When you borrow money from a bank, they tend to be very pedantic. They go to great effort to verify your identity, scrutinise your assets, liabilities & income, and then prepare large & comprehensive loan documents.
And yet despite these well established systems, sometimes it goes wrong & the banks lose – in today’s example a $3,800,000 loss! When they lose, the bank examines what went wrong, & then refine their systems even more.
Don’t be surprised if your bank is even more pedantic than the last time you dealt with them.
National Australia Bank Case Study
Last year, a court decided that a Guarantor did not have to repay $3.8 million to the NAB.
The loan documents were signed in 2007 – prior to the GFC! It’s surprising that the NAB’S processes didn’t withstand court scrutiny! The court judgement explains why, the next time you borrow money, the process is more complicated than the last time!
When are personal guarantees necessary?
When you borrow money to buy assets (such as real estate) using a company or a trust, your Lender will require personal guarantees from you (as the individual who controls or owns the company or trust). Lenders may also require personal guarantees where parents assist their children to purchase a property.
The reason for this is that if the borrower (the company or trust) fails to repay the loan, the Lender will seize and sell the assets that were purchased with the borrowed money. Where these sale proceeds are insufficient to repay the loan, the Lender will also seize any other assets owned by the company and trust, as well as any personal assets owned by you.
It’s important to keep in mind that the Lender can choose which assets to seize and sell – it doesn’t necessarily have to follow any particular order.
NAB Case Study: The Background
Mr Rose entered into a joint venture with Mr Rice to purchase 8 investment properties on the Gold Coast.
The purchases were financed by funds from Mr Rose and borrowings from NAB. Mr Rose signed loan documents and a guarantee personally guaranteeing the loan repayments. All documents were signed in the presence of Mr D’Angelo, a senior business banking manager at the NAB. Whilst Mr Rose was a successful businessman, he had not previously been a real estate investor.
The loans were not repaid and the properties were repossessed and sold. NAB issued a demand against Mr Rose for the outstanding debt.
Mr Rose argued that Mr D’Angelo had failed to warn him of the risks involved in guaranteeing the loans. The trial judge had found that Mr D’Angelo had failed to tell Mr Rose that he should seek independent advice and had also failed to offer a 24-hour cooling off period in breach of the Code of Banking Practice.
NAB lodges an Appeal
NAB appealed the decision arguing that the trial judge had paid insufficient regard to the written warnings on the Guarantee documents, relying instead on what Mr D’Angelo did or did not say to Mr Rose. The Appeal Court disagreed.
The Appeal Court judges affirmed the trial judge’s conclusion that NAB failed to give the prominent notice which was required. The judges took into account the circumstances in which the guarantees were signed at Mr Rose’s home; it was a brief meeting between 15 to 30 minutes; the size and number of the documents; Mr D’Angelo guided the movement through the documents & gave incomplete summaries to Mr Rose; Mr D’Angelo’s knowledge that Mr Rose was not reading the documents; and that Mr D’Angelo did not leave the documents with Mr Rose for him to review.
Although Mr Rose could have read the various documents if he wished, Mr D’Angelo dealt with him on the basis that there was no need to review the documents. The Appeal Court decided that it could not be said that Mr Rose had been given a notice of the relevant matters which was ‘prominent’ in the circumstances.
Effects of the Decision
The effects of the decision are that:
- The Code of Banking Practice imposes contractually binding obligations on banks
- Banks should not rely solely on written warnings on their guarantee documents to discharge their duties under the Code
- Banks have to prove that they have discharged their duties under the Code, with detailed notes of their dealings with borrowers & guarantors
- Banks should allow the guarantor time to review the documents & give obtain independent legal & financial advice
Disclaimer: The above is to be considered as general education. This is not advice and it is not to be acted upon without advice from a qualified professional who understands your personal circumstances.
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