Campbell Hudson, Partner
19 March 2014
Small business customers and financial hardship
Introduction
FOS Annual Report 2012-2013
Overall 22% decrease in credit
disputes involving financial difficulty
However:
14% increase in credit disputes relating to
business finance – 40% of which related to
financial hardship
66% increase in disputes relating to business
guarantees – 27% of which related to financial
hardship
Reminder: Hardship under NCC
Is it that different for small businesses?
No strict time lines for non-regulated loans
Small business credit covered by Codes of
Practice (ie Banking, Mutual Banking, MFAA)
and/or COSL Rules – all have standards and
requirements for dealing with small
businesses in financial difficulty
Arguable lenders have similar obligations for
small business loans – “policed” by
FOS and COSL
Definition of small business
‘Small businesses’ are business with either:
less than 100 employees if the business is
or includes the manufacturing of goods; or
in any other case, less than 20 employees.
Obligations in dealing with small businesses in financial difficulty
Source of obligations
Code of Banking Practice
COSL Rules
Mutual Banking Code of Practice
Lender’s own policies
Industry codes of conduct - such as the
MFAA’s Code of Practice
Good industry practice
Obligations under Code of Banking Practice
Try to help a small business overcome financial
difficulties with any credit facility.
Respond promptly to any request for assistance
Inform a customer in writing as to whether assistance
will or will not be provided.
Provide reasons for the decision.
Put the main details of any arrangement in writing to the
customer.
Take reasonable steps to ensure relevant staff are
trained on provisions of Code.
Case law on operation of Code of Banking Practice
In addition to be considered by FOS, failure to comply
with the Banking Code of Practice is being raised more
and more in court
Banking Code of Practice is incorporated in the terms of
all loans to which the Code applies
NAB v Hunter November 2013 summarised the case law
on the Code:
no prescribed remedy for non-compliance
compliance with Code not pre-condition for the operation of a
loan document (such as a guarantee)
CBA v Starrs [2012] SASC - the operation of the Code describes
a series of "do's and don'ts" and breaches of the Code may be of
considerable relevance in unconscionability cases
Jurisdiction of FOS and COSL
Since 1 January 2014, FOS and COSL no longer have
jurisdiction over small business lending disputes where:
the credit limit of the contract that is the subject
of the dispute exceeds $2 million (limits of
multiple contracts cannot be added together); and
debt recovery legal proceedings have been
commenced.
Otherwise, same FOS and COSL jurisdiction limits (such
as compensation amounts) apply to complaints by small
businesses in financial hardship
Jurisdiction of FOS and COSL
2013 Independent Review of FOS appears to
distinguish between small business
complaints analogous to consumer
complaints and more complex disputes
2013 Independent Review recommends FOS
be more active in exercising its discretions
under its Terms of Reference to refuse large,
complex commercial credit disputes
Guidance from FOS
In its April 2010 Circular, FOS provided guidance to its
members in relation to dealing with small businesses in
financial difficulty including:
Genuinely considering to enable business to operate
as going concern in long term
Having clear internal processes
Ceasing enforcement action whilst assessing request
for assistance
Providing reasons for any rejection
ANZ v Londish - March 2014 Supreme Court NSW
Defence of unjust contract under Contracts Review Act
considered as re- finance of Home Loan
Home Loan proceeds applied to business of Husband
and Wife to re-finance home loan and pay amount to
business
Court upheld loan contract and noted that Mrs Londish
received the benefit of the loan
Subsequent business failure did not prevent Bank from
enforcing home loan and mortgage and did not make the
loan unjust
Appointment of receivers to small business in financial difficulty
Receivers
Hardship request or FOS complaint can
delay appointment of receivers – often not
actually in best interest of the business
Lenders obligations regarding hardship do
not extend to any receivers or managers
appointed (as agents of the company)
Once receivers are appointed, FOS has no
jurisdiction regarding actions of receiver and
can only consider validity of appointment
from lenders standpoint
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