Enforcement of a credit contract

Contributed by Ian Macdonald and current to 1 September 2005

WHAT REQUIREMENTS HAVE TO BE MET BEFORE A CREDIT CONTRACT OR MORTGAGE IS ENFORCED?

The credit provider cannot begin “enforcement proceedings” in relation to a credit contract or mortgage unless the debtor is in default under the credit contract or mortgage (s.80).

Under the Code “enforcement proceedings” includes:

• proceedings in a court to recover a payment due under a contract or a guarantee; or
• taking possession of property under a mortgage or taking any other action to enforce a mortgage.

The Code does not define the term “default”. The credit contract or mortgage itself will usually define the meaning of “default” in detail. Usually “default” includes not making payments when they fall due. Failing to insure mortgaged goods is also usually considered to be an event of default. Under the Code an acceleration clause (as described on page 144 above) can only operate if the debtor is in default.

The credit provider must give each debtor and any guarantor a default notice allowing the debtor a period of at least 30 days from the date of the notice to remedy the default.

In relation to mortgages, the credit provider is also prevented from taking possession of, selling, appointing a receiver for or foreclosing in relation to property subject to a mortgage unless the notice has been given.

During the 30 day notice period, the debtor or mortgagor can remedy the default. If the default is remedied, then no enforcement proceedings can be taken (s.81).

What is the format for a default notice?

The format for a default notice is set out in section 80 of the Code.

A default notice must specify the default and the action necessary to remedy it and state that a subsequent default of the same kind that occurs during the notice period of 30 days may be the subject of enforcement proceedings without further notice if it is not remedied within the period.

Where the credit provider believes on reasonable grounds that a default is non-remediable, the default notice need only specify the default; the notice does not need to specify that the default can be remedied. The credit provider may begin enforcement proceedings after the period of 30 days from the date of the notice (s.80(5)).

If an acceleration clause is to operate, the default notice must contain a statement of the manner in which the liabilities of the debtor or mortgagor under the contract or mortgage would be affected by the operation of the acceleration clause and also of the amount required to pay out the contract (as accelerated) (s.85).

How is a default notice given?

A default notice must be given to each debtor or guarantor. Even if joint debtors or guarantors live at the same address, they must receive separate default notices. The notice can be given by delivering it to the debtor or guarantor personally. In that case it is taken to be given on the date that it bears or on the date it is received by the consumer, whichever is the later.

The notice can also be given by sending it by post, telex, or facsimile or “similar facility” to residential or business address of the debtor or guarantor. A notice sent by post is taken to be given on the date it bears or on the date when it would have been delivered in the ordinary course of the post, whichever is the later. A fax is taken to be given on the date it bears or on the date stated on the transmission report (s.173).

The credit provider fulfils its obligations if it sends a default notice to the last known address of the debtor or guarantor. If the debtor or guarantor does not advise the credit provider of changes of address, then the debtor or guarantor could be in danger of not receiving default notices (s.172).

When is a default notice not required?

In certain circumstances a credit provider is not required to give a default notice or to wait until the period specified in the default notice has elapsed, before beginning enforcement proceedings. This occurs if:

• the credit provider believes on reasonable grounds that it was induced by fraud on the part of the debtor or mortgagor to enter into the credit contract or mortgage;
• the credit provider has made reasonable attempts to locate the debtor or mortgagor but without success;
• the Court authorises the credit provider to do so; or
• the credit provider believes on reasonable grounds that the debtor or mortgagor has removed or disposed of mortgaged goods under a mortgage related to the credit contract or under the mortgage concerned, or intends to remove or dispose of mortgaged goods, without the credit provider’s permission, or that urgent action is necessary to protect the mortgaged property (s.85(2)).

STOPPING ENFORCEMENT ACTION

If the debtor cannot comply with a default notice by paying out arrears, the debtor may have to consider negotiating a postponement of enforcement action. Negotiating a Hardship Variation (see above) can also be considered.

