Applying the National Credit Code

by BN26 Nov 2011

The National Credit Code may now be in force, but that doesn’t mean brokers understand exactly when it applies. Matthew Bransgrove explains the detail.

There is still a great deal of confusion as to when the National Credit Code applies and when it does not. This is resulting in a lot of loans not getting submitted to commercial lenders because brokers wrongly assume the code applies.
One scenario where brokers are shaky is where the security is a house, owned by an individual, who is providing a guarantee to secure the obligations of a company borrower, and the loan purpose is to renovate a residential property. Such a loan is not regulated. This is despite the fact the security it is a residential property, despite the fact the security is owned by an individual, despite the fact that the loan purpose is to renovate residential property. The key factor - the element that irrevocably removes the loan from regulation by the NCC - is the fact that the borrower is a company.
In summary, when figuring out whether a loan is code regulated the first question should be, “Is the borrower a company?” If the answer is yes, then that is the end of it. The NCC does not apply.

Why does the code not apply where the company is a borrower?

Section 5 of the NCC states that the NCC applies where:
a) the debtor is a natural person … and
b) the credit is provided or intended to be provided wholly or predominantly:
i) for personal, domestic or household purposes; or
ii) to purchase, renovate or improve residential property for investment purposes; or
iii) to refinance credit that has been provided wholly or predominantly to purchase, renovate or improve residential property for investment purposes…

Debtor means the same as borrower. This is because s204 of the NCC defines debtor “as a person (other than a guarantor) who is liable to pay for the credit”.  Because a company is not a natural person s5(a) is not satisfied and so the NCC does not apply. Whether or not s5(b) is satisfied is irrelevant as s5(a) must be satisfied as well.

Section 7(1) of the NCC states that the code applies to a mortgage where:
a) it secures obligations under a credit contract or a related guarantee; and…

The first question is does such a loan secures obligations under a credit contract? Section 4 of the NCC defines credit contract as “a contract under which credit is provided, being the provision of credit to which this Code applies”. Thus whether there is a credit contract is a circular reference to s5. If the borrower is a company the loan is not caught by s5 and therefore also not caught by section 7.
The next question does it secure obligations under a related guarantee? The NCC does not define related guarantee. Section 204 of the NCC defines guarantee unhelpfully (as “includes an indemnity”). Thus related guarantee must be given its normal meaning: a guarantee related to a credit contract. Thus whether there is a related guarantee is a circular reference to s5. If the borrower is a company then the loan is not caught by s5 and therefore also not caught by section 7.

Section 8 of the NCC states that it applies to a guarantee if:
a) it guarantees obligations under a credit contract; and…

Once again a credit contract is a circular reference to s5. If the borrower is a company then the loan is not caught by s5 and therefore also not caught by section 7.

In Equititrust v SLJM [2010] NSWSC 1059 the individual guarantor argued he was the real borrower and the use of company borrower was a sham and that therefore the Code should apply. The judge rejected this argument noting that High Court said that the expression “sham” had a well-understood legal meaning. It referred to steps that took the form of a legally effective transaction but which the parties intended should not have the apparent, or any, legal consequences. In these situations it is quite clear the lender intended the transaction to have exactly the legal consequences which the documents have on their face. 

Matthew Bransgrove is senior partner at Bransgroves Lawyers, and co-author of The Essential Guide to Mortgage Law in NSW (LexisNexis, 2008)