The case for a special purpose vehicle when lending

In ANZ Banking Group v Londish [2014] NSWSC 432 handed down on 11 April 2014, there is bad news for lenders. It underscores the dangers posed by “unjustness defences” brought under the National Credit Code of the Contracts Review Act for dragging into current disputes lenders whose mortgages have been discharged, and then leaving them with a large legal bill, regardless of outcome.

ANZ sought to hedge its bets by joining the former lender (Challenger) to the proceedings in order to step into its shoes for the amount that was discharged. We previously reported on this decision. The borrower in response claimed that Challenger’s mortgage was unjust. ANZ countered this contingency by seeking restitution from Challenger.

The claims against Challenger involved it in the peril of having to disgorge the money it received on discharge of its loan. This necessitated Challenger expending $84K on legal fees. 

In the event ANZ was successful against the borrower. The borrower, as is normal after such a case, had no money to pay anyone any legal costs. Thus Challenger sought its costs from ANZ.

Challenger argued that it ought not be left to bear its costs of the proceedings in circumstances where the ANZ took the risk that, if it was successful against the borrower, it would fail to obtain any relief against Challenger. Challenger submitted that it was in the interests of justice that Challenger not be left to recover its costs against the borrower because it was almost certain she was insolvent.

The judge rejected this submission and effectively told Challenger that these are the vicissitudes of lending. If you loan to someone in New South Wales, there is a danger that long after the loan has been discharged someone can come along and sue you and force you to incur large amounts of legal costs for which you have no security.

The only way to avoid such a state of affairs is to establish a special purpose vehicle for each loan and then deregister it after the loan has discharged. For smaller lenders, who cannot afford the risk of a calamity of this scale, we recommend this be done.

For those lenders who believe they are safe because they do not lend in New South Wales, think again. The “justness in all the circumstances” formula has been incorporated into the National Credit Code. Thus any lender doing coded loans anywhere in Australia is potentially exposed.

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