Alan Liddel - New Zealand Credit & Finance Institute Inc

NZ Credit and Finance Institute conference July 2012 - Speech 13-7-12.
Ladies and Gentlemen when I came in this morning, I heard someone asking
another “who is this guy Alan Liddell?” and I thought it was a reasonable question.
The other day I googled myself and the first entry related to the website of a credit
consultant I do contract work for, the second referred to my Linked In profile (which
is sparse) and the third one was - this
invoice in July invoices
1. • Liddell Alan • Tauranga • Lawyer, Lawyers
Paedophile Liddell detained indefinitely - National - NZ Herald News Detective
Sergeant Alan Symonds said that though Liddell was not the worst offender, ...
That is not me or, more grammatically, I am not he.
Some of what I say today overlaps with what I discussed with a lunchtime meeting of
the Auckland branch back in March this year as the subject of that talk was also
recent developments in the PPSA.
The first case we look at is SOMME LTD v CENTRAL HOUSE MOVERS LTD - High
Court, Wanganui, a decision of Kos J delivered on the 9 th of September last year.
Citation so far is CIV-2011-483-2
A delivers four relocatable houses to B's property as part of a sale to B. However, B
only pays one-third of the sum due to A. So A comes and takes three of the houses
away again. The problem is that by then B has already sold the land (and the
houses) to C. C sues A in conversion and trespass, and seeks summary judgment
for what appears to be a highly inflated figure. Does A have an arguable defence?
(From the judgement)
A is Central House Movers (CHML), the supplier and remover of the houses, and
defendant in this proceeding. CHML is in the business of shifting and selling houses.
It operates from premises at Bulls. One of its directors, a Mr Michael O'Byrne,
provided affidavit evidence..
B is a company called Vakamon Ltd -- the purchaser of the houses. Prior to August
2009 it owned the property at No 141B, No 3 Line. Vakamon was incorporated in
August 2006 by a Mr Farid Herschend. Mr Herschend is the sole shareholder of
Vakamon. He and his sister, a Ms Torkan May, are its directors.
So CHML sells 4 houses to Vakamon and delivers them to Vakamon’s land.
Vakamon fixes them to the land and does not pay for them.
C is Somme Ltd, the plaintiff. It now owns the property at No 141B, No 3 Line.
Somme was incorporated in July 2008. The sole shareholder and director of Somme
is now a Mr Robert Stadniczenko. Mr Stadniczenko became the sole shareholder on
24 July 2009 -- a few days before Somme acquired the property at No 141B, No 3
Line. Mr Stadniczenko provided affidavit evidence.
After the houses were delivered they had been placed on and attached to piles.
Skirting boards had been placed round them. Some had exterior deckings and
gardens were planted round them. The plaintiff company claimed also that services
- power, water etc - had been connected but the court did not believe it.
CHML sues and obtains judgment against Vakamon which by then is not worth
powder and shot. It is a shell.
And now from the judgment:
Unsurprisingly frustrated with what had occurred, CHML's Mr O'Byrne, went to the
property on 30 January 2010. He took with him 25 workmen. Over the course of the
day they removed three of the houses. The fourth was disconnected and prepared
for removal. Some of its fixtures and fittings were removed.
There is some dispute on the evidence as to what occurred during the removal
Mr O'Byrne was present. So were the 25 workmen.
On the other side, Mr Stadniczenko did not attend. He seems to have been out on a
boat in Cook Strait. But his solicitor, a Mr Moore, had no fishing to do that day and
so he attended instead.
Then two police constables attended. They came at Mr Moore's request. Mr Moore
left the site and prepared 30 trespass notices. On his return he handed out the
notices to Mr O'Byrne and his workmen. The notices were not received with
complete equanimity by those served. The words used are not stated in evidence,
but with the due regard for precedent displayed in those parts, were probably
"emphatic versions of You be off'".
Work to remove the houses continued notwithstanding the notices. The police did
not intervene further. They saw it all as a civil dispute. Far away on his boat, but
informed of events by cellphone, Mr Stadniczenko saw it rather differently. He
thought that his houses were being stolen. But perhaps house stealing had not
yet been recognised as a crime in the Wanganui police district. Certainly it was fairly
novel activity for any district. In any case Mr Stadniczenko's theories on the state of
the criminal law did not avail him. The police continued to stand by.
Each side continued to order the other off. Probably in similar terms and tones as
accompanied the trespass notices. But no one went anywhere.
Mr Moore then arranged for 15 security guards -- they are less charitably described
by Mr O'Byrne -- to attend. They parked their vehicles in front of the defendant's
house removal transporters. Soon after, they engaged the workmen in conversation.
Despite the security guards' presence, and their parking arrangements, three houses
were still removed. The fourth was left behind. It had been much damaged in the
course of preparing to remove it.
