Australian Guarantee Corporation Ltd v Various Debtors [1994] QSC 314

IN THE SUPREME COURT OF QUEENSLAND No. 392 of 1993 Brisbane Before Mr Justice Thomas [AGC v. Various Debtors] BETWEEN AUSTRALIAN GUARANTEE CORPORATION LIMITED (ACN 000 015 485) Applicant and VARIOUS DEBTORS Respondent JUDGMENT - THOMAS J. Judgment delivered 29/11/1994 CATCHWORDS: CONSUMER CREDIT - credit providers - payment for use of Westpac's premises and officers - whether a "commission" - non-disclosure of commission - loss of all interest and charges - reinstatement of credit charges no loss to debtors and credit provider acted bona fide - Canham v. AGC Ltd (1993) 31 NSWLR 246 discussed - Credit Act 1987 (Qld) ss. 7, 38(1)(h), 86 - whether full reinstatement appropriate. Counsel: K Dorney QC for Applicant A Collins for Respondent Debtors Campbells and Dungavells D Logan for Registrar under Credit Act Solicitors: Feez Ruthning for Applicant Barker Gosling for Respondent Debtors Campbells and Dungavells K M O'Shea, Crown Solicitor, for Registrar under Credit Act Hearing date: 24 and 25 November 1994 -- 1 of 12 -- IN THE SUPREME COURT OF QUEENSLAND No. 392 of 1993 BETWEEN AUSTRALIAN GUARANTEE CORPORATION LIMITED (ACN 000 015 485) Applicant and VARIOUS DEBTORS Respondent JUDGMENT - THOMAS J. Judgment delivered 29 November 1994 This is an application by AGC for relief against the consequences of The Credit Act 1987, in respect of numerous loan contracts made by it between 1 May 1989 and 26 May 1994. Apart from re-financing contracts, the application concerns about 2440 contracts. AGC is a credit provider within the meaning of The Credit Act 1987. That Act commenced operation in this state on 1 May 1989. Similar Acts had been passed in New South Wales and Victoria in 1984. From the early 1980's AGC and its parent company Westpac had acted under an arrangement which enabled AGC's business to be conducted at Westpac's bank offices by certain bank officers. A mechanism was established enabling fees to be calculated and paid by AGC to Westpac in respect of the provision of these services. One of the provisions of The Credit Act required the inclusion in relevant loan contracts of a statement whenever "a commission charge is payable", (s.38(I)h). AGC regarded its payments to Westpac as a service fee rather than a commission for the introduction of customers. It did not make any statements in its contracts about the arrangement, and it continued to conduct its business -- 2 of 12 -- 2 in this way after the introduction of The Credit Act. On 5 August 1993, the New South Wales Court of Appeal handed down a decision (Canham v. AGC Limited (1993) 31 NSWLR 246). Its effect was to hold that similar practices between AGC and Westpac in New South Wales amounted to the payment of "commission charges" to the Bank. The effect of this finding was that all contracts entered into by this means contravened the Act unless they contained a statement to the effect that a commission charge was payable together with the names of the payer and payee (s.38(1)(h)). The consequence of such an omission is that the debtor is not liable to pay to the credit provider any credit charges under the contract (s.44(1)). A "credit charge" is the amount by which the amount payable under the contract by the debtor exceeds the amount financed. In practical terms, having regard to the AGC contracts in question, it means the loss of all interest charged (s.13(1)). This exceeds $25 million. The only means by which a credit provider can avoid this drastic consequence is to apply to the court under s.86 "for an order increasing the liability of the debtor to the credit provider". This section, along with succeeding sections, gives the court jurisdiction to reinstate the charges or part of them. The present application is brought under ss.86 and 87. The known contracts in respect of which relief is sought are "regulated loan contracts" to which part 3 of the Act applies (ss. 7(1) and 32(2)). Relief is sought in paragraph 1 of the amended Notice of Motion with respect to approximately 2440 contracts entered into between 1 May 1989 (the date of commencement of the Act) and 26 May 1994 (the date of the amended Notice of Motion). Paragraph 2 seeks relief in respect of "refinancing contracts" which are unavoidably tainted by reason of the contravention effected by the original contracts. Relief is sought both with respect to current contracts and those which have been discharged. The Notice of Motion expressly reserves the question whether AGC's conduct was in breach -- 3 of 12 -- 3 of the Act. Counsel for the applicant, on the first day of the hearing, submitted that the arrangements were distinguishable from those considered by the Court in Canham's case (above) and that there was in fact no breach of s.38. Had this course been maintained, it would, I think, have been open