Insolvency: A question of independence: guarantee set aside despite legal advice
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By: Ryan Solomons, Esq. & Mark Madsen, Esq.
Mullins Lawyers
Brisbane, Australia
As part of debt recovery for the benefit of the pool of creditors, external administrators need to assess prospects against any guarantors and whether the guarantee will be upheld, notwithstanding that this is primarily a matter for the guarantor to raise as a defence.
Since the High Court decision in Commercial Bank of Australia v Amadio, it has been good practice for lenders to require guarantors to obtain independent legal advice to prevent having the guarantee set aside. The quality of that protection depends upon the independent nature of the advice given.
In Aliceon Pty Ltd v Rose1, the NSW Supreme Court outlined the importance of the advice obtained being of the right kind. This is pertinent to creditors (including external administrators of creditors) seeking to enforce guarantees.
The case involved a director who had a pressing need to refinance a large commercial debt owed by his company. The refinance was conditional on guarantees being obtained from Chris Rose (director), from a corporate shareholder, Rose Custodians Pty Ltd, and from the director's parents, Peter and Betty Rose. The director's parents were both beneficiaries of a trust of which the shareholder company was trustee. The lender required a mortgage to be provided over the home of Mr Rose Snr and Mrs Rose to give value to the guarantee.
The company defaulted on the loan and the lender sought to enforce the guarantees. Both of the director’s parents attempted to argue that the guarantees were unenforceable but, given the knowledge of Mr Rose Snr in relation to the business, only Mrs Rose was successful.
The Court considered the following:
This case serves as a timely reminder that compliance obligations and procedures are not simply a “check the box” exercise. Consideration must be given to appropriate due diligence and searches performed or not to properly consider the value of the guarantee provided. Further, when legal advice is required to be obtained by a party it must be truly independent. Where there are special circumstances, due to either age, cultural background, language or some disability, lenders should take additional measures to ensure that guarantees given are enforceable.
Insolvency practitioners must keep in mind the possibility of the above factors when assessing the prospects of any action to enforce guarantees.
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