There is a dispute as to whether an agreement was reached permitting removal of
the three houses. I will get to that issue in due course.
The judge then quoted from another case which suggested that since the houses
were fixed to the land it was for CHML to prove that they were not intended to be
part of it.
Since CHML could not prove that the houses had been intended to remain as
chattels, the houses were therefore part of the land and belonged to whoever owned
the land. In this case it is Somme. So any remedy for CHML is going to be in
damages, not against the houses. But we already know that Vakamon which was
the contractual purchaser is a shell.
However, even before that, what was missing from CHML’s defence? Two things.
Did Vakamon own the houses on the land before it sold the land to Somme?
Section 20 rule 1 of the Sale of Goods Act 1908 says it did. Secondly, did CHMl
take any security interest? No, it didn’t. But even if it had done so and had
registered that interest, it would have been fruitless as the houses were no longer
chattels. They were fixtures on the land and no longer subject to the PPSA.
What CHML should have done was retain a security interest in the houses but also
obtained an agreement to mortgage over the land in case the houses were fixed to it
and then lodged a caveat pursuant to the agreement to mortgage. Similarly it should
have obtained the consent of any mortgagee to the effect that either the houses did
not become part of the land or that CHML had the right in any event to remove them
if not paid.
Now as it happens before CHML went and got the houses, there was a proposal
from the solicitors for Vakamon whereby Vakamon acknowledged the outstanding
debt (by then apparently $187,000) that CHML would get some security over the
land once a subdivisional consent was granted and that then Vakamon would enter
into an agreement to mortgage. A deed of acknowledgment of debt was signed by
Vakamon. However, it was conditional as to the consent being obtained and the
court held that it did not create an immediate right to a mortgage. Then of course
Vakamon sold to Somme, anyway. Now the court held that Vakamon’s wrongful
action in selling to Somme may have essentially “triggered” CHML’s right to call for
an immediate agreement to mortgage and the Judge left it to the final hearing to deal
with that issue. Remember this was an argument over summary judgment.
Further, even if CHML succeeded in proving a right to an immediate agreement to
mortgage, supporting a caveat, it then faced Somme which claimed to be a bona fide
purchaser for value. The judge said that it was too early to make a finding of
dishonesty against Somme and its principal but if dishonesty was found the fraud
exception to indefeasibility might apply. Secondly, Somme might face an in
personam (against the company not in relation to the land) action in Equity based on
unconscionable conduct.
Why would it find dishonesty against Somme? If I tell you that the initial director and
shareholder of Somme was Mrs May, the sister of Mr Herschend and that Mr
Stadniczenko became shareholder and director a few days before Somme
purchased the land and that Mr Stadniczenko was the trustee of Mrs May’s trust and
that Mr Stadniczenko had guaranteed Vakamon’s debt to its mortgage lender and
there were other business connections with Mrs May - would you then suspect some
dishonesty. Clearly the judge had his suspicions and said so.
The court found that the relationship between Vakamon and Somme was much
closer than the bald information given here which in itself raises suspicions as to
whether Vakamon had ever intended to pay CHML.
Anyway, the judge said that though CHML might have defences to the claim for
damages, it did not have a defence to the claim of conversion as Somme
undoubtedly owned the houses and had not agreed to their removal. Despite that,
he decided it was one of the rare cases where he should exercise his discretion and
refuse summary judgment. He refused it not only on quantum but also liability even
though CHML had no defence. He had a discretion to do that, one rarely exercised,
and he exercised it. He also awarded costs to CHML.
Now the facts can be used to support a conclusion that Herschend, Mrs May and Mr
Stadniczenko were in cahoots to obtain the houses cheaply. Similarly, there may
have been an entirely innocent explanation of why Vakamon could not pay for the
houses and had to sell the property when it did and the fact that Herschend, Mrs
May and Mr Stadniczenko were related in business or to each other was a pure
However, it is a very good example of why business owners should know something
about the law relating to their businesses because what was necessary to protect
CHML’s position was simple and cheap compared with the total price of the 4
houses of $287,000
The next case I wanted to deal with was that of RABOBANK V MCNULTY a
decision of the Court of Appeal [2011] NZCA 212 issued on the 10 th of March last
year. It relates to leases for a term of one year and bailment. What’s bailment?
Bailment has a number of definitions but as a minimum for it to exist, one person
must be in possession of goods to which another person has a superior or
reversionary right.
