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% incr...
Reminder: Hardship under NCC
Is it that different for small
businesses?
 No strict time lines for non-regulated loans
 Small business credit covered ...
Definition of small business
‘Small businesses’ are business with either:
 less than 100 employees if the business is
or ...
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
 ...
Obligations under Code of Banking
Practice
 Try to help a small business overcome financial
difficulties with any credit ...
Case law on operation of Code of
Banking Practice
 In addition to be considered by FOS, failure to comply
with the Bankin...
Jurisdiction of FOS and COSL
 Since 1 January 2014, FOS and COSL no longer have
jurisdiction over small business lending ...
Jurisdiction of FOS and COSL
 2013 Independent Review of FOS appears to
distinguish between small business
complaints ana...
Guidance from FOS
 In its April 2010 Circular, FOS provided guidance to its
members in relation to dealing with small bus...
ANZ v Londish - March 2014
Supreme Court NSW
 Defence of unjust contract under Contracts Review Act
considered as re- fin...
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 ...
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Campbell Hudson, Gadens - Financial hardship and its impact on small business loans

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Campbell Hudson, Partner, Gadens delivered this presentation at the inaugural Financial Hardship Forum. The Forum convenes the banking and credit sector, plus regulatory, compliance and resolution agencies, to address changes in financial circumstances for consumers and businesses.

For more information, please visit http://www.informa.com.au/finhardship

Published in: Economy & Finance
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Campbell Hudson, Gadens - Financial hardship and its impact on small business loans

  1. 1. Campbell Hudson, Partner 19 March 2014 Small business customers and financial hardship
  2. 2. Introduction
  3. 3. 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
  4. 4. Reminder: Hardship under NCC
  5. 5. 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
  6. 6. 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.
  7. 7. Obligations in dealing with small businesses in financial difficulty
  8. 8. 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
  9. 9. 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.
  10. 10. 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
  11. 11. 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
  12. 12. 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
  13. 13. 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
  14. 14. 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
  15. 15. Appointment of receivers to small business in financial difficulty
  16. 16. 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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