Debentures and Loan Capital



Debentures and Loan CapitalIntroductionDistinction between share capital and loan capitalShare capital is equity capital that is raised and the shareholder who purchased the capital becomes an owner of the company.Loan capital is debt finance that is raised externally by an external creditor who typically secures a right in interest over assets and charges an appropriate interest rate for the finance.Important to note that interest on a loan can be paid from the companies capital while dividends can only be paid from profits.GearingRatio of borrowed funds to issued share capital is described as the ‘gearing ratio’ of a company.If a company has borrowed a large amount relative to its issued share capital, it is said to be “highly geared”.Effect of a high gearing ratio is to make the return on shareholders funds relatively volatile.Effect of low gearing ratio is to make the return on shareholders funds very stable.If the company operates profitably and thereby use its borrowed funds to obtain a return greater than interest paid on the loans, the return on shareholders funds will be relatively high.If the company operates at a loss, the loss on shareholders funds will be relatively greater than if the company had borrowed less. If the company records a relatively low profit, the effect of payment of interest on the borrowed funds results in a relatively low return on shareholders funds.Borrowing Powers of CompaniesWhat can they do ?Company has the power to borrow in the same was an individual. It has power to issue debentures and give security for loans by charging uncalled capital and granting floating charges over its property s124(1).This is despite any express restriction or prohibition contained in the companies constitution, if it has one s125(1)Who has the power to authorise?The person acting for the company must have requisite authority to borrow on behalf of the company.The power to borrow is usually conferred on the directors.The replaceable rule in s198A gives directors the power to manage the companies business and includes the power to borrow.In rare cases this may not be so, or the directors may have a limit imposed by the companies constitution of their borrowing powers. In such a case, an outsider is protected by s 129(1) and may assume that the constitution has been complied with. DebenturesWhat can a company do with debentures?A company may borrow funds in much the same ways as individuals. a company may borrow from a bank or other money lender with or without security. An indirect method of borrowing available to both companies and individuals is to delay payments to trade creditors. Companies can ISSUE debentures.What is a debenture?The term “debenture” has a number of meanings:Common LawAt the common law, a debenture is a document that acknowledges the indebtedness of the company. The debt is often secured by a charge over the property of the company but this is not necessary. Corporations LawUnder the Corporations Act, “debenture” has a broader meaning than the common law meaning. Section 9 says a debenture means a “chose in action that includes an undertaking by a body to repay as a debt, money deposited with or lent to the body.” The chose in action may (but need not) include a charge over the property of the body to secure repayment of the money.Certain undertakings to repay money deposited or lent are excluded from the s 9 definition. The exclusions include undertakings:by an Australian ADI (authorised deposit-taking institution) to repay money deposited with it or lent to it in the ordinary course of its banking business; andto pay money under a cheque or bill of exchange.Corporations Act Definition of Debentures 9 definition of debenture specifically notes that a debenture may (but need not) be secured by a charge over the body’s property, this does not accord with the public’s understanding of the word. For this reason, the Corporations Act restricts how borrowers may describe or refer to debentures:s 283BH. The appropriate description depends on whether a charge has been granted s security for the borrowing and if so, the type of charge.A borrower may describe a debenture in any one of the following three ways:Description When description may be usedMortgage debenture Only if the circumstances in s 283BH(2) are satisfied. These circumstances include where repayment of the borrowings is secured by a first mortgage given to the trustee for debenture-holders over land vested in the borrower or in any of the guarantors: s 283BH(2)(a).Debenture Only if the circumstances in ss 283BH(2) and (3) are satisfied. These circumstances include where repayment of the borrowings is secured by a charge in favour of the trustee for debenture-holders over the tangible property of the borrower or guarantors: s 283BH(3)(a).Unsecured note or unsecured deposit note In any other case.Relationship between Borrowing Company and Debenture HolderThe relationship between the borrowing company and a debenture-holder is governed by the law of contract and, if the debenture is secured, also by property law. The debenture provisions in Ch 2L (ss 283AA–283I) of the Corporations Act also regulate the borrowing companies that issue debentures.Issuing Convertible Debentures or NotesBorrowing company may issue convertible debentures or convertible notes to lenders. These provide the holders a right that allows them to convert the