Australia: Financial Services Recovery Update

Last Updated: 8 August 2006


  • putting your foot on the money trail
  • when legal advice is not good enough
  • compliance with the hardship provisions of the Consumer Credit Code


An important question, yet to be considered by the Australian Courts, is whether a bank, once notified of a freezing injunction affecting an account held by a customer with the bank, owes a duty to a third party to take reasonable care to comply with the terms of the order.

This question is relevant for both banks and creditors who obtain a freezing order preventing assets being dissipated. It was considered in June by the House of Lords in the UK (Her Majesty's Commissioners of Customs and Excise v Barclays Bank plc).

A few hours delay

In this case the Commissioner obtained a freezing order in relation to an account Brightstar Systems held with Barclays Bank.

A few hours after the Commissioner served the freezing order by facsimile on Barclays, Barclays authorised payments totalling about $5 million to be made out of Brightstar's account.

The Commissioner obtained judgment against Brightstar but Brightstar had insufficient assets to satisfy the judgment. The Commissioner claimed as damages the sums paid out by Barlclays in breach of the injunctions. It was alleged (and for the purposes of the question before the House of Lords – assumed) that Barclays conduct in permitting the payments to be made was negligent.

How does one determine whether a duty of care is owed?

In cases of pure economic loss such as this, for a court to find a duty of care owed by Barclays, it is not sufficient that Barclays ought reasonably to have foreseen that unless they had proper systems in place and their employees took reasonable care to give effect to any freezing orders which came along, the beneficiaries of those orders might suffer loss.

In the case of personal or physical injury, reasonable foreseeability of harm is usually enough to generate a duty of care. However in the case of economic loss, as was the case here, something more is needed.

The relevant test was summarised by the English Courts as follows.

"In addition to foreseeability of damage, necessary ingredients in any situation giving rise to a duty of care are that there should exist between the party owing the duty and the party to whom it is owed a relationship characterised by the law as one of 'proximity' or 'neighbourhood' and that the situation should be one in which the court considers it fair, just and reasonable that the court should impose a duty of a given scope upon the one party for the benefit of the other."

Court of Appeal

The Court of Appeal found that this test was satisfied and ruled in favour of the Commissioner.

According to the Court of Appeal:

  1. foreseeability was straightforward – it being obvious that Barclays failure to follow the order may cause some loss to the Commissioner;
  2. service of the order created proximity (even though Barclays "may not be particularly willing to have a relationship to the commissioners"); and
  3. it was "eminently fair, reasonable and just" that a bank should take care not to allow a defendant to flout the order and that "practical justice requires the recognition of such a duty".

On appeal to the House of Lords

The House of Lords disagreed with the decision of the Court of Appeal and allowed the appeal.

The House of Lords was swayed by the following policy reasons as to why no duty should be imposed.

  1. The freezing injunction jurisdiction developed as one exercised by Court order, enforceable only by the Court's power to punish those who broke its orders. The documentation issued by the Court did not hint at the existence of any other remedy. The regime made perfect sense on the assumption that the only duty owed by the notified party was to the Court.
  2. The customer owed no duty to the party who obtained an order, since no duty was owed by a litigating party to its opponent. It would be a strange and anomalous outcome if an action in negligence lay against a notified party who allowed the horse to escape from the stable but not against the owner who rode it out.
  3. It was, in the final analysis, unjust and unreasonable that Barclays should, on being notified of an order which it had no opportunity to resist, become exposed to a liability which was in the present case for a few million pounds but which might in another case be for very much more. For that exposure Barclays had not been in any way rewarded.

The Position in Australia

The question has not yet been determined by an Australian Court. However the approach taken by the House of Lords would be highly persuasive should the question arise.

Judgment creditors who obtain the benefit of a freezing order should take care to ensure that any freezing order is promptly actioned by the bank – this may involve follow up phone calls and facsimiles, beyond the initial facsimile/letter serving a copy of the orders.
by Justin Bates


The Supreme Court has, last month, relieved a single mother from her obligation to repay a loan secured over her family home.

The single mother was under pressure from a colleague to borrow the funds. The loan proceeds were used to pay the debts of her colleague's business.

The NSW Supreme Court decision (No Fuss Finance Pty Limited v Miller) highlights the risks faced by a lender who fails to ensure that a borrower has had ample time to consider the documents they are being asked to sign, and nevertheless proceeds with the loan and takes security.

The loan application

Danielle Miller was a divorced woman of reasonable intelligence. She was receiving a single-parent's pension and child support payments from Centrelink. She also received a small income for cleaning houses. Her only substantial asset was her house. When younger, she had worked in a bank for 10 years in an administrative capacity. She had also been a party to the borrowing, and granting of, mortgages with her ex-husband.

In May 2004, Ms Miller agreed to assist a colleague, Garry Rampling, by allowing him to "use her home for a business project". Mr Rampling needed funds urgently for a property redevelopment project and promised that he would repay her in six weeks.

Ms Miller agreed to assist her friend but told the Court that she did not understand that this 'favour' involved any gift of a financial nature. While the Court described Ms Miller as "extremely timid, hesitant, confused and almost childlike", it concluded that Ms Miller knew and understood, that in agreeing to assist her friend, she was "lending" her house for Mr Rampling's benefit.

