Challenging a bank guarantee

Monday, May 22, 2017

This is both a cautionary tale for anyone who is contemplating acting as guarantor of someone else’s liability, and a David-and-Goliath story of a battle with a major bank.

The short version

Quinn & Scattini Lawyers acts for a client who is seeking relief from a guarantee and associated mortgages that were provided to a bank to secure repayment of monies lent to a company of which our client’s son was sole director and shareholder.  The purpose of the loan was to purchase a motel.

The facts

Our client provided the guarantee in reliance on a number of representations made by the bank. 

These representations included assurances from the bank that:

  • the borrower did not have financial problems, and the income from the motel meant that the borrower would not default under the loan,
  • the location and estimated value of the motel meant that the guarantee would never be called upon, and
  • the son had enough management expertise to operate the motel in order to meet the obligations of the borrower under the loan.

As a result of the representations, and due to pressure by the bank to sign the relevant documents urgently, our client signed the guarantee.  When the son defaulted under the loan, the bank pursued our client under the guarantee. 

Our client alleges that the representations by the bank were misleading and deceptive, based on the facts that our client’s son was unemployed and had no assets, the annual loan repayments exceeded the motel’s current net annual income, and the motel required reasonable experience in motel management to maintain good occupancy.

The remedy sought

Our client has applied for an order under section 86 of the Trade Practices Act 1974 (“the TPA”) to discharge our client from all liability under the guarantee, and damages under section 82 of the TPA.  In the alternative, our client has applied for an injunction pursuant to section 12GD of the Australian Securities and Investments Commission Act 2001 (“the ASIC Act”) preventing the bank from enforcing the guarantee.  We also argue that it is unconscionable to enforce the guarantee and that the bank’s conduct contravened section 51AC of the TPA or section 12CC of the ASIC Act.   This case is still before the court, so watch this space.

An important reminder

It is important to remember before you sign any documents, especially guarantees, that:

  • you should take your time and seek independent legal advice,
  • you should not give in to pressure by the borrower’s finance company to sign any documents on the spot, and
  • if you feel pressured, do not sign any documents.

If you are being chased by a creditor under a guarantee, you should immediately seek legal advice.

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