A recent decision by the Supreme Court of New South Wales has provided some useful guidance on the meaning of clause 28.2 of the Code of Banking Practice (Code) that obliges banks to “… try to help you overcome your financial difficulties with any credit facility you have with us. ...”

In one of the first judicial considerations of this part of the Code, Justice Davies, in Marsden v DCL Developments Pty Limited (No.3) [2016] NSWSC 179, commented that the enforceability of clause 28.2 must be doubted because it contains “vague and amorphous concepts”. However, His Honour was prepared to approach the question of interpretation, on the basis that the particular words used were commensurate with an obligation to use “best endeavours”.

Background Facts

The borrower was engaged in the business of free range egg production.

In April 2015, the bank made approximately AU$2.7 million of finance available to the borrower to refinance existing facilities and to provide additional working capital for the business in order to, amongst other things, purchase additional flocks of laying hens.

The facilities were secured by general security interests over the borrower’s business and assets, together with real property security over and upon which the business was carried out. In addition, the director of the borrower provided personal guarantees.

However, the borrower did not use the working capital component of the funds advanced by the bank to purchase additional laying hens, as had been intended. In late 2015, the borrower subsequently made the unilateral decision to terminate all of its existing flock. This meant that, after September 2015, the borrower was not producing eggs, had no income, and no money to buy more laying hens.

As a result of the financial difficulty in which it now found itself–a fact that Justice Davies found was entirely of its own making–in November 2015, the borrower approached the bank for additional funding to purchase two new flocks of laying hens.

Despite the fact that the borrower was in financial difficulty and now in default under the facilities, in early December 2015, the bank approved an AU$325,000 increase to the facilities to enable the borrower to purchase two new flocks of laying hens to get its business up and running.

In approving the increase to the facilities, the bank imposed a number of conditions (Conditions). Most notably, these included:

• a reduction in the term of the facilities from five years to one year; and
• restrictions on further borrowing without the bank’s consent for any amounts over AU$60,000.

In mid 2016, following further defaults by the borrower, the bank exercised its right to appoint receivers and managers to the borrower. The receivers commenced proceedings seeking possession of the business and assets from the borrower, which the borrower refused to deliver.

The borrower cross claimed against the bank, seeking to set aside the variations to the facilities and damages, by reason of the bank’s alleged breach of clause 28.2 of the Code, and for contravening the unconscionable conduct provisions of the Australian Securities and Investments Commission Act 2001 (Cth).

At the heart of the borrower’s cross claim against the bank were the following allegations:

• the prohibition on further borrowing prevented the borrower from entering in to a finance contract with another lender to facilitate the purchase of an egg grading machine. This would have led to a GST refund that the borrower could have used to finance ongoing commitments; and
• the shortening of the loan term was designed to force the borrower to sell its business in order to refinance the bank’s debt rather than trade itself out of difficulty.

Findings

The court dismissed the borrower’s cross claim against the bank.

In doing so, the court found that the Conditions were not unreasonable or unconscionable. In particular, the court found that:

“[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.”

And:

“The imposition of this condition, so far from being unconscionable, was a reasonable one in all the circumstances. If moral obloquy is needed, there was none.”

Clause 28.2 of the Code

The borrower argued that the imposition of the Conditions negated any assistance that the additional funding, provided in December 2015, may have rendered. Accordingly, the borrower argued that the bank had failed to discharge its duty under clause 28.2 of the Code.

In order to determine the outcome of this particular allegation, the court was first required to consider the meaning of clause 28.2 of the Code, which provides as follows:

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

Initially, Justice Davies observed:

“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: Walford v Miles [1992] 2 AC 128 at 138.”

However, Justice Davies then considered an alternate approach as possibly having some utility in the circumstances:

“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; Hospital Products Ltd v Surgical Corporation [1984] 156 CLR 41 at 64; Foster v Hall [2012] NSWCA122. This imports an objective test.”

Ultimately, Justice Davies was satisfied that the bank had discharged its obligations under clause 28.2 of the Code. In particular, he found on the facts of the case that:

“[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…..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.”

Good news for lenders

The courts have now made clear that the Code has contractual effect when incorporated by reference in terms and conditions applicable to loan contracts. However, there are a number of aspects of the Code that have yet to be fully considered and interpreted by the courts.

In the circumstances, this decision should be welcome news for lenders because it provides some useful guidance on the interpretation of clause 28.2 of the Code. More importantly, it demonstrates that, where the language of the Code is “vague and amorphous” (as Justice Davies described it), the courts are still prepared to take a pragmatic approach to interpretation.