debentures into shares. Holders obtain the advantages of being debenture-holders with a secure, regular return and after a period they may exercise their right to become a shareholder and thereby participate more fully in the success of the company.advantageous if the market value of the shares increases significantly over their issue price. It thereby affords the holder a hedge against inflation. From the company’s point of view, if its future prospects are attractive, it may find its convertible debentures marketable at a relatively low interest rate. Holders may be prepared to accept a low interest rate in exchange for the prospect of converting the debentures into shares with a relatively high market value. The company may also be able to avoid having to raise funds to redeem the debentures if the holders select to convert them into shares.Fund-raising provisionsThe term “debenture” comes within the s 92 definition of “securities”, s 727 prohibits a person making offers of debentures or distributing application forms for debenture offers unless a disclosure document for the offer has been lodged with ASIC. The provisions of Ch 2L apply specifically to offers of debentures that need disclosure under the fundraising provisions of Ch 6D of the Corporations Act: s 283AA(1)(a).What are Borrower’s and guarantor’s duties?The Corporations Act imposes a number of statutory duties on a borrower including a requirement to enter into a trust deed under s 283AA. BorrowerThe term “borrower” in relation to a debenture means the body that is, or will be, liable to repay money under the debenture: s 9. Under s 283BB, the general duties of a borrower include the duty to:carry on and conduct its business in a proper and efficient manner; andmake all its financial and other records available for inspection by the trustee and give the trustee any information, explanations or other assistance required about the matters relating to those reports.Sections 283BC–283BF impose a number of specific duties on borrowers. They have a duty to:notify ASIC of the name of the trustee (s 283BC);replace the trustee if this becomes necessary (s 283BD);inform the trustee about any charges it creates (s 283BE); andgive the trustee and ASIC quarterly reports about certain specific matters: s 283BF.GuarantorA guarantor in relation to a debenture means a body that has guaranteed the repayment of any money deposited or lent to the borrower under the debenture - s 9Under ss 283CB and 283CC, a guarantor is under a duty to carry on and conduct its business in a proper and efficient manner, to make its financial records available for inspection by the trustee, and to notify the trustee about any charges it creates.Duties of Both PartiesA borrower and guarantor commit a criminal offence if they intentionally or recklessly contravene any of the statutory duties imposed upon them: ss 283BI and 283CE.Statutory rights of debenture-holdersThe Corporations Act confers several rights on the debenture-holders or their trustee. s 318, a borrower in relation to debentures must give the trustee a copy of its annual financial report, directors’ report and auditor’s report by the deadline for the financial year set by s 315.a borrower’s auditor must give the trustee for debenture-holders a copy of the auditor’s report within seven days after providing the original to the company or its members: s 313(1). The auditor must also provide a report on any matters prejudicial to debenture-holders’ interests within seven days of the auditor becoming aware of the matter: s 313(2). s 283EA gives debenture-holders who hold 10 per cent or more of the nominal value of the issued debentures the power to direct the borrower to call a meeting of debenture-holders. s 283EB(1). The purpose of this meeting is to enable the trustee to inform the debenture-holders of the failure, submit proposals for protection of the debenture-holders’ interests and to ask for directions in relation to the matter.Register of debenture-holdersA company that issues debentures is required to set up and maintain a register of debenture holders:s 168(1)(c). Under s 171, the register of debenture-holders must contain the following:information about each holder of a debenture:the debenture-holder’s name and address; andthe amount of the debentures pany chargesCompany ChargesWhat is a Company Charge?A charge involves a borrowing company giving a lender security over some or all of its property for repayment of the debt. The lender is a secured creditor, also known as a “chargee” and the assets over which security is given are said to be “charged” or “secured”. If the borrowing company that has granted a charge defaults under the loan agreement, the secured creditor is entitled to take possession of the secured property and sell it. The secured creditor can use the proceeds from the sale of the secured property to repay the debt owed to it. The enforcement of a charge is often carried out by a receiver appointed by the chargee. What types of charges are there?A charge can involve a number of different types of securities. i.e. a borrowing company may give a secured lender a mortgage over its land as well as a charge over the company’s plant and equipment. A company has the power to grant floating charges over its property: s 124(1)(f). It may also give security by charging its uncalled capital: s 124(1)(e). While, in a strict legal sense, there is a difference