No conspiracy in UK GRG case

The conduct of RBS’ loan workout unit GRG in the aftermath of the GFC was highly controversial, attracting media and Parliamentary attention, and resulting in a series of inquiries and reports (discussed here and here), as well as litigation by unhappy borrowers.

Some of the judgements have provided insight into the inner workings of bank restructuring teams, such as the claims pursued by PAG (discussed here), and most recently, a case in which the borrower claimed conspiracy on the part of the Lender arising from the involvement of a borrower-side adviser (the Adviser) engaged and paid by the borrower but nominated by the lender.

Background

The claims were brought by a chiropractor and his wife, and various associated entities which operated sixteen chiropractic clinics and owned property (the Claimants).

Banked by RBS since 1999, control of the account was transferred into GRG in 2009, and shortly thereafter GRG proposed a strategy which included the engagement of the Adviser.

A range of measures were tried, including a restructure in 2011, but none were successful. In February 2013 RBS appointed administrators following an attempt by the chiropractor to liquidate the companies, and in due course the Claimants commenced action for damages in respect of three claims alleging:

Mis-selling of an interest rate swap in 2007 which locked in a base rate of 5%, resulting in an interest cost £100,000 per year higher it would have been with a variable rate.
Mis-selling said to arise from the 2009 restructuring of the 2007 swap.
Conspiracy to exploit a claimed “breach by [the Adviser] of her duties of loyalty.”

A contrast in witness credibility

The Court found that the chiropractor “had become obsessed with blaming the Bank for the collapse of his business…[which] meant that it was difficult for him to give evidence comprising his best recollection…[some parts were] at best wishful thinking, mis-recollection and bluster, and at worst (as the Bank submitted) an obvious lie.”

By contrast the Court found that the Adviser was “an impressive witness” whose evidence was comprised of “honest and (usually) brief and clear answers to questions,” and that it was “easy to see why…[she] had been held in high regard by RBS.”

Findings

In CJ & LK Perks Partnership & Ors v NatWest Markets Plc [2022] EWHC 726 the Court found, in relation to the mis-selling claims:

There was no complaint by the chiropractor at the time when advised that loan approval was subject to interest rate hedging.
There was no evidence to support the conclusion that a claimed misrepresentation – that interest rates were going to rise – was made at all; and there was no evidence that the chiropractor relied upon it, because the chiropractor “wanted to expand the business and wanted the loan which RBS was proposing” and he was “happy to enter a swap if that is what the Bank wanted.”
There was no misstatement in the information provided by RBS, who in fact had warned him of significant risks which were associated with the swap.
There was no evidence to support the existence of other purported unadvised risks, and no evidence that those purported risks had actually impacted the Claimants – but even if there had been, the chiropractor would still have entered the swap, because he wanted the loan.
A claim for improper advice also failed. Not only had the RBS banker recommended that the chiropractor seek independent advice, but there was no causation grounds because the chiropractor “would still have entered into the swap, because [he] wanted the loan.”
The more limited claim in respect of the 2009 swap was also unsuccessful because there was “no substance to the case that the [relevant] risks…were not sufficiently explained.”

In relation to the conspiracy claim, the Court held:

There was no evidence whatsoever to support the allegation that the transfer to GRG “was driven by an ulterior motive on the part of RBS.”
A payment default was “obviously a serious matter” and together with clear evidence that the business would not be able to meet future obligations, justified transfer to GRG.
It was true that the Adviser had put moderate positions to RBS, but that was because she recognised that a favourable outcome for the businesses required the agreement of RBS, and that “it was unproductive to take positions which were likely to be rejected.”
Not only was there “no substance in the case of conspiracy” it was appropriate to “exonerate” the Adviser and the RBS staff, who had “acted with integrity.”

The Claimants were unsuccessful.

Small Business Restructuring: off to a good start

On 1 January 2021 a new restructuring process becomes available for some types of small business. It is a useful low cost option for those businesses that it does suit – but the Treasurer’s claim that it is part of “the most significant reforms to Australia’s insolvency framework in 30 years” is hard to support. However, it is not the nature of the changes, but rather the way that the changes were made that should concern turnaround and restructuring professionals.

First, it appears that there was no meaningful consultation with those professionals, or the organisations that represent them – which suggests that the legislators see us as part of the problem, not the solution.

Secondly – if the government really does believe what appears in its press releases – there is the prospect that after tinkering in the middle of the fringe of reform the government may move on, rather than deliver meaningful reform.

The new Small Business Restructuring Process (SBR)

The Treasurer describes the SBR as drawing on “key features from Chapter 11 of the Bankruptcy Code in the United States.” As White & Case explain, it draws on the Subchapter V process that is available to small business, rather than the Chapter 11 that we read about in the business press – but the key point is that it leaves the existing management team in situ and does not replace them with an outsider.

In summary:

The SBR is available to companies with liabilities of less than $1 million.
Just as for Voluntary Administration (VA), the process is initiated administratively by the directors, who select a registered company liquidator to act as the SBR Practitioner (SBRP).
The directors continue to manage the company, although transactions which are outside “the ordinary course of business” must be approved by the SBRP, or the court.
Unlike VA, only the company directors may propose a Restructuring Plan, and it must be proposed within twenty business days of starting the restructuring process.
The SBRP is to help the directors prepare the Restructuring Plan, and he or she then “provides a declaration to certify the restructuring plan” – arguably reporting on their own work.
Similarly to the Part IX process for personal bankruptcy, the creditors “vote” on the proposal without a physical meeting, and it is approved by a majority in value of “replies” received within 15 business days of the Restructuring Plan “being given” to creditors.
The Restructuring Plan must be executed within twenty business days of starting the restructuring process, or up to thirty business days if the SBRP grants an extension.

The “you snooze you lose” mechanism is worth noting – only votes received within the fifteen business day period are taken into account. That mechanism means that active and alert creditors will have the biggest say, and it will be common to see plans being accepted even though only a minority of creditors actually voted.

Limited accessibility to the new regime

The obvious restrictions are that the mechanism is only available to companies – not individuals, and that it only applies where liabilities are less than $1m.

There are other restrictions which will arise due to the way the SBR process operates:

Availability of credit – Creditors will know by the fact of an appointment that the company must be insolvent, and they will also know that the SBRP will not be liable to pay for any goods and services provided after his or her appointment. Directors will need to be quite sure that they will have practical access to credit, or capacity to operate on a cash on delivery basis, before they invoke the SBR.
Fixed fees for the SBRP – The Insolvency Practice Rules specify that that the fees for the SBRP must be fixed in dollar amount up to the execution of the plan, and then calculated as a percentage of the actual distributions to be made under the plan. In practice this will limit the types of Restructuring Plans that are put to creditors: prospective SBRPs will have a strong preference for simple, quick Restructuring Plans which will implicitly limit the time and work required.
Employee entitlements and tax reporting – A restructuring plan will not be valid unless the company has paid all payable employee entitlements and lodged all taxation reports and lodgements before it was circulated.

