Download assignment of hire-purchase agreements and more Exams Finance in PDF only on Docsity!
ASSIGNMENT OF HIRE-PURCHASE AGREEMENTS 321
THE LAW AND PRACTICE OF ASSIGNMENT OF HIRE-PURCHASE AGREEMENTS
The last official trading period for which figures relating to hire- purchase agreements are available is the last quarter of 1967. In this period, not a particularly good trading one, hire-purchase transactions involving goods with a cash value of 42 million dollars were executed. Of this sum, only an approximate 45% was paid in cash. 1 It is there fore obvious that, over the course of a year, retailers dealing in hire- purchase agreements must have a considerable outlay of capital. Yet every dealer must replace the stock he sells under hire-purchase, and usually must pay for these replacements in cash or on a monthly basis. Somehow the dealer must obtain finance to purchase this new stock-in trade, and commercial lawyers have been productively engaged over the course of many decades in devising a great many schemes whereby he may do so. The systems available to him, and other retailers who grant consumer credit in ways other than by hire-purchase, range from short-term loans from banks to the granting of a floating charge or the entering into of elaborate field-warehousing arrangements. These, and many other forms of sales financing, are independent areas of study in their own right. It is the purpose of this paper, however, to study the law and practice of a system whereby the hire-purchase agreements themselves are used by the dealer to recoup immediately the bulk of his outlay tied up in unpaid instalments— the system of assignment of the hire-purchase contracts.
THE PRACTICE
The basics of an assignment transaction are simple. A hire- purchase agreement is concluded between the dealer and the “pur chaser,” 12 the dealer then assigns his “interest” 3 in the agreement to a finance company for consideration. The details are complex, due mainly to differences in practice which occur. However, there is some degree of uniformity on the major points of practice, am most assign ment transactions share the following characteristics: ...
- They are executed in pursuance of a standing master agreement between the finance company and the dealer. This agreement usually sets out in some detail the terms upon which the finance company will take the assignment and the dealer’s liability in respect of transactions he assigns. It will also usually fix the rate and method of payment by the finance company for the agreements (or the rate of advances on 1. These figures are taken from the 1968 New Zealand Year Book, **pp. 605-607.
- In this paper the term “ purchaser” has been used to signify both the hirer under a** Helby v. Matthews [1895] A.C. 471 agreement and the conditional purchaser under a Lee v. Butler **[1895] 1 Q.B. 333 agreement.
- In respect of a hire-purchase transaction a dealer has two interests he can assign— his contractual interest in the agreement and his proprietary interest in the goods sold or hired under the agreement.**
322 V.U.W. LAW REVIEW
them, if the assignment is my way of mortgage4). Often, the first two matters above will also be included on the hack of each individual agreement assigned, but the master agreement is in most cases the dominant document vis-a-vis the rights and obligations of dealer and finance company.
- Under the terms of the above agreement (or in a few cases, in accordance with an oral agreement between the parties) the finance company undertakes to consider, at stated (usually monthly) intervals, proposals put forward by the dealer for assignment of agreements. Although not bound to take an assignment of every or any agreement proposed, in practice the finance company will in fact discount them all. There is practically no investigation by the company of the purchaser’s credit-worthiness, nor a checking of the agreement to ensure it has complied with the Hire-Purchase and Credit Sales Stabilisation Regulations 1957. Although this prima facie appears to place the finance company in a financially dangerous position should the pur chaser be a poor risk and default, or sell or destroy the chattel, or should the Regulations have been breached, its apparent carelessness is justified on at least two grounds: primarily, the cost involved in such investigations would absorb the little profit usually made on these transactions, and secondly, the risk of the purchaser’s default is often borne by the dealer under a recourse clause in the master agreement or in the deed of assignment. Both these factors will be discussed at length subsequently.
- In practice, most assignments are made in “block”. Dealers collect all the contracts they have entered into, at the end of each month, and assign them together. Schedules are usually prepared preparatory to assignment, and on this schedule the agreements will be listed by number, together with particulars such as deposits and instal ments paid. Assignment of individual agreements takes place to a far lesser extent, for reasons explained below.
