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Problems with Credit Contracts

Problems may arise with credit contracts for any reason. There are a number of things that a borrower can do to when there is difficulty meeting repayments, or if the terms of the contract seem unfair or unjust. It is important to act quickly as delays can result in added unnecessary costs.

If a loan is secured meaning that the credit provider has an interest in property which entitles it to sell the property to recover the debt, the credit provider can take steps to repossess the property, as long the right process is followed.

If the loan is unsecured the credit provider may have to take legal action to enforce the debt.

One of the features of the NCC is the ability for a borrower to ask for a Hardship Variation of a loan as set out in s 72 NCC (discussed in more detail below). This is quite commonly used, and borrowers should seek help from a financial counsellor if unsure about what to do.

Other problems which may affect credit contracts include:

  • Unjust transactions - s 76 NCC
  • Unconscionable conduct
  • Breaches of responsible lending obligations

These are also discussed in more detail below.

Enforcement of a Credit Contract

Under section 88 of the NCC, the credit provider cannot issue legal proceedings or repossess or take any other enforcement action unless and until:

  • the debtor has defaulted (i.e. is behind in payments);
  • the credit provider has given or posted a notice to the last known address of both the debtor and any guarantor (it is important for this reason to keep the credit provider informed in writing of any change of address); and
  • the account remains in default after the expiration of the notice period (at least 30 days).

The notice must specify:

  1. the default;
  2. the action necessary to remedy the default;
  3. a period for remedying the default;
  4. the date after which enforcement proceedings in relation to the default, and, if relevant, repossession of mortgaged property may begin if the default has not been remedied;
  5. that repossession and sale of mortgaged property may not extinguish the debtor's liability;
  6. the information prescribed by the regulations about the debtor's right to:
  • make an application to the credit provider under section 72; or
  • negotiate with the credit provider under section 94; or
  • make an application to the court under sections 74 and 96;
  1. the information prescribed by the regulations about:
  • the approved external dispute resolution scheme of which the credit provider is a member; or
  • the debtor's rights under that scheme;
  1. that a subsequent default of the same kind that occurs during the period specified for remedying the original default may be the subject of enforcement proceedings without further notice if it is not remedied within the period;
  2. that, under the Privacy Act 1988 (Cth), the debt may be included in a credit reporting agency's credit information file about the debtor if:
  • the debt remains overdue for 60 days or more; and
  • the credit provider has taken steps to recover all or part of the debt; and
  1. any other information prescribed by the regulations.

These pre-conditions do not apply if the credit provider proves that there are reasonable grounds for believing:

  • it was induced to enter the contract or mortgage by fraud by the debtor;
  • the goods mortgaged have been or will be concealed, damaged or disposed of;
  • it cannot find the debtor despite reasonable efforts; or
  • a court allows the credit provider to repossess.

In South Australia, a notice is also required under s 55A of the Law of Property Act 1936 (SA) to commence any enforcement proceedings in relation to real property that is subject to a registered mortgage, and where the mortgagor is a natural person and the land is appropriated for domestic or agricultural use. It is the usual practice of lenders to combine the two notices into one to avoid duplication. A mortgagee in possession must certify that the requirements of S55A have been complied with prior to registering the transfer of real property.

Direct debit default notice

Section 87 of the NCC requires a credit provider to issue the debtor with a special notice within 14 days of the first occasion of default under a direct debit payment system using Form 11A. The notice does not replace or modify any other preconditions for enforcement action under the NCC.

Such a notice may alert a consumer to any deficiency in information provided to the credit provider about direct debit arrangements.

Unjust contracts - changes and charges

Sections 76 and 77 contain the NCC's version of statutory unconscionable conduct. These sections allow a court to grant relief to debtorfrom the consequences of entering into "unjust transactions". The provisions set out a two-step test.

STEP 1

Was the contract, mortgage or guarantee unjust at the time it was entered into or changed?

A definition of the term "unjust" is provided in section 76(8) of the NCC, which states that "unjust includes unconscionable, harsh or oppressive". This phrase, derived from the Contracts Review Act 1980 (NSW), has been dubbed the "tautological trinity": see West v AGC (Advances) Ltd(1986) 5 NSWLR 610 at 621 per McHugh JA.

The definition of unjust is wider than that of unconscionable conduct at common lawand includes unconscionability: Maisano v Car and Home Finance Pty Ltd [2005] VCAT 1755 (the Maisano case). The concept also includes both:

  • substantive unconscionability (pertaining to the terms of the document itself); and
  • procedural unconscionability (pertaining to the conduct of the parties at or prior to the time the transaction was entered into: see the Maisano case, above).