The most significant reforms to Australia’s insolvency framework in 30 years?

The SBR is clearly not the most significant reform to Australia’s insolvency framework in 30 years. That claim can be made by Australia’s VA regime: a world leading insolvency process when introduced on 23 June 1993.

Although used by companies as large as Arrium Limited, VA is less suited to businesses with multiple classes of creditors, but there no restrictions on its availability or use. It is true that VA places an insolvency practitioner as the central decision maker during the period of administration, but that is a temporary position, and the mechanism can certainly accommodate a debtor-in-possession model through an appropriately drafted Deed of Company Arrangement. Critics may say that it is relatively expensive for smaller businesses, but that is true to some extent for any insolvency process, and no doubt the new SBR will also prove to be “too expensive” for the smallest businesses.

Unfortunately, there has been no development or refinement of voluntary administration in the almost twenty-seven years since it was introduced.

It’s true that in 2016 the Government passed the laughably misnamed Insolvency Law Reform Act, which added red-tape and expense to existing insolvency processes. The Treasurer could very fairly describe the SBR as the most significant reforms to Australia’s insolvency framework in the last twenty-six years – but sadly, to say so only highlights the complete absence of any insolvency reform during that period.

Who’s asking? Who’s listening?

It seems that there was no pre-release consultation with the various organisations which (sometimes in overlap) represent turnaround and insolvency professionals: ARITA, the TMA, the AIIP, or the Insolvency & Reconstruction Committee of the Law Council or Australia; and if any individuals were consulted they have kept remarkably quiet about it.

As described in Missing Pieces, the draft Bill was released with perhaps the shortest consultation period on record: 4 business days. Those various organisations and many of their members worked very hard to meet the deadline – with almost all of the 53 submissions completely ignored.

It’s hard to believe that the absence of meaningful consultation was inadvertent, leading to the very disappointing alternative: that the legislators made a deliberate decision not to consult. If that is true then that is a very great concern, because it means that legislators may see restructuring and turnaround professionals as part of the problem, not part of any solution.

What should be on the Insolvency Reform agenda?

By a long margin, the very first thing that our legislators should do is to clearly establish an overall objective which applies to all insolvency processes.

SBR appears to be predicated on the basis that the most important objective is that owners stay in control of their business. VA has an explicitly stated goal: to maximise “the chances of the company, or as much as possible of its business, continuing in existence.” By contrast, liquidations seem geared to taking control of a business away from those previously responsible for managing it. Three different processes, three different objectives!

If a single overriding objective can be established then it should be far simpler to decide whether a stringent insolvent trading regime helps, or hinders, the achievement of that objective, in which case it might be possible to avoid continuing the hitherto regular policy flip-flops.

Other things that should be on the agenda:

SME insolvency – For most small business operators, personal guarantees to trade suppliers and banks mean that their personal financial position is inextricably linked to the financial position of their company. If their business fails, they will most likely become bankrupt. If that does happen, two separate insolvency appointees will run two separate insolvency processes under two separate pieces of legislation (and supervised by two separate regulators). Rationalisation so that there is a single process seems well overdue.
Employee Entitlements – Employees have a theoretical priority for repayment of their entitlements but the use of “payroll companies” by corporate groups means that in practice the cupboard can be bare. There should be a regime to ensure employees are consistently protected, regardless of variations in corporate structure and reducing reliance on the GEERS safety net.
Multi-class restructuring for VA – VA is a useful and powerful restructuring tool but there is a significant gap – the absence of a capacity to bind secured creditors or owners of property (such as intellectual property licensors, or landlords) unless they agree to be bound. The requirement for unanimous agreement means that any single lender or property owner has the ability to veto a restructure. It would be relatively simple to create a low cost statutory multi-class restructuring option by amending VA so that creditors in a class are bound by a 75% by value majority of class creditors, with a cram down of any out-of-the-money classes.
Fix scheme classes – Schemes of Arrangement are currently the only option to deal with multi-class restructuring, but the composition of those classes is problematic. In Australia, classes are constituted by grouping creditors based on how the scheme deals with their claim, rather than by grouping creditors with common rights. Changes so that classes are constituted by creditor rights would stop scheme promoters contriving outcomes by bundling together creditors with different rights.
Debt for Equity – Debt for equity can be a very effective restructuring tool, but there are constraints which make it difficult for banks to enter into such arrangements. The restrictions that quite properly limit the ability of Authorised Deposit-taking Institutions to invest in non-banking ventures apply equally to debt for equity restructures. This means that ADIs must consult with APRA before committing to any proposal to hold more than 20 per cent of equity interest in an entity. If ADIs had the capacity to more easily take equity, and hold it off balance sheet, then a rarely used restructuring tool might be more widely deployed.
Rescue Finance – In Australia rescue finance is typically provided by existing lenders either through informal workouts, or by providing finance to the receivers they appoint. Administrators are free to incur credit but they cannot grant a priority security over circulating assets (such as book debts and inventory) without the consent of existing security holders. If there is a change to allow multi-class restructuring on a majority, then there should be a similar change to the rules allowing an administrator to pledge security to obtain rescue finance with the consent of a majority of existing security holders.

Conclusion

It is hard to argue against a low-cost restructuring tool: what has been delivered is welcome – but it won’t suit all small businesses, and it leaves small unincorporated businesses behind altogether. There is a great deal more that could and should be done, but it is difficult to be confident that the Government even understands the opportunities before it, and quite worrying that they may regard restructuring and turnaround practitioners as part of the problem, rather than as professionals who can help them achieve meaningful reform.

The Banking Royal Commission Implementation Roadmap & Agri Lending

The Treasurer today announced the Banking Royal Commission “Roadmap.”

The roadmap document, available here, provides a response to each of the recommendations made by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

The recommendations relevant to Agricultural Lending, and the response today, are set out below:

Recommendation 1.11 – Farm debt mediation – A national scheme of farm debt mediation should be enacted.

Roadmap:

The Government is working with states and territories through the Agriculture Ministers’ Forum (AGMIN) to progress work on the establishment of a national farm debt mediation scheme

A National Farm Debt Mediation scheme is a universally supported measure, which has been recommended by numerous inquiries over several years. Implementing such a popular and well-supported measure should be relatively straightforward.

