The lender applied for summary judgment against the borrower, seeking possession and a sum of money. The loan and mortgage were Code regulated. The borrower argued that the default notice failed to comply with the Code. The borrower also sought to vary the terms of the loan and mortgage pursuant to section 74 of the Code.
Summary judgment ie a judgment without a trial on oral evidence can be given where a defence has no real prospect of success. In other words, its prospects are fanciful rather than realistic. However the Court retains a discretion to refuse summary judgment and order that the proceeding continue to trial, even if there is no real prospect of success in the defence.
Sections 88(1) and (2) of the National Credit Code provide that a “credit provider” must not begin enforcement proceedings pursuant to a credit contract or a mortgage, unless the debtor or mortgagor is in default, the credit provider has given that person a default notice which complies with s 88 and allows the debtor or mortgagor a period of at least 30 days from the date of the notice to remedy the default, and the default has not been remedied within that period. By s 88(3) the default notice must specify a number of matters including, by paragraphs (f) and (g), certain information prescribed by the Regulations.
It is conceded that the default notice served does not comply with the form specified. The notice did not contain the words:
You have specific legal rights to request changes be made to your contract to help you repay the debt if …
Section 208(1) of the National Credit Code provides that if a form is prescribed, strict compliance with the form is not necessary and substantial compliance is sufficient. Default notices are valid so long as they reasonably convey to the recipient the message that the section intends the borrower to receive and the borrower is not misled.
The court found that the departure above meant the notice did not reasonably convey all that it was intended it convey, given that postponement and change are distinct options available to a debtor by the Code (s 94 deals with postponement and s 72 with change). The court did not consider that the notice was in substantial compliance with the Code, although it was otherwise in substantial compliance.
Section 193 says that non compliance does not make the underlying transaction illegal, unless the Code expressly makes it so. There is no express provision in s 88 that failure to comply with Code requirements renders the enforcement proceedings ineffective i.e. makes the mortgage unenforceable.
It flows that notwithstanding that the notice is defective, this is an irregularity only which does not render the proceedings invalid and a court can retrospectively authorise the commencement of the enforcement proceedings, including the present action, pursuant to s 88(5)(c). Section 88(5) permits “the court” to authorise the commencement of proceedings without a valid notice. The court concluded that it had jurisdiction to authorise the commencement of enforcement proceedings because an Associate Judge has power to exercise any power of the Court save give judgment at trial. The authorisation of enforcement proceedings is of its nature interlocutory. Associate Judges routinely exercise similar interlocutory powers.
No notice that all moneys would become payable
National Credit Code provides in s 93 that an acceleration clause only operates if the default notice contains notification “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 93(1)(b)) but does not contain any applicable requirement as to the form of words to be used.
The court was satisfied that the words used in the default notice were sufficient to meet this requirement because it provided that enforcement proceedings would be brought and the power of sale exercised to recover a stated account balance.
Application for change to the loan agreement
Section 72(1) of the Code enables a debtor to apply to a credit provider for a change to his obligations under a credit contract if the debtor is unable for reasonable cause (including unemployment) to meet those obligations, and reasonably expects to be able to do so if the obligations are changed. The debtor is only able to seek to change his obligations in one of the ways set out in subsection 2.
Section 72(3) provides:
If the debtor makes an application, the credit provider must, within 21 days after the day of receiving the application, give the debtor a written notice:
- that states whether or not the credit provider agrees to the change; and
- if the credit provider does not agree to the change-that states:
- the name of the approved external dispute resolution scheme of which the credit provider is a member; and
- the debtor’s rights under that scheme; and
- the reasons for not agreeing to the change.
Failure to comply is an offence of strict liability.
On this basis, the borrower’s defence was that he made application for a change, which the plaintiff did not accept, and yet the lender did not comply with its obligations to give reasons and notify the borrower of its external dispute resolution scheme.
The court did not consider that there were any real prospects of success in such a defence. First, it would not succeed on the facts. However where the proposed defence failed for the purposes of the summary judgement application was as a matter of law. The court did not consider there were any real prospects of success to the contention that failure to comply with section 72, even if established, was a defence to enforcement action, for the same reasons as in relation to failure to comply with section 88. Failure to comply with section 72 and 88 expressly incurs criminal penalty only. The sections do not state that enforcement action becomes invalid by reason of failure to comply. In addition, the intention of the Code is that the civil remedy for failure to comply with section 72 is provided by section 74, by which the debtor may apply to a court where the credit provider has not accepted the debtor’s hardship application. The stay of enforcement action pending determination of a hardship application by the court in section 74(3) supports the view that the Code envisages that both actions may run concurrently.
Application under Section 74 of the Code
An application should properly be pleaded as a counter claim and not as a defence. The court was prepared to overlook this but noted a number of difficulties with the “defence”. First, no details of the change to the terms of the mortgage and loan were given. Second, the court must be able to determine whether the debtor’s application meets both the preconditions (that he or she is unable to meet his or her obligations by reason of one of the permitted causes) and that he or she reasonably expects to be able to discharge his or her obligations if the contract is changed as proposed. The borrower did not give any detail of the existing arrears, complete payment history, the precise amount he proposed to pay by way of regular payment and, most importantly, when that would commence. Instead, the borrower made a series of requests for further time to show that he could formulate a proposal, rather than give the detailed change proposal that is required to have any real prospect of success at trial under section 74. The borrower neither advanced a firm proposal for change on the basis of credible financial information nor made any substantial payment for many months. The court found that the evidence in the borrower’s affidavits was insufficient to show any reasonable prospect of even reinstating regular instalment payment, let alone payment of the full principal and interest now outstanding.
In conclusion, the court did not find that the borrower had any real prospect of success in any defence advanced, except as to the failure to comply with the statutory requirements for the form of the section 88 notice and in particular the required reference to change and postponement. That failure may be cured under s 88(5). The court held it was appropriate to cure the defect for the purposes of the summary judgment application for the following reasons:
- the action the defendant took was treated as falling within the very option the lender had failed to include in the default notice;
- the borrower could not be said to have been prejudiced by it and there can be no better basis for curing the defect;
- the borrower had the advantage of multiple extensions of required repayment after the original postponement, and further adjournment following his complaint to the Financial Ombudsman Service;
- the debt would simply increase further; and
- it was not in the interests of justice to allow the matter to proceed when the borrower conceded that the debt may already exceed the equity in the land and there was no credible basis upon which the debt was likely to be reduced other than by sale.
The court considered it appropriate to cure the defect in the default notice, so as to authorise the commencement of the enforcement proceedings and gave summary judgment to the lender.