Debt Recovery DisputesA realistic alternative to the Courts

Diana Ennis – Manager Dispute Resolution

Terms of Reference Expedited dispute resolution process Dispute data Jurisdiction Hot topics:

– Preservation of assets– Settlement agreements

Case studies

Discussion Points

Legal proceedings and debt recovery action – The Circular Issue 3 www.fos.org.au/publications

Defined as:“a proceeding commenced in a court by the

FSP to obtain judgment for a debt, or for recovery of possession of an asset provided by a debtor or guarantor as security for a credit facility”

While FOS is dealing with a Dispute lodged by an App the FSP must not instigate legal proceedings against the App relating to the subject of the Dispute (13.1(a)(i))

TOR paragraph 13.1

While FOS is dealing with a Dispute lodged the FSP must not pursue legal proceedings relating to debt recovery instituted before lodgement unless the Applicant has taken a step in those proceedings beyond lodging a defence or defence and counterclaim (13.1(a)(ii))

The FSP must not seek judgment in those proceedings

TOR paragraph 13.1

A step beyond lodging a defence/defence & counterclaim includes App:

- defending application for summary judgment- issuing notice for discovery or subpoenas- issuing application for further and better particulars of the

claim- serving interrogatories- issuing a notice to produce

A step beyond lodging a defence/defence & counterclaim does not include:

- lodging an amended defence- directions hearing/consent orders of procedural nature

TOR paragraph 13.1

While FOS is dealing with a Dispute lodged the FSP must not take action to recover a debt that is the subject of the dispute, to protect assets securing that debt or to assign any right to recover that debt (13.1(a)(iii))

This includes:- taking possession of secured property- appointing a Receiver & Manager

- serving of demands or notices- collection calls- assigning the debt- making a credit listing

TOR paragraph 13.1

Two exceptions subject to FOS consent and terms: FSP may issue legal proceedings where the

relevant limitation period will shortly expire (13.1(b)(i))

FSP may exercise any rights to freeze or preserve assets the subject of the Dispute (13.1(b)(ii))

TOR Paragraph 13.1

FSP obligations arise out of membership contract and FOS Constitution (clause 3.7)

FSP failure to comply with FOS requirements concerning legal proceedings and debt recovery action can result in:

- serious misconduct reported to ASIC (11.3)

- cancellation of FOS Membership- requirement that legal proceedings be discontinued at no cost to App

TOR obligations

Background December 2009, ASIC approved the FOS TOR

subject to certain conditions, including:

Identify: Early identification where debt recovery legal proceedings commenced

Expedite: Treat the dispute as urgent and expedite the dispute resolution process

Dispute data: Provide data to ASIC for a review in July 2011

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2

3

Date and time of lodgement of dispute with FOS or other EDR scheme (if referred on from other EDR scheme) - 6.5 TOR

Legal proceedings must be issued and filed in a Court prior to lodgement

Default notices/letters of demand alone are not legal proceedings

Legal proceedings must relate to the repayment of a debt which is the subject of dispute

Criteria for LPPI

Assessed upon lodgement of dispute:– Information provided by App relied upon– Documentation or verbal information– Online dispute form

Onus on FSP to tell us not LPPI– You know, we don’t– We will assume LPPI unless told otherwise

We rely on you to provide: – Relevant Court documentation– Current status of proceedings

Identify1

Registration

Acceptance Case Management

• Recommendation

• Determination

• Review

• Negotiation

• Conciliatio

n

• Investigation

• Internal Dispute

Resolution

Expedite Initial IDR period (21/45 days) waived

2

Immediately progressed to Acceptance– Referral within 2 business days

Prioritised over other disputes– Expedited referral to FSP and review of response– Expedited allocation to compulsory TCC– Expedited decision

Only where shorter timeframes met by FSP

Expedite2

Expedite2

Upon initial referral of dispute FOS will request:– Relevant Court documentation:

Defence or defence and counterclaim Notice of discontinuance dated prior to lodgement of dispute Judgment (if applicable to demonstrate OTR) Interlocutory applications/documentation

– Documentation relevant to the issues raised by App including response to App

Copies of prior settlement agreements /repayment arrangements important

This will not occur when:– Incomplete FSP response received– FSP response not received within 14 days– FSP requests extension of time to respond

If de-expedited usual dispute resolution process timeframes apply

TCC still compulsory LPPI $1,000 surcharge applies from Review

status regardless of when or whether dispute de-expedited

Expedite2

• Initial case management

fee

$500

• LPPI surcharg

e

$1,000

• Usual case fee$....

