A Victorian Consumer Credit Code prosecution that began in 2003 has finally concluded with an order that Australian Finance Direct Ltd (AFD) be fined $100,000.00 for breaches of section 15(B) of the Code.(Director of Consumer Affairs Victoria v Australian Finance Direct Ltd (Credit) [2009] VCAT 129)

AFD made loans to people who wished to attend property investment seminars conducted by a third party but who did not wish (or were unable) to pay the fees for the seminars in cash.  The purpose of the credit was to enable them to defer payment.

But the loan contracts did not disclose "holdbacks" retained by AFD which amounted to between 10% and 40% of the loan amount depending on its assessment of the risk of the borrower.

The decision that AFD had committed a breach had previously been unsuccessfully appealed all the way to the High Court here.

The Tribunal Deputy President made the following comments:

1. AFD concedes and I agree that its breach was serious. It failed to disclose key information to its debtors – information which affected their choices and their understanding of the transaction. It stated incorrectly that the whole of the amount of credit was to be provided to the introducer. This statement had the potential to mislead debtors about the true nature of the transaction.
2. The breaches were systemic. They affected all the credit contracts entered into by AFD in relation to the introducers NII and Capital, in the period to which this proceeding relates. That period is relatively long – from February 2002 to November 2003.
3. While the total number of contracts affected is not in the hundreds of thousands, and the amounts involved are not in the hundreds of thousands or millions, the amounts involved and the number of contracts affected are substantial. This is the more so because AFD is (as the parties agree) a relatively small credit provider.
4. I did not find that there were breaches of multiple provisions of the Code. Only one provision was breached. All breaches arose out of the same kind of conduct, and not out of diverse kinds of conduct.
5. I do not agree with the Director’s submission that I should, in determining civil penalty, take into account that AFD retained the high risk holdback to guard itself against the risk it took in lending to people who did not meet its standard lending guidelines. The civil penalty is imposed for breach of the disclosure requirement of the Code, not for inappropriate lending practices.

When you are dealing with corporate borrowers or key suppliers,  you need to be aware of the warning signs to avoid being drawn into complications arising from their insolvency.

Whilst it may be thought that lenders would get the first warning of a borrower's inability to pay debts as they fall due, your systems may not identify cash flow problems when they first occur. Or you may feel that the borrower's balance sheet (if it is accurate) outweighs temporary cash flow problems.

If a key supplier (eg a software service) gets into financial difficulty, it could affect your services to customers and ultimately your right to use a licence and access key personnel or even to appoint a replacement supplier.

Refinancing or restructuring your relationship could be reviewed critically at a later time if the company is insolvent. You could end up in a worse position.

You need to determine whether the party is experiencing  just a shortage of working capital or is actually insolvent.

Is your refinancing or restructuring plan really a preference for your benefit or a proper workout for the company's benefit? An uncommercial transaction could be set aside under section 588FB of the Corporations Act.

Insolvency is a factual test under section 95A of the Corporations Act which can be complicated as the recent Bell Group decision showed.

If you are not sure how to handle a potential or actual insolvency of a customer or supplier , get legal advice.

This glossary of insolvency terms from ASIC may be helpful.

Currently Victoria, Tasmania, ACT, NT, Queensland and Western Australia have no mortgage duty.

South Australia will abolish mortgage duty on 1 July 2009.

In New South Wales,  mortgage duty has already been abolished on owner occupied housing and investment housing.  But the abolition of the remaining mortgage duty has been deferred until 1 July 2012.

The proposed Australian Consumer Law (see here) has specific implications for national financial services laws.

The Government has provided a commitment to maintain consistency between the Australian Consumer Law’s generic provisions and the consumer (or investor) protection provisions in credit and financial services laws, to the extent that it is practicable to do so.

The financial services laws are currently the subject of a reform process including the establishment of uniform national laws for the regulation of consumer credit.

Nevertheless there will be an overlap between the 2 sets of laws, especially in the area of unfair contracts.

Unfair contract terms are those that cause a significant imbalance in the parties’ rights and obligations arising under a contract and are not reasonably necessary to protect the legitimate business interests of the supplier. They are prevalent in standard form contracts.

The consultation paper lists banking and financial services, including credit agreements, as examples of contracts that may be affected.

Particular unfair terms that will be banned include:

• Unreasonable flat/fixed early termination fees and those requiring the paying out of the contract; and
• Terms requiring consumers to pay more than suppliers’ reasonable enforcement costs reasonably incurred.

A Bill is expected to be drafted by June 2009 with commencement on 1 January 2010.