12 – Business Law Newsletter
In this edition:
- Credit Fees: Are You Being Reasonable?
- PMSIs – What are they? How do you get them? How useful are they?
- Business Law Team
Credit Fees: Are You Being Reasonable?
A recent decision of the Supreme Court has confirmed the Commerce Commission’s approach in relation to credit fees, in particular whether a fee is ‘reasonable’. The decision provides a timely reminder for all businesses that charge credit fees to ensure they are complying with the relevant consumer legislation.
Credit Contracts and Consumer Finance Act 2003
The Credit Contracts and Consumer Finance Act 2003 (CCFA) governs consumer contracts, and the fees that businesses can charge under consumer contracts. This includes establishment fees, default fees and other credit and enforcement related fees. Although the CCFA mandates rules in relation to fees, interest charges and payments that businesses can charge, it provides no guidance around these rules. As such, there is no assistance in the CCFA as to how such fees should be calculated and charged.
The decision of the Supreme Court in Sportzone Motorcycles Limited (in liquidation) and Motor Trade Finances Limited v Commerce Commission has concluded a dispute spanning almost 10 years. The Supreme Court has definitively confirmed the Commerce Commission’s (Commission) approach in determining what kind of fee levels may or may not be reasonable.
Sportzone Motorcycles Limited (Sportzone) was a motorcycle dealer, and had business connections with Motor Trade Finances (MTF), which included MTF providing financial services to Sportzone’s customers. The case against Sportzone (brought by the Commission) dealt with 39 contracts. The fees charged by MTF and Sportzone (in relation to those contracts) included:
- establishment fees of $190 – $200;
- monthly account maintenance fees of $3 – $5; and
- repossession fees of $70 – $80.
MTF passed a greater proportion of its operating costs on through its fees, which it said was matched by a reduction in interest rates. It also said that each one of its fees was in line with those charged by competitors. This however, was deemed to be irrelevant.
The Court held that it isn’t the level of the fee that determines whether it is reasonable or unreasonable, but rather that a fee is considered unreasonable, except to the extent that it recovers costs that are closely relevant to the actual transaction, or the particular activity, in respect of which the fee is charged. The transaction-specific nature of fees means that general overheads should not be recoverable. The Supreme Court stated that:
“It is not permissible to take all operating costs (or virtually all) and allocate them to one fee or the other. The consequence of this is that many costs incurred by a credit provider will not be referable to particular credit transactions and will therefore have to be recovered in the interest rate.”
The Court acknowledged that this would lead to practical issues for businesses. It was suggested that variable costs would always meet the reasonableness test more easily than fixed costs, and that businesses would have to find a way to set reasonable fees through the principles of management or cost accounting.
Significance of the Decision
It is important for all businesses to note that this does not only apply to financial institutions and lenders in the traditional sense. Although the subjects of this decision are ‘lenders’, the CCFA applies a broad interpretation to creditors. If:
- you sell goods and/or provide services on credit; and
- your customers are people who are not in business, but are acquiring your goods and/or services for personal, household or domestic use,
you are a creditor under the CCFA, and are subject to the same provisions as Sportzone and MTF that were the subject of the decision. Therefore, the Court’s direction and general principles as to what is and what is not reasonable (with relation to fees) will more than likely apply to you.
Following the decision, in a media release, the Commission stated that consumer credit issues in relation to lenders (such as excessive fees, and not meeting disclosure requirements) are a real focus for the Commission. All businesses, small or large, to which the CCFA applies, are encouraged to have their terms of trade and/or financing documents reviewed. There are recognised accounting practices that will be able to help you determine that the fees set take into account the matters discussed by the Court in this decision.
How can we help?
If you are unsure of your status under the CCFA, or any of your obligations under consumer protection legislation, please contact the Corporate Team at Lane Neave.
PMSIs – What are they? How do you get them? How useful are they?
When the Personal Property Securities Act 1999 (PPSA) came into force in 2001, it provided a new comprehensive framework for securities, restating some existing concepts but also bringing in some entirely new ones. PMSIs were one of these new concepts: although well entrenched in the law now, many people still fail to fully benefit from the protections this particular form of security offers.
PMSI (pronounced pim-zee) stands for Purchase Money Security Interest: to be the holder of a properly perfected PMSI is to be the beneficiary of the highest priority security interest that the law provides for. A PMSI is primarily obtained by:
- A credit sales contract where the debtor/buyer’s obligation is secured by the security interest taken in the goods provided on credit by the secured party/seller (ie goods sold on credit under a retention of title provision);
- In a loan transaction where money is advanced to the debtor/borrower to allow them to purchase a specific item, giving the secured party/lender a specific security interest in that item; and
- A secured party being the lessor in relation to a lease of goods that extends (or could extend) for more than one year.
Not all securities in specified goods are PMSIs, for example, while a security over a car to secure lending to enable the debtor to buy the car is a PMSI, a security over a car to secure lending to enable the debtor to go on holiday is not a PMSI. As a rule of thumb, consider this: was the money advanced to purchase the specified item? Goods supplied on credit can be looked at in the same way: the secured party has in effect supplied the credit needed by the debtor to enable the debtor to acquire the goods.
To obtain PMSI status, there must be three satisfied criteria:
- The transaction must fall within one of the categories contained within the definition of what constitutes a PMSI;
- There must be a written security agreement between the parties containing a charging clause (there is no magic in the wording that has to be used in a charging clause: it simply has to give the secured party in interest in the goods, eg “the debtor grants a security interest to the secured party in the Goods”);
- The secured party/creditor must ensure that its financing statement evidencing the PMSI is registered on the Personal Property Securities Register (PPSR) within the time period specified in the PPSA. Failure to register the financing statement within the stipulated time periods will result in a loss of PMSI status.
The time periods for registration depend on the category that the items or goods fall into. The PPSA stipulates that, depending on the reasons for the acquisition of items by the debtor, any item may be considered to constitute (for example) consumer goods, plant and equipment or inventory:
- A computer purchased by Stan for home use is a consumer good;
- Computers purchased by Stan’s company for office use are plant and equipment;
- Computers purchased by the supplier to Stan’s company are inventory.
Understanding the concept of how one item may be viewed in different capacities is important to ensuring that a secured party is taking the proper steps needed to protect their PMSI status.
To acquire a PMSI in the consumer goods or the plant and equipment, the secured party must register its financing statement not later than 10 working days after the day on which the debtor obtained possession of the item. To acquire a PMSI in the inventory, the secured party must register its financing statement before or at the time the debtor obtains possession of the items. In a rolling account, failure to register in the time prescribed will not mean that the PMSI status is lost forever but it will certainly be lost until a financing statement is registered and the next supply of inventory is made.
In the situation of a debtor insolvency, having a perfected PMSI may be the difference between the secured creditor being able to retrieve items supplied or be fully paid for them, and falling into a less preferential position with other creditors who are secured, but do not have PMSI status. A PMSI will rank ahead of a Bank’s general security over all present and after acquired personal property (no matter whether it was registered before or after the Bank’s security), and it will rank ahead of other competing securities in the same item (for example, the secured party/lender who advanced money to buy the car will rank ahead of the secured party/lender who took a security over the car in relation to the holiday loan).
How can we help?
It is important that everyone in business understands what security they are entitled to have, how to ensure that you obtain it, and what it means for you in the situation of a debtor’s insolvency. If you have any question or need advice please contact the Corporate Team at Lane Neave.
Business Law Team
If you have any queries in respect of the above, or any other business law issues, please contact a member of Lane Neave’s Business Law Team:
Disclaimer: The content of these articles are general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.