The crippling of the live export trade, the prevailing drought, the resulting reduction in cash flows and correction in rural property values across northern Australia in recent years has led to a significant reduction in equity in many operations. Any number of Thynne & Macartney’s clients have received approaches from their financiers to revise budgets and engineer debt reduction strategies to address these issues.
As their relationship with their bank deteriorates, clients often ask us what options are available to them to avoid foreclosure.
Queensland Farm Finance Strategy
Most banks which service the Agricultural industry take part in this voluntary scheme which is available to borrowers with debts between $50,000 and $10,000,000.
The scheme encourages borrowers and the bank to enter into a mediation process to set out timeframes in which the borrowers must achieve certain objectives before the bank will take further action (such as a foreclosure). Such arrangements are “binding” in that if the borrowers are unable to meet the agreed objectives then the bank will become entitled to take over control of the mortgaged property.
Caution should be exercised when entering into such agreements as they will usually contain an acknowledgement by the borrower that the loan documents were validly entered into which could stop a borrower from later alleging that the bank acted improperly, for example, when it approved the loan.
Financial Ombudsman Service
The Financial Ombudsman Service acts as an external complaint resolution service which a troubled borrower can approach to seek a solution to an issue which it has encountered with a bank if the loan in dispute is less than $500,000 and the Ombudsman determines that the complaint is not too complex nor will it take up to many resources to hear the complaint.
Many loans for rural operations won’t meet these criteria and so the Ombudsman may be of limited use in circumstances where a foreclosure is pending, however, it can be a useful tool in resolving ancillary issues to delay foreclosures.
A borrower sometimes has grounds to sue a bank over an issue that arose during the course of the relationship. This could involve a challenge to loan agreements, guarantees, mortgages and other securities.
Usually, by the time serious issues have arisen the borrower will have entered into comprehensive securities documents that can be difficult to challenge.
However, it might be that the borrower suffered some “special disadvantage” that led the borrower to be unfairly exposed to the bank and that a court might accept entitles the borrower to compensation from the bank or affects the borrower’s liability.
Of course, engaging in any form of litigation involves significant costs and personal time and should be only considered as a last resort once all other avenues of negotiation have been explored.
Our advice to clients is generally – keep your bank informed – both with the good news and the bad. Banks (like us all) do not appreciate unpleasant surprises.
If you have kept the bank informed then generally it will be easier for all parties to sit down and negotiate a strategy acceptable to all.