Expedite - LPPI costs

Expedited referral

Payable even where no LPPI or OTR

Cost if documented resolution within 14 days

Payable if progressed

Applies to all LPPI disputes (expedited/de-expedited) at Review status

Determined at closure

Depends on closure status and complexity level

2

Expedited disputes result in speedier outcomes 59% dealt with expeditiously

– 56% resolved within 60 days– 25% resolved between 60 - 90 days– Overall resolution 81% within 90 days

41% LPPI disputes de-expedited– 16% resolved within 60 days– 20% resolved between 60 - 90 days– Overall resolution 36% within 90 days

Expedite2

No. of Days Expedited De-expedited< 30 23% 4%

31 - 60 33% 12%61 - 90 25% 20%

91 - 120 10% 17%121 - 180 6% 27%

Above 180 2% 20%

Expedite

< 30

31 - 60

61 - 90

91 - 120

121 - 180

Above 180

0% 5% 10% 15% 20% 25% 30% 35%

De-expeditedExpedited

Days

2

Facilitated negotiation prior to TCC – this is where FSPs need to focus

Settlement agreement reached during/post TCC Where no resolution expedited to decision within

7 days Recommendation Ombudsman’s Case Conference

Outcomes2

Expedited Determination (8.6)– proceed to final decision where appropriate– all parties to the dispute notified– reasonable opportunity for parties to make

submissions and exchange information Criteria to expedite

– dispute involves financial difficulty issues only– property securing debt may need to be sold– App has not agreed to or taken any steps to repay

outstanding debt

Outcomes2

March April

MayJu

neJu

ly

August

Septembe

r

Octobe

r

Novembe

r

Decembe

r0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Not resolvedResolved

Compulsory TCC - 83% resolution rate in 2010

Expedite2

Conciliated outcomes:– repayment

arrangements 61%

– agreed sale timeframe 26%

Expedite - TCC outcomes2

Repaym

ent arra

ngem

ent /

varia

tion

Timefr

ame fo

r sale

of ass

et or r

efina

nce d

ebt

APRA releas

e

Debt w

aiver

Other C

ommercial R

esolutio

n0%

20%

40%

60%

Expedited V De-expedited(%)

Expedite

Jan-1

0

Feb-1

0

Mar-10

Apr-10

May-1

0

Jun-1

0

Jul-1

0

Aug-10

Sep-10

Oct-10

Nov-10

Dec-1

0

Jan-1

1

Feb-1

1

Mar-1

1

0%

10%

20%

30%

40%

50%

60%

70%

80%

De-expedited Expedited

2

FOS has collated data on:– LPPI disputes received– Number of days dispute open– Whether App is individual or small business– OTR reason– Nature of dispute– Numbers of disputes expedited and de- expedited

Quarterly reports provided to ASIC ASIC review post 30 June 2011

Dispute Data3

Dispute Data

0

20

40

60

80

100

120

140

160Volume Received

Growth of LPPI disputes

Increasing challenge for all to expedite

Feb 201061 per month

March 2011141 per month

3

Dispute Data3

Jan-1

0

Feb-1

0

Mar-1

0

Apr-10

May-1

0

Jun-1

0Ju

l-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-1

0

Jan-1

1

Feb-1

1

Mar-1

10

20

40

60

80

100

120

140

160

Opened Closed

Open V Closed

Dispute Data3

Jan-1

0

Feb-10

Mar-10

Apr-10

May-1

0

Jun-1

0Ju

l-10

Aug-1

0

Sep-1

0

Oct-10

Nov-10

Dec-1

0

Jan-1

1

Feb-11

Mar-1

10

10

20

30

40

50

60

70

80

Closed: expedited V de-expedited

Expedited closed De-expedited closed

Who lodges disputes?