You all know that a lease for a term of more than one year is also a security
agreement requiring registration to protect the lessor’s title against as many counterclaimants as possible. Thus an operating lease is caught by the PPSA as well as a
finance lease. So what is a lease for a term of one year? The PPSA defines it thus:
Lease for a term of more than 1 year -(a)
Means a lease or bailment of goods for a term of more than 1 year; and
Includes -(i)
A lease for an indefinite term, including a lease for an indefinite
term that is determinable by 1 or both of the parties not later than 1
year after the date of its execution; and
A lease for a term of 1 year or less that is automatically
renewable or that is renewable at the option of 1 of the parties for 1 or
more terms, where the total of the terms, including the original term,
may exceed 1 year; and
A lease for a term of 1 year or less where the lessee, with the
consent of the lessor, retains uninterrupted or substantially
uninterrupted possession of the leased goods for a period of more than
1 year after the day on which the lessee first acquired possession of
them, but the lease does not become a lease for a term of more than 1
year until the lessee's possession extends for more than 1 year; but
Does not include
A lease by a lessor who is not regularly engaged in the business
of leasing.
Notice that (b) makes no reference to bailment. So theoretically a lease for a term of
more than one year includes a bailment if the bailment is for a term of more than one
year but not if the bailment is for a term of less than one year even though a lease
for less than one year can also become one for more than one year if the term is
indeterminate or if the lessee holds over with the lessor’s consent so that the lease
extends to more than one year.
The issue has arisen several times in my experience but Rabobank v McNulty is the
first Court of Appeal decision and I agree with it
The McNulty case involved a stallion owned by a group of investors. Mr McAnulty
and others, collectively the February Syndicate, entered into a standing agreement
with Stoney Bridge Ltd (SBL) whereby SBL was appointed as studmaster/manager
of a stallion owned by the Syndicate. For those of you who are interested its name
was St Rheims. SBL became a bailee of the stallion. Under the standing
agreement, the Syndicate did not receive any rent from SBL. A portion of the service
fees earned by the stallion were paid to SBL.
Rabobank New Zealand Ltd provided finance to SBL and SBL granted a security
interest over its property to Rabobank. Rabobank registered a financing statement
under the Personal Property Securities Act 1999 (the PPSA). The Syndicate did not
register a financing statement. SBL defaulted on its obligations to Rabobank.
Rabobank claimed it had a secured interest in the stallion, which had been perfected
by registration and therefore took priority over the Syndicate's interest in the stallion.
The Syndicate claimed its interest in the stallion was not a security interest and
therefore the priority rules of the Act did not apply.
The issue before the Court was whether the standing agreement constituted a "lease
for a term of more than one year" per ss 16(1) and 17(1) of the Act and was
therefore a security agreement creating a security interest.
If the bailment was such a lease and if the syndicate were “regularly engaged in the
business of leasing “then the syndicate’s interest should have been registered and
as it wasn’t, Rabobank had a priority claim to St Rheims. If the bailment was not a
lease or if the owners were not in the business of bailing a horse or horses then they
did not have a lease and not need to register and their ownership claim beat that of
The Court of Appeal essentially said that it thought that the word “lease” in
subparagraph b and c of the definition of lease for a term of one year was shorthand
for “lease or bailment of goods”. A highly sensible interpretation and first strike to
Rabobank. Consequently if the owners of St Rheims were in the business of leasing
or bailing goods then they should have registered their security interest in St Reims
and therefore Rabobank’s position was superior. That makes sense and means that
parties are more likely to know where they are.
Was the syndicate regularly the business of leasing goods?
The Court of Appeal, decided that a one-off bailment was not being “regularly
engaged in the business of leasing goods”. It could be if it was the first of a series of
bailment or leases. However, this was the only one the syndicate had. The court
said that the syndicate was in the business of maintaining and making a profit from
its stallion and the cost of standing the horse with the studmaster was an incidental
expense, not the business itself. The Court went on to say that
“In our view, the words "in the business of leasing goods" should be read as
importing a requirement that the owner actually be intending to profit from
the bailment or lease. This would exclude gratuitous bailments where the
bailor was not receiving any payment for the use of the goods and bailments
where the bailee is in the business of bailments, not the bailor. The
interpretation we favour has the practical effect of excluding from the
definition of "lease for a term of more than 1 year" all bailments in respect of
which the bailor is not receiving (or intending to receive) consideration with
a view to making a profit. Although it is not an aid to interpretation of the
PPSA, it is interesting that the recently enacted Australian Personal Property
Securities Act 2009 (Cth) has express statutory language that yields that
[Of course, the fact that the Aussies said so specifically IS an aid to interpretation.
Our CA is merely acknowledging that the Australians got it right first time and our
Ministry of Economic Development has never got round to fixing up our PPSA. It’s
actually quite odd as some of the more bizarre and confusing aspects have been
fixed up but others have been left for the courts to sort out with attendant commercial
loss and provision of work to lawyers.]
And the words “in respect of which the bailor is not receiving (or intending to receive)
consideration with a view to making a profit” as a way of deciding whether the bailor
is in the business of leasing also makes sense. Being in business surely means you
intend to make a profit and if you do not intend to make a profit you are a hobby or a
charity or a government department.
