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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In Agripay Pty Limited v Byrne [2011] QCA 85 the Supreme Court of Queensland Court of Appeal refused to allow a financier’s appeal against the trial judge’s decision to set aside a guarantee by a wife (who was a practising medical practitioner) of a loan to her deceased husband, an entrepreneurial doctor, to participate in a tax avoidance agricultural managed investment scheme, because it was unconscionable to allow the appellant to enforce it. The lender did not require the wife to obtain independent legal advice.

The Court of Appeal was bound the relevant legal principles as stated in Yerkey v Jones and Garcia v National Aust Bank Ltd:

“Yerkey v Jones begins with the recognition that the surety is a volunteer: a person who obtained no financial benefit from the transaction, performance of the obligations of which she agreed to guarantee. It holds … that to enforce it against her if it later emerges that she did not understand the purport and effect of the transaction of suretyship would be unconscionable (even though she is a willing party to it) if the lender took no steps itself to explain its purport and effect to her or did not reasonably believe that its purport and effect had been explained to her by a competent, independent and disinterested stranger. And what makes it unconscionable to enforce it … is the combination of circumstances that: (a) in fact the surety did not understand the purport and effect of the transaction; (b) the transaction was voluntary (in the sense that the surety obtained no gain from the contract the performance of which was guaranteed); (c) the lender is to be taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife; and yet (d) the lender did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her.”

“There seems to be no sound reason why these principles should be limited to wives entering into guarantees of their husbands’ liabilities. Human weaknesses and unconscionable conduct are not limited to heterosexual marriage relationships. These legal principles should apply equally to all vulnerable parties in personal relationships.”

The President of the Court of Appeal concluded:

“the judge was right to conclude that the respondent was a volunteer who did not understand the purport and effect of her transaction of suretyship. It is not now disputed that the appellant knew of the marriage relationship and did not explain or have explained to the respondent the purport and effect of the transactions she was guaranteeing. In those circumstances, the judge correctly concluded that it was unconscionable to allow the appellant to enforce the respondent’s guarantee…

It may seem odd that in this case a practising medical practitioner with some business experience can avoid the obligations of her guarantee under Garcia. But the respondent is not disentitled to the protection of the law because she is tertiary-educated. It must be remembered that the principles explained in Garcia over 13 years ago have long been the law in Australia. Commercial lenders like the appellant, which require partners of borrowers to guarantee their partners’ loans, should be well aware of their legal obligations to ensure such guarantors understand the purport and effect of their guarantees and the transactions to which they relate. It would not have been difficult for the appellant to itself have explained, or to ensure that a competent, independent person had explained, to the respondent the true effect of the guarantee and the transactions to which it related: see Garcia. Its failure to do so disentitles it to reliance on the respondent’s guarantee. ”