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[2007] NSWSC 735
Supreme Court of NSW
2007-04-30
Smart AJ
Original judgment source is linked above.
Introduction
Principal $ 328,000.00 2. The plaintiffs, by their statement of claim, instituted proceedings on 23 May 2005, contending that the defaults in March and April 2005 entitled them to repayment of the principal.
(5) For the purposes of this section, the predominant purpose for which credit is provided is - … (a) the purpose for which more than half of the credit is intended to be used …" 6. It was pointed out that in the first instance, because of the presumption in s 11(1) of the Code, the Court need not concern itself with ascertaining whether there had been compliance with s 6(1)(a)-(d). It will be necessary to look more closely at these provisions when considering the plaintiffs' alternative submissions.
Section 11 of the Code provides: "11 Presumptions relating to application of Code
(1) In any proceedings (whether brought under this Code or not) in which a party claims that a credit contract, mortgage or guarantee is one to which this Code applies, it is presumed to be such unless the contrary is established. (2) Credit is presumed conclusively for the purposes of this Code not to be provided wholly or predominantly for personal, domestic or household purposes if the debtor declares, before entering into the credit contract, that the credit is to be applied wholly or predominantly for business or investment purposes (or for both purposes). (3) However, such a declaration is ineffective for the purposes of this section if the credit provider (or any other relevant person who obtained the declaration from the debtor) knew, or had reason to believe, at the time the declaration was made that the credit was in fact to be applied wholly or predominantly for personal, domestic or household purposes. For the purposes of this subsection, a relevant person is a person acting for a finance broker) through whom the credit was obtained. (4) A declaration under this section is to be substantially in the form (if any) required by the regulations and is ineffective for the purposes of this section if it is not."
Much of the argument centered upon s 11(2), the plaintiffs relying upon certain declarations signed by the defendants and contending that they fell within the terms of that sub-section as the defendants declared, before entering into the credit contract that the credit (the money advanced) was to be applied wholly or predominantly for business or investment purposes (or both purposes).
Section 80(1) & (2) of the Code provide: "80 Requirements to be met before credit provider can enforce credit contract or mortgage against defaulting debtor or mortgagor (1) Enforcement of credit contract. A credit provider must not begin enforcement proceedings against a debtor in relation to a credit contract unless the debtor is in default under the credit contract and - (a) the credit provider has given the debtor, and any guarantor, a default notice, complying with this section, allowing the debtor a period of at least 30 days from the date of the notice to remedy the default; and (b) the default has not been remedied within that period. Maximum penalty - 50 penalty units. (2) Enforcement of mortgage. A credit provider must not begin enforcement proceedings against a mortgagor to recover payment of money due or take possession of, sell, appoint a receiver for or foreclose in relation to property subject to a mortgage, unless the mortgagor is in default under the mortgage and - (a) the credit provider has given the mortgagor a default notice, complying with this section, allowing the mortgagor a period of at least 30 days from the date of the notice to remedy the default; and (b) the default has not been remedied within that period. Maximum penalty - 50 penalty units."
It was common ground that no default notice had been given by the plaintiffs under s 80 of the Code. The plaintiffs contended that it was not necessary to give such a Notice as the Code did not apply and that if the Code did apply the consequence was that a summary offence had been committed (see ss 178-180) and that the present proceedings could continue. See also s 170 of the Code.
From 2001 to about four months ago Ms Blundell (the second defendant) did not have employment. She was dependent on social security benefits. Mr Ashikian (the first defendant) has not worked for the past eight months and is not presently employed. As at 2005 and prior thereto he was not in employment and was receiving Aus-Study payments. He was attending University but dropped out because he was not able to attend to his studies successfully. Neither of the defendants individually had the money to meet the instalments payable under the mortgage nor could they meet them acting together. Mr Ashikian's previous occupation had been that of a panel beater. Ms Blundell stated that the finance broker, Mr Paul Michaels of Finance Information Centre was aware of the financial position of herself and Mr Ashikian. He had been shown their bank statements and had been involved in arranging the third and fourth loans taken out by the defendants.
The mortgage to the plaintiffs and the subject of these proceedings was the fourth one undertaken by the defendants, who live together in a de facto relationship as husband and wife.
The defendants purchased the Douglas Park property using money lent to them, without security, by Mr Ashikian's parents. It was their residence. About 16 June 2003 they borrowed money (amount unknown) from Permanent Mortgages Pty Ltd via La Trobe Homes of Australia Pty Ltd (the first loan) to fund renovations to that property and repay money to Mr Ashikian's parents. Ms Blundell said that neither she nor Mr Ashikian had any intention of applying the borrowed funds to an investment or business purpose. I accept that is so. The solicitors acting for the mortgagee were R L Kremnizer & Co with Jamie Khoury, an employed solicitor with that firm, signing the mortgage as the mortgagee's solicitor.
Late in 2003 the defendants defaulted on the first loan. The evidence establishes that at the time they entered into the first loan the defendants had little chance of making the required payments.
The defendants refinanced by borrowing $210,000 from Darrell Riles about 21 November 2003 (the second loan). Ms Blundell believed she was dealing with Baccus Investments Limited. Mr Ashikian left Ms Blundell to deal with the matter. The term of the mortgage was 12 months and the interest rate 10.75 per cent per annum reducible to 8.25 per cent per annum. Monthly payments were to be made. The solicitors for the mortgagee were R L Kremnizer & Co, with Jamie Khoury signing the mortgage as the mortgagee's solicitor. At the time the defendants entered into the second loan they had little chance of making the required payments without a change in their circumstances. I accept that the second loan had no investment or business purpose so far as the defendants were concerned.