- Before assignment, usually on the basis of the particulars in the schedule, the sum due to the dealer from the finance company is calculated. Many considerations affect the discount rate, and before these can be adequately explained it is necessary to mention some points of overall financing practice. Finance companies which discount hire-purchase agreements are in much the same position as was Odysseus between Scylla and Charybdis. Looming on the one hand are the high administrative costs discounting involves—on the other the relatively high incidence of default among purchasers under hire- purchase contracts. Twenty, or even ten, years ago most finance companies took these risks and were prepared to lay out large sums of capital to discount agreements. In the last few years there have been many important changes in the New Zealand retailing economy, and the financing of many retail transactions. First and foremost there has 4. There are two basic forms of assignment: absolutely, or by way of mort gage. For all non-legal purposes they amount to the same thing; in both there is basically a sale of the dealer ’s interest to a finance company. For the law on this point, see pages 326 ff infra.
324 V.U.W. LAW REVIEW
cash price and the contract price for the finance company. However, it is often the finance company’s policy to withhold payment of a proportion of the discounted price as a reserve, until the purchaser has completed payment under the agreement. Should the purchaser default or sell the chattel, the reserve (or as much of it as is required to satisfy the debt) is withheld by the finance company. The incidence and amount of the reserve depends directly upon the relative strength or weakness of the finance company and the dealer. A retailer whose business the finance company is anxious to secure or retain will be in a strong position to resist reserve trading. However, many finance companies, even when dealing with larger retailers, will insist upon a reserve of 10%-20%, if the agreements being discounted relate to electrical goods, home appliances or furnishings. Such chattels have, usually, very low resale value. Should the purchaser default and necessitate repossession by the finance company, the amount realised on the agreements is usually less than the balance owing under them. The security given by the reserve in such cases is often the only way the finance company can ensure it receives the full price owing. In the case of automobiles, resale value is usually closer to the contract price, and so the reserve is less frequently used in transactions when agree ments relating to these are assigned. Although this appears to be the usual situation, it must again be stressed that the reserve, or lack of it, and the percentage it involves rests largely on a policy decision by the finance company. It may be willing—or forced— to forego it when discounting for a home appliance dealer to secure his business or prevent it going to another discounter.
(b) The Recourse Clause. In this connection there is again the conflict between the finance company ’s desire for maximum security vis-a-vis the agreements it discounts and the practical requirements of offering attractive terms to a retailer in this competitive field. Retailers, understandably, dislike recourse trading, which makes them liable (in general terms) to indemnify the finance company for any loss the latter suffers through discounting the agreement. Therefore, a promise by a finance company to make recourse free discountings is a strong inducement to a retailer to give this company his business, and the evidence tends to suggest that, especially in the used-car field, recourse-free discounting is becom ing the rule rather than the exception. This has been forced upon finance companies due to the competitive nature of used-car discount ing, and although individual recourse (i.e. the dealer guaranteeing specific agreements) may still take place, dealers are usually in a position to force recourse-free assignments. Home appliance, electrical and furniture dealers are, as in the case of the reserve, in a less advantageous position. Recourse terms in the master agreement are usually insisted upon by all companies. This is not because the rate of default is any higher than among purchasers of new cars, but because the value of the chattels repossessed is often low, especially in die case of carpets, fittings and furniture. Because of the same considerations that prompt companies to institute the
ASSIGNMENT OF HIRE-PURCHASE AGREEMENTS 325
reserve in this area, the recourse clause is a necessary security in order to make the practice of discounting these agreements viable from an economic standpoint. There is also another point to be borne in mind. Although default rates by purchasers of home appliances or electrical goods are probably no higher than among used-car purchasers, there are numerically far more agreements of the former type. Automobiles are movable but they are traceable. Transistor radios, television sets and even refrigerators and radiograms are not. If they disappear with the purchaser, or are sold by him, they are generally not recovered. So in this way too the potential loss ratio per agreement is far higher in this field. Even to win a desirable customer, finance companies are reluctant to dispense with recourse trading in areas outside used-cars. (c) The Finance Company’s Service Charges “Service charges” are perhaps the greatest bargaining point between finance company and dealer, or, more correctly the greatest point of competition between the finance companies themselves. Most com panies pay a dealer the difference between the money he, the dealer, has already received directly from the purchaser and the cash price of the chattel. The company’s “profit” is therefore the difference between the cash and contract prices— about 10%-15% of the cash price. However, finance companies would regard this latter statement rather cynically, for two reasons, since out of this “profit” two main expenses must be met. The first is the charge for administering the agreement, about which more will be said presently. The second is the high cost of securing the assignment. That discounting is highly competitive, especially in the case of agreement relating to automobiles, needs no repetition. In order to secure the discounting business of the more desirable—and even slightly suspect— motor dealers, a finance company will often reduce its own profit margin to pay a bonus of $5, $10 or even $20 to the dealer in respect of each contract he executes and assigns. Such a bonus does, in effect, reduce the dealer’s “loss ”, on each agreement. Premium payments are far less common in the other fields of retailing. In the merchandise area, the finance company is in a stronger bargaining position and it is only when the company is making a concerted attempt to secure a large amount of business that bonus payments will be offered. The dichotomy of the used-car and what I have termed the merchandise practices is readily apparent if one studies the differences in the terms of master agreements in respect of each retailing field. Naturally, there are exceptions. To secure the business of a large merchandise trader, non-recourse, non-reserve terms may be offered. Conversely, a finance company may insist upon high-reserve dealing with some of the less reputable and, perhaps, financially insecure car dealers. This latter point is borne out by the case of one company which refused to take assignments from a Wellington dealer without a 40% reserve provision, an indemnity term, and an independent under taking to pay on demand all sums owing under the assigned agree ments. The dealer, to what one may suspect was the company ’s relief, refused.