Now, despite that fact that the owner of the goods might regularly bail them, it looks
as if failure to receive any rental from the bailee (the person in possession) would
mean that it was not a lease of goods for more than one year. So a drinks
wholesaling company like Coca Cola Amatil could lend a retailer a frig for storage of
Coca Cola products without the frig becoming subject to the retailer’s bank’s GSA. A
petrol retailer could supply its customer with tanks without their goods suddenly
being caught up in the security interest granted by the retailer to its bank. I think it is
practical and sensible.
Our third case deals with a lien. Anyone know what a lien is? A lien is the right of
someone to retain possession of something belonging to someone else or to have a
charge over it until the someone else satisfies an obligation - usually pay money.
There are lots of types of lien and they can arise under contract or at common law or
by statute. But if you have a contractual lien entitling you to retain possession of
something - goods - or have a charge over it till an obligation is satisfied, what is
that? A security interest. So, if you need to assert that contractual that lien against
another secured party of the same debtor with respect to the same goods, you need
to have the lien in writing and you’d be wise to register.
However, liens also exist at common law - what’s an example? The mechanics lien the lien your garage has against your car when it works on it. In law the garage
need not release your car to you until you have paid for the work. That lien has in
fact been extended by statute but it originated at common law.
Such common law liens also take priority over a security interest in some
circumstances under section 93 of the PPSA.
93 Lien has priority over security interest relating to same goods
A lien arising out of materials or services provided in respect of goods that are
subject to a security interest in the same goods has priority over that security
interest if—
 (a) the materials or services relating to the lien were provided in the
ordinary course of business; and
 (b) the lien has not arisen under an Act that provides that the lien does
not have the priority; and
 (c) the person who provided the materials or services did not, at the
time the person provided those materials or services, know that the
security agreement relating to the security interest contained a
provision prohibiting the creation of a lien by the debtor.
Person A has a perfected security interest in person B's car.
Person B takes the car to a garage for repairs.
The garage repairs the car but keeps possession of it until the garage receives
payment for those repairs.
The garage's lien has priority over person A's security interest.
Well, a mechanic has a lien over your car for the work he does but what about
somebody who stores, packs and distributes goods for sale on behalf of another - is
there a packer’s lien in New Zealand?
The Court of Appeal last year in TOLL LOGISTICS V MCKAY [2011] NZCA CA 188
held that there was none. A company called Scene 1 Entertainment Ltd imported
DVD’s for sale. It stored them with Toll in Toll’s warehouse and when it received
orders for a DVD it told Toll and Toll packed up the DVD and sent it off to the
customer. Scene 1 banked with the ASB and granted it a security interest over all its
present and after-acquired property. It then defaulted with the ASB and the ASB
appointed receivers. The ASB had registered its financing statement on the PPSR
on 4th of March 2008.
When Scene 1 went into receivership it owed Toll $287,368.50 and Toll was then
holding in its warehouse 500,000 DVD’s worth approximately $2.6 million. The ASB
was owed $7 million and said it had the right to all the DVD’s in priority to Toll’s
Toll asserted a general packer's lien over the DVDs. Toll said it was entitled to the
lien because part of services it provided to Scene 1 involved the packing of the
DVDs to the order of Scene 1's customers. Toll claimed that a lien arose either at
common law or pursuant to contractual arrangements agreed with Scene 1 and
recorded in a letter dated 5 June 2009.
Now Toll had a contractual lien under the letter but had not registered. Why might it
deliberately not have registered - apart from ignorance or slackness or bad decisionmaking? It had possession of the DVD’s and possession is a form of perfecting your
security interest just like registration.
However, what would override Tolls possession? A security interest registered
before Toll got possession. So the ASB general security agreement had priority over
Toll’s security interest in the form of its lien
Toll then asserted a lien at common law and, as we noted above, that has priority
over a security interest provided that the lien claimant does not know of the security
interest of the secured party. Your mechanic does not have priority over your hire
purchase company for the value of the work he does if he knows the car is on hire
purchase and the hire purchase agreement prohibits the creation of liens.
The Court of Appeal went back to cases hundreds of years old to find that that there
was no packer’s lien in New Zealand and to the extent such had existed in the past it
had been associated with a time when packers were also factors and certainly in this
case, Toll was not factoring Scene 1’s debts. Accordingly Toll failed.
The Ministry of Consumer Affairs and Legislation since its Consumer Credit
Review in 1999-2000.
I’m now going to talk to you a little about the proposed changes to the Credit
Contracts and Consumer Finance Act 2003 (“CC&CFA”) but out of interest, more
from the point of view of the approach to lending of the Ministry of Consumer Affairs.
