The Law Handbook 2024

Chapter 5.8: Mortgages, consumer leases and other finance products 433 Mortgages over household goods and tools of trade For contracts entered into after 1 July 2010, section 50(2) of the NCC prohibits mortgages over essential household property – as defined in section 116(2)(b)(i) of the Bankruptcy Act 1966 (Cth) and regulation 27 of the Bankruptcy Regulations 2021 (Cth). (For a list of protected items, see ‘Warrant to seize property’ in Chapter 5.2: Are you in debt?) The exceptions to this rule are: • where the mortgagee supplied the goods to the mortgagor as part of the mortgagee’s supply busi- ness (s 50(2)(a) NCC); and • where the mortgagee is a linked credit provider of the person who supplied the goods to the mortgagor (s 50(2)(b) NCC). Section 50 also prohibits mortgages over: • employees’ remuneration (s 50(1) NCC); and • tools used to earn an income (s 50(5) NCC) – if the total value of the tools is not more than the relevant limit worked out under regulation 29 of the Bankruptcy Regulations 2021 (Cth). Guarantees Introduction The following information applies to all guarantees, whether or not they are regulated by the NCC. The provisions of the Banking Code of Practice regarding guarantees may also apply. For more information about the codes of conduct for the credit services industry, see Chapter 5.10: Unauthorised transactions and ePayments Code. What is a guarantee? A guarantee is a binding agreement between the credit provider (lender), and the debtor (borrower), and the guarantor. Guarantees are sometimes required by credit providers before they agree to lend money if they suspect the debtor may not be able to make all the repayments. A ‘guarantor’ promises the credit provider to repay the loan if the debtor refuses or fails to repay the loan. Agreeing to become a guarantor may cause financial hardship. It involves more than helping a friend or relative who needs money or who wants to buy goods on credit, because if the debtor stops making repayments, the guarantor has to pay. Rights of a guarantor A guarantee involves a promise by the guarantor that they will pay the debt owing to the credit provider if the debtor fails to pay it. Unless the guarantee document is a deed, the guarantee must be given before or at the time the credit provider lends to the debtor. If the guarantee is given after the credit provider lends to the debtor, the guarantee may not have been given in exchange for the loan; this makes the guarantee unenforceable. Also, if the credit provider used any force, fraud, illegality, duress, undue influence, or allowed the guarantor to be mistaken about their rights and liabilities under the guarantee, the guarantee may be avoided. A guarantee may also be avoided if the credit provider was aware of another party using fraud, illegality, duress, undue influence or mistake against a potential guarantor. What if the guarantor pays? The guarantor is entitled to recover any money paid from the debtor, if possible. Also, the guarantor is entitled to any securities held by the credit provider. In Lavin v Toppi [2015] HCA 4 at 52, it was held that a co-guarantor to a bank loan (Lavin) – who subsequently entered into a deed of release with the bank that contained a promise by the bank not to sue Lavin – had to make an equitable contribution to her co-guarantor who paid a disproportionate amount of the guaranteed debt to the bank. Other circumstances where a person may escape liability under a guarantee A guarantor may be freed from their obligations if: • the guarantee is altered by the credit provider (e.g. the name of one co-guarantor is struck out); • the credit provider changes; • the guarantor is called on to pay but the credit provider cannot hand over securities it has taken; • the credit provider fails to protect the guarantor (e.g. fails to insure when there is an obligation to do so); or