Case note: assessing a guarantor’s capacity to pay

In Fast Fix Loans Pty Ltd v Samardzic [2011] NSWCA 260, the NSW Court of Appeal rejected an appeal from a Supreme Court decision to refuse a mortgagee’s application for possession of land owned by the third party mortgagors.

The mortgagors were the parents of the sole director of a property development company. They succeeded in their application under the NSW Contracts Review Act to declare the mortgage unjust and unenforceable.

The guarantors were Serbian and whilst they could read English to a simple degree and knew what a mortgage was, their capacity was insufficient to enable them to understand the lender’s commercial deed of loan and mortgage. Whilst a Serbian speaking lawyer gave them independent advice there was no evidence that they had any knowledge about the precarious financial position of their son or the company. They thought their liability would cease at the end of three months. The parents obtained no benefit from the transaction.

The trial judge found that the son pressured his parents to obtain the legal advice and to sign the documents.

In rejecting the appeal Judge Allsop concluded:

There is no reason why considerations such as those here cannot lead to the conclusion that a contract of guarantee is unjust if entered into by a lender who is uncaring of a guarantor’s capacity to repay where there is a real and significant possibility of default by the borrower and the guarantor takes no benefit under the borrowing. This is particularly so in all the other circumstances of this case – most particularly the recognition by the appellant of the only two likely sources of repayment, one (successful refinancing) having a real risk to it. The appellant lent at a significant interest rate, reflecting the underlying commercial risk, appreciating the position the parents had been placed in, without any basis to consider that the parents appreciated the commercial risk or that they could afford to take that risk.

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