ASSIGNMENT OF HIRE-PURCHASE AGREEMENTS 327
has two interests he can assign, his interest in the hire-purchase agree ment and his property rights in the chattel hired or conditionally sold. As each of these interests is legally separate, he could assign his contractual interest to A and his property interest to B. Assignment of the latter alone is, however, commercially unrealistic. An assignee of such interests would take them subject to the contractual agreement in relation to the goods and would receive but a “reversion of diminish ing value without any corresponding contractual right to receive the instalments paid ”. 9 Only in the event of the purchaser’s default or termination do the property rights assume importance. An assignee of contractual rights obtains a far more valuable interest, most importantly the right to receive instalments. But should the purchaser default, although he can sue for breach of contract, he has no right to repossess the goods, as this right is dependent on title. Since repossession and subsequent resale is the main way the finance company would recover the unpaid instalments value, it is seldom content to take an assignment solely of the dealer’s contractual rights. To protect itself the finance company adopts one of the following courses: (a) It may take an assignment of the contractual interest plus the right to repossess in the event of the purchaser’s default; (b) It may place a clause in the deed of assignment which obliges the dealer, at the company’s request, to repossess the chattel; (c) It may take an assignment of both contractual and property rights. This is the most common form, but it is far from being axiomatic that this is the universal practice, for, as will be subsequently seen, there are possibly some minor draw backs with such an assignment. It should be noted, however, that even if form (c) is adopted, there may be a limited class of contractual rights conferred upon the dealer in the hire-purchase agreement which are incapable of assign ment. Despite the fact that the assignment may purport to transfer “all right, title, claim, interest and demand ” in the agreement, a licence to enter and seize the goods in the purchaser ’s possession has been held, on basic common law principles, not to be assignable. 10 11
- Registration Under the Chattels Transfer Act 1924 From the definition in section 2 of an “instrument” it is obvious that assignments of a dealer’s proprietary interest are prima facie instruments requiring registration. Dugdale, New Zealand Hire-Pur chase Law, 11 however, differentiates between an assignment of property rights and contractual rights (the usual practice), and an assignment solely of the contract. In his view the latter is exempt from registra tion on the grounds that it constitutes the assignment of a chose in action. This writer agrees that contractual rights do constitute a chose 9. Guest (supra) p. 298. 10. Chatterton v. McLean **[1951] 1. All E.R. 761.