Further, the fact that a contract favours one party's rights over another (West v AGC (Advances) Ltd (1986) 5 NSWLR 610; Esanda Finance Corporation Ltd v Murphy(1989) ASC 55-703; Custom Credit Corporation Ltd v Lupi [1992] 1 VR 99; Custom Credit Corporation Ltd v Gray [1992] 1 VR 540), or that a contract fails to comply with the NCC (Custom Credit Corporation Ltd v Gray [1992] 1 VR 540; Morlend Finance Corporation (Vic) Pty Ltd v Westendorp [1993] 2 VR 284; Custom Credit Corporation Ltd v Lynch [1993] 2 VR 469; McKenzie v Smith (1998) ASC 155-025) will not, on their own, amount to unjust conduct.

Under section 76(2), when considering this question a court must have regard to:

  • the public interest; and
  • all the circumstances of the case.

Note the two competing public interests of consumer protection and upholding bargains.

Further, under section 76(2), a court may have regard to the following matters when deciding whether or not a contract is unjust:

a. the consequences of compliance, or non-compliance, with all or any of the provisions of the contract, mortgage or guarantee;

b. the relative bargaining power of the parties;

c. whether or not, at the time the contract, mortgage or guarantee was entered into or changed, its provisions were the subject of negotiation;

d. whether or not it was reasonably practicable for the applicant to negotiate for the alteration of, or to reject, any of the provisions of the contract, mortgage or guarantee or the change;

e. whether or not any of the provisions of the contract, mortgage or guarantee impose conditions that are unreasonably difficult to comply with, or not reasonably necessary for the protection of the legitimate interests of a party to the contract, mortgage or guarantee;

f. whether or not the debtor, mortgagor or guarantor, or a person who represented the debtor, mortgagor or guarantor, was reasonably able to protect the interests of the debtor, mortgagor or guarantor because of his or her age or physical or mental condition;

g. the form of the contract, mortgage or guarantee and the intelligibility of the language in which it is expressed;

h. whether or not, and if so when, independent legal or other expert advice was obtained by the debtor, mortgagor or guarantor;

i. the extent to which the provisions of the contract, mortgage or guarantee or change and their legal and practical effect were accurately explained to the debtor, mortgagor or guarantor and whether or not the debtor, mortgagor or guarantor understood those provisions and their effect;

j. whether the credit provider or any other person exerted or used unfair pressure, undue influence or unfair tactics on the debtor, mortgagor or guarantor and, if so, the nature and extent of that unfair pressure, undue influence or unfair tactics;

k. whether the credit provider took measures to ensure that the debtor, mortgagor or guarantor understood the nature and implications of the transaction and, if so, the adequacy of those measures;

l. whether at the time the contract, mortgage or guarantee was entered into or changed, the credit provider knew, or could have ascertained by reasonable inquiry of the debtor at the time, that the debtor could not pay in accordance with its terms or not without substantial hardship;

m. whether the terms of the transaction or the conduct of the credit provider is justified in the light of the risks undertaken by the credit provider;

n. for any mortgage – any relevant purported provision of the mortgage that is void under section 50;

o. the terms of other comparable transactions involving other credit providers and, if the injustice is alleged to result from excessive interest charges, the annual percentage rate or rates payable in comparable cases; or

p. any other relevant factor.

Just because a transaction exhibitone of the above factors does not render that transaction unjust. See: Esanda Finance Corporation Ltd v Murphy (1989) ASC 55-703; Custom Credit Corporation Ltd v Lupi [1992] 1 VR 99; Australian Guarantee Corporation Ltd v McClelland (1993) ASC 56-230; Morlend Finance Corporation (Vic) Pty Ltd v Westendorp [1993] 2 VR 284.

STEP 2

If the transaction is reopened as unjust, what remedy should a court grant the debtor?

Under section 77 of the NCC, a court has a discretionary power to make any one or more of the following orders upon reopening a transaction under section 76:

a. reopen an account already taken between the parties;

b. relieve the debtor and any guarantor from payment of any amount in excess of such amount as the court, having regard to the risk involved and all other circumstances, considers to be reasonably payable;

c. set aside either wholly or in part or revise or alter an agreement made or mortgage given in connection with the transaction;

d. order that the mortgagee takes such steps as are necessary to discharge the mortgage;

e. give judgment for or make an order in favour of a party of such amount as, having regard to the relief (if any) which the court thinks fit to grant, is justly due to that party under the contract, mortgage or guarantee;

f. give judgment or make an order against a person for delivery of goods to which the contract, mortgage or guarantee relates and which are in the possession of that person; or

g. make ancillary or consequential orders.

