Permanent Custodians v King [2009] NSWSC 600

In this case the son had a business arranging surfing tours in Indonesia. He asked his father to guarantee the debts of the business. The father claimed he was happy to do so because the son told him that he had assets (interests in boats and a share in property) which exceeded the debt and so the guarantee would never be called upon. The guarantee was backed up by a mortgage over the father’s house. The son lived with his father.

The son’s business got into difficulties and a liquidator was appointed. The son then arranged a refinance of the loan, significantly increasing the debt. When the new lender sought to enforce that mortgage, the father cross claimed against the solicitor who advised him, alleging that if the solicitor had advised him properly, he would either not have agreed to the loan, or he would only have entered into the loan and mortgage if his son, or one of the son’s two companies, had provided him with sufficient security to enable the discharge of the loan and mortgage from those assets.

The court found against the solicitor on the grounds that the proper practice was to meet separately with the elderly father in a situation such as this, in order to ascertain that he had an understanding of his son’s business and the true risk which he was taking on as mortgagor of considerably increased borrowings. He did not do this and so failed to properly deal with the conflict of interest. Moreover, the evidence showed that the solicitor had been put on notice that there was a problem with the son’s business at the time the advice was given.

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