- Op. Cit. n. 5 supra at page 52.**
328 V.U.W. LAW REVIEW
in action, but disagrees with Dugdale when he says this fact exempts the assignment of them from the need for registration. Although choses in action are stated in section 2 not to be chattels, as a result of the 1939 amendment to the Act, book debts are; and it is submitted that instalments due under a hire-purchase agreement are book debts. Book debts include all such as are entered ... in the account books of the vendor: 12
“Those words really appear to mean debts which are due to the business and which in the ordinary course of business, would pass through the business ledgers”: 13 14 15 These two judicial definitions appear to leave no doubt on the matter, but because Dugdale is recognised as being an excellent commentary and this writer is apprehensive in disagreeing with it, reference to two other decisions should be made. In Olds Discount v. John Playfair 14 the fact that instalments due under a hire-purchase agreement were book-debts of the dealer was assumed without question by the court. An even more direct authority is Independent Automatic Car Sales Limited v. Knowles and Foster. 1 * In a decision directly upon the point in question the court held that hire-purchase instalments exist, at the date of the initial deposit, as book debts. “[The] fact they were not then immediately payable would not make them any less debts, nor, in my judgment, any the less book debts.” 16 It is therefore submitted that even an assignment of contractual rights alone under a hire-purchase agreemeiit CQHSlilUie5""n instrument and prima facie requires registration......... 1
- Yet in practice almost no assignments arei registered, due to the rftHftving provision oTsection :>/ (*3) of the Chattels Transfer Act 1924. This subsection provides that: ^ Ji A customary hire-purchase agreement, and any assignment of If a customary hire-purchase agreement, and of the chattels the subject of the agreement, whether absolute or by way of t mortgage, is valid and effectual for all purposes without I! registration thereof. As in all probability the contract between dealer and purchaser will be a customary one (as defined in section 57 (1)), an assignment of the contract and the property in the chattels does not require registration. Yet not all agreements are customary. The Seventh Schedule list of chattels is relatively exhaustive, but some chattels often sold on hire-purchase are not included therein. 17 It does occasionally happen that non-customary hire-purchase agreements are assigned and the assignment is not registered. It is not amiss therefore to examine
12. Stanley Stamp Co. v. Brodie (1914) 34 N.Z.L.R. 129, per Stout C.J. at 148. 13. Haigh v. Haigh **(1907) 51 Sol.Jo. 343 per Parker J. at 343.
- [1938] 3 All E.R. 275.
- [1962] 1 W.L.R. 974.
- Ibid., 984.
- Especially boats, yachts and pleasure craft.**
330 V.U.W. LAW REVIEW
and their assignment rests solely on New Zealand draftsmen. The interpretation of section 18 (1) as above is supported by the Booth MacDonald 18 decision.
(b) In the case of sale by the purchaser
Now suppose a registrable assignment is made to a finance com pany which does not rqjister, and that the purchaser fraudulently sells the chattel to a bona fide purchaser. In these circumstances, is the instrument of assignment void as against this third person under section 19? Section 19 prima facie gives the third party a good title: the finance company’s sole chance to resist his claim would rest upon the possible application of Carmine v. Howell™ In that case a dealer and a purchaser entered into a Helby v. Matthews 20 type of hire-purchase agreement. Before having completed payment the purchaser sold the hired chattel to a bona fide purchaser. The hire-purchase agreement was held to constitute an instrument and the learned magistrate agreed it was void through non-registration. He nevertheless decided that the dealer was entitled to the return of the chattel on the basis that section 19 renders the instrument void, but does not preclude a person from proving his title independently of the void instrument. There are remarks of Myers, C.J. in the General Motors Finance Co.18 19 20 21 22 case which show that Myers C.J. did not hold this view but they are dicta, and as Carmine v. Howell has stood for many years unchallenged directly by any higher authority, it must be accepted as correct law, and, it is submitted, good law. As far as Lee v. Butler 22 types of agreements are concerned there is no reason why the Carmine defence should not be available to a dealer there as well: but a dealer would obviously fail in his claim due to the operation of section 27 (2) of the Sale of Goods Act 1908 which would be sufficient to protect the bona fide purchaser. Could a finance company successfully plead Carmine v. Howell in the circumstances outlined at the beginning of the previous paragraph? The short answer must be no. Its title to the chattel rests upon the deed of assignment, the very instrument struck down through non registration. Unlike the dealer in Carmine , it has no way of proving title antecedent to the execution of the instrument. If there is a recourse clause in the deed of assignment or in a master agreement between dealer and finance company which is drafted sufficiently widely to place liability upon the dealer for losses to the company arising from the purchaser ’s unlawful disposition — the standard undertaking “The assignor will pay to the company on demand the total sum repayable
... or the balance thereof for the time being unpaid” would seem sufficient— the company would not suffer loss in any case. But should there be no such clause, and should the chattel be of considerable **18. (1913) 33 N.Z.L.R. 110.
- (1924) 19 M.C.R. 103.