Recommendation 1.12 – Valuations of land – APRA should amend Prudential Standard APS 220 to:

require that internal appraisals of the value of land taken or to be taken as security should be independent of loan origination, loan processing and loan decision processes; and
provide for valuation of agricultural land in a manner that will recognise, to the extent possible:
- the likelihood of external events affecting its realisable value; and
- the time that may be taken to realise the land at a reasonable price affecting its realisable value.

Roadmap:

On 25 March 2019, APRA released for public consultation proposed revisions of Prudential Standard APS 220 Credit Quality. Consultation closed on 28 June 2019. APRA intends to finalise the standard in the second half of 2019 with a view to it becoming effective from 1 July 2020.

An independent internal valuation will add some cost and delays for some remote customers, but otherwise should not be controversial, or difficult to implement.

As discussed here in greater detail, it is harder to understand how valuers will change their practices to implement the second recommendation around “external events.”

Recommendation 1.13 – Charging default interest – The ABA should amend the Banking Code to provide that, while a declaration remains in force, banks will not charge default interest on loans secured by agricultural land in an area declared to be affected by drought or other natural disaster.

Roadmap:

The ABA has announced the amended Banking Code, incorporating recommendations 1.8 and 1.13, will be implemented by March 2020.

Recommendation 1.14 – Distressed agricultural loans – When dealing with distressed agricultural loans, banks should:

ensure that those loans are managed by experienced agricultural bankers;
offer farm debt mediation as soon as a loan is classified as distressed;
manage every distressed loan on the footing that working out will be the best outcome for bank and borrower, and enforcement the worst;
recognise that appointment of receivers or any other form of external administrator is a remedy of last resort; and
cease charging default interest when there is no realistic prospect of recovering the amount charged.

Roadmap:

The Government expects that banks will implement recommendation 1.14 as soon as possible.

Banks will believe that they already manage every distressed loan on the footing that working out will be the best outcome for bank and borrower, and enforcement the worst and recognise that appointment of receivers or any other form of external administrator is a remedy of last resort. In my opinion they will be untroubled by those recommendations, and comfortable with immediate implementation.

A requirement to offer farm debt mediation as soon as a loan is distressed may be problematic – depending on what is meant by distressed, which is not otherwise defined. For example, in Victoria a lender can only initiate FDM by serving a notice that they “intend to take enforcement action.” If the recommendation is intended to make FDM available in situations where enforcement is not planned, then the respective FDM legislation will require amendment.

A mandatory requirement to ensure Agri loans are managed by experienced agricultural bankers will have banks working to understand what “managed” means. Often the banker in contact with the customer is not the banker making the final credit decision. Does the recommendation require the customer contact to be an experienced agri banker, or the credit approver, or both?

New rules from APRA? A draft APS220 update

In March 2019 APRA released a draft Prudential Standard APS 220 Credit Risk Management. The new standard is intended to replace the current APS 220 Credit Quality.

The revised standard, available together with a discussion paper here, represents the first significant update since 2006. It provides APRA with the opportunity to respond to both the Banking Royal Commission, and also to recent guidance issued by the Basel Committee.

The change in the name of the standard is intended to emphasise the importance of a ‘whole of loan life’ approach, rather than just focus on origination. Some noteworthy points include:

The cost of bank recognition of borrower hardship

The definition of restructured loans will expand. Currently, restructured loans are those where loan terms have been modified “for reasons related to the financial difficulties of an entity.” Under the draft standard this would expand to loans for which “a borrower is experiencing temporary financial difficulty or hardship in meeting its financial commitments.”

Further, the rehabilitation period – the length of time for which loans must meet those modified terms to be considered as performing – will increase from 6 months to 12 months, likewise increasing the time period in which a higher risk weighting penalty is applied.

These two measures have the potential to make it more expensive for banks that grant hardship relief. Applying a cost overlay if hardship relief is granted is probably technically sound, and conservative, but might surprise those who believe that banks should be encouraged to provide hardship relief, not penalised.

Use of covenants

The draft standard makes it mandatory for banks to consider the use of “covenants designed to limit the ADI’s exposure to changes in the future risk profile of the borrower.”

The most common covenants are based around financial ratios such as interest cover ratios and loan to valuation ratios. The use of such covenants was heavily criticised by another arm of government – the office of the Small Business Ombudsman – with the result that the 2019 Banking Code of Practice no longer allow banks to use them (except in relation to specialised lending) as an event of default.

It seems that lenders to small business might need to choose between complying with the draft APS220, and complying with their own Banking Code of Practice – because they may be unable to comply with both.

Valuation methodology

The discussion paper notes that the draft standard implements one of the recommendations of the Royal Commission, requiring valuations of agricultural land taken as security to:

take into account the likelihood of external events, such as drought and flood, which may impact the valuation of the land

Prior to the Royal Commission, valuations were widely understood to be point-in-time assessments of current value under current conditions, and were not thought to be estimates of future value. In most cases, reliance beyond a three month period from the date of valuation is specifically excluded by a written disclaimer.

It will be interesting to see how valuers respond to the change if it proceeds as proposed. Some may expand their reports to include commentary on the likelihood of external events for the three month period in which the valuations are “live.” Others may add (more!) boiler-plate text to make it even clearer than they do not provide a view as to future value.

Next steps?

The period for feedback closed on 28 June 2019. Market feedback suggests that further, less formal, consultation processes may already be underway.

Financial Services Royal Commission: How the Interim Report deals with Agricultural Lending

The Interim Report of the Financial Services Royal Commission (available here) was tabled in Parliament yesterday.

Section 6 deals with Agricultural Lending, and concludes by identifying a list of ‘key questions’ for further consideration. The full list is reproduced at the bottom of this post, but for me the most important are:

Farm Debt Mediation

Should there be a national system for farm debt mediation?
If so, what model should be adopted?
Should lenders be required to offer farm debt mediation as soon as an agricultural loan is impaired (in the sense of being more than 90 days past due)?

There is mandatory FDM in South Australia, Victoria, Queensland and New South Wales, and a voluntary scheme in Western Australia. There is no legislative scheme in Tasmania, the Northern Territory or the ACT.

To replace the current patchwork coverage with a national scheme would be one of the most widely supported and least-opposed recommendations that the Royal Commission could make. It will be easier for lenders to comply if they do not need to manage up to seven different regimes, but there is more to it than that. Some borrowers will have farms either side of a state boundary, or will cross a State border to sign loan documents, and it will be easier for them too if only one regime applies.

The NSW system is the most well established, and best developed – it is the model that should be adopted. There is one feature of the Victorian scheme which should be applied nationwide however: assistance with the cost of mediation so that farmers can always afford to engage.

A current problem is that FDM regimes are only available where there is a default. It would be helpful if mediation schemes could be accessed prior to that point, but the proposed linkage to the loan being ’90 days past due’ does not go far enough. A better option would be to also allow access to the scheme where a lender has determined that it is not prepared to extend a current loan.