Now, the CC&CFA was supposed to be the latest thing in consumer protection and
prevention of lender abuse. It was drafted as a result of some un-researched reports
from the Ministry of Consumer Affairs (“MCA”) which came out from June 1999 to
October 200. The official name is the Consumer Credit Law Review - the CCLR. A
lot of what is said is common sense but much of it is waffle, some of it is wrong.
These are the reports.
I read them and I noted that none of them referred to
consultations with people from the lending industry at all let alone the small financier
and high risk lending industry. In 2000, I went to a seminar where the Ministry had
speakers talking about its intentions for the new legislation and I asked the main
speaker how many finance companies they had consulted and he told me none.
Can you imagine what drafting 5 reports on an industry - and some of them exhibit
serious ignorance - without even consulting the members of that industry. Imagine
what would happen if the government tried to do that with education or Maori affairs
or welfare. That policy of keeping the industry out of proposals for reform of lending
has continued.
Anyway, the MCA cocked it up so badly that, they had to come back again, less that
6 years after the CC&CFA came into force, to have another go and part of that was
the so called Financial Summit in (I think) August 2011.
In fact the Ministry has they have been trying to get credit law to fit with how its policy
wonks think it should ever since they got the Labour Government to pass the act
originally. Let’s see how they have managed:
Puzzle One
The first think to look at is 5 of the CCLR, at pages 15 - 17. There the MCA lists
criticisms of the Disputes Tribunal as a source of settlement of disputes between
borrowers and lender. The jurisdiction for the DT at the time was $7,500 or $12,000
with the consent of both parties.
Here is the extract from page 17. It is criticising the Disputes Tribunal.
“Limited rights of appeal
The feature of the Disputes Tribunal system of perhaps most concern to legal observers is
that legally untrained referees can make binding decisions that are wrong in law and cannot
be appealed. Referees are required to determine disputes according to the substantial merits
and justice of the case, but this does not guarantee that the law will be followed. This is
more likely to be a problem if the referee is not familiar with the law relevant to the dispute
or the law is difficult to understand and apply, as is the case with the Credit Contracts Act.
Not only is this unfair to those parties who do not obtain their legal rights as a result of a
Tribunal decision. it also contributes to inconsistency between decisions as there is no further
opportunity to "get the law right”.”
Now you would think that with that attitude, the Ministry would be assiduous in
making sure that a new dispute resolution system created to provide for consumer
borrowers would deal with those problems (Or rather deal with what the MCA
regards as problems - in fact the DT operates very well on a system of substantial
justice.) So what do we get?
In 2008, the Labour Government enacted the Financial Service Providers
(Registration and Dispute Resolution) Act (“FSPA”). It provides that all financial
service providers, which includes all lenders, must register. Additionally, they all, not
just those lending under consumer credit contracts, must join a dispute resolution
scheme. There are 4 such schemes, each run by a Disputes Resolution Provider.
Most finance companies have registered with the only non-governmental DRP - that
is Financial Service Complaints Ltd or FSCL.
The FSPA was drafted by and came out of the Ministry of Economic Development
which is the umbrella ministry of the MCA. The MCA is a branch of the MED.
So what did the MED come up with in reconciling the problems its sub-ministry said
were caused by the Disputes Tribunals?
Schedule 1
Disputes Tribunals
Who prepares complaining
borrower’s case
Borrower (sometimes with
help from court staff but
never from anyone who
contributes to the
The DRP staff (may be a
person who also
contributes to the
Not normal practice
No but referee may
If both parties attend
personally. Normal if in
Unlikely but possible if
face to face mediation
same town.
takes place
Now an informal
Not required but may be
$7,500 (now $15,000)
$200,000 (now same)
questions of the opposition
through referees
Evidence on oath
Hearing held
Lender gets
Legally qualified referee
Jurisdiction in 2008
Right of appeal
Yes if hearing unfairly held Borrowers
decision subject to higher
internal review if either
party does not accept.
Who pays referee
complainant upheld?
Who pays referee
complaint rejected?
Lender - even if borrower’s
claim is opportunistic and
decisions due to further
opportunity to "get the law
Only if the borrower
I have already had experience of an initial recommendation from a DRP which
ignored the fact that a naïve and foolish borrower had borrowed money for a
commercial purpose, taking the money from my client lender and paying it to a friend
to invest in the friend’s business. The friend misappropriated the money. The DRP
treated her as if she had borrowed for a domestic, household or personal purpose that is as if she had borrowed under a consumer credit contract. That decision
essentially guts the distinction in the CC&CFA between consumer credit contracts on
the one hand and business or investment credit contracts on the other. Such
decisions could be corrected with an appeal process but, from the Ministry’s position,
it appears that lack of appeal rights are only wrong if consumers lack them. In the
case concerned, as it was an initial recommendation, we had a chance to comment
and, in any event, the borrower accepted the recommendation. So did my client
because although the reasoning had this massive flaw, the actual result was not too
bad for my client and it was a good lesson for it to review its procedures anyway. I
have no doubt that the DRP was considerably relieved that both sides accepted the
initial recommendation because, if it had had to revisit its decision on review, it would
have had to acknowledge its own egregious mistake and possibly to reduce the
award to the borrower (who was represented by a solicitor).
