As the banks have tightened their lending criteria, we have been
working with a number of private financiers who have increased
their activity to satisfy the demand for debt finance in the SME
market. Most lenders charge borrowers an establishment fee to help
recover the costs of establishing a loan facility. The general
position at law is that if a term of a contract is a penalty then
that term will be unenforceable. A term is a penalty if a party is
required to pay an agreed sum which exceeds what a court would
consider to be a genuine pre-estimate of damage likely to
be caused by a breach.
In a recent case in the Victorian Court of Appeal (Melbourne
Linh Son Buddhist Society Inc v Gippsreal Ltd), the court
found the establishment fee charged for the loan to be a penalty.
The establishment fee was originally 1.5% of the loan amount but
remained unchanged when the loan amount was reduced (making the
establishment fee over 5%). It was held to be a penalty because
