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Loan guarantee deemed unenforceable

Loan guarantee deemed unenforceable

Lenders are being warned about the enforceability of loan guarantees following a surprising legal result in a case before the NSW Supreme Court.

As Jon Denovan, partner of law firm Gadens, notes, the case of Alceon Group Pty Ltd v Rose [2015] NSWSC 868 looked like a straightforward case of calling in a guarantee following a loan default.

“The case involved a borrower desperate to refinance a large commercial debt. During the course of negotiations, the lender agreed to the commercial terms of the refinance on the condition that guarantees were obtained from QPS shareholder Rose Custodians Pty Ltd as well as from Christopher Rose (sole director of QPS), Peter Rose and Betty Rose (Christopher’s parents), who were both beneficiaries of a trust of which Rose Custodians Pty Ltd was trustee,” Mr Denovan said.

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“Security was required to back the guarantees and as such, a mortgage was taken over the home of Mr and Mrs Rose.”

However, QPS defaulted on its loan and so the lender sought to enforce the guarantees, which were disputed by Mr and Mrs Rose.

The Supreme Court dismissed Mr Rose’s claim, given his substantial involvement in the operation of QS, however it sided with Mrs Rose on the basis that while statutory legal advice was provided to her, it was insufficient and was not provided by an independent source acting in her best interests.

“While the lender did require that the guarantors obtain legal advice, the court acknowledged that this was more to protect themselves than to protect Mrs Rose. This was evidenced by the lender asking the lawyer for QPS to provide Mr and Mrs Rose with the advice. The lawyer himself acknowledged that the advice was brief,” Mr Denovan explained.

“Due to his involvement in the matter, including involvement with the loan negotiations with the lender, the lawyer providing the advice knew that the financial situation of QPS was dire and that default was likely. He explained none of this to Mr and Mrs Rose and was in a position of ‘impossible conflict of interest’.

“Most importantly, the court held that the lender was well aware that the lawyer who provided the advice to Mr and Mrs Rose was not impartial and was heavily invested in his client, QPS, securing the loan, and in fact encouraged him to give less than satisfactory advice to Mrs Rose.”

According to Mr Denovan, the case demonstrates that lenders must ensure that not only is legal advice provided to guarantors but that such legal advice is also impartial.

Loan guarantee deemed unenforceable
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