Can a lender enforce its security if it breaches the Code of Banking Practice? - Part one

1.     There have been a number of recent Victorian Supreme Court decisions about the effect of the incorporation of the Code of Banking Practice into agreements between bankers and their customers.

2.     In Commonwealth Bank of Australia v Doggett [2014] VSC 423, Justice Hargrave of the Supreme Court accepted that errors and omissions in a lender’s credit assessment could breach the Code and open the door for a guarantor to argue that their liability under a guarantee was extinguished. In that case, the bank successfully fended off its borrowers’ claims, on the basis of the compromise agreement between the bank and the customer.

3.    Commencing in about 2004, the appellants Steven Doggett and Kevin Sullivan (who were domestic partners), who lived in Melbourne, started buying investment properties on the Gold Coast in Queensland, concentrating in particular on the purchase of apartments in a complex known as ‘Trickett Gardens’. These purchases were largely funded by money borrowed from the respondent, the Commonwealth Bank of Australia. By late 2007, the appellants had purchased seven of the 33 apartments in the complex. Their loans had by that time been consolidated into a single portfolio loan facility.

4.    Their problems commenced when they entered into an agreement to purchase another apartment in the complex through a corporation established to run the management of the apartment complex. That purchase was to be 100% financed, shortly after they had personally bought 2 more apartments in June 2008.

5.    You may recall the dates – the GFC hit in around August 2008, adversely affecting occupancy rates and rentals for apartments in the complex.

6.     In those circumstances, the appellants were unable to meet the payments due to the Bank. The Bank gave the appellants some discounts on the amount due, and the parties signed a compromise. However, the appellants were still unable to meet their (reduced) obligations to the bank, which eventually appointed receivers, sold all the apartments owned by the guarantors and related corporate borrowers and suffered an alleged shortfall of over $3m, for which it sued the guarantors and won. 

7.    In Doggett v Commonwealth Bank of Australia [2015] VSCA 351, the Court of Appeal (Whelan, McLeish and Garde JJA) upheld the trial judge’s decision that errors and omissions in a lender’s credit assessment could breach the Code of Banking Practice and open the door for a guarantor to argue that their liability under a guarantee was extinguished. 
8. In the particular circumstances of that case, the Court of Appeal also agreed that the Bank could rely on the compromise agreement between the Bank and the customer, meaning that the customer could not raise the breach of the Banking Code as a defence.

W G Stark 

Hayden Starke Chambers