Borrowers (and guarantors) might have a claim against their bank and might be able to avoid enforcement action for their loan default
The purpose of this short blog is to raise awareness that both business borrowers and consumers (and guarantors) might have a claim against their lender. Claims against banks might be deployed in preemptive action or used in defence of a loan default claim by the lender against the borrower or enforcement of security or of a guarantee. This blog is not intended to cover all possible claims.
What are these claims against banks?
Claims against banks by borrowers might arise through a:
- breach of contract;
- breach of statutory law, such as in relation to unconscionable conduct and or misleading or deceptive conduct; and
- breach of responsible lending legislation.
There may well be other claims that could be made and should be explored, which are not covered in this short blog.
Breach of contract
Banking Code of Practice
All major Australian banks are signatories to the Banking Code of Practice (Code). The Code sets out the standards and obligations of financial institutions to protect individuals and small businesses.
While the Code is not mandatory and does not have legislative force, signatories to the Code are required to incorporate it into their lending documents. Accordingly, the terms of the Code form part of the contract between borrower and lender. The bank therefore might have a contractual obligation to, among other things, exercise the skill and care of a prudent lender.
If the bank breaches a term of the Code, the borrower might be able to bring a breach of contract claim for non-compliance, and a guarantor could allege a breach to avoid liability under a guarantee. Such a claim might arise as a result of the bank not properly assessing whether the borrower could actually afford the loan repayments.
If you believe your lender should not have lent you as much as they did or should have made further enquiries about your business’s resilience or your ability to pay, consider whether you might claim against the bank.
Other terms of the contract
Your loan agreement will have a number of other express (usually written) terms. There may also be some terms that the law deems should be incorporated into the contract (implied terms).
In addition to a breach of contract claim arising under the terms of the Code, depending on the other terms of your loan agreement, there may be grounds on which you can claim against your bank. A careful review of the contract and the circumstances leading up to the lending would need to be undertaken by a suitably qualified lawyer.
Section 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) provides that a person must not, in connection with the supply or possible supply of financial services, engage in conduct that is, in all the circumstances, unconscionable.
If you bring a claim for unconscionable conduct under the ASIC Act, the court may consider a broad range of issues, including (but not limited to):
- whether there was any inequality of bargaining power;
- your numerical and financial literacy; that is, did you understand, and could you be expected to have understood, the terms of the loan; and
- the amount paid for the relevant service, including whether there was an unusually high interest rate.
A claim for unconscionable conduct may arise (for example) if you believe that you were mis-sold a business loan, persuaded to take out a loan that was unreasonable or coerced into taking the loan. It may also arise in connection with a personal guarantee given to the bank.
Another instance where unconscionable conduct might arise is where you were persuaded by a lender to take out income protection and/or business interruption insurance. Claims under these policies are spiking since so many policyholders have experienced business loss because of COVID-19. However, many insurance policies have an exclusion clause that denies cover in the event of a pandemic.
There will no doubt be a legal fight between the insurance companies and claimants about whether COVID-19 is a valid exclusion under their policies. In the meantime, business owners might be able to argue that they were mis-sold the policy by their lender.
Misleading or deceptive conduct
Section 12DA(1) of the ASIC Act states that: A person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive in trade or commerce.
The intention of the bank is irrelevant. If a borrower can show that they were misled or deceived or were likely to have been misled or deceived, the objective test is met.
This might occur where a bank withholds information either deliberately or because the lending officer assumes the borrower would understand it already, and the borrower has a reasonable expectation that the information would be offered. For example, loan break costs or acceleration clauses are frequently the subjects of claims against banks. If you can show that you were misled about the existence or applicability of the break fee, the bank may be liable to pay penalties and or compensation.
Responsible lending legislation
The government has recently intimated that the responsible lending laws might be relaxed in favour of banks. Nevertheless, until that happens, lenders are to comply with the responsible lending laws. Even if the laws are relaxed, claims might arise under them in relation to lending that occurred before the relaxation.
Responsible lending laws and guidelines are set out in the National Consumer Credit Protection Act, Banking Code of Practice and regulatory guidelines issued by ASIC and APRA.
Lenders must ensure that a loan:
- is suitable for the requirements and objectives of the borrower; and
- can be repaid by the borrower without substantial hardship.
Lenders who are found to have breached responsible lending guidelines may be required to compensate the borrower for any losses suffered.
What to do if you believe you have a claim or if you wish to defend a claim by a bank
There are strict time limits in which to bring claims, and there are also time limits for responding to claims against you. You may be able to resolve a dispute informally without having to go to court.
Either way, you should take legal advice as soon as possible.
For more information about claiming against banks, including the time limits which apply, contact Trevor Withane: