Pittwater Life January 2018 Issue

ecause of the Consumer
Credit Code does not include
Guarantees that support loans
for business purposes.
Litigation is expensive
and legal costs are high. The
inclusion of ‘all reasonable costs
of recovery’ clause is common
in guarantee documents.
These costs are in addition
to the claimed principal and
interest, and include legal costs
of pursuing the borrower and
the guarantor. These terms
can raise a significant portion
of the risk of lending and may
amount to tens of thousands
of dollars before litigation has
commenced.
So is there a way of
resolving the borrower,
guarantor, lender impasse
without litigation?
During the ’80s there was a
spate of defaults by borrowers,
many in rural areas and on the
central coast. Borrowers took
the risk of borrowing in Swiss
Francs at a very competitive
rate which after time proved
not to be, so default occurred.
Guarantees were called in and
foreclosure of properties – the
usual security – triggered. There
were some very high-profile
cases, including Kerry Packer.
But very few ended in litigation
in the courts; most were settled
by mediation.
One family case in which
this writer was concerned
involved parents in a regional
city guaranteeing their son’s
purchase of a building in which
to conduct his business. The
borrowing was in the vicinity
of $600,000. The son’s annual
income was approximately $65-
70K per annum. Interest rates
were high. The son mortgaged
his home and the building as
security. In granting the loan
and accepting the parents as
guarantors the bank said it
would be helpful if the parents
put up the deeds of their
property. A very substantial
unencumbered rural property.
The son defaulted and lost
the business, the building
and his home and then the
bank turned to the parents as
guarantors and claimed their
home as well. This painful
situation was resolved by
mediation and negotiation.
Ultimately the bank took
ownership of their home and
the parents were permitted
to stay there for the rest of
their lives and on leaving the
property or their passing the
bank took possession thus
denying any inheritance to the
son and his siblings.
One solicitor commented:
‘People will give guarantees
unwisely because they have
dreams and aspirations and can
only achieve those by borrowing.
Most guarantees are given by
spouses and company directors/
shareholders who share the
dreams.’
So, for those contemplating
borrowing – which is tempting
in this environment of
extremely low interest rates
– think carefully; seek legal
and financial advice on any
documents you are asked to
sign.
Comment supplied by
Jennifer Harris, of Jennifer
Harris & Associates, Solicitors,
4/57 Avalon Parade,
Avalon Beach.
T: 9973 2011. F: 9918 3290.
E: jennifer@jenniferharris.com.au
W: www.jenniferharris.com.au
Business Life
The Local Voice Since 1991
JANUARY 2018 59