Victorian Civil and Administrative Tribunal|2006-10-10|Before: Luay J

Paulis v Perpetual Trustees Australia Limited (Credit) [2006] VCAT 2039 (10 October 2006)

Credit - debtor hardship application - application to strike out proceeding - whether loans made for purposes to which Code applies - whether Tribunal has jurisdiction to make the changes to the credit contracts which the debtor seeks - Consumer Credit (Victoria) Code ss6, 8, 11 and 66-68; Consumer Credit (Victoria) Regulations r10; Victorian Civil and Administrative Tribunal Act 1998 s75

Mr Paulis's application is dismissed in relation to two of the three loans concerned. It is struck out in relation to the third loan.

1 Mr Paulis's application is dismissed in relation to two of the three loans concerned. It is struck out in relation to the third loan.

Mr Paulis's application and the strike out application

2 On 31 July 2006, Mr Paulis applied to the Credit List of VCAT. His application includes a number of documents and has been further clarified by more information which he has sent to the Tribunal and by the submissions which he has made in response to the strike out application made by the respondent (Perpetual). That application is made under s75 of the Victorian Civil and Administrative Tribunal Act 1998 (the VCAT Act). There is a suggestion in some of the documents before me that the name of the respondent may have changed, but no application to correct the name has been made. I assume that the respondent is correctly named.

3 Given that Mr Paulis is not legally represented and is not a lawyer, I explain what I understand to be his claim on a reading of the material he has filed, in a broader non-technical way. He asks VCAT to change his obligations under three loan contracts because of a period of hardship. That period was a period of unemployment and marital breakdown. The changes he seeks are somewhat unclear. On a broad reading of his documents, he either seeks that the arrears owing under each of the three loans be added to the principal amount of each loan, or that the arrears owing under one of the loans be re-distributed between the three loans and added, in roughly equal amounts, to the principal owing under each of those loans.

4 I treat the application as made under s68 of the Consumer Credit (Victoria) Code (the Code). The effect of ss66-68 of the Code is this. A debtor under a credit contract may request the credit provider to change the contract in a way specified in s66 if, because of unemployment, illness or other reasonable cause, the debtor is unable reasonably to meet his or her obligations under the credit contract and expects reasonably to be able to meet his or her obligations if the contract is changed as requested. The specified changes are to reduce the amount of each repayment under the contract and to extend its term, to postpone for a specified period the date due for repayments under the contract, or to postpone, for a specified period, repayments under the contract and extend its term. The specified changes do not include a change in the annual percentage rate. If the credit provider refuses the debtor's request, the debtor can apply to VCAT which can make any of these changes or refuse to change the contract.

5 These provisions are subject to a ceiling. They only apply if the maximum amount of credit which is or may be provided under the contract does not exceed an amount specified in s66 or by the Consumer Credit (Victoria) Regulations (the Regulations). Regulation 22A has specified such an amount by reference to a percentage of a figure specified in a table in an Australian Bureau of Statistics publication specified in that regulation. At the time Mr Paulis's application was made, the ceiling for the purposes ss66-68 (determined according to the Regulations) was $327,910. Each of the three loans to which this application relates is under this ceiling.

6 Perpetual opposes Mr Paulis's claim and has applied under s75 of the VCAT Act to strike out or dismiss it. The application is made on the basis that the claim is misconceived or lacking in substance. Perpetual says that this is so because the Code does not apply to the three loans. It does not apply because the three loans are for business or investment purposes, not for personal, domestic or household purposes.

7 Under s75 of the VCAT Act, the Tribunal can strike out or dismiss a proceeding if satisfied, among other things, that it is misconceived or lacks substance. Principles which the Tribunal applies to such applications follow what was said by the Victorian Court of Appeal in Electricity Commission of Victoria v Rabel[1]. The principles are relevantly these.

8 Section 75 permits the summary termination of a proceeding. In this case, the application is made before the hearing, before oral evidence is given or tested by cross-examination. The Tribunal should be cautious before summarily terminating a proceeding at such an early point and so depriving the litigant of the chance to have his or her case heard in the ordinary course. It should only do so if, for a reason mentioned in the section, it considers the case manifestly hopeless, undoubtedly untenable, or doomed to fail. If a respondent simply disputes an assertion by a claimant, this is not in itself enough to justify the summary termination of the proceeding. Rather, the matter should go to a hearing where evidence as to the dispute can be called and tested by cross-examination. On applications of this kind, the Tribunal takes the claimant's case at its highest.

