5.3 Guarantors

I do not favour altering or adding to the existing law in relation to guarantees, whether given in support of lending to SMEs or more generally.

As I explained in the Interim Report, because third party guarantees are commonly taken in support of loans to SMEs, the general law principles that affect whether a guarantee is enforceable are important.[1]

The law, as it now stands, will sometimes prevent a creditor from enforcing a guarantee given by a volunteer.[2] In the Interim Report, I made reference to the cases of Commercial Bank of Australia Ltd v Amadio[3] and Garcia v National Australia Bank Ltd.[4] I explained that, in Amadio, the High Court held that it would be unconscionable to allow the bank to enforce a guarantee given by the parents of a borrower because the bank’s employee had shut his eyes to the misconduct by which the son had procured his parents to give the guarantee. I also explained that, in Garcia, the High Court held that it would be unconscionable to allow the bank to enforce a guarantee of a company’s obligations given by the wife of the principal of the company when the bank had not taken steps to explain the content and effect of the guarantee or have a third party do so. Though the wife was both a shareholder and director of the company, her participation was nominal rather than substantial and she was, therefore, treated as a volunteer.

These principles are important, and they form the backdrop against which many individuals and businesses have structured their dealings. I therefore approach any amendment to these principles with caution.

The 2019 Banking Code has introduced some additional protections for guarantors, particularly those contained in Part 7 of the Code. I consider that those developments are desirable. But the evidence received by the Commission has not persuaded me that any steps need to be taken beyond those developments.

If the principles of general law do not prevent enforcement, if the bank has assessed the principal debtor’s ability to repay according to the standard set in the 2019 Banking Code, and if no other provisions of the 2019 Banking Code stand against enforcement, then a guarantee should be enforceable according to its terms.

The issues referred to so far have all been issues about loan origination. What about loan renewal and enforcement?

[1] FSRC, Interim Report, vol 1, 178.

[2] FSRC, Interim Report, vol 1, 178–9.

[3] Commercial Bank of Australia v Amadio (1983) 151 CLR 447.

[4] Garcia v National Australia Bank Ltd (1998) 194 CLR 395.