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

1.  As I have noted in blog posts over the past 2 days, 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. This is the third post about that issue. 

3.  You could almost feel sorry for the poor old NAB. After all, they lost against the famous guarantors Mr and Mrs Amadio many years ago!

4.  Now, in National Australia Bank Ltd v John Albert Rose [2016] VSCA 169, the Victorian Court of Appeal was called upon to determine whether the breaches by the Bank of the Banking Code of Practice caused the guarantor loss.

Background 

5.  In 2007, John Albert Rose entered into a joint venture with a Timothy Craig Rice (‘Rice’), the first defendant at trial, to acquire investment properties on the Gold Coast (I am starting to see a pattern here). They had been personal friends for a number of years. Rose had been a successful businessman. Rice apparently had no money.

6.  Rose and Rice established a holding company in which they had equal shareholdings and, for each property acquisition, a separate subsidiary company of which they were both directors.

7.  The acquisitions were funded by a combination of (a) funds contributed by Rose and (b) borrowings from NAB, broadly speaking as follows. In March 2007, Rose contributed $4.8 million. Then, in June 2007, the joint venture acquired three properties at a total price of $10.3 million, of which around $5.7 million was borrowed from NAB. Between June and December 2007, five further properties were acquired for a total price of around $3.4 million; those purchases were funded almost entirely by borrowings from NAB.

8.  For each acquisition, Rose signed loan documents on behalf of the borrowing entity, which was the relevant subsidiary company. He also executed a guarantee in respect of each acquisition, personally guaranteeing the liabilities of the relevant borrower company to NAB. The documents were all signed in the presence of John D’Angelo, a senior business banking manager at NAB.

9.  In 2010, following default on the loans, the properties were repossessed and sold. NAB issued demands against the guarantors, including Rose, seeking payment of the outstanding balance of the loans.

10.  The trial judge (Elliott J) dismissed NAB’s claim for $3,878,744.05, plus interest and costs, brought pursuant to five guarantees executed by Rose. In summary, his Honour did so because he found that (1) NAB had breached contractual warranties by failing to comply with the Code of Banking Practice (‘Banking Code’) in taking the guarantees; and (2) those breaches had caused loss to Rose in the amount claimed by NAB.

11.  The majority of the Court of Appeal (Warren CJ and McLeish JA; Ferguson JA dissenting) granted leave to the NAB to appeal, and then dismissed the appeal.

Summary of the law in relation to the Code of Banking Practice in Victoria

12.  Therefore, the current law in relation to the Code of Banking Practice in Victoria is that:

a.     The Code forms a part of the contractual arrangements between a banker and its customer, and

b.     Any breach of the Code that results in a loss to the guarantor who enters into a guarantee procured in those circumstances, may make the guarantee unenforceable.

W G Stark 

Hayden Starke Chambers 

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

1.  As I noted in my blog post yesterday, 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 Wood [2016] VSC 264, Justice Elliott of the Supreme Court of Victoria has confirmed that not all breaches of the Code of Banking Practice (Code) will be fatal for lenders. Importantly, in the decision the court rejected as an exercise of hindsight the often run argument a guarantor would not have entered into the guarantee if they had received all necessary documents.

3. In that case, Mr Robert Wood (an orthopaedic surgeon) was involved in property development together with his brothers, Graeme and Philip Wood.  

4. The Woods had decided in 2006 to become involved in a joint venture for the acquisition and development of Kunanadgee Homestead, Spring Drive, Corowa, New South Wales (“the Property”). It was proposed that the Property be developed as an “Eco Resort”, with the sale and leaseback of units. They borrowed money from Westpac for 12 months to fund the development.

5. They refinanced the Westpac loan with BankWest (which subsequently became the CBA) in 2007. The CBA eventually sued Mr Wood under a guarantee that he had given in respect of the refinance.

6. Mr Wood alleged in his defence that the CBA breached the Code by not drawing to his attention various matters required by the Code, and importantly, that he would not have entered into the guarantee had he known its full terms and effect. 
7. The defence failed on the second point. 

W G Stark

Hayden Starke Chambers

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