Knowles v Victorian Mortgage Investments [2011] VSC 611

Mrs Knowles sought $1.05 million to refinance her property which had on it:

  1. a residence (in which the plaintiff and her family reside);
  2. two factories;
  3. a cool-store transport refrigeration warehouse building; and
  4. land leased to a primary producer.

The property was subject to four leases from which she received rental.

The case involved a dispute over whether the National Credit Code applied to the loan application. There was no valid credit code declaration so the issue swung on what the loan was used for. A determinative portion of the funds was to be used to refinance a judgement debt that arose out of commercial dealings.

Justice Clyde Croft held that the nature of the litigation is irrelevant because, regardless of its nature, Mrs Knowles was personally liable to pay the judgment debt and it is therefore a personal debt.

Although no authority was cited for this radical conclusion His Honour made repeated references, to the need for the National Credit Code to be “broadly and liberally interpreted as beneficial legislation”.

While this formulation may sound very grand it is not a valid legal principle in the tradition of the rule of law. This is because to ignore the plain meaning of the words of a statute, in favour of stretching their meaning so that the consumer will always prevail, is in fact an abandonment of the rule of law.

As Cesare Beccaria  observed:

There is nothing more dangerous than the common axiom, ‘the spirit of the laws is to be considered’. To adopt it is to give way to the torrent of opinions. This may seem a paradox to vulgar minds, which are more strongly affected by the smallest disorder before their eyes, than by the most pernicious though remote consequences produced by one false principle adopted by a nation.

John Locke in Two Treatises on Government explained that for justice to prevail the law cannot have favourites–even if they are consumers:

Freedom of men under government is, to have a standing rule to live by, common to every one of that society

They are to govern by promulgated established laws, not to be varied in particular cases, but to have one rule for rich and poor, for the favorite at court, and the countryman at plough.

If the normal rules of construction are to be abandoned, and instead legislation is to be interpreted broadly and liberally in favour of one party, the law will be uncertain. Montesquieu explained this in Spirit of the Laws:

The judgments ought to be fixed, and to such a degree, as to be always conformable to the exact letter of the law. Were they to be the private opinion of the judge, people would then live in a society without knowing exactly the obligation it lays them under.

Although His Honour did not cite any authority for his radical new rule he did attempt to justify it as follows:

[My broad and liberal interpretation] is consistent with the maxim transit in rem judicatam, meaning “a judgment is regarded as of a higher nature than any cause of action”. This maxim is a convenient reference to the rule that, “when judgment has been given in a claim…, the cause of action in respect of which judgment is given is merged in the judgment and its place is taken by the rights created by the judgment…”

However as Thomas Jefferson observed :

Laws are made for men of ordinary understanding, and should, therefore, be construed by the ordinary rules of common sense. Their meaning is not to be sought for in metaphysical subtleties, which may make anything mean everything or nothing, at pleasure.

Those who believe the consumer should always win, are motivated by misguided compassion. They forget the experiences of history. Whenever commercial relations of the parties are uncertain, whenever every case is decided in favour of a favoured party, commerce breaks down. 

This decision will mean people like Mrs Knowles will in future have no opportunity to obtain finance. The slightest blip in your commercial affairs, a judgement against you on a commercial guarantee, will now render or your affairs subject to the consumer credit code. You will thereby have your assets sterilised–unable to be used to raise funds.

Perhaps Justice Croft thought that he was helping all the future Mr Knowles of the world by deeming their loans to be coded–perhaps he thought that if the loans are in future subject to the code and his decrees they will be more just and beneficial to the Mrs Knowles of the world. Sadly that view is not realistic. Justice Croft used the jurisdiction he gave himself under the code to set aside the transaction in its entirety citing justness in all the circumstances. The main aspect of the case that enlivened his innate sense of fair play was the fact that Mrs Knowles claimed to be illiterate–even though she had the documents explained to her by a solicitor.

The reality now is that not only future Mrs Knowles, but in future this Mrs Knowles, will find it impossible to refinance these sorts of commercial debts. The decision makes clear that the code applies, and further that because she is illiterate, any contract she enters into is of suspect enforceability–something that cannot be cured even by insisting that she receive independent legal advice. What cruel and false compassion removes from a class of people, the ability to own property and raise funds against it.

Click here to read the full judgment

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