On 6 December 2017, the Senate released its report on proposals to ‘shake up’ rural lenders and the Insolvency Practitioners they appoint. Whilst it remains to be seen if anything will come about as a result of this report, the Banking Royal Commission has currently dominated everyone’s attention for the time being.
In January 2017, the Senate established a committee to explore the practices of financial institutions in relation to primary industries in response to persistent and widespread criticism of these practices in the community. The outcomes include recommendations that, if implemented, could result in a radical ‘shake up’ of how financial institutions approach their work with primary industry customers.
Even if only some of the recommendations are adopted, they have the potential to significantly impact rural lending and rural receiverships. If all recommendations are adopted, that would be surprising (for example, the recommendations to, in certain circumstances, remove time limitations for the commencement of legal proceedings against rural lenders1 and not allowing rural lenders to appoint receivers and manager2).
Despite that industry players, their advisors and Insolvency Practitioners should study this report to gauge the challenges that may be awaiting them at some stage in the foreseeable future.
2. A sample of some of the 27 recommendations3
The recommendations include:
- revising the Code of Banking Practice, including implementing a more open dialogue with rural borrowers prior to the expiry of a term loan and the extension of unfair contract protections;
- penalty interest rates are only to be imposed on rural borrowers in the most exceptional circumstances;
- if a default arises from circumstances beyond the control of the rural borrower (e.g. natural disaster, market conditions, government regulation) no penalty
- interest rates are to be imposed within the first 12 months, and a penalty interest rate of only 1% is to be imposed 12 months after the default event; and
- the Government introduce higher standards and accountability measures for Insolvency Practitioners, including that they:
- be required to disclose their estimate of costs of the receivership prior to being engaged;
- be required to account for all incurred fees and outlays and report these to both the rural lender and the rural borrower; and
- be required to provide monthly reports to the rural lender and the rural borrower on their farming management and fees incurred (including future plans);
- rural lenders be prohibited from making fundamental unilateral changes to the loan agreements where such changes are detrimental to the rural borrower;
- stipulations be made that if a resolution cannot be made during farm debt mediation that receivers not be appointed, and rather that the family, if willing, be able to manage the property and be paid a wage until the property is sold;
- the Australian Restructuring Insolvency and Turnaround Association revise its Code of Professional Practice to stipulate that every effort be made by rural lenders and the receivers appointed by those lenders to achieve the maximum sale price of an asset;
- the Government commit funding to train rural counsellors in mediation to ensure that all farmers have access to appropriately qualified and experienced representatives during farm debt mediation;
- rural lenders offer better training and more comprehensive supervision of frontline and management staff to ensure that they deal fairly and reasonably with rural borrowers and have a sound understanding of the unique characteristics of rural enterprises; and
- the Government establish a nationally consistent compulsory farm debt mediation scheme, based on the NSW model, with a $10 million limit on loan amounts.
Please click here to view the list of recommendations.
3. What now?
In response, the Australian Bankers Association have already encouraged the implementation of a compulsory farm debt mediation scheme, and have indicated they are currently working on a new Banking Code of Practice4.
The recommendations have the potential to fundamentally alter how the working relationships between rural lenders and rural borrowers currently operate, intruding on freedom of contract, increasing the cost of credit and limiting access to credit.
Insolvency Practitioners should be particularly aware that if Recommendations 15 – 21 (set out in the Schedule) are ultimately adopted by the Government, they will have to change the way they go about their business when accepting receiverships in relation to rural borrowers.
1 Recommendation 7 set out in the Schedule.
2 Recommendation 16 set out in the Schedule.
3 For the full list of recommendations, please refer to the Schedule.
4 Page 31 of the Report.