The negotiation should be initiated by the debtor, mortgagor or guarantor before the end of the period specified in the notice. Thus, for a section 80 default notice, the negotiation should be commenced within the 30 day notice period.

Although the negotiation should be initiated within that period, it seems that the actual postponement agreement can be reached outside the notice period, since the Code makes provision for a situation where the credit provider has taken possession of mortgaged property. It is a condition of any postponement negotiated with a credit provider after the credit provider has taken possession of mortgaged property that the mortgagor pay the reasonable costs of the credit provider taking possession of the property.

The postponement provisions also apply where the credit provider has obtained a judgment against a debtor and given the debtor a written demand for payment.

The sections of the Code relating to postponements only apply where the maximum amount of credit that is or may be provided under a credit contract is $316,800 or less (s.86).

What is the effect of a postponement ?

A default notice is taken not to have been given to the debtor or mortgagor if:

• a postponement is negotiated with the credit provider;
• written notice of the conditions of postponement is given to the debtor or mortgagor;
• the debtor or mortgagor complies with the conditions of the postponement (s.87).

What can the debtor or mortgagor do if a postponement cannot be negotiated?

If the debtor or mortgagor cannot negotiate a postponement, the debtor or mortgagor can apply to the SAT for a postponement. The SAT may stay enforcement proceedings until the application has been determined (s.88).

ENFORCING HOME MORTGAGES

What is the process for enforcing home mortgages?

The provisions of the Code relating to enforcement of goods mortgages are more extensive than those relating to mortgages over other kinds of property (for example, houses).

The provisions of the Code that are relevant to enforcement of home mortgages relate to default notices, hardship variations and postponements.

A home mortgage is usually enforced by the credit provider taking possession of the mortgaged home and selling it. If there is any shortfall on the sale, then the debtor (mortgagor) is liable for that amount. Often, recovery of any shortfall amount will be in the hands of a mortgage indemnity insurer, who takes over this debt from the credit provider.

Usually the credit provider demands possession of the property; if the debtor does not hand over possession, the credit provider commences proceedings in the Supreme Court for an order for possession of the property.

ENFORCEMENT OF MORTGAGES OVER GOODS – REPOSSESSION

Can the credit provider repossess goods when most of the loan has been paid?

A credit provider must not take possession of mortgaged goods if the amount currently owing under the credit contract related to the relevant mortgage is less than 25% of the amount of credit provided under the contract, or $10,000, whichever is the lesser.

However, the credit provider can apply to the SAT for permission to repossess the goods in these circumstances.

The “amount of credit” is the amount of money lent under the contract, and does not include interest or other fees and charges. For example, if a borrower takes out a loan for $20,000, then for the rule to apply, the total of principal, interest, and other fees and charges payable under the contract must be lower than $5,000, (25%) of the amount lent.

The “twenty-five percent rule” does not apply to continuing credit contracts, as there is no fixed amount of credit under these contracts. Nor does the rule apply if the credit provider believes on reasonable grounds that the debtor has removed or disposed of the mortgaged goods, or intends to remove or dispose of them, without the credit provider’s permission, or that urgent action is necessary to protect the goods (s.83).

Does the borrower have to reveal the location of mortgaged goods?

It is an offence for the borrower not to comply with a written notice under section 90(1) of the Code requiring the borrower to reveal the location of mortgaged goods. Such a notice can require the borrower to reveal the location of goods within 7 days.

If the goods are not in the possession of the borrower, the mortgagor must give the credit provider all information in the borrower’s possession that might assist the credit provider in tracing the goods.

Can the credit provider enter residential property to take possession of goods?

The credit provider or its agent cannot enter any part of premises used for residential purposes for the purpose of taking possession of mortgaged goods under a goods mortgage unless:

• the SAT has made an order authorising the entry; or
• the occupier of the premises has, after being informed in writing of the provision of the Code relating to entry onto residential premises, consented in writing to the entry.

The word “occupier” is not defined, but usually refers to the person in control of the premises, including tenants as well as owner-occupiers.