An application under section 76 must be made within two years of the relevant credit contract being rescinded, discharged or otherwise brought to an end.

The decision of the Supreme Court of NSW in Permanent Mortgages Pty Ltd v Cook [2006] NSWSC 1104, in which a credit contract was set aside against a debtor on the basis that it was unjust, is a good example of the operation of the unjust transaction provisions of the old Credit Code.

UNCONSCIONABLE CHANGES AND CHARGES

Under section 78 of the NCC, a court can also annulor reduce any change in the annual percentage rate, any establishment fee or charge or fee payable on early termination of a contract. This can occur if the change or charge is unconscionable. A change is unconscionable if:

  • the change occurs in an unreasonable manner, having regard to the advertised rate and the period of time since the contract was entered into; or
  • the change discriminates against the debtor compared to other similar debtors.

A court has to decide if a charge is unconscionable taking into account the credit provider's reasonable costs.

Repossession of Mortgaged Goods

Please note this section applies to goods only. The procedure most commonly applies to the enforcement of car loans. Information about the repossession of real property that is subject to a mortgage (for example, a home loan) can be found in the Mortgage Stress Handbook, published by Legal Aid NSW and the Consumer Credit Legal Centre NSW.

When can the credit provider repossess?

The credit provider may be entitled to repossess mortgaged (secured) goods if the period specified in the default notice has expired and the default has not been remedied. The following procedure only applies if the borrower agreed at the time of entering into the loan that the goods would be secured. If a borrower is unsure, legal advice should be sought urgently.

Restrictions on the right to repossess

In most cases, the amount owing must be more than 25% of the amount of credit provided under the contract, or $10 000 (whichever is the lesser), unless a court otherwise consents s 91 NCC.

The credit provider or its agent cannot enter onto residential premises to repossess mortgaged goods unless a court has authorised entry, or the occupier of the premises has consented in writing, after being informed in writing of the provisions of this section s 99 NCC. (Note: the NCCP Regulations set out the form of the written consent (Form 13) and permitted hours of contact).

The credit provider can seek an order from a court to enter onto residential premises and take possession of mortgaged goods [s 100], or an order that the goods be delivered to the credit provider at a specified time and place s 101 NCC.

What can the debtor do to avoid repossession?

To avoid repossession of goods that are subject to security for a debt, a debtor can:

  • bring the account up to date;
  • seek the credit provider's permission to sell the goods privately (this may allow for the goods to be sold at a better price than would be obtained at auction;
  • seek a postponement of enforcement proceedings (see above) under s 94 NCC;
  • seek a hardship variation (see above) under s 72 NCC; or
  • pay out the net balance due under the contract.

What happens after repossession?

Within 14 days after repossession of the goods the credit provider must give to the debtor, or post to the debtor's last known address, a written notice setting out the estimated value of the goods, the enforcement expenses that have and will accrue, and a statement of rights and obligations as required under the NCCP Regulations (Form 14). The credit provider cannot sell the goods until 21 days after this notice has been given.

Section 103 allows the debtor to nominate in writing a purchaser for the goods within the 21 day period of the Form 14 notice. The purchaser must offer at least the estimated value of the goods. During this period the debtor may also explore other options, including seeking a hardship variation.

Sale of repossessed goods

Goods must be sold:

  • as soon as is reasonable and practicable in the circumstances; and
  • so as to receive the best price reasonably obtainable.

It is possible for goods to be sold at a fraction of their real value and for the credit provider to sue the debtor for money still owing after the sale. The debtor can apply to a court for a determination as to whether the power of sale has been properly exercised and the onus falls on the credit provider to prove that it has in fact followed the procedure. If it has not, the debtor can be awarded compensation but it is important to seek legal advice as soon as possible if the credit provider demands money after repossessed goods have been sold.

If the price received for the goods is less than the balance due to the credit provider, the debtor can be sued for the difference as an unsecured debt. It has been held, however, that sale by public auction will in most cases constitute a sufficient attempt by the credit provider to receive the best price reasonably obtainable.

Mortgagor's remedies

Division 6 of Part 5 of the NCC allows a debtor to apply to a court for orders that the credit provider return repossessed goods, even where the secured credit contract remains in default. However, neither the legislation nor the explanatory memorandum states what factors a court would consider in making such an order.

Problems with Credit Contracts  :  Last Revised: Fri Apr 19th 2013
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