28.07.2021

High Court emphasises the extent of duties that banks owe to guarantors

A recent High Court case, ASB Bank Ltd v Davis [2021] NZHC 1812, clearly illustrates where the line is drawn in relation to duties banks owe to guarantors.

Background 

Mr and Mrs Davis owned and ran a trucking business called Grays Transport NZ Ltd (the Company).  In 2015 they refinanced the Company’s loans from Westpac to ASB. 

In 2018 the Company’s position deteriorated and it defaulted on its loans.  ASB demanded repayment of the loans from the Company, and the Mr and Mrs Davis as guarantors.  The demand was not met.  After repossessing and selling two trucks, a shortfall of $502,181.42 remained.  ASB sought the shortfall from Mr and Mrs Davis via the personal guarantee.

Mr and Mrs Davis argued that the guarantee was invalid as it related to a withdrawn loan facility agreement.  Furthermore, they counterclaimed that ASB was negligent in several ways.

ASB successfully obtained summary judgment for their claim against the Mr and Mrs Davis, and the Davis’ counterclaims were struck out.

Did Mr and Mrs Davis guarantee the company’s December facility agreement?

On 30 November 2015, ASB provided a loan facility agreement to the company (November Agreement). 

The November Agreement contemplated that, amongst other interests, ASB would be able to take a first registered security interest in the two of the Company’s trailers (AB trailers).  However, as ASB has not taken security over the AB trailers it was not possible for ASB to obtain first registered security interest in them. As a result, the November agreement was withdrawn.

On 9 December a new facility agreement was provided (December Agreement).  By this time, Mr and Mrs Davis had already signed a personal guarantee. Mr and Mrs Davis argued the personal guarantee related to the withdrawn November Agreement and therefore there was no signed personal guarantee for the December Agreement.

The personal guarantee clearly stated that it related to all amounts owing to ASB by the Company, including future advances.  Accordingly, Mr and Mrs Davis did not have an arguable defence.  Even if Mr and Mrs Davis did not appreciate they had guaranteed future sums advanced to them when they signed the guarantee (which is unlikely as they had a solicitor representing them) this did not relieve them of their obligations.

Did ASB owe Mr and Mrs Davis a duty of care to explain the nature and effect of the guarantee or obtain independent legal advice? 

Mr and Mrs Davis argued ASB owed them a duty of care to explain the nature and effect of the guarantee, and that they should obtain independent legal advice as their solicitor had been instructed by ASB to act in relation to the execution of the documents.

The legal position is clear.  A guarantor will only be able to complain where there is deceit, misrepresentation, unconscionable bargain, mistake, undue influence, or negligence where advice is volunteered by a bank or lender in a careless manner.  There is no duty on a bank to explain the nature and effect of guarantee to intended guarantors, or to warn/recommend that they obtain independent legal advice. 

Did ASB owe Mr and Mrs Davis a duty obtain and register a security interest over the AB trailers? 

Mr and Mrs Davis argued ASB breached a duty of care owed to them as guarantors by failing to obtain and register proper security for the loan.  This was specifically argued in relation to failing to register a second-ranking security for the AB trailers.

ASB was entitled to make its own assessment of the security available to it and decide whether to proceed based on a second-ranking security, or reduce the amount of the loan to a level it was comfortable with.  A first-ranking security in the AB trailers was unavailable, therefore, the bank reduced the amount lent to the company and with it, the Davis’ exposure as guarantors.  Ultimately, there was no duty of care to obtain a security interest in the AB trailer, nor did Mr and Mrs Davis suffer any loss because of ASB’s actions.

Did ASB provide Mr and Mrs Davis with negligent financial advice which they relied on to their detriment? 

Mr and Mrs Davis alleged ASB provided negligent advice about when to sell company assets.

There was no evidence of such advice being provided.  The bank provided an assessment that the company’s level of debt was unsustainable and either a significant improvement in trading or reduction in debt was required to meet ASB’s ongoing credit criteria.  It was clear that any discussion about a potential sale of assets was in the context of ASB’s concern for its own position as a secured creditor, not as a financial advisor.

