Can Parents Provide Personal Guarantees to Their Children?

It is not uncommon for parents to provide their children with financial assistance by providing personal guarantees or security for any money loaned. With housing prices in NSW continuing to sky rocket, it’s easy to see why.

But the Supreme Court in Alceon Group Pty Ltd v Rose [2015] NSWSC 868 is a warning to lenders, casting doubt on the enforceability of those personal guarantees or security instruments in particular circumstances.

What Was the Problem?

Christopher Rose was the director and secretary of Quadwest Developments Pty Ltd (“Quadwest”). When Quadwest experienced financial difficulties and were unable to repay their loan, Alceon Group Pty Ltd (“Alceon”), a lending institution, agreed to $23,000,000 in funds provided the loan was subject to personal guarantees.

Both Peter and Betty Rose, parents of Christopher Rose, signed personal guarantees limited to $2,000,000 and also to the mortgage of their home to enable their son to continue Quadwest.

Alecon suggested Mr Lennox, a solicitor acting for Quadwest, advise Mr and Mrs Rose of the various documents they were required to sign. Unfortunately, Quadwest defaulted on the loan leaving Alceon to enforce the personal guarantees from Peter and Betty Rose, and their rights under the mortgage.

Both Peter and Betty Rose separately defended the orders sought by Alceon. Peter Rose’s defences included that Alceon should exhaust the assets of Quadwest first before he was found to be liable, and that Alceon were engaging in unconscionable, and misleading and deceptive conduct by first claiming in the early stages of negotiations that they would not require personal guarantees.

Betty Rose pressed several arguments including:

• She executed the documents under her husband’s ‘undue influence’;
• Alceon failed to advise her that Quadwest’s finances were in a ‘parlous state’; and
• Alceon’s conduct was unconscionable, and she was part of an unconscientious bargain.

What Was the Outcome?

The Court rejected the defences raised by Peter Rose, primarily because it was increasingly obvious that the proposed loan was of high risk, and the security that Alceon sought was not unreasonable. Furthermore, Peter Rose knew that Quadwest’s financial position was desperate.

On the other hand, Mrs Rose had several situational factors that negated her liability from Alceon, namely:

• She had, for 58 years, trusted Peter Rose and left financial decisions for him. Consequently, she did not read the documents and took no notice of what the documents were when she signed them, which was in accordance with her usual practice.
• She did not benefit from the securitised documents – she was a volunteer in the agreement.
• She had no appreciation for the magnitude of risk of default in Quadwest, and hence the risk that Alceon would exercise their rights under the mortgage. She did not know that Quadwest were desperate, and no one attempted to convey that information to her.
• Mr Lennox’s advice was inadequate, making no attempt to explain what the documents she was signing were, or the consequences of signing the documents. Furthermore, since he was acting for Quadwest, he was not ‘independent’.

From the above facts, the Court found that the principles required in Garcia v National Australia Bank Ltd [1998] HCA 48 were satisfied and hence the agreement with Mrs Rose was unconscionable.

The Court then considered Alceon should bear the consequence of the unconscionable agreement. Alceon knew that they were obliged to advise Mrs Rose of the documents by a ‘competent, independent and disinterested stranger’. As Alceon advised Christopher Rose to use Mr Lennox to give advice to Mrs Rose, knowing that Mr Lennox was a solicitor for Quadwest and themselves introducing a conflict of interest, it was clear that Alceon had undermined the protection that they had sought to provide for themselves.

The Court ordered that Mr Rose be liable for $2,000,000 plus interest and costs of the plaintiff. Mrs Rose remained in possession of the house’s mortgage.

Key Takeaways

This case presents several takeaway lessons. Firstly, advice should always be independent. Secondly, where a party is inexperienced, or other factors indicate a lack of knowledge, the advice given should be thorough explaining the transaction the party is entering into, whether they understand what they’re signing and the consequences of the transaction. Lastly, parents can be considered as two separate parties with distinct interests, and accordingly they can bring separate claims in proceedings that are even against each other.