9 I first say something about the Code. I then summarise the material before me. Finally, I consider the arguments of the parties and whether the claims should be struck out or dismissed.

10 Among other things, s6(1) of the Code has the effect that the Code applies to the provision of credit, the credit contract and related matters if, when the credit contract is entered into, "the credit is provided or intended to be provided wholly or predominantly for personal domestic or household purposes". Section 6(4) provides that for the purposes of the section, investment by a debtor is not a personal, domestic or household purpose.

11 Section 11 is headed "Presumptions relating to application of Code". The effect of s11(1) is relevantly this. In proceedings (whether under the Code or not) if a party claims that the credit contract or mortgage is one to which the Code applies, it is presumed to apply until the contrary is established.

12 Section 11(2) to (4) provide -

(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 associated with the credit provider or a finance broker (or 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.

13 Among other things, it is clear from clause 1(2) of Schedule 1 of the Code that a person is associated with a credit provider if that person is the credit provider's officer, agent or employee. Section 176 has the effect that the conduct of a credit provider's officer, agent or employee, acting within actual or ostensible authority is imputed to the credit provider. For the purposes of the Code, a credit provider is not taken to know or have reason to believe something because the credit provider's officer, agent or employee knows or has reason to believe it, unless that officer, agent or employee came to know or have reason to believe it in that capacity and in connection with the transaction concerned.

14 Regulation 10 of the Regulations concerns what I call in these Reasons "business purposes declarations". Regulation 10(1) and (2) provide -

(1) For the purposes of section 11 of the Code, the form of the declaration is as follows--

'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).'.

(2) The declaration is to contain (immediately below the above words) a warning in the following form--

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 your protection under the Consumer Credit Code.

15 Regulation 10(3) relevantly requires the declaration to contain the signature and signature date of the declaration maker.

16 I have before me Mr Paulis's original application and a number of documents sent by him to the Tribunal after that. I have Perpetual's submissions on its strike out application including an affidavit by Ms Madden-Melder to which is exhibited a number of documents. I have Mr Paulis's submissions in reply which include what is said to be an "affidavit" but has not been sworn before a person authorised to take such an affidavit. I treat this document as an unsworn statement which is part of Mr Paulis's submissions.

17 Members' Equity Pty Ltd (ME) is Perpetual's mortgage manager in relation to the three loans which are the subject of this proceeding. Under its agreement with Perpetual (which is before me), it can, on Perpetual's behalf, originate, manage and take recovery action, in relation to certain loans and mortgages to which Perpetual is a party, including these loans. Many of the matters are not in dispute. Where a dispute exists, I indicate this.

18 By application dated 24 October 2001, Mr Paulis applied, through ME, to Perpetual for a loan of $121,599 (the first loan). The application shows the loan purpose as "purchase". A statement of income included in the application shows rental income from a property at 5/116 John Fawkner Drive Endeavour Hills (the John Fawkner property) and 5 England Walk Narre Warren South (the England Walk property). Both these properties are shown as investment properties. The application shows that security for the loan is to be the John Fawkner property. It appears from the application that this is the property to be purchased using the loan. The application shows that the property is to be occupied by a residential tenant. The application form includes a form of business purposes declaration which is unsigned.

19 On 9 November 2001 ME, on Perpetual's behalf, executed a contract which offered Mr Paulis a loan of $121,600. Mr Paulis signed an acceptance of this offer on 16 November 2001. The loan product is called "Member Choice Home Loan". The contract consists of two parts - Part A "Your Housing Loan Details" and Part B "Additional Terms and Conditions of Your Housing Loan". Part A contains terms particular to the loan. Part B contains generic terms and conditions. The interest rate is variable. The loan is repayable by six hundred and twenty six fortnightly payments - six hundred and twenty five of $351.79, and a final repayment of $347.45. The loan term is twenty five years. The security property is the John Fawkner property.

20 Part A contains the statement headed "Things you should know about Your Proposed Credit Contract". This is a statement prescribed for the purposes of s15(O) of the Code by r15 of the Regulations.

