Business Loan TermsTerms and Conditions for Business Loans
The ASIC has recognised several different kinds of terms which are normally contained in loan agreements and which can be considered abusive and null and void under the system of abusive contractual terms. So if your business includes the provision of financing to small companies, you should review your credit agreements to make sure they do not contain anything of this kind (and other unfair clauses in general).
When you are a small business borrowing, you should be conscious of your privileges under this scheme. However, as discussed below, the potential impact of an unequal duration of a loan agreement on small entrepreneurs is serious and far-reaching. What is the date of application of the provision on abusive contractual terms for small business credit?
Abusive terms apply to small exposures in standardized forms of up to US$1 million granted (or renewed) on or after November 12, 2016. By and large, a loan agreement falls under the system if: it is made available to the borrower on a "take it or let it" terms with minimum negotiations between the contracting partners; the loan amount does not exeed USD 1 million (or USD 300,000 if the loan is 12-month or less).
Where the scheme is applied to a small business loan, any improper provision in the loan agreement (and all similar loan agreements with other parties) is invalid and ineligible. In a small business finance agreement, a clause is unjust if it: would create a significant imbalance both in the right and obligation of the contracting partners; would create pecuniary or other disadvantages for the other contracting partner (usually the small business financier) if the creditor were to rely on it.
The general definition of'injustice' appears to apply to a wide variety of credit terms. The ASIC provides some more concrete samples of credit terms that may be unjust under this test. The ASIC has identified five types of clauses that are typically included in credit and that can be unjust in the standardised format of small business contracts:
This is a clause which states that the credit contract in writing constitutes the whole arrangement between the contracting partners. Any such clause may be unjust if it creates the impression that the Creditor is not liable to the Mortgagor for his (or his agents') behaviour or any statement or explanation made to the Mortgagor before or during the Credit Period.
If, for example, a creditor assures the creditor that it will use its judgement in a particular manner, the creditor may have claims against the creditor arising from this presentation. Using a full contract term can be unjust (and misleading) for the creditor to suggest otherwise. Excessively high compensation:
Creditors often get the advantage of compensation from the debtor so that the creditor is shielded from loss incurred as a result of the debtor's action. Compensation can be lawful and proportionate, but it runs the risks of being unjust if the debtor is obliged to release the creditor from matters outside the creditor's sphere of influence.
ASIC considers, for example, that exemptions in small business agreements should not oblige the debtor to compensate the creditor for debts incurred as a result of the creditor's own deception, recklessness or intentional mishandling. Too wide a range of defaults: The ASIC makes it clear that small business creditors should consider thoroughly whether the defaults in their credit agreements are too high.
Failure regimes carry the greatest risks of being unjust when they create wide discrepancies for the creditor to establish whether a particular occurrence is considered a failure and also to identify the effects of the failure. A number of joint contingency clauses, which ASIC believes to be unjust, include:
Accruals for significant unfavorable changes: Those rules allow a creditor to report a failure in the event of a significant unfavourable event in the creditor's condition. Those rules may be unjust if they are sufficiently comprehensive to cover any event which does not significantly impair the borrower's capacity to pay back the loan or the lender's capacity to secure its collateral.
Extensive enforceability without notice: A number of credit agreements contain "shopping lists" with possible measures that the creditor can take against a defaulter. This may be unjust if the rules would allow the creditor to take measures of execution which would be out of proportion to the borrower's failure. As an example, a slight mistrial of the borrower's contact information would probably not warrant the occurrence of a delay on the part of the creditor and the demand for reimbursement of the loan.
It is important that creditors also consider the failure scheme as a whole, as well as how the failure rules in their collateral documentation interrelate with those in the credit agreement. Where the loan agreement contains cross-default clauses which allow a collateral failure to be considered as a loan agreement failure, these clauses may be unjust if the collateral itself contains too wide a deficiency scheme.
The ASIC reports suggest that some of these problems can be tackled by the creditor, who gives the debtor a fair amount of time to rectify a violation, and by setting a substantiality level so that only serious violations can give rise to serious execution measures. Creditors often demand that debtors adhere to certain interest coverage levels, credit-value relationships or other key performance measures.
Those standards may be unjust, subject to the conditions under which the violation of key financials may result in execution - for example, if the creditor is unable to obtain redress from the debtor even in the event of minor violations of a key financials indicator which do not significantly impair the creditor's repayment capacity or capacity to obtain collateral, the standards of credit labelling may be unjust.
Credit agreements often contain clauses that allow creditors to change certain conditions without the borrower's approval. However, such rules are rather unjust if they: do not give the debtor a fair chance to terminate the loan (e.g. by repaying or refinancing) if he so desires before the change becomes effective.
When you are a small business creditor and your default credit agreements contain abusive clauses, these clauses are invalid and not enforceable against the debtor. That' s enough for the creditor, but it gets even worst. If a creditor is acting in confidence in an unfair clause, the creditor could be in violation of the credit agreement or otherwise responsible for damage (e.g. by taking over collateral ownership if he had no statutory right to do so);
in the event that a judicial authority considers a repayment period to be unjust and the period is likely to cause losses or damages to those who are not involved in the proceeding, a judicial authority could order the creditor to indemnify those other individuals; in the event that a judicial authority has determined a repayment period to be unjust and a creditor nevertheless attempts to depend on it, the creditor may be the object of an interim measure or be required to indemnify small businesses.
With ASIC now completing its examination of the credit granting policies of the four major credit institutions, it is likely that ASIC will further investigate the activity of non-bank creditors to small enterprises. In addition, a creditor's execution measures in relation to credit agreements concluded on or after 12 November 2016 with small enterprises may be challenged if those measures are based on credit terms which could be found to be "unfair".
Therefore, it would be advisable for creditors to check the documentation they use in the framework of small businesses in order to minimize the likelihood that items of such documentation will be contested as 'unfair'.