What would have happened however, if the lender had not instructed me and the
penalty had been much heavier? The lender might have objected and gone to
review but there is no guarantee that the DRP would have noticed its own mistake
without input from me or from someone else aware of the law. And there would have
been no appeal for the lender and not chance to get the law right? So much for the
MCA’s concerns in its report of 12 years ago
Puzzle two
In the Part 2 of the Consumer Credit Law Review (“CCLR”) at page 17, paragraph
3.3.4 the MCA says:
“Opportunistic use of the Act by defaulting borrowers
Defaulting borrowers can use the provisions of the Act to avoid contractual obligations, at
great expense to the lender and other third parties. Many reported judgements on the Credit
Contracts Act involve non-consumer transactions. Borrowers often are experienced traders
who received professional advice before entering into the transaction. Not uncommonly, they
later invoke the reopening or the disclosure provisions of the Credit Contracts Act to avoid
performance of obligations which were apparent to them at the time of agreement.”
Firstly, intelligent, experienced, articulate defaulting borrowers are not restricted to
business borrowers. I have had the misfortune to deal on behalf of a number of
finance companies with articulate and intelligent consumer borrowers, who have had
a very good idea of their rights and have been unhesitating in their attempts to gain
advantage from presumed deficiencies in my clients’ documentation, procedures and
practices in order to avoid the consequences of their defaults.
Secondly, the abuses able to be carried out by borrowers are still available to them
as a result of FSPA. That legislation is an open invitation to the deranged, the
dishonest, the deluded and the merely dopey to claim a non-existent dispute as a
manner of blackmailing lenders into foregoing penalties on default or of obtaining
another advantage such as a waiver of full prepayment losses or of other fees.
Indeed, one Dispute Resolution Provider, Financial Services Complaints Limited,
deliberately does not publicise the fees it charges lenders for each dispute so as to
discourage dishonest borrowers from using the threat of loss of such fees to
blackmail lenders into concessions. I have already acted for a firm faced with such a
blackmail attempt.
I’m sure you will not have missed the fact that business and investment borrowers
also have rights to apply to the DRP’s in the event of a dispute. So even if the
MCA’s concern at business borrowers abusing the system was genuine in 2000, by
2008, it had not only set up more procedures for consumer borrowers to do so, but it
had made it easier for business borrowers to do so as well.
Ordinary Courts in year Disputes
Providers from 2008
Business borrowers able
to game the system
Consumer borrowers able
to game the system
Change from 2000 to 2008
Consumer and business
borrowers able to game
the system and successful
lenders must pay the DRP
for the privilege of
defending themselves
Puzzle three
The CCLR in part 5 on page 19 section 2.4.1 complains at the power imbalance
between borrowers and lenders - the lenders being regarded as having more
knowledge and “clout”. This is what it says”
position of borrower versus lender
The lender will usually know more than the borrower about the contract, the Credit
Contracts Act, and the legal system generally. Lenders are often large institutions, with
far greater resources and "clout` than an individual borrower. Consumer credit policy has
traditionally recognised that there is a major imbalance of knowledge and power between
lender and borrower. Some of the criticisms in this chapter suggest that the redress and
enforcement provisions of the Credit Contracts Act do not always rectify this imbalance
between borrower and lender.”
It is interesting to note this in the light of the aberrant interpretation of section 51 of
the CC&CFA which caused the Commerce Commission, supported by the MCA, to
bully finance companies on issue where both were wrong. It threatened prosecution
unless the companies repaid break fees (losses on full prepayment) or stopped
charging them in a way that recovered their losses. The fact is that the MCA and
Commerce Commission were wrong and but use of the power imbalance for a
wrongful purpose did not seem to bother the Ministry then. It was not until the
Commerce Commission unsuccessfully prosecuted Avanti Finance (and then lost
again after a foolish appeal) that the industry began as a rule to charge proper break
fees. Nobody likes to see power abused but the Ministry’s insincerity on the subject
is unedifying, especially in the light of the Commission’s refusal to debate or even
discuss its interpretation of the law with the industry beforehand. Further, since the
Avanti decision there has been absolutely no attempt from the MCA or the
Commerce Commission to engage with the industry on fees for loss on full
prepayment but instead the CC&CFA retains an attempt to compel lenders to adopt
the restrictive and commercially bizarre voluntary calculation used in the regulations.
