Fair contracts move by banks gives small business a lifeline

The Australian, May 29, 2017

At least one of Australia’s top insolvency firms has undertaken significant staff retrenchments in recent weeks.

The main reason is the big fall in the demand by big banks that their small business clients be bankrupted.

Part of the reason for the lower bankruptcy actions will be the fact that for some time small enterprises have been much more cautious in their borrowing from banks because, outside the property sector, they are taking less risk.

But a significant second reason for the fall in bankruptcy is the fact that the banks are paying a big price for their decision to take on the Australian Parliament and not change their small business overdraft agreements to comply with the unfair contracts act.

That foolish action by the banks and their big legal firm advisers prompted ASIC and the small business ombudsman Kate Carnell to intervene and force the banks to obey the law. It is possible that recalcitrant action by the big banks contributed to the decision by the government to impose the bank levy in this month’s budget.

But the good news is that a vast number of small enterprises are today still in existence thanks to the fair contracts act covering standardised contracts to small enterprises which made vast slabs of the old long overdraft agreements void.

I think it is important to recognise that those enterprises have been given a second chance thanks to the efforts not only of the Australian Parliament but the chief of Independent Contractors Australia Ken Phillips plus the actions of Kate Carnell and Peter Kells at ASIC.

The small enterprises who benefited need to use this time to get their financial house in order because the fair contracts act does not prevent enterprises that fail to meet their commitments to banks from being bankrupted.

What the act does do is to curb that bank power. Previous overdraft agreements gave banks unfettered power to bankrupt the small enterprises they loaned to. They might not have used the power but they had it. And because they had that power they ran down their management ability to assess small enterprises. Without that unfettered power some banks may try to lift their small business loan rates (providing a wonderful opportunity for the growing army of non banks financing the sector). Other wiser banks may seek to improve their management abilities.

The current small business overdraft agreements are in chaos. In some cases the final wording of the ASIC/Ombudsman agreements are not settled and while the new prescribed agreements are back dated to November 12 last year there will be doubt about which older agreements apply because of disputes over renewal. It’s not a good basis to conduct a bankruptcy action.

The problem is much wider. Because of the poor legal advice given out by the top firms a vast number of non-bank enterprises are operating on standardised non-negotiated contracts, which have many clauses, that are void..

In non-banking matters fair contracts are the responsibility of the ACCC and Michael Schaper. He has already taken action against Sensis (Yellow Pages) and they have agreed to a contract.

He will now be moving onto a range of other large companies.

Those larger companies that have CEO’s that think about bigger issues will not want to have their agreements dictated by the government bodies.

Meanwhile as we clean up the fair contracts issues we are drawn back to a parallel situation in the Australian Tax Office where the Cranston Affair is underlining the fact that confidence in the current tax arrangements for small enterprises is close to zero, although few are prepared to risk repercussions for speaking out.

The combination of the one body being investigator, prosecutor, judge, appeal judge and sentencer is simply wrong. As readers will know my suggestion is that the Inspector General of Taxation should be given the power to be an appeal body that does not use lawyers. But a top tax lawyer has put forward a second suggestion to restore confidence in small business tax. He says: “ATO’s cultural problems, where there is a perception the ATO can act with impunity, have a lot to do with the Federal Court, as the day-to-day superior court charged with upholding the rule of law under the Constitution, not being accessible to taxpayers, or being too expensive, or too slow, or not being seen to hold the ATO to the rule of law.

The Federal Court currently has an monopoly on Part IVC tax appeals, as well as a monopoly on appeals on errors of law from the AAT.

By changing the act (section. 14ZZ TAA) to add a few words to allow taxpayers to choose to file in a state court of their choice (subject to dollar limit jurisdiction of each court) as an alternative to the Federal Court, is a very simple change the Parliament could make with immediate effect, will open the Federal Court up to competition.

There is nothing judicially unique about a tax dispute — it can be heard by a District or County Court Judge or Supreme Court Justice just as well, if not better given their robust commercial knowledge. Most commercial disputes are heard in the state courts, where small businesses also litigate, so their judicial officers have deep and insightful day to day commercial knowledge; additionally state courts are active champions of court ordered mediation]. Opening up competition has worked very well in other areas, and is likely to do so here.

Taxpayers properly litigating their tax dispute may well be entitled to a stay on enforcement of their tax debt whilst the case proceeds — which is a more recent promising development in the case law”.

One way or the other let’s get it fixed.