CBA v Wales [2012] NSWSC 407

The lender obtained default judgment against a borrower arising out of a home loan secured by a mortgage. The borrower sought to have the default judgment set aside.

The borrower defaulted as a result of losing her job and contacted the Financial Ombudsman Service (FOS) for assistance with financial hardship. After receiving an email from FOS, the bank agreed with the borrower that if she made increased repayments, the bank may adjust the arrears back to zero after a 3 month review.
The borrower thought she had made a hardship application but the bank did not consider that to be the case because no formal application was lodged. The borrower also thought that she was allowed to revert to the original payments automatically after making three increased payments and did that. There was no review and many months later, the bank complained to the borrower that she had not been making the increased payments as agreed and informed the borrower that the bank was taking legal action. Default judgment was obtained with no further notice to the borrower.

The court noted that the agreement with the bank made little concession to hardship because the borrower was required to make increased payments to repay the debt within its original term. The court also found that the agreement was not assisted by FOS. Their only involvement was their initial email to the bank.

The law
A judgment may, on sufficient cause being shown, be set aside if made irregularly, illegally or against good faith.

The following considerations are relevant to the court’s discretion:

  • a satisfactory explanation for any delay in filing a defence or moving to set aside the judgment;
  • whether the default judgment was obtained without notice;
  • whether the defence is bona fide;
  • whether, if the judgment was set aside, the plaintiff would suffer prejudice;
  • whether the defence presents an arguable or triable issue;
  • whether it would be futile to set aside the judgment.

An affidavit in support of the default judgement must state the amount due as at the time the originating process was filed and any reduction of that amount since that time. The bank accepted that the affidavit was inaccurate as to the amount due. However default judgment was entered for the correct amount. The court held that given the judgment sum was correct, it would not have set aside the judgment for the inaccurate affidavit alone.

The court held that while default judgment may be given without notice, it is a relevant consideration. The only consideration against granting relief was the lack of a formal defence to the bank’s claim. The court noted that entitlement to have a hardship application determined under the National Credit Code does not amount to a defence. However, the court found that a defence is not an express requirement for the exercise of the power, which is directed to affording fairness in the processes of the court. The court made the following findings:

  1. The borrower’s delay before judgment was entered was largely due to the conduct of the bank in failing to review the borrower’s payments after three months and could be explained by the negotiations.
  2. The default judgment was obtained without notice to the borrower. Proper notice would have required that the motion and supporting affidavit be served on the borrower.
  3. No prejudice would be suffered by the bank if the judgment was set aside.
  4. There was no reliable basis to apprehend that the borrower would not continue to meet her repayments in the future.

The court set aside the default judgment principally because the bank, combined with its failure to give notice, deprived the borrower of the opportunity to avail herself of the remedies provided for in Division 3 of Part 4 of the National Credit Code. Where a hardship application is made and the bank does not agree to the change sought, it must refer the dispute to FOS. The dispute lodged with FOS prevents any enforcement proceedings being started or continuing and FOS may impose its own remedies.

The court found that while the borrower did not make a formal hardship application to have the terms of the loan changed, that was the result of the way in which the bank administered the Code. The bank employee negotiated a resolution of the dispute rather than informing the borrower of the procedure for making a hardship application.

The court said:

Had the bank embraced the principles embodied in the Code rather than treading a careful path around their application, there is at least a reasonable prospect that changes would have been made to the loan agreement, either by agreement, by decision of the FOS or by the Court under s 74 of the Act.

However the court cautioned that grounds for a hardship application under s 72 of the Code should not always be seen as a basis for setting aside default judgment. The critical consideration here was that the borrower endeavoured in good faith to engage the processes contemplated by the Code but was defeated by the bank’s passive resistance to those processes and lack of notice. The court went so far as to say that it may be open to conclude that judgment was obtained against good faith.

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