A court has ruled that a lender seeking to avoid the provisions of the National Consumer Credit Protection Act by lending to a company “for no purpose genuinely connected to its normal business” engaged in unconscionable conduct.
In handing down his judgment in Integrated Securities No 3 Pty Ltd v Creatrix Web Development and Online Marketing Solutions, Justice Nigel Rein of the New South Wales Supreme Court called on ASIC to consider taking steps to have the legislation amended to stop such lending activity.
Milijana Pejkic and Cai Valerio bought a property in Pejkic’s name in the Sydney suburb of Yowie Bay, with a loan from Bankwest.
In 2014 they decided to demolish the house and build a duplex, with the intention of renting or selling one half of the duplex and living in the other.
To refinance their existing loan and pay for the planned demolition and rebuilding, they borrowed A$2.38 million from RAMS.
Costs got out of control and they had problems with their builder, who quit the job leaving the building unfinished. They went to RAMS to get additional finance but were knocked back.
They went to a broker, Tim Haynes of Highland Financial Services, who suggested they use a company as the borrower. He introduced them to Integrated Securities, which lends at extremely high interest rates.
In February 2018, Integrated Securities agreed to finance Creatrix Web Development and Online Marketing Solutions, a company set up by Valerio. The loan was $530,000 initially and was later topped up by $93,000. With pre-payment of some interest, the amount advanced was $440,000.
The annual interest rate on the Integrated Securities loan was 36 per cent and there was a default rate of 4.5 per cent a month compounding – 69.59 per cent a year.
The duplex was completed later that year and one half was sold for $1.9 million in May 2019, all of which was paid to RAMS. After the payment, $1.008 million was still owed to RAMS.
By June 2019, the Integrated debt was $825,000 – a significant amount of interest having accrued. Integrated took Creatrix to court to recover the debt.
Pejkic and Valerio argued that the loan agreement should be declared void under the National Consumer Credit Protection Act and that the loan agreement was obtained by unconscionable conduct.
The court ruled that the introduction of a company was not legally effective to avoid the protections of the NCCP Act because the company’s sole director and property owner had a primary liability to repay the loan as “debtor”.
It also ruled that the introduction of a company as the borrower even when there is no existing business or venture of the business for which the loan is sought was unconscionable.
And it ruled that the loan was, in effect, asset lending, which is unconscionable conduct under the ASIC Act.
The judgment said: “The borrower named in the loan agreement is Creatrix. As it is not an individual, the [National Credit] Code would appear to have no application.
“The defendants, however, contend that the loan agreement made Valerio and Pejkic debtors and that by the terms of the loan agreement they were persons liable to repay credit.
“They pointed out that Integrated had only asked for statements of assets and liabilities from Valerio and Pejkic, not from Creatrix.
“There was no obvious reason for Creatrix to be involved in the transaction at all, other than as a means of Integrated Solutions lending in a fashion that would preclude the operation of the Code.
“There is no reason not to regard Pejkic and Valerio as having undertaken a primary liability to repay the money lent to Creatrix and hence, the Code applies to the loan agreement.
As a result, Integrated had entered into a credit contract that infringes the Code.
The court ordered that Pejkic and Valerio repay the $440,000 advanced by Integrated and interest paid at the “court rate” of 4.1 per cent.
On the question of unconscionable conduct, the court ruled that it was not satisfied that Integrated had a genuine basis to conclude the Pejkic and Valerio could pay back the loan without sale of the whole of the asset. In other words, it was engaging in asset lending.
“It is clear that Integrated and other lenders engaged in lending on onerous terms are very much aware of the loophole that seemingly permits them to escape the operations of the Code by insisting on the introduction of a company as the borrowers even when there is no existing business or venture of the business for which the loan is sought,” the court ruled.