Conduct of valuations

How, and by whom should property offered as security by agricultural businesses be valued?
If prudential standard APS 220 is amended to require internal appraisals to be independent of loan origination, loan processing and loan decision processes, when should that amendment take effect?

To those of us in capital cities the answer seems clear and obvious: a banker originating a loan should never be involved in valuing the security.

A farmer west of Longreach however, might be frustrated to be told that their loan approval will be held up until someone can get out from head office, and that they will need to meet the travel and accommodation costs.

There does need to be some allowance for a local banker with appropriate training in remote locations to conduct valuations for relatively small loans or small increases to existing loans.

Should LVR ratios be capped?

Is the possibility, or probability of external shock sufficiently met by fixing the loan-to-value ratio?

A maximum LVR sounds like a practical way of ensuring that borrowers retain some level of buffer to allow them to cope with external shocks – but it will be a double-edged sword. A hard-coded LVR limit would also stop lenders from providing carry on funding – potentially forcing the sale of farms.

Enforcement only as a last resort

In what circumstances may a lender appoint an external administrator (such as a receiver, receiver and manager or agent of the mortgagee in possession)?
Is appointment of an external administrator to be the enforcement measure of last resort?

Each of the banks that gave evidence would agree that the appointment of an external administrator should be the last resort. The difficulty arises in practice: what does ‘last resort’ actually mean, and when has that point been reached?

It is significant that all but one of the case studies were either from states without mandatory FDM, or pre-dated the current FDM. There is good reason to think that FDM has played an important role in avoiding the need to enforce at all.

Not only does FDM provide an unmistakable signal to all parties that the point of ‘last resort’ may be approaching, at the same time it provides them with an alternative to enforcement.

The Next Phase

The executive summary explains that the next round of public hearings will address the questions raised in the interim report.

The Interim Report of the Financial Services Royal Commission is available here.

5.0 Issues that have emerged

All agricultural enterprises are subject to the effects of events beyond the control of the individual farmer. Occurrence of any of these events, let alone a combination of them, will affect cash flow and profitability and, hence, the ability to service debts. Their occurrence will often have profound personal effects on those who conduct the business.

Four issues emerged: about revaluation of securities; difficulties in obtaining access to banking services and appropriate support; changes to conditions of lending; and, enforcement by appointment of external administrators.

The particular questions can be identified as including:

How are borrowers and lenders in the agricultural sector to deal with the consequences of uncontrollable and unforeseen external events?
Does the 2019 Banking Code of Practice provide adequate protection for agricultural businesses? If not, what changes should be made?
How, and by whom should property offered as security by agricultural businesses be valued?
- Is market value the appropriate basis?
- Should the possibility, or probability of external shocks be taken to account in fixing lending value? How?
- Should the time for realisation of security be taken to account in fixing value? How?
- Is the possibility, or probability of external shock sufficiently met by fixing the loan-to-value ratio?
- If prudential standard APS 220 is amended to require internal appraisals to be independent of loan origination, loan processing and loan decision processes, when should that amendment take effect?

Should distressed agricultural loans be managed only by experienced agricultural bankers?
Do asset management managers need more information (such as the cost to the lender of holding the loan) to make informed commercial decisions about management of distressed agricultural loans?
Are there circumstances in which default interest should not be charged?
- In particular, should default interest be charged to borrowers in drought declared areas?
- If it should not, how, and where, is that policy to be expressed?
- Should the policy apply to other natural disasters?
In what circumstances may a lender appoint an external administrator (such as a receiver, receiver and manager or agent of the mortgagee in possession)? Is appointment of an external administrator to be the enforcement measure of last resort?
Having regard to the answers given to the preceding questions:
- Is any regulatory change necessary or desirable?
- Is any change to the 2019 Code necessary or desirable?
Should there be a national system for farm debt mediation?
- If so, what model should be adopted?
Should lenders be required to offer farm debt mediation as soon as an agricultural loan is impaired (in the sense of being more than 90 days past due)?

How do we measure up? Australian treatment of SME borrowers

The first hearings of Australia’s Banking Royal Commission began in March 2018 – only one month after the final conclusion of a long running UK review into the post-GFC handling of problem loans by UK’s Royal Bank of Scotland.

A so-called ‘Skilled Person’ report was commissioned by the UK Financial Conduct Authority in January 2014, and delivered in September 2016. But it was only released to the public in February 2018 when an apparently impatient Parliamentary Committee acted unilaterally by publishing the full report online here.

Whereas the Royal Commission hearings in June 2018 presented a small and carefully curated selection of customer complaints, the RBS review conducted an extremely detailed analysis of more than 200 cases – an unprecedented insight into the working of a workout team.

The background to the report is discussed in detail here.

The report concluded that there was ‘widespread inappropriate treatment of customers’ by GRG – RBS’ workout team. It included recommendations for RBS specifically, and also made recommendations ‘for the wider market.’ Both are reproduced in full below.

How does Australia measure up against the RBS report recommendations?

At a time when there appears to be fierce scrutiny of the treatment of small business borrowers by Australian banks, it is appropriate to measure the current Australian position against the four general recommendations contained in the RBS report:

1. Extension of Unfair Contract Terms protections to SMEs

The UK’s Unfair Contract Terms regime does not apply to SME businesses at all.

The Australian UCT regime does not completely align to the UK regime (for a careful comparison see here) but what is in place does apply to loans of less than $1 million to small business (defined as those with fewer than 20 FTE) made or varied after 12 November 2016.

The ASBFEO and others argue that the $1m limit is too low, but Australia at least has some coverage.

2. Greater access to the Financial Ombudsman Service

In the UK, ‘micro-enterprises’ (an EU definition: businesses with an annual turnover of up to two million euros and fewer than ten employees) can access their FOS scheme, with compensation awards limited to £150,000.

In Australia, the current FOS scheme compensation is limited to $323,500. At present then, the UK and Australian schemes provide broadly similar coverage, however from 1 November 2018 the new Australian Financial Complaints Authority will commence operations. AFCA will have power to award compensation of up to $1m in relation to business credit facilities up to $5m provided to businesses with less than 100 staff.

As of 1 November the Australian scheme will therefore be available to micro, small, and medium businesses, and it will provide significantly larger compensation. Australian businesses will clearly have better protection from 1 November than their UK counterparts.

3. Introduction of a Code for bank support of customers

There is a ‘Lending Code’ in the UK, but it provides limited guidance in the area of bank support, and in any event it only applies to micro-enterprises.

The Australian Code of Banking Practice – approved by ASIC last week, but to apply no later than 1 July 2019 – is available here.

