•
LAW OF FINANCIAL INSTITUTIONS AND SECURITIES
BLO3405
• 1. Guarantees
• ‘A guarantee is a promise by which one person, called the guarantor, or surety, undertakes
to answer for the present or future obligation of another, called the principal debtor’.
•
• A guarantee may be required by a lender before it is prepared to lend or extend credit to a
debtor
• Essence of a guarantee:
•
• ‘If you lend $1,000 to D and if D does not pay you, then I shall’. Therefore it is a
secondary liability, the debtor having primary liability.
•
• A guarantee consists of a personal promise from a guarantor and is not a ‘security’ ( as
discussed in Part A, ‘Securities’).
•
• Why is it not a security?
•
• Sometimes a lender may also require the guarantor to provide security, such as a
mortgage over property if the debtor is unable to provide it ( see Part A, ‘Securities’)
•
2. Bank's standard guarantee forms
• Trend towards ‘plain English’ forms for consumer use
• Banks adhere strictly to their own standard form guarantees.
• 3. Guarantees may be used to secure overdrafts.
• Overdrafts ( see Topic 3 )
• frequently used to secure overdrafts from business customers including companies
• a credit facility provided by a bank to a business customer
• when an overdraft is given to a company, it is common practice for the director(s) of
the company to guarantee the company’s debt, if required. This arrangement occurs
because the company, as debtor, is a separate legal entity (see Topic 3, company accounts).
• 4. Types of guarantee
• Features of continuing guarantees relating to overdrafts
, • Guarantee is ‘continuing’ or ongoing so long as the overdraft remains
• Right of guarantor to revoke the guarantee can occur in relation to stopping
• future advances of credit. This has implications for both borrower and
• guarantor
• May or may not be limited
• 'All moneys owing' clause means that guarantor may be liable for other accounts held by
debtor
• Joint and several liability if more than one guarantor
• Usually operate additionally as an indemnity ( see below)
• 6. Obligation of disclosure to guarantor/surety?
• 7. Implied rights of guarantors ( under the common law)
•
8. Regulation of guarantees
• A. Industry Code:
• Code of Banking Practice ('CBP'); section 28
• • Revision: CBP applies to banking services provided to individuals and small
businesses. It also extends some provisions to the guarantors of such persons: see section 40
definition of ‘you’. Section 28 extends important protections to certain guarantors, including
a cap on the guarantor’s liability
• Legislation
•
• Privacy Act 1988 (Cth) (as amended)
•
• Under s 18N credit references or opinions about individual customers may not be given to
other credit providers or to guarantors without the customer's written consent.
•
• In addition, prospective guarantor must give consent to credit check on itself.
•
• ASIC Act 2001: note issues of misleading and deceptive conduct ( Crisp v ANZ Bank (1994)
ATPR 41- 294), and unconscionable behaviour in relation to guarantees
•
• National Consumer Credit Code
LAW OF FINANCIAL INSTITUTIONS AND SECURITIES
BLO3405
• 1. Guarantees
• ‘A guarantee is a promise by which one person, called the guarantor, or surety, undertakes
to answer for the present or future obligation of another, called the principal debtor’.
•
• A guarantee may be required by a lender before it is prepared to lend or extend credit to a
debtor
• Essence of a guarantee:
•
• ‘If you lend $1,000 to D and if D does not pay you, then I shall’. Therefore it is a
secondary liability, the debtor having primary liability.
•
• A guarantee consists of a personal promise from a guarantor and is not a ‘security’ ( as
discussed in Part A, ‘Securities’).
•
• Why is it not a security?
•
• Sometimes a lender may also require the guarantor to provide security, such as a
mortgage over property if the debtor is unable to provide it ( see Part A, ‘Securities’)
•
2. Bank's standard guarantee forms
• Trend towards ‘plain English’ forms for consumer use
• Banks adhere strictly to their own standard form guarantees.
• 3. Guarantees may be used to secure overdrafts.
• Overdrafts ( see Topic 3 )
• frequently used to secure overdrafts from business customers including companies
• a credit facility provided by a bank to a business customer
• when an overdraft is given to a company, it is common practice for the director(s) of
the company to guarantee the company’s debt, if required. This arrangement occurs
because the company, as debtor, is a separate legal entity (see Topic 3, company accounts).
• 4. Types of guarantee
• Features of continuing guarantees relating to overdrafts
, • Guarantee is ‘continuing’ or ongoing so long as the overdraft remains
• Right of guarantor to revoke the guarantee can occur in relation to stopping
• future advances of credit. This has implications for both borrower and
• guarantor
• May or may not be limited
• 'All moneys owing' clause means that guarantor may be liable for other accounts held by
debtor
• Joint and several liability if more than one guarantor
• Usually operate additionally as an indemnity ( see below)
• 6. Obligation of disclosure to guarantor/surety?
• 7. Implied rights of guarantors ( under the common law)
•
8. Regulation of guarantees
• A. Industry Code:
• Code of Banking Practice ('CBP'); section 28
• • Revision: CBP applies to banking services provided to individuals and small
businesses. It also extends some provisions to the guarantors of such persons: see section 40
definition of ‘you’. Section 28 extends important protections to certain guarantors, including
a cap on the guarantor’s liability
• Legislation
•
• Privacy Act 1988 (Cth) (as amended)
•
• Under s 18N credit references or opinions about individual customers may not be given to
other credit providers or to guarantors without the customer's written consent.
•
• In addition, prospective guarantor must give consent to credit check on itself.
•
• ASIC Act 2001: note issues of misleading and deceptive conduct ( Crisp v ANZ Bank (1994)
ATPR 41- 294), and unconscionable behaviour in relation to guarantees
•
• National Consumer Credit Code