The residential premises do not have to be the premises of the mortgagor of the goods for this provision to apply. For example, if the goods comprise a vehicle parked at the house of a friend of the mortgagor, the credit provider would need to get the permission of the occupier of the house or an order of the SAT before entering the premises.

The credit provider or agent of the credit provider is guilty of an offence if the premises are entered without the proper process being followed (s.91).

Can a person who has possession of mortgaged goods be forced to deliver them to the credit provider?

The credit provider can apply to the SAT for an order to compel a person who has possession of mortgaged goods to deliver them to the credit provider at a specified time or place or within a specified period. The order can be made against the borrower or another person in possession of the goods (s.93).

Usually such an order would only be sought if the credit provider has requested the return of the goods but the person in possession has refused to return them.

The credit provider must be entitled to possession of the goods for the order to be made. The minimum conditions for this entitlement would usually be, firstly, that the borrower is in default, and secondly, that a notice under section 80 of the Code allowing at least 30 days to remedy the default has been given to the borrower but the default has not been remedied.

Borrower’s rights when goods have been repossessed

What does the credit provider have to do after taking possession of goods?

Under s.94 of the Code, a credit provider that has repossessed goods under a mortgage must, within 14 days of doing so, give the mortgagor a notice containing the following matters:

• the estimated value of the goods;
• the enforcement expenses incurred up to the date on which the goods were taken into the credit provider’s possession and, if enforcement expenses are accruing while the goods remain in the credit provider’s possession, the rate of accrual; and
• a statement of the mortgagor’s rights and obligations in the form set out in the regulations.

The goods are not to be disposed of within 21 days after the date of the notice, unless the SAT authorises the credit provider to do so. Thus where goods are repossessed, the borrower will usually have at least 21 days to get them back. Remember that the 21 days runs from when the section 94 notice is given, not from when the goods are repossessed (s.94).

CAN THE BORROWER GET THE GOODS BACK?

The credit provider must return the goods to the borrower if:

• the borrower pays the amount in arrears. The amount in arrears does not include any accelerated amount, for example, where the whole of the amount of credit and accrued interest becomes immediately payable on default by the borrower. Thus the borrower is only required to pay instalments that have fallen due to pay out the arrears;
• the borrower pays the credit provider’s reasonable enforcement expenses; and
• the borrower has not defaulted again under the credit contract in the same way as before (s.94(4)).

CAN THE BORROWER ARRANGE TO SELL THE GOODS TO SOMEONE ELSE?

The notice given to the borrower after repossession contains a statement of the “estimated value” of the goods.

The borrower can nominate in writing a person who is prepared to purchase the goods from the credit provider at the estimated value or at any greater amount for which the credit provider has obtained a written offer to buy the goods.

The written nomination must be given to the credit provider within 21 days after the date of the notice given by the credit provider.

The credit provider must offer to sell the goods to that person for the estimated value or, if there is a written offer to buy the goods for a greater amount, that amount (s.95).

Sale of repossessed goods by the credit provider

WHAT ARE THE BORROWER’S RIGHTS IN RELATION TO THE PRICE OBTAINED FOR THE GOODS?

The credit provider who has repossessed goods has a duty to sell goods “as soon as reasonably practicable” if the borrower does not redeem the goods or arrange for another person to buy them. The credit provider must wait the 21 day period after giving the borrower a notice under s.94 of the Code.

The goods must be sold for “the best price reasonably obtainable”. Goods such as vehicles are usually sold by auction by the credit provider. The mere fact that an auction process has been held does not mean that the “best price reasonably obtainable” has been obtained for the goods (s.96).

Where the credit provider does not sell the goods “as soon as reasonably practicable” for the “best price reasonably obtainable” the borrower can apply to the SAT for an order that the credit provider pay the borrower an amount fixed by the SAT (s.98).

In addition, if the power of sale is not exercised in accordance with the Code, the borrower can apply to the SAT for compensation for any loss suffered.