Mr Rampling prepared and submitted the loan application to the lender on Ms Miller's behalf. Mr Rampling also directed the lender to make one of the settlement cheques out to his own company. The lender was on notice that Mr Rampling stood to benefit from the loan and had effectively been acting as Ms Miller's loan broker.

Ms Miller met with a solicitor at the lender's offices to sign the loan and mortgage. The solicitor was not acting for the lender. However, the lender had arranged for the solicitor to be present. Ms Miller was presented with the loan and mortgage for the first time at the lender's offices when she first met 'her' solicitor.

Ms Miller was given no advance opportunity to read the loan documentation or seek alternative legal or financial advice in relation to it. Mr Rampling sat with Ms Miller while she received the legal advice. Ms Miller claimed that the solicitor merely "read out" a large number of documents without explanation.

Ms Miller failed to repay the loan when due.

The Supreme Court of New South Wales decision

In April 2005 the lender commenced proceedings against Ms Miller in the Supreme Court of New South Wales, seeking to enforce its loan and mortgage. Ms Miller sought relief under the Contracts Review Act.

The trial judge found that the loan agreement and mortgage were unjust under the Contracts Review Act on the following grounds:

  • there was never any direct negotiation between the lender and the borrower. The borrower was presented with pre-prepared documents and asked to sign on the spot
  • there was no evidence that the advice provided by the solicitor was of any value
  • the borrower had no opportunity to seek out a lawyer of her own choice
  • the lender should have been aware of the unfair pressure being exerted on the borrower by Mr Rampling
  • the lender knew that Mr Rampling had a conflict between his own interests and Ms Miller's but failed to check the information that he had supplied in the loan application on her behalf
  • there was unequal bargaining power. The defendant was an unsophisticated woman of "timid disposition" who had never entered into a similar transaction before. The plaintiff was a commercial lender and a purveyor of loans at extremely high rates of interest that might be considered too risky by the general run of commercial lenders.

Implications for lenders

The judgment highlights the risks faced by lenders who think that a transaction is 'bullet proof' once the borrower receives legal advice.

The decision means that lenders who are on notice of, but fail to diffuse pressure on, a borrower may lose the right to have the loan repaid.
by Sarah Kavanagh


It is timely for all lenders to review their procedures in relation to dealing with customers to whom the hardship provisions of the Consumer Credit Code may apply. This is particularly the case where regulators are looking into, and questioning lenders' practises in this area.

Hardship provisions of the Consumer Credit Code

Division 3 of the Consumer Credit Code deals with changes to domestic or household loans on grounds of hardship. Section 66(1) of the Consumer Credit Code provides for a debtor, under a credit contract, to apply for a change to their contract when both of the following occur:

  • they are unable to meet their obligations under the contract due to illness, unemployment or any other reasonable cause
  • they would be able to meet their obligations if the contract was changed in one of the ways listed in Section 66(2).

Under Section 66 (2) of the Consumer Credit Code, an application can seek to change the terms of the contract in one of the following ways:

  • extend the period of the contract and reduce the amount of each payment due under the contract
  • postpone payments during a specified period
  • extend the period of the contract and postpone payments during a specified period.

If the credit provider does not change the contract in accordance with an application made by a debtor, then, under Section 68 of the Consumer Credit Code, the debtor may apply to the Court to change the terms of the contract.

The Code of Banking Practice

The Code of Banking Practice (Banking Code) extends the operation of the hardship provisions of the Consumer Credit Code for banks that subscribe to the Banking Code. Section 25.2 of the Banking Code requires a bank to inform a customer when the hardship provisions of the Consumer Credit Code apply to their circumstances.

Compliance with the Codes

Lenders are under increasing scrutiny and being investigated in relation to their compliance with the two Codes by the Code Compliance Monitoring Committee and the Minister of Fair Trading. The Code Compliance Monitoring Committee (set up under the Banking Code) has the power to conduct its own inquiries into compliance with the Banking Code. Similarly, the Minister of Fair Trading can conduct investigations as the Minister responsible for the Consumer Credit Code.

As investigations occur into lenders' practices, it is important that all lenders have procedures in place to ensure compliance with the hardship provisions. While the Banking Code only applies to subscribing banks, it may be prudent for all lenders to have regards to the terms of Section 25.2 in addition to the provisions of the Consumer Credit Code. A lender whose practises comply with the more stringent requirements under the Banking Code will easily be able to deal with any inquiries in relation to their practices under the hardship provisions.

It is particularly important for mortgage managers to consider the adoption of procedures to ensure compliance with both Codes. Although mortgage managers are not banks, the funders of the loans that they manage often are. It is arguable that the Banking Code applies to the operation of those loans and, as such, they should comply with the requirement of Section 25.2.


At a time where lenders' practises are being investigated, lenders must have procedures in place to ensure their compliance with the hardship provisions of the Consumer Credit Code. For banks, these procedures also need to ensure adherence to Section 25.2 of the Banking Code. All astute lenders should also comply with the additional requirement of the Banking Code.
by Helen Van Ravels


Justin Bates

t (02) 9931 4763


Helen Van Ravels

t (02) 9931 4919


Sarah Kavanagh

t (02) 9931 4781


This publication is provided to clients and correspondents for their information on a complimentary basis. It represents a brief summary of the law applicable as at the date of publication and should not be relied on as a definitive or complete statement of the relevant laws.

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