The company defaulted on its loan and the lender sued the guarantor. The guarantor sued the lender and others for fraud, misleading and deceptive and unconscionable conduct and breach of the lender’s duty to sell the secured property at market value. The lender and others argued that the guarantor’s claim should be struck out. The misleading conduct was said to arise from representations by the bank that the loan would only be made if one of their wealthy clients became a shareholder in the company taking out the loan, which occurred. The bank allegedly did not disclose that this client was associated with a risky loan that was overdrawn and the guarantor argued that if the bank had disclosed this, the guarantor would not have provided a guarantee.
The court said that the guarantor could not sue for a wrong done to the company to recover the loss in the value of his shares. This is known as the reflective loss principle and the rationale for it stems from the fact that if shareholders were permitted to recover their losses, the company’s creditors would suffer. The court noted that the guarantor’s claim was defective for this reason and should be struck out. The court said:
There has been no suggestion that Mr Hayes was a party to the loan. A claim by My Hayes for a loss suffered by the company is not maintainable.
The court noted that the guarantor’s claims could be re-pleaded as a loss suffered in his capacity as guarantor as opposed to a loss suffered as shareholder. The court struck out the current counterclaim but gave the guarantor the opportunity to re-plead.
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