Do the crime and give time? Prejudgment breaches of the National Credit Code

Hicksons has recently successfully opposed a number of applications by borrowers of different lenders to set aside a default judgment obtained many months earlier on the basis of a alleged illegality on the part of the lender.

The alleged illegality on the part of the lender was a breach of the National Credit Code (NCC) before commencement of the enforcement proceedings.

Applications to set aside default judgment on the basis of an illegality are brought, in NSW, under rule 36.15(1) of the Uniform Civil Procedure Rules (UCPR) which gives the court power to set aside a judgment if entered “irregularly, illegally or against good faith”.

Where a borrower demonstrates that a judgment was entered illegally the judgment is set aside as of right and even if the judgment has been perfected or spent, for example, by exercise of a writ of possession.

Applications under rule 36.15 UCPR differ from, the more common, applications to set aside default judgment under rule 36.16 UCPR which require the borrower to explain the reasons for delay in defending the proceeding and to show a bona fide and arguable defence to the claim in respect of which default judgment was entered.

RHG Mortgage Corporation Limited v Saunders

One of these recent cases was RHG Mortgage Corporation Limited v Saunders [2016] NSWSC 929 in which Hicksons acted for the lender who had obtained default judgment in December 2015 and exercised the subsequent writ of possession in March 2016.

The borrower’s application to set aside the default judgment was filed in May 2016 and was based on the proposition that the lender, in May 2015, failed to comply with the hardship notice provisions in section 72(4) of the NCC and, consequently, had commenced the enforcement proceedings and obtained the default judgment in breach of section 89A(2) of the NCC.

Section 89A(2) of the NCC prohibits the commencement of enforcement proceedings unless the mortgagee has responded to a hardship notice in accordance with section 72(4) of the NCCC.  Breach of section 89A(2) of the NCC is an offence of strict liability within the meaning of section 6.1 of the Criminal Code.

It was submitted on behalf of the borrower that as section 89A(2) of the NCC was a strict liability offence its breach constituted a criminal offence per se which justified the setting aside of the default judgment.

Ultimately, Harrison AJ accepted the submission on behalf of the lender that non-compliance with the NCC did not constitute an illegality but instead was “at worst an irregularity” which did not, in the circumstances, justify the default judgment being set aside.

Her Honour noted the meaning of the rule as considered in Perpetual Trustees Australia Ltd v Heperu Pty Ltd (No.2) [2009] NSWCA 387 where it was determined that the focus of rule 36.15 is on irregularity or illegality in the ‘making’, ‘entering’ or ‘giving’ of judgment. Rule 36.15 is not concerned with the merits of any decision or the irregularity or illegality of other steps in the proceedings. Her Honour also relied on section 193(1) of the NCC to hold that a non-compliance with the NCC does not mean that there is a failure of a condition precedent to the enforcement proceedings.

In the alternative to rule 36.15 UCPR, the borrower also relied on rule 36.16 UCPR.  As borrower’s proposed defence was based on the alleged illegality her Honour found that the borrower did not have a good defence on the merits to the lenders claim nor did he have an adequate explanation for delay.

Her Honour concluded it would not be in the interests of justice to set aside the default judgment and dismissed the borrower’s notice of motion.

Lessons to be learned

The real practical lesson for lenders out of this case is that an ounce of prevention is worth a pound of cure.  Lenders can quite obviously avoid these types of applications by making sure hardship notices are properly acted upon and the provisions in section 72 requiring written responses within set time limits (and all other NCC obligations) are complied with at all times.

If you need any assistance in this regard or wish to discuss any aspect of this issue further, we are here to help.

Post by Tatyana Virgara and Rod Cameron 

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