Category: Non-bank lending

A choice of expert discipline

On By Geoff GreenIn Banking, Expert Witness, Non-bank lendingLeave a comment

Background

Astor provided funding in 2004 to restart mining operations of a Spanish Copper mine, secured by security over the shares in the mining company (technically described as a Pledge).

In 2008 there was litigation about whether Astor was entitled to enforce the Pledge, and whether a transfer of shares to Atalya was valid.  Astor was successful at Court, and it negotiated an arrangement by Atalya would pay €63.3m to keep the shares.

Most of the purchase amount was deferred until production had restarted under an arrangement which also included a so-called Cash Sweep.  That Cash Sweep required the mining company (ARM) to make additional payments from “Excess Cash,” as defined.  Notably, the agreement also prevented ARM from arranging senior debt unless that debt raising included arrangements for payment of €17.5m to Astor.

ARM was unable to arrange any new funding, and by the time of the GFC it was experiencing financial difficulties, and Astor agreed to amend the agreement so that ARM could borrow from associated companies to fund operating expenses.

ARM relied on that intra-group exemption to borrow “huge amounts” that Atalya had raised in the equity markets, which it used to restart and fund the rapid expansion of the mine.  Notably, ARM did not pay €17.5m to Astor, because it said that the intra-group borrowings were not “senior debt.”

Legal Action

Astor took legal action seeking repayment of the deferred balance.  The Court ruled that the intra-group borrowing did not trigger the requirement to pay the €17.5m, but the debt raising did result in Excess Cash of an amount which that hearing did not determine, thereby resulting in a repayment obligation of an unquantified amount.

That led to a further round of disputes (and the case described here): first, over the calculation of the amount of Excess Cash and repayment obligation; second, whether there was any entitlement to interest.

A choice of expert evidence?

The parties were given permission to tender submit reports by experts “in the field of accountancy and/or mine finance.”

Notably, the alternatives available under the “slashmark” resulted in Astor arranging a report from a finance expert, and ARM arranging a report from an accountancy expert, who, as the Court noted, “viewed the intended operation of the Excess Cash Clause from fundamentally different perspectives.”

Outcome

In Astor Management AG & Anor v Atalaya Mining PLC & Ors [2022] EWHC 628, the Court found that:

  • Both experts did their best to assist the Court and gave their evidence in a candid and straight-forward manner.
  • An “accounting approach” to the interpretation of Excess Cash was not appropriate. The parties were not accountants, and had negotiated the wording without accountancy advice, and the phrase had “no standard or universally accepted meaning in accounting or valuation literature.”
  • Finance was the appropriate field of expertise for the interpretation of the wording, and the finance discipline did provide a standard definition for a critical definition of “sustaining capital.”
  • ARM had “huge quantities of cash,“ and the Excess Cash definition made no distinction between cash derived from revenues and cash derived from any other source.
  • Astor was entitled to compound interest under the agreement from the date that Excess Cash became payable.

Expert evidence – “bordered on the absurd”

On By Geoff GreenIn Banking, Expert Witness, Non-bank lending, SME lendingLeave a comment

Background

The National Credit Code (the Credit Code) applies to credit provided wholly or predominantly for “personal, domestic or household purposes.” In practical terms, purpose is established by a borrower declaration – unless the declaration is found to be ineffective.

This case dealt with two specific loan transactions.  ASIC said that the two borrowers had lied in making those business purpose declarations – to access credit more readily available to unregulated borrowers – and that the lender would have detected the false declarations if it had made reasonable inquiries.  More significantly for the sole director, ASIC said that those bad lending outcomes evidenced a failure to take appropriate steps to ensure that the company did not contravene the Credit Code, which meant that the sole director had breached her statutory duty under s 180(1) of the Corporations Act.

A complex theoretical framework

Central to ASIC’s case was a long report from a credit expert, which set out a detailed business management framework said to be applicable to all business lenders.  The framework extended well beyond credit management, into general business and human resources management.

