Financial Services Recovery Update

Pursuing complex recovery actions such as claims against valuers and brokers can be a lengthy process. If the loan accounts in question are kept active, lenders frequently encounter reporting and compliance issues because of the age of the debts. In responding to these issues, for accounting purposes, many lenders have adopted a practice of internally writing off delinquent loans once recoveries action reaches a certain stage.

In CBA v Greyson [2005] FMCA 852 the Federal Magistrates Court of Australia rejected an argument by a borrower that a lender's debt was no longer owing because it had been written off by the lender for accounting purposes. The judgment provides a degree of comfort for lenders who write off debts for reporting purposes whilst maintaining actions against the borrowers or other parties in complex recoveries actions.

The potential problems caused by debts which become seriously delinquent are not limited to compliance and reporting issues. For example, another potential problem is that loan intermediaries may be penalised under their contractual arrangements with the lender because of the age of the debts. In cases where the loan intermediary is not at fault this may cause relationship issues for lenders and their intermediaries.

The borrower in CBA v Greyson submitted that a bank statement issued by the bank during the course of its recovery proceedings showed a zero balance. The borrower submitted that the lender had "appropriated a credit to the bank account", and was bound by that appropriation.

The Court rejected this argument, and held that: "Where the applicant creditor has for accounting purposes written off the debt, that does not of itself provide any or any proper basis upon which the Court can conclude that the debt in no longer owing. It does not provide any or any proper basis of evidence of forgiveness of debt or other compromise."

From time to time during the course of recovery proceedings, it is often necessary for the lender to swear an updated affidavit of debt. There may also be a need to provide updated debt figures to other parties in the context of settlement negotiations.

For that reason, we recommend that lenders retain the capacity to track interest and enforcement expenses on their systems even though the debt in question has been written back to minimise reporting and compliance obligations.

FSR update - november 2007

Yes. However:

• in cases where a legally assisted borrower sues a former mortgagee, the amount of costs recoverable by the former mortgagee may be capped at $5,000 because of section 47 of the Legal Aid Commission Act

• if a borrower challenges any enforcement expenses then careful consideration should be given to the terms of the mortgage covenants to ensure that costs of any court proceedings are costs which the mortgagor has an obligation to pay.

Section 47(1) of the Legal Aid Commission Act provides that where a court or tribunal makes a costs order against a legally assisted person:

• the amount of costs payable by that person is nil

• the amount of costs payable by the Legal Aid Commission is capped at $5,000.

In Maher v Network Finance Limited (1986) 4 NSWLR 694, the NSW Court of Appeal held that, despite section 47, a mortgagee could look to the legally assisted borrower for the full amount of costs it had incurred in connection with the borrower's unsuccessful court action.

The basis for the Court's decision was that the $5,000 cap specified in the Act only applied to costs orders made by a court or tribunal. The cap did not apply to expenses recoverable according to the terms of the borrower's contractual obligations under the mortgage.

However, the other side of the Maher coin is that, where a borrower's contractual obligation to pay the mortgagee's costs ceases (such as, for example, where the debt has been refinanced or where there is a surplus after a mortgagee sale), it is likely that the costs recoverable by a former mortgagee in any proceedings will be capped at $5,000 by virtue of section 47.

This is will be of concern in cases where a mortgagor sues a number of former mortgagees as well as the current mortgagee. The present legal position in that scenario is that the present mortgagee can recover all of its costs whereas a former mortgagee is limited to $5,000.

It remains to be seen whether the law will develop so as to cure this anomalous situation.

Watch this space....

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.