The Queensland Court of Appeal has allowed a bank to enforce a personal guarantee given by a woman who claimed she was a volunteer and did not understand the nature and effect of the transaction.1
This case provides lenders and their solicitors a useful example of how to ensure guarantees are enforceable.
Kym Schultz (appellant) married her former husband in 1999. At this time she owned properties in Highgate Hill and the Sunshine Coast’s Cotton Tree.
The appellant’s husband had inherited vacant land at Mudjimba Beach. The appellant funded the building of a family home on that property. Initially the appellant and her husband were registered as co-owners of the property, however the property was later transferred to the appellant’s sole name in order to protect the property from the husband’s creditors.
The couple created a family trust, which was loaned $773,000 by the respondent bank (Bank) to enable the family trust, through its corporate trustee, Camelon Pty Ltd (of which the appellant and her husband were directors), to acquire a parcel of land adjacent to the appellant’s residence at Mudjimba Beach.
The loan was guaranteed by the appellant and secured by mortgages over the appellant’s Mudjimba Beach and Cotton Tree properties.
The appellant, in seeking to overturn the primary decision which upheld the guarantee, claimed that it would be unconscionable to enforce the guarantee in circumstances where:
- She did not understand the nature and effect of the transaction she entered into with the Bank;
- She entered the guarantee as a ‘volunteer’; and
- As the Bank knew she was providing a guarantee for a loan to a company controlled by her husband, the Bank did not explain the nature and effect of the guarantee to her in accordance with its obligations.2
Understanding the nature and effect of the transaction
The appellant claimed the primary judge was in error by concluding there was no misunderstanding by the appellant as to the nature of the loan. The appellant submitted she was unaware that she had a personal liability and could be declared bankrupt, saying instead she understood her liability to be limited to the mortgaged properties.
The Bank argued the appellant had experience with mortgages and guarantees, was advised of the potential consequences of default and had not provided evidence that bankruptcy was a worse scenario than the sale of the mortgaged properties (which the appellant was aware was a possibility).
The Bank also submitted that it was not required to explain every consequence of the transaction (such as the possibility of bankruptcy). What was required was an explanation of the general purport and effect of the transaction, which the Bank claimed it had achieved.
In her own words, the appellant’s understanding of the loan arrangement was that the Mudjimba Beach property and her Cotton Tree unit were ‘on the line’. She acknowledged that she had been told by the Bank that the properties may be sold in a ‘worst case scenario’.
The appellant did not receive independent legal advice, and signed a waiver to the effect that the appellant had been told by the Bank to seek independent legal and financial advice, but decided not to do so before entering into the guarantee. The waiver further acknowledged the appellant understood the practical legal effect of the documentation and transaction.
The Court of Appeal agreed there was no obligation on the Bank to explain that if there was a shortfall from the sale of the properties she could be made personally bankrupt. The appellant understood the nature and effect of the transaction, and to tell her that she could be made personally responsible would have added nothing to this understanding.
The Court of Appeal ultimately found that those factual findings, and a consideration of the appellant’s evidence as a whole, supported the primary judge’s finding that there was no material misunderstanding by the appellant as to the nature and effect of giving a guarantee and entering into the mortgage.
Was the appellant a volunteer?
As discussed in Garcia v National Australia Bank Ltd3, a volunteer is a person who does not benefit from the loan for which they are providing the guarantee. A benefit in this sense must be direct or immediate.
At first instance, the primary judge assumed the appellant was a volunteer despite acknowledging the transaction involved the purchase by a trustee of a family trust (of which the appellant was a major creditor) of land adjacent to the family home which was to be used by the appellant and her family to access the beach.
The Court of Appeal found that the benefit to the appellant from the transaction was not of such a direct and immediate nature to preclude the appellant from being a volunteer within the meaning of the equity identified Garcia, and the judge’s failure to make an express finding on this point did not affect the correctness of the decision.
The appellant contended she was under a special disadvantage in all of the circumstances, including that she was not informed that Camelon Pty Ltd was in default of the terms of a separate previous loan of $444,000 by failing to provide financial documentation within 180 days as required by the terms of the facility. The appellant contended this would have entitled the Bank to terminate the facility and call upon the appellant’s security.
The primary judge found the breach of the facility to be a ‘technical point’, which did not place the appellant in a position of special disadvantage, ultimately the judge denied the equitable relief sought by the appellant pursuant to Amadio4 or under the Australian Securities Investments Commission Act 2001 (Cth).5
The Court of Appeal found that finding was open to the judge on the evidence available, which included:
- The first meeting for the $773,000 loan occurred before there had been any such breach;
- At trial the appellant abandoned her pleaded case that the Bank had failed to inform her of material financial information; and
- There was no suggestion the appellant’s husband did not provide the up-to-date financial information to the Bank to enable a proper assessment of whether it ought to grant the facility of $773,000.
The appeal was dismissed. The Court of Appeal found the Appellant was under no material misunderstanding as to the nature and effect of the transaction. The Bank had provided an adequate explanation of the nature and effect of the transaction, and no special disadvantage existed such as to support the appellant’s allegation of unconscionable conduct.
Unlike the earlier 2015 decision of Alceon Group Pty Ltd v Rose6 (Carter Newell’s analysis of that case can be found here) the appellant was deemed to have an understanding of the nature and effect of the guarantee in circumstances where she knew her properties were ‘on the line’.
The appellant in the present case was a 56 year old woman with a year 12 education, a career as a sales representative for a major corporation and had independently owned multiple properties. Arguably, she may be presumed to have a better understanding of mortgages and banking arrangements than the elderly Ms Rose in Alceon, who was 81 years old at the time she signed the guarantee, was described by the judge in that case as a ‘traditional’ wife and homemaker,7 and had only participated in mortgage agreements under the direction of her husband.
The adequacy of an explanation given to a surety by a bank is subjectively tested, having regard to all of the surrounding circumstances. It is therefore imperative that lenders (and their solicitors) are certain that any third party guarantor (particularly a ‘volunteer’) has received an adequate explanation of the purport and effect of the guarantee in a way whichthey understand. In this case, the appellant’s own understanding was that the properties were ‘on the line’ and could be sold in a ‘worst case scenario’. This was sufficient for the court to conclude that the appellant had an adequate understanding of the effect of the mortgage, and allow the Bank to rely on the guarantee.