for the Court to make a declaration to that effect, and of course in that event no occasion would have arisen for the reinstatement of charges under ss.86 or 87. However, after an adjournment, counsel indicated that his client would no longer seek a declaration to that effect, and that it would submit to a finding of contravention which would activate the power to grant specific relief under those sections. In my view the question whether AGC's arrangement with Westpac involved a payment of a "commission charge" as defined in s.7 of the Act is a fairly arguable one. This facilitates my acceptance that AGC and its officers acted in good faith during the period in question in the belief that they were not paying commission charges and that accordingly believed that no additional statements to that effect were required in the contracts. This was the effect of their legal advice. It was also the view of the Tribunal in Australian Guarantee Corporation Limited v. Roberts (1989) ASC 54-950 when the matter was first tested; and of Carruthers J. in Canham v. Australian Guarantee Corporation Limited (1990) ASC 56-008. Three years later, by which time many thousands more of such contracts had been entered into, that position was undone by the New South Wales Court of Appeal. With some hesitation I find that in entering into the relevant contracts in Queensland, AGC contravened s.38(I)(h) by failing to include in such contracts a statement to the effect that a commission charge was payable by AGC to Westpac. Perhaps I should briefly state the basis of my hesitation in so finding. The essence of the relevant arrangement between AGC and Westpac is that AGC obtained the benefit of additional premises upon which it could operate its business, and the services of other persons who would act as AGC's agents. There was undoubtedly an inbuilt benefit in that banks are -- 4 of 12 -- 4 places where potential borrowers gather, and they can readily be diverted from doing business with the bank to doing business with a finance company. However, the essence of the arrangement was the provision of additional facilities and of part-time agents who would act on behalf of AGC. The provision for remuneration was that the bank would be paid "fees to be agreed upon between the parties to reimburse the bank on a realistic commercial basis, including cost plus a normal profit for the facilities and services provided to AGC by it". For the period 1 May 1989 to 10 August 1993 the management fee was set at 0.55% of the net amount financed. The calculation of that amount was made following a detailed costing by a Westpac officer, Mr Maish. The process was based upon a costing of the services and facilities by the bank. In particular Mr Maish calculated the cost to the bank of processing a unit cost of each of AGC's "lending products" (i.e. personal loans, leases, property finance loans etc.) by reference to the time taken to perform each task involved and the work carried out on behalf of AGC in respect of the product. To do this he took into account the salary of the relevant bank officers involved, the cost to the bank of rent, utilities and telephones, the cost to the bank of the data system, its administrative costs and, importantly, the costs to it of performing work for AGC which did not result in a customer taking out a loan. One out of every three or four approaches to Westpac in relation to potential transactions with AGC failed to result in completed loan contracts. Ultimately, Mr Maish calculated, as accurately as he could, the unit cost for each product, expressed as a percentage of the aggregate net amount to be financed. Those unit costs were applied to the relevant number of transactions of each kind transacted by the bank whether or not they led to concluded contracts between the customer and AGC. A margin of about 30% was then added to produce the final management fee. Mr Maish's recommendation was accepted by both AGC and Westpac. AGC's executives considered that a 30% margin was reasonable in order to gain access to the services provided. The essential element in the definition of "commission charge" is that there be a payment in -- 5 of 12 -- 5 the nature of a commission "being an amount ... that is ... payable in respect of the introduction of the debtor to the credit provider .." . Of course the use of the words "in respect of" makes available a very wide linkage between the payment and the introduction of the debtor. However, the use of the definite article ("the") suggests that the act focuses upon payments in respect of the particular contract in issue. This must be carried through into s. 38(1)(h) which uses the disarmingly simple words "if a commission charge is payable" as the factor which requires a statement to be included in that loan contract. Whilst s.38(1)(h) does not say by whom, to whom or in