Default clauses, and the notice a bank gives a small business

Which loans these rules reach

The Banking Code of Practice is the banking industry’s own code. The Australian Banking Association says it sets standards for individual and small business customers and their guarantors, that ASIC approved the 2025 version on 27 June 2024, and that its provisions are legally enforceable. A committee, the Banking Code Compliance Committee, investigates alleged breaches.

Part B5 of the Code holds the commitments about lending to a small business. Whether a business counts as one turns on the Code’s own test in Part E, which is worth reading against the business’s figures before relying on anything below. Throughout the Code, “we” means a bank that has signed up to it. A lender that has not signed up is held to its contract and to the law, not to these paragraphs.

Before the loan is made

The Code’s first commitments to a small business borrower come before any default is possible:

• The bank says how to apply, what information it needs and, once it has that information, roughly how long a decision is likely to take (paragraph 76).
• It assesses a new loan, or a higher limit, with the care and skill of a diligent and prudent banker, looking at the business’s financial position or account conduct, and sometimes its projected cash flow (paragraphs 77 and 78).
• It will not ask a third party, such as the business’s accountant, to certify that the loan can be repaid (paragraph 78).
• Before the offer is accepted, it gives a plain English document setting out the loan’s key general terms (paragraph 80).
• If it declines the loan, it gives the general reason, unless it is reasonable not to (paragraph 81).

That plain English document is the one to read slowly. Everything that follows on this page is about clauses it summarises.

A missed payment, in order

The Code sets out what a subscribing bank does when a loan payment is not made. Read as a sequence:

1. The payment is missed. Under the Code’s definitions, failing to meet any of the contract’s terms and conditions is a default.
2. Notice of at least 30 days. Before it demands full repayment or takes enforcement proceedings for the missed payment, the bank gives the business no less than 30 days’ notice of it (paragraph 82). The Code counts in calendar days unless it says otherwise.
3. Paying it within the notice period. If the overdue amount is paid during that period, along with any further amount that falls overdue inside it, the bank will not call up the loan or enforce for that missed payment. It can still rely on a different, non-payment default that the Code allows (paragraph 83).
4. When the notice can be shorter, or none. The Code allows less notice if the business or a guarantor becomes insolvent or enters an insolvency process, or loses legal capacity, or where less notice is reasonable to manage a material and immediate risk (paragraph 84).
5. Overdrafts and on-demand facilities. When the bank requires one of these to be repaid, it may not have to give any notice. If failing to repay one is also a default under another loan with the same bank, the notice rules apply when the bank enforces that other loan (paragraph 85).

Defaults that are not about money

A loan contract can also list events other than non-payment that count as a default; ASIC calls them “specific events of non-monetary default”. The Code says the loan’s terms will spell out how and when the bank can enforce for them (paragraph 86), and then, for standard form small business loans, it limits them to a closed list in paragraph 87. Grouped in our own words, the list covers:

Two further limits apply. Before acting on one of these events, the bank gives a notice of the grounds and at least 30 days to put the default right where it can be put right, with the same exceptions as for a missed payment (paragraphs 88 and 89). And it acts only if the event is material by its nature, or has had or is likely to have a material effect on repayment, on the bank’s security, or, for some events, on its legal or reputation risk (paragraph 90).

The clause the Code rules out

A standard form small business loan from a subscribing bank will not contain a default based on an unspecified “material adverse change” (paragraph 92). ASIC’s 2018 report on small business loans explains why these clauses mattered: they gave a lender “a very broad discretion to call a default” without telling the borrower what kind of change could trigger one.

Some loans may still carry financial covenants tied to their nature. The Code names property development loans and specialised lending such as margin lending, loans to self-managed super funds, invoice discounting, construction finance, foreign currency loans and tailored cash flow lending (paragraph 91).

At the end of the term

Some business loans are not paid off by regular repayments: a balance is left owing when the term ends. If the business is not in default, the Code says a subscribing bank will give at least three months’ notice before that date if it has decided not to extend the loan (paragraph 93). An extension or refinance need not be on the same terms (paragraph 94).

Where to read the wording

The full text is in the Banking Code of Practice, Part B5 (paragraphs 76 to 99, including valuations and investigating accountants), with definitions in Part E. The Australian Banking Association keeps the list of subscribing banks. If a clause in a small business loan looks one-sided whoever the lender is, the unfair contract terms law may reach it: see roll 04.