21 In Part B under section 11, the debtor acknowledges that the statements made to the lender are true. Condition 15.8 has the effect that, if the Code does not apply to the contract (that is, if the credit is to be applied wholly or predominantly for business or investment purposes), the information statement "Things you should know..." does not apply.

22 The loan account for this loan is numbered 007492901. Mr Paulis gave a mortgage over the John Fawkner property and that mortgage was registered on title.

23 It appears from the material exhibited to Ms Madden-Melder's affidavit that, until at least August 2002, the John Fawkner property continued to be rented out by Mr Paulis.

24 On 24 October 2001 Mr Paulis applied, through ME, to Perpetual for a loan of $124,399 (the second loan). The application shows the purpose of the loan as "purchase". It shows the use of the property to be purchased as "investment property". Security is shown as the England Walk property. It appears that this is the property to be purchased and that the property is to be occupied by a residential tenant. The application includes a business purposes declaration which is not signed.

25 On 9 November 2001, ME, on Perpetual's behalf, executed a contract which offered Mr Paulis a loan of $124,400. Mr Paulis has signed an acceptance of this offer on 16 November 2001. The contract is for the Member Choice Home Loan product and contains Parts A and B. Part A is particular to the loan, and Part B contains similar generic conditions to those applying to the first loan. The interest rate is variable. There are six hundred and fifty one fortnightly repayments, with six hundred and fifty repayments of $360.39 and a final payment of $359.90. The loan is for twenty five years. The security property is the England Walk property. The loan account number is 007492936.

26 Mr Paulis gave to Perpetual a mortgage over the England Walk property, and that mortgage was registered on title.

27 On 15 March 2002, Mr Paulis applied, through ME to Perpetual, for an additional advance of $12,000, to be added to the balance of the second loan. Mr Paulis says that he does not recall applying for or receiving this advance. He has not sworn an affidavit to this effect and includes no supporting documentation in his submission. The statements for the account for the second loan included in Mr Paulis's own documentation show repayment figures which are consistent with the advance having been made. He includes no documents in his material which dispute the amount of those payments. Ms Madden-Melder in her affidavit states that the advance was made. I accept that this advance was applied for and was made.

28 The application for the advance shows as security both the England Walk property and the John Fawkner property. The application indicates that the purpose of the loan is investment. The business purposes declaration in section 8 of the form has been signed. That form (with one exception) complies with r10(1) of the Regulations. It declares that the loan is to be applied wholly or predominantly for business or investment purposes, and contains the prescribed warning that by signing the declaration the debtor may lose the protection of the Code. The departure from the prescribed form is that the warning appears above the declaratory words and not immediately below them. The application included documentation from a real estate agent showing that, at least until February 2002, the England Walk property was rented out by Mr Paulis.

29 On 12 April 2002, ME, on Perpetual's behalf, wrote to Mr Paulis approving the advance and that it was to be added to the balance of the second loan. It stated that the amount of credit, with the advance, would now be $135,716.42. It stated that, assuming that the advance was made on the date of the letter, the new repayments would be six hundred and forty four repayments of $385.20, and a final payment of the same amount.

30 Mr Paulis made a written acknowledgment, dated 26 November 2002, that the mortgages given by him to Perpetual over the England Walk property and a property at 1 Leprosa Close Endeavour Hills (the Leprosa Close property) was security for the second loan and a third loan which I shall shortly describe. I note that this document states the original amount of the second loan rather than the amount as increased.

31 By application dated 14 October 2002, Mr Paulis sought, through ME from Perpetual a loan of $160,000 (the third loan). The application form as exhibited to Ms Madden-Melder's affidavit is incomplete. It does not contain sections 1, 4, 7 and 8 of the form, but appears to contain all the other sections. The part of the form in the material before me states that the properties to secure this loan are the England Walk property and the Leprosa Close property. As to whether the England Walk property is to be owner-occupied, there is a tick in the part of the application which indicates that it is to be so occupied. However, also concerning that property, there is a tick and a cross against the words "no-investment". Section 12 of the form is the business purposes declaration. It is in the same form as the form contained in the application for the advance relating to the second loan. It contains the same departure from the form required by the Regulations. Perpetual asserts, and Mr Paulis denies, that he signed this declaration. He says that the signature is not his.

