Your FOS Toolkit (December)

Topics discussed:

• Market value of repossessed commercial vehicle and steps taken to sell vehicle
• Increasing a credit card limit where the funds were used for gambling

Market value of repossessed commercial vehicle and steps taken to sell vehicle

Product: Motor vehicle loan

Result: In favour of FSP

Decision: Case number 466915 dated 28 August 2017

Facts

The applicant company obtained a loan from the FSP to buy a new truck. The loan went into default and the FSP repossessed the truck and arranged for it to be sold at auction.

The applicant alleged the FSP did not properly market the truck for sale and that the FSP had sold it below its market value.

Before selling the truck, the FSP had obtained two valuations: one from a well-known independent national vehicle auction house and the other from a commercial entity related to the FSP. The valuations were both $110,000.

On 27 April 2016, the auctioneer appointed by the FSP emailed a full-colour e-flyer with the auction details to its national customer base.

On 3 May 2016, the truck was offered for sale in an online auction with an auction reserve of $115,000. It was passed in but was subsequently sold by negotiation for $112,000 on 9 May 2016, $2,000 above the valuation.

The applicant supported his claim that the truck had been sold for below market value by providing an advertisement from the second-hand commercial truck dealer that purchased the truck after the FSP’s auction. The dealer was attempting to on-sell the truck for a higher price.

Decision

The determination was in favour of the FSP.

Generally speaking, applicable state legislation requires a mortgagee in possession to take all reasonable steps to obtain market value for property that it sells.

As the mortgagor was a company, the FSP has the following obligations under section 420A of the Corporations Act:

In exercising a power of sale in respect of property of a corporation, a controller must take all reasonable care to sell the property for:

(a) if, when it is sold, it has a market value – not less than that market value; or

(b) otherwise – the best price that is reasonable obtainable, having regard to the circumstances existing when the property is sold.

FOS said that, as a mortgagee in possession, the FSP’s obligations were to:

• adequately and appropriately advertise the property using an adequate description;
• take reasonable steps to ascertain the value of the property, such as an independent valuation;
• exercise reasonable care in setting a reserve price;
• sell the property by auction unless the FSP has good reasons for selling it by private treaty; and
• sell the property at ‘arm’s length’.

FOS stated that a mortgagee is not under a duty to wait for a market to rise or delay the sale in a falling market.

FOS determined that the FSP had complied with its obligations as the truck was:

• valued by two companies, one separate from and independent of the FSP;
• advertised to the auctioneer’s entire customer base, being a market that would likely have interest in the type of vehicle;
• offered for sale by public auction; and
• passed in but later sold for more than its valuation.

FOS also said the FSP was not required to accept the applicant’s suggestions about how the FSP should market or sell the truck, consult with the applicant about its decisions, or to spend money on significant repairs or modifications to the truck.

Takeaway message

A mortgagee exercising power of sale, among other things, is required to obtain a current valuation, market the property appropriately and first submit the property for sale by public auction unless there is evidence establishing the property should be sold in another way. The mortgagee would have the onus of showing that it was not appropriate to submit the property to public auction. If the mortgagee fails to comply with its duties it can be liable for damages.

In the case of second hand vehicles, it is appropriate for that auction to be conducted online by a reputable auction house.

The mortgagee should not forget it is also required to comply with statutory requirements such as the giving of statutory notices relating to the repossession and sale.

Increasing a credit card limit where the funds were used for gambling

Product: Credit card

Result: In favour of FSP

Decision: Case number 470792 dated 11 September 2017

Facts

The borrower had a credit card with an initial credit limit of $5,500 that was subsequently increased by the FSP to $25,500.

The credit increases were requested by the borrower and approved by the FSP in the ordinary course of business.

It subsequently came to light that the borrower had significant gambling issues and it was apparent from the borrower’s credit card statements that the funds were being used for gambling.

The borrower alleged that the FSP did not lend responsibly due to the applicant’s gambling problems. The borrower said the FSP:

• had a duty to monitor what the credit card was being used for and should have noticed that the funds were being used for gambling; and
• should not have offered further credit where money was being spent on gambling.

The borrower did not dispute that, on the available financial information, it could afford the credit increase. The dispute was on the basis that the FSP held an obligation to consider whether the provision of the credit was appropriate in the circumstances.

Decision

As a threshold issue FOS considered whether the borrower could afford the credit account and increased limit. Having reviewed the relevant documentation, FOS confirmed that the borrower had demonstrated a capacity to service the increased credit amount and, on that basis, the FSP had lent responsibly.

FOS said the FSP:

• was not obliged to review or monitor what the credit card was being used for when approving credit card increases; and
• has no obligation to prevent the borrower from using the credit card for gambling purposes.

FOS considered the body of case law where people have gambled away funds lent by an FSP. In those cases, the courts have found that no duty of care exists for FSPs to protect someone from losing their money through gambling if they lose it through their own deliberate and voluntary act. It was the borrower’s individual decision to use the funds to gamble.

Takeaway message

In the context of credit cards, an FSP is under no obligation to review or monitor what a borrower uses the funds for, provided any credit increases have been responsibly granted given the borrower’s financial capacity.

If you would like further information about these issues, please contact Graham Roberts or Clare McDonald of our litigation and dispute resolution team on 07 3231 2444.