The Court described the Report as creating “the very real impression that [the expert] had essentially constructed in his own mind, based on his experience, an ideal sense of the Execution Framework and Minimum Requirements he considered were “necessary” for every lender to have in place, irrespective of its particular circumstances.”

Size does matter

The Court described the expert’s Execution Framework as proposing a gold standard, because it did not allow for adjustment to suit the circumstances of the lender, or the size of the loan.

The Court held that requiring a gold standard approach for a business seeking a loan of $2,000 was “as counter-intuitive as it is entirely unrealistic” and said that “there was considerable force” in submissions that “some of [his] opinions, with respect, bordered on the absurd” for example, requiring an applicant for a $2,000 loan “to prepare a detailed business plan…including an explanation of how the business will be marketed, including target market and pricing; a market analysis; staffing; a budget containing forecast revenues and costs; provision for premises including a lease agreement; and evidence of the equipment needed to undertake the business.”

Conclusions on the expert evidence

The Court noted that the expert had only been involved with one comparable business – an un-identified start up business – and that there was no evidence that any Australian non-bank small business lender followed any of the policies and procedures that he identified as necessary.

In terms of his evidence, in ASIC v Green County Pty Ltd [2025] FCA 367 the Federal Court held that:

  • It was “unsatisfactory and less than compelling in several critical respects…of low weight and [providing] little assistance.”
  • His opinions “did not seek to differentiate between lenders depending on the relative cost and burden.”
  • He “demonstrated a willingness to express definitive conclusions which did not withstand scrutiny when tested by reference to the particular circumstances.”
  • Some of his opinions “took a particular example to an extreme conclusion” – most notably expressing broad conclusions about the management of a portfolio of many thousands of loans, based on a review of only three loans.
  • He “was prepared to express inflexible and single-minded opinions in his report from which he was only willing to resile in limited respects (and even then, only reluctantly) when met with logical propositions countering the extremities of his opinions.”

Outcome

The Court held that the lender had breached the Credit Code, but dismissed the claims against the director, finding that although “[the lender] should have done more by way of reasonable inquiries…and that more generally [its] systems and training could have been better,” ASIC had not established the specific pleaded case that it brought.

The “missing” banking expert

On By Geoff GreenIn Banking, Expert Witness, Non-bank lending, SME lendingLeave a comment

Background

A lender took action to recover a debt of $430,000 which in three years had grown to $3.61m, due to the impact of fees, and interest of $3.18m.

The borrowers disputed the amount of the debt. They said that a compounding monthly interest rate of 70.72% per annum was excessive, and amounted to a penalty.  They also claimed that the loan agreement was unenforceable due to misleading and deceptive conduct on the part of the Lender, and that it an unjust contract under the Contracts Review Act 1980 (NSW).

The loan agreement adopted an interest rate structure which is typical of non-bank lenders: a specified “Higher Rate” (in this case, 1.36% per week), which reduced to a “Lower Rate” (in this case 0.35% per week) if paid on time.

The “Missing” expert

The Court noted that there was no expert evidence provided by either party as to whether the Higher Rate was “excessive or even unusual in the context of a short term financing by way of a second mortgage.”

Outcome

In Commercial N Pty Limited v Huang & Ors [2024] NSWSC 23, the New South Wales Supreme Court held that:

  • Higher Rate – Lower Rate mechanisms had been subject to judicial review on many occasions, and the position was well-established: if drafting made it clear that a Lower Rate was a discount for timely payment then a such a mechanism could not of itself amount to a penalty.
  • The Higher Rate of 70.72% per annum was “very high” relative to the lower interest rate and “seemingly extravagant” – but there was no expert evidence on the point, and the rate was within the range of rates accepted by the Court in other matters.
  • Although the Higher Rate was not of itself unconscionable, monthly compounding at that Rate was “inherently oppressive and unconscionable” because it equated to an “utterly crushing” effective annual rate of interest of about 417% per annum.
  • The Lender took no steps to highlight the effect of the compounding rate to the Borrowers other than to refer to “a lengthy set of interest provisions” which included a formula “attended by a degree of ambiguity,” and was aware that they may need to sell their home to repay the loan.
  • In the circumstances, the Lender’s conduct was “irreconcilable with what is right and reasonable” and involved “a level of sharp practice and unfairness that [was] unconscionable”

The Borrowers were successful in obtaining orders removing the compounding regime from the loan contract, which reduced the interest charge by almost $2m.