Did ASB owe the Mr and Mrs Davis a duty to repossess and sell the company’s assets? 

Mr and Mrs Davis alleged that ASB was negligent by failing to sell the Company’s assets in 2017. 

There is no obligation on the secured party to sell assets at any particular time.  Rather, the secured party may take possession and sell collateral when the debtor is in default, and if they do, they owe a duty to the debtor to obtain the best price possible at the time of sale.[1] 

There was no evidence that the trucks ASB repossessed were sold below market value.

Comment 

This case provides a clear example of the duties that banks owe (or perhaps do not owe) to guarantors.

Where a bank acts diligently, it will be able to enforce a signed guarantee against the guarantor.  While the financial implications on the guarantor are often significant, it will be held that the party has chosen to enter into the agreement and therefore they will be bound by the obligations.  A bank has no obligation to explain the legal effects of a guarantee, or instruct a guarantor to seek specific legal advice.

Ultimately, the commercial reality of parties entering transactions will prevail and the guarantor will be held responsible for their decision making.  Notwithstanding that, lenders should always be careful in their dealings with potential guarantors and accurately record transactions and dealings with guarantors to guard against the position that ASB found itself in this case. 

If you wish to discuss this case or any matters arising out of lending / guarantor arrangements generally please contact our Insolvency Team who have vast experience in acting for banks, lenders and borrowers, or your usual contact at Hesketh Henry.

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required. 

 [1] Personal Property Securities Act 1999, s 109 and 110.

Do you need expert legal advice?
Contact the expert team at Hesketh Henry.
Kerry
Media contact - Kerry Browne
Please contact Kerry with any media enquiries and with any questions related to marketing or sponsorships on +64 9 375 8747 or via email.

Related Articles / Insights & Opinion

Privacy Commissioner to consult on Privacy Rules for Biometric Information
With the increasing use of facial recognition technology (FRT), retinal scans, and voice recognition by an array of different agencies, privacy concerns about its collection and use are set to be form...
24.11.2023 Posted in Business Advice
Fern forest NZ
Bioenergy in New Zealand: Fuels for the Future?
The energy transition from combustion fuels to low carbon alternatives is viewed as critical in the race to cut global CO2 emissions and reach climate targets.  We look at some of the opportunities p...
14.11.2023 Posted in Business Advice & Climate Change & Forestry
Will Wide BW
A well drafted will is a craft
The New Zealand do-it-yourself “DIY” attitude and way of life is not limited to home improvements, but sometimes also extends to wills.  Recently we had a DIY $5.99 fill in the blanks will acros...
07.11.2023 Posted in Private Wealth
rsz large pillars
Health and Safety: The Consequences of Dishonesty
Siddhartha Gautama said that lies are like huge, gaudy vessels, the rafters of which are rotten and worm-eaten, and that those who embark in them are fated to be shipwrecked.  Two remarkable health a...
03.11.2023 Posted in Employment & Health & Safety
Properly sequencing your Construction Adjudications: Henry Construction Projects Ltd v Alu-Fix (UK) Ltd
According to the UK’s Technology and Construction Court (TCC) (in Henry Construction Projects Ltd v Alu-Fix (UK) Ltd [2023] EWHC 2010) valid payment claims must be paid before the underlying merits ...
30.10.2023 Posted in Construction & Disputes
Key change to rules on distribution of surplus assets under the new Incorporated Societies Act 2022
On 5 October 2023, the new Incorporated Societies Act 2022 (2022 Act) came fully into force, replacing the Incorporated Societies Act 1908 (1908 Act). One of the key requirements under the 2022 Act is...
18.10.2023 Posted in Business Advice
Construction Framework Wide BW
Major milestone passed – NZS3910:2023 expected in time to fill Christmas stockings
As the most widely adopted standard form construction contract in NZ, NZS 3910 was more than ready for updated conditions given the changes in the industry since its last review in 2013.  After almos...
09.10.2023 Posted in Construction
SEND AN ENQUIRY
Send us an enquiry

For expert legal advice, please complete the form below or call us on (09) 375 8700.