The defendants defaulted on the second loan in early 2004 and refinanced by borrowing from MDN Mortgages Pty Ltd about $265,000 (the third loan). While the date does not appear expressly the papers suggest that probably the refinancing was finalised about June 2004. Mr Paul Michaels was the broker and it seems that he arranged for a solicitor called Frank Bassi to act for the defendants. It does not appear who acted for the lender. The third loan had no investment or business purpose so far as the defendants were concerned.
The defendants defaulted in their payments under the third loan within a short period and there was a need to refinance. The defendants again spoke with Mr Michaels who drew their attention to the possibility of obtaining a loan through R L Kremnizer & Co. Ms Blundell said that on more than one occasion Mr Michaels sent to the defendants by post several documents which she and Mr Ashikian signed and returned by post. She was not able to detail the documents and the contents, but on each occasion there were only a few pages.
On 19 January 2005 Bleier Mortgage Corporation Pty Limited, which was located in the same business premises as R L Kremnizer & Co and had the same Post Office box number at Double Bay, made what counsel for the plaintiffs described as a written indicative offer of the lesser of $328,000 or 80 per cent of valuation of the Douglas Park property at an interest rate of 13 per cent reducible to 10.5 per cent. The term was 12 months. The lender was to commission a valuation from a valuer approved by the lender's solicitor. The valuation had to be satisfactory to the lender. There was an establishment fee of $7000 of which $1945 was payable to Bleier Mortgage and $5055 to the Finance Information Centre (Michaels).There were other terms. The defendants "accepted the offer" by signing the duplicate and returning it to Bleier with the required cheque for $2446.40, possibly about 25 January 2005.
By letter dated 31 January 2005 Baccus Investments Limited (as the Manager for the Kremnizer Mortgage Fund) advised the defendants that their application for loan had been approved and was now offered on stated terms for a period of 12 months. These included that the total loan was for $328,000 upon the security of a first mortgage over the Douglas Park property. The mortgage required interest only monthly repayments of $2870. The lender (Mortgagee) was: "As specified by R L Kremnizer & Co." That firm was also stated to be the mortgagee's solicitor.
The letter stated that the defendants should seek independent legal advice and that their signed acceptance must be returned within 48 hours. There were other terms and conditions.
The defendants signed the offer purporting to accept it. One of the copies (p41 of Ms Blundell's affidavit) bears the date "8.2.05". The other copy bears no date. It is probable "8.2.05" is not in the handwriting of either defendant.
On 31 January 2005 R L Kremnizer & Co wrote to various investors inviting them to participate in the proposed mortgage and enclosing documents outlining the terms of the offer.
The evidence established that Mr Paul Michaels and Mr Frank Bassi attended at the defendants' home in early February 2005, probably on 8 February 2005. This was arranged by Mr Michaels. Ms Blundell said that Messrs Michaels and Bassi came to their home with a large bundle of papers. There appeared to be a number of discrete documents. Ms Blundell estimated that Messrs Michaels and Bassi were at her home for about fifteen to twenty minutes and said that only a few minutes into the visit Mr Michaels received a telephone call after which he said that he needed to leave as soon as possible. Ms Blundell stated that beyond being told that the documents were related to getting a fourth loan, the defendants received no explanation of the documents they were signing and that they had no opportunity to read them. Ms Blundell said that she did not know what documents were in the bundle except that she recalled clearly that the top document in the bundle was headed Mortgage and featured a number of boxes. It was distinctive. Her signature and that of Mr Ashikian appear on page 2 of the mortgage to the plaintiffs, but the date of "8 February 2005" was not written by her. She and Mr Ashikian were told by Mr Bassi not to date the documents. Ms Blundell said that each document or group of documents in the bundle was passed in a circle from Mr Bassi to Mr Ashikian who then signed it or them and then to her. She signed and handed it or them back to Mr Bassi. Ms Blundell said that she did not have an opportunity to make a copy of any of the documents and neither she nor Mr Ashikian did so.
The following further points emerge from Ms Blundell's cross-examination: (a) When she entered into the first loan, the solicitor provided for her did not really explain the documents to her. She neither had the opportunity to read the mortgage nor did so. She did not know she should read the mortgage. She trusted the broker (Mr Jim Deru) and the solicitor he arranged (Mr Bayliss from Bransgroves). (b) She realised that each time the loan was refinanced there had to be a bigger loan with higher repayments. (c) She knew that she had to sign the documents for the fourth loan to obtain the money. She was prepared to sign the documents because she was told by Mr Michaels that this was the best deal. She needed the money. (d) She knew, as to the fourth loan, before she signed a bundle of documents that she was agreeing to pay back the loan and that the repayment instalments had to be made regularly (monthly) and that if she did not do so, the lender could sell the property to get the money back. (e) She did not read the letter of 19 January 2005 from Bleier Corporation, but flicked through it. She did not read cl 6 of that letter which stated that she (and Mr Ashikian) declared that the credit to be provided was to be applied wholly or predominantly for business or investment purposes (or both purposes), that they should not sign this declaration unless the loan was wholly or predominantly for business or investment purposes and that by signing this declaration they may lose protection under the Consumers Credit Code. Comment: This needed further explanation to be fully understood. The declaration is sandwiched in the middle of the terms and conditions of the proposed loan. (f) When taken to the letter of 31 January 2005 from Baccus Investments Limited, Ms Blundell said that she was unable to say whether she received this letter in the post. However, in her affidavit of 5 May 2006 she refers to having made a copy of it after she and Mr Ashikian had signed it and to having received the original document by post and that their signature and return of this document occurred before the day on which Messrs Michaels and Bassi attended their home. The copy of the letter of 31 January 2005 made by Ms Blundell, while containing copy signatures had no dates. The copy of the original signed by each of the defendants and supplied by the plaintiffs' solicitor contains additional matters, namely, ticks on p 1 and on the last page (p 41 of Ms Blundell's affidavit) and the date 8.2.05 in two places. The date is not in the handwriting of Ms Blundell nor that of Mr Ashikian. (g) She did not read the documents because they do not make sense to her. She also said that she was under pressure from Mr Michaels to sign and return the documents posted to her. Comment: The cross examiner drew attention to this entry on p 1 of the letter of 31 January 2005 "Loan Purpose: Business". That bald statement would not have conveyed much to Ms Blundell but in any event she did not read it. (h) She did not read cl 25 of the Terms & Conditions attached to Baccus' letter of 31 January 2005 (p 26 of Ms Blundell's affidavit). Amongst other things, that clause asserts that she had read the letter etc and that all information she had given to Baccus was accurate. Nor did she read, prior to signature the words in the acceptance (p 28 of Ms Blundell's affidavit - the box) namely: Important You should not sign this declaration unless this is wholly or predominantly for business or investment purposes. By signing this declaration you may lose protection under the Consumer Credit Code.