respect of what the commission charge is payable, in context it can only refer to commission charges payable in respect of that loan contract by the credit provider to some third party. It may however, I think, refer to indirect payments as well as direct payments. In Canham v. Australian Guarantee Corporation Limited (1993) 31 NSWLR 246 Kirby P. (with whom Meagher JA. agreed) identified the critical question as whether the amount paid by AGC to Westpac was paid or payable in respect of the introduction of the debtor to the credit provider. His Honour also posed the obverse question - "Properly characterised, could the payments made be more properly described as having been made in respect of the fee for the use of Westpac facilities and staff?" The pivotal passage is in the following paragraph:- "In my view the key to answering this question favourably to the borrowers is the variable sum which Westpac was to receive from AGC for negotiating credit arrangements on behalf of AGC according to the rate of interest agreed upon. The higher the rate of interest secured, the greater the fee Westpac received. The lower the rate of interest, the lower the fee. With very high rates of interest the fee was large. It dropped away substantially with reduction in the rate of interest. This provided a very real incentive to employees of Westpac (described as "agents" of AGC) to negotiate with their customers the provision of credit by AGC at a rate which was not necessarily in favour of the customer/borrower. This was a classic situation of -- 6 of 12 -- 6 potential conflict of interest and duty. It was in the interests of Westpac to do something other than to procure the best rate of interest for its customer, the potential borrower. The fact of that potential conflict was precisely the kind of circumstance which occasioned the legislative obligation to disclose them in a credit contract." (pp.259-260) (my underlining) On the evidence before me, in no contract with a consumer was any additional fee charged for the intervention of any third party or for any factor such as introduction. The "charges" were simply in the form of a stated interest charge which disclosed the rate of interest and the amount to be paid. Of course the rate of interest demanded by AGC from time to time would reflect its overheads and total costs of management but this is far removed from varying the rate to take account of any additional impost resulting from its arrangement with Westpac. I find it very difficult to say that Westpac's receipts varied according to the rate of interest agreed upon between AGC and consumers introduced by Westpac. Only in a very indirect way does the rate of interest have any impact upon the calculation of Westpac's entitlement. On this analysis it is at least arguable that AGC's conduct in Queensland on the evidence placed before me, is distinguishable from that which was considered by the New South Wales Court of Appeal. For example the critical finding in the words underlined above would be difficult to sustain on the evidence in the present proceeding at least with respect to individual contracts or even contracts of this class, except in a very indirect way. The Credit Act of course does not oblige credit providers to state other than the truth. To reduce the matter to commonplace terms, the question might be posed whether AGC could truthfully have notified these customers, on each contract, "we are paying a commission to Westpac", or "we are paying a commission to Westpac on any business they introduce" or perhaps "we are paying a commission to Westpac on this contract." It would certainly be true, if something tantamount to a fee for introduction could be discerned. The ultimate question is whether an -- 7 of 12 -- 7 additional payment for the benefit of introducing customers may be discerned in the 30% surcharge. Undoubtedly such services would be of great additional value to AGC having regard to the position of advantage in which the bank was placed to introduce customers. That realistic consideration could hardly have been outside AGC's contemplation. In the end I think it is possible to find that the 30% profit component, or a substantial part of it, may be regarded as giving expression to this factor, and that it is possible to regard a payment as having been made in respect of the introduction of customers, albeit indirectly. As the arrangement, broadly looked at, can be characterised in this way, it is unnecessary for me further to examine the provisions which AGC is said to have infringed. In the interests of consistency with the finding of the Court of Appeal of New South Wales which examined the same type of arrangement, I shall act on this view. The foregoing discussion sufficiently indicates the basis of my reservation in making such a finding. The jurisdiction to make special