The recent New South Wales decision in Alceon Group Pty Ltd v Rose [2015] NSWSC 686 considered the quality of the legal advice provided to a guarantor and the enforceability of the guarantee provided by that guarantor.

BACKGROUND

The plaintiff advanced $23,000,000 to Quadwest Development Pty Ltd (Quadwest) of which Christopher Rose was the director and secretary. The plaintiff required that Quadwest provide, amongst other things, a supported third party guarantee to secure the repayment of the facility. Christopher Rose arranged for his parents (Mr & Mrs Rose) to provide the required third party guarantees for $2,000,000 supported by a mortgage over their family home.

The plaintiff also required Mr & Mrs Rose to obtain independent legal advice prior to signing the guarantees and to execute, amongst other things, a Declaration (as to receipt of independent legal advice).

Quadwest’s solicitor had a brief telephone conversation with Christopher Rose, Mr & Mrs Rose in which he informed them:

“If Quadwest does not comply with its obligations, [the plaintiff] may under the guarantee issue a demand to you up to an amount of $2 million. If this is not paid then [the plainfiff] may exercise the rights as a mortgagee against the mortgaged property (namely the family home). These rights include the ability to sell the property.”

The Borrower effectively defaulted on the facility and the plaintiff sought to enforce its security. Both Mr & Mrs Rose argued that the guarantees were unenforceable. However, only Mrs Rose was successful.

DECISION

The court found in Mrs Rose’s favour due to, amongst other things, the plaintiff’s knowledge that Quadwest’s solicitor was not impartial in the transaction and was unable to provide Mrs Rose with independent legal advice. In fact, the court went as far as to say that the plaintiff’s “express statement that “the advice need only be brief”, and independent only of” the plaintiff shows that the plaintiff “had no reason to believe that advice of the requisite standard was given” to Mrs Rose.

The court went on to say that the plaintiff “encouraged Quadwest to procure [its solicitor] to give the advice to Mrs Rose, fully aware that [its solicitor] was the solicitor for Quadwest, knew its dire financial position, knew the financially severe terms of the arrangement [the plaintiff] was offering, and must therefore have been cognisant of the very high degree of risk associated with [the] arrangement.”

The guarantee was enforceable against Mr Rose as the court found that he “was an experienced businessman; he was involved in the Quadwest project; he was aware of the financial position of Quadwest; and he was aware of the potential consequences of the Guarantee and the Mortgage.”

COMMENT

The decision demonstrates that lenders cannot just tick the required ‘independent legal advice’ box when obtaining guarantees but must consider the quality and effect of the advice being provided to a guarantor if they want to enforce a guarantee.