There have, of late, been a string of decisions involving the question of the enforceability of guarantees. In some instances the lender has prevailed [1], but in others the lender has not fared as well. Indeed, in two recent cases spouses of borrowers avoided liability: one on the grounds of the so called “married woman’s equity" [2]; and, another (as recently as three days ago), on the basis that her husband forged her signature on the guarantee (and associated mortgage). [3]
Another very recent decision is a salutary reminder to lenders as to the potential pitfalls associated with the law of guarantees and the need to ensure that liabilities are properly assigned.
In Property Builders Pty Limited v Adelaide Bank Limited [4] Eurofinance lent $2,400,000.00 to Property Builders secured by way of a registered mortgage, and personal guarantee of its director, Mr Phontos. This guarantee was in many ways overtly linked to the mortgage, including its express inclusion as a ‘collateral document’ pursuant to the mortgage definitions.
In an attempt to ‘free up’ capital, Eurofinance duly transferred the loan to its related entity AIF, which had the benefit of advantageous lending facilities with Adelaide Bank. Though the resolutions made between AIF and Eurofinance for the transfer of the loan did not make reference to the guarantee, the communication of the transfer to Mr Phontos expressly noted that his obligations pursuant to the “Agreement” between Eurofinance and AIF (which was said to include the guarantee) were now owed to Adelaide Bank (to whom the mortgage was assigned).
Was the guarantee assigned?
In dealing with the loan and its affiliated securities, Eurofinance, AIF and Adelaide Bank had acted prudently, and in compliance with their statutory obligations. This was reflected in the finding that the mortgage was duly transferred and enforceable.
The guarantee however was, on appeal, found to be unenforceable on the basis there was no evidence that the rights of Eurofinance under the guarantee were assigned to either AIF or Adelaide Bank. The resolutions of both Eurofinance (in assigning the loan) and AIF (in accepting the assignment) made no express reference to the guarantee.
As a result, Adelaide Bank did not have grounds to bring proceedings pursuant to the guarantee, though its mortgage was enforceable. This reflects the position at law that, where the debt is assigned but the guarantee is not, the right to recover under the guarantee must be suspended, as two persons (i.e. a mortgagee and the beneficiary of a guarantee) cannot be entitled to recover the amount of the same debt. The court noted that “the position is the same when the assignee of the principal debt seeks to sue on a guarantee which has not been assigned to it”. [5]
Importantly, the court had little regard for the express provision contained in the guarantee allowing the lender to assign or otherwise deal with the guarantee in any way it wished and obliging the guarantor to sign anything and do anything the lender reasonably required to enable any dealing with the guarantee. The fact that the guarantee was not mentioned in the process of assignment was critical to the outcome.
Conclusion
The “lesson” from this judgment, and others before it, is simply a reminder of the intermittently fraught legal framework applying to the law of guarantees. The guarantee is often a fundamental - or at least important – residual “security” to which lenders expect to have recourse if necessary. What this and other decisions demonstrate, however, is that those expectations can often be overstated, particularly if there are deficiencies in the way a guarantee is executed or liabilities assigned.
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[1] ING Bank (Australia) Ltd v Leagrove Pty Ltd & Anor; ING Bank (Australia) Ltd v Stafford & Ors [2011] QCA 131
[2] Agripay Pty Ltd v Byrne [2011] QCA 85
[3] Commonwealth Bank of Australia v Nicole Kathleen Perrin [2011] QSC 274
[4] [2011] NSWCA 26 (delivered 15 September 2011)
[5] Paragraph 51.
