RENT 2 OWN CARS AUSTRALIA CHARGES MORE THAN 48% p.a. TO ITS DEBTORS VIOLATING THE NATIONAL CREDIT CODE AND ASIC ACT

Australian Securities and Investments Commission v Rent 2 Own Cars Australia Pty Ltd

[2020] FCA 1312

This is an application by the Australian Securities and Investments Commission (“ASIC”) for a range of relief in relation to alleged conduct of Rent 2 Own Cars Australia Pty Ltd (“R2O”) involving contraventions of the National Credit Code (“Code”) and the Australian Securities and Investments Commission Act 2001 (“ASIC Act”). ASIC contends that R2O provided credit through a hire purchase style of contract between R2O and consumers for the purchase by them of used cars from R2O franchisees. ASIC also contends that R2O directors Mr Roberts and Mr Green were “involved” in willful deception of said consumers as to the annual interest rate of the contracts, in contravention of the National Credit Code.

Facts: 

• R2O is a holder of an Australian Credit Licence. That licence recites 12 classes of "credit activities" in which R2O is authorised to engage as a "credit provider”.
• R2O operated its business through a network of franchisees. Between 17 July 2017 and 26 July 2018, there were 21 such franchisees operating in Queensland, New South Wales, Victoria, South Australia, Tasmania and Western Australia. R2O authorised each franchisee entity or person, and/or one or more persons employed by the franchisee to be a credit representative of R2O.
• During this period, R2O made 232 contracts with consumers for the purchase by them of used cars from R2O franchisees. Save minor differences in format and terminologies, the contracts have the following features:
  • First, each contract required a consumer to pay a deposit, sometimes called a first payment, which is approximately 75% of the stock purchase price of the used car.
  • Second, the contract provided for each consumer to make weekly repayments throughout the term of the contract, majority of which is between 1.5 years to 2 years.
  • Third, each contract referred to the cash price of the car as the car retail price or the comparison price, usually determined by price of similar cars advertised on the internet.
  • Fourth, each contract set out the total amount to be paid by the consumer under the contract which was sometimes called the contract price. The contract price is the sum of the comparison price (as earlier described), the first payment (deposit), and the total weekly repayments subject to a nominated interest of 45% per annum.
  • Fifth, as to ownership, each contract provided for an option enabling the consumer to acquire title to the used car.
• ASIC contends that R2O contravened the following obligations contained in the National Credit Code:
  • A credit provider must not enter into a credit contract if the annual cost rate of the contract exceeds 48%. 141 of 232 contracts exceeded 48%, sometimes reaching as much as 77.11%.
  • A credit contract must not impose a monetary liability on the debtor in respect of an interest charge under the contract exceeding the amount. Because 140 of the 232 credit contracts in issue exceeded the annual cost rate of 48%, those 140 credit contracts imposed on the consumers a monetary liability in respect of an interest charge
  • The contract document must contain the annual percentage rate or rates under the contract. In 133 of those credit contracts, the annual percentage rate actually charged was higher than that stated in the credit contract.
  • The contract document must contain the method of calculation of the interest charges payable under the contract and the frequency with which interest charges are to be debited under the contract. The 232 contracts do not deal at all with the frequency with which interest rates are to be debited under the contract.
• ASIC also contends that R2O committed the following violations prohibited by the ASIC Act:
  • misleading or deceptive conduct in relation to the provision of financial services
  • false or misleading representations that services are of a particular quality in connection with the supply of financial services
  • false or misleading representations with respect to the price of services in connection with the supply of financial services

Issue:

1. Does the National Credit Code apply to each of the 232 contracts in issue? If so, did R2O contravene 32A, 23(1), 17(4) and (17)5 of the National Credit Code? Were Mr. Roberts and Mr. Green involved in any, or all, of the contended contraventions by R2O of the National Credit Code?
2. Did R2O contravene ss 12 DA(1), 12DB(1)(a) and/or 12DB(1)(g) of the ASIC Act? If so, were Mr Roberts and Mr Green involved in any, or all, of the contended contraventions of the ASIC Act?

Law:

1. Section 5(1) of the National Credit Code provides that the Code applies to the provision of credit if, when the credit contract is entered into or is proposed to be entered into, the debtor is a natural person; and, the credit is provided or intended to be provided for personal, domestic or household purposes; and, a charge is or may be made for providing the credit; and, the credit provider provides the credit in the course of a business of providing credit, or as an incident of, any other business of the credit provider.

2. Section 9 of the National Credit Code states:

Goods leases with option to purchase to be regarded as sale by installments 

• For the purposes of this Code, a contract for the hire of goods under which the hirer has a right or obligation to purchase the goods, is to be regarded as a sale of the goods by instalments if the charge that is or may be made for hiring the goods, together with any other amount payable under the contract (including an amount to purchase the goods or to exercise an option to do so) exceeds the cash price of the goods.
• A debt is to be regarded as having been incurred, and credit provided, in such circumstances.
• If the contract is a credit contract, this Code applies as if the contract had always been a sale of goods by instalments

 ...

• For the purposes of this section, the amount payable under the contract includes any agreed or residual value of the goods at the end of the hire period or on termination of the contract, but does not include the following amounts:

(a)  any amount payable in respect of services that are incidental to the hire of goods under the contract;

(b)  any amount that ceases to be payable on the termination of the contract following the exercise of a right of cancellation by the hirer at the earliest opportunity.

