The High Court recently considered whether a loan provided in 1988 with a 24 percent interest rate (which was common at that time) and a 36 percent penal rate was oppressive under the Credit Contracts Act 1981 ("Act").

Despite the Court finding that the interest rate of 24 percent was quite reasonable at the time the loan was made, and that the penal rate of 36 percent was not in itself oppressive, it nonetheless found the loan in question to be "oppressive" and therefore able to be reopened under the Act. The Court's basis for finding the loan to be oppressive was that the Act defines "oppressive" to include circumstances where a term is "harsh".

In the circumstances of this case the Court considered that interest at the penal rate of 36 percent over the whole of the period claimed was "harsh" and therefore "oppressive" for the purpose of the Act. The reasons for the Court reaching that conclusion included that:
-For the period of the loan the borrowers could do absolutely nothing to repay the loan or the interest on it; and
- The interest accumulated amounted to over three times the amount of the original debt (which was considered by the Court to be a "real detriment or hardship" given that interest rates had reduced significantly over the period of the loan). As a consequence of finding the loan to be oppressive, the Court reopened the contract and required the defendants to pay a scaled interest rate which ranged from 24 percent to 11 percent over the period of the loan.

This is a general summary only and should not be taken as a substitute for specific advice.

Russell McVeagh, law firm
Web site: Russell McVeagh

March 2001