This week’s TGIF considers the decision of Commonwealth Bank of Australia v Currey in which the Court looks at whether a breach of clause 25.1 of the Code of Banking Practice renders a guarantee void or voidable.
A bank lent money to a family company, which was secured by personal guarantees provided by the applicants.
The loan fell into default and the bank sued the company and the guarantors in the Supreme Court of Queensland to recover the debt. The guarantors unsuccessfully sought to challenge both the judgment and its enforcement. The bank then obtained a second judgment against the guarantors in the Magistrates’ Court in relation to a separate loan.
The bank issued a bankruptcy notice against the guarantors based on both the Supreme Court and Magistrates’ Court judgment debts. That notice was not complied with and a sequestration order was ultimately made against the guarantors.
In this case the guarantors sought an order that the sequestration order be set aside.
The guarantors argued, amongst other things, that:
- no debt remained owing to the bank because they had provided the bank with what they claimed to be promissory notes which constituted an offer to repay the money in the future; and
- the bank acted unconscionably in continuing to pursue recovery of the debt in circumstances where the promissory notes were provided.
In a similar vein to that of Commonwealth Bank of Australia v Doggett & Ors (which has been the subject of a recent TGIF article: The Code of Banking Practice and guarantees: are you a diligent and prudent banker? ), the guarantors’ submitted that clause 25.1 of the Code of Banking Practice (Code) had been incorporated into the loan agreement between the bank and the company, and the guarantees, and that if the bank was in breach of that clause, the guarantees were void.
Clause 25.1 provides that:
Before we offer or give you a credit facility (or increase an existing credit facility), we will exercise the care and skill of a diligent and prudent banker in selecting and applying our credit assessment methods and in forming our opinion about your ability to repay it.
However, unlike in Doggett, damages for the breach of clause 25.1 were not sought.
In dismissing the guarantors’ application, the Honourable Judge Jarrett held that Doggett was distinguishable from this case, as inDoggett the guarantors pursued a counterclaim for damages for breach of contract against the relevant bank (as opposed to arguing that any breach of clause 25.1 resulted in the guarantees being void).
His Honour further held that:
- In order to have succeeded on the guarantors’ argument (as they put it) that the bank was not a creditor, they were required to show that the guarantees were void or voidable.
- Even if his Honour had been persuaded that it was appropriate to go behind the Supreme Court judgment, he would have declined to do so because it was apparent that there was a debt owed and the bank was therefore a creditor of both guarantors.
- While there was evidence to suggest that insofar as the Supreme Court judgment was concerned, clause 25.1 of the Code was incorporated into the guarantees, there was no such evidence put before the Court concerning the Magistrates’ Court judgment;
- Even if clause 25.1 was incorporated into the guarantees for the purposes of the Magistrates’ Court debt, there was no evidence put before the Court of any breach of clause 25.1 by the bank; and
- Had it been the case that a breach of clause 25.1 of the Code meant that the guarantees were void or voidable (and there had in fact been a breach), an assessment of damages as was undertaken in Doggett would have been unnecessary.
The decision demonstrates that while an alleged breach of clause 25.1 of the Code is likely to be increasingly raised as a possible defence to any claims under a guarantee (including bankruptcy proceedings), any such breach will sound as a claim in damages only and is unlikely to render a guarantee void or voidable.