Under the NCC, money borrowed for residential property purposes must be for the borrower’s sole use
MAG Financial and Investment Ventures Pty Ltd v El-Saafin [2022] VSCA 286
The Victorian Court of Appeal has recently held that credit provided under the National Credit Code (“the NCC”) to purchase, renovate or improve residential property for investment purposes is restricted to the immediate use of the debtor.
Although the NCC does not specify that the purpose of borrowing money must be for the borrower’s direct use, in MAG Financial and Investment Ventures Pty Ltd v El-Saafin [2022] VSCA 286 (“MAG Financial”) the Court construed s 5(1)(b)(ii) of the NCC as being so inextricably tied to the debtor that credit for residential property purposes must be provided solely for use by the debtor and no other. In MAG Financial, the NCC did not apply in circumstances where the borrower’s intention was to pass on the loan funds to a related third party for use in connection with residential property purposes, even where the third party was a company in which the borrower was a shareholder.
This approach is in contrast to the broader interpretation given to the provision of credit for personal, domestic or household purposes under s 5(1)(b)(i) of the NCC, which is “expressed in the language of ultimate purpose only”: [113].
Sections 5(1) – (4) of the NCC set out the prescriptive components of the types of credit that are covered by the NCC. Relevantly, pursuant to s 5(1)(b), the credit must be 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.
In MAG Financial, the relevant loan agreement was held not to be a contract to which the NCC applied because the language of subsection 5(1)(b)(ii) suggests a direct and immediate connection between the provision of the credit and the act of purchasing, renovating or improving the residential property. The credit itself must necessarily be used by the debtor to do the purchasing, renovating or improving: [113]. Similarly, the “investment purposes” are limited to those of the person to whom credit is provided, not to a third party. It is necessary to focus on the purpose of the loan as between the borrower and the lender: [115].
Although the totality of the background facts of this case are somewhat complicated, the significant underlying fact was that, pursuant to the loan agreement, the credit provided to the borrowers (who were natural persons) was not provided to improve the residential property, but was provided for them to lend or advance the borrowed funds to Saafin Constructions Pty Ltd in order to assist the company in carrying out the residential property improvements. Thus, the credit was not provided to the borrowers to improve residential property for investment purposes. Interestingly, the Court also noted that no argument was advanced that that purpose was a “personal” purpose under s 5(1)(b)(i): [139], fn 50.
The upshot was that for s 5(1)(b)(ii) to have application it was not sufficient for the ultimate use of the funds to be by someone other than the debtor.
As part of its analysis, the Court pointed out that s 5(1)(b)(ii) does not turn on whether the credit is provided “for the purpose” of purchasing, renovating or improving residential property, but whether it is provided “to purchase, renovate or improve” residential property: [113]. The Court contrasted the provision of credit for residential property with the provision of credit for “personal, domestic or household purposes”, noting that s 5(1)(b)(i) “is framed differently” from s 5(1)(b)(ii), since the former does not require that the credit be provided for the immediate purpose of undertaking a particular activity for a particular ultimate purpose, but is solely directed to the purpose for which credit was provided: [125].
Not only does s 5(1)(b)(i) not concern residential property, but s 5(3) expressly provides that for the purposes of s 5, investment by the debtor is not a personal, domestic or household purpose. The Court referred to three cases concerning s 6(1)(b) of the Consumer Credit (New South Wales) Code which was analogous to s 5(1)(b)(i) of the NCC: Jonsson v Arkway Pty Ltd [2003] NSWSC 815; (2003) 58 NSWLR 451; Mango Media Pty Ltd v Comitogianni [2011] NSWSC 152 and Provident Capital Ltd v Bortolin Papa [No. 1] [2011] NSWSC 460. In Jonsson, the borrower was a daughter who used the loan funds to purchase a home for her parents as beneficiaries under a trust. In Mango Media, the borrower on-lent the loan funds to a friend to invest in a commercial investment opportunity. In Provident Capital, the borrower was a mother who on-lent the loan funds to her son for his gymnasium business. In each of these cases, the courts found that the loan was for a personal purpose within the meaning of s 6(1)(b) of the NSW Code.
However, these cases can be compared with Lauvan Pty Ltd v Bega [2018] NSWSC 154; (2018) 330 FLR 1, where the borrower’s express purpose under the loan agreement was to assist with short-term on-lending to family members for proposed commercial investment opportunities. Even though the borrower’s son ultimately used the funds to assist his company to complete the purchase of a residential development, Gleeson JA held, first, that the use for which the credit was provided was, as intended, a commercial purpose and not a personal, domestic or household purpose ([256]) and, secondly, that the credit was not provided or intended to be provided to the borrower to purchase any residential property for investment purposes: [258]-[259]. Consequently, the contract was not regulated by the NCC.