Comment

This case pre-dates the 9 November 2023 amendments to the Unfair Contracts legislation (discussed here), which shifts the burden of proof to lenders.  There may well have been a different outcome under the now current regime.

Arm’s length lender loses their security due to a liquidator’s attack on related-party transactions

On By Geoff GreenIn Banking, Expert Witness, Non-bank lending, SME lending1 Comment

[edit on 10 April 2025  to note that this decision was overturned on appeal, a blog on the appeal decision is now on the to-do list!]

Background

A company (the Guarantor) had provided a mortgage to secure the borrowings of two associated companies, which were guaranteed by its directors.

Almost four years later the Guarantor was placed into liquidation, and the liquidator attacked the mortgage as an unreasonable director-related transaction, asking the lender to disgorge $12.15m in net proceeds, received after the land was sold and the first mortgagee repaid.

The Expert Evidence

The Lender arranged expert evidence to the effect that:

(1) It was common for lenders to take cross-securities from related entities when the security on offer from a borrower was inadequate.

(2) It was reasonable for the Guarantor to provide a mortgage in the circumstances; and

(3) The Lender acted in accordance with reasonably accepted lending practices in the circumstances.

That opinion was provided by an insolvency practitioner, rather than a banking expert, but it appears that there was no challenge to her expertise.

Conclusion

In Cooper as Liquidator of Runtong Investment and Development Pty Ltd (In Liquidation) v CEG Direct Securities Pty Ltd [2024] FCA 6, the Federal Court held that:

  • The evidence was “incomplete and lacking a number of important respects.” None of the directors of the three companies gave evidence, and the purpose of at least some of the funding was never explained.
  • The Expert’s conclusion that the three companies were a part of a group was “no more than speculation on her part” given the “paucity of the evidence,” and so her conclusions based on that assumption could not be accepted.
  • It was true that some part of the advances were later used to develop the mortgaged land but that did not demonstrate any benefit to the Guarantor at the time the mortgage was entered into. Once that was recognised, there was no benefit to the Guarantor in providing the mortgage whereas the detriment to the Guarantor was “obvious and substantial.”
  • The liquidator was successful in having the mortgage declared an unreasonable director-related transaction – but was not entitled to the whole of the proceeds, because the Lender was entitled to credit for the circa $10m used to develop the mortgaged land, and which increased its value.

Comment

If the circumstances of the transaction had been properly understood and documented by the Lender it may well have been able to show that there was a genuine corporate benefit to the Guarantor in entering into the mortgage – but that opportunity being missed it was not something that could be later remedied in the absence of directors who had no reason to return to Australia.

Under the radar?

On By Geoff GreenIn Banking, Non-bank lending, SME lending1 Comment

From 9 November 2023, small business loans of less than $5m will become subject to the existing Unfair Contracts regime.  New definitions and presumptions that operate against lenders will make prosecution easier, and severe penalties will make adverse outcomes very expensive.

The fees and interest charged by lenders following borrower default will be caught by the changes.  In my opinion the changes will not affect banks greatly because they already operate within the Banking Code of Practice, but they will have a very significant impact on some non-bank lenders.

The current position – a high bar

As things stand, a business borrower unhappy with the default fees or interest charged by a non-bank lender has very limited options.  They can argue that the charges are unenforceable because they are “penalties” – but this requires the borrower to show that the charges are “out of all proportion” to the greatest loss that the default might cause,[i] a high bar.

The new test – a much lower threshold

After 9 November 2023, the key question will be whether the default provisions sit within a standard form contract, and are unfair.

An unfair term is defined in the ASIC Act, [ii] as one that (my highlighting):

(a) …would cause significant imbalance in the parties’ rights and obligations arising under the contract; and

(b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and

(c) it would cause significant detriment (financial or otherwise) to a party if it were to be applied or relied on.