Comment: The full significance of these words needed to be explained to Ms Blundell and Mr Ashikian. That would involve contrasting business or investment purposes with personal, domestic or household purposes.
Mr Ashikian said that he left it up to Ms Blundell to deal with the various people that needed to be dealt with for the loans. She explained to him in a general way what was taking place. They could not afford to make the loan payments so they ended up rolling over the loans and obtaining larger loans with higher repayments. He did not read the documents before he signed them nor did he ask Ms Blundell what was in the documents He asked her on each occasion if they were the forms for the loan and if she said "Yes" he signed them. He did not ask her anything else about the loans or the mortgage documents. He understood that each of the loans was secured over their house and that if they could not repay the loans the lenders could sell the house to recover the money.
He just signed the documents because he needed the money and he knew that he had to sign the documents to obtain the money. He relied on Ms Blundell to read through the documents and tell him what was in them. He did not recognise any of the documents although they bore his signature. He was not aware of many of the details of the documents for the fourth loan.
Mr Ashikian recalled Mr Frank Bassi coming to their house with documents for them to sign. They included a mortgage. Mr Ashikian signed all the documents and recalled Mr Bassi signing the documents as witness. He said they passed the documents around in a circle. He agreed that they went to Ms Blundell first, that she signed, then he signed then Mr Bassi signed. He thought that happened with all the documents there were. He was not able to identify the documents signed on this occasion. He did not see Mr Bassi date any of the documents as he (Ashikian) was not taking much notice. Mr Ashikian could not remember the date of Mr Bassi's visit but agreed that it would have been in early February 2005. He did not read the documents. He just signed all that were passed to him. He did not recognise any individual paperwork. That included the Consumer Credit Code Declaration. It is not of importance whether Mr Ashikian signed the document after Ms Blundell or vice versa.
Mr Ashikian agreed that when he signed the documents he knew that the lender would look at the documents and decide whether or not to lend the money.
Although it is not completely clear it appears that on the visit, probably about 8 February 2005, of Messrs Bassi and Michaels, they, or principally Mr Bassi, had Ms Blundell and Mr Ashikian sign: 1. Mortgage to Hely Nominees Pty Limited ($128,000), V H Benjamin & J S Fingret ($70,000), V H Benjamin & Sons Pty Ltd ($80,000), V H Benjamin ($50,000). Subsequently Hely Nominees Pty Limited was deleted and Hamafam Pty Limited substituted for the same amount. The alteration occurred after signature by Ms Blundell and Mr Ashikian but probably prior to settlement. The altered Mortgage with the new lender was registered as number AB 301489H. Following this was possibly copy Memorandum 9989575Y setting out extensive terms and conditions On p 1 of the Mortgage these are expressly incorporated into the Mortgage. The defendants do not appear to have signed the Memorandum. Mr Kremnizer signed it. The statement in the Declaration by borrower to the effect that the defendants have signed Memorandum No 9989575Y is probably incorrect. 2. Declaration by Borrower. This states that the defendants are the borrowers named in certain loan and security documents between them and Hely Nominees Pty Limited and the other plaintiffs (except Hamafam Pty Limited) relating to the Douglas Park property. The declaration states: "We have received independent legal advice regarding the loan and security documents" and that "after receiving that advice we have freely and voluntarily signed the following documents:
The date inserted "8 February 2005" and the place of execution "Douglas Park" are not in the handwriting of either defendant. The witness is "Frank Bassi." Comment: The name of "Hely Nominees Pty Limited" has been struck out and the name "Hamafam Pty Limited", written in the Declaration. This must have happened after the Declaration was completed, the alteration probably being made on 17 or 18 February 2005. Hamafam does not appear to have agreed to advance any money until 17 February 2005. It is hard to see how the plaintiffs can alter a previously completed verified Declaration, irrespective of any authority. It was expressed to be made by virtue of the Oaths Act and takes the form of a statutory declaration.
The Declaration states: "We declare that the credit to be provided to us by the credit provider is to be applied wholly or predominantly for business or investment purposes (or for both purposes) IMPORTANT You should not sign this declaration unless the loan is wholly or predominantly for business or investment purposes. By signing this declaration you may lose your protection under the Consumer Credit Code.
