Guarantees and Secured Loans

Business borrowers have once again been reminded (if they needed reminding) that, should they go into default under their banking facilities they are entirely at the bank’s mercy. The lender has virtually a free hand in deciding whether it sells the secured property first, or takes the more likely course of suing on a personal guarantee whilst “parking” the property for the time being.

In the case of Commonwealth Bank of Australia v Thompson [2013] NSWSC 149, the borrower’s property development venture failed before completion, so the bank went into possession of the real estate and called on the developers’ personal guarantees. As at February 2013 an amount of $3.068m was outstanding under the guarantees, with interest of $1,468 accruing daily.

The guarantors’ case was that the bank should have moved smartly with regard to realising on the property, so as to mitigate their exposure under the guarantees. As it was, the bank was found to have been “dilatory” with regard to dealing with the property, but still prevailed to the tune of $1.9m against the guarantors.

The law, which has its origins in 19^th century English commercial life, is that a creditor has the right to sue a guarantor without resorting to any mortgages it may have been granted.  So long as the lender acts in good faith, it may choose the time when it sells mortgaged property, no matter how disadvantageous this may be to a guarantor.

In the 21^st century business world this may seem harsh and “unconscionable” (basically, not right), and there certainly no shortage of statutory remedies in Australia for unconscionability. However, the courts are uneasy about the over-reliance on what they often see as vague general standards which are felt to be capable of misuse.  Whist the bank had undoubtedly been tardy in its dealings with the borrower group, absent was the high level of morally objectionable conduct necessary to grant the guarantors the relief they sought.