On 16 March 2007 the Supreme Court of New South Wales handed down a ground breaking decision.
It appears to be the first time that a borrower has made a hardship application as a cross claim in possession proceedings.
The hardship claim became an effective defence to the proceedings even though no issue was raised about the enforceability of the loan and the mortgage or the borrower's default. It is relevant to all retail lenders, regarding a hardship application made by a defaulting borrower pursuant to the Consumer Credit Code.
The borrower re-financed a property on the Central Coast in order to obtain funds to purchase a business called Bimbo's Take-away, and to refinance an existing home loan.
The borrower claimed the business had operational difficulties that resulted in cash flow issues. The borrower left her employment to investigate the cause of the business' stress.
The business eventually failed and the borrower then regained employment.
The borrower defaulted on her loan for three months during the business' failure.
Proceedings for possession of the security property were commenced by the lender.
The borrower's only defence to the possession claim was that she did not receive the section 80 default notice that had been placed in her mail box at the security address.
However, the borrower also cross-claimed for hardship relief under the Consumer Credit Code.
Key Hardship Issue Determined In The Case
The borrower was unsuccessful in her claims that the section 80 Notice or possession proceedings were defective.
Accordingly, the remaining issue for determination was whether the borrower was entitled to relief under the hardship provisions of the Code.
Under the Code's hardship provisions, a borrower may apply to the Court to vary their loan contract in circumstances where:
- the loan is regulated by the Code; and
- the credit amount is less than the prescribed limit, currently $300,850.
To qualify for a hardship variation, the borrower must show that:
- they have been reasonably unable to meet their obligations under the loan, because of illness, unemployment or other reasonable cause; and
- if the loan were varied, they would reasonably expect to be able to meet their ongoing obligations, as varied.
What Relief Can The Borrower Claim Due To Hardship?
Assuming that hardship is established, as outlined above, the Code provides that the loan contract may be changed in one of the following ways:
- extending the period of the loan contract and reduce the amount of payments due under the contract accordingly (without a change being made to the annual percentage rate).
- postponing during a specified period the dates on which payments are due under the loan contract (without a change being made to the annual percentage rate); and
- extending the period of the contract and postponing, during a specified period, the dates on which payments are due under the loan contract (without a change being made to the annual percentage rate or rates).
Further, the Code provides that if the lender does not change the contract as requested, the debtor may apply to the Court for a change.
Pursuant to section 68(2) of the Code, the Court may change the credit contract in the manner set out above and make such other orders as it thinks fit, or refuse to change the credit contract.
Can Hardship Application Be Made After Expiry Of A Default Notice Accelerating The Debt?
The lender submitted that after the default notice expired, the loan had accelerated, so that it was not possible for there to be a variation of the terms of the loan.
This is because there were no longer any monthly payments capable of being meaningfully varied under the hardship provisions, as the full loan balance was now payable.
The Court held that Code contemplated hardship orders being made after the period in the default notice had ended, and that a borrower was entitled to make a hardship application under the Code at any time up until judgment.
What Is The Test For Hardship Under The Code?
The Court held that the phrase "other reasonable cause" was to be read widely.
Based on the wide operation of the test, the Court found that the borrower had suffered hardship as a result of her business' failure.
This was despite the fact that the borrower had voluntarily left her employment to investigate her business' decline and despite the fact that she obtained employment shortly after the business was eventually sold.
The Court ordered that the arrears be capitalised and the 30 year loan term recommence.
Implications For The Industry
This decision provides authority for borrowers to frustrate a lender's enforcement action, at any time up until judgment has been entered, by bringing a last minute hardship application before the Court.
The decision also appears to significantly widen the circumstances in which Courts will accept a borrower comes within the scope of "reasonable cause" of hardship provisions of the Code. The decision highlights the risk that almost any defaulting borrower will be able to defend and delay possession proceedings by claiming hardship.
Ironically, the outcome of the Court's orders is that the monthly payments required to be made under the Court-amended loan contract are now greater than the payments that were required to be made under the original loan contract, while the hardship provisions appear to contemplate a reduction of the monthly payments as an outcome.
The options available to a lender under the hardship provisions do not expressly include capitalising any arrears - although the Court can do this under their "such other order" power.
Lenders will be puzzled by this outcome, which appears to place the borrower in a position where they will be less likely to be able to meet their ongoing loan obligations.
This was the outcome on the facts of this particular case.
It would also follow generally unless the borrower's financial position happens to have improved from what it was before the event of hardship.
If you would like to discuss any aspect of the case please contact us.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.