This declaration is made before we have signed or entered into a credit contract relating to this intended transaction. And We Make this solemn declaration conscientiously believing the same to be true pursuant to the Oaths Act 1900"
The declaration is stated to be subscribed and Declared and made pursuant to the Oaths Act 1900. It is signed by each of the defendants. Neither the date of signing of 8 February 2005 nor the place (Douglas Park) at which it was signed are in the handwriting of either defendant.
Comment: The Declaration takes the form of a statutory declaration. The plaintiffs were not entitled to alter a statutory declaration after it had been completed, notwithstanding any authority it holds. On the evidence of Ms Blundell it was incorrect to state that the declaration was made before the defendants signed, or entered into, a credit contract relating to "this transaction".
On the form, the details required are not in the handwriting of either defendant. Mr Ashikian is described as a self-employed Panel Beater and Ms Blundell as a self employed Office Manager.
The amount required is stated as $328,000.00 and the Loan Purpose as "Business". The Douglas Park property is stated to have a value of $410,000.00" and total assets to be $515,000. The amount owing is said to be $265.000.00
The form is signed by each of the defendants but the date of "8.2.05" is not in the handwriting of either of them. No place of execution is specified.
On 16 February 2005 Bassi Lawyers confirmed by FAX that settlement was to take place on 18 February 2005 and asked Kremnizer & Co to draw loan funds in a specified way. $274.990.41 was to be paid to MDN Mortgages Pty Limited, $15,000 to Ms Blundell, $24,804.56 to P Michaels, $9,588.40 to R L Kremnizer & Co and $2.452.00 to Bassi Lawyers. There were other much smaller sums totalling less than $1200 to be paid to others.
It is probable that settlement took place on 18 February 2005. As might prudently have been anticipated the defendants defaulted in their interest payments on 18 March 2005 and 18 April 2005.
The defendants submitted that the lenders and the mortgagees were the credit providers and that the various brokers, solicitors and others were their agents, although they allowed for the possibility or probability that Mr Michaels and Mr Bassi were either the agents for the defendants or acting in some independent capacity.
The defendants submitted that the word "before" in s 11(2) of the Consumer Credit Code was critical in that credit is presumed conclusively for the purposes of the Code not to be provided wholly or predominantly for personal, domestic or household purposes if the debtor declares before entering into the credit contract that the credit is to be applied wholly or predominantly for business or investment purposes (or for both purposes).
This raises the issue when did the defendants enter into the credit contract? The defendants first submitted that the defendants did so when they "accepted the offer" contained in the letter of 19 January 2005 by signing the duplicate and returning it to Bleier with the required cheque for $2446.40. This was about 25 January 2005.
I do not think that the defendants entered into the credit contract at this point. The plaintiffs did not contend that the defendants did so. The letter of Bleier of 19 January states "that the following application for finance has been approved subject to the following indicative terms and conditions." A list of conditions follows. The offer was stated to be open for 48 hours with the lender reserving the right to withdraw the letter of offer prior to acceptance. The lender was not specified.
By letter of 31 January 2005 (described as an offer) Baccus Investments Limited advised the defendants that their application for loan had been approved and was now offered to them by Baccus (as the manager for the Kremnizer Mortgage Fund) on the terms therein stated. The lender and the mortgagee was stated to be "As specified by R L Kremnizer & Co." Clause 21 of the printed conditions stated "The Formal Loan Offer does not become contractually binding until the date of the settlement of the Mortgage." There are two copies of this document annexed to Ms Blundell's affidavit, being Annexures C and D. Page 8 as secondly numbered of Annexure D, the second copy, bears the date "8.2.05" in handwriting other than that of either defendant.
In paragraph 19 of her affidavit Ms Blundell said: "By comparing Annexures C and D hereto, and from my knowledge of surrounding circumstances (in particular the exchange of documents by post mentioned in paragraph 8 above and the lack of opportunity to make copies mentioned in paragraph 10 above) I am able to say that I must have received the original document dated 31 January 2005 by post to my home, have signed it, have then made a copy of it have then posted the signed original, and have retained the signed copy, and I am able to say that this must have occurred before the day on which Messrs Michaels and Bassi came to our home as mentioned above, I did not have any documents awaiting for them: they brought all the documents with them."
During cross-examination Ms Blundell was unable to say whether she received the Baccus letter of 31 January 2005 through the post. She said that her memory was a lot fresher when she made her affidavit. The date of 8 February 2005 at the end of the second page 8 of Annexure D makes me wonder when the document was signed.
Paragraph 8 refers to Mr Michaels sending the defendants by post (on more than one occasion) several documents which Mr Ashikian and she signed and returned by post. She was not able to say what all the documents were but on each occasion there were only a few pages (say, half a dozen or less) and they fitted into an Express Post Envelope designed for A4 paper folded in half. In paragraph 10 she detailed the 15-20 minute home visit of Michaels and Bassi and explained that she did not have an opportunity to make a copy of the documents.
The plaintiffs submitted that the business purpose declaration incorporated in the acceptance of the offer of 31 January 2005 was not dated by the defendants when they signed it but it was dated 8 February 2005 presumably when it was received by R L Kremnizer & Co. I would not so conclude. It is more likely that that date was inserted by Mr Bassi about 8 February 2005, perhaps shortly after or at the signing exercise about that day. The evidence does not enable a finding to be made as to when and where that date was inserted.
