Lender Australian Capital Financial Management has failed in its bid to have a court rule that the Australian Financial Complaints Authority denied it procedural fairness in the handling of a complaint brought by a borrower.
The New South Wales Supreme Court ruling (Australia Capital Financial Management Pty Ltd v Australian Financial Complaints Authority Ltd, NSWSC 1577) focused on AFCA’s powers and the procedures it is required to follow in making its determinations, particularly whether it should conduct hearings.
In May 2014, ACFM provided a loan facility of up to A$2 million to Australian Sheepskin and Hide Pty Ltd, which was guaranteed by the business owners Benyu Bai and his wife Wenhua Yang.
The loan was to fund the establishment of a business exporting Australian sheepskins to China. In support of the guarantees, Bai and Yang provided mortgages over two residential properties.
Later that year the business got into financial difficulties and early in 2015 ACFM started district court proceedings for payment of $742,800. The court ruled in favour of ACFM.
Bai and Yang sold one of the properties and paid ACFM more than $250,000.
In 2019, Bai and Yang lodged a complaint with AFCA, arguing that the guarantees had been obtained unfairly.
AFCA agreed and ruled that the guarantees were invalid and unenforceable. It said ACFM had presented the loan agreement in English, even though Bai and Yang did not speak or read English.
It also found that the lender was unable to provide evidence that the guarantors were given sufficient time or opportunity to obtain legal or financial advice – counter of AFCA’s minimum conduct standard.
It ordered ACFM to repay money paid by Bai and Yang from the sale of the property plus compensation.
In arguing that it was denied procedural fairness, ACFM said AFCA should have conducted a hearing to allow for the cross-examination of the guarantors.
However, in its ruling the court said AFCA is not bound by the rules of evidence and is not required to conduct hearings to allow cross-examination. It said AFCA is bound to “consider complaints with the minimum of formality”.
On the question of procedural fairness, the judge said: “AFCA appreciated that there was a conflict in the account of what happened given by the lender and the guarantors. Conflicts of this type are not uncommon in disputes between enders and guarantors.
“AFCA chose to resolve that conflict by reference to the objective facts derived from the material presented to it. I cannot see why in taking that approach AFCA denied ACFM procedural fairness. The approach that it took is an orthodox one for resolving conflicting accounts of oral conversations.”
The court said AFCA is allowed to resolve conflict by reference to the facts available to it. Both parties to a dispute must be given the opportunity to provide written submissions and AFCA must consider all circumstances having regard to legal principles, applicable industry codes and good industry practice.
In a note to clients, Chamberlains Law Firm said the case was a reminder to financial services providers that their submissions to AFCA must be comprehensive, including all reasons a complainant’s argument should be rejected and with a focus on applicable industry codes and good practice guidelines.