32 On 28 October 2002 ME, on Perpetual's behalf, signed a contract offering a loan of $160,000 to Mr Paulis. He signed his acceptance of that offer on 29 October 2002. The contract contains Parts A and B. Part A relates to the particular loan. Part B contains similar generic conditions to those relating to the first and second loans. The loan account is numbered 007906013. The loan is at a variable interest rate. There are six hundred and twenty nine fortnightly repayments, 628 of $481.97 and a final repayment of $478.40. The loan is twenty four years and two months. It is to be secured over the England Walk property and the Leprosa Close property. The contract notes that these securities also secure the second loan.

33 Mr Paulis gave a mortgage to Perpetual over the Leprosa Close property, and this was registered on title.

34 There is no dispute that the three loans are in arrears. Mr Paulis has not made repayments of the first loan since December 2004. As at 15 July 2006, the total arrears were $16,179.90, with a balance of $128,428.60.

35 Mr Paulis has not made payments of the second loan since January 2005. As at 15 July 2006, total arrears were $15,797.75, and the total balance was $130,905.85.

36 Mr Paulis has not made repayments under the third loan since December 2004. As at 15 July 2006, total arrears were $23,265 and the total balance was $174,967.74.

37 In mid 2004, Mr Paulis wrote to ME asking for hardship relief concerning at least the third loan, and perhaps all three loans. The letter is not in the material before me, but ME's response is.

38 By letter dated 23 June 2004, ME agreed to defer repayments until 20 August 2004. It appears that Mr Paulis did not commence repayments on that new date.

39 On 13 September 2004, Mr Paulis wrote to ME asking for the loan arrears under the third loan to be added to the principal of all three loans. On 30 December 2004, ME declined this request.

40 Mr Paulis then complained to the Banking and Financial Services Ombudsman (the Banking Ombudsman). In April 2005, the Banking Ombudsman advised him that the matter was one of commercial judgment for the bank and suggested that an appropriate forum for a hardship application was VCAT. The same option was later mentioned by a barrister who advised Mr Paulis in July 2006. There is no explanation in Mr Paulis's material for the delay in applying to VCAT.

41 In June 2005, Perpetual (as Plaintiff) filed three separate proceedings against Mr Paulis (as Defendant). They are numbered 6482, 6483 and 6729 of 2005. They seek orders for possession of the John Fawkner property, the England Walk property and the Leprosa Close property. Particulars of claim and defence have been filed and discovery has occurred. Mediation has been ordered but has not been successful.

42 Perpetual has now applied for summary judgment against Mr Paulis in the three proceedings. There is nothing in the material before to indicate the outcome of that application.

Should the proceeding be dismissed or struck out?

43 It is argued for Perpetual that all three loans are for business or investment purposes, and not for personal, domestic or household purposes. Therefore the Code does not apply. Mr Paulis does not dispute that the first and second loans are for business or investment purposes. But he says that the third loan was to buy a house in which he and his wife and child in fact lived from its purchase and until the breakdown of his marriage. He says that the Leprosa Close property is now occupied by his wife and, when his child is living with his wife, by his wife and that child.

44 I am satisfied that the first and second loans were provided for investment purposes. Accordingly, the Code does not apply to them. My conclusion is not affected by the fact that part of the security for the second loan is a mortgage over the Leprosa Close property, a property which may have been used for residential purposes. The test to determine whether the Code applies to a credit contract (as distinct from a mortgage) is whether the credit was provided wholly or predominantly for personal, domestic or household purposes. Investment is expressly not such a purpose. If the Code does not apply to these loans, VCAT has no jurisdiction to hear hardship applications concerning them. This lack of jurisdiction cannot be cured by amendment. To the extent that it concerns the first and second loans, the application must be dismissed.

45 The third loan is in my view different. Mr Paulis disputes that he signed the business purpose declaration in that application. As to this dispute between the parties, no oral has been given, and no oral evidence has been tested by cross-examination. If this were the only issue, this part of the application would go to hearing where the dispute could be resolved.

46 Even if Mr Paulis did sign the declaration, this would not be the end of the matter. For two reasons, I am not satisfied that the declaration is effective for the purposes of s11. That is, it is not effective to found the conclusive presumption that the loan was not wholly or predominantly for personal, domestic or household purposes, and so the Code does not apply.

