The guarantor wife was a director and shareholder of the borrower company. Nevertheless, the guarantee was set aside under the “Wife’s equity principle.”
It is unconscionable to enforce a guarantee against a wife who does not understand its effect and receives no benefit from the transaction if the lender took no steps to explain the transaction to her or ensure the wife received independent legal advice.
The court preferred the evidence of the husband and wife over the bank in relation to the bank discussions and found this equity principle applied, even though the wife was a shareholder and director, for the following reasons:
- The wife had no real involvement in management;
- The wife did not receive any company drawings;
- The wife was not advised to seek independent legal or financial advice;
- The documents were not sent to the wife personally;
- The bank did not ensure she had adequate time to read the documents, much less understand them and seek independent legal or financial advice;
- The bank ignored all of the safeguards that should have been in place to ensure that the guarantees would be enforceable against her;
- The process was at odds with the procedure contemplated by the Code of Banking Practice (“the Code”), which specifically deals with execution of guarantees.
The court found the bank could not rely upon the wife’s statutory declarations that she received independent legal and financial advice because:
- The declarations were not properly witnessed;
- The guarantees were dated after the declarations, and yet the declarations used the past tense with respect to the guarantees;
- A waiver alone will not defeat the equity principle as a matter of policy.
The court found that the guarantees and in addition, the loan to the husband and wife should be set aside as far as the wife was concerned because it would be unconscientious for the bank to enforce them against the wife. The court extended the equity principle to the loan itself as far as the wife was concerned because the loan, though not a guarantee, was a constructive guarantee since it, like the guarantee, was for the husband’s advantage, not the wife’s. The funds lent by the bank travelled through the joint account of the husband and wife to the companies and did not go to the wife. The businesses conducted by the companies and the husband and wife partnership were in a real sense part of one group of businesses controlled by the husband. It was clear from the evidence that the husband made all the financial and business decisions.
The appeal court found that the bank knew the wife was under a special disability due to her limited understanding of business matters, her dependency upon her husband and the lack of independent advice, such as to make it prima facie unconscientious for the bank to enforce the guarantees or the facility against the wife.
Did the bank interfere with the receivership?
The husband and wife alleged that the receivers breached their duties for which the bank was liable. The court found that the bank was not liable for the conduct of the receivers because the husband and wife failed to establish that the bank interfered with the receivers in relation to the performance of their duties beyond mere consultation and updates so as to make the receivers the agent of the bank.
The court noted that there was frequent interaction between the bank and the receivers because the business involved aged care facilities and was complex but there was no interference.