Fink’s case shows just how hard it is for a small business owner to challenge a business loan debt using consumer laws and codes.

In Australian & New Zealand Banking Group v Fink [2015] NSWSC 506, Justice Adamson of the Supreme Court of New South Wales decided that the debtors, André and Cecile Fink, had failed to prove they were entitled to relief from their loan debts under either the Contracts Review Act or the National Credit Code or for breach of the Banking Code.

How did the Finks get into loan difficulties?

Since 1987, the Finks had run an antique business, specialising in 18th century French antiques in Woollahra in Sydney. Previously, they had a shop in France.

In 1996, they raised funds by an auction of antique stock which they used to buy land on Wallis Island, 10 minutes by boat from Forster, which is north of Sydney.

In 2000 they started to build a “traditional French Château” on the land, using loan funds from the NAB, supplemented by funds from an antique stock auction in 2002, along with a business loan. The loans were secured by mortgage.

By 2007, the building of the stone château, which they called “Château Le Marais”, was a near completion.  The Finks refinanced with the ANZ Bank. They obtained new home loans, and a business loan and overdraft facility, to provide working capital and to complete the building work. The loans were in their personal names because the land and business were in their personal names.

In 2008, the Global Financial Crisis significantly diminished the market for 18th century French antiques which made it difficult to sell stock to raise funds to complete “Château Le Marais”.

In 2010, after a failed stock auction, the ANZ Bank approved a further temporary extension (increase in amount and more time to repay) of the business loan facility, on condition that the Finks execute a goods and property mortgage over their stock.  Later in 2010, the Finks sold all of their antique stock by auction, and the net proceeds were paid to the ANZ Bank under the mortgage.

By 2013, the Finks were in default under their home loans and the Bank repossessed “Château Le Marais”.

The 2015 decision quantified the debt due as $3,389,750.48 and dealt with whether the Finks’ application for relief from repayment of the debt under the consumer laws and codes.

The Finks use a trilogy of consumer laws and codes to seek relief from repayment

The Finks used the Contracts Review Act 1980 (NSW), the National Credit Code 2009 (Cth) and the Banking Code to seek relief from repayment of the debt. This is what the Court decided:

The Contracts Review Act and the home loans

Looking at the Finks, the Court concluded that it was not in any way improvident or beyond the means of Mr and Mrs Fink to repay the loans when they were advanced in 2007. They were experienced business people, knew the nature and effect of a loan or mortgage, and were capable of protecting their own interests.

Looking at the ANZ Bank, the Court concluded that the bank did no more than act in a commercially reasonable way, even if the building project made little sense commercially. The Court granted no relief, and said:

To lend money on unremarkable commercial terms for the completion of a partially constructed dwelling, even if its style and location give it the character of a folly rather than an investment, is not unjust where the borrowers have a demonstrated capacity to pay and there is, as here, no reason to believe that they are not capable of acting in their own interests.

Were it otherwise, the provision of funds for depreciating or whimsical assets, such as luxury cars or boats, or overcapitalised real estate, would be put into jeopardy.

The Contracts Review Act and the business loan facilities

The ANZ Bank established that the business loan facilities were for working capital and for the purchase of antique stock, and so they were not subject to the Contracts Review Act.

Although it had decided against it, the Court did express views on the application of the Act, had it been a consumer loan. The central issue was whether there was substantive injustice in the ANZ Bank requiring the goods and property mortgage as a condition of the extension of the business loan facility in 2010. Was it reasonably necessary to protect ANZ’s legitimate interests?

The Court concluded that it was not unreasonable. Nor was it unreasonable to refuse to provide funds to complete the building work – It was not obliged to share the “vision” of its customers.

The National Credit Code and the business loan facilities

The National Credit Code applies to loans for personal, domestic or household purposes.

The Court concluded that the business loan facilities were used for rent and for working capital for the antique business. Although part was used for building work on “Château Le Marais”, it was not the dominant purpose. In any case, “Château Le Marais” was to have a business purpose – to be used to display antiques for sale.

The Banking Code and the business loan facilities

The Finks failed in their claims that the ANZ Bank had not acted fairly and reasonably against them in breach of the Banking Code, by not giving a sufficient extension of time for repayment of the loan extension; and by not exercising the care and skill of a diligent and prudent banker by refusing to advance further funds to complete “Château Le Marais” or to return the stock to France for sale.

Would extending the Unfair Contract Term Protections to Small Business have made a difference to Finks’ situation?

The fact that the Finks failed to obtain relief from payment of the ANZ Bank debt, particularly the business loan facilities, demonstrates how difficult it is for a business person to use the consumer laws and codes to challenge a business loan.

The Australian Government has released draft legislation to extend protection against unfair contract terms for small businesses [28 April 2015].

Essentially, small businesses across Australia are to be given the rights of consumers to challenge unfair terms under the Australian Consumer Law for general contracts and under the ASIC Law for financial instruments.

The new proposals would not have made a difference to the Finks’ situation because they already had these rights under Contracts Review Act (which is restricted to NSW).

Fink’s Folly lay in having insufficiently liquidity to complete “Château Le Marais”, and not in maltreatment by the bank.