Borrowers are becoming more creative in devising defences to claims by banks and challenging the powers of receivers and managers. Not content with the usual gamut of claims of breach of loan commitments, misleading or deceptive conduct or unconscionable conduct, borrowers are increasingly relying on alleged breaches of the Code of Banking Practice (Code). Some receivers and managers may be surprised to learn that the Code can affect the exercise of their powers. In its original form, the Code only applied to individual borrowers and their guarantors. But the revised version of the Code, which came into force on 1 June 2004, covers small business borrowers and their guarantors. A “small business” is defined in section 40 of the Code as a business having:
less than 100 full time (or equivalent) people if the business is or includes the manufacture of goods; or
in any other case, less than 20 full time (or equivalent) people, unless the banking service is provided for use in connection with a business that does not meet these elements.
In light of this definition, the Code will apply to a significant part of lending to small and medium‑sized enterprises in Australia, including many businesses operating in corporate form. Hence, the Code will be relevant in most company receiverships.
To whom does the Code apply?
The Code applies to banks who adopt the Code by making a public announcement. Most Australian banks have adopted the Code. For a list of these banks, click here. As to other codes affecting the finance sector, click here.
The contents of the Code
The Code contains many general obligations, such as a duty to act fairly and reasonably towards the borrower in a consistent and ethical manner, and numerous procedural obligations, such as an obligation to provide the borrower with copies of relevant documents. It clearly applies to loan agreements, mortgages, mortgage debentures and guarantees. For present purposes we are not concerned with guarantees but the other documents are relevant to receiverships. The full provisions of the Code can be found at the Australian Bankers’ Association website mentioned earlier.
What is the legal effect of the Code?
The Code was once regarded merely as a guide to good banking practice (Craigie & Weaver, Law Relating to Banker and Customer (Thomson Reuters, Legal Online) at [2.520]. However, increasingly borrowers have argued that the Code is a binding legal contract with any bank that has adopted the Code. Some courts have accepted this argument. For example, Sam Management Services (Aust) Pty Ltd v Bank of Western Australia Ltd [2009] NSWSC 676 at [27] and [2009] NSWCA 320 at [74]; Seeto v Bank of Western Australia Ltd [2010] NSWSC 922 at [39] and Ing Bank (Aust) Ltd v Stafford [2010] QSC 289 at [32].
On the other hand, in Bank of Western Australia v Abdul [2012] VSC 222 at [100] Croft J held that the Code “in the present circumstances, did not have contractual force”. His Honour appeared to accept the bank’s view that the Code was “merely a distillation of fair and prudent banking practice which represents a consensus in the banking and finance section” [at [100]]. However, the better view appears to be that the provisions of the Code are contractually binding because they are usually incorporated by reference in loan agreements.
A breach of the Code does not constitute unconscionable conduct (Bank of Western Australia v Abdul [2012] VSC 222 at [100]) but it is a factor that can be taken into account under section 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) in deciding whether a provider of financial services engaged in unconscionable conduct, at least where the borrower acted on the reasonable belief that the provider would comply with the Code (see section 12CC of the Australian Securities and Investments Commission Act 2001 (Cth)).
The Code itself contains dispute resolution procedures for dealing with breaches of its provisions. In addition, a breach of the Code could render the bank liable for damages for breach of contract. The damages would be designed to compensate the borrower for the loss it suffered as a result of the breach of the Code. In other words, the bank or financial institution would be obliged to make good the borrower’s expectation that the provisions of the Code would be observed. However a breach of the Code would not necessarily justify the borrower accepting the breach and rescinding the loan contract, this would only be justified if the breach was a breach of a fundamental term of the loan contract or if it was a breach of a non-essential term that had serious consequences for the borrower. A breach of the Code is not, therefore, a “get out of jail free card”.
Lavan Legal comment
A breach of the Code does not justify a declaration that a bank’s appointment of receivers and managers was invalid or that the exercise of their powers was improper. The general provisions of the Code do not require a bank to subordinate its own interests to those of its borrower: Seeto v Bank of Western Australia Ltd [2010] NSWSC 922 at [39]. For this reason, receivers and managers should have little to fear from the Code but they should be aware of this case to rebut any argument to the contrary.
For further information about the impact of the Code on receivers and managers, please contact:
| Dan Butler | |
| Senior Associate |
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| (08) 9288 6714 |
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| dan.butler@lavan.com.au |