The form of Acceptance on pp 6 and the second page 8 of the offer of Baccus (Annexure D) states: "I/We accept this Offer of Loan on the terms and conditions contained in this Offer of Loan together with the General Terms and Conditions pages and Schedule of Related Charges page and Special Conditions listed below, which I/we have received, which have been read and are understood. I/we declare the loan will be used for the purpose(s) stated in the Letter of Offer. I/We declare that the credit to be provided to me/us by the Credit Provider is to be applied wholly, or predominantly for business or investment purposes (or for both purposes). IMPORTANT You should not sign this declaration unless this loan is wholly or predominantly for business or investment purposes. By signing this declaration you may lose protection under the Consumer Credit Code."
Section 11(4) of the Code provides that a declaration under s 11 is to be substantially in the form (if any) required by the regulations and is ineffective for the purposes of s 11 if it is not.
The terms of the declaration repeat the form of the declaration specified in reg 10(1). The declaration contains immediately below the terms of the specified declaration the warning specified in reg 10(2). There are immaterial differences in the set out. I do not regard it as important that the words "not" and "lose" are not in bold type in the Declaration when they are in reg 10(2). Substantial compliance suffices. See Permanent Mortgages v Cook [2006] NSWSC 114 per Patten AJ at [56] to [60]
Regulation 10(3) provides that the declaration is to contain the signatures of each person making the declaration and either the date on which the declaration is signed or the date on which it is received by the credit provider. Each of the defendants has signed the declaration and the date "8.2.05" is not in the handwriting of either.
On p 9 of Annexures C and D (the Baccus letter of offer of 31 January 2005) it is stated that some special conditions (8) are to be satisfied before the loan can proceed to settlement and that satisfaction of the conditions should be directed to R L Kremnizer & Co. These included satisfactory assessment of the defendants' application including final approval by the lender and receipt of signed Baccus Letter of Offer.
One of the difficulties with the declaration in the offer and the acceptance is that the credit provider is not specified. A major lender changes from after documents in the bundle are signed about 8 February 2005.
As earlier noted many of the major documents were altered after execution by the deletion of Hely Nominees Pty Limited and the substitution of Hamafam Pty Limited. This applies to the Mortgage (AB 301489H) Declaration by the Borrower, Consumer Credit Code Declaration and Direction and Authority to Complete and Undertaking. It seems that neither Hely Nominees Pty Limited nor Mr and Mrs Hely responded to the invitation of R L Kremnizer & Co of 31 January 2005 to contribute $128,000 out of $328,000 to be advanced.
Ms Khoury is a solicitor in the employ of R L Kremnizer & Co in its lending division. Virtually all of Kremnizer's business is that of organising and perhaps later enforcing loans secured by mortgage. She explained that Bleier Mortgage Corporation submits the loan application to Kremnizer & Co which allocates a lender to the particular application from its stable of lenders. The finance broker of the potential borrowers contacts Bleier and Bleier contacts Kremnizer & Co. Baccus monitors the lender and repayments. Baccus issues the loan offer and has a certification process involving approval (or refusal) of the proposed loan. The lenders are members of Baccus.
Kremnizer & Co does not deal directly with the borrowers. It requires each borrower to have a separate solicitor acting for him or her. Where interest is paid in arrears Kremnizer & Co requires the borrower to submit an accountant's certificate as to capacity to pay before the loan is finalised. None appears to have been submitted in the present case.There is a limited number of brokers who account for most of the work of Kremnizer & Co. While every borrower has his own solicitors and there is not a limited number of solicitors there are a number of solicitors with whom Kremnizer & Co regularly do business when acting on loans. Mr Bassi was described as "quite a regular"and Joe Michael regularly provided accountant's certificates. She said that Kremnizer & Co tries to maintain a professional relationship with brokers and solicitors.
Ms Khoury denied that at the time the loan to the defendants was entered into about February 2005 she was aware that they had at least three prior loans on which they had defaulted. She could not recall the first loan and said she did not know that the defendants had defaulted on that loan. She said that she was not aware that the defendants had had a series of loans and kept having to refinance. The office does not keep an index of borrowers who have defaulted on earlier loans on which they have acted for the lender. However, there is a procedure for checking where a loan is being refinanced in respect of an existing loan and mortgage. Ms Khoury said that Kremnizer & Co write up hundreds of loans every year.
Ms Khoury could not confirm that the loan the subject of these proceedings was the fourth in a series of back-to-back loans. She said that most loans were a re-finance of existing or prior loans. She agreed that she thought that the security property in the present case was a residence.
Without abandoning the submission that a concluded credit contract existed when the defendants signed and returned their acceptance of the letter of Bleier of 19 January 2005, the defendants submitted strongly that the defendants entered into a concluded credit contract when they signed the letter of offer of Baccus of 31 January 2005 and returned it or caused it to be returned to Baccus or R L Kremnizer & Co. The borrowers have to notify the lender of their acceptance of the loan, including the loan conditions. If the defendants had not notified the lender or caused the lender to be notified of their acceptance there would have been no credit contract. In my opinion there is no entry into the credit contract by the defendants until they have notified the lender or caused the lender to be notified of their acceptance. Clause 23 of the General Terms and Conditions refers to the borrower having returned the signed Offer of Loan and suggested action thereafter, that is requesting his, her or their solicitors to contact the lender's solicitor. Earlier, reference has been made to cl 21 of the General Conditions attached to the offer providing the Formal Loan Offer does not become contractually binding until the date of the settlement of the Mortgage.
Under cl 20 of the General Conditions the Mortgage prevails over the Formal Loan Offer.
The plaintiffs submitted that the earliest there was a binding contract was 17 February 2005 when R L Kremnizer & Co informed Mr Bassi of the lenders. The plaintiffs contended that there can be no contract until the parties were ascertained. The plaintiffs also submitted that the credit contract actually came into force on settlement on 18 February 2005.
