better banking

Case - 46792

2015 - 2016

Lending

Property lending

Mr O had operated a horticultural enterprise for many years. He owed the bank more than $1.1m. Of this, $720,000 was a term loan secured by a mortgage over three rural properties which were owned by two family trusts and himself personally. A further $450,000 was secured by a general security agreement (GSA) over all the business chattels and operation. The term loan was interest only. For the previous three years the business had incurred trading losses totaling about $700,000, and over the past year the debt had increased by more than $100,000.  

In addition, Mr O had incurred a $220,000-plus debt to IRD including penalties, leading to the registration of statutory land charges over his properties.  This meant the bank could not then process its request to increase its priority sums on the mortgages.   The priority sum is the total amount of debt the bank can claim (in the event of a sale) before another creditor.

The bank was in frequent contact with Mr O and his lawyer, seeking financial updates and forecasts.  In June 2012 when two loan repayments were missed, the bank issued a demand notice under the Property Law Act.  Two days before it expired, the bank appointed receivers. 

As it transpired, Mr O had a good season, and he felt the bank’s decision to appoint receivers was premature and not warranted. Mr O believed he was tricked into signing some documents and had no recollection of signing the GSA, alleging that his signature was forged. He felt that the bank officer he was dealing with had acted out of malice, had unreasonably put stops on payments and had breached his privacy by discussing his finances with other banks and with members of the public.

We explained that the bank’s decision to appoint receivers was a matter of commercial judgement and we cannot interfere with that. We looked at the bank’s conduct prior to this decision. We found that Mr O’s signature on the GSA had been witnessed by a solicitor who had completed all appropriate documentation so there was no evidence Mr O’s signature was forged.  The bank had suspended one bank account on request from another party to that account, and had notified Mr O in accordance with the Code of Banking Practice.  On another account a payment was declined because of insufficient funds.  The GSA provided a legal basis for the bank to appoint receivers if they saw fit.  There was insufficient evidence that the bank officer had discussed Mr O’s financial affairs with anyone, and we obtained confirmation from another bank that Mr O had approached for finance, that they had not discussed the matter with Mr O’s bank at all.

We were mildly critical of some of the bank’s communication. At one meeting the bank had agreed to allow Mr O to use an advance from a customer for harvest costs, only to renege on that the next day.  Although there was no evidence Mr O had acted in reliance on this, we felt there was some inconsistency in the bank’s communications. We were in no doubt that during the six months before the Property Law Act notices were issued, the bank was warning Mr O that it might make demand, but it was evident that it had also given hope that it would wait for the harvest. Mr O’s lawyer was surprised when the bank proceeded to issue notices under the Property Law Act, and to appoint receivers before the expiry of that notice period. We considered these mixed messages would have fed Mr O’s disappointment when the bank did proceed with recovery action.  When Mr O later sought information from the bank, there were some delays and we had to intervene.  For these two matters we recommended that the bank compensate Mr O a total of $1,000. Mr O didn’t agree, and indicated he would pursue his grievance through other channels.