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,
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
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
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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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