Category: SME lending

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).

Golden advice from Lord Hamblen SCJ

On By Geoff GreenIn Banking, Expert Witness, Experts in Singapore, SME lendingLeave a comment

A keynote paper presented to the Expert Witness Institute Online Conference in May 2022 by Lord Hamblen of the Supreme Court of the United Kingdom is now available online, here.

For those of us who do expert work, “The modern expert: personal insights and current issues” is well worth reading in its entirety, but in my opinion the best advice is:

[17] …do what you can to make it easy for the judge to understand your expertise and your expert views. This involves explanation. Do not assume prior knowledge and understanding. In simple and clear language try and make it easy for a judge to assimilate and to understand.

Make clear what your underlying assumptions are and set out all the building blocks which lead to the conclusions that you reach.

That may involve covering what seems like basic ground for you, and possibly for the judge, but it is far better to err on the side of cautious simplicity than diving straight in to the key disputed issues.

[18] …Make a conscious effort to simplify and to clarify.

[20]…All the opinions you express and the conclusions you draw must be supported by reasoning. Those reasons must be clearly set out and explained.

Make sure, however, that the supporting reasons are cumulative rather than individually critical. You want to avoid the risk of your expert opinion being undermined if one building block is taken down.

Try and build as effective defences as you can for any opinion you express. This means careful and convincing reasoning.

[21] …do what you can to try and gain the judge’s trust and confidence. This means demonstrating objectivity and an awareness of your duty to the court, not just your client.

Be prepared to make concessions even if that appears to be against your client’s interest in winning the case. Acknowledge errors or omissions, if made.

[28]…the clearer your oral evidence is, the better it will be understood and the greater its likely impact. Clarity in the giving of oral evidence involves keeping to the point and making your points in shortly expressed but plain language. Avoid speeches.

[29]…Show that you have been even handed and are concerned to arrive at the right answer rather than simply the answer that may suit your client. As it is put in one of the cases to which I shall be referring [my note: this one], give the impression that your evidence would have been exactly the same if you had been instructed by the other side.

[33] There is nothing more fatal to the acceptability of an expert’s evidence than concerns about their independence and impartiality.

[34] …avoid being an advocate. It is counsel’s job to argue the case. That is not the role of the expert. If you give your evidence in an argumentative manner that will inevitably undermine that evidence and risk allegations of partiality. Counsel may try to provoke you and to get a rise from you, but you must retain your clear-headed objectivity.

Make points, explain points, but do not argue them. Never get into an argument with counsel, however provoked you may be. If you are not being treated fairly in cross examination then your counsel or the judge will usually intervene. Do not, however, take matters into your own hands.

[35] …know the limits of your expertise…do not stray into areas of non-expertise. You are being asked to give expert opinion evidence. That opinion evidence is only admissible because it is expert evidence. But keep to your expert opinions.

Do not stray into judgments as to the facts. Ensure that the evidence you give is and remains the expression of your expertise and nothing else.”

The Review of the Australian Banking Code of Practice

On By Geoff GreenIn Banking, SME lendingLeave a comment

Background

The Banking Code of Practice (the Code) issued by the Australian Banking Association (the ABA) is independently reviewed every three years.  The 174 page review conducted by Mike Callaghan AM PSM – an economic consultant and 38 year veteran Treasury official – released on 3 December 2021, and available here, is the first review since the Hayne Royal Commission.

The Code applies to consumers and small businesses, the latter specifically defined as those with annual turnover of less than $10 million and fewer than 100 FTE employees, and less than $3 million total debt to all credit providers (whether fully drawn or not).

Recommendations impacting lending to small business

I have set out below the recommendations which relate to small business lending, together with my comments, in italics:

(60) Part 6 should be extended from referring to ‘lending to small business’ to cover ‘providing banking services to small business.’ The first commitment in this part should be for banks to assist small businesses with their banking services that are suitable to their circumstances.

BNPL products are blurring the line as to what is “lending” and what is not. The proposed recommendation will also make it clear that merchant (i.e., credit card clearing) and foreign exchange hedging arrangements are caught, which seems sensible and uncontroversial.

(61) While it will take time to incorporate the Pottinger Review recommended changes to the definition of small business in a revised Code following the triennial review, ABA banks should commit to introduce the changes as soon as possible.

The change referred to here is to increase the total debt threshold from $3m to $5m, so that larger small businesses are protected by the Code.

Significantly, this would further limit the ability of banks to enforce “non-monetary defaults” (i.e., defaults other than non-payment of principal and or interest).  Currently banks use non-monetary triggers such as financial covenants to monitor the health of businesses with multi-year loans.  If the use of non-monetary triggers is further limited, banks are likely to reduce loan tenor to a standard 12 months, at least for riskier customers.

(62) To help clarify what parts of the Code apply to small business, and to recognise there is a difference in the requirements for lending to small business and lending to individuals, the references to small business lending in Part 5 should be shifted to Part 6 of the Code.

A minor and sensible change

(63) The Code should specify that future earning capacity is taken into account when assessing a small business’s capacity to repay a loan.

Banks will be happy to explain to their customers that they take future earning capacity into account when assessing a loan, and in my experience, this is already well-understood, so this will not be a significant change.

(64) The Code should clarify that a bank’s approval of a small business loan will not be dependent on a third party (such as the small business’s accountant) certifying the capacity of the small business to repay the capacity of the small business to repay the loan.

Some banks ask their customer’s accountant to certify the capacity of a business to repay a proposed loan.


This creates problems where the customer is unwilling or unable to pay the accountant’s fees for doing so, or where the accountant forms the view that the business does not in fact have capacity to repay the loan.  The solution as proposed, however, may convert conditional approvals into unconditional refusals.

(65) Banks should advise a small business if there is likely to be a delay in the initial indication of how long it would take for a decision, the reason for the delay, and give a revised estimate when a decision is likely.

Unexpected delays can sometimes be an important “soft signal” that a customer is not regarded as being as credit-worthy as they (or perhaps the front-line banker) believe.  In practice this proposal is more likely to see lenders formally estimate the longest possible period, to simplify later management of turnaround times.

(66) Banks should commit that if they require additional information when considering a loan application, they will endeavour to ensure that this does not delay the time it will take for the bank to make a decision.

In my opinion rules that would hold lenders to fixed decision periods should be approached with caution! It is always quicker to decline a loan than to approve it, and this proposal risks a default “no” the day before the deadline, to ensure that the target is met.

(67) Banks should commit to tell small business the reason, if appropriate, as to why a loan was declined, along with what would be needed for the application to be reconsidered.

This proposal was pressed by the Australian Small Business and Family Enterprise Ombudsman. It is hard to see how it will result in anything other than generic broad-brush statements, with most businesses being told that “the bank could not be satisfied that the borrower could service the loan.”

Overall

The most significant recommendation is the proposal to extend the small business lending protections from $3m to $5m, and the larger small business borrowers affected by this may be frustrated if it makes it harder to secure longer term loans.

Other recommendations will result in loans being more speedily declined for less creditworthy customers, but it is hard to see them as major, or significant.

Lending to small business would remain conservative: reference to the decision of a prudent banker remains unchanged, and there is no sign of a specific invitation for lenders to “look through” (i.e., make allowance for) external shocks such as drought or flood, or most recently, Covid, which seems a missed opportunity.