The recent decision by the Supreme Court of New South Wales in Alceon Group Pty Ltd v Rose [2015] NSWSC 868 is of particular relevance to lenders and solicitors advising guarantors in third party guarantee transactions.

Background

Christopher Rose was a director and secretary of QPS Developments Pty Ltd (QPS Developments). The sole shareholder of QPS Developments was Rose Custodians Pty Ltd who held the shares on trust for the Rose Investment Trust. The beneficiaries of the Rose Investment Trust were Christopher Rose and "the persons related [to him]", namely his parents (Mr Rose and Mrs Rose).

QPS Developments wholly owned Quadwest Developments Pty Ltd (Quadwest). Christopher Rose was director and secretary and created the company to develop a residential property site in Perth (Project). Mr Rose was a director of Quadwest for varying periods between 2005 and 2011. He had worked previously as a builder and was involved in the construction aspect of the Project and Christopher Rose was in charge of the financial affairs of the Project.

In their early married years, Mr and Mrs Rose ran a coffee shop, then a restaurant together. Mrs Rose took care of the management and cooking; Mr Rose the financial side of the business and the family. Mrs Rose retired when her first child was born. She has never been an employee, shareholder or director of QPS or Quadwest, nor any other company for that matter.

Quadwest initially obtained funding for the Project from Bank of Scotland International (Australia) Ltd (BOSI). By the time repayment of the BOSI loan approached in August 2010, the Project was in financial trouble and sales did not procure the funds needed for Quadwest to discharge its debt to BOSI.

Quadwest then refinanced with Alceon Group Pty Ltd (Alceon). In order to manage credit risk, Alceon sought additional security from Quadwest by requiring personal guarantees as security, supported by real estate (other than the Project). Alceon ultimately provided $23,000,000 to Quadwest with personal guarantees (limited to $2,000,000) provided by Christopher Rose and Mr and Mrs Rose. The personal guarantees provided by Mr and Mrs Rose were supported by a mortgage over their own residential property.

Quadwest defaulted on the loan and Alceon sought to enforce the personal guarantees given by Mr and Mrs Rose and to enforce its rights under the mortgage.

The issues

Mr and Mrs Rose resisted Alceon's attempts to enforce the guarantees. Mrs Rose's defence, and the focus of this article, centred on the circumstances in which she signed the guarantee, particularly the level of legal advice received.

Mrs Rose gave evidence and acknowledged signing the guarantee. She provided evidence that Mr Rose had told her there were some documents he wanted her to sign and showed her where to sign, which she did. Mrs Rose did not read the documents and it was her evidence that she did not recall being given any advice about the guarantee or the loan documents. She acknowledged that she had previously signed a mortgage over her home.

The lawyer for Quadwest (Lawyer) also gave evidence stating that he had a telephone conversation with Christopher Rose and Mr and Mrs Rose. It was the Lawyer's evidence that he had never communicated directly with Mrs Rose and had never met her. Further, he admitted to not explaining to Mrs Rose the other documents which she was asked to sign, in particular, the "Consent to legal advice"; document and the declaration which stated that Mrs Rose had received independent legal advice.

Decision

The Lawyer was not a party to the proceedings but Justice Simpson found his advice to be "wholly inadequate". Mrs Rose entered into the transaction as a volunteer, a person who stood to gain no benefit from the arrangement with Alceon.

Justice Simpson found:

  • The Lawyer did not act as an independent solicitor. He was the Lawyer for the borrower, Quadwest, and was actively involved in the attempts of the borrower to secure the loan.
  • The Lawyer did not explain the "purport and effect" of the documents to Mrs Rose and Alceon had no reason to reasonably believe that its purport and effect had been explained by an "independent and disinterested stranger" (as based on the High Court decision in Garcia v National Australia Bank Ltd [1998] HCA 48). The Lawyer had a primary duty to Quadwest, whose interest it was to secure the loan and Alceon was aware of this. The Lawyer knew that the loan from Alceon would only proceed if the guarantees were given.
  • The Lawyer did not explain the content of the Consent to legal advice or the acknowledgment of advice that Mrs Rose was asked to sign.
  • The Lawyer was obliged to give advice that Mrs Rose could comprehend.
  • Alceon "undermined the protection it sought to provide itself" by encouraging the Lawyer to provide advice to Mrs Rose, who was fully aware of the high credit risk involved in the transaction and the dire financial circumstances of Quadwest.

The Court found that it would be unconscionable to enforce the transaction against Mrs Rose.

Lesson learned

The decision serves as a warning to lenders when obtaining third party guarantees and to lawyers advising guarantors. Particular care needs to be taken by lenders and solicitors where personal guarantees are taken as security, particularly from volunteers, as was the case with Mrs Rose.

When obtaining personal guarantees, a lender needs to be mindful of the quality and independence of the advice given - it is not enough that legal advice has been obtained and an acknowledgment of advice document has been signed. Solicitors are to explain the "purport and effect" of not only the loan documents, but also of the declarations and acknowledgments relating to the legal advice, and ensure that the advice has been reasonably understood by the guarantor.