Sportzone Motorcycles Ltd ((in Liquidation)) v Commerce Commission

JurisdictionNew Zealand
JudgeO'Regan J
Judgment Date12 May 2016
Neutral Citation[2016] NZSC 53
Docket NumberSC 40/2015
CourtSupreme Court
Date12 May 2016
BETWEEN
Sportzone Motorcycles Limited (In Liquidation)
First Appellant
Motor Trade Finances Limited
Second Appellant
and
Commerce Commission
Respondent

[2016] NZSC 53

Court:

Elias CJ, William Young, Glazebrook and O'Regan JJ

SC 40/2015

IN THE SUPREME COURT OF NEW ZEALAND

Appeal against a Court of Appeal (CA) decision which upheld a High Court (HC) decision which found some fees charged by the appellants were unreasonable under the Credit Contracts and Consumer Finance Act 2003 (CCCFA) — a subsequent HC decision quantified the extent to which the fees were unreasonable — the appellants provided finance to consumers in connection with the purchase of motorcycles from the first appellant — whether the CA erred in finding that the fees charged were unreasonable for the purposes of s41 CCCFA (unreasonable credit fee or default fee) — what approach should be taken to the assessment of the reasonableness of fees for comparing credit offerings by competing credit providers — whether the fees should be assessed on a per transaction basis or by reference to the activities undertaken by the creditor — whether one of the purposes of the CCCFA was flexibility in pricing models and the encouragement of innovation by creditors.

Counsel:

D J Goddard QC, I J Thain and C M Moody for Appellants

S J Mills QC, K C Francis and P J L Arnold for Respondent

  • A The appeal is dismissed.

  • B The appellants must pay the respondent costs of $25,000 plus reasonable disbursements (to be determined by the Registrar in the absence of agreement between the parties). We certify for two counsel.

JUDGMENT OF THE COURT

REASONS

(Given by O'Regan J)

1

This appeal addresses the provisions of the Credit Contracts and Consumer Finance Act 2003 (the 2003 Act) regulating fees charged by financiers to consumers under consumer credit contracts.

2

The appellants, Sportzone Motorcycles Limited (in liquidation) (Sportzone) and Motor Trade Finances Limited (MTF), provided finance to consumers in connection with the purchase of motorcycles from Sportzone. Sportzone assigned each consumer credit contract to MTF under an arrangement between Sportzone and MTF. MTF then became the creditor under the assigned contracts.

3

The respondent (the Commission) alleged that the fees provided for in these consumer credit contracts were unreasonable for the purposes of the 2003 Act. After an eleven day hearing in the High Court, Toogood J delivered a judgment in which he found that the fees were, in some respects, unreasonable (the HC liability judgment). 1 In a subsequent judgment (the HC quantum judgment), Toogood J quantified the extent to which the fees were unreasonable. 2

4

Sportzone and MTF appealed to the Court of Appeal which dismissed the appeal against both the HC liability judgment and the HC quantum judgment. 3

5

This Court gave Sportzone and MTF leave to appeal on the following question: 4

Did the Court of Appeal err in finding that the fees charged by [Sportzone and MTF] were unreasonable for the purposes of s 41 of the Credit Contracts and Consumer Finance Act 2003?

6

Sportzone and MTF also sought leave to appeal on a second question. However, leave to appeal on that question was declined. 5

The financing arrangements and the fees charged
7

As its name suggests, MTF provides funding facilities for motor vehicle dealers. Sportzone was one of these dealers. In 2004 Sportzone purchased 10,000 shares in MTF and entered into an MTF dealer agreement. Under that agreement,

Sportzone was authorised to provide intending purchasers of motorcycles with finance for periods between one and five years with security taken over the relevant motorcycle to secure the obligations of the debtor. The present case relates to 39 transactions under which Sportzone provided funding to debtors (who were purchasing motorcycles from Sportzone) under a document called an “MTF Credit Contract”. Sportzone then drew down from MTF an advance of a sum equal to the amount advanced by Sportzone to the debtor and assigned its interest in the credit contract and the security interest over the motorcycle to MTF. 6 We will call these advances from MTF to Sportzone “MTF loans”
8

MTF funded its operations through a securitisation programme, short term loans and capital received from shareholders. The securitisation programme involved MTF assigning its interests in credit contracts and security interests to an associated company, MTF Securities Limited (MTFS). 7 MTFS then securitised the transactions and sold them on the Euro-commercial paper market. Payments made by debtors to MTFS in relation to the amounts due under the credit contracts discharged the obligations of Sportzone to pay equivalent amounts to MTF under the MTF loans. Most of the 39 MTF consumer credit contracts at issue in the present appeal were assigned by MTF to MTFS.

