Banker behaving badly
A recent Victorian case highlights that strict adherence to the compliance requirements for guarantees is needed if parties expect to be able to rely on those guarantees when a business venture goes wrong. The background John Rose and Timothy Rice started a joint venture, which was funded largely by Rose and borrowings from NAB. In June 2007, the joint venture acquired three properties after $5.7 million was borrowed from NAB. Later that year, five further properties were acquired for around $3.4 million, almost all of which was borrowed from NAB. Rose signed the NAB loan documents on behalf of the borrowing entity, which was a subsidiary to their joint venture. Importantly, Rose also gave a personal guarantee to NAB, which he signed in the presence of John D’Angelo, a senior NAB business banking manager. By 2010, the joint venture had failed, Rose and Rice had defaulted on the loans and NAB had repossessed and sold all of the properties. NAB then sought payment of the shortfall, which amounted to $3,878,744.05, by issuing demands to the guarantors, including Rose. Rose denied liability under the guarantee, claiming that NAB had not complied with the Code of Banking Practice 2013 (Cth) (the Banking Code). The first court proceeding In National Australia Bank Ltd v Rice and Rose, the Supreme Court of Victoria found that D’Angelo: 1. did not provide the guarantee documents to Rose prior to execution; 2. did not fully explain the guarantee documents to Rose; 3. did not tell Rose that he should get legal advice in relation to the documents; and 4. did not give ‘prominent notice’ of the warnings and risks associated with executing the bank documents to Rose. The Court held that: 1. D’Angelo’s above failures constituted breaches of section 31.4 of the Banking Code, which requires lenders to tell guarantors certain things and give certain documents to guarantors; 2. NAB’s non-compliance with the Code amounted to a breach of an implied warranty in the guarantee executed by Rose; and 3. NAB’s breach of warranty rendered the guarantee unenforceable.
The Court noted that had NAB complied with the Banking Code, Rose would not have signed the guarantee and the dispute would never have arisen. The appeal In National Australia Bank Ltd v Rose, NAB contended that the trial judge did not place sufficient weight on the written notices and warnings displayed throughout the guarantee and other bank documents that Rose signed. The key questions for determination by the Victorian Court of Appeal were whether: a. NAB had failed to provide Rose with a 'prominent notice' of the information set out in section 31.4 of the Banking Code; and b. Rose would have entered into the guarantee had NAB complied with the Banking Code. Ultimately, the Court of Appeal upheld the Supreme Court’s decision. The Court of Appeal noted that under the Banking Code, a lender’s duty to give a ‘prominent notice’ goes beyond the mere display of warnings or verbally reciting the required warnings. The Court of Appeal looked at the context in which NAB provided its warnings to Rose, including: a. the length of D’Angelo’s meeting with Rose; b. the number of documents provided to Rose; c. D’Angelo’s guidance to Rose through the documents; d. D’Angelo’s knowledge that Rose had not previously read the documents; e. D’Angelo’s incomplete summaries of the documents provided to Rose; f. D’Angelo’s responsibility to ensure Rose sought legal advice; and g. D’Angelo’s responsibility to ensure Rose properly reviewed and understood the documents. Interestingly, one of the appeal judges, Justice Ferguson, dissented with the majority and suggested that NAB did provide a ‘prominent notice’ to Rose. Her Honour noted that it’s irrelevant whether Rose did not read or see the warnings and notices, but whether they are likely to be seen and stand out, especially to an experienced businessman like Rose. Key Lessons This case emphasises the caution that banks ought to exercise when dealing with guarantees. The case highlights the importance of strict adherence to the Banking Code, especially in relation to the explanation of warnings and risks to guarantors before they sign guarantees because the obligations in the Code are likely to be implied into contracts as a warranty. While many find the guarantee compliance obligations a time wasting process this case certainly highlights that guarantees should be taken seriously when entering into loan arrangements.
If you have been asked to guarantee a loan, but are unsure of what it all means, then we strongly encourage you to seek your own independent legal advice before signing the guarantee. Our Property + Commercial team would be happy to assist. Alternatively, if you have already signed a guarantee, but feel that the bank may not have fully complied with the Banking Code, then please don’t hesitate to contact our Litigation + Dispute Resolution team.   VSC 10.   VSCA 169.