better banking

Case - 49296

2016 - 2017


Non-property lending

Mr V’s company had various lending facilities with a bank, including term loans and overdrafts, which were secured by a general security agreement. The company had a slow trading year and the bank agreed to temporarily increase its lending facilities. However, the temporary limit expired and the company did not have enough money to reduce the amount owing back to the earlier limit. Mr V decided to sell an intellectual property licence, using the proceeds to repay other creditors and keeping the rest for the year ahead. He told the bank of his plans and also indicated his company would reduce its lending facilities in the future.

Mr V gave the bank a draft of the licence sale agreement. The document noted that some of the company’s assets were to be included in the sale, although it did not say how much of the sale price related to the licence, and how much to the assets.

He asked the bank whether it would require any of the sale proceeds to go towards reducing bank debt. The bank said it would respond within three days after checking whether selling the licence would have any effect on the general security agreement. When he received no response after three days, Mr V asked again but still did not get a reply. Mr V then signed the licence sale agreement and sent a copy to the bank.

The agreement showed the company was selling assets of significant value and the bank was uncomfortable with this because the assets were security for the lending. The bank wanted to use the sale proceeds to reduce bank debt, but Mr V was unhappy with this. For two months, the bank and Mr V tried to reach a solution. During this time, the bank would not allow Mr V access to the sale proceeds. Unable to reach any agreement, the bank ended its relationship with the company and Mr V refinanced elsewhere.

Mr V complained to us that it was unfair of the bank to make the company repay everything it owed the bank. He said the bank had told him he would not have to reduce the company’s debts if he went ahead with the sale. By ending the relationship, the bank had forced him to repay not just some, but all of the company’s debt. During this time, he had been unable to use the sale proceeds as intended.

We found that the bank had not breached any obligation owed to the company. The general security agreement placed a security interest over all company property – including the assets that formed part of the licence sale. The agreement said the company needed the bank’s written consent before it could sell any assets. The bank did not give its consent. Nor could we find any correspondence to support Mr V’s position that the bank had said the company would not have to use the sale proceeds to reduce bank debt.

The bank should have responded when Mr V asked whether it would require any of the proceeds to be used to repay bank debt. However, at that point it did not know the value of the assets earmarked for sale. This information came to light only after it received a copy of the sale agreement. Even so, the bank should have warned that it was possible it could want some or all of the proceeds. It could also have reminded Mr V of the obligation to refrain from selling assets until it had the bank’s written consent.

For his part, Mr V should have flagged to the bank that the assets the company intended to sell were of a sizeable value. This would probably have prompted an immediate response from the bank.

As to the reasonableness of requiring the company to repay everything it owed the bank, the company’s temporary overdraft limit had expired and some of its loan facilities were repayable immediately on demand, so the bank was within its rights to ask for full payment.

We could not therefore uphold Mr V’s complaint.