The CoBP is stated to apply to ‘small businesses’ (yet another definition!): those with fewer than 100 staff and annual turnover of less than $10 million in the previous financial year, and less than $3 million total debt.

Part 6 of the CoBP sets out protections for small businesses. Perhaps the most significant development is a limitation on the recovery of loans based on the grounds of non-monetary default. That said, careful explanation is required because some non-monetary defaults will still apply if material: formal insolvency, lapsing of insurance, failure to provide correct and complete information, a loss of license or breach of law, or use of the loan funds for an unauthorised purpose. There also specific types of loans where ‘financial indicator’ non-monetary defaults are ‘ruled in’ : margin lending, SMSF loans, bailments, invoice finance, construction finance, foreign currency loans and tailored cash flow lending.

Other changes include:

A minimum 30 days’ notice of enforcement action (albeit with some exceptions where special risks are evident).
A minimum of 3 months’ notice where a bank decides not to extend a loan beyond its original term.
A blanket prohibition against the use of ‘material adverse change’ clauses.
Clarity around valuation processes: clear explanation around the purpose of the valuation, with copies of property valuations and valuer instructions to be provided to the borrower unless enforcement action has already commenced.
An undertaking to ensure that valuers and investigating accountants are members of professional organisations with appropriate codes of conduct. Banks must apply additional internal oversight if investigating accountants are to be appointed as receivers.

ASBFEO argues that the $3m limit is too low and should be increased to $5m, but again, Australia is clearly ahead of the UK in relation to a formal code of practice.

4. Dealings with third-party providers, especially in relation to secondees.

The RBS report identified issues which it said gave rise to concerns that third-party service providers ‘may be too ready to see the bank’s point of view.’ Most would expect that a service provider would work hard to see things from a clients’ point of view however, so it is not clear at first reading what criticism was intended by the authors of the report.

More clearly, the report identifies the need for controls around distribution of sensitive information to advisers, and the potential for conflicts of interest where secondees are involved.

Most lenders would have their own controls around such issues, but there is no industry standard in either the UK or Australia.

Recommendations do not apply to non-bank lenders

The RBS recommendations refer specifically to ‘banks’ rather than ‘lenders.’

At least in Australia, the market share of non-banks is growing strongly in some sectors. Some part of that growth may be due to a customer preference for Fintech offerings, but it also reflects the lack of alternatives for borrowers who are excluded by the CoBP criteria (for example, those who are ‘asset rich’ but ‘income poor’), or seeking funds in areas where bank portfolio management issues translate to limited appetite (currently: property development).

Some critics of banks may argue that it is appropriate that banks are subject to a higher standard than other lenders. Leaving the merits of that argument to one side, it raises an interesting policy question: is there a need for non-bank borrowers to have a real understanding of which regime applies, or is it acceptable for that to be left to the ‘small print’ of the loan agreement?

Overall

It may not suit the narrative of some bank critics, but protection of small business bank customers is greater than that available to small business non-bank customers, and it is clear that both have significantly better regulatory protection in Australia than their UK counterparts.

Part 7 of RBS Group’s treatment of SME customers referred to the Global Restructuring Group (available online here) is reproduced in full below.

Part 7 – Recommendations

7.1 Throughout this report, we have Identified Issues relating specifically to RBS, but we also believe that there are wider lessons for RBS and for the industry as a whole. In this Part we draw together specific recommendations for RBS and draw out some wider observations in the light of our findings.

7.2 The FCA has instigated a review of its own approach to SMEs as users of financial services and we see our report and its recommendations as a contribution to that work. There are also Important Implications for other lenders, the professionals with whom they work, policy makers, and SME customers.

Recommendations for RBS

7.3 The conclusions we have reached in this report warrant a fundamental rethink by RBS of how it handles Its SME customers in financial distress.

7.4 We recognise that some change was already being made at the end of the Relevant Period. But the terms of reference for Phase One meant that we did not review whether or not the lessons from these events have been learnt by RBS, or whether the wide-ranging changes that we consider to be necessary have been made and are embedded. As we did not review changes made by RBS after the end of the Relevant Period we recognise that some of the recommendations set out below may already have been addressed or their relevance superseded by subsequent events but nonetheless they provide a framework within which future treatment of SME customers can be developed and provide an opportunity to address the weaknesses in governance and oversight, and indicators of poor culture in GRG that we have highlighted In this report.

7.5 We recommend that a review is carried out to ensure that our conclusions and recommendations that remain relevant to RBS have been implemented and in particular, to provide assurance to RBS, customers and the FCA that adequate governance and oversight arrangements are now in place to ensure that similar poor treatment of distressed SME customers could not happen in future.

7.6 Specifically we recommend that in carrying out that review RBS should, in the light of the observations and conclusions in this report:

Improve its governance arrangements and in particular*:
- Review the objectives set for its turnaround division – the revised objectives should be agreed by the RBS Group Board;
- Review the governance of its turnaround division to ensure that it is subject to effective scrutiny, and establishes effective second and third lines of defence;
- Review the content and form of management Information to ensure that customer outcomes and experience are accurately reported:
- Review the staff objectives set for, and culture of, those In Its turnaround unit dealing with SME customers to ensure that these more closely align with the revised objectives the RBS Board has agreed;
Improve the arrangements around transfer into and out of the turnaround unit:
- Revise the criteria for the consideration of referral to the turnaround unit In respect of SME customers;
- Review the governance of the transfer process for SME customers to ensure that It is acting both efficiently and fairly: specifically we recommend that the chair of the group considering transfers should be independent of both B&C and the turnaround division;
Ensure that its arrangements for returning customers to mainstream banking are clearly signposted to SME customers and that where RTS is appropriate this can be expedited promptly;
Provide a greater focus on turnaround options where these are viable:
Review and Improve Its training and guidance for staff handling turnaround issues and ensure that staff have the necessary support and training to deliver good turnaround practice;
- Ensure in future that viability assessments are carried out on all cases following transfer and that where customers are potentially viable, a clear turnaround plan with milestones and targets should be produced and wherever possible shared and agreed with the SME customer;
- Review the role and purpose of the Strategy and Credit Committee (or its successors) to ensure the terms of reference contain a requirement that turnaround options and the fair treatment of customers are reviewed in addition to credit considerations;
Rethink its approach to pricing in respect of distressed SME customers:
- Review the policy and practice of the turnaround unit on pricing to ensure that Relationship Manager pricing decisions and reasoning are fully documented and validated and that turnaround considerations are taken Into account;
- Review the range and form of fees and other charges for SME customers and set out for customers a clear and simple guide to when fees wiII be applied;
- Review the rationale for an additional administrative/management fee being routinely levied on distressed customers;
Ensure any internal valuations are handled more carefully:
- Ensure that internal valuations and the reasoning behind them are fully documented and that this information is shared with the customer if the valuation is to be used in the development of strategy, or in decisions around the level of facilities or pricing;
- Where in-house resources are used to provide valuations upon which significant decisions are made In the context of a turnaround unit, RBS should ensure that there is a clear separation of functions and adequate safeguards to prevent conflicts of Interest;
Review its policies and practices on dealing with customers and on complaints:
- Review its policy and procedures for Relationship Managers’ engagement with SME customers. In particular RBS should consider how Its engagement with SME customers takes appropriate account of the different circumstances of the diverse group of SMEs with which it deals;
- Review and revise its communications with customers to ensure that it is transparent, clear and informative,
- Revise its approach to complaint handling and provide SME customers with clearly signposted routes to escalate their complaint if necessary;
Review its use of third-party firms and in particular the use of secondees’

