Case note: can a company guarantee its own debt?

In ING Bank (Australia) Ltd v Leagrove Pty Ltd & Anor; ING Bank (Australia) Ltd v Stafford & Ors [2011] QCA 131 the Queensland Court of Appeal rejected a claim by a guarantor that the guarantee was ineffective as the guarantor both borrowed the $8.25 million from ING Bank and guaranteed that loan.

ING Bank contended that Leagrove as trustee could guarantee the debts of Leagrove in its own right to ING Bank. ING argued that Leagrove as trustee as guarantor was acting in a different capacity to Leagrove in its own right as debtor. There was no reason to consider that Leagrove as trustee in acting as guarantor and mortgagor was acting outside the terms of the trust.

Judge McMurdo decided that whilst Leagrove, acting in its own right, and Leagrove as trustee were not different entities, Leagrove entered into the loan in one capacity and guaranteed the loan and gave a mortgage over trust land in another capacity. Leagrove as trustee held legal title to the assets of the trust and owed a fiduciary duty to the beneficiaries of the trust. The fact that Leagrove as debtor and Leagrove as trustee were acting in such different capacities as debtor and trustee meant that Leagrove as trustee was not prohibited from guaranteeing Leagrove’s debt, at least whilst acting within the terms of the trust and consistent with its fiduciary duty.

Judge McMurdo concluded that:

The terms of the trust deed authorised Leagrove as trustee to enter into a guarantee. The agreement to extend Leagrove’s loan facility appeared to be for the benefit of the trust. There was no evidence to the contrary. Nor was there evidence that, in entering into the guarantee and in mortgaging trust land, Leagrove was breaching the terms of its trust or compromising its fiduciary duty as trustee. In the absence of such evidence, the only rational inference in the circumstances of this case was that Leagrove as trustee was acting for the benefit of and within the terms of the trust in entering into the guarantee and mortgage. I am satisfied it was entitled as trustee to guarantee Leagrove’s debt to ING Bank and to mortgage trust property.

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