Guarantors – when they’re not under a “special disability” – a word of caution for banks and lawyers

Elderly guarantors? Limited English? Living overseas? Alleged fraud? Guarantees executed under power of attorney? In what may sound like a recipe for disaster, it is surprising to learn that the Supreme Court of NSW held for the bank in these precise circumstances.

The decision of Paratei Pty Ltd v ING Bank Australia Limited; Sparks v Battaglia[1] represents a notable departure from the case law[2] on guarantors seeking to set aside guarantees because of a “special disability.”

Facts

The facts underlying the claims were extensive and complex.  In summary:

• A husband and wife gave multiple guarantees and indemnities to the bank over some 20 years.
• The guaranteed liability was initially about $3 million but, by the time of enforcement, had increased to about $30 million.
• The guarantees were given for a corporate group of which the couple’s twin sons were directors of some of the entities.  The couple were the ultimate shareholders of the corporate group and were variously directors or co-directors (with each other or their twin sons) of the various entities.
• At the time of judgment, the husband was 79 years of age and the wife 66 years of age. The husband grew up in Italy and the wife in Peru and whilst both had relocated to Australia during their adulthood, both alleged they had limited understanding of, and ability to read, written English.
• In 1986, the husband sustained severe injuries in a car accident and was said to have developed a memory loss condition.  At or about this time, he set-up residence in Argentina and operated a business there until at least 2011.  The wife and children lived with him in Argentina for a time, but ultimately were based in Australia.  The husband and wife travelled frequently, and separately, between Argentina and Australia.
• At some stage, the husband gave the wife a general power of attorney pursuant to which she executed various bank documents including mortgages and guarantees and indemnities (on behalf of her husband as guarantor, as well as herself).
• The husband and wife separately gave one of the sons a power of attorney on their own respective behalves.  These powers of attorney were used by the son to execute bank documents including, notably, a mortgage over a property in Queensland where the wife resided whilst in Australia.

Transactions

The first guarantee transaction subject to challenge was a cross-guarantee pursuant to which the husband and wife became liable for the total debts of the corporate group.  A significant portion of the guaranteed liability related to the business interests of the twin sons.  The guarantee was executed by the wife on behalf of herself and on behalf of her husband, pursuant to the power of attorney he had granted to her. She also executed statutory declarations on behalf of herself and her husband.  These documents were signed at the family’s lawyers’ office.  No certificate of independent legal or financial advice was insisted upon by the bank or completed by the lawyer or any financial advisor to the husband and wife.

The couple argued that no explanation of the documents had been provided to them, nor had they dealt directly with the bank.  It appears the bank dealt predominantly with one of the sons who facilitated the execution of the guarantee as one of numerous documents executed that same day by his mother.  There was evidence that the bank manager in charge of the file had a close working relationship with the sons and had, overtime, advocated favourably for the sons’ business interests within the bank.  The couple suggested the bank preferred their sons’ business interests over those of the parents as a result of which it was unconscionable (both in equity and under statute) for the bank to enforce the guarantee.

The second of the guarantee transactions comprised a guarantee and indemnity executed by the sons pursuant to powers of attorney granted to them by their parents some seven years earlier.  Extensive correspondence was entered into between the bank and the sons in relation to the business interests including the need for strategy papers, new property acquisitions and the granting of additional facilities.  The bank’s lawyers issued documents to the family’s lawyers and those documents were all signed by the sons pursuant to the powers of attorney which, according to evidence were granted to the sons to “deal with the banks.”  This included not only the facility documents, but the guarantees, statutory declarations and waivers of independent legal and financial advice.

The couple said they would not have authorised the execution of the guarantees and associated documents had they been informed of them.  In relation to a letter of acknowledgement signed by them personally and contemporaneously with the transaction, albeit in Argentina, the couple said they were forced to sign the documents under pressure of either the sons or the bank.  The husband alleged he had no memory of actually signing the document.  Both said they were not given the chance to seek independent advice.

Decision

The Court held entirely in favour of the bank and, in a related action, its receivers appointed to recover possession of the security properties.  Specifically in relation to the transactions described above, the Court said that whilst the bank was “astute to protect its own commercial interests” that conduct did not amount to unconscionable conduct.

Interestingly the Court recognised that the interests of the parent-couple were different to those of their sons but that did not amount to a circumstance which impugned the validity, or enforceability of the guarantees.

Critically, the Court found that each of the husband and wife was sufficiently well informed about the totality of the corporate group’s business interests, had a sound knowledge of the financial state of the corporate group and were adequately knowledgeable about the lending transactions.

Lavan Legal comment

The Court’s comments, and the lengthy evidence given by the bank manager, show that banks should exercise care when dealing with family groups with competing business interests and varying degrees of involvement in the operations.  Here, basic enquiries would have revealed the unusual dynamics and the risks associated with communicating through one of the family members.  The guarantors placed significant reliance on the closeness of the relationship between the one bank manager and their sons over the lending relationship, inferring a clouding of judgment and a conflict of interest in respect of the two family factions.

Overall, this decision should be treated with caution.  The factual background was unique and in our view, the Court was heavily influenced by the inconsistencies in the evidence given by the husband and wife, who the Court treated as unreliable witnesses, including engaging in “self-serving statement[s to] bolster” their evidence.

It is a reminder to adopt a conservative approach to the execution of documents, ensuring those documents are sent directly to the guarantors (not via a third party or borrower) and to establish direct, and regular, communication lines with stakeholders.