Lenders who require guarantors to obtain legal advice are unlikely to have their guarantee set aside – right?  Well, maybe not.

The NSW Supreme Court in Alceon Group Pty Ltd v Rose [2015] NSWSC 868 provides a cautionary tale for lenders. 

The case involved a borrower desperate to refinance a large commercial debt.  During the course of negotiations the lender agreed to the commercial terms of the refinance on the condition that guarantees were obtained from QPS shareholder Rose Custodians Pty Ltd as well as from Christopher Rose (sole director of QPS), Peter Rose and Betty Rose (Christopher’s parents), who were both beneficiaries of a trust of which Rose Custodians Pty Ltd was trustee.  Security was required to back the guarantees and as such, a mortgage was taken over the home of Mr and Mrs Rose.

QPS then defaulted on the loan and the lender sought to enforce the guarantees.  Both Mr Rose and Mrs Rose attempted to argue that the guarantees were unenforceable.  Only Mrs Rose was successful.

The reason that Mrs Rose was successful came down to the fact of the case, which were as follows.

  • At the time the guarantee was signed, Mrs Rose was 81 years old and had always simply signed whatever was put in front of her by her husband without question.  
  • While the lender did require that the guarantors obtain legal advice, the court acknowledged that this was more to protect themselves than to protect Mrs Rose.  This was evidenced by the lender asking the lawyer for QPS to provide Mr and Mrs Rose with the advice.  The lawyer himself acknowledged that the advice was brief.  
  • Due to his involvement in the matter, including involvement with the loan negotiations with the lender, the lawyer providing the advice knew that the financial situation of QPS was dire and that default was likely.  He explained none of this to Mr and Mrs Rose and was in a position of ‘impossible conflict of interest’.    
  • Most importantly, the court held that the lender was well aware that the lawyer who provided the advice to Mr and Mrs Rose was not impartial and was heavily invested in his client, QPS, securing the loan, and in fact encouraged him to give less than satisfactory advice to Mrs Rose.  
  • The reason that the guarantee was not unenforceable with respect to Mr Rose was that he was heavily involved in the business dealings with his son and was well aware of the risks and that financial situation of the borrower.  

This case serves as a reminder for lenders that when it comes to enforcing guarantees, it is not only the fact that legal advice is obtained that is important, but the advice must also be impartial and a lender must have no reason to believe that the advice will not be of an acceptable quality.  The lawyer providing the legal advice should be truly independent of both the lender and the borrower.  Where there are any ‘special’ circumstances, lenders should take additional appropriate action to ensure that guarantors are not misled or uninformed.