RBS should ensure that appropriate guidelines and mechanisms are in place to guard against conflicts of interest in these areas;

Fundamentally review its approach to the purchase of distressed assets:

Amend the governance, policies and practices and other arrangements relating to circumstances where it (West Register) acquires or considers the acquisition of assets owned by its distressed SME customers to address the shortcomings in arrangements that we have Identified and ensure effective separation of the function from any turnaround unit;

Review the use of Upside Instruments in the context of SME customers:
- Review the Information provided to SME customers In relation to PPFAs to ensure that the agreements and the associated costs are transparent; and
- Review the role of EPAs In relation to SME customers, in so far as RBS Judges their continued use is justified and helpful to some customers it should further consider customer communication, minimum timescales and notification of buy-back terms, the governance around the arrangements and more widely the Interaction between SIG, the turnaround unit and SME customers

7.7 Addressing these recommendations will help ensure that similar problems to those experienced In RBS’s GRG during the Relevant Period do not occur in future. These recommendations do not, however, address the concerns and Issues of those SMEs that were handled by GRG. We make two recommendations that are intended to address specific unfairness that we observed during the course of our review. These are:

Revisit the cases Identified in our review where it Is clear that GRG failed to respond to a complaint or where Its response was Inadequate, and
Review the position of those SME customers who entered Into an EPA during the Relevant Pernod with a view to ensuring that where a West Register minority holding in their business remains in place that they have a fair means of resolving disputes about the value of that holding.

7.8 But those specific recommendations do not address the central findings of our review. We have identified a number of cases where we conclude that the actions of RBS are likely to have caused material financial distress to the customers affected and there are other cases where it seems clear that the customer will have suffered from some unfairness. It is understandable that there will be calls for RBS to compensate the customers affected.

7.9 As we have noted previously the extent and nature of financial distress vary considerably and are often hard to quantify with any precision. The circumstances of GRG customers often meant that the Bank had considerable discretion under the law, and those Individuals who suffered may not have a straightforward legal position. In any case, for example because the company was the Bank’s customer, and they may no longer be the owners, or the company may have ceased to exist. The inappropriate actions we identify and their wide ranging consequences for customers were not caused by breaches of regulatory rules or principles so the scope for regulatory action is limited

7 10 Responsibility for responding to these Issues and the distress GRG caused many of its customers rests with the Board of the RBS Group. We do not underestimate the challenges of any redress scheme it would likely require independent, lengthy and complex mediation, operating outside the strict legal framework.

7.11 Nevertheless we recommend that RBS should consider the practicalities of providing redress to GRG customers who are likely to have experienced financial distress as a result of its actions.

7.12 There are also some wider Issues for RBS to consider. First the extent to which the Issues we report here In respect of GRG were or In particular remain features of other units handling SME customers. We recommend that RBS reviews the relevance of these findings more widely to its handling of SME customers.

7.13 Second the terms of the Requirement Notice meant that we did not review the extent to which those in RBS outside GRG were aware of the Issues. In any event it appears to us that there are wider lessons for RBS to consider in terms of how the events in GRG could have continued for so long apparently either unnoticed or unchallenged by others in the wider RBS Group.

Lessons for the wider market

7.14 The FCA has, as noted above, Instigated a review of its own approach to SMEs as users of Manual services. Our report and its recommendations can be viewed as a contribution to that work. Our findings highlight the diversity of SMEs and the Inequality of bargaining power between less sophisticated SMEs and banks. They also underline the lack of protection available more widely to SMEs.

7.15 The case for standards – established either by regulation or by agreement – In relation to lending to SMEs Is derived from the special features of the market, as described In the CMA/FCA Market Study and the wider CMA Retail Banking – SME market Investigation: a sector with high concentration in lending, the lack of understanding of many SMEs as to the pricing of banking products Including loans, and the paradox of Simultaneous low levels of satisfaction and of switching among SME bank customers. As our work has shown, SME customers facing hardship may have even more limited choices. They will often have little realistic prospect of changing their banking arrangements – whatever their level of satisfaction or dissatisfaction with the services provided, and whatever the price of those services. This Is particularly the case during periods of economic uncertainty

7.16 The SMEs In our sample illustrate the variety of SMEs that banks have to deal with. They included some SMEs with a reasonable level of financial sophistication who had available to them expert advice; but they also included SMEs without access to Independent advice, and with little financial experience. Even when a SME had some reasonable understanding of financial Issues, this was not necessarily sufficient for the increased complexity of the Issues which often arose once the SME was transferred to GRG, where the situation could be complicated both by general legal issues such as the different protections and treatments offered to limited companies and to sole traders, and by the complexity of the solutions which GRG on occasion brought forward. There were other important differences some were In effect sole traders or owner managers where the sickness of a key individual could have catastrophic consequences for the business for some smaller customers the lending was closely intertwined with personal financial arrangements, so that when things went wrong in the business the consequences were personal as well as professional.

7.17 We have noted that GRG had few arrangements for drawing such distinctions in its customer base and for shaping its services and communications with an eye to these differing levels of capability. Indeed, it is not clear that RBS now accepts the need for this.

7.18 We believe that policies and practices for the SME sector need to be based at least In part on an appreciation of differing customer capabilities, if the SME customer is to be treated fairly. This is not readily defined by arbitrary limits such as amounts of debt or even turnover. But it will be relevant to take account of the stage in the banking relationship reached by the customer, to ensure that products, services and communications are appropriate for the needs of the SME customer.

7.19 The present regulatory protections for SME-related conduct are limited. Given the widespread inappropriate actions Identified in this report in relation to lending activities, we consider that the FCA should work with the government and other relevant parties to extend the protections available to SME customers.

