Guarantor's desperate arguments to avoid liability fail

This case¹ was brought by a guarantor seeking to avoid liability under a standard form bank guarantee.

The guarantor entered into a largely standard form guarantee in respect of the obligations of a group of companies to a bank. The guaranteed indebtedness was $1.95 million, but was to be reduced to $1.815 million and released after five years provided certain conditions were met.

The lending history

• July 2002: Term loan for $3.3 million to enable the borrower to purchase and develop a new property. The guarantor was familiar with the business and its development plans.
• September 2002: The bank agreed to lend an additional $888,000 – documented by a deed of variation signed by the guarantor.
• June 2003: The guarantor consented to the bank increasing the borrower's overdraft to $2 million.

When things started to go wrong

• August 2003: The borrower's financial situation was looking bleak and the bank transferred its accounts to its assets management group, informing the guarantor of the issues.
• September 2003 – March 2006: The bank continued its financial support of the borrower to assist in the payment of its creditors.
• March 2006: It was clear that the borrower would fail financially. The bank appointed receivers and made a demand under the guarantee for $1.815 million plus accrued interest.
• The guarantor lost her house and her part ownership in a fishing quota, the proceeds of sales of which were put toward repaying the guaranteed indebtedness.
• September 2007: $245,495 remained outstanding.

The guarantor issued proceedings against the bank, outlining nine broad issues, the more relevant of which are summarised below:

Construction of the guarantee

• The guarantor contended that the guarantee only covered the $3.3 million term loan and not the further advances under the overdraft facility other than those expressly agreed to by her. She claimed that the guarantee did not contemplate liability for what she described as "excessive lending" and that the money lent was based on "extraordinary and unusual" choices given that funds were advanced after the borrower was effectively insolvent.

• It was also contended that the guarantee was to be limited to indebtedness incurred by a specific borrower, whereas some overdraft funds were lent to other companies in the borrowing group.

The Judge found that the guarantee provisions made it clear that it was to be an all moneys obligation, intended to extend to all lending made to the borrowing group. It related to all money that a member of the borrowing group may owe now and for any reason in the future. The wording of the guarantee did not restrict it to particular facilities or particular companies.

Appropriation

This issue was about whether the bank was entitled to appropriate sale proceeds of the new property (sold in 2005 for $6.28 million) to the overdraft facility, which had, by 2005, been extended to $5.2 million, or whether it had to first repay the $3.3 term loan.

The Judge decided that the bank was able to rely on clause 10 of the guarantee, which provided that any money received by the bank in reduction of the debt could be used to pay off any part of that debt and that, in any event, the bank had a contractual right under clause 4.5 of the mortgage over the new property to use the money to pay off any part of the secured money owed to it.

Breach of disclosure obligations

The guarantor failed to establish any breaches by the bank in terms of its statutory requirements. She had the benefit of legal and accounting advice and was aware of further advances being made to the borrower.

Oppression

In response to a claim of oppression, the Judge determined that the guarantee was in a standard form and was consistent with usual standards of banking practice. There was nothing inherently harsh or oppressive about the bank's conduct.

The guarantor failed on all claims and judgment was given in favour of the bank for $245,265.92.

¹ Krtolica v Westpac Banking Corporation, High Court, Auckland, 9 January 2008, CIV 2006-404-3999

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