Australia: Commercial Law: Liability of guarantors when misleading and deceptive conduct by lender

Adisan concerned a loan agreement between a lender and two companies engaged in property development, guaranteed by six co-guarantors. An advance of $600,000.00 was made to the borrowers, with the principal and capitalised interest to be repaid by 12 January 2009. When the borrowers defaulted, the parties then agreed to amend the terms of the facility.

The proposed amendments included extending the time to repay the principal and accrued interest, increasing the interest rate payable, and the provision of further security. That security encompassed a first priority mortgage over an apartment owned by another company, Bingemann Holdings Pty Ltd (Bingemann), and a guarantee from that same company. It was also agreed by the lender, the borrower, and Bingemann, that Bingemann's liability would be limited to the amount released from the sale of the secured property. A Deed of Variation was executed by the lender, both borrowers, Bingemann and all other six guarantors, however, that Deed of Variation did not disclose the agreement that Bingemann's liability was to be limited, nor was it otherwise drawn to the attention of the other guarantors.

Thereafter, the borrowers failed to pay the monies due under the amended terms of the loan. On 26 May 2011, the lender served default notices in the amount of $1,190,696.52 on the guarantors, demanding payment. Another guarantor denied liability on the basis of the undisclosed limitation on Bingemann.

The matter was eventually taken to the New South Wales Court of Appeal. The Court of Appeal closely examined the terms of both the original and varied loan contracts and scrutinised the terms of the variation as to what precisely had been disclosed. The Court characterised the matter as effectively a "new loan contract", with a contractual obligation to disclose as much to the guarantors. The Court held that the cap to liability granted by the variation altered the terms of the facility sufficiently to mean that the guarantee which had been provided with the initial facility did not extend to the amended facility.

What can be gleaned from this decision is that lenders and guarantors must carefully consider whether any variations on amendment to the terms of the loan agreements are fully disclosed, as insufficient disclosure may curtail the contractual ambit of any provided guarantee

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