A business opportunity too good to be true
In 2015 Vijay started work for Mike’s Make-up Limited importing and selling cosmetics. Mike Make-up’s directors, Mike and Lucy, said they were successful in business and that they felt Mike’s Make-up was their best idea yet.
Mike and Lucy told Vijay they would give him a stake in the company, and a share in the profits, if he loaned them $10,000 to help expand the company. Vijay agreed and paid $10,000 to Mike and Lucy.
In July 2015, Lucy updated the companies’ office records to record Vijay as a director of Mike’s Make-up in her place. Vijay was also assigned 1000 shares in Mike’s Make-up which amounting to a 20% stake in the company, with Mike and Lucy controlling the other 80%.
In August 2015 Mike and Lucy decided to contact a finance company to organise a loan. Mike and Lucy insisted that Vijay signed the loan contract with the finance company in his own name for $42,563 (the first loan). The first loan was for business purposes to buy a truck for Mike’s Make-up to complete deliveries.
Then, in September 2015, Vijay signed as a director of Mike’s Make-up for a second loan of $25,523 (the second loan). The second loan was for business purposes to buy a van for Mike’s Make-up staff to deliver orders door-to-door. Vijay gave his personal guarantee as security for both loans.
In November 2015, the payments on both the loans fell into arrears. Vijay had also not been paid any of the promised profits and he decided to quit Mike’s Make-up and try to get back his $10,000.
In December 2015 Lucy updated the companies’ office to remove Vijay as a director and also to remove his shareholding in Mike’s Make-up.
In June 2016 Mike’s Make-up was placed in liquidation and Mike and Lucy disappeared without repaying the finance company debt and Vijay his $10,000.
The finance company repossessed both the truck and the van and sold them to recover the debt, leaving the total amount outstanding to the finance company at $41,847.77 (the outstanding balance). The finance company then made demand on Vijay for the outstanding balance under his personal guarantee.
Vijay started to make payments to the finance company at $50 per week but couldn’t keep this up. Vijay’s new job was only part-time and he had started studying. Vijay asked the finance company to consider letting him make repayments at $20 per week. The finance company refused and told Vijay he would need to increase his repayments or it would enforce its guarantee and lodge the default with a credit reporting agency.
Vijay was stressed about having to increase payments to the finance company and was worried that listing his defaulted debt would cause his bank to call up his mortgage. Vijay complained to FSCL.
Vijay’s view
Vijay felt that it was unfair for the finance company to pursue him for Mike’s Make-up’s loans. Vijay felt that the finance company should chase Mike and Lucy as it was their company, they were responsible for the loan repayments, and they had already taken Vijay’s $10,000.
Vijay said Mike and Lucy had pressured him into signing the loans with the finance company and he had felt that if he didn’t sign the loans he would lose his job. Vijay also said that he was never actually a director of, or shareholder in, Mike’s Make-up because he had never signed anything to register ownership.
Vijay also felt that the finance company had acted recklessly and in breach of responsible lending laws in providing finance when he was not being paid an income by Mike and Lucy, and his personal finances were ‘super bad’ when he was approved for the first and second loans.
Vijay wanted the finance company to act reasonably and to accept his proposal of $20 per week repayment contribution.
The finance company’s view
The finance company said the loan was a commercial transaction and that Vijay was responsible for paying the outstanding balance under his personal guarantee.
FSCL review
We found that the loans were not subject to responsible lending laws because the credit was borrowed for business and commercial purposes and was not “consumer credit”. Vijay had signed declarations saying that the loans were for business purposes and he also stated that the loans were to buy specific vehicles for business purposes.
We found that when the finance company approved the lending, Vijay’s name was recorded on the companies’ office register as a director of Mike’s Make-up. Vijay had also presented himself to the finance company in person as Mike’s Make-up’s director.
We considered that Vijay’s conduct and the evidence available at the time of lending would not have given the finance company cause for concern, and it was fair for the finance company to accept that Vijay was a director of Mike’s Make-up.
We looked at Vijay’s evidence that he was not really a director and could not find any written consent from Vijay to act as a director of Mike’s Make-up. It appeared that Lucy had temporarily replaced her name with Vijay’s name on the companies’ register so as to have Vijay apply for the loan from the finance company.
However, in the circumstances, we considered it would be unreasonable to have expected the finance company to investigate Vijay’s legal status as a director, prior to it approving the lending. We felt that it was sufficient for the finance company to have checked the companies’ office records and trust that the Registrar of Companies had ensured the records were accurate.
No undue influence
We accepted that Vijay had been taken advantage of by Mike and Lucy but could not find that he had been unduly influenced by them. We noted that the relationship of employer and employee had statutory safeguards around it and that Vijay could have left to get a new job as he did after Mike’s Make-up stopped trading.
We found that QFL had no notice that Vijay may have been unduly influenced. Vijay represented himself to QFL as a director, he explained his role in Mike’s Make-up and that he had already invested heavily in the venture.
Finance company had made sufficient enquiries
We checked Vijay’s statement of financial position that he had completed for QFL. Vijay had declared he had total assets of $622,000, including his home valued at $560,000. Vijay’s only liability was a mortgage of $360,000 which he was re-paying at $3000 per month.
We considered that Vijay’s equity of $262,000 would reasonably satisfy QFL’s business lending criteria.
We were satisfied that the finance company had made full disclosure to Vijay of all the terms and conditions that applied to arranging loan finance. We found that Vijay had the opportunity to take independent advice and that he had signed all the documents with an apparent full understanding of their nature and effect.
Outcome
We found that Vijay was responsible for the debt and should discontinue his complaint.
Vijay was still very concerned that he would lose his home due to Mike and Lucy’s actions.
We worked with both parties and were able to negotiate a settlement whereby Vijay would pay a lump sum of $12,000 to the finance company and the balance on a long-term repayment arrangement.
Our insight
Business loans are not covered by the new responsible lending laws under the Credit Contracts and Consumer Finance Act.
We strongly advise consumers not to enter into any commercial lending unless it is for their own business. Many commercial lenders will require a personal guarantee which means that the guarantor can be pursued for the outstanding debt even if the company has stopped trading.
It is very important that a consumer completely understands their obligations when signing up for business lending.