47 First, the form is not, in my view, substantially in accordance with the Regulations. It departs from the requirements of the Regulations in what I consider to be a very important way. It is placed above, and not immediately below, the declaratory words. The reason I consider the placement of the wording to be so important is that the warning itself is crucially important. It warns the debtor that he or she may lose the protection of the Code if he or she signs the declaration. The Regulations effectively require the warning to be placed between the declaratory words and the debtor's signatures. It is difficult for the debtor to avoid reading the warning before he or she signs the declaration. If the warning is placed above the declaratory words, the debtor's eye may easily pass over the warning to read the declaration itself and then sign it. Placed where it is on these loan application forms, this critical warning can easily be overlooked.

48 Second, although the application form contains the business purposes declaration, it also contains contradictory entries about whether at least one of the properties to which it relates is to be owner-occupied or occupied by a residential tenant. The form must be read as a whole. One cannot read the business purposes declaration only and ignore the rest. It might well be said that the person who obtained the declaration (ME or its agent) might have known or had reason to believe that the loan was in fact to be applied for personal, domestic or household purposes. If this so, s11(3) of the Code makes the declaration ineffective to found the conclusive presumption that the Code does not apply.

49 I am not satisfied that the claim the Code applies to this third loan is so manifestly hopeless that this part of the case should be dismissed or struck out for that reason alone.

50 However, for another reason, it is my view that this part of the case should be struck out. I explain why.

51 First, a reading of all the documents filed by Mr Paulis suggests that he either wants the loan arrears owing under all three loans to be capitalised or added to the principal of each of those loans, or that he wants the loan arrears owing under the third loan to be capitalised, re-distributed and added in roughly equal parts to the principal owing under each of the three loans. Each of these alternatives would involve me changing each of the three loan contracts. I have no jurisdiction to change the contracts for the first and second loans, because the Code does not apply to them. As far as the third loan is concerned, I can only deal with the arrears owing under that loan. Section 68 of the Code only permits me to make specified changes. Although it permits me to postpone payments for a specified time or to reduce payments and extend the term of the loan, or to extend that term and postpone payments, it does not permit me to capitalise arrears or increase the amount of credit by adding the arrears to the amount lent. To the extent that it relates to the third loan, the application should be struck out because it asks me to do something not permitted by s68 of the Code.

52 It may be that Mr Paulis can, in relation to the third loan, suggest an amendment to the application that would comply with s68 of the Code. He might then apply for reinstatement. I say nothing about the prospects of success of such an application.

53 Mr Paulis's application is in part dismissed, and the rest is struck out. I make some concluding comments.

54 First, because the material before me does not indicate whether the Supreme Court has entered summary judgments in the proceedings between Perpetual and Mr Paulis, it is unnecessary for me to consider whether rights and obligations under the loan contracts have merged in such a judgment.

55 Second, it should not be assumed that, even if the Code applied to the third loan, this would prevent the enforcement of Perpetual's mortgage over the Leposa Close property. The effect of s8 of the Code is that the Code only applies to a mortgage to the extent that it secures obligations under a credit contract to which the Code applies. The Code does not apply to the extent that the mortgage secures other obligations. The mortgage over the Leprosa Close property secured the second and the third loans. The Code would not apply to the enforcement of the mortgage to the extent that it secures the second loan.

56 Third, I view with considerable concern the departures from the requirements of the Regulations in relation to the business purposes declaration. That declaration appears on several loan application forms before me. It would appear to be a standard form used by ME. If this form is still in use, it should be urgently corrected.

57 Fourth, I note that in each of the loan contracts before me, Part A includes the information statement required by the Code and headed "Things You Must Know About Your Proposed Credit Contract". But clause 15.8 of Part B says that, if the Code does not apply to the loan, the information statement does not apply. In my view, this way of dealing with loans to which the Code does not apply is potentially confusing for debtors. If the debtor does not read Part B deeply, the debtor may be led to think that he or she has remedies which in fact are not available. If this form is still in use, I urge Perpetual to give prompt consideration to amending it so that it is not potentially confusing or misleading for debtors.

Paulis v Perpetual Trustees Australia Limited

At a glance

Court

Decision date

Before

Source

Judgment (25 paragraphs)

Paulis v Perpetual Trustees Australia Limited (Credit) [2006] VCAT 2039 (10 October 2006)

Parties