A recent High Court decision in Real Finance Limited v Setefano1 provides clarification that a court can reopen a credit contract on the grounds of oppression under the Credit Contracts and Consumer Finance Act (the
CCCFA),2 in an undefended debt recovery proceeding.
The District Court Rules provide that where a plaintiff has commenced a proceeding for a liquidated sum, and no statement of defence is filed in the requisite time, the plaintiff creditor may apply for default judgment. In the usual course, an application for default judgment is processed by the registry staff, without recourse to a Judge.
However, from mid-2015 District Court registries began to adopt a practice whereby if registry staff had concerns about high interest rates, the amount of time which had elapsed from default before a claim was brought or collection costs and other charges claimed by financiers, the registry staff would refer the file to a Judge for further direction and the possibility of formal proof being required. This, in turn, often led to the registry offering to seal default judgment for a lesser sum than that claimed or, alternatively, refusing to seal default judgment and referring the proceedings to formal proof before a Judge.
When claims did proceed to formal proof, District Court Judges had differing opinions on whether the court could reopen a credit contract on the basis of oppression of its own motion: some Judges would reopen the credit contract and award judgment for a lesser sum; others held the court had no jurisdiction to do so.3 Given this uncertainty, coupled with the additional costs that a creditor will incur proceeding to formal proof (which in many cases are unlikely to be recovered from the debtor), creditors would often choose to obtain default judgment for a lesser sum than that for which the contract provided than proceed to a formal proof.
Real Finance case
Real Finance, funds had been lent to a Mr Setefano pursuant to two loan agreements. The terms of the loan agreement provided for an interest rate of 30% p.a. and a default rate of 40% p.a., establishment fees, a “monthly administration fee” of $60 and default fees for various steps the creditor might take when a debtor is in default. These latter fees included charges for telephone calls made and letters sent and an hourly charge out rate for any administration time when the account was in default. Mr Setefano defaulted. Real Finance issued proceedings in the District Court and, when Mr Setefano did not file a statement of defence within the requisite time, applied for default judgment. Pursuant to the procedure outlined above, the registry referred the matter to Judge for formal proof.
Judge Touhy considered that the Court was entitled to reopen a credit contract on the grounds of oppression on its own motion and proceeded to do so. The Judge held that the monthly administration fee was excessive and oppressive, when one considered the high interest rate, the establishment fees and the default charges. The Judge awarded judgment for the amounts claimed, less the monthly administration fees. Real Finance appealed.
On appeal, the High Court confirmed that a court can reopen a credit contract of its own motion, where it considers the contract to be oppressive. It considered that such a power was consistent with the CCCFA’s purpose of consumer protection and the District Court’s overriding discretion as to whether to seal judgment on a liquidated demand. The High Court did however note that the court ought to exercise caution before acting on its own motion.
While this decision provides clarification, it will concern financiers as it shifts an evidential burden onto them to disprove oppression, in circumstances where a debtor itself has not raised the issue. The Courts have previously held that the onus is on a party asserting oppression to provide evidence to support that assertion – except in the "plainest of cases" a mere assertion is insufficient.4 It seems that when the party alleging possible oppression is either a Judge or registry staff, the evidential burden is reversed.
This may not be the end of the matter. A second case on this same issue,
Diners Club (NZ) Limited v Brooker,5 has also been appealed to the High Court. We will provide a further update once that case has been determined.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.