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  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
- the credit provider alters the guaranteed contract (e.g. by giving the debtor more time to pay than the original contract provides for), as long as this alteration is by a binding contract.
However, the terms of the guarantee may make the guarantor liable even if one of the matters listed above has occurred.
The National Credit Code and guarantees
Formalities of guarantees
The NCC creates additional requirements for guarantees that are related to credit contracts that are regulated by the NCC. These requirements are:
- a guarantee must be in writing and must be signed by the guarantor; although, it is enough if the guarantee is contained in a mortgage signed by the guarantor (s 55(2) NCC);
- a guarantee must contain a Form 8 warning (s 55(3 NCC); reg 81, Form 8, sch 1 National Consumer Credit Protection Regulations 2010 (Cth) (‘NCCP Regulations’); the guarantee is not enforceable unless these requirements are complied with (s 55(3) NCC);
- a copy of the credit contract must be given to a guarantor before they sign (s 56(1)(a) NCC); the guarantee is not enforceable unless this is done (s 56(2)NCC);
- a credit provider must give a prospective guarantor a copy of a document entitled, ‘Form 9 information statement: Things you should know about guarantees’, which explains guarantors’ rights and obligations (s 56(1)(b); reg 82, Form 9, sch 1 NCCP Regulations);
- a credit provider must, within 14 days after a guarantee is signed, give the guarantor a copy of the guarantee signed by the guarantor and any related credit contract or proposed credit contract (if a copy of the related contract has not previously been given to the guarantor) (s 57 NCC).
Can a guarantee be cancelled?
A guarantor can withdraw from a guarantee by giving written notice to the credit provider:
- at any time before credit is first provided under the credit contract (s 58(1)(a) NCC); or
- after credit is first provided under the credit contract, if the contract is materially different from the proposed credit contract given to the guarantor before they signed the guarantee (s 58(1)(b) NCC).
A guarantee can also be cancelled by a court under section 76 of the NCC if it is found to be unjust (see ‘Unjust contracts’ in ‘Varying, re-opening and terminating credit contracts‘).
In the cases of Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 and Garcia v National Australia Bank Ltd (1998) 194 CLR 395, the High Court held that it would be unconscionable to allow the respective banks in those cases to enforce the guarantees against the guarantors due to defective sign-up processes.
A guarantee may provide that the guarantor guarantees not only the debtor’s obligations under a particular credit contract but also obligations under future credit contracts (s 59(1) NCC). The guarantee will only be enforceable in relation to future credit contracts if the credit provider has given the guarantor a copy of the contract document of that future credit contract and subsequently obtained from the guarantor a written acceptance of the extension of the guarantee (s 59(2) NCC).
Increasing a guarantor’s liabilities
A guarantor’s obligations under a guarantee can be significantly increased in a variety of ways (s 61 NCC). For instance, the credit contract subject to the guarantee may allow the debtor and credit provider to agree to vary the contract by providing further amounts of credit under that contract to the debtor.
However, increased liability has no effect unless:
- the credit provider gives the guarantor a written notice setting out how the terms of the credit contract can be changed to allow an increase in the guarantor’s liabilities; and
- the credit provider obtains from the guarantor an acceptance of the extension of the guarantee to that increased liability (s 61(2) NCC).
Certain exceptions to these requirements are set out in section 61(2) of the NCC.
ANZ v Manasseh  WASCA41
In the case of ANZ v Manasseh  WASCA 41, the court had to decide if a second letter of offer to 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  NSWSC 562 (13 April 2012)).
A guarantee will be void to the extent that it:
- secures an amount that exceeds the debtor’s liabilities 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).
A creditor cannot begin enforcement proceedings against a debtor unless:
- the debtor is in default; and
- 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’ in ‘Varying, re-opening and terminating credit contracts‘).
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 exceptional 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 A.13.1(d), A.14.2(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 (cl 107) unless certain exceptions apply – such as, that the prospective guarantor obtained independent legal advice (cl 108);
- the bank will give the guarantee documents directly to the guarantor not the borrower (subject to exceptions) (cl 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) (clause 110).
NAB v Rose  VSCA 169
In the case of National Australia Bank Ltd v Rose  VSCA 169, the Victorian Court of Appeal confirmed that NAB had breached the previous version of the Banking Code by failing to verbally inform a guarantor, Rose, of certain written warnings in the documents (including that the guarantor should seek independent legal advice before signing) in the course of taking five guarantees from him in connection with the purchase of investment properties. The court held that the Banking Code was a term of the guarantee, and so the Banking Code breach constituted a breach of the banker–client contract. The court concluded that NAB’s breaches of the Banking Code caused loss to Rose in the amount of the guarantees. This had the effect that Rose was entitled to set-off damages (i.e. that Rose’s liability under the guarantees should be reduced by the amount of his loss).
Doggett v CBA  VSCA 351
In the case of Doggett v Commonwealth Bank of Australia  VSCA 351, the Victorian Court of Appeal confirmed that the equivalent of the current clause 49 in the 2004 version of the Banking Code was a term of guarantees given by two guarantors, and accordingly required the bank to exercise the care and skill of a diligent and prudent banker in assessing whether a borrower would be able to afford and repay a loan. In this case, however, the guarantors were not entitled to a remedy because they had released the bank under a compromise agreement.
CBA v Wood  VSC 264
In the case of Commonwealth Bank of Australia v Wood  VSC 264, the guarantor alleged that the CBA breached the Banking Code by giving the guarantee to the debtor, or someone acting on behalf of the debtor, to arrange the signing. The guarantor also argued that the bank failed to ensure that he signed the guarantee when the debtor was not there, and that the breaches gave him the right to terminate the guarantee. The court found that the guarantor had failed to prove that his loss, which was the amount of his liability under the guarantee, was caused by the breach of the Banking Code. So even through the court found that the relevant provisions of the Banking Code were incorporated as contractual terms of the guarantee, and that they were breached, the guarantor was not entitled to a remedy.
(See ‘Banking Code of Practice’ in ‘Credit and finance industry codes of conduct‘.)