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