Pitfalls for lenders when taking personal guarantees from spouses
The recent decision of the Queensland Court of Appeal in Agripay Pty Ltd v Byrne  QCA 85 is a timely reminder to lenders when taking a personal guarantee from a borrower’s spouse to ensure that the nature and effect of the guarantee and the risks involved are explained to the guarantor.
Dr Murray Byrne and Dr Joan Byrne were husband and wife and both medical practitioners. The husband borrowed funds from Agripay to invest in an agricultural managed investment scheme for tax purposes. His wife guaranteed the loan and signed a declaration that she had been given an opportunity to obtain independent legal advice and understood the effect of the agreement and her obligations under it.
The husband passed away in 2007 and his estate defaulted on interest payments to Agripay. Agripay sought to enforce the wife’s guarantee claiming approximately $786,000 from her.
Unconscionability and guarantors
Courts have traditionally held that where the guarantor:
- is a “volunteer” and has obtained no benefit from the transaction which they have agreed to guarantee;
- does not understand the substance and effect of the guarantee; and
- is vulnerable in that they are in a personal relationship of trust and confidence with the debtor so that they may not ask for or receive a sufficient explanation of the transaction,
then it may be unconscionable for the lender to enforce the guarantee if the lender did not take steps to explain the transaction or ensure the transaction was explained to the guarantor by a competent and independent stranger.
The Court of Appeal confirmed that although Dr Byrne was well educated and understood the general nature of a guarantee, in the circumstances it would be unconscionable to allow Agripay to enforce the guarantee against her for the following reasons:
- Whilst Dr Byrne understood she had signed a document that would make her responsible for repaying the loan if her husband were to die, she did not understand her potential liability in respect of the specific transaction. She did not understand the amount of the loan or the specific consequences following default. A high level of understanding was necessary given the loan was very complex and for a significant amount.
- Although Dr Byrne may have obtained an indirect benefit by way of a boost to the family’s finances, in order for her not to be a volunteer, her gain from the transaction would have to be direct or immediate.
- Agripay knew the transaction was not for Dr Byrne’s benefit as a wife, but did not ensure she properly understood the transaction and did not inform her of the details salient to the obligation she was taking on in circumstances where she was subject to pressure to sign the documentation immediately.
It is common for lenders to take a personal guarantee from a husband or wife when extending a facility to their spouse. This case confirms that when taking a personal guarantee from a borrower’s spouse where the spouse is obtaining no direct benefit from the transaction, it is not enough for a lender to rely on the standard written warning in the guarantee. To avoid the danger of a guarantee being rendered unenforceable, the lender must ensure the risks and consequences of the guarantee have been properly explained to the guarantor.