The Supreme Court of Western Australia has confirmed a corporate guarantor cannot rely on a breach of the Code of Banking Practice and that more than adoption of the Code by the financier is required to incorporate it as a contractual term.
Success Assets Pty Ltd (Success) borrowed money from Statewest Credit Society Ltd (Statewest) to assist with purchase of land, on security of mortgage over that land. Other related companies guaranteed the loan and provided unlimited guarantees in favour of Statewest (Guarantors). The debt was later transferred to Bank of Queensland Ltd (BOQ). The guarantees continued to operate.
BOQ made further advances to Success and Success defaulted on the repayment of those loans. Receivers were appointed over the mortgaged property and it was sold. BOQ made demand on the Guarantors for the shortfall.
In response to the demands, the Guarantors commenced proceedings, seeking a declaration that BOQ was not entitled to claim the shortfall from them, on a number of grounds, including:
- the Code of Banking Practice 2004 (Code) applied and it had been breached; and
- BOQ had breached duties owed to the Guarantors in relation to the appointment of the Receiver and the sale of the mortgaged properties at less than market value.
The Guarantors argued the Code applied and that had been breached because the guarantees were for a limited amount and had not been endorsed to indicate that the Code applied. To determine these arguments the Court first considered if the Code applied at all. The Court held s 28 of the Code is quite plain in its language and applied to a guarantee where the guarantor is an individual at the time the guarantee is provided.
The Court confirmed that the Code makes no provision in respect of corporate guarantors and so could not operate in respect of the claims made by BOQ against the Guarantors for the shortfall.
The Court then considered if the Code had been incorporated into the guarantee at all. The Court found that the mere fact that BOQ had adopted the Code was not enough to cause the Code to be incorporated into the guarantee or the Success loan agreement as a contractual term.
The Guarantors also made a number of complaints about the appointment of the receiver and conduct of the receivers generally in enforcing the securities. They said this conduct should deny BOQ the right to rely on the guarantees.
In dismissing these complaints, the Court looked to the provision in the guarantee which required that ‘all payments’ under the guarantee be made free from any set off or counterclaim.
The Court confirmed that it is well recognised that clauses in guarantees requiring that payments be free from any set off or counterclaim are enforceable irrespective of whether the claim arises under statute, common law or equity. It was observed that these clauses are to be generally construed as meaning what they say and as precluding reliance on any claim which does not impeach the guarantee itself. The purpose of such a clause is to prevent the commercial purpose of a guarantee being defeated by a plea of a set off or counterclaim by the guarantor as a defence to an action to enforce the guarantee.
Here the claimed breaches of duty concerned the enforcement of the securities held by BOQ and did not deny the existence of liability under the guarantee. Even if made out, the pleas would not have impeached the guarantees themselves and did not provide a basis for denying BOQ’s claim against the Guarantors.
This case explores a number of issues regarding the application of the Code and guarantees generally. While Code defences are becoming the norm in litigation against guarantors, it is a timely reminder that a claim for a breach of the Code cannot be made by a corporation and that the Code will not be incorporated into guarantees or loan agreements simply because the financier has adopted the Code.