By Nigel Stranaghan
Friday 28th May 2004 |
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On April 1, 2005, the Hire Purchase Act 1971 (which applies to business and consumer hire purchase agreements) and the Credit Contracts Act 1981 (which applies to business and consumer loans and other credit contracts) will be repealed by the Credit Contracts and Consumer Finance Act 2003.
Repeal of the Hire Purchase Act is welcome, since it adds little to the protections given by the Credit Contracts Act and it is difficult to justify its application to large transactions with business borrowers.
However, it is arguable that the Credit Contracts Act serves a useful function for small-business borrowers by protecting them from oppressive contract terms and conduct by lenders and by requiring disclosures that make it easier to compare the cost of loans. (In this context a small-business borrower is a business borrowing less than $250,000).
The argument for a distinction between consumer and business lending is that consumers need to be protected but businesses can look after themselves.
It is consistent with the approach taken in New Zealand in the Consumer Guarantees Act and the Credit (Repossession) Act. (On the other hand, the Fair Trading Act applies to business and consumer transactions). It is also consistent with the approach to credit regulation taken in Australia under its Consumer Credit Code.
However, New Zealand has a large number of small businesses and it is certainly arguable that they are not in any better position to look after themselves than consumers.
Does it make sense that a relatively unsophisticated individual borrowing $200,000 to buy a house will be protected by the new act but will not be protected if he or she borrows the same amount for business purposes? There is even an argument that the $250,000 cut-off point in the Credit Contracts Act is too low, as it does not reflect more than 20 years of inflation. If the cut-off had been inflation-adjusted, businesses borrowing up to about $850,000 would have the benefit of the act's disclosure regime.
These issues were considered by the select committee that considered the new act and to some extent the need to protect business borrowers has been recognised. In particular, although disclosure requirements and rules relating to interest and fees in the new act will not apply to business borrowing, its oppression provisions will apply to both business and consumer borrowing.
So what protections will small businesses be missing out on? The lender's obligations to make disclosure when loans are made or varied are carried forward with some changes. The main new protections for consumers will be:
Nigel Stranaghan is a banking partner with the transtasman commercial law firm Phillips Fox
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