TUTORIAL EXERCISE No 5

Question 1

Jane borrows $800,000 from Easy Bank. Half of the loan is to be used for
personal use and the other half to refinance purchase of a commercial property in
Morley for investment purposes. She did not sign a business purpose declaration
when she took the loan. When Easy Bank failed to comply with one of the
provisions of the National Credit Code, Jane commenced legal proceedings
against Easy Bank. Explain whether the National Credit Code would apply to the
loan.

The National Credit Code applies to contracts providing credit if the contracts
comply with the criteria set out under sections 3, 4, 5 and 6.

According to s 4, the definition of ‘credit contract’ must be satisfied, which in this

question, we could assume that Easy Bank has provided credit to Jane through
signing a contract, and the credit is regulated by the Code. Therefore, this
criterion is satisfied. According to s 3(1)(b), Jane, the debtor has incurred a
deferred debt to Easy Bank, the credit provider, which has provided credit to Jane
in the course of business for the total amount of $800,000 and this criterion is
satisfied. As stated in the Queensland v Shark case, the Code could be applied
because Jane has not signed on the business purpose declaration when she took
the loan. Jane, the debtor satisfied the requirement under s 5(1)(a), as a natural
person. According to s 5(1)(b)(i), the Code applies to half of the loan, which Jane
uses it predominantly for personal use purpose. However, Jane uses another half
of the loan to refinance purchase of a commercial property for investment, instead
of a residential property, which this does not satisfy s 5(1)(b)(ii). S 5(4)(a) states
that predominant purpose refers to the purpose for which more than half of the
credit is intended to be used. In this question, Jane uses equal half of the credit
for both personal use and investment purposes. Therefore, this criterion is not
satisfied. In this question, we can assume that the credit contract does not fall into
any of the exception under s 6.

This credit contract has not satisfied the criterion stated in s 5, therefore, National
Credit Code could not be applied to the loan.
Question 2

Lee wanted to buy a car from Happy Motor, a used car dealer in Victoria Park, for
$6,000. The car was to be used predominantly for personal use. As Lee did not
have sufficient funds, Happy Motor agreed to hire the car to him for 24 months at
a monthly rental $300. Ownership of the car will pass to Lee on payment of the
last rental. Lee may terminate the hire arrangement at any time subject to the
terms of the contract.

How would you describe such a financing arrangement? Explain whether such an
arrangement will be governed by the National Credit Code?

This is a hire purchase agreement, as the ownership will be passed to Lee, the
hirer on payment of the last rental and the hiring charges exceed cash price of
goods, which exceed for an amount of $1200 [($300×24 months) − $6000].
Section 5 applies as Lee uses the car predominantly for personal use. Therefore,
the Code can be applied to this hire purchase agreement.

Section 9 of the Code converts hire purchase contract into a sale of goods by
instalments secured by mortgage over goods. The ownership of the car is
deemed to have passed to Lee, the hirer and the debtor, and Lee is deemed to
have mortgaged the car to Happy Motor, the supplier of the used car and the
credit provider.

Therefore, the National Credit Code can be applied to this agreement.

Question 3

Jim, a real estate agent from Northam, decides to purchase a $25,000 painting
from Art Gallery (AG). He tells AG that he intends to hang the painting in his
dining room. Jim is having a temporary cash flow problem and AG agrees to let
him pay for the painting in twelve equal monthly instalments of $3,000.

AG tells Jim that they can 'dispense with all the cumbersome paperwork’ if he
signed a declaration that the credit is not for personal, domestic or household
purposes. Jim agrees and signs a business purpose declaration form provided by
AG. The agreement is not reduced to writing but is concluded by a handshake
between Jim and the managing director of AG.

A month later, Jim becomes ill with Ross River virus and is unable to meet the
instalment payments on the painting. His doctor advises him that he would be fully
recovered in three months’ time. Jim asks AG for an extension of time to pay off
the painting but AG refuses.

Advise Jim of his rights, if any, under the National Credit Code.

National Credit Code can be applied to this credit contract as the criteria state in s
3,4,5 and 6 are satisfied. According to s 4, this is a credit contract, which AG
provided credit to Jim, and credit, according to s 3, refers to that payment of the
painting is deferred that Jim is required to pay $3000 for 12 equal monthly
instalments. The Code applies to credit as Jim, the debtor is a natural person as
required under s 5(1)(a), intends to hang the painting in his living room, which is
predominantly for personal use stated under s 5(1)(b)(i) and a charge of $11000
[(12 months × $3000) - $25000] has been made under s 5(1)(c). AG provides the
credit to Jim as part of its art gallery business, which is required under s 5(1)(d).
Section 6 does not apply to this question because the credit does not fall into any
of the exceptions. Even though Jim has signed the business purpose declaration,
which the Code would not be applied according to s 13(2), the declaration is
ineffective because AG, the credit provider knew or had the reason to believe at
the time the declaration was made, that Jim would hang the painting for personal
purpose as Jim has told AG about it. This is similar to Queensland v Shark case
as a loan shark forced his customer to sign business purpose declarations.
Therefore, the Code can be applied to this credit contract.
In the question, the agreement is concluded by a handshake between Jim and the
managing director of AG. It can be assumed that prior to entry into the contract or
before the offer is made, Jim has not been given a pre-contractual statement
required under s 16(1)(a) and an information statement required under s 16(1)(b),
which means that AG has breached the pre-contractual disclosures requirements.
Because there is no written agreement, it is a breach of s 14, which requires the
agreement to be in writing and signed by both the credit provider and debtor or by
the signature of credit provider and the debtor’s conduct. There is a breach of s 17,
as no information listed in s 17 is contained in the credit contract. Jim has not given a
copy of the contract within 14 days because is only concluded by handshake,
therefore, breach of s 20.

According to s 22, breach of sections 14 to 21 is an offence resulting in a fine

imposed on AG, which is the credit provider. A civil penalty may be imposed on AG
as the key requirements state under s 111 have been breached, which the key
requirements are essential for Jim to understand the complete cost of credit. Jim
may apply to the court or tribunal for a penalty order to be made under s 112 and the
maximum amount of penalty would be interest charges payable or actual loss
suffered under s 114(1). Jim can also seek for compensation if ASIC or AG has
applied to the court under s 118.

According to s 72, Jim, who is affected by the Ross River virus, has applied to
change the credit contract on grounds of hardship by providing oral or written
hardship notice, but AG, the credit provider has rejected it. Jim can apply to the court
and the court would hear arguments from both sides before decide whether to refuse
request for change or accept it. According to s 72(3), credit provider need not to
agree to change if it does not believe that the cause is reasonable. Assume that Jim
only request to extent for 3 months, it is similar with McNally v ANZ Banking Group
Ltd, which the cause is only for short term and the court held that it is reasonable.
Therefore, the court may accept the change.