It is very common for the owners of a business operating through a company to have to provide a personal guarantee of the debt owed to the bank by the company. The Code of Banking Practice requires banks to give notice of particular features of guarantee and indemnity documents to business owners before such documents are executed. Often, however, that process is rushed in order to get a particular transaction over the line.
In a recent case from Victoria, a senior business banking manager presented a sophisticated business owner with various finance documents, including a guarantee and indemnity. The banker spent 15 to 30 minutes discussing the documents with the business owner and then pointed him to where they were to be signed. The business owner did not read the documents before signing. He thought he was only guaranteeing a portion of the company’s loan, not the full $8 million. The banker did not tell him he would be liable for the full amount if the company defaulted.
When the company later defaulted on the loan and the bank sued the business owner for the debt, he brought a counter-claim on the basis that the Code had been breached. The Court scrutinised the process the banker had followed and found that he did not comply with the Code. The guarantee and indemnity was held to be void, and the business owner was able to avoid liability for the $8 million.
What does this mean for you, the everyday business owner? It probably means that bankers will go to extra lengths to provide you with finance documents earlier to read and they will likely double and triple check with you that you have read and understood them. More likely, bankers will become more insistent that business owners obtain independent financial and legal advice on business banking documents before they are signed.
Our team at Everingham Solomons is well equipped to advise business owners on the legal aspects of financing your business because Helping You is Our Business.
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