The Supreme Court of NSW has provided guidance on how far a bank should “try to help” a borrower in financial difficulty, after negating an SME’s claim that its lender had failed in its obligations under the Code of Banking Practice.
In a court case involving a failed free-range egg farming operation, DCL Developments, and agricultural lender Rabobank, it was alleged that the bank had breached clauses 20, 28 and 32 of the Banking Code of Practice by failing to give reasonable notice to the borrower and failing in its obligations to “try to help” them overcome their financial difficulties with the credit facility they held with the bank.
According to David McIntosh, restructuring, insolvency and bankruptcy partner at Dentons, who successfully acted for the lender, the case marked the first time that judicial consideration has been given to the relevant “try to help” provision of the code.
In April 2015, the bank made approximately $2.7 million of finance available to the borrower to refinance existing free-range egg production facilities and to provide additional working capital for the business in order to (amongst other things) purchase additional flocks of laying hens.
The facilities were secured by general security interests over the borrower’s business and assets, together with property security. In addition, the director of the borrower provided personal guarantees.
However, Mr McIntosh argued that the borrower did not use the working capital component of the funds advanced by the bank to purchase additional laying hens, as had been intended.
Speaking after the case, Mr McIntosh stated: "In late 2015, the borrower subsequently made the unilateral decision to terminate all of its existing flock. This meant that, after September 2015, the borrower was not producing eggs, had no income, and no money to buy more laying hens.
"As a result of the financial difficulty in which it now found itself — a fact that Justice Davies found was entirely of its own making — in November 2015, the borrower approached the bank for additional funding to purchase two new flocks of laying hens.
"Despite the fact that the borrower was in financial difficulty and now in default under the facilities, in early December 2015, the bank approved an $325,000 increase to the facilities to enable the borrower to purchase two new flocks of laying hens to get its business up and running."
Mr McIntosh added: "In approving the increase to the facilities, the bank imposed a number of conditions (Conditions). Most notably, these included: a reduction in the term of the facilities from five years to one year; and restrictions on further borrowing without the bank’s consent for any amounts over $60,000.
"In mid-2016, following further defaults by the borrower, the bank exercised its right to appoint receivers and managers to the borrower. The receivers commenced proceedings seeking possession of the business and assets from the borrower, which the borrower refused to deliver."
The borrower then cross-claimed against the bank, seeking to set aside the variations to the facilities and damages, by reason of the bank’s alleged breach of clause 28.2 of the Code, and for contravening the unconscionable conduct provisions of the Australian Securities and Investments Commission Act 2001.
At the heart of the borrower’s cross claim against the bank were the following allegations:
However, the court dismissed the borrower’s cross claim against the bank and found that the conditions set were not unreasonable or unconscionable.
The court found that: “[The bank] merely sought to protect its own position, as it was entitled to do, by limiting further large borrowing without consent and by making it clear [that the borrower] would have to refinance or sell within a year. Again, it is difficult to understand an assertion of unconscionability when the bank, being entitled to act on the… default immediately, not only gave [the borrower] a further year to sort itself out but endeavoured to assist in that process by extending a further loan in the amount requested.”
The court added: “The imposition of this condition, so far from being unconscionable, was a reasonable one in all the circumstances. If moral obloquy is needed, there was none.”
The judge presiding over the case, Justice Davies, said that part of the problem with the case was the ambiguous language used in the Code of Banking Practice.
Justice Davies commented: “Whether clause 28.2 of the code imposes any enforceable obligation on the bank must be doubted when it contains such vague and amorphous concepts as ‘try to help you overcome your financial difficulties’. These terms seem to me to be similar to an agreement to negotiate in good faith which has been held not to be enforceable...
“If, on the other hand, the words are commensurate with ‘using best endeavours’ then the obligation is not to go beyond the bounds of reason but to do all he, she or it reasonably can... This imports an objective test.”
Ultimately, Justice Davies was satisfied that the bank had discharged its obligations under clause 28.2 of the code.
He concluded: “[The borrower’s] financial difficulties consisted of a lack of income because it had no birds laying eggs. The most obvious way of helping [the borrower] to overcome those financial difficulties was to assist it in buying birds. That was exactly what the bank did. It went beyond 'trying' to help. It did help. Moreover, it did exactly what the [borrower] asked, that is, it made a further loan… They did not ask for anything more. It is not easy to understand how it can be asserted that the bank did not try to help when they did exactly what was asked of them.”
Mr McIntosh said: "This decision should be welcome news for lenders because it provides some useful guidance on the interpretation of clause 28.2 of the Code. More importantly, it demonstrates that, where the language of the code is “vague and amorphous” (as Justice Davies described it), the courts are still prepared to take a pragmatic approach to interpretation."
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