7.20 One option would be to extend the regulatory perimeter to bring SMEs within the scope of FCA’s regulated activities, to ensure that regulatory action can be taken to guard against unfair treatment of customers and that the principles for business and standards of good governance and personal respon5ibility apply to this sector as they do to other parts of retail banking However a higher priority may be to give SMEs avenues to challenge banks where they are treated unfairly For example consideration should be given to extending the unfair contract terms protections to SMEs, and giving them greater access to the F0S.

7.21 Contracts with SMEs for the provision of credit facilities and other services can be markedly more complex than their retail market equivalents. In part this reflects limited protections for SMEs – in particular the Unfair Terms in Consumer Contracts Regulations (UTCCRs).

7 22 As a result, SME contracts can give banks wide discretionary rights to vary terms that would not be compliant with unfair contract terms provisions in a retail setting. The lack of unfair contract terms protections, taken together with the restricted access to redress/dispute mediation for SMEs, can give rise to a risk of unfair treatment of customers. Whilst some discretion may be inevitable given the nature of the products involved, the ability of banks to change lending criteria, or to treat many loans as well as overdrafts as ‘on demand’, means that banks have a wide discretion that SMEs cannot readily plan against or challenge.

7.23 The Law Commission’s recommendation” that Unfair Terms in Consumer Contracts provisions should be extended to at least some SME customers has not been progressed. Coupled with the restrictions on access to dispute resolution services, this can place SMEs at a material disadvantage

7 24 A concern raised by many SME customers in our sample related to the absence of any serious consideration of their complaints while RBS had a policy to respond to complaints in line with its requirements under regulatory rules, many SME customers were not micro-enterprises and as such complaints from them were not covered by DISP. That meant the Bank had no regulatory obligations to handle complaints promptly, to investigate them fairly or to consider the root causes of such complaints. And there was no obligation to record and report on those complaints or to publish information about them.

7.25 For customers other than micro-enterprises there is no access to the F0S. The ability, alternatively, to litigate for most of these customers will be limited, litigation is notoriously slow and costly and detracts from the running of the business. FCA is committed to reviewing the scope of FOS following the report of the Banking Standards Commission. But the micro-enterprise definition is not the only barrier facing SMEs in their dealings with FOS. Even for micro-enterprises, the F0S award limit (£150,000), coupled with the inability to litigate for any additional compensation Following a FOS decision, limits the relevance of FOS as a redress option

7.26 We encourage the FCA to work with the government to ensure that there are adequate protections for the less sophisticated SMEs. This could include the extension of the unfair contract terms protections to SMEs and greater access to the F0S.

7.27 An alternative (or supplementary) approach would be to develop professional standards governing banks’ lending to SMEs. The Lending Code applies to some SMEs, but only micro-enterprises. It includes some provisions on helping micro-enterprises who are experiencing financial difficulties and complaints handling. The Lending Code is monitored by the Lending Standards Board.

7.28 In relation to turnaround divisions the need for additional protection for SME customers is more acute. At present there are no generally recognised professional standards for turnaround or restructuring units in the UK, although various guides and codes exist which are seen as relevant. These include for restructuring the IMF Restructuring Guidelines, the ‘London approach’ and the INSOL Principles. Both the Insolvency Practitioners Association and the Institute for Turnaround publish codes of ethics, and the latter has recently published a ‘Statement of Principles for the UK ‘ Business Support Units’ of Banks’.

7.29 The principles cover Issues we identified as part of our review, including provisions on treating customers sympathetically, communication, appropriate pricing and complaints handling. They have been endorsed by several banks. However, there is little transparency about what banks have done to ensure that they meet the principles, and it seems no independent monitoring of compliance with the principles it is unlikely, therefore, to give customers confidence that this will make a difference to their treatment in future.

7.30 Both the Lending Code and the Institute for Turnaround Statement may have a useful role here. What is Important is that any self-regulatory action has the confidence of both banks and customers and has demonstrably effective independent oversight and monitoring.

7 31 We encourage the industry and customer groups to develop a code on how banks can best support customers in need of business support. Such a code should be subject to independent oversight and monitoring.

7.32 The situation In RBS and GRG was particular to that organisation at that time. Nevertheless the themes raised in this report may have wider resonance as banks consider how they should further develop turnaround units. For example, a concern that was raised with us by some stakeholders was the nature of the relationship between lenders and various professional firms that support the turnaround or Insolvency process.

7.33 Inevitably banks are a major user of accounting/Insolvency, valuation and legal services. Given their scale and scope providers of these services will understandably wish to have strong and constructive relationships with banks. A complex pattern has emerged of links between Individual suppliers and banks which, It Is argued, includes frequent use of secondees from professional firms, complex and sometimes non-transparent fee and revenue agreements between advisers and individual banks, and questions around the control of sensitive information between the banks and their advisers

7.34 Such Issues can give rise to concerns about the availability of qualified third-party support with the relevant experience to support customers (given that most with experience will have extensive conflicts with the banks serving those customers) There is also a perception that customer perspectives will be Ignored because of the commercial significance of meeting wider bank requirements where a bank Is a major client of a specific adviser and that the professionals may be too ready to see the bank’s point of view.

7.35 In the case of GRG we identified weaknesses in the management of potential conflicts of interest, in particular around the use of secondees. It was not surprising that many customers were left with the Impression that third-party providers were too close to the Bank. But a more general comment is that, whether or not such behaviours take place, the absence of agreed standards can create a suspicion of inappropriate practice, particularly where clients are facing economic distress, even If this may not In fact exist.

7.36 We suggest that banks should review how they interact with third-party providers, especially in relation to secondees.

7.37 More generally we suggest that banks should review their own turnaround units with a view to ensuring that the lessons from this report in so far as they are relevant to other institutions are applied more widely.

Subsidiary roman numerals do not reproduce in WordPress format, so they appear here as second-order bullet points

Safe Harbour Restructuring Plans: Would the Carillion turnaround plan pass muster?

The investigation in the UK into the collapse of Carillion Plc by a House of Commons select committee provides rare public access to the restructuring plan for a large company. Would the plan meet the requirements of Australia’s Safe Harbour regime?

The Collapse of Carillion

Carillion was a UK-headquartered construction company with worldwide operations employing 43,000 staff. It was placed into liquidation on 15 January 2018 following the UK government’s refusal to provide emergency funding,

With only £29 million in cash and creditors of more than £4.6 billion the position was so dire that – according to the select committee report – the company was forced into liquidation because it could not find a administrator prepared to take on the job in light of uncertainty about whether there was enough money to cover their costs.

Investigations into the conduct of the directors and auditors by the Insolvency Service, Financial Reporting Council, Financial Conduct Authority, and the Pensions Regulator are underway. In addition, the House of Commons Work and Pensions Committee launched an inquiry within a fortnight of the collapse.