orders under s.86 proceeds from a finding that there has been a contravention of the Act. I find that AGC's failure to include a statement to the effect that commission was payable by it to Westpac contravened s.38(1)(h) in each of the contracts the subject of the present application. I turn to the question of the relief that should be granted. Extensive directions were given in relation to service upon debtors who are or might be affected by the removal of the charges. Some responded and made their own particular arrangements with AGC. By the time the matter came on before me the only appearances were on behalf of two debtors (Campbell and Dungavell) whose counsel sought and obtained leave to withdraw, and by Mr Logan of counsel who appeared for the registrar under the Credit Act. His instructions were that if undertakings were given in terms foreshadowed by AGC he would support the granting of the relief that was proposed. The effect of the undertakings will be that AGC will pay $40,000 into the Consumer Credit -- 8 of 12 -- 8 Fund, and will set aside a further $80,000 out of which a relatively small credit will be paid to the debtors under contracts entered into between 1 May 1989 and 8 September 1989. In effect they will receive 3.9 percent of the total credit charges under their contracts, and any surplus left out of the $80,000 will be paid into the Consumer Credit Fund. The basis upon which this particular undertaking was proposed was not stated to me, but I infer from the dates between which this particular class of consumers entered into their contracts that AGC is acknowledging that its position might be thought slightly more vulnerable with respect to the period before it obtained a favourable decision from the Commercial Tribunal of New South Wales on 8 September 1989 than it was with respect to the later period. I understand that after 1 May 1989, when the Act commenced operation, approximately 2443 relevant contracts were entered into without the necessary disclosure. In addition relief is required with respect to all such contracts which were the subject of refinancing. The total amount of the credit charges which are automatically forfeited by AGC under the legislation (unless the Court grants relief) is $25,846,980. Under s. 86(2) the Court has jurisdiction to "determine that the debtor is liable to pay the whole or such part of the credit charge under the contract as it determines". The relevant circumstances that the Court is required to consider under s.86(2) include: a) The conduct of the credit provider; b) The conduct of the debtor; c) The loss or damage (if any) suffered by the debtor. There is nothing to suggest that any debtor has suffered any relevant loss or damage. Had the statement that a commission was payable to Westpac by AGC been contained on the contract, it is hard to imagine any different arrangement ensuing. Had the debtor asked "How much extra am I paying by reason of the arrangement?", the correct answer might well have been "Nil". Alternatively there could have been an answer of a thousand words describing the effect of the -- 9 of 12 -- 9 contract and expressing the opinion that the interest charges would be the same whether the customer had come to AGC through a Westpac branch or whether he had found AGC by himself. Or possibly the answer might have been "Indirectly our interest rates are marginally higher because Westpac is charging 30% more than its actual costs in introducing customers like you." However, even acting on this last basis, as I think I should, the loss to any debtor through the failure to include the statement will be relatively insignificant. On my analysis, no appreciable relevant loss or damage is disclosed on the part of any debtor. There is no relevant conduct of any debtor which I can take into account. The conduct of the credit provider was, as indicated earlier, bona fide. AGC adverted to the problem, possibly with a degree of apprehension, but this was allayed by advice from senior counsel, and ultimately by the Commercial Tribunal and a Supreme Court Judge on appeal. As soon as the adverse decision was given on 5 August 1993, urgent decisions were taken, and within five days (on 10 August 1993) payment of the management fee ceased in relation to regulated loan contracts, with effect from 1 July 1993. Within a further eight days, the present application was filed in this Court seeking relief. The alacrity with which AGC took these steps was appropriate. Extensive management procedures and staff training has ensued to prevent any further contraventions or failures. Enormous expense has been incurred by AGC in researching and identifying the contracts entered into over a period exceeding four years, in giving notice to all debtors who might be affected, and in prosecuting this particular application. The legal costs so far incurred