Insolvency Update | Small Business Loans Inquiry

The Report into the Bank’s small business lending practices has been released today by the Australian Small Business and Family Enterprise Ombudsman, Kate Carnell AO.

Whilst concentrating on the Bank’s practices, some of the Report’s 15 recommendations have a direct bearing on the interaction of Insolvency Practitioners with their Banking clients.

In particular, in relation to loans less than $5 million, it is proposed that:

• A Bank would be required to provide both the instructions to, and the final Report by an Investigating accountant, to the Borrower (this would also apply to Valuers appointed by the Bank);
• All Banks should introduce a competitive “tender” process to the selection of a receiver to a Borrower, and introduce a policy of not appointing a Receiver who has been the investigating accountant to the Borrower entity;
• Receivers, Investigating Accountants and Valuers all be subject to a newly established external dispute resolution scheme, as well as the Banks themselves.

A full set of the List of Recommendations in the Report is set out below.

List of Recommendations made in the Small Business Loans Inquiry

1. The Australian Bankers’ Association’s six-point plan must be strengthened by publishing individual bank implementation plans, including key milestones and deliverables. Outcomes against these plans must be published. Implementation by 1 July 2017.
2. The revised Code of Banking Practice 2017 be approved and administered by the Australian Securities and Investments Commission under Regulatory Guide 183. The Code must be written in plain English and include a dedicated section on small business clarifying how breaches will be enforced. Implementation by December 2017.
3. For all loans before $5 million, where a small business has complied with loan payment requirements and has acted lawfully, the bank must not default a loan for any reason. Any conditions must be removed where banks can unilaterally:
   • Value existing security assets during the life of the loan
   • Invoke financial covenants or catch-all ‘material adverse change’ clauses. Implementation 1 July 2017.
4. A minimum 30-business day notice period to all changes to general restriction clauses and covenants (except for fraud and criminal actions) be added to give borrowers more time to respond and react to a potential breach of conditions. Implementation by 1 July 2017.
5. For loans below $5 million, banks must provide borrowers with decisions on roll over at least 90 business days before loans mature, so borrowers can organise alternative financing. A longer period of time should be given for rural properties and complex businesses that would take longer to sell or refinance. Implementation by 1 July 2017.
6. For loans below $5 million, banks must provide a one-page summary of the clauses and covenants that may trigger default or other detrimental outcomes for borrowers. Implementation by 1 July 2017.
7. For loans below $5 million, banks must put in place a new small business standard form contract that is short and written in plain English. Implementation by December 2017.
8. All banks must provide borrowers with a choice of valuer, a full copy of the instructions given to the valuer and a full copy of the valuation report. Implementation 1 March 2017.
9. Every borrower must receive an identical copy of the instructions given to the investigating accountant by the bank and the final report provided by the investigative accountant to the bank. Implementation by 1 July 2017.
10. Banks must implement procedures to reduce the perceived conflict of interest of investigating accountants subsequently appointed as receivers. This can be achieved through a competitive process to source potential receivers and by instigating a policy of not appointing a receiver who has been the investigating accountant to the business.
11. The banking industry must fund an external dispute resolution one-stop-shop with a dedicated small business unit that has appropriate expertise to resolve disputes relating to a credit facility limit of up to $5 million.
12. Banks must establish a customer advocate to consider small business complaints and disputes that may or may not have been subject to internal dispute resolution.
13. External dispute resolution schemes must be expanded to include disputes with third parties that have been appointed by the bank, such as valuers, investigative accountants and receivers, and to borrowers who have previously undertaken farm debt mediation.
14. A nationally consistent approach to farm debt mediation must be introduced.
15. The Australian Securities and Investments Commission must establish a Small Business Commissioner.