Claiming $548,000 was still owed after a mortgagee sale, Merchant Finance was instead forced to pay Cheryl Xu and Karl Litt $145,800 following its failure to provide proper credit contract disclosure.
Ms Xu and Mr Litt launched into the Auckland restaurant business in late 2017, repurposing a small convenience store in front of their 1930s villa on Remuera Road into a café. A $1.98 million Merchant Finance Ltd loan was used to both refinance existing short-term borrowing and also to expand with new restaurants in St Heliers and Onehunga.
The High Court was told Merchant Finance sold the Remuera Road property for $1.79 million in a June 2019 mortgagee sale. Mr Litt was bankrupted in September 2020. Further legal fallout followed with Merchant Finance suing for money allegedly still due after the forced sale. Sloppy loan documentation resulted in Justice Fitzgerald ruling no interest was payable on the loan; Merchant Finance breached Credit Contracts and Consumer Finance Act requirements to make proper disclosure of contract terms.
Evidence was given of Merchant Finance’s failure in loan documentation to state its physical address and the date interest starting running. Total interest payable over term of the loan was miscalculated. Disclosure of the default interest rate was obscured. The default interest rate was described as 20 per cent, but off to one side of the loan document a typed notation stated ‘plus ordinary interest rate.’ What appeared to be a default interest rate of twenty per cent was in fact about forty per cent.
The Credit Contracts penalty for failing to make proper disclosure meant Merchant Finance could not recover any interest and had to refund all interest paid.
The base loan advanced by Merchant Finance was $1.65 million, which was less than the $1.79 million received following its mortgagee sale. Its actual loan advance of $1.98 million included some $208,000 being twelve months interest treated as paid in advance and capitalised into the loan.
Merchant Finance Ltd v. Xu & Litt – High Court (21.12.21 & 19.05.22)
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