- [1895] A.C. 471. * 21.** General Motors Acceptance Corp. v. Traders Finance Corpn. Ltd. **[1932] N.Z.L.R. 1.
- [1893] 2 Q.B. 318.**
value, there is one further line of argument the finance company could pursue. It could argue that as section 19 makes the instrument of assignment void, the instrument was not therefore capable of passing title from the dealer to the company. Therefore title must still be in the dealer, and as he can presumably prove his title independently of the void instrument, he is entitled to recover the chattel on behalf of the finance company. However, there are two objections to this argument:
(i) Section 19 makes the instrument void as against a bona fide purchaser. It does not appear to invalidate it inter partes , and so the instrument would effectively pass title to the finance company (only, of course, for the latter to lose it to the bona fide purchaser). (ii) In Singh v. Ali 23, a case to be discussed in detail subsequently, the Privy Council held that title could pass under a void agreement. So even if section 19 was held to render the assignment totally void, the assignment could still be effective to pass title to the finance company, again for the latter to lose it as in (i) above. Overall, therefore, the possibility of a bona fide purchaser acquir ing an interest in the chattel through non-registration of a registrable assignment holds far more serious consequences for the assignee com pany than the claim by the Official Assignee of a bankrupt dealer in circumstances previously described. Dugdale, however, does hold out some slight glimmer of hope to a finance company in the section 19 situation. He states at page 53 (referring to assignment of non customary agreements):
Where by one instrument a vendor assigns his title and his interest in the chattel (i.e. his contractual interest), and that instrument is not registered and a bona fide stranger acquires an interest in the chattel, the assignment may be treated as severable.
“Severability ” of an instrument into its constituent parts will be allowed in only a few cases, mainly in fact situations such as those of In re Issacson .24 In that case there was an assignment, in the same deed, of the assignor’s proprietary interest in a piano and of a hiring agreement in relation to the piano concluded between the assignor and a third party. The deed was not registered under the Bills of Sale Act
- Upon the assignor’s bankruptcy his trustee in bankruptcy claimed the whole assignment was void through non-registration. The Court of Appeal held that although the assignment of title was void, that of the contractual interest could be severed and remain valid. Lord Esher emphasised “the two distinct things in the deed”. He reasoned that had the assignment of the contract been made separately the Bills of Sale Act could not effect it—therefore it was not invalidated merely because it was made in the same deed as a void assignment.
ASSIGNMENT OF HIRE-PURCHASE AGREEMENTS 331
**23. [I960] A.C. 167.
- [1895] 1 Q.B. 333.**
ASSIGNMENT OF HIRE-PURCHASE AGREEMENTS 333
goods. In the course of research for this paper the writer studied four assignment deeds from different companies in which the only material difference was that two of the deeds purported to “assign, transfer, and set over to the company by way of mortgage only ... ” and the other two purported to transfer absolutely. The obligations of the parties under the deeds were almost identical. Were it not for the operative words “by way of mortgage only” few people would conclude from the construction of the deeds by way of mortgage that they were anything but absolute assignments: not only was there no right of redemption (which admittedly could be implied) but it is obvious that there is no intention on the part of the assignor or assignee that the agreements should ever be reassigned to the dealer. Other deeds differ in the details of their terms, but I believe the above remarks apply to almost all of them.
It is nevertheless true that almost every finance company has a definite policy on the question whether assignment should be by way of mortgage or by assignment absolute. Each system has its benefits and corresponding disadvantages. The chief benefit of the mortgage form is thflt _assignment_* inrnr nnHe.f.. the .Stamp PtitiftR A at 1954 whereas absolute assignments do incur duty under section 66 (b) of this Act. At a rate of 35 cents per hundred dollars, stamp duty may assume formidable proportions when a block of contracts worth several thousand dollars is discounted. As the finance company usually pays this charge it is in its financial interest to take assignments by way of mortgage. Assignment by way of mortgage is for this reason the most common form of assignment. There are, however, several disadvan tages in using this practice from which absolute assignments are free. (a) Dealers may be precluded from pledging or mortgaging their assets under, for example, the terms of a loan by a bank or other finance company. Strictly speaking, a waiver would be required in such circumstances from the bank before the dealer could assign contracts by way of mortgage. But this is hardly a weighty argument against the mortgage form, as the party holding the charges or a lender will almost invariably consent to waive. In fact, in two agreements referred to this writer, a debenture-holding trading bank had apparently waived the non-mortgage term by an agreement with the dealer that assignments by way of mortgage of hire-purchase contracts were to be deemed part of the dealer’s ordinary business and disposition of assets in the course of such business. The consent of such a debenture-holder is not needed, however, if the assignment is absolute. (b) An assignment by way of mortgage of a non-customary hire- purchase agreement will require registration under section 102 of the Companies Act 1955, where the assignor is (as he usually will be) a company. This is a time consuming and therefore costly requirement. There is no such requirement in the case of absolute assignments. (c) “An absolute assignment is not a moneylending transaction; an assignment by way of mortgage, except in the case of customary
334 V.U.W. LAW REVIEW
hire-purchase agreements, is a moneylending transaction.” 27 As the question of moneylending and assignments, in general, is an important one, and as I feel this statement by Dugdale is incorrect, it is proposed to deal with moneylending as a separate and independent question.