Alternatively the plaintiffs submitted that even if the argument of the defendants doing things (presumably signing and forwarding the letter of 31 January 2005 and signing a group of documents about 8 February 2005) is accepted as the test for entry into the credit contract they authorised changes to be made to the mortgage documents and the substitution of new lenders. Those changes were at law, made on or about 17 February 2005 when Hamafam joined the lenders. The plaintiffs submitted that there was nothing inconsistent with this in the Baccus loan offer.
Section 12 of the Code specifies the form of credit contract and what constitutes acceptance of the offer. This does not affect the meaning of "before entering into the credit contract". If anything, s 12 reinforces the view I have taken. The plaintiffs submitted that in either event the business purpose declarations included in the letter of offer of 31 January 2005 and that contained in the separate declaration bearing date 8 February 2005 pre-dated the credit contract.
I hold: (a) "Entry into the credit contract" occurs when the parties are bound by it.
(b) In the present case because of cl 21 of the General Conditions of the Offer there was no binding contract until the date of the settlement of the Mortgage. The Special Conditions included in the Letter of Offer provided that such conditions must be satisfied before the loan can proceed to settlement. There has to be final approval by the Lender. Clause 24 of the General Conditions requires payment of outstanding fees, legal costs, all relevant expenses to be borne by the defendants following acceptance of the terms and conditions of the Letter of Offer. The condition also provides that if the loan is not made for some reason the legal costs and expenses incurred by the lender and Baccus must be paid by the defendants. That appears to be a separate but related contract. While the separate and related contract contained in cl 24 imposed obligations on the defendants to pay certain moneys it does not amount to the provision of credit.
(c) There was no context in 11(2) of the Code which would result in the phrase "before entering into the credit contract" being given other than its ordinary meaning. Section 5 of the Code provides that for the purposes of the Credit Code a credit contract is a contract under which credit is or may be provided being the provision of credit to which the Code applies. This does not alter or bear upon the ordinary meaning of the phrase "before entering into the credit contract". 57. The letter of offer of 31 January 2005 does not specify the lenders. The mortgagee is to be as specified by R L Kremnizer & Co. On p 5, the Kremnizer Mortgage Fund Offer states the fees and charges payable by the defendants. Under the heading "Upfront" there appears: "Application: As confirmed by R L Kremnizer & Co". The Lenders are not specified in the Acceptance. The Acceptance states "Once you [the borrowers] have signed this Offer you are bound by it' " The letter also provides that the Offer of Loan is made subject to the General Terms and Conditions detailed in the letter including any Special Conditions. The letter contains this description at the bottom of many pages of the Offer "Kremnizer Mortgage Fund 1st Mortgage Loan Offer to Ashikian & Blundell dated 31.1.05."
Section 11(2) of the Code refers to the debtor declaring "before entering into the credit contract that credit is to be applied" predominantly for business purposes. This envisages specific credit being provided and not credit at large.
The declaration incorporated in the Acceptance of the Offer of 31 January contained neither the date on which the declaration was signed nor the date on which it was received by the credit provider. There was no acceptable evidence that it was received on 8 February 2005 by either Baccus or Kremnizer Mortgage Fund. See s 11(4) of the Code and Regulation 10(3).
The Credit Code Declaration a copy of which is attached as Annexure C to the affidavit of Toni Rizk of 27 February 2006 and bearing date 8 February 2005 takes the form of a statutory declaration. This is not objectionable of itself. Unfortunately it has been altered after it was made with the deletion of Hely Nominees Pty Limited and the substitution Hamafam Pty Limited. The alteration took place on 17 or 18 February 2005.
I have also earlier held that at the signing ceremony or exercise about 8 February 2005 the Credit Code Declaration, a copy of which was Annexure A to the affidavit of Toni Rizk was signed after the Mortgage in its earlier form.
I hold that such Declaration does not comply with the Credit Code.
The plaintiffs further submitted that if they did not have the benefit of s 11(2) the credit was provided or intended to be provided for business purposes and therefore the loan was not regulated by the Code, s 6(1)(b).
The plaintiffs concentrated on the words "the credit is provided or intended to be provided" and submitted that the test of a reasonable person in the position of the credit provider should be applied: Park Avenue Nominees Pty Ltd v Boon [2001] NSWSC 700 at [46] .
In Linkenholt Pty Ltd v Quirk 2000 VSC 166, one issue was whether credit was provided predominantly for personal or business purposes. In considering s 6(1)(b) of The Code, Gillard J said at [98]: "… it is appropriate to consider what the money was used for in order to determine the purpose of the provision of the credit. In considering the question it is important to consider the substance of the transaction in the context of its performance. "
That is not necessarily inconsistent with the approach adopted in Park Avenue especially when the findings of fact in Linkenholt are recalled at [139]: "In the present matter on an objective basis the transactions were one and the same and all that occurred was the substitution of a new agreement for what was an obligation to re-pay money which had been lent for business purposes. "
In Jonsson v Arkway Ltd 58 NSWLR 451 at 456 Shaw J, after stating his regret at the divergence of judicial interpretation of s 6(1)(b)( expressed the view that "insufficient attention had been given to the need to broadly and liberally interpret beneficial legislation of this kind." Shaw J preferred the approach of Gillard J quoted above to that taken in Park Avenue (following Rafiqi v Wacal Investments Pty Ltd (1998) ASC 155-024 QDC). Shaw J observed that Gillard J's emphasis was that the Court should consider the substance and reality of the transaction.
