Small business financial difficulty
Small businesses sometimes find themselves in financial difficulty and may be eligible for additional help and consideration, if the small business credit facility is $2 million or less.
A small business’s financial difficulty may be caused by events including bad debts, loss of clients, competition or unexpected changes in market conditions.
The 2013 Code of Banking Practice (CBP) places an obligation on its subscribers to try to help small business customers overcome their financial difficulty. Clause 28.2 of the CBP states:
“With your agreement and co-operation, we will try to help you overcome your financial difficulties with any credit facility you have with us. We could, for example, work with you to develop a repayment plan.”
The 2014 Customer Owned Banking Code of Practice (COBCOP) and the 2010 Mutual Banking Code of Practice (MCBP) provide for similar obligations to be placed on credit unions and mutual building societies in respect to financial difficulty.
Clause 24.1 of the MBCP states:
“We will work with you in a constructive way if you experience genuine difficulties meeting your financial commitments to us. With your agreement and commitment, we will try to assist you to overcome those difficulties. We will do this whether or not you have a right to seek a hardship variation or change under consumer credit laws.”
Clause 24.2 of the MBCP provides additional detail regarding a credit union or mutual building society’s procedures in considering a customer’s financial difficulty.
We consider that non-code subscribers also have obligations to small businesses in financial difficulty as a result of their own internal hardship policies and good industry practice.
Small business financial difficulty disputes may include:
- the cancellation of business facilities on a request for assistance
- demand by a financial services provider for immediate repayment of a credit facility in full
- unreasonable timeframes for refinance
- the appointment of an investigative accountant
- application of increased risk margins and higher interest rates on a request for assistance.
Where a financial services provider takes such action without first giving genuine consideration to a request for assistance, then this conduct could have the effect of seriously prejudicing the small business’ ability to operate as a going concern or the opportunity to refinance.
Whether an FSP is able to assist a small business in financial difficulty will depend on the individual circumstances facing the business. Many options may be available to an FSP, including assistance such as:
- temporary increase in overdraft limit facility
- an extension of trade finance terms
- deferment of scheduled principal repayments
- the appointment of an investigative accountant to better understand the small business, taking into account the contractual entitlement of the financial services provider to do so
- consolidation of debts; and/or
- restructure of finance facilities and terms to reflect changes in cash flow.
A telephone conciliation conference may take place to seek to reach a resolution of the dispute. We will take into account whether the applicant has provided information to show that the small business is viable and whether a timeframe for the sale of the assets is an appropriate resolution.
Click here for more information about telephone conciliation conferences.
Where financial difficulty cannot be overcome
We accept that FSPs may refer the relationship to an asset realisation area where the FPS’s focus changes to loss mitigation. Where a small business can no longer operate as an ongoing concern, the business may be liquidated either by its owners, creditors or other appointed controllers.
We would expect that prior to taking such steps the FSP should undertake a process of genuine consideration of the small business’ financial difficulty. In our investigation we will seek supporting documentation from the FSP in respect to the steps that it took to give genuine consideration to the small business’ financial difficulty prior to the referral to the asset realisation area or the appointment of an external controller.
If a receiver is appointed on behalf of the company, we can only consider the validity of the appointment of the receiver by the FSP. We will consider whether the appointment of the receiver was in accordance with the terms and conditions of the security documentation.
That is, a receiver is appointed to act on behalf of the company and is the company’s agent, rather than the FSP’s agent. Accordingly, we cannot review any action by a validly appointed receiver.
The receiver is not obliged to suspend enforcement action while we are considering the dispute and we cannot intervene in any action by the receiver, such as sale of the company assets.
However, we do have the ability to consider a dispute in relation to an FSP’s response to its customer’s request for assistance in financial difficulty. Any such dispute can only be made to us with the consent of the receiver (as the company’s representative) and may require the receiver to take such steps as attend a telephone conciliation conference.
This is because in order to conduct or assist in any negotiation between the customer and the FSP we must deal with the party authorised to negotiate on behalf of the business. Upon the appointment of a receiver, the directors or owners of the company are no longer capable of binding the company to any agreement reached between it and the bank.
Additionally, it is important to note that any award made in favour of the applicant or the company, involving a cash payment by the bank would be paid to the receiver for distribution to its appointer (usually the FSP).
Where a small business goes into voluntary liquidation or is placed into liquidation as a result of a court order, we recognise that the Liquidator controls the affairs of the company and stands in the shoes of the directors. On this basis, the Liquidator must lodge the dispute.
If the company is controlled by an Administrator the authority must be signed by the Administrator.
We regularly consider disputes which have been raised by guarantors who have provided personal guarantees to a small business.
Where an FSP makes a claim under a guarantee, the guarantors are generally entitled to raise any claim the company may have unless the terms of the guarantee expressly do not allow it to do so and where it would be unfair to allow the FSP to recover any amount outstanding without taking into account any claim the company may have. In such circumstances, the dispute would usually be brought by the company and the guarantors. However, if the company is in liquidation, we do not require the Liquidator’s consent to the dispute being lodged with our office, as the guarantors are entitled at law to raise any claim which the company may have without involving the insolvent company.
The obligations of an FSP under clause 28.2 of the CBP and clause 24.1 of the MBCP apply to the guarantors of a small business, including the obligation to give genuine consideration to the guarantor’s financial difficulty. The options available to the FSP to assist in meeting its obligation may include time to pay or instalment arrangements. If a realistic repayment arrangement cannot be agreed, consideration may be given to allow a reasonable time for sale of assets by the guarantors or negotiation of a timeframe for the guarantors to seek the opportunity to refinance the business debts into their name.
Cash flow difficulties
The applicants owned a small business specialising in finance broking. It received its income on a fluctuating basis, as it was dependent upon the settlement of its client’s financial arrangements.
The small business experienced financial difficulty as a result of a downturn in finance settlements due to the global financial crisis. This impacted on the small business’ ability to meet the repayment conditions on a short term cash flow facility and its repayment obligations on other facilities. The small business was seeking assistance from the FSP in the form of the provision of a different facility, with the aim of spreading its repayment obligations over a longer term to offset the fluctuation of commission sales.
After a period of negotiation, an agreement was reached between the small business and the FSP prior to a telephone conciliation conference. Pursuant to the agreement, the short term cash flow facility was converted into a regularised principal and interest facility to be repaid over an extended term. In addition, the FSP gave concessions in relation to previous charges which had been incurred by the small business.
Appointment of investigative accountant
The applicants owned a retail store which had previously experienced a period of growth, financed by the small business through debt. Over time the small business became concerned that it would be unable to service its trade facility, and elected to sell assets which acted as underlying security to the FSP’s facilities.
The repayment in full of these facilities following the sale of assets put in jeopardy the long term viability of the business as it was at risk of being unable to meet its short term obligations. In accordance with the lending agreement, the FSP appointed an Investigative Accountant for the purpose of further understanding the small business and what options were available. The small business was concerned about the cost of this review.
We conducted a telephone conciliation conference to determine whether a resolution could be reached between the parties before we conducted a detailed investigation into whether the FSP had met its obligations. An agreement was reached. A progressive reduction of facilities over time was put in place to enable the business to continue trading. In addition, arrangements were put in place to enable the injection of further funds to the business by a third party. The conclusions reached by the Investigative Accountant in his report formed the basis of the agreement. By obtaining the report, the parties were able to obtain a clearer view about the longer term direction and viability of the business. The FSP agreed to refund half the costs of the Investigative Accountant as a gesture of goodwill.