Guarantees

1 Feb

Written By For Good Digital

The following information applies to all guarantees, whether or not they are regulated by the NCC. The provisions of the Banking Code of Practice (‘Banking Code’) regarding guarantees may also apply. For more information about the codes of conduct for the credit services industry, see Chapter 5.10: Unauthorised transactions and ePayments Code.
A guarantee is a binding agreement between the credit provider (lender), and the debtor (borrower), and the guarantor. Guarantees are sometimes required by credit providers before they agree to lend money if they suspect the debtor may not be able to make all the repayments.
A ‘guarantor’ promises the credit provider to repay the loan if the debtor refuses or fails to repay the loan. Agreeing to become a guarantor may cause financial hardship. It involves more than helping a friend or relative who needs money or who wants to buy goods on credit, because if the debtor stops making repayments, the guarantor has to pay.
A guarantee involves a promise by the guarantor that they will pay the debt owing to the credit provider if the debtor fails to pay it.
Unless the guarantee document is a deed, the guarantee must be given before or at the time the credit provider lends to the debtor. If the guarantee is given after the credit provider lends to the debtor, the guarantee is unenforceable, as it may not have been given in exchange for the loan.
If the credit provider used any force, fraud, illegality, duress, undue influence, or allowed the guarantor to be mistaken about their rights and liabilities under the guarantee, the guarantee may be avoided. A guarantee may also be avoided if the credit provider was aware of another party using fraud, illegality, duress, undue influence or mistake against a potential guarantor.
The guarantor is entitled to recover any money paid from the debtor, if possible. Also, the guarantor is entitled to any securities held by the credit provider.
A guarantor may be freed from their obligations if:
- the guarantee is altered by the credit provider (e.g. the name of one co-guarantor is struck out);
- the credit provider changes;
- the guarantor is called on to pay but the credit provider cannot hand over securities it has taken;
- the credit provider fails to protect the guarantor (e.g. fails to insure when there is an obligation to do so); or
- the credit provider alters the guaranteed contract (e.g. by giving the debtor more time to pay than the original contract provides for), as long as this alteration is by a binding contract.
However, the terms of the guarantee may make the guarantor liable even if one of the matters listed above has occurred.

