In case you missed it, almost a year ago now the Victorian Supreme Court provided some important guidance to banks and bankers about the importance of their duties to guarantors under the Code of Banking Practice. The decision in National Australia Bank Ltd v John Albert Rose also provides a useful example of when a written warning on the front page of a guarantee will not be enough to discharge that duty.
The Court dismissed, by majority, an appeal by National Australia Bank Ltd against a decision by the lower court that allowed Mr Rose to walk away from guarantor liabilities in excess of $3.8 million.
Background
Mr Rose entered into a joint venture with his friend, Mr Rice, in 2007 for the purpose of acquiring investment properties on the Gold Coast. Rose and Rice established a holding company in which they had equal shareholding and, for each property acquisition, a separate subsidiary of which they were both directors.
A total of 8 property acquisitions were funded by a combination of funds contributed by Mr Rose and borrowings from NAB. For each acquisition, Mr Rose signed loan documents and executed a guarantee, personally guaranteeing the liabilities of the relevant borrower subsidiary. All documents were signed in the presence of John D'Angelo, a senior business banking manager at NAB.
Mr Rose had a history as a successful businessman (having established the 'stack hat' safety helmet brand) but significantly, he had not previously invested in real estate for commercial gain.
In 2010, following default on the loans, the properties were repossessed and sold. NAB issued demands against the guarantors, including Mr Rose, for the outstanding balance of the debt owed to NAB.
Mr Rose argued that Mr D'Angelo had failed to warn him of the risks involved in guaranteeing multi-million dollar loans to the companies he had established with Mr Rice. The trial judge had found that Mr D'Angelo had failed to tell Mr Rose that he should seek independent advice and had also failed to offer a 24-hour cooling off period in breach of clauses 28.4 and 28.5 of the Code of Banking Practice ("Code").
The Appeal
NAB appealed the decision contending that the trial judge had paid insufficient regard to the written notices on the documents that Mr Rose had signed, focusing instead on what Mr D'Angelo did or did not say to Mr Rose. The bank's guarantees had, on their cover page and signing page, detailed written warnings about the information it was required to disclose. NAB also argued that, in any event, the Code was of no legal effect - merely providing a 'desirable code of practice' rather than imposing any contractual obligations on NAB.
The Appeal Court disagreed. It found that the Code did not require Mr D'Angelo to have orally recited or explained the required matters to Mr Rose but instead, there was indeed an obligation upon NAB to give Mr Rose 'prominent' notice of those matters. The Court explained that 'prominent' meant conspicuous or likely to come to Mr Rose's attention in the context in which that notice was provided.
The majority of the Appeal Court judges affirmed the trial judge's conclusion that NAB failed to give the prominent notice which clause 28.4(a) required. The majority took into account the circumstances in which the guarantees were signed, in this case at Mr Rose's home, including the brevity of the meeting, which was approximately 15 to 30 minutes; the length and number of the documents involved; the fact that Mr D'Angelo guided the movement through the documents and gave incomplete summaries to Mr Rose; Mr D'Angelo's knowledge that Mr Rose was not reading the documents; and the fact that Mr D'Angelo did not leave the documents with Mr Rose overnight for his review.
Although Mr Rose could have read the various documents if he wished, Mr D'Angelo had dealt with him on the basis that he had no need to do so. In all of the circumstances, the Appeal Court considered that it could not be said that Mr Rose had been given a notice of the relevant matters which was 'prominent' in the circumstances.
Effects of the Decision
The effects of the decision are that:
- The Code does in fact impose contractually binding obligations on banks
- Banks are advised not to rely solely on written warnings on the cover of or contained in their guarantees to discharge their duties under the Code
- Banks will also need to be aware that they bear the burden of proving that they have discharged their duties under the Code. So as a matter of good practice, bankers should ensure that they take and keep clear and comprehensive file notes of all of their discussions and interactions with borrowers and guarantors
- It is best practice for bankers to leave documents with guarantors at least overnight to allow the guarantor time to read and consider the finance documents and to obtain independent legal and financial advice if necessary
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
