In a significant decision by the NSW Supreme Court, the Court found that a non-bank loan (a ‘non-coded loan’) was subject to the National Credit Code.
As a result, the Court tore up the Loan Agreement and ordered the repayment of only the loan amount the borrower had received plus interest at the Court rate of 4.1% per annum, instead of at the loan rate of 4.5% per month.
The loan was a short-term loan used to finish construction of a duplex, with one dwelling to be sold and the other used as a family home by the borrower. The title was in the name of an individual (the 'natural person').
If the loan was made in the normal way, the loan would have been made to the 'natural person' for 'improving a residential property' and would have needed to have been Code compliant.
But the lender wanted to make the loan outside of the Code (a non-coded loan). And so, the loan was structured in this way:
- The loan was made to a company, as opposed to being made to the ‘natural person’;
- The borrower signed a business purposes declaration.
This structure is common for non-coded loans.
So where did it all go wrong?
- Using the company was not effective because in the Loan Agreement the 'natural person' was made jointly liable to repay the loan; and
- The business purposes declaration was a sham - the company had no legal interest in the property and did not receive any benefit from the loan.
The result was that of a loan of $623,295.46, the lender was allowed to recover only $440,384.45, which was the loan amount actually received, net of interest and charges. And instead of being able to receive default interest at the rate of 69.588% pa (effective rate), the lender was able to receive interest at the Court rate of 4.1% per annum.
The Loan Agreement was also torn up for a second reason - unconscionable conduct - but that is a story for another day.
For a full account of decision