The National Credit Code and guarantees

The NCC creates additional requirements for guarantees that are related to credit contracts that are regulated by the NCC. These requirements are:
- a guarantee must be in writing and must be signed by the guarantor; although, it is enough if the guarantee is contained in a mortgage signed by the guarantor (NCC s 55(2));
- a guarantee must contain a Form 8 warning (NCC s 55(3); National Consumer Credit Protection Regulations 2010 (Cth) (‘NCCP Regulations’) reg 81, Form 8, sch 1); the guarantee is not enforceable unless these requirements are complied with (NCC s 55(3));
- a copy of the credit contract must be given to a guarantor before they sign (NCC s 56(1)(a)); the guarantee is not enforceable unless this is done (NCC s 56(2));
- a credit provider must give a prospective guarantor a copy of a document entitled, Form 9 Information Statement: Things You Should Know About Guarantees, which explains guarantors’ rights and obligations (NCC s 56(1)(b); NCCP Regulations reg 82, Form 9, sch 1);
- a credit provider must, within 14 days after a guarantee is signed, give the guarantor a copy of the guarantee signed by the guarantor and any related credit contract or proposed credit contract (if a copy of the related contract has not previously been given to the guarantor) (NCC s 57).
A guarantor can withdraw from a guarantee by giving written notice to the credit provider:
- at any time before credit is first provided under the credit contract (NCC s 58(1)(a)); or
- after credit is first provided under the credit contract, if the contract is materially different from the proposed credit contract given to the guarantor before they signed the guarantee (NCC s 58(1)(b)).
A guarantee can also be cancelled by a court under section 76 of the NCC if it is found to be unjust (see ‘Unjust contracts’, in this chapter).
In the cases of Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 and Garcia v National Australia Bank Ltd (1998) 194 CLR 395, the High Court held that it would be unconscionable to allow the respective banks in those cases to enforce the guarantees against the guarantors due to defective sign-up processes.
A guarantee may provide that the guarantor guarantees not only the debtor’s obligations under a particular credit contract but also obligations under future credit contracts (NCC s 59(1)). The guarantee will only be enforceable in relation to future credit contracts if the credit provider has given the guarantor a copy of the contract document of that future credit contract and subsequently obtained from the guarantor a written acceptance of the extension of the guarantee (NCC s 59(2)).
A guarantor’s obligations under a guarantee can be significantly increased in a variety of ways (NCC s 61). For instance, the credit contract subject to the guarantee may allow the debtor and credit provider to agree to vary the contract by providing further amounts of credit under that contract to the debtor.
However, increased liability has no effect unless:
- the credit provider gives the guarantor a written notice setting out how the terms of the credit contract can be changed to allow an increase in the guarantor’s liabilities; and
- the credit provider obtains from the guarantor an acceptance of the extension of the guarantee to that increased liability (NCC s 61(2)).
Certain exceptions to these requirements are set out in section 61(2) of the NCC.
In ANZ v Manasseh [2016] WASCA 41, the court held that a bank’s offer of a new loan amount was a new agreement, which caused the termination of the original loan agreement and therefore of the guarantee, as the guarantor did not consent to guarantee the new loan. This meant that the guarantor was not liable to pay the borrower’s debt.
If a guarantor gave a guarantee (including a clause giving a legal mortgage) to a credit provider to secure a debtor’s debt, and the guarantor bankrupts after the credit provider called on the guarantee to be honoured, the bankruptcy makes no difference to the enforceability of the guarantee (see GE Commercial Corporation (Aust) Pty Ltd v Nichols as Trustee of Bankrupt Estate of Lymn [2012] NSWSC 562).
A guarantee will be void to the extent that it:
- secures an amount that exceeds the debtor’s liabilities under the credit contract and the reasonable expenses to enforce the guarantee (NCC s 60(1)); or
- limits the guarantor’s rights to indemnity from the debtor (NCC s 60(5)).
A creditor cannot begin enforcement proceedings against a debtor unless the debtor is in default, a default notice has been served on the debtor and the guarantor, and the default is not remedied within 30 days (NCC s 88(1)) (see also ‘Enforcement of credit contracts’, in this chapter). Extra obligations exist where the credit contract is a reverse mortgage (NCC s 88(1)(d)). A creditor can only enforce a judgment obtained against a guarantor if it has a judgment against the debtor that has been unsatisfied for 30 days after a written demand, or if other exceptional circumstances apply, such as that the creditor has been unable to locate the debtor or the debtor is insolvent (NCC s 90).

The current version of the Banking Code – which has applied since 12 December 2019 – contains protections for people who are, or may become, guarantors under Part 7 of the NCC. The protections apply to customers of banks who are members of the Australian Banking Association (ABA); however, in determining disputes against non-member financial firms, the Australian Financial Complaints Authority (AFCA) may consider the Banking Code to be good industry practice (AFCA Rules rr A13.1(d), A14.2(c)).
Some of the protections in the Banking Code that apply to guarantees signed after 1 July 2019 include:
- the bank will not accept a guarantee until the third day after the prospective guarantor has been given the notices and documents required by sections 96–99 of the Banking Code (para 107) unless certain exceptions apply – such as, that the prospective guarantor obtained independent legal advice (para 108);
- the bank will give the guarantee documents directly to the guarantor, not the borrower (subject to exceptions) (para 109);
- if the bank attends the signing of the guarantee, it will ensure the guarantor signs it in the absence of the borrower (subject to exceptions) (para 110).
On 27 June 2024, the Australian Securities and Investments Commission (ASIC) published further changes to the Banking Code which will come into effect on 28 February 2025. The changes include new provisions requiring member banks to take reasonable steps to ensure a meeting is held with a guarantor without the borrower being present before they sign the guarantee (Banking Code paras 109, 110).
In NAB v Rose [2016] VSCA 169, the court held that the Banking Code was a term of the guarantee, and a breach of the Banking Code constituted a breach of the banker–client contract.
In Doggett v CBA [2015] VSCA 351, the court found that the Banking Code requirement to exercise the due care and skill of a diligent and prudent banker applied as a term of the guarantees given by two guarantors.