- Moneylending and Assignment
The operative motive for a dealer assigning hire-purchase agree ments is to secure finance to buy new stock-in-trade. This very fact makes it obvious that by their very nature assignment transactions run the risk of offending against the Moneylenders Act 1908. Finance companies which, in one form or another, finance hire-purchase agree ments have come under greater attack through the Act than any other institution. This is probably due to the very fine legal distinction between financing agreements and lending, and the almost complete absence of a practical distinction between the two activities. Lord Denning’s statement:
It would appear to the unpractised eye that a hire-purchase finance company (is) nothing more or less than a lender of money on the security of (chattels) 28
was echoed by Porter J. when, referring to “all bodies which finance hire-purchase agreements”, he said “... what one has to remember is that their real function is the lending of money, and it must, neces sarily be so”. 29 30 But be this as it may, the law does recognise a distinction between transactions such as assignments, and moneylend ing; or to put it rather more realistically, it does not hold every lending transaction a moneylending one.
In analysing the actual application of the Moneylender ’s Act to assignments one may start with the general proposition that “it is now settled law that a hire-purchase finance company, when it carries on the normal business of financing hire-purchase transactions, is not a moneyender”. This statement comes from Lord Denning’s decision in Premor Ltd. v. Shaw 30 which was a case involving a direct collection 31 system of financing, but from the decisions he offers in support of his claim he obviously was referring to financing in general. His main authority was Olds Discount Co. Ltd. v. John Playfair. 32 In that case Branson J. held the discounting of hire-purchase agreements was not a moneylending transaction despite the fact that the parties could have achieved the same end (i.e. placing money in the dealer’s hands to acquire stock-in-trade) by use of a simple loan.
It is the nature of the agreement entered into and not its object, at which the Court has to look in order to decide whether in any
27. Dugdale op. cit. n. 5 at page 54. 28. Premor v. Shaw [1964] 2 All E.R. 583, 585. 29. Olds Discount Co. Ltd. v. Cohen [1938] 3 All E.R. 281. 30. Premor **n. 28 supra at 585.
- A system whereby the dealer assigns the chattel to be hired to the finance** company which then enters into the hiring or conditional sale agreement **with the purchaser.
- [1938] 3 All E.R. 275.**
336 V.U.W. LAW REVIEW
[I]t must be remembered that hire-purchase agreements take a very large part in the commercial and social life of the com munity. ... It appears to me that financiers and the dealers co-operate in the common venture of making the whole busi ness of hire-purchase agreements feasible and to regard one party to that common venture, which is now a recognised mercantile service, as carrying on the business of a money lender is an abuse of language. 39 This decision is important for two reasons. On a specific level, it shows that, although there was no direct assignment to the plaintiffs, the transfer of the beneficial interest of hire-purchase contracts as security was not regarded as the basis of a moneylending transaction. It seems to this writer that had W. and R. assigned the contracts by way of mortgage the result would have been exactly the same. On a more general level, it shows the generally realistic approach the courts have taken to hire-purchase financing.