(The voluntary regulation does not allow for possible variation in the lender’s cost of
funds between the time a loan is made and the time it is repaid and re-lent and also
penalises lenders who have reserves and are able to lend to new customers without
using prepaid funds).
It is easy to be cynical about the MCA and I also have constant problems with people
quoting its websites. Time prevents me giving you samples of the legal advice it
publishes on its site but suffice to tell you that a lot what it says is the law is subject
to dispute and some of it is plain wrong.
So can we go to the Minister and get the MCA reined in somehow? There have
been 4 ministers in the last year - John Boscowen, who resigned in May 2011,
Simon Powell, Chris Tremain and Simon Bridges. Craig Foss may have held it for a
milisecond or so too - it’s hard to tell from searches on the net.
I had hopes of the current Minister - Simon Bridges - appointed a couple of months
ago. Bright young guy, ex criminal prosecutor in my home town and my local MP. I
emailed him on one issue to do with the MCA’s incompetent management of its
website a month or so ago and he fixed the website within two days. He listens, I
thought and he’s efficient too.
So when his Ministry in staff speeches and he himself in speeches and publications,
started saying that the new changes proposed to the CC&CFA would affect only loan
sharks and that responsible lenders won’t be affected, I emailed him and said “hey,
this legislation affects all my clients - how do you define a loan shark and please tell
me how my clients are loan sharks.
Here is the email:
Dear Minister,
I note that in Tauranga National Party Electorate May newsletter you refer to laws
toughening up on loan sharks. Attached is a copy of the newsletter.
I assume that the consultation meetings you refer in the newsletter to having held
were those held in Christchurch, Wellington and Auckland on the proposed changes
to the Credit Contracts and Consumer Finance Act (“CC&CFA”). You are aware that
I attended the Auckland meeting.
One of the Ministry of Consumer Affairs (“MCA”) speakers at the Auckland
consultation meeting also used the expression “loan sharks” and said that the
proposed legislation was aimed only at such businesses. I was a little surprised as I
had read the legislation and it appeared to me to be directed at all lenders who lent
money for consumer purposes, not merely at “loan sharks”. However, I thought that
perhaps the Ministry regarded all lenders who made loans to consumer as loan
sharks. I hoped I was wrong.
Accordingly last Wednesday , as I was finishing my submissions on the proposed
bill, I phoned the Ministry and asked one of the staff dealing with the CC&CFA
(Amelia Bell) what a loan shark was. She told me that the Ministry did not use the
expression as it was “political” and she referred me to “the Minister”. Now I know
that the Ministry does use the expression as I heard the speaker at Auckland do so.
Further when I go on to the Ministry Website one of the URL’s is for “
– Consumer Affairs” and that leads me to another site with a list of press releases of
which one is headed “Loan shark law meetings start next week”. For your interest,
here is the URL for that. At the bottom of that press release there are further URL’s
for you and back to the Consumer Affairs section of the beehive URL. One assumes
that the Ministry would not have a link to something that it did not agree with,
especially what it is the beehive government website.
As the Ministry was evasive, I was unable to address the question in my submission.
Since then I have been given a copy of the newsletter and seen the press release on
the beehive site. They concern me as the expression “loan shark” is extremely
offensive and instead of being restricted to some casual oral comments, they are
now in writing for all to see.
Since the Ministry does use the expression and denies it but you use it and would
not deny it, would you mind please advising the answers to the following questions.
1 What precisely is a loan shark? My clients and I would prefer that you gave
us this definition in clear concise and intelligible language. That is the
requirement for lenders when giving disclosure to borrowers under the
CC&CFA we would expect you to apply the same standard to your own
advice to my tax paying clients. The reference to people who operate out
of car boots or garages (your expressions in Auckland) is hardly going to
inform us.
2 Do you regard all my clients as loan sharks? I recently filed a submission with
the MCA on behalf of a 24 finance companies who make loans for
consumer purposes. They are concerned because the proposed changes
will impose widely and vaguely worded standards which depend hugely on
value judgements and those standards affect all of those 24 finance
companies. They are listed at the end of the submission I supplied but I
am happy to provide a list to you directly.
3 If my clients are regarded as loan sharks, why are they?
4 If you do not regard all my clients as loan sharks, do you regard some of them
as such?
5 If you accept that some or all of my clients are not loan sharks, why is your
Ministry introducing legislation that affects all business that lend to
consumers rather than merely lenders who fall within the definition of loan
sharks (which I assume you are going to give us)?
6 Or, if you cannot define a loan shark, why are you using the expression? And
why is it in writing published in government websites and your electorate
Anyway, the minister didn’t reply. I couldn’t work out why and then realised how
naïve I’d been when he replied quickly the first time. In the first email I had pointed
out to him that when we Googled the words Minister of Consumer Affairs, the second
entry was an announcement on the MCA website that John Boscowen had been
appointed the new Minister and he was 4 ministers back.