As discussed here, the 16 May committee report (available here) is scathing in its criticism of directors, auditors, and regulators. The Inquiry has also made public a large number of documents which would not ordinarily be available – most notably including the 100 page turnaround plan.

Australia’s Safe Harbour regime

Australia’s severe insolvent trading laws make company directors personally liable for debts incurred when a company is insolvent.

By comparison the UK’s ‘wrongful trading’ regime imposes liability if directors ‘knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation’ and did not take ‘every step with a view to minimising the potential loss to the company’s creditors.’

The Australian Safe Harbour regime provides company directors with protection against insolvent trading claims but only if their conduct and actions, and the conduct of the company, meet minimum standards.

Would the Carillion plan meet the Australian Safe Harbour requirements?

The plan does articulate an appropriate objective that is clearly a better outcome than liquidation, and it does identify the use of a big 4 accounting firm as an appropriately qualified adviser.

However the plan is silent about any steps the directors had taken to conclude that they are properly informed about the financial position of the company, or that they proposed to take to stay informed. The document identifies a number of actions that have been taken, but it doesn’t really set out a future action plan, identify those responsible for each action, or set milestone dates.

Those omissions may not be fatal – perhaps there were other documents that provide appropriate detail. The biggest difficulty that the directors would have in meeting the Australian criteria is that the forecasts in the plan exclude employee pension contributions from the company budgets, and paying employee entitlements ‘as they fall due’ is a key requirement of the Australian regime.

Too little, too late

Of course the Carillion turnaround plan was never designed to meet the Australian requirements, so it’s not a huge surprise that it doesn’t. But nonetheless, that ‘failure’ highlights that it is essential for directors seeking to access safe harbour to ensure that they have a plan that is fit for that purpose.

In the case of Carillion, history shows that the plan was too little, too late: the company was in liquidation within a fortnight of the plan being finalised.

First published here

Restructuring & Turnaround professionals and the Royal Commission

In December (here) I suggested that the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (‘FSRC’) had the potential to become the seventh inquiry in the last seven years to examine the conduct of Restructuring and Turnaround practitioners.

The third round of hearings which commence on 21 May specifically allocates time (the agenda is here) to considering the “approach of banks to enforcement, management and monitoring of loans to businesses.”

On 7 May the FSRC published its 10th background paper: Credit for small business – An overview of Australian law regulating small business loans. The paper does extremely well to condense a very broad subject into 41 pages but surprisingly makes no mention whatsoever of the PPSA – which is surely significant, if only for the fact that it imposes a duty comparable to section 420A.

Two days later the FSRC released background paper 11 (both papers are available here) prepared by Treasury at the request of the Royal Commission to provide an “overview of reforms to small business lending.” There is likewise no mention of the PPSA regime, but the paper does include comment about the ILRA legislation, as well as brief reference to safe harbour and ipso facto.

There have not yet been any reports of Restructuring & Turnaround professionals being asked to appear – but we may be getting closer.

Less butting of heads? Changes to the NSW Farm Debt Mediation Act

The Farm Debt Mediation regime established in NSW in 1994 is now well understood, and is regarded by most observers as the Australian benchmark.

The changes contained in a Bill tabled in Parliament on 10 April 2018 and available here follow a careful and thorough consultation. Although the reforms represent more of an adjustment than a major overhaul, they are significant nonetheless.

One of the most striking changes is the creation of an offence, committed by a creditor who enforces a farm debt without having first obtained an ‘exemption certificate’ from the Rural Assistance Authority. An exemption certificate will only be available if a ‘satisfactory mediation’ has been already undertaken and completed, or if the farmer declines mediation or fails to properly participate.

Other changes include:

Broadening the ambit of the scheme, to apply to ‘matters involving farm debts’ rather than ‘farm debt disputes.’
More specific definition of a ‘farming operation’ as a business undertaking that ‘primarily involves’ agriculture, aquaculture, the cultivation or harvesting of timber or native vegetation or any connected activity – but excludes wild harvest fishing, or the hunting or trapping of animals in the wild.
Confirmation that a breach of an earlier mediated outcome does not require a second round of mediation.
Allowing the parties to waive the 14 day cooling off period in writing.
Implementing a more structured approach by which the parties may reasonably request information or copies of documents from each other.
Sensibly allowing parties to break the current confidentiality regime if it will ‘prevent or minimise the danger of injury to any person or damage to any property.’

What’s missing?

To create a criminal offence for enforcement absent an exemption certificate will be seen by some as heavy-handed, but otherwise the changes should receive broad support. That said, there are some missed – albeit less significant – opportunities for improvement:

Currently lenders can only invite a farmer to mediate if he or she is in default. In practice this may lead a lender to call a default earlier than they otherwise might, because that is the only way to access the mediation process. A way to initiate mediation without a default would be useful in some situations.
Attendance at a mediation by all parties is preferable – but sometimes relationship breakdowns contribute to financial difficulties, and vice versa, and it can sometimes be better to mediate with one party ‘attending’ by video conference. The amendments don’t directly facilitate this, however there is allowance for later modification of the mediation process by regulation.
There is no ‘minimum’ size for a farming operation. The question: ‘how many fruit trees turn a weekender into a farm?’ remains unanswered.

If passed, the legislation will commence on proclamation.

PAG v RBS: Calling for Valuations – A final outcome

Property Alliance Group is an ex-customer of the Royal Bank of Scotland so unhappy about its treatment by GRG – RBS’ workout unit – that it took legal action against the bank.

Some of the issues raised by PAG concerned an interest rate hedging program entered into before the transfer to GRG, and are not relevant to restructuring and turnaround practitioners. However, PAG also complained about management by GRG, including decisions to seek updated valuations, which resulted in breach of a loan to valuation ratio, and led to a subsequent renegotiation of terms.

As discussed here, PAG was unsuccessful in its first attempt before the UK High Court, but it kept on fighting, with an appeal. PAG argued that the judge at first hearing was wrong to decide that RBS’ contractual power to call for a valuation was completely unrestricted – PAG said that there were implied terms which meant that for example RBS could not call for a valuation capriciously or vexatiously.

In a judgement (available here) handed down last week, the Court of Appeal agreed with PAG that the power was ‘not wholly unfettered’ – but it found that RBS was free to seek an updated valuation if it was for a purpose related ‘to its legitimate commercial interests.’

On that point, on the facts the Court held that it was

‘very far from apparent, however, that the Judge would have held the valuation at issue to have been pointless, lacked good or rational reason or been commissioned for a purpose unrelated to RBS’s legitimate commercial interests or when doing so could not rationally be thought to advance them…’

After providing some rare behind-the-scenes glimpses of a loan workout, it appears that we have now reached a final resolution, leaving the law probably as most impartial observers expected the position to be.