In Permanent Mortgages v Cook, Patten AJ, after referring to the divergence just mentioned, thought that it would be a rare case where the two tests produced a different result [51]. This may not be so where the borrower has misled the lender on material matters so as not to reveal the true nature of the transaction, for example where the borrower, to get the money, mis-states the purpose for which the credit is to be provided or is intended to be provided.
Patten AJ pointed out that the words in the introductory part of subs (1) created some difficulty, in that they refer to pre-contractual "obligations", a contradiction in terms. He continued: "The phrase … does no more than indicate that it is relevant to consider the applicability of the four criteria stated for the whole of the period from commencement of negotiations up to the time of contract. It is, therefore, appropriate to consider the state of knowledge and intention of the plaintiff."
Patten AJ concluded that as at the time Mr & Mrs Cook were taken to have accepted the offer of loan the plaintiff intended no more than that the transaction should be documenrted in a way which would take it outside the Code.
In Cook the facts were somewhat complex and at one stage, prior to amendment, the borrowers in their application in its final form as returned to Kremnizer & Co stated the purpose as "Refinance of existing debt and Home Improvement" and answered "Yes" to the question, "Is the loan purpose predominantly (more than 50%) for investment or business purposes (or for both purposes)?" This was ultimately queried by Kremnizer & Co but they "accepted the rather unconvincing reply" of the solicitors for the Cooks [28]: "We also enclose herewith amended and initialled Application for Finance form. We note that our clients completed this form without assistance and as such misunderstood the question and answered incorrectly."
Patten AJ remarked at [53]: "The plaintiff knew that the credit was required to refinance a mortgage in default over the defendants' home, a circumstance which, prima facie, at least to my mind, indicated a personal domestic or household purpose."
In Dale v Nichols Constructions Pty Ltd [2003] QDC 453 McGill DCJ followed the purposive approach adopted by Shaw J in Jonsson. The Code, in s 6(1)(b) does not make it clear whether the purposes are those of the lender or the borrower. The critical time to ascertain such purpose is at the time the contract is entered into or is proposed to be entered into. I agree with Patten AJ that the words "in the case of pre-contractual obligations" means no more in the context than that it is relevant to consider the applicability of the four criteria from commencement of negotiations up to the time of contract.
Credit providers and their advisers are naturally keen to ensure, so far as they can, with the documents that the particular loan falls outside the restrictive provisions of the Code. There are real problems with the purposes of the lenders and borrowers not coinciding and what facts are known or ought reasonably to be known to the lenders and to the borrowers. Should s 6(1)(b) be construed on the basis of the facts known to both parties as to the purposes of the provision of the credit when the contract is entered into or proposed to be entered into? The test in Park Avenue depends, in part, on how much knowledge, and perhaps scepticism, should be attributed to the reasonable person in the position of the credit provider.
I agree with Gillard J in Linkenholt that the Court must consider the substance and reality of the transaction. It is permissible to consider statements made and events occurring after the credit contract is entered into to the extent that they throw light on the purposes of the provision of the credit.
The Code provides a way for credit providers to protect themselves in s 11. While s 11 is an evidentiary provision nevertheless by subs (2) there is a conclusive presumption for the purposes of the Code that credit is not provided predominantly for personal, domestic or household purposes if the debtor makes the requisite declaration substantially in the form required by the Regulation. If such a declaration is made that determines the matter and s 6(1)(b) does not apply no matter what the true facts and purposes might be. (I leave out of account the case where the documents are a sham or s 11(3) applies). The issues which I have been discussing arise because the requisite declaration was not made by the borrowers (debtors) before entering into the credit contract.
In the present case the bulk of the credit (or moneys) provided, being $274,990.41 out of $328,000, was being used to pay out the existing mortgage under which the defendants were in default. This re-financing was also the reason for the mortgage to the plaintiffs. The plaintiffs, by their solicitors, were aware of those matters. They were also aware that the type of property to be, and in fact used, as security was "Residential". $328,000 represented 80 per cent of its value ($410,000).
Having regard to the circumstances of the defendants it is plain that the credit provided was not used for business or investment purposes but to enable the defendants to stay in their home.
The following have not been overlooked: (a) The lenders, by their agents, issued and received a number of documents stating that the loan was for business purposes. See, for example, the letters written by R L Kremnizer & Co to the various lenders and the documents signed by the defendants.
(b) In each of the Loan Repayment Ability Declaration and the Application For Finance the relevant details are not in the handwriting of the defendants. In the Declaration each is shown as having a current gross income of a round $75,000. This is curious and would lead to the asking of questions. The Declaration contains this incorrect statement by each defendant, "I have never … defaulted on any previous loan." In fact, default had been made on each loan at an early stage. The Application incorrectly described each defendant as self-employed, one as a panel beater and the other as an office manager. For both the same mobile telephone number for business is given. These details would also lead to questions. 79. The succession of four mortgages over the same property within the space of less tthan 2 years (June 2003 - February 2005) with default having been made on the first three mortgages at an early stage and none running its term of 12 months, with increased amounts borrowed and higher payments on each re-financing constituted a warning sign of the lack of credit worthiness of the defendants. R L Kremnizer & Co acted for the lenders on the first, second and fourth mortgages. This history must have raised queries in the minds of those advising the plaintiffs. It is a very unusual history, especially if the loan was for business purposes. Knowing that the property was a residential one and the facts narrated points to the loan, on the balance of probabilities, being for the home of the defendants.
There remains the question of the meaning of the words "personal domestic or household purposes" in s 6(1)(b) of the Code. In Linkenholt it was common ground that the credit was not provided for domestic or household purposes. Gillard J held that on an objective basis all that occurred was the substitution of a new agreement for what was an obligation to repay money which had been lent for business purposes and that the Consumer Credit Code did not apply to the new agreement. The credit was not provided for personal purposes. The facts in the present case differ significantly. The previous loans were for the home of the defendants and not in truth for business purposes although stated to be so.