(c) Based on (b) above, I am convinced that a court would not strike down a bona fide assignment by way of mortgage. Not only do broad general statements of principle such as Lord Denning’s in Premor 40 support this conclusion but it would be illogical to do so. As was pointed out previously, the “realistic” consequence of both absolute and mortgage assignments is the sale of book-debts to the finance company. The form they take certainly differs, but the “nature of the transactions” are not basically dissimilar. In substance both involve sale and purchase rather than a charge on the security of contracts. In view of the fact that many finance companies are registered moneylenders, it may appear that the above discussion is rather academic. However, even those that are registered are anxious to avoid any dealer-financing arrangements being deemed moneylending transactions, since the Act requires certain strict requirements to be fulfilled in regard to each such transaction, requirements which are costly and time consuming. Section 2 of the 1931 Amendment removes most risks in this area of discussion, however, and, as submitted above, there is little danger of bona fide non-customary assignments coming under attack from the 1908 Act.
- Illegality Considering the large number of hire-purchase agreements executed each year only a relative few are known to offend against the Hire Purchase and Credit Sales Stabilisation Regulations 1957. Those that do are void under Regulation 10. It is nevertheless relevant to analyse the rights of a finance company which takes an assignment of an illegal agreement. For the sake of convenience this question can be divided threefold: (a) Can the finance company enforce the contract? Quite obviously the answer is no. The agreement is unenforceable in the hands of the assignor/dealer, and this being so, a finance com 39. per Simonds J. at 551. 40. Premor v. Shaw Bros, supra n. 37.
ASSIGNMENT OF HIRE-PURCHASE AGREEMENTS 337
pany cannot enforce it even if it takes without notice. 41 The applica tion of this principle can lead to harsh results. In Stenning v. Radio and Domestic Finance Ltd. 42 43 the agreement was held unenforceable against the purchaser even though it was shown that the purchaser and the dealer had deliberately falsified the facts and that the finance company would not have taken the assignment had it known the true circumstances. The finance company may, however, have remedies outside the contract against purchaser and/or dealer. In Luhrs v. Baird Investment 43 Turner J. suggested conspiracy as a possible basis for the finance company proceeding against dealer and purchaser, on facts similar to those in Stenning. However, conspiracy was not pleaded in this latter case, and it is submitted the evidentiary burden on the company to prove conspiracy precludes this remedy of efficacy in all but a few fact situations. The same can be said of an action in deceit. In an unreported judgment of the Court of Appeal 44 Cleary J. said “a dealer who prepares and hands over agreements to be dis counted impliedly represents they are genuine”, but in order to success fully plead deceit a company would have to show more than a breach of thi$ representation; it would have to prove that that the dealer knew of the illegality and intentionally misrepresented that the agreements were valid in order to induce the finance company to discount them. The chances of a company resorting to one of the above actions are remote, as illegality seldom arises in practice and when it does the company is more concerned to recover the chattel hired or conditionally sold under the illegal contract; if it does seek to recover any loss it incurs through the illegality it will usually try to do so through a recourse claim in the deed of assignment or master agreement.
(b) Can title pass to the company under an illegal agreement? The law seems settled that even if the assignment of contractual rights is ineffective, and the rights unenforceable against the purchaser through the illegality of the original contract, an assignment of the dealer’s property rights in the same deed of assignment is fully effective to vest title in the finance company. For it must be remembered that the assignment of an illegal contract is not itself illegal or void. Conceptually the contractual rights in an illegal contract are assigned: they merely remain unenforceable in the company ’s hands. In any case, it seems clear that it is possible to sever the two distinct things assigned. In passing his title to the finance company the dealer is assigning something independent of the void contract. On general principles of severance found in cases such as In re Issacson 45 this title should be effectively passed. That title does pass in these circum stances appears to have been accepted in recent decisions. 46
41. Luhrs v. Baird Investment **[1958] N.Z.L.R. 663.
- [1961] N.Z.L.R. 7.
- supra n. 41. 44.** Rural Finance Ltd****. v. Official Assignee **(C.A. 13/60).
- [1895] 1 Q.B. 333. 46.** Kingsley v. Sterling Industrial Securities [1967] 2 Q.B. 747; Portland Hold ings v. Cameo Motors Ltd. [1966] N.Z.L.R. 571, C.A.
to the chattel. In his much quoted judgment in Bowmakers du Parcq L J. said: 81 a man’s right to possess his own chattels will, as a general rule, be enforced against anyone who without claim of right is detaining them
and that the owner can recover them
even if the chattels come into the defendant’s possession by reason of an illegal contract between himself and the plaintiff, provided that the plaintiff does not seek, or is not forced to found his claim on the illegal agreement or plead its illegality to support his claim. 5152 53 54 Although the learned Lord Justice seems to have misapplied his own principle,52A its approval in Singh v. AW 3 establishes it as correct law. A dealer would not be forced to rely on the illegal contract; his action is based on his antecedent proprietary rights and the wrongful retention of the goods by the purchaser. An action by him in conver sion would almost undoubtedly succeed. It is submitted that the same principles would apply when a finance company is the owner of the goods by virtue of an assignment of title. The company would be forced to rely upon the assignment to establish its title, but as before stated, the assignment of title is probably effective and not dependent for its validity on the illegal contract.