on the reinstatement exercise are $1,268,188. The loss of management time this exercise is estimated to be worth at least $500,000. Such consequences are by no means irrelevant (AVCO Financial Services Limited v. Baschinski (1994) A.S.C. 56-256, 58, 652). It is difficult to see why any of the debtors should be recipients of benefits in consequence of this expensive error on AGC's part. I do not necessarily agree with the analysis of the Victorian Full -- 10 of 12 -- 10 Court in Encyclopaedia Brittanica (Australia) Inc v. Director of Consumer Affairs (1988) V.R. 904, which regards any benefit to the debtor as a "windfall" in the context of these orders. I consider that the "penalty" to the credit provider and the benefit to the debtor (if there is to be one) need to be considered as part and parcel of the one process. (Compare observations of Kirby P. in Canham at p. 266). However factors do not exist in the present case which call for the further disadvantage of the credit provider or for the benefiting of the debtors. It was submitted that the legislation was complex, technical and virtually impossible to comply with (compare Household Financial Services Limited v. Various Debtors (1992) A.S.C. 56- 197, 58, 020). It is true that the legislation is difficult and complex, and whilst in particular cases this may make it easier to accept that a credit provider's conduct was bona fide and not motivated by a desire to circumvent the law, I do not think that it is an independent factor aiding the exercise of a Court's discretion under s. 86. The legislation obviously has a social purpose and places a high onus upon commercial entities to deal with consumers in the manner described. At the same time it may be unduly harsh to visit penalties upon these companies as if they had the benefit of hindsight. The issue will usually come down to the reasonableness or otherwise of the conduct of the credit provider in failing to get and act on the best possible advice on the meaning of difficult legislation. Sometimes they may obtain the best advice that money can buy and still be found to be wrong. In other cases, perhaps the "best" advice may be purchased cynically. It will not always be possible for the credit provider to hide behind counsel's opinion. Legislation such as the Credit Act behoves credit providers to act with an abundance of caution. In a doubtful situation such as the present where there was genuine doubt whether it was a service contract or one which included at least a component of commission, it would seem better to concede the doubtful position, if necessary with a reservation. The commercial disadvantage would surely have been negligible. To sum up in the present case, AGC has been found to have infringed s. 38(1) as indicated -- 11 of 12 -- 11 above. The question whether a breach occurred at all is and always was at least arguable. It could not be regarded as a serious breach. There was nothing of the cavalier or careless attitude that is sometimes encountered (compare Encyclopaedia Brittanica case above). Enormous expense has already been visited upon the applicant in pursuing the present necessarily complex and expensive means (the only means that the Act provides) of salvaging an extreme legislative penalty. Debtors have not been disadvantaged or suffered any loss. As soon as the Court made a determination adverse to it the practice ceased and a prompt application was brought. In these circumstances it is appropriate to restore the charges which were originally agreed to. In the terms of the Act this will require an order that the liability of each debtor be increased by an amount equal to the credit charge shown in each affected contract by an amount equal to the amount of the credit charge therein. A similar order should be made with respect to contracts which have been discharged. Whenever a loan contract needed to be refinanced a further breach (i.e. of s. 38(2)(c)) was unavoidable (see s. 38(1)(h) and s. 44). It is therefore appropriate that a second order be made in terms of para. 2 of the draft with respect to refinancing contracts. Certain undertakings, perhaps negotiated after the intervention of the registrar under the Credit Act, were offered by the applicant. These consist of the earlier mentioned $40,000 donation to the Consumers' Credit Fund and an $80,000 benefit for the debtors whose contracts were entered into before 8 September 1989. Whilst I have not been told why such additional actions should be undertaken by the applicant, and would not necessarily have required them as a condition of restoring the charges, they are acts of grace which AGC has been prepared to undertake, and I see no reason to interfere with what has been negotiated, presumably at arm's length. I shall order in terms of the draft initialled by me and placed with the papers. -- 12 of 12 --