Critically, the onus is on the lender to establish that a term is reasonably necessary to protect their legitimate interests.[iii]

What is a standard form contract?

Whether a contract is a standard form contract will be determined by the Court on a case by case basis.  The legislation does not provide a specific definition, instead it identifies matters for the Court to take into account, including whether:

(a)  one of the parties has all or most of the bargaining power relating to the transaction;

(b)  the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;

(ba) one of the parties has made another contract, in the same or substantially similar terms, prepared by that party, and, if so, how many such contracts that party has made.

(c)  another party was, in effect, required either to accept or reject the terms of the contract…in the form in which they were presented;

(d)  another party was given an effective opportunity to negotiate the terms of the contract…

(e)  the terms of the contract…take into account the specific characteristics of another party or the particular transaction;

Notably, here again the onus is on the lender to establish that a contract is not a standard form contract.[iv]

Well-advised lenders will be reviewing their documentation to minimise the risk that it can be categorised as standard form – but that would appear to require more than repeated boilerplate invitations to negotiate.

Consequences

Individual borrowers will be able to take action, as now, but there will now also be a regulator on the scene, with a remit, and a very significant enforcement budget.

The Court will have wide powers to address unfair terms in a standard form contract: voiding part or all of the contract, injuncting to restrict enforcement, and making orders for redress.

Far more significantly, the Court will be able to impose civil penalty charges of (at least) $50m for each contravention.  Crucially, the penalties can be imposed regardless of whether or not the lender has actually relied upon, or invoked, the offending clause.

Which loans are affected?

Unsurprisingly the new regime applies to new loans made on or after 9 November 2023.  More significantly it will apply to existing loans that are renewed or varied after that date, which means that a lender might expose themselves to a $50m penalty by doing nothing more than (for example) agreeing to a one-month extension of an expiry date without a complete re-documentation.

[i] The test in Paciocco v Australia and New Zealand Banking Group Limited [2016] HCA 28

[ii] ASIC Act, Section 128G.

[iii] ASIC Act sub-section 12BG(4).

[iv] ASIC Act, sub-section 12BK(1).

The High Court: Stubbings v Jams 2 Pty Ltd

On By Geoff GreenIn Banking, Non-bank lendingLeave a comment

This week the High Court delivered judgement in Stubbings v Jams 2 Pty Ltd [2022] HCA 6, the final instalment of litigation which addressed whether asset-lending – loans made based on the value of security rather than the capacity of the borrower to repay by instalments – was inherently unconscionable, and the extent to which lenders might rely on certificates of advice.

The answers to those questions are: “no” and “it depends,” turning on quite specific facts.

The Plan

An unemployed man (the Guarantor) wanted to buy a new home to live in, after falling out with his landlord – but he was unable to arrange bank finance.  Supposedly guided by a consultant, he used a shelf company to borrow the whole of the purchase price from a private lender, secured by mortgages over two other properties that he owned in Narre Warren.

The Guarantor’s stated plan was to renovate the two Narre Warren properties and sell them, and then refinance through a bank after two or three months.  The Court found that this plan “was never going to work” – he did not have the money to renovate the properties or pay interest while any renovation was underway, and he did not have a realistic chance of later arranging bank finance either.

The Guarantor’s disadvantage

The Guarantor was described as “completely lost, totally unsophisticated, incompetent and vulnerable…incapable of understanding the risks involved in the transaction” and “precisely the sort of person who needed protection and was vulnerable to being exploited.”

The Lender’s system

The lender was represented by a lawyer who “deliberately avoided knowledge of borrowers’ and guarantors’ personal and financial circumstances.”  Through a system of conduct that was almost the opposite of bank lenders, he:

  • Did not require application forms from borrowers.
  • Did not seek any information about the income of borrower or guarantor.
  • Did not run credit checks.
  • Treated the asset position of the nominal borrower company as irrelevant.
  • Refused to communicate, meet, or negotiate with proposed borrowers.

