Australia: How far do banks need to go to discharge their obligation to try to help a borrower in financial difficulty?

Services: Banking & Finance
Industry Focus: Financial Services

What you need to know

  • A recent decision of the NSW Supreme Court has considered allegations of a bank's breach of the Banking Code of Practice (the Code), including an alleged breach of clause 28.2.
  • In finding that there had been no breach with respect to the borrower, and also no breach with respect to the guarantor (or none that resulted in loss or damage to the guarantor), the judge in this case canvassed the various actions the bank had taken to meet its obligations under the Code.
  • The decision is likely to be welcomed by banks, but still raises questions about what they may need to do in different circumstances to discharge their obligation to 'try to help' a borrower in financial difficulty.

On 16 December 2016 Justice Davies of the NSW Supreme Court gave judgment in Marsden v DCL Developments Pty Ltd (No. 3) [2016] NSWSC 1795, a case in which Rabobank (the Bank) was alleged to have breached clauses 20, 28 and 32 of the Banking Code of Practice (the Code).

His Honour found that there had been no breach of the Code by the Bank with respect to the borrower, and also no breach of the Code with respect to the guarantor (or none which resulted in any loss or damage to the guarantor).

The decision will no doubt be welcome news for banks following two recent Victorian Court of Appeal decisions which appear to set the bar quite high for banks in complying with their Code obligations. However the decision also raises the question – how far does a bank need to go to discharge its obligation under clause 28.2 of the Code to 'try to help' a borrower in financial difficulty?

Background

The proceedings arose out of a failed free-range egg farming operation.

The Bank had appointed receivers and managers.

The borrower, and the guarantor, defended the Bank's claim for possession and for enforcement of the guarantee on the grounds of unconscionable conduct, breach of the Code and breach of the Contracts Review Act 1980 (NSW).

The Bank had given extensions and further advances (on certain terms and conditions) at the request of the borrower, and a mediation had been held pursuant to the Farm Debt Mediation Act 1994 (NSW).

The borrower had failed to apply funds for the purpose for which they were advanced by the Bank.

The terms imposed by the Bank, which the borrower later challenged as unconscionable conduct, included expiry of the loan in 12 months and a restriction on further borrowings in excess of $60,000 per annum without written consent from the Bank.

Proceedings

Breach of the Code alleged by the borrower

The borrower alleged that the Bank had breached clauses 20 and 28.2 of the Code, arguing that the Bank:

  • had not given reasonable notice of the imposition of the impugned terms, contrary to clause 20.4 of the Code which requires a bank to give reasonable notice (not less than 10 business days) of any variation it reasonably considers will be materially adverse to the borrower
  • had not complied with its obligations under clause 28.2 to try to help the borrower overcome its financial difficulties.

Justice Davies said it may be accepted that the Code formed part of the loan contract, however whether clause 28.2 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'. Justice Davies said it was similar to an agreement to negotiate in good faith. His Honour then went on to say 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. His Honour said this imports an objective test.

On the assumption that the clause imposes an enforceable obligation to use best endeavours, His Honour was entirely satisfied that the Bank complied with the obligation, noting that:

  • the Bank had gone beyond trying to help – it did help by advancing further funds and granting extensions
  • the conditions the Bank imposed did not significantly undermine the positive steps the Bank took to help
  • the Bank had lent beyond its policy – it had given considerable indulgence and it was certainly entitled to protect its own interests by imposing conditions on further lending
  • the conditions imposed by the Bank took into account the borrower's needs – it struck a balance between the interests of the Bank and the borrower
  • the Bank did not insist on further security, it merely sought to protect its own position, as it was entitled to do.

Breach of the Code alleged by the guarantor

No breach of clause 31 of the Code was pleaded (i.e. to give prominent notice of certain things before taking a guarantee, including a warning that the guarantor should seek legal advice), however the guarantor claimed that he did not obtain legal advice.

The guarantor was the principal of the borrower and had signed a guarantee when the initial loan was advanced in April 2015. He subsequently signed an extension of the guarantee in December 2015 when further funds were advanced to the borrower on certain terms and conditions imposed by the Bank.

The Bank officer gave evidence that he told the guarantor to take the guarantee and letter of offer home to think about it and obtain legal advice, but the guarantor wanted to sign it "here and now". His Honour said that in those circumstances, the claim that the guarantor did not obtain legal advice "rings hollow".

His Honour said that even if clause 31.4 applied to this guarantee when it was merely an extension of the existing one, it was not clear where any breach of it led.

The guarantor knew all of the matters referred to in clause 31.4(a) because he had given an earlier guarantee. When he agreed to the extension, he acknowledged that he had been recommended and had the opportunity to obtain advice before signing and that he had entered into the guarantee freely. His Honour said he could easily infer, not only from the failure of the guarantor to give evidence but also from all the circumstances, that the guarantor would have signed the guarantee in any event because it was in the borrower's and the guarantor's interest to sign.

Conclusion

Whilst the decision might be welcomed by the banks, it could also lend support to an argument that a bank's obligations under clause 28.2 of the Code include an obligation to use its best endeavours when trying to help borrowers overcome financial difficulties with any credit facility with that bank.

What amounts to 'best endeavours' is likely to depend on the facts of each case. According to Justice Davies, it is an objective test which does not require a bank to go beyond the bounds of reason, but to do all it reasonably can.

The final sentence of clause 28.2 of the Code gives an example of how a lender could 'try to help', i.e. "We could, for example, work with you to develop a repayment plan". If banks are required to do 'all they reasonably can', then this might require more than working with the customer to develop a repayment plan, depending on the circumstances of the case.

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories

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