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By: Mark Madsen, Esq. & Ruth Sainsbury, Esq.
Mullins Lawyers
Brisbane, Australia

Trustees frequently have to consider a bankrupt’s dealings with banks. Bankrupts often allege misconduct on the part of a bank. The Code of Banking Practice sets out best practice in relation to a bank’s conduct towards its customers. Until recently, the Code had generally been considered to be a guide; a desirable code of practice which banks should follow. However, two recent cases confirm that the banking code may be contractually binding in particular cases.

The first case was Commonwealth Bank of Australia v Dogget in which the Supreme Court of Victoria held that certain provisions of the Code applied to grantors. In this case, a commercial loan was made to a company. The loan was guaranteed by the company directors. The guarantors argued that the Code applied to the loan and guarantees and, relevantly, the bank had failed to exercise the necessary care and skill of a diligent and prudent banker in assessing and approving the loan.

There was a clause in the bank’s terms and conditions which said that if the borrower was a small business, relevant provisions of the Code would apply to the facilities. The Bank argued that the Code did not apply to the guarantees.

The Court held that a promise by the bank to the customer to exercise care, or that it had exercised care, in the terms set out in the Code was relevant to a guarantor. Accordingly, the Court held that this provision was incorporated into both the loan facility and the guarantees as a contractual obligation extending beyond the previously recognised duties or obligations of the bank. However, the Court found no breach on the part of the bank.

The second case was National Australia Bank Ltd v Rice. The Court held that NAB’s breach of various provisions of the Code rendered five guarantees to be unenforceable. The defendants had entered into a joint venture arrangement. The first defendant sought to have the investment companies borrow money from NAB to cover his share of the funds to purchase the properties. The second defendant had a pre-existing relationship with the manager at NAB who arranged the loans for the companies purchasing the property. As a condition of the loans, NAB required personal guarantees from each of the defendants for the amount of the debt. The second defendant executed the guarantees but later alleged that the bank manager did not give him time to read the guarantees or advise him to obtain independent legal advice.

The Court found that the Code was expressly incorporated into each of the guarantees and that the terms of the Code amounted to contractual warranties. It was further held that NAB had failed to comply with the Code in procuring the guarantees from the second defendant, specifically by failing to warn him of the risks of entering into a guarantee; failing to advise him that there were financial risks; and failing to allow the guarantors a day to consider documents prior to signing.

It is no longer sufficient to dismiss the Code to be merely a guide for best practice. These cases highlight that Courts may be willing to incorporate terms of the Code into contractual documents.

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