9.08.2021

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Mr and Mrs Davis argued that the guarantee was invalid as it related to a withdrawn loan facility agreement.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 As a result, the November agreement was withdrawn.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 Mr and Mrs Davis argued the personal guarantee related to the withdrawn November Agreement and therefore there was no signed personal guarantee for the December Agreement.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.

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Kerry
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