Are guarantees caught by the National Credit Code

In determining whether the National Credit Code applies, it is a common misconception that the first question that must be asked is what is the purpose of the loan. As this article demonstrates the first question is whether the borrower is a natural person.

 

 

The scenario we consider is as follows:

  1. Borrower: ACME Pty Limited (ACME);
  2. Guarantors: Husband and wife, Norm and Shirley are the sole shareholders of ACME through which they carry on their business.
  3. Security: 1st mortgage over residence owned by Norm and Shirley in their individual names.
  4. Purpose: to purchase and renovate a residential property.

The transaction could possible be caught by section 5, 7 or 8 of the National Credit Code (NCC). These are examined below.

Section 5 – Provision of credit to which this Code applies

Section 5 of the NCC states that the NCC applies where:

1. the debtor is a natural person … and

2. the credit is provided or intended to be provided wholly or predominantly:

i) for personal, domestic or household purposes; or

ii) to purchase, renovate or improve residential property for investment purposes; or

iii) to refinance credit that has been provided wholly or predominantly to purchase, renovate or improve residential property for investment purposes; and

3. a charge is or may be made for providing the credit; and

4. the credit provider provides the credit in the course of a business of providing credit carried on in this jurisdiction or as part of or incidentally to any other business of the credit provider carried on in this jurisdiction.

The debtor here is ACME (not Norm and Shirley) this is because s204 of the NCC defines debtor “as a person (other than a guarantor) who is liable to pay for the credit”.

As ACME is not a natural person s5(a) is not satisfied and so the NCC does not apply.

Despite the fact the purpose of the loan is caught by section 5(b)(ii) because s5(a) is not satisfied the NCC does not apply.

Section 7 – Mortgages to which this Code applies

Section 7 of the NCC states that it applies where:

  1. it secures obligations under a credit contract or a related guarantee; and
  2. the mortgagor is a natural person or a strata corporation.

Norm and Shirley are natural people and so section 7(b) is satisfied.

The next question is does it “secure obligations under a credit contract”? Section 4 of the NCC defines credit contract as “a contract under which credit is provided, being the provision of credit to which this Code applies”. Thus whether there is a credit contract is determined by asking whether the NCC applies. We have answered this already (see above) and the answer is no.

The next question does it “secure obligations under a related guarantee”? The NCC does not define related guarantee. Section 204 of the NCC defines guarantee unhelpfully (simply as “includes an indemnity”). Thus related guarantee must be given its normal meaning, which would be a guarantee related to a credit contract. We have already concluded that the loan in question is not a credit contract, thus Norm and Shirley’s guarantee is not a “related guarantee” and so the mortgage securing their guarantee is not a Mortgage to which the NCC applies.

Section 8 – Guarantees to which this Code applies

Section 8 of the NCC states that the NCC applies to a guarantee if:

  1. it guarantees obligations under a credit contract; and
  2. the guarantor is a natural person or a strata corporation.

Norm and Shirley are natural people and so limb (b) is satisfied.

We have already concluded that the loan in question is not a credit contract, thus Norm and Shirley’s guarantee does not guarantees obligations under a credit contract so this guarantee is not regulated by the code.

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