When a loan guarantee goes wrong


Accountants are often asked to provide certificates of independent advice in financial transactions and usually do so as a matter of formality, with little appreciation of the consequences.

In addition, they are at the forefront of advising directors and others who have given personal guarantees. This is an important decision that accountants need to be aware of, especially if advising a client about a personal guarantee.

A recent High Court ruling found that a lender acted unreasonably in trying to enforce its alleged rights against the personal guarantor, even though there were certificates of independent legal and financial advice.

Practical takeaways from the case

  • Asset-based lending is not per se unreasonable. The facts of each case will determine whether the application of rights is inadmissible.
  • Conduct systems designed to protect the lender against its inability to learn about the borrower’s financial prospects through the use of intermediaries will likely amount to willful blindness and will therefore be impermissible.
  • Independence is paramount. Any system where there is even an appearance of loyalty or allegiance on the part of the party or parties advising any other party other than the advised party should be avoided. It is essential to obtain independent legal and financial advice.
  • In situations where loans are made to businesses which are guaranteed by a personal guarantor, any legal or financial advice should be provided to both the business and the guarantor in their respective capacities, even though both entities may in practice be identical.
  • Accountants should not regard independent opinion certificates as a mere formality – failure to include the necessary information may lead to adverse findings of unfairness and negatively impact their credibility.

Facts of the case

Mr Stubbings (the guarantor) wanted to get a loan to buy a property but was refused a loan from a traditional bank due to his lack of income.

He was introduced to a law firm, AJ Lawyers (the agent), who advanced the money to him on behalf of Jams 2 Pty Ltd (the lender). The loans were formally made to Victoria Boat Company Pty Ltd (the borrower) – a shell company wholly owned by the guarantor – ostensibly for the purpose of doing business, but the real purpose was really for the guarantor to buy its ownership in a very unusual “driving system”.

The “driving system” had the following main characteristics:

  • Loans have never been given to businesses except to circumvent the National Credit Code.
  • The loan had to be guaranteed by a guarantor.
  • There was never any direct contact between the lender and the borrower. All communication was done through intermediaries.
  • The agent provided certificates to the lender indicating that the borrower had received independent legal advice and independent financial advice.
  • The agent deliberately avoided asking about the ability of the borrower/guarantor to repay the money.

Other than the properties, the guarantor had no income or other assets to meet its obligations and the borrower had no assets or history of business activity or income. When the borrower defaulted on the payments, the lender took legal action against the borrower and the guarantor.


In a highly critical judgment, the Court ruled that the lender’s insistence on its rights under the mortgages was inadmissible.

The Court held that the elements of unconscionability, being (i) the existence of a relationship where one party is at a “particular disadvantage” in relation to the other; (ii) knowledge of that particular disadvantage by the stronger party; and (iii) the unconscious exploitation of disadvantage by the same, must be assessed holistically.

On the facts, the Court concluded that the guarantor suffered from a “particular disadvantage” because of his financial illiteracy and that there was “unconscious exploitation of [the guarantor’s] special disadvantage” by the lender and its agents.

The Court also held that the system of conduct employed by the lenders in this case, which sought to prevent the lender from obtaining relevant information about the guarantor’s ability to pay, amounted to willful blindness and was therefore also inadmissible.


The decision highlights the importance of the advice given by professionals (i.e. accountants and lawyers) to their clients, including (1) the independent nature of the advice and (2) the quality of the advice itself. .

This decision shows the importance of obtaining genuine independent legal and financial advice when entering into personal guarantee agreements. Any system where there is even an appearance of allegiance on the part of the party or parties advising any other party other than the advised party should be avoided.

It is important not to view independent advice as a mere ‘box-picking exercise’.

Failure to include necessary information may result in adverse inequity findings, which negatively impact the practitioner’s credibility. In fields where the element of trust is as important as accounting, this could have a huge impact on the ability of professionals to secure work and/or referrals in the future.

Trevor Withane is a partner at Blackwattle Legal, a Sydney-based firm specializing in commercial litigation, insolvency and bankruptcy.

When a loan guarantee goes wrong

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Last update: April 01, 2022

Posted: April 02, 2022

Philip King

Philip King

Philip King is editor of Accountants Daily and SMSF Adviser, the leading sources of news, information and educational content for professionals in the accountancy and SMSF industries.

Philip joined the Securities in March 2022 and brings extensive experience from various roles at Australian daily The Australian National Broadsheet, most recently as Automotive Editor. His background also includes spells in various consumer and trade magazines.

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