In Jonsson Shaw J pointed out that there is a distinction between consumer transactions to which the Code is principally directed and business transactions. Shaw J applied the decision of the Full Court of the Supreme Court of Victoria in Minchillo v Ford Motor Co of Australia Ltd [1995] 2 VR 594: "Although the words 'domestic or household' have a similar connotation, 'personal use' is clearly intended to cover a wider field, but the primary contrast intended to be drawn is with commercial or business use, whatever other personal activities a vehicle may be used for."
Shaw J continued at [25]: "The word 'personal' means 'pertaining to the person': Le Cras v Perpetual Trustee Co Ltd [1967] 2 NSWR 706 at 715. … It is a concept of extension and should … be construed broadly." And at [27]: "… the adjective 'personal' in the context of beneficial legislation has separate and independent work to do, that is to say, connotations distinguishable from the other concepts contained in the same section of 'domestic' or 'household' purposes. Each of the adjectives in that section should be given their full meaning and … something can be said to be characterised as 'personal' if it involves a transaction designed to benefit the person by providing for her parents."
In the present case part of the first loan was to be used to pay back the moneys Mr Ashikian's parents had lent the defendants to buy their home and for home renovations.
Shaw J concluded [36]: "… the substance and reality of the relevant transaction was to re-finance a debt incurred for the personal purposes of providing a home for the parents of the [borrower] and the subsequent changes to the loan or mortgage also reflected the re-financing of the debt was 'predominantly' incurred for the purpose of providing a home for the plaintiff's parents. In the context of the nature and scope of the legislative scheme I think that this can be fairly and reasonably characterised as 'personal'.'
The facts in the present case are different. All the re-financing which took place, including that involving the plaintiffs was for the purpose of providing a home for the defendants and their child and initially the re-financing was to repay Mr Ashikian's parents and for home improvement. In my opinion, the substance and reality of the fourth loan involving the plaintiff was the provision of credit prediminantly for personal, domestic or household purposes. In my opinion the Code applies to this provision of credit. Does s 11(3) of the Code Apply
The defendants submitted that s 11(3) applied in that the declaration was ineffective for the purposes of s 11(2) as the plaintiffs as the credit providers had reason to believe, at the time the Declaration was made that the credit was in fact to be applied predominantly for personal, domestic or household purposes. The plaintiffs, by their agents, were aware that the property was a residential one and had been occupied as a home for 2½ years, that Mr Ashikian was 31 and Ms Blundell was 29, that there were curious features about the statement of the income of each, their occupations and business telephone number and that the loan in question was a re-financing of an existing loan consequent upon default in repayment. In my opinion, the circumstances provided reason to believe, despite the statements as to business purposes, that the credit was in fact to be aplied predominantly for personal domestic or household purposes, at least upon a prima facie basis. This was a substantial residential property and I have allowed for the fact that sometimes people of their age borrow substantial sums on their homes to finance a business. However, the circumstances would have given the credit providers and their agents reason to believe that at the time the Declaration was made the credit was to be applied predominantly for personal, domestic or household purposes. I have treated Bleier Mortgage Corporation, Baccus Investments Limited and R L Kremnizer & Co as relevant persons for the purposes of s 11(3) of the Code.
The plaintiffs submitted that the consequence of commencing proceedings in breach of s 80(2) is simply that set out in s 80(2) and no other, that is, a pecuniary penalty in the maximum amount of $5000, see s 80(2) and s 179. Counsel for the plaintiffs drew the Court's attention to s 170 of the Code which provides: "(1) A credit contract, mortgage or guarantee or any other contract is not illegal, void or unenforceable because of a contravention of this Code unless this Code contains an express provision to that effect. (2) Except as provided by this section, this Code does not derogate from rights and remedies that exist apart from this Code." 87. That section is not directed to the institution of proceedings and meeting the requirements of s 80(2). Section 180 provides that an offence against the Code is punishable summarily.
(b) Strike out this action without prejudice to the right of the plaintiffs to bring fresh proceedinghs after they have served a default notice in conformity with the Consumer Credit Code and at least 30 days have elapsed. (c) Order that the plaintiffs pay the defendants' costs of the replacement motion not including any prior amendments with leave reserved to the plaintiffs to move to discharge this order and list the issue of costs for argument by letter addressed to my Associate (with a copy to the solicitor for the defendants) such letter to be delivered within 7 days of today. Order that the defendants pay the plaintiffs' costs thrown away by any amendment to the defendants' motion.
10/07/2007 - Incorrect delivery date on p 1 of judgment - Paragraph(s) N/a
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Benjamin
Ashikian
CITATION : Benjamin v Ashikian [2007] NSWSC 735 This decision has been amended. Please see the end of the judgment for a list of the amendments.
Dale v Nichols Constructions Pty Ltd [2003] QDC 453 Jonsson v Arkway Ltd 58 NSWLR 451 Le Cras v Perpetual Trustee Co Ltd [1967] 2 NSWLR 706 CASES CITED : Linkenholt Pty Ltd v Quirk 2000 VSC 166 Minchillo v Ford Motor Co of AustraliaLtd [1995] 2 VR 594 Park Avenue Nominees Pty Ltd v Boon [2001] NSWSC 700 Permanent Mortgages v Cook [2006] NSWSC Rafiqi v Wacal Investments Pty Ltd (1998) ASC 155-024 QDC