A recent decision of the Victorian Supreme Court has highlighted the importance of banks strictly complying with the Banking Code of Practice. In National Australia Bank Limited v Rice a guarantor, Mr Rose, successfully avoided liability under a number of personal guarantees where National Australia Bank (NAB) claimed in excess of $6 million.
Mr Rice and Mr Rose entered into a joint venture arrangement for the acquisition and sale of real estate on a 50/50 basis. When a property was purchased, a new company was incorporated for the acquisition of the property and finance was obtained from NAB. Rice and Rose were directors of the company.
Before the joint venture arrangement, Rice had an existing relationship with NAB. Rose had no previous business relationship with NAB.
Although Rose had been successful in business, he had never invested in real estate for commercial gain and had only limited experience in general business affairs.
Rose signed guarantees that made him liable for all of the obligations of the borrowers. Rose thought that, in signing the guarantees, he was only liable for ‘interest on the loans or something like that’.
The guarantees were signed by Rose when they were given to him by the NAB as part of the bundles of loan documentation for execution.
At no time were the guarantee documents in Rose’s possession before signing, other than as part of the execution process.
The guarantees signed by Rose contained a warning statement on the front page of the guarantee that he should seek independent legal and financial advice on the effect of the guarantee before signing the guarantee. The signature page for each guarantee also contained warnings, however they were not immediately adjacent to the place for the required signature.
The NAB’s representative was aware that Rose did not read any of the warnings or the documents before signing the guarantees.
The Banking Code of Practice provides that before the bank takes a guarantee, the bank is required to give the proposed guarantor a prominent notice that:
- they should seek independent legal advice and financial advice on the effect of the guarantees;
- they can refuse to enter into the guarantees;
- there are financial risks involved;
- they have a right to limit their liability in accordance with the Code and as allowed by law; and
- they can request information about the transaction or facility to be guaranteed including any facility that is being refinanced.
The Court found that in this case the NAB representative:
- was unclear as to the explanations and warnings that he had given Rose when the guarantees were signed;
- did not discuss any page of the guarantee in any detail; and
- relied on his standard practice as to what he did and what he said to Rose at the time of the execution of the guarantees.
It was not part of the NAB representative’s standard practice to refer to the warnings on any page. After the guarantees were signed, he returned to his office and completed a record of interview or checklist as to what occurred when the guarantees were signed.
There were gaps and errors in the bank’s internal records as to what it’s representative did and what he said to Rose at the time the guarantees were signed. Accordingly, the Court placed little reliance upon the bank’s documentation purporting to record what occurred.
Instead the Court preferred the evidence of Rose, who:
- said that he did not have any of the guarantees properly explained to him and that he simply signed where he was told to sign by the NAB;
- was emphatic that the NAB representative never told him that he should obtain independent legal advice; and
- said that, if he had been told to obtain independent legal advice, he would have done so.The Court commented that in some cases, asking a potential guarantor whether they wanted to get legal advice, as opposed to telling the potential guarantor that legal advice should be obtained, would be unlikely to have any effect on the attitude of the guarantor. However, in this case the Court said the distinction was critical.
The Court held:
- While the Court accepted the NAB’s submission that it was not obliged to give an oral warning, it was required to give Rose ‘a prominent notice’ of such matters. Simply ‘looking’ at the front page and giving the inadequate summary and not inviting Rose to read any of its contents, did not give prominent notice of the required warnings.
- NAB’s failure to comply with the requirements of the Code constituted a breach of warranty entitling Rose to claim damages;
- Rose’s damages equated to at least his liability under the guarantees; and
- if NAB had not breached the Code, Rose would not have signed any of the guarantees and he would not have had any liability to NAB.
- The decision is a very harsh reminder for the banks that they must strictly comply with the provisions of the Banking Code of Practice in relation to the preparation and execution of guarantees.