The Supreme Court of South Australia has issued a timely reminder that providing a guarantee is a serious undertaking and certainly not an obligation to be entered into starry-eyed!
In Starrs v CBA the full court rejected an appeal by Dr and Mrs Starrs on guarantees given by them in the sum of almost $2.4million.
The guarantees secured a $3million overdraft which CBA provided to Seniors Care Services Pty Ltd (Seniors). Mrs Starr was sole director of Seniors and Mr Starrs was the sole shareholder.
The purpose of the overdraft facility was to enable Seniors to acquire and operate the distressed business of Truscott’s Pty Ltd (then in receivership). The guarantees were further secured by mortgages over the Starrs’ 3 properties. The CBA did not register the mortgage on one of the properties until nearly two years after the overdraft facility was made.
Seniors ultimately defaulted on its overdraft and CBA called on the Starrs’ guarantees.
On appeal, the Starrs tried to argue that the guarantees were ineffective because the bank failed to register the mortgage at the time the overdraft facility was first made available to Seniors.
The legal argument was based on a line of precedents which essentially provides that if the borrower fails in their obligations in delivering up the appropriate securities then the obligation of the guarantee does not materialise. In this instance, the Starrs’ tried to extrapolate that argument to apply to their circumstances by claiming that the failure by the CBA to immediately register the security meant that the obligation under the guarantee did not materialise.
The terms of the guarantee were wide ranging and included:
(a) all amounts owning by Seniors;
(b) every future credit contract between CBA and Seniors; and
(c) liability of up to $3,000,000.
There was also a clause in the guarantees which expressly provided that the Starrs’ liabilities were not affected by any failure on the part of the CBA to register any security or to effectively secure any other guarantee.
The court held that the failure by CBA to register mortgage did not excuse the Starrs from their obligations under the respective guarantees. They were therefore liable to pay the full amount of the overdraft plus interest in accordance with the term of the loan and the guarantees.
Lesson 1: Don’t be starry eyed when signing up as guarantor – the obligations are real and will ultimately come to rest with you. Unless there is some deficiency in the guarantee or loan agreement, the court will uphold your contractual obligations.
Lesson 2: Get legal advice so that you are clear on your obligations under the loan agreement and the guarantee – make sure that you know the full extent of your liability.
Lesson 3: If in doubt, don’t guarantee the borrower’s obligations – because while it’s all starry eyed optimism in the beginning that optimism quickly dries up when guarantee is called upon and you are left with the liability.
For more information or for any help with understanding your legal obligations contact:
 Starrs & Anor V Commonwealth Bank of Australia  SASCFC 94