On 27 February 2020, the Prime Minister Scott Morrison announced a Coronavirus Emergency Response Plan in respect to preparing for the Covid-19 Pandemic. The Department of Health has noted that the illness can cause the common cold to more severe diseases.
As Covid-19 continues to spread more rapidly around the globe, governments world-wide have continued to implement travel bans and trade restrictions. It is expected that these changes will impact market conditions and value of collateral in Australia.
The markets are set to remain volatile for the short to medium terms given the developments with Covid-19 internationally. With changes to the market and value of collateral, it is possible that you will need to make margin calls or restructure debt arrangements and obtain Financial Advice and there will be significant pressure during these difficult and challenging times.
In such circumstances, you will need to be prepared and also aware of the key risks in relation to these changes and the possible unprecedented steps you and/or your Lenders and Fund Manager will need to take, at such a vulnerable time.
Below is an outline of the key risks that may arise, and the proposed measures required to mitigate these risks.
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Time Restraints
Whilst Financial Advisors, Lenders or Fund Managers will be conducting their due diligence through market research and market analysis, the value of collateral will begin to decline rapidly with the spread of Covid-19.
It is possible that in such circumstances, a lender may be inclined to give limited time to make a margin call or restructure and refinance of a loan, before they pursue further action.
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Contractual Rights and Obligations
When acting quickly, things often go wrong. It is necessary that teams, lenders and borrowers are aware of their contractual rights and obligations under a margin loan or loan arrangements.
In times of a pandemic, it is crucial that not only stakeholders act fast, but also uphold their contractual rights and obligations to ensure that they see their end through.
It is important that both parties, respect and abide by the clauses in the contract, even if it is not in their favour. For example, if notice is required in writing, it is not sufficient for a Relationship Manager to make a margin call by telephone, processes need to be followed and verification of follow up needs to occur.
Despite the evolving pandemic, or any other turbulent time, the contract must be upheld. Therefore, it is beneficial to review and ensure that you can perform the contract you are entering into.
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Timing and Liquidation
If you are unable to meet a margin call, and the assets have already been liquidated in your account to repay the debt, you’ll find that the remaining balance owned becomes an unsecured debt that will now be in default. Lenders will do whatever is necessary to bring the account back up to the minimum value. Therefore, it is important to not take any steps to liquidate until time to meet the margin call has passed. This is to ensure that you have not defaulted on an unsecured debt.
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Documenting Calls for Action
It is obvious that in challenging times, lenders and borrowers may need to act quickly and make unprecedented changes, to ensure that the contract can be fulfilled. In this respect, it is highly recommended that any steps you or the borrower may need to take are not only reasonable and in good faith but are also documented appropriately.
Documenting any unprecedented calls for action will protect you in the long run.
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Negotiations with the lender
It is imperative that when negotiating with the lender, you do so directly with the lender and not other team members to ensure that no conflicting messages are being delivered. It is also important, that anything you agree to is put into writing and in line with your contractual rights and does not impose further obligations on you which you cannot fulfill.
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Other Obligations
Further to the above, it is important that you understand your wider obligations applicable when dealing with margin loans and calls. It is necessary to ensure that any terms of the agreement do not impede your rights and are not unfair on you. Further, it is important to understand the lenders responsible lending requirements pursuant to the Corporations Legislation Amendments (Financial Services Modernisation) Act 2010 and the broader National Consumer Credit Regulation; as well as Financial Advice under the Corporations Act 2001.
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Complaints / Seeking further Advice
Lastly, familiarise yourself with the ASIC complaints system and the Australian Financial Complaints Authority (AFCA) to ensure that if need be, you are well equipped with the tools and information needed to pursue a complaint. However, before you do so, you may need to seek legal advice in respect to your contractual rights and obligations.
If you are considering pursuing a complaint, one of our experienced solicitors will be able to assist you in understanding your contractual rights and obligations. Feel free to contact our office on 02 9251 3611 or email us at enquiries@pavuklegal.com.