The Court found that “if enquiries had been made, they would have led to [the lawyer] discovering… that the transactions from the perspective of the [Guarantor] were not merely risky and dangerous but entirely uncommercial and could not in any way have advanced his interests…that the appellant had fundamentally misunderstood the transaction…and that it was possible that [the Accountant] had given [the borrower] and [the Guarantor] no financial advice at all.

Pro forma certificates of independent legal and financial advice

The lawyer prepared pro forma certificates of independent legal and financial advice, and the lender’s claimed reliance on them to the exclusion of any other information except valuations was crucial – but there were three problems with that claimed reliance:

  1. The certificate of legal advice addressed the consequences of default for the guarantor – but did not address the likelihood of default.
  2. The certificate of financial advice which would potentially address the likelihood of default was completed in respect of the borrower shelf company, not the Guarantor.
  3. The certificates could not displace the lawyer’s actual knowledge that “the loans were a dangerous transaction” for the Guarantor who, the Court found, the lawyer knew to be under a disadvantage.

Conclusion

The High Court clearly accepted that there was nothing inherently unconscionable about asset‑based lending.  However, in the circumstances here, the lawyer’s conduct amounted to the unconscientious exploitation of the Guarantor’s special disadvantage, and the Court held that it would be unconscionable to allow the lender to be able to enforce its rights under the mortgages.

Compensation ordered against expert witness

On By Geoff GreenIn Expert Witness, Non-bank lendingLeave a comment

Introduction

A “group proceeding” legal action against the auditor, directors and trustee of a failed non-bank lender was settled for $64m, subject to approval by the Court. The Court of Appeal approved the overall settlement and asked the Victorian Supreme Court to review the legal costs as well as the amount of commission claimed by a litigation funder.

What presumably began as a routine approval process uncovered matters which gave rise to very serious concerns about the conduct of the solicitor and the barristers (“the Lawyers”), the litigation funder, and the Legal Costs Expert engaged to express an opinion on the reasonableness of the legal fees.

The Bolitho v Banksia Securities Ltd (No 18) [2021] VSC 666 judgement is long, and the facts are complex.  Others will focus on the duties owed by the Lawyers, but as someone undertaking expert witness work, I am very interested on the issues that resulted in an expert witness being ordered to pay compensation!

The Expert Witness

The Legal Costs Expert witness had issued four reports expressing the opinion that the claimed legal costs “were fair and reasonable,” before issuing a fifth report in which he withdrew those opinions and claimed that he had been misled.

The Court agreed that the Legal Costs Expert had been misled by “grossly improper” and dishonest conduct by which false evidence was “manufactured” to support the barristers’ fee claims, but it made swingeing criticisms of the expert nonetheless:

  • Inadequate disclosure of previous engagements – The Legal Costs Expert did not appropriately disclose previous engagements involving the barristers, which were relevant to an assessment of his independence, and he did not draw the Court’s attention to his limited experience in large commercial litigation, and specifically, group proceedings.
  • Breach of duty to assist the court impartially – The Legal Costs Expert did not undertake a proper independent objective assessment of the facts he was asked to assume, and he failed to seek further evidence or information when he should have done so. His claim that he had complied with the Expert Code of Conduct in this regard, when he had not, misled the Court.
  • Failure to apply specialised knowledge – His reports did not demonstrate the application of any expertise or specialised knowledge. He adopted a “formulaic approach” and did not satisfy himself that the time claimed was both actually spent and reasonably spent – as demonstrated by his failure to identify duplicated work and charges.
  • Failure to promptly respond to new information – Despite becoming aware of material new information the Legal Costs Expert did nothing to correct the misleading statements in the reports that he had prepared until “the eve of the trial” when he issued a fifth report that recanted his earlier opinions. Even then, the fifth report did not “confront the reality that [the expert] had, by his third report, misled the court.”

Conclusion

The Court held that the Legal Costs Expert had breached his duties to the Court and that those breaches “materially contributed” to the loss suffered by investors.  Together with the other parties, the Legal Costs Expert was ordered to pay compensation of $11.7m and to also pay costs on an indemnity basis.