The borrowers raised three defence to the lender’s claim for possession:
- failure to serve a s80 Notice;
- unjustness pursuant to the Contract Review Act and Consumer Credit Code;
- that the mortgage memorandum did not secure the loan.
Was the loan code – regulated?
The Bank obtained 2 signed Business Purpose Declarations however, as the Bank conceded, the Declarations were not effective as they did not comply because, in the first case, the Declaration was neither witnessed nor dated, and in the case of the increased loan it was signed after the loan agreement was entered into.
The Bank argued that the fact that the borrowers signed the Business Purpose Declarations is an admission by them that the purpose of the loans was not wholly or predominantly for personal, domestic or household purposes. The court held however that the presumption in s 11(1) is that the contracts are contracts to which the Code applies and the onus is on the lender to show that the loan was provided wholly or predominantly for a purpose other than personal, domestic or household purposes.
In determining whether the code applies the test applied was not what the credit provider thought at the time of the advance but rather:
What the money was used for in order to determine the purpose of the provision of the credit. In considering the question it is important to consider the substance of the transaction in the context of its performance.
The judge found the deception by the borrower as to the purpose was irrelevant:
It does not seem to me appropriate to approach the legislation from a different point of view dependent upon whether the borrower tells the truth to the lender. The legislation has a particular meaning which must be construed independently of the facts that give rise to the need to understand its meaning in any given case. Section 11(2) enables the credit provider to protect itself against all sorts of borrowers including untruthful ones. If the credit provider does not avail itself of that sub-section it takes the risk that the presumption in sub-s (1) will operate against it because it cannot prove that the funds were used for purposes other than the purposes for which the borrower proves they were in fact used.
The judge found that the funds were used for personal purposes by the borrowers who were living well beyond their means.
Failure to serve a s80 Notice
Because the loan was found to be code regulated the court next had to determine the effect of the non-service of a s80 notice. In previous cases the Associate judges of the court had found that non-service invalidated the lender’s proceedings (eg Smart AJ in Benjamin v Ashikian  NSWSC 735, Patten AJ in Permanent Mortgages Pty Ltd v Cook  NSWSC 1104). The judge in this case rejected those lines of authority and found that the proceedings were not invalidated:
1. Firstly, because the legislature envisaged that proceedings under certain circumstances could be brought without a notice. In those circumstances it cannot have been the intention that if those circumstances were not met that new proceedings be started to determine what had already been decided by the court.
2. Secondly, sub-s (4)(c) of the code provides that the Courts can authorise the credit provider to begin the enforcement proceedings and this can be done after the fact.
3. Thirdly, s 170 of the Code provides:
A credit contract, mortgage or guarantee or any other contract is not illegal, void or unenforceable because of a contravention of this Code unless this Code contains an express provision to that effect.
All that s 80 does is to provide a penalty for commencing the proceedings without serving a notice. It contains no express provision that the credit contract or mortgage is unenforceable.
4. Fourthly, a policy reason, if the only way the credit provider could avoid invalidation of his proceedings was to serve a s 80 notice just in case, the effect of the service of the notice would likely result in an admission by the credit provider that the Code applied although that was an issue in the proceedings.
5. Fifthly, a policy reason, it would be in no party’s interest for it to be determined after a full hearing that the borrower had made out no defences under the Code but that the proceedings had to be dismissed simply so that notice could be served and then new proceedings commenced to decide the same issues.
6. Sixthly, the proceedings cannot be regarded as a nullity. At worst, there is an irregularity involved in the commencement of the proceedings because Section 80 does not confer the jurisdiction for the bringing of the proceedings.
Unjustness pursuant to the Contract Review Act and Consumer Credit Code
The borrowers claimed the loan was unjust because the Bank (amoung other claims) knew that the they would not be able to service the loans, and, therefore, should not have entered into them as they amounted to asset-based lending.
The claim of asset lending was rejected, the Bank was found not to have known the borrowers were not able to service the loans. The Bank was able to show it was concerned to ensure that the loans were able to be serviced before they were made. The bank did not true state of affairs because of the decit of the borrower. What was more significant was that Mr Dutta himself knew of his financial position and the difficulties that he would have in servicing the loan. Nor was he operating under any relevant disadvantage.
In disposing of the Contracts Review Act claim the the judge held that although Mr Dutta was an unreliable, and sometimes untruthful, witness:
He is an intelligent man who was more than able to protect his and his wife’s interests. The manner in which he conducted the defence of the case including the affidavits he drafted and the submissions he prepared and delivered indicate clearly to me that he is not the sort of person for whom the Court needs to have a particular concern when considering the provisions of the Code and the CRA, and matters concerning unconscientious behaviour on the part of the Bank. Mr Dutta did not need to be told by the Bank or anybody else that he was living beyond his means nor that he may have difficulty servicing the loans if he did not take other steps such as endeavouring to sell one or more of his properties.
Did the mortgage memorandum secure the loan?
The borrower was given the wrong memorandum however the document differed only in its cover pages and in the layout of their list of contents. However the judge ultimately found for the lender on the basis of the deeming provisions of the Real Property Act:
Nothing in Perpetual Trustees v English or the cases it follows qualifies or impacts upon the rights contained in the Memorandum incorporated into the mortgage in the present case. English, and a number of the other cases, concerned a forged loan document and mortgage where the issue was not whether the registration of the mortgage conferred indefeasibility but rather the identification of the “estate or interest” that upon registration was made indefeasible. There is no such issue in the present case. The mortgage incorporated the terms and conditions of the Memorandum, and the loan agreements signed by the Defendants were agreements covered by the mortgage.