Which products?– 93% consumer credit products– 6% business finance

What is the nature of the dispute?– Majority Financial Difficulty (81%)

Dispute Data3

6%

93%

1%

Business Finance

Consumer Credit

Guarantees

Within TOR

Dispute Data

60%40%

Within TOROTR

61%18%10%

Dealt with by CourtMore appropriate placeNot a current FOS member

OTR Outcome

3

Where dispute assessed as within TOR documentation must be provided to show otherwise– FSP written submission with reasons for why considered OTR– App provided 30 days to object

Misguided Terms of Reference submissions result in delays

Common misconceptions to exclude:– A dispute which is lacking in merit is not necessarily frivolous or

vexatious– Complex factual and legal issues– Eroding security – court timeframes apply equally where defended

in court

Jurisdiction

Preservation of Assets We recognise it may be necessary for FSP to preserve

assets that are subject of dispute FSP to request in writing & provide supporting

documentation explaining:– What action it wants to take– Why it is more likely than not asset will be lost or

destroyed if consent not given – erosion of equity alone not generally sufficient

Each application considered on individual merits

App small business which operated real estate agency. FSP entered into various facilities one of which was to assist in the purchase of rent roll

FSP had fixed and floating charge over business (including rent roll), personal guarantees & mortgage over property

Deficiency in trust fund relating to the rent roll, estate agents licence cancelled and guarantors bankrupt

FOS dispute concerning financial difficulty lodged. Substantial arrears and App seeking time to refinance

FSP provided full details of loans and current status, documentation about trust fund deficiency and documentation to show discussions had been held between App and third party about sale of rent roll

FOS consented to appointment of Receiver & Manager on basis rent roll at risk of sale to third party. FOS did so on condition that R&M take no action to sell asset while FOS file open

Case study

App lodged a dispute concerning financial difficulty in relation to a car loan which was in arrears. The car had been in the possession of a repairer for a year because App could not afford to pay for the repairs. FOS consented to the FSP taking possession of the car on the basis that the car not be sold while the FOS file remains open

App lodged a dispute with FOS concerning financial difficulty in relation to a car loan. The car was insured and registered and in the possession of App’s mother who was his authorised representative. FSP said that loan was in arrears and App in jail. FSP requested consent to repossess the car on basis no repayment arrangement could be made while App in jail. FOS did not consent to repossession on the basis that the car was at no additional risk of loss or damage.

Case Study

FOS will not generally consider a dispute which has previously been settled unless exceptional circumstances apply. This is because liability of FSP is discharged at law

Exceptional circumstances may apply if agreement harsh or unconscionable, FSP induced/misled App to enter into agreement/App agreed to enter into settlement under duress (illegitimate pressure)

Informing an App that an FSP intends to exercise its contractual rights if the agreement is not met is not in itself considered duress

Each dispute assessed on a case by case basis.

Settlement agreements

Provide finalityBendigo and Adelaide Bank Limited v Tombs and Anor [2010] NSWSC 1427 at 40

Must reflect agreement between parties without addition Deal with consequences of non-compliance Deal with current legal proceedings:

– Discontinue– Should not require consent to judgment

Reflect resolution is in full and final settlement of FOS dispute

Settlement agreements

App lodged a dispute concerning financial difficulty and seeking time to sell security properties. App had been in financial difficulty for some time and negotiations had been entered into resulting in a Moratorium Deed being signed by the parties prior to lodgement of the FOS dispute

The Deed set out the terms of settlement which included the following:- various payments to be made on specific dates- App acknowledgment that legal advice had been obtained by App prior to entering the deed/opportunity had been provided to obtain

such advice- App acknowledgment that if he failed to make payments FSP

entitled to enforce its rights in full in accordance with the T&Cs of securities FOS assessed the dispute as OTR by applying the general exclusion under

5.2 TOR on the basis that the dispute had previously been settled.

Case study

Ensure the dispute remains expedited:– Provide substantive responses– Provide timely responses– Increased chance of resolution within 90 days if

expedited Be commercial and flexible

– Exhaust opportunities to resolve - don’t wait for a TCC!– Think creatively and laterally– Approach dispute with fresh eyes

Document settlement agreements

Timely and cost effective resolution

Questions?

Resolution