WHAT INFORMATION HAS TO BE GIVEN TO THE BORROWER AFTER THE SALE?

A credit provider that sells mortgaged goods must give the mortgagor a written notice stating the gross amount realised on the sale, the net proceeds of the sale, the net amount due under the credit contract, and any further recovery action proposed to be taken by the credit provider against the debtor (s.96(3)).

On the sale of goods, the total amount payable under the credit contract becomes due. After a mortgage has been enforced by repossession of goods, the borrower is still liable to the credit provider for any amount left owing after the sale. Many kinds of goods tend to depreciate rapidly, and it is very common for borrowers to be left liable for a substantial shortfall after repossessed goods are sold.

ENFORCEMENT EXPENSES

The Code defines “enforcement expenses” to include expenses incurred by the mortgagee in preserving or maintaining property subject to the mortgage (including insurance, rates and taxes payable for the property), but only if the expenses are incurred after a breach occurs and are authorised by the mortgage (Sch. 1).

The Code defines “enforcement proceedings” as:

• proceedings in court to recover a payment due under the contract or a guarantee; or
• taking possession of property under a mortgage or taking any other action to enforce a mortgage.

Expenses incurred in relation to enforcement proceedings could be considered to be “enforcement expenses”.

A credit provider must not recover or seek to recover enforcement expenses from a debtor or mortgagor in excess of those “reasonably incurred” by the credit provider. A possible interpretation of this is that where the credit provider does not actually spend money on enforcement expenses, these expenses are not “incurred” by the credit provider (s.99).

SURRENDER OF GOODS

Where a person buys goods by instalments and title to the goods does not pass until all instalments are paid, or where the credit provider has a mortgage over goods, the goods can be surrendered to the credit provider.

The debtor or mortgagor can give the credit provider a written notice requiring the credit provider to sell the goods. The notice may be given when the goods are in the possession of the credit provider, such as when they have been repossessed by the credit provider.

The debtor or mortgagor may return the goods to the credit provider at the credit provider’s place of business during ordinary business hours within 7 days of the date of the notice, or at some other agreed time or place.

Within 14 days after the goods have been returned, the credit provider must give the debtor or mortgagor a written notice containing the estimated value of the goods and any other information required by the regulations. After this “notice of value” is given, the debtor can, within 21 days, give a written request for return of the goods, or can withdraw the requirement to sell the goods. If this written request is made, and the debtor or mortgagor is not in default, the credit provider must return the goods. Alternatively, within the same 21 day period, the debtor or mortgagor may nominate in writing a person who is prepared to purchase the goods from the credit provider at the estimated value or any greater amount for which the credit provider has obtained a written offer to buy the goods.

If the goods are not required to be returned by the borrower or mortgagor, or if no buyer is nominated, the goods must be sold for the best price reasonably obtainable. The proceeds of the sale must then be credited to the debtor or mortgagor. The credit provider must give the debtor or mortgagor a written notice stating the gross amount realised on the sale, the net proceeds of the sale, the amount credited to the debtor or mortgagor and the net amount due under the credit contract (s.78).

ENFORCEMENT OF JUDGMENTS AGAINST GUARANTORS

Where the debtor has defaulted under a credit contract, the credit provider may look to a guarantor of the debt for payment of the amount outstanding under the credit contract.

Where the credit provider takes legal proceedings against the guarantor, a judgment may be obtained against the guarantor in relation to money owed under the guarantee.

The Code places restrictions on the enforcement of judgments obtained against guarantors. A credit provider must not enforce a judgment against a guarantor unless:

• the credit provider has obtained a judgment against the debtor for payment of the guaranteed liability and the judgment remains unsatisfied for 30 days after the credit provider has made a written demand for payment of the judgment debt;
• the State Administrative Tribunal has relieved the credit provider from the obligation to obtain a judgment against the debtor on the ground that recovery from the debtor is unlikely;
• the credit provider has made reasonable attempts to locate the debtor but without success; or
• the debtor is insolvent (s.82).