offer a credit facility to a Cash King customer on behalf of a BMC Lender, BMC would issue a credit facility approval letter on RL Kremnizer & Co letterhead on behalf of, or purportedly on behalf of, the BMC Lender. It was the practice of BMC to state in this letter that it was a term of the credit facility that an establishment fee, in a certain sum, was payable to BMC. 15 On receipt of the approval letter from BMC by way of email or facsimile, it was Cash King's practice to transfer the details onto Cash King's letterhead and to forward the letter to the relevant customers. 16 From about June 2002 to about November 2003, Cash King engaged in a practice whereby, in preparing the letter on Cash King's letterhead containing the details from the BMC approval letters, it would increase the amount of the establishment fee payable. Pursuant to an agreement between BMC and Cash King, Cash King was entitled to claim a payment from BMC of 65% of the difference between the establishment fee specified by BMC in its approval letter and the increased establishment fee specified by Cash King in its letter. 17 By these letters Cash King represented that BMC sought and required an establishment fee equal to, and no less than, the increased establishment fee specified. Cash King did not inform its customers of the increase in the establishment fee or the arrangement described in [16] above. 18 On the basis of this material I am satisfied that Cash King, in trade or commerce, engaged in conduct in relation to financial services that was misleading or deceptive, or likely to mislead of deceive, in contravention of s 12DA(1) of the ASIC Act. I am further satisfied that Cash King made representations in contravention of s 12DB(1)(e) of the ASIC Act.

[61]

Enforcement of costs or expenses 19 In providing financial services, as set out above at [11]-[12], Cash King provided credit facilities that were secured by mortgages over real property in relation to which Cash King entered into written agreements with the borrowers ('Secured Credit Facility Agreements'). The terms of these agreements were contained in a 'Letter of Offer' and a mortgage agreement. The terms included that the borrower agreed to pay all costs and expenses incurred by Cash King in consequence of, or on account of, any default by the borrower. 20 From about June 2002, whenever Cash King formed the view that a borrower was in default of the obligations created by the above agreement, Cash King undertook steps to enforce the terms of the agreement, including: (a) preparing and serving notices pursuant to s 57(2)(b) of the Real Property Act 1900 (NSW); (b) preparing, filing with the Supreme Court of New South Wales and serving statements of claim seeking orders for possession; and (c) obtaining and entering of orders for default judgment, obtaining writs of possession and arranging for the enforcement of writs of possession. 21 From about October 2002 in respect of certain borrowers, it was Cash King's usual practice for these enforcement activities to be undertaken by employees of Cash King. The majority of these activities were carried out by one particular employee. None of the employees who undertook enforcement activities had legal qualifications. 22 At various times, Cash King advised certain borrowers of a payout figure for the mortgage, a figure which included an amount payable for 'enforcement costs'. The enforcement costs were calculated by Cash King by reference to a memorandum provided to it by an external solicitor which itemised various enforcement activities and set out how much that solicitor charged his clients for completing those activities. However, this was in circumstances where Cash King had not engaged any external solicitor and instead had undertaken enforcement activities as described above at [20]-[21]. In fact, the actual enforcement costs incurred were lower than those charged. Some of the borrowers paid the enforcement costs charged rather than those actually incurred. 23 On the basis of this material I am satisfied that by engaging in the above conduct in respect of enforcement costs or expenses Cash King contravened s 12DA(1) of the ASIC Act. In addition, I am satisfied that Cash King made false and misleading representations concerning the existence of a right or remedy in contravention of s 12DB(1)(g) of the ASIC Act.

[64]

Misrepresentation about default under credit facilities 30 Cash King entered into Secured Credit Facility Agreements with certain borrowers which provided that: (a) interest be paid monthly on a fixed day each month; (b) pursuant to clause 5 of the mortgage 'the first payment is to be made in the month after which the principal is advanced'; and (c) a lower rate of interest applied if the borrower made the monthly payment with seven days of the due date. 31 Despite the express provision in clause 5 of the mortgage agreement, Cash King withheld from the amount advanced to certain borrowers under each Secured Credit Facility Agreement an amount equal to at least one month's interest. Further, Cash King treated each of these borrowers as being in default of his or her obligation to make payments of interest under his or her Secured Credit Facility Agreement when he or she did not make a second payment on or before the date when the first interest payment was due, approximately one month after entering into the Secured Credit Facility Agreement; or a third payment on or before the date when the second interest payment was due, approximately two months after entering into the Secured Credit Facility Agreement; or a further payment within the relevant monthly interval or intervals. 32 In addition, when Cash King advised these borrowers of the amounts required to pay out the secured credit facility, the amount stated exceeded the correct amount as the former included interest payable at a higher rate. In fact these borrowers were not liable for a higher interest rate and/or costs and expenses purportedly incurred by Cash King consequent on the alleged default; they were not in default and therefore not liable to pay these costs and expenses. 33 On the basis of this material, I am satisfied that Cash King engaged in conduct in relation to financial services in contravention of s 12DA(1) of the ASIC Act. I am further satisfied that Cash King made false and misleading representations concerning the existence of a right or remedy in contravention of s 12DB(1)(g) of the ASIC Act.

Parties

Applicant/Plaintiff:

Australian Securities & Investments Commission

Respondent/Defendant:

Cash King Pty Ltd

Legislation Cited (4)

Australian Securities and Investments Commission Act 2001(Cth)

Federal Court of Australia Act 1976(Cth)

Real Property Act 1900(NSW)

Australian Securities and Investments Commission Regulations 2001(Cth)

Cases Cited (4)

Australian Securities & Investments Commission v Cash King Pty Ltd [2005] FCA 1429 TRADE PRACTICES - misleading or deceptive conduct in relation to financial services - false and misleading representations - declaratory relief sought in relation to conduct in contravention of ss 12DA and 12DB of the Australian Securities and Investments Commission Act 2001 (Cth) - requirement that Court must be satisfied on the evidence that declarations sought ought to be made - orders restraining first defendant from such conduct - consent orders providing for the Court to note the terms of an enforceable undertaking accepted by ASIC from the defendants in accordance with s 93AA of the Australian Securities and Investments Commission Act 2001 (Cth) - undertaking within the powers of ASIC to accept Australian Securities and Investments Commission Act 2001 (Cth), ss 12A, 12BAA, 12BAB, 12DA, 12DB, 12GD, 12GJ, 12GLA, 12GM, 13, 93AA Federal Court of Australia Act 1976 (Cth), s 21 Real Property Act 1900 (NSW), s 57 Australian Securities and Investments Commission Regulations 2001 (Cth), reg 2B

Australian Securities and Investments Commission v Edwards (2004) 51 ACSR 320 cited Australian Securities and Investments Commission v Rich (2004) 50 ACSR 500 cited Australian Securities and Investments Commission v Rich (No 2) (2003) 44 ACSR 682 cited Australian Securities and Investments Commission v Tower Australia Ltd [2003] FCA 660 applied Australian Competition and Consumer Commission v Woolworths (South Australia) Pty Ltd (2003) 198 ALR 417 applied BMI Ltd v Federated Clerks Union of Australia (1983) 51 ALR 401 applied Dean-Willcocks v Commissioner of Taxation (No 2) (2004) 49 ACSR 325 cited Australian Securities and Investments Commission v Cash King Pty Ltd and DANIEL SWART NSD 767 OF 2005 STONE J 12 OCTOBER 2005 SYDNEY

(2003) 198 ALR 417

(1983) 51 ALR 401