between a mortgage and a charge, s 9 defines the word “charge” in very broad terms. It means a charge created in any way and includes a mortgage.Fixed and Floating ChargesA borrowing company can grant the lender a fixed or floating charge over its property as security for a loan. What is a fixed charge?A fixed charge attaches to specific property owned by the borrower. This property may or may not be owned by the company at the time the charge is created. In fact, it need not necessarily be in existence at the time the charge is given. The courts of equity also recognise fixed charges over future property. Because of the nature of a fixed charge, the company is unable to dispose of the charged assets without the lender’s consent.AdvantagesIt is sometimes important to determine whether a charge is fixed or floating because floating charges are subject to certain priorities in receivership under s 433 and in a liquidation under s 561. This means that holders of fixed charges stand in a stronger position than floating charge holders.What is a floating charge?Floating charges are charges that float above specified categories of property such as inventory. The company is free to dispose of these assets in the normal course of business and to replace them by acquiring the same category of assets in the future. When a specified event occurs, such as the company defaulting or going into liquidation, the debenture-holders may enforce the charge, usually by appointing a receiver. From this time, the charge ceases to float and drops down to attach itself to the specified categories of assets then owned by the company. On default, the floating charge is said to “crystallise” and becomes, in effect, a fixed charge over the assets of the company held at the time of crystallisation or acquired afterwards.Advantages of a Floating ChargeA floating charge provides a very practical device for companies to secure debts. A company may already have granted a mortgage over specific assets, or it may not own land or other assets suitable for a fixed charge. However, its other assets, particularly its trading stock, may be of considerable value. Such assets are acquired for the purpose of resale or manufacture and it is not practical for the company to retain such assets or seek the consent of the debenture-holders every time trading stock is sold. A floating charge enables a company to dispose of its trading stock in the ordinary course of business, while still giving the debenture-holders a good security by floating over any trading stock that may be acquired. Similarly, a floating charge may also be conferred over book debts.What is the difference between a Floating Charge and a Fixed Charge?Made by Buckley LJ in Evans v Rival Granite Quarries Ltd [1910] 2 KB 979. He said: (IMPORTANT)“A floating security is not a future security; it is a present security, which presently affects all the assets of the company expressed to be included in it. On the other hand, it is not a specific security; the holder cannot affirm that the assets are specifically mortgaged to him. The assets are mortgaged in such a way that the mortgagor can deal with them without the concurrence of the mortgagee. A floating security is not a specific mortgage of the assets, plus a licence to the mortgagor to dispose of them in the course of his business, but is a floating mortgage applying to every item comprised in the security, but not specifically affecting any item until some event occurs or some act on the part of the mortgagee is done which causes it to crystallise into a fixed security.”What is the main difference between Fixed and Floating?Main difference:fixed and floating charges indicates that the holder of a floating charge has no legal or equitable interest in specific property of the company while the charge is floating; and the company may dispose of assets subject to the charge in the ordinary course of its business.NOTE: If the debtor company is obliged to pay proceeds from debts into a designated account and can only draw on the account with the consent of the chargee, the charge is more likely to be a fixed charge.CasesUnited Builders Pty Ltd v Mutual Acceptance Ltd (1980) 144 CLR 673High Court held that whether a charge is a fixed or floating charge depends on the intention of the parties. A charge is a floating charge if:it is a charge on a class of assets of a company—present and future;that class is one that in the ordinary course of the company’s business would be changing from time-to-time; andit is contemplated that, until some future step is taken by or on behalf of those interested in the charge, the company may carry on its business in the ordinary way as far as concerns the particular class of assets.Whitton v ACN 003 266 886 (1996) 14 ACLC 1799Was held that a charge over book debts was a fixed charge where the company was prohibited from dealing with or disposing of its book debts. Such a prohibition was inconsistent with a fundamental characteristic feature of a floating charge.National Westminster Bank plc v Spectrum Plus Ltd [2005] UKHL 41, A charge described as a fixed charge was granted over book debts. Under the terms of the charge, the chargee did not take control of the account into which the proceeds of the book debts were paid as the chargor company retained the right to access and draw on the money in the account. The House of Lords held that this was a floating