- Recourse Clauses . The law relating to these clauses is basically that of the common law rules of guarantee and indemnity. The most common form, whether in a master agreement or in an individual deed of assignment is simply a guarantee by the dealer of the purchaser’s obligation to pay all the instalments coupled with an undertaking to reimburse the finance company for any loss it sustains in repossessing'or reselling the chattel. As the most common (by far) occasion in which the recourse clause will be invoked is the purchaser ’s default in payment, such a clause as that above is fully adequate from the finance company’s point of view in most cases. Contracts of guarantee, and therefore clauses of guarantee, do, however, suffer one defect which in some ways limits their effectiveness as a basis for a recourse clause; it is a basic common law rule that a guarantee of a void obligation is also void. “No man [can] guarantee anybody else’s debt unless there is a debt of some other person to be guaranteed.” 04 There is no debt and no obligation to pay, in a purchaser under an illegal hire-purchase agreement, and therefore a guarantee based recourse clause will be ineffective to bring home liability to a dealer for any loss suffered by a finance company which discounts an illegal agreement. 51. at 71. 52. per du Parcq L.J. at 71. 52 a. Joe v. Young [1964] N.Z.L.R. 24, C.A. 53. supra n. 47. 54. Lakeman v. Mountstephen (1874) L.R. 7 H.L. 17 at 25 per Lord Selboume.
ASSIGNMENT OF HIRE-PURCHASE AGREEMENTS
340 V.U.W. LAW REVIEW
The case of Cotton v. Centred Districts Finance Corpn. Ltd illustrates the application of this principle. There the deed of assign* ment of an illegal (void under the 1957 Regulations) hire-purchase agreement contained a guarantee by the dealer of the purchaser’s payment of all instalments. The purchaser defaulted and the finance company sought to enforce the recourse clause. The Court of Appeal held they could not. Although the case mainly developed arourtd the question of whether the agreement was in fact illegal, the court accepted that if it were, the recourse clause could not be invoked as it would be a guarantee of a void obligation. As was said in Cotton’s case The guarantee contained in the assignment from the defendant to the plaintiff in these hire-purchase agreements would also be tainted with illegality and unenforceable against the defendant. 5556 57 The decision in Cotton does not mean though that it is impossible to draft a recourse clause which will protect the finance company in the illegality situations. But it does mean that the guarantee concept cannot be used to give such protection. The answer to legal draftsmen’s problems came in the Court of Appeal decision in Portland Holdings Ltd. v. Cameo Motors Ltd? 1 In this case the respondent car dealer entered into a hire-purchase agreement with one Wiblin. The agreement contravened die 1957 Regulations in that it failed to specify at the time of execution particulars such as the number and amount of instalments and the due date for the payment of these instalments. These particulars, contained in a “working slip ” were not filled in until the time for the assignment of the agreement to the appellant company came. Both the Supreme Court and the Court of Appeal agreed that this rendered the contract between Cameo and Wiblin void. The real issue, however, was whether this illegality rendered the recourse clauses iq the_assignment inoperative and so excused Cameo from liability for the appellant’s loss. The relevant clauses read as follows: /And for the consideration aforesaid the assignor hereby i covenants with the Company as follows: I 1. The assignor will pay to the Company on demand the j “total balance owing” shown in the second schedule here- I under or the balance thereof for the time being unpaid.
- The said hirer will punctually pay observe keep and per form all and singular his obligations under the said agreement to the extent that the assignor shall for all purposes be deemed to be jointly and severally liable as a principal debtor
\
with the hirer to the Company notwithstanding that as between the hirer and the assignor the assignor may be a surety only.
**55. [1965] N.Z.L.R. 992, C.A.
- at pages 376-377 per Tompkins J. at first instance.
- [1966] N.Z.L.R. 571.**
