Recent cases have highlighted guarantee risks including deficiencies in processes in the execution of guarantees and credit assessment issues.

In Violi v Commonwealth Bank of Australia [2015] NSWCA 152 the Supreme Court of NSW Court of Appeal set aside a default judgment obtained by the CBA against Francesco Violi as guarantor for the borrower company of which he was a shareholder. The company was acquiring harvesters for Mr Violi’s brothers’ farm.

As well as arguing that service of the proceedings had not been properly made before default judgment Mr Violi argued that he had a strong defence notwithstanding his delay once he became aware of the proceedings.

His uncontested evidence was that he was presented with documents for signature on the bonnet of the Bank Manager’s motor vehicle out in the paddock whilst he was working. He said that nobody explained to him he was signing a guarantee for $1,500,000. He said he signed the document because he believed he was required to do so as a 25% shareholder in the borrower company. When he signed the papers, he was not given a copy of any other documents to read or to retain.

A majority of the Court of Appeal concluded that Mr Violi showed that he has reasonable prospects of success in his proposed defence.

Justice Bergin Chief Judge in Equity said:

“On the evidence presented in Mr Violi’s application before the primary judge, there was clearly no explanation of the guarantee given to him as he paused from his labour in the paddock to sign “the papers” on the bonnet of the Bank Manager’s car. There was no opportunity for Mr Violi to take independent legal advice or independent financial advice. There was no opportunity for Mr Violi to read the Usual Terms and Conditions of this particular guarantee. There was no opportunity for Mr Violi to seek to limit his liability as suggested in the section under the heading “Things You Must Know” on the signature page for guarantors on the Master Agreement. It is also clear that the Bank Manager knew that Mr Violi’s brother had simply asked him to sign “some papers” about the purchase of the grape harvesters with no mention of a guarantee.

Clearly the Bank was concerned to caution prospective guarantors about the matters contained in the box headed “Important”. If these facts are established at trial it would not be a situation of a mere oversight in explanation. It would appear to be a serious departure from the Bank’s accepted practice.

In my view if these facts are established at the trial, they will afford Mr Violi a defence…..

The fact, if it were established at trial, that a Bank Manager would have such important documents executed on a car bonnet in a paddock without any proper explanation is a significant matter in determining whether there is “sufficient cause” to set aside the default judgment of over half a million dollars….

I am satisfied that it is in the interests of justice to allow the defendant in to defend the case on the merits. There is sufficient cause to set aside the default judgment.”

Credit assessment

In NAB v Rice (discussed here), as well as the key issue of the execution process, there was a discussion whether the lender could look at the combined resources of the borrower and guarantor when assessing the loan application or only the borrower and the lender’s duty of disclosure to the guarantor.

The trial judge observed that:

“there was no term of the Banking Code that required NAB to disclose to the co-guarantors the result of any credit assessment it made of the other guarantor. Further, there was no term that made any representation as to the responsibility of NAB of any such assessment of the other guarantor or to make such an assessment. …

As Hargrave J discussed in Commonwealth Bank of Australia v Doggett, clause 25.1 of the Banking Code is confined to a credit assessment of the borrower and not the guarantors. Further, with respect to each loan facility in this case, there was no real possibility that the borrower itself would be able to repay the loan, together with all of the interest and other expenses, from its own resources….

on the facts of this case, there was never any suggestion or prospect that NAB would perform a credit assessment in order to ascertain whether the borrower itself (as opposed to the borrower and the guarantors) had sufficient resources to repay the loan. ”

Both NAB v Rice and CBA v Doggett are under appeal.

It is likely that this issue will be considered in future decisions.