I guess when it comes to the minister being personally affected he moves quickly but
not when his Ministry is demonising a bunch of small businesses which are operating
within the law in a highly regulated environment.
So with this sort of background, when the MCA introduces changes to credit law and
claims that the changes are intended only to affect loan sharks, when in fact they
apply to the whole consumer lending industry, you can imagine that faith in the
Ministry’s integrity of process is pretty low. And when you read the changes and
learn of the appalling lack of proper research behind them, you can see why it drops
to minus levels. There was consultation after the ministry drafted a bill for
consideration but that consultation was less effective as the MCA had already set the
stage using its own prejudices and assumptions. Besides, the industry was
“consulted” merely as part of the general public.
Time prevents my covering all the flaws in the MCA’s proposals and the worst, the
wording of the so called “responsible lending” rules are not covered at all here but
here is a small sample.
Example 1 - Default interest may only be charged on unpaid instalments, not
on the full unpaid balance of the loan. Now this shows such a ignorance of
lending and of risk that one wonders what the qualifications of the staff at the MCA
might be. The Ministry in fact has claimed on its website for some years that this is
already the law but it knows it’s wrong and now the policy wonks want set it out
specifically. OK - the theory behind it is that since the lender is only losing the use of
the instalment on default, penalty interest should only be charged on that instalment.
What’s missing? What has not been considered?
Lending and interest rates are all about risk. When a lender sets an interest rate for
its borrowers, it is based on its assessment of risk for that borrower or that class of
borrowers. However, bearing in mind that every time a borrower fails to repay all or
part of a loan, the failure begins with one or more payment defaults, the fact that a
borrower may so default once or more is something that affects what interest rate a
lender will charge him.
If a lender is in the high risk lending business, its basic interest rate is likely to be
from 16% per annum to 30% per annum based on that risk. If a lender knew in
advance that any loan applicant was going to default in paying an instalment at least
once, the interest rate on the initial loan amount would be anywhere from 5 to 10%
per annum higher, depending on what a lender knew about the applicant and that
borrower class.
Since a lender does not know in advance, it treats the applicant as if she will make
all her payments on time and charges her the normal rate for her or her borrower
class risk level and when she defaults (and only if she defaults), the lender charges
her for the additional risk caused by that default.
That additional charge should be applied against the unpaid balance because it is
the unpaid balance that is at greater risk as a result of the default. Had the lender
known at the beginning the debtor would default it would have charged the higher
interest rate on the whole loan from the beginning.
The proposal to alter the incidence of risk in the manner set out in the proposed
amendments is bizarre and will merely load greater burdens on to non defaulting
Example 2
A lender must disclose agreed changes and changes following an
exercise of a power even if the terms have become more lenient to the debtor. In
some circumstances this may not matter. It will be inconvenient and lenders would
rather avoid it but they charge for sending out disclosure letters and emails and can
compensate themselves. However one aspect of it is plain stupid and it would have
been avoided if the MCA had consulted one (just one and any one) small finance
company before putting it in the bill. That is to repeal sections 22(3) and 23(5) of
the CC&CFA which essentially say that if the parties agree or the lender exercises a
power to allow the debtor extra time to make a payment (or in some others ways to
reduce the debtor’s obligation, then variation disclosure is not necessary.
I have a friend who runs a small lending company with a book of about $500,000.
He has a lot of small loans. He gets called several times a week to be advised in
advance that one or another debtor will miss the next due periodical payment. He
notes the person’s file, charges them the penalty interest and, because they call in
advance, he waives the default fee which he otherwise would charge. That fee,
which involves trying to contact the debtor when there is a default and seeing what
the problem is, will be $15.00 for a first default like that. If he has to send out a
variation disclosure notice every time he gets a phone call from a debtor and gives
him a bit longer to pay, he is going to be sending out several notices a week telling a
borrower what the person already knows and people who are struggling to the point
where they are going to miss making an instalment are then going to be loaded with
another fee. It costs money to create send out notices and the amounts lenders can
charge are regulated and lenders would rather avoid it.
Section 45(5) of the Act is proposed to be repealed. That is the subsection that
presently allows a lender to charge a reasonable commission when passing on the
cost of credit related insurance premiums
The complete prohibition of commissions in the absence of explanation, suggests an
intention not to provide for a fair commission but to deny a lender income altogether.
No research has been published showing any excess of commissions charged or
comparing commissions paid to lenders with commissions paid to insurance brokers,
lawyers, accountants and other businesses operating insurance agencies. What is
the evil this prohibition is aimed at? Why are lenders being refused the right to
charge commission when other agents are allowed to do so. The MCA is silent on
the topic.
Thank you for listening to me.