Court rules on “vague and amorphous concepts” in the Code of Banking Practice

The NSW Supreme Court decision in Marsden v DCL Developments Pty Ltd (No. 3) [2016] NSWSC 1795 ruled on the meaning of clause 28.2 of the Code which provides:

“With your agreement and cooperation, we will try to help you overcome your financial difficulties with any credit facility you have with us”.

The bank had appointed receivers following a number of defaults by the borrower. However the borrower refused to deliver possession of its business and assets and instead filed a cross-claim alleging:

  1. that the bank did not comply with its obligations under clause 28.2 of the Code;
  2. that the bank had engaged in unconscionable conduct under the Australian Securities and Investments Commission Act 2001 (Cth) (“ASIC Act”).

Facts

The bank had advanced 2.7 million to the borrower in April 2015. From those funds, $2.4 million was to be used to refinance an existing facility with another bank. The balance was to be used as working capital and to buy further flocks of chickens for the borrower’s free range egg production business. However, the borrower did not use the funds to purchase the further flocks of chickens. Shortly after, the borrower went into default.

In November 2015, the borrower requested, and was granted, further funds of $325k, subject to the following conditions:

  1. The term of the facility was reduced from five years to one year;
  2. The borrower could not incur any further secured borrowings over $60,000 per annum without the written consent of the bank.

The borrower again fell into default.

Unconscionability

In determining unconscionability under the ASIC Act, the Court said it was necessary to look at the unwritten law which provided that:

“The equitable doctrine of unconscionability “is not a principle of what ‘fairness’ or ‘justice’ or ‘good conscience’ requires in the particular circumstances of the case”. Rather, conduct that is “unconscionable” in the requisite sense must demonstrate “a high level of moral obloquy”; it must be “irreconcilable with what is right or reasonable”.

The Court held that “the position the borrower was in by November 2015 was its own doing”. The borrower’s failure to use the funds to purchase the further flocks left it with no chickens and no income. Accordingly, 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 Code

It was argued that the conditions imposed by the bank could not be viewed as compliance with clause 28.2 of the Code to “try to help” because it prevented the borrower from obtaining a facility with another lender to buy an egg grading machine for the business. An additional argument was that the reduction in the loan term was an effort by the bank to force the borrower to sell its business. The Court disagreed, noting:

“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 of $325,000. 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”.

In reaching this decision, the Court adopted the following reasoning:

“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”.

Ultimately, the Court was satisfied that the bank had complied with clause 28.2 of the Code and the borrower’s cross-claim was dismissed.

The Court danced around the issue of whether or not clause 28.2 is enforceable. Nevertheless the decision went a long way to deriding the obligation as a feel good exercise without any enforceable teeth. This may or not have been the banks intention but it is welcome news to other lenders who have de facto been dragged into this contract (the Banking Code) through the best industry standards principle adopted by both the External Dispute Resolution providers.