• The statutory purpose of s 9(1) is to bring contracts for the hire of goods coupled with a right in the hirer to purchase those goods, within the "protective" measures provided for by the National Consumer Credit Protection Act 2009 and the National Credit Code for those consumers incurring a debt and being provided with credit, by contract, in relation to that debt.

3. Section 12BAB(1) of the ASIC Act states that a person provides a "financial service" if they provide financial product advice, deal in a financial product, or provide a service that is otherwise supplied in relation to a financial product.

Section 12BAA(7)(k) provides that a credit facility is a financial product, and that the provision of credit for any period is a credit facility and thus a financial product for the purposes of the ASIC Act

4. Section 32A of the National Credit Code provides:

“Prohibitions relating to credit contracts if the annual cost rate exceeds 48%

Entering into a credit contract

(1) A credit provider must not enter into a credit contract if the annual cost rate of the contract exceeds 48%.

Criminal penalty: 50 penalty units.”

• The formula for computing the “annual cost rate” takes into account all of the costs to the consumer under the credit contract, expressed as an annualised percentage. The purpose of the provision, and the formula contained within it, is to prevent credit providers from circumventing the prohibition upon charging an annual interest rate in excess of 48% by imposing fees and charges on the consumer which would then have the practical effect of delivering an effective interest rate in excess of a 48%.

5. Section 12DA(1) of the ASIC Act provides:

A person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or likely to mislead or deceive.

12DB of the same Act provides:

“False or misleading representations

12DB(1) A person must not, in trade or commerce, in connection with the supply or possible supply of financial services, or in connection with the promotion by any means of the supply or use of financial services:

(a) make a false or misleading representation that services are of a particular standard, quality, value or grade;

...

(g) make a false or misleading representation with respect to the price of services.”

6. In In Yorke v Lucas, Brennan J said this at 675 and 676:

When the conduct constituting the contravention is the making of a false representation, it is immaterial that the corporation did not know that the representation was false when it was made. The essential facts to be established in sheeting home liability to a corporation under s 52 include the making of the representation and the falsity of the representation but not the corporation’s knowledge of the falsity.

• It is not necessary that the person knows that the conduct is "misleading or deceptive" which is a conclusion about the import or legal consequences of the facts and circumstances giving rise to the contravention. It is enough if the person knows the essential facts giving rise to the contravention.
• Constructive knowledge is not sufficient. However, actual knowledge may be inferred from wilful blindness or from dishonest or deliberate ignorance.

Analysis:

• The contracts are credit contracts, thereby covered by the National Credit Code. They are properly characterised as contracts for the hire of goods under which the hirer has a right to purchase the goods, in this case the used car.
• If the "charge for hiring the goods" taken together with “any other amount payable under the contract” exceeds the cash price, the contract is regarded as a sale by instalments and a "debt" is regarded as having been incurred, and credit is regarded as having been provided.
• Green concedes that if the Code applies to the contracts in issue (as it does), the evidence shall support a finding that he was "involved in" R2O's contravention of s 17(5) of the Code. Mr Roberts, on the other hand, does not contest any aspect of the case advanced by ASIC or the evidence adduced by ASIC on any matter.
• Each of the contracts in issue engage the supply of a financial service within the meaning of the ASIC Act because they engage the provision of credit by R2O, which is a credit facility concerning a financial product, all as defined. The 232 R20 credit contracts are therefore governed by the ASIC Act.
• R2O made a false or misleading representation with respect to the price of services because for 177 of the 232 credit contracts in issue, the annual interest rate actually charged to those consumers was higher than the annual interest rate recited in the contracts.
• A misrepresentation made by a credit provider for the purchase of a used car on the critically important matter of an interest rate of 45% as the cost of the credit is a matter that goes to both the price and the very quality of the financial service.
• It is not necessary to show that Mr Green or Mr Roberts knew of the legal characterization of the facts that establish that R2O is a "credit provider" or that the contract in fact entered into is characterised as a "credit contract". It is sufficient if Mr Green knew the foundation fact that something in the contracts, which the legislation chooses to call the "annual cost rate" exceeded 48%, and he did.
• Evidence does not demonstrate that Mr Green and Mr Roberts knew that the effective rate being charged to the hirer was incorrect in relation to those contracts entered into after the commencement of the new 2018 calculator on 30 May 2018. Mr Green formulated the 2018 calculator and ASIC accepts that the 2018 calculator correctly calculated the interest rate

Conclusion:

The Code apply to each of the contracts in issue in these proceedings. It follows that R2O and Mr Green accept that R2O has contravened ss 32A(1), 17(4) and 17(5) of the National Credit Code “in the respects alleged”.

R2O has contravened s 12DB(1)(a) of the ASIC Act in respect of all of those contracts where the interest rate actually charged to the customer/hirer is greater than the rate nominated in the contract. It follows that R2O has engaged in conduct in contravention of s 12DA(1), s 12DB(1)(a) and s 12DB(1)(g).

Mr Green and Mr Roberts were both knowingly concerned in R2O’s contraventions of s 32A of the Code, except as to the 2018 contracts.
The question of the determination of an appropriate penalty will be the subject of further directions in relation to a further hearing on the separate question of penalty.
The applicant will be directed to submit proposed forms of relief consistent with these reasons, within 14 days.