Guarantees and the Code of Banking Practice – compliance with the Banking Code required to enforce a guarantee

Case Note by Kieran Hickie and Andrew Kirby

National Australia Bank Ltd v Rice [2015] VSC 10

The recent decision of the Supreme Court of Victoria in National Australia Bank Ltd v Rice [2015] VSC 10 highlights that care and attention must be taken by banks and lenders to ensure compliance with the Banking Code is taken in order for guarantors to understand their rights and liabilities under a guarantee. Non-compliance with the requirements of the Banking Code can result in guarantees not being enforceable.

Background

Mr Rice (the first defendant) and Mr Rose (the second defendant) were friends who entered into a joint venture agreement to acquire and sell investment properties on the Gold Coast for a profit.

In order to give effect to the joint venture agreement, Mr Rose drew on and utilised his own wealth and assets to provide his 50% share of funding required to acquire property for the joint venture. Mr Rice, on the other hand, was required to borrow funds to finance the provision of his 50% share of funding required to acquire property.

Mr Rice contacted a senior business banking manager at NAB (with whom he had a pre-existing relationship) to obtain a loan (through his investment company) for the purpose of financing his 50% share of funds for the joint venture project. As a condition of the loan, NAB required personal guarantees to be provided by both Mr Rice and Mr Rose as directors and shareholders of the joint venture entity incorporated for the joint venture project. This was despite Mr Rose already having provided his own 50% share of funding from his own personal assets.

Mr Rose executed the guarantees in favour of Mr Rice’s loan. Mr Rice subsequently defaulted and NAB sought the recovery of the loan. Proceedings were commenced by NAB against Mr Rose (as guarantor) claiming $6,184,593.48 plus interest and costs, pursuant to the five guarantees executed by him.

Mr Rose raised a number of defences to NAB’s claim. One of the defences relied upon by Mr Rose was a failure of the NAB to comply with the code of banking practice (the Banking Code), and at trial evidence was given about the circumstances surrounding the execution of the guarantees by Mr Rose. Mr Rose gave evidence that he was not provided with sufficient time to read or understand the guarantees or to obtain independent legal advice in relation to them. Mr Rose also gave evidence that he was not advised that he could limit his liability under the guarantees.   The NAB sought to rely upon documents that demonstrated (among other things) that Mr Rose was given the right to seek independent legal advice in relation to the guarantee. However, these documents were not properly completed which had the effect of reducing the weight that could be given to these documents.

The decision

Elliott J held that the NAB had failed to comply with relevant provisions of the Banking Code in respect of the guarantees executed by Mr Rose. Elliott J considered that NAB had:

• failed to warn Mr Rose of the risks of entering into a guarantee and his right to limit his liability (in contravention of clause 28.4(a)(i), (ii) and (iv) of the Banking Code). The Court was satisfied that:
• NAB knew (thorough its agent) that Mr Rose had not read the guarantee documents;
• the guarantee documents had not been provided to Mr Rose to peruse or read before signing;
• despite the ‘warning’ on the front page of the guarantee documents, Mr Rose had not been told to seek independent legal advice before signing the guarantees;
• Mr Rose had not been told he could refuse to sign the guarantee documents or could seek to limit his liability under the guarantee;
• failed to advise Mr Rose that there were financial risks in relation to signing the guarantee documents (in contravention of clause 28.4(a)(iii) of the Banking Code). The Court was satisfied that NAB (through its agent) had failed to advise Mr Rose that he could be liable for the whole of the debt under the guarantee);
• failed to allow Mr Rose a day to consider the guarantee documents prior to signing them (in contravention of clause 28.5(b) of the Banking Code). The Court was satisfied that NAB (through its agent) had attended Mr Rose’s house with the intention of having Mr Rose execute the guarantee documents at that visit.

The Court held that the relevant provisions of the Banking Code had contractual force as warranties, as they had been expressly incorporated into the terms of each of the guarantees executed by Mr Rose. Accordingly, the Court held that the breach of the provisions of the Banking Code by NAB gave rise to a claim for damages by Mr Rose which offset the NAB’s claim against him under the guarantee.