The Law Handbook 2024

Chapter 5.8: Mortgages, consumer leases and other finance products 435 a borrower (to increase the borrower’s loan facility limit) was a new or replacement arrangement, or a variation of the original loan agreement entered into by the borrower. The guarantor had given a guarantee to the bank in respect of the borrower’s original loan. The terms of the guarantee provided that the guarantor would not be liable for any new or replacement arrangements unless he consented to them. The guarantor refused to consent to guarantee payment of the second loan offer. The bank allowed the borrower to draw funds under the second offer without obtaining the guarantor’s consent. The question arose if the guarantor was liable to pay the bank the borrower’s increased debt under the second loan offer. The Court of Appeal decided that the second loan offer was a new agreement, which caused the termination and replacement of the original loan agreement. This meant that the guarantor was not liable to pay the borrower’s debt. Lenders must obtain the existing guarantor’s consent or enter into new guarantees when a borrower’s facility agreement is replaced. Guarantor goes bankrupt If a guarantor gave a guarantee (including a clause giving a legal mortgage) to a credit provider to secure a debtor’s debt, and the guarantor bankrupts after the credit provider called on the guarantee to be honoured, the bankruptcy makes no difference to the enforceability of the guarantee (see GE Commercial Corporation (Aust) Pty Ltd v Nichols as Trustee of Bankrupt Estate of Lymn [2012] NSWSC 562 (13 April 2012)). Guarantee limitations A guarantee will be void to the extent that it: • secures an amount that exceeds the debtor’s liabil- ities under the credit contract and the reasonable expenses to enforce the guarantee (s 60(1) NCC); or • limits the guarantor’s rights to indemnity from the debtor (s 60(5) NCC). Enforcing guarantees A creditor cannot begin enforcement proceedings against a debtor unless the debtor is in default, a default notice has been served on the debtor and the guarantor, and the default is not remedied within 30 days (s 88(1) NCC) (see also ‘Enforcement of credit contracts’, below). Extra obligations exist where the credit contract is a reverse mortgage (s 88(1)(d) NCC). A creditor can only enforce a judgment obtained against a guarantor if it has a judgment against the debtor that has been unsatisfied for 30 days after a written demand, or if other except- ional circumstances apply, such as that the creditor has been unable to locate the debtor or the debtor is insolvent (s 90 NCC). Banking Code of Practice 2021 and guarantees The most recent version of the Banking Code of Practice (‘ Banking Code ’) – which has applied since 12 December 2019 with amendments incorporated in 2020 and March 2021 – contains protections for people who are, or may become, guarantors under Part 7 of the NCC. The protections apply to customers of banks who are members of the Australian Banking Association ( ABA ); however, in determining disputes against non-member financial firms, the Australian Financial Complaints Authority ( AFCA ) may consider the Banking Code to be good industry practice (regs A13.1(d), A14.2(c) AFCA Rules). Some of the protections in the Banking Code that apply to guarantees signed after 1 July 2019 include: • the bank will not accept a guarantee until the third day after the prospective guarantor has been given the notices and documents required by sections 96–99 of the Banking Code (para 107) unless certain exceptions apply – such as, that the prospective guarantor obtained independent legal advice (para 108); • the bank will give the guarantee documents directly to the guarantor, not the borrower (subject to exceptions) (para 109); • if the bank attends the signing of the guarantee, it will ensure the guarantor signs it in the absence of the borrower (subject to exceptions) (para 110). In response to two independent reviews of the Banking Code conducted in 2021, the ABA has released further proposed changes to the Banking Code. These proposed changes are under consultation at the time of writing and include new provisions requiring member banks to take reasonable steps to ensure a meeting is held with a guarantor before they sign the guarantee (paras 106 and 107 of the proposed Banking Code).