9

Under the 2003 Act, all of Sportzone, MTF and MTFS (in relation to the loans onsold to it) are creditors in relation to the consumer credit contracts with the motorcycle purchasers.

10

The fees payable under the credit contracts that are the subject of this proceeding were:

  • (a) An establishment fee of $200 charged by Sportzone.

  • (b) An establishment fee of $190 charged by MTF. 8

  • (c) A monthly account maintenance fee of $5 charged by Sportzone.

  • (d) A monthly account maintenance fee of $3 charged by MTF to Sportzone and by Sportzone to the debtor.

  • (e) A full prepayment administration fee of $50 charged by MTF to debtors who fully repay their loans before the date on which the last payment was due. This was not challenged.

  • (f) A fee of $5 charged by MTF and described in the loan documents as a “PPSR Financing Statement Registration Fee”. 9 This was not challenged.

11

The credit contracts also provided for the payment of fees in the event of a default occurring. These were:

  • (a) A prepossession fee of $50 charged by MTF to debtors in arrears for 12 days. This fee was increased to $80 for credit contracts entered into after 2 February 2007.

  • (b) A $70 repossession fee charged by MTF to debtors in arrears for 34 days. This fee was increased to $80 for credit contracts entered into after 2 February 2007.

12

Although the appeal was advanced on behalf of both Sportzone and MTF, the focus of the argument was on MTF's position (Sportzone is now in liquidation).

13

MTF's approach to the fees it charged apparently developed as a result of a review it undertook after the 2003 Act was passed. After that review, MTF altered its fee structure to recover a greater proportion of operating costs through fees, rather than through interest charged on consumer credit contracts. MTF claimed that its fees did not completely cover its operating costs and that the increases in the level of fees were matched by a reduction in its interest rate margin. Evidence given at the trial from MTF executives was to the effect that the increased fee income did not, in fact, lead to increased profitability per transaction. MTF adduced evidence showing that the amount of its fees was not out of line with the fees charged by selected competitors.

14

There was evidence before the High Court that the Board of MTF had treated the introduction of the 2003 Act as presenting “profit opportunities”, including the chance to increase fee income. The Commission highlighted evidence that one of MTF's senior executives commented that attempts to claw back provisions and bad debts through fees “would be wrong”, but this did not deter MTF from seeking to recover such items through fees. 10

15

The Commission's case was that the review undertaken by MTF involved a full cost-absorption model, which was aimed at recovering all costs incurred in running MTF's business from fees, other than MTF's cost of funds (essentially, interest costs), the cost of its securitisation programme and the cost of capital employed in its business. 11 The review involved MTF dividing its expenses into separate “cost centres” containing a number of cost categories and line items. For each financial year, MTF undertook a separate allocation of each line item to one or more of the four different fee categories it was using. These were establishment fees, account maintenance fees, prepayment fees and default fees. 12 The costs for each fee category were divided by the estimated number of fees MTF expected to charge in the next 12 month period to derive a fee per transaction and then compared to existing or proposed fees.

16

The basis for this exercise appears to have been MTF's view that, as its only business was the provision of credit, all of its costs (subject to the above exceptions) were recoverable in one of the fees it charged its customers. 13 Its chief executive, Mr Todd, confirmed this in cross-examination. One of MTF's expert witnesses, Professor Lont, explained in cross-examination that all MTF's business costs related to its financing business could be described as having a “beneficial relationship” with that business and could therefore be recovered in fees without infringing the requirement not to charge unreasonable fees. We will come back to this argument later.

17

MTF says it did not in fact recover in its fees all costs other than interest costs incurred by MTF. For example, it says in 2006, it recovered 77 per cent of such costs in fees and the remaining 23 per cent in interest charges. It is not clear to us how much of the 23 per cent mentioned by MTF relates to the other exceptions identified by the Commission (securitisation costs/cost of funds) and therefore unclear to what extent the positions of MTF and the Commission differ. However, we do not see it as necessary to resolve this because it is not a decisive factor in our analysis of the issues before us. 14

Statutory scheme
18

The 2003 Act is consumer protection legislation. It has recently been amended but the provisions to which we refer...

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7 cases
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    • New Zealand
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    ...of s 41 of the Act, which prohibits unreasonable credit or default fees. 3 Sportzone Motorcycles Ltd (in liq) v Commerce Commission [2016] NZSC 53, [2016] 1 NZLR 1024 at 4 CIV-2016-404-2125. 5 Memorandum of counsel for the Commission dated 29 June 2018. 6 Commerce Commission v Harmoney Ltd......
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