The borrower wanted to make a hardship application under the National Credit Code and to that end sought to set aside the default judgement on two grounds:
- Firstly she argued the banks affidavit in support of default judgement was inaccurate. The affidavit stated (falsely) that no payments had been made since the time of commencement of the proceedings. In fact, the borrower had made payments totalling $13,812 during that period. The judge commented: The requirements of an affidavit sworn in support of an application for default judgment on a debt are set out in r 16.16 of the Uniform Civil Procedure Rules. It is an express requirement of the rule that the affidavit state the amount due as at the time the originating process was filed and provide particulars of any reduction of that amount since that time. It is unfortunate that greater care was not taken in the preparation of the affidavit. However, on balance, I would not have set the default judgment aside on that ground alone, having regard to the fact that the judgment sum was evidently correct.
- Secondly she argued that default judgement was entered without notice to her in the context of ongoing negotiations: Telling Ms Wales by telephone that the bank’s solicitors would be instructed “to continue legal action” does not amount, in my view, to her being put on notice of the motion for default judgment. Proper notice of that motion would have required that the motion and supporting affidavit be served in accordance with the rules. The default judgment was obtained without notice to her.
The bank argued that setting aside judgement would be futile as there was no evidence that the borrower would be able to service the loan even if a hardship application was granted. The judge disagreed commenting
With some insignificant exceptions, she was able to comply with a repayment schedule more draconian than that provided for in under the original loan agreement. There is no reliable basis to apprehend that she would not continue to meet her regular repayments in the future.
The judge next considered the power of the court to set aside default judgement in the absence of a defence:
There is no defence in the present case, as the entitlement to have a hardship application determined under the National Credit Code does not amount to a defence. The application thus raised a point that, so far as the parties were able to inform me, has not previously arisen.
Plainly, the discretion must be exercised judicially and in accordance with the dictates of justice. In the novel circumstances raised by the present application, I formed the view that the power to set aside default judgment could properly be exercised notwithstanding the acknowledged absence of a defence.
The judge then summarised the law on hardship applications and external dispute resolution as follows:
The National Consumer Credit Protection Act requires that the bank be licensed to provide services as a credit provider. One of the obligations of a licensee is to be a member of an approved external dispute resolution scheme: s 47(1)(i) of the Act. The FOS is one of two such approved schemes.
The Code is a schedule to the Act and governs credit contracts, which include loans for personal purposes (such as home loans) and mortgages that secure such loans (see ss 5 and 7 of the Code).
Part 4 of the Code deals with changes to obligations under credit contracts. Division 3 of Part 4 creates a series of remedies to effect such changes on grounds of hardship and in the case of unjust transactions. The remedies include applying to the credit provider and applying to the court. In the case of an application to the credit provider, a credit provider who does not agree to the change sought must refer the applicant to its approved external dispute resolution scheme.
The terms of reference of the FOS dated 1 January 2010 provide remedies that may be imposed by the FOS in resolving a dispute. Those remedies (set out in clause 9.1 of the terms of reference) include deciding that the bank resolve the dispute by variation of the terms of a credit contract in cases of financial hardship. As the parties informed me, any such decision would have been binding on the bank.
Further, clause 13.1 of the terms of reference provides that, where a dispute has been lodged, the financial services provider must not pursue legal proceedings related to debt recovery instituted prior to the lodging of the dispute and, in particular, must not seek judgment in those legal proceedings provided the dispute is lodged before the applicant takes a step in those proceedings beyond lodging a defence or a defence and counter claim. It does not appear to have been determined whether the existence of an unresolved hardship application under the Code would sustain a cross-claim to a claim for possession.
The bank argued that the borrower had not made a proper hardship application in the bank’s prescribed form. The judge rejected this commenting:
It is difficult to see why Ms Wales should be prejudiced by her failure to complete the bank’s prescribed form for a hardship application when she was not invited or directed to do so. It is clear to me that, 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.
The bank argued that now default judgment had been entered there could be no question of considering a hardship application. The judge rejected this but carefully confined himself to the facts before him:
To refuse the relief sought on that basis would be a triumph of form over substance. That is not to say that the existence of grounds for an application under s 72 of the Code should always be seen as a basis for setting aside default judgment. On the contrary, the entry of judgment should ordinarily be seen as the end-point past which the opportunity for hardship consideration is lost. The critical consideration in the present case is that the defendant endeavoured in good faith to engage the processes contemplated by the Code but was defeated by the bank’s passive resistance to those processes, coupled with its decision to move the court for judgment without notice to her.
Accordingly the court set aside default judgment.