charge despite the description of the charge as “fixed”.Disposal in ordinary course of businessA floating charge enables the borrowing company to dispose of the charged property in the ordinary course of its business without obtaining the lender’s consent. What dealings are in the ordinary course of business?CasesReynolds Bros (Motors) Pty Ltd v Esanda Ltd (1983) 1 ACLC 1333, ‘Held IN Ordinary Course of Business’New South Wales Court of Appeal held that transactions are within the ordinary course of business if they are made for the purpose of carrying on the business. Reynolds, a dealer in agricultural equipment, entered into an agreement in 1980 with Esanda. The agreement provided that Reynolds had possession of certain tractors as bailee for Esanda. This enabled it to sell the tractors as Esanda’s agent and earn a commission. Reynolds also owned a number of its own tractors. In 1981, Reynolds granted the State Bank of New South Wales a floating charge over all its assets. In 1982, Reynolds breached its agreement with Esanda when it sold Esanda’s tractors and failed to account for the proceeds. In order to reduce this debt, Reynolds transferred ownership of 10 of its own tractors to Esanda. The State Bank treated this as a breach of the terms of its floating charge and appointed a receiver and manager who challenged the validity of the transaction with Esanda. The court held that the transfer of the tractors to Esanda was within Reynolds’ ordinary course of business. This was because it enabled Reynolds to maintain itself as a going concern and meant that the tractors were not covered by the State Bank’s floating charge.Fire Nymph Products Ltd v The Heating Centre Pty Ltd (1992) 10 ACLC‘Held OUT OF Ordinary Course of Business’The Heating Centre Pty Ltd (THC), entered into an agreement with its major supplier, Fire Nymph Products Ltd (FNP), whereby FNP agreed to take back all units previously supplied by it. It was acknowledged that FNP had full title to the goods and THC retained possession as a bailee of FNP. THC was authorised to sell the goods at cost price with proceeds of sales to be paid into FNP’s account. A finance company, AGC, had previously loaned money to THC secured by a floating charge over the whole of its assets. THC defaulted and AGC appointed receivers to THC who sold a number of heaters. FNP sought to recover the proceeds of these sales under the agreement. It was held that the agreement with FNP was not in the “ordinary course of the ordinary business” of THC. The agreement was a means by which FNP attempted to recover money from an insolvent debtor by return of stock and use of THC’s sale facilities. This resulted in AGC’s floating charge automatically crystallising immediately before the agreement came into effect and title did not pass to FNP. It is also within the ordinary course of business for a company to grant a later fixed charge over specific assets that has priority over a prior floating charge covering that category of assets. A disposal of a company’s business in its entirety as a preliminary step in ceasing business would not be in the ordinary course of business.Crystallisation of floating chargesWhat is crystallisation of floating charges?A feature of a floating charge is that the secured property consists of a classof property owned by a borrowing company. The floating charge creditor does not have security over any specific items within the class. The borrowing company may dispose of those items in the ordinary course of business. A floating charge is said to crystallise when a floating charge transforms into a fixed charge that attaches to those items of property in the class that are owned by the borrowing company at the time of crystallisation. From the time of crystallisation, the borrowing company loses the ability to dispose of the items of property covered by the floating charge in the ordinary course of business.When does crystallisation occur?The loan agreement usually specifies the circumstances in which a floating charge crystallises. The most common situation that will trigger crystallisation occurs when the borrowing company defaults in paying interest or repaying the principal sum and the creditor gives notice that it intends to take steps to enforce the charge by taking possession of the secured property. The creditor may do this personally or appoint a receiver. When else do floating charges crystallise?A floating charge also crystallises when the borrowing company is wound up or ceases to carry on business. This is because it is an implied condition of a floating charge that the company continues to carry on business. What is automatic floating charge crystallisation? Automatic crystallisation occurs upon the happening of a specified event when the charge becomes fixed without any further action being required by the chargee.Automatic crystallisation can result in commercial difficulties. A charge may crystallise without anyone being aware of it and both the borrower and lender may continue to act as though the charge is still floating. Floating charge loan agreements often make provision for automatic crystallisation on certain stated events. These include where the borrowing company:defaults in payment of interest for a specified period;breaches restrictions on future borrowings;allows the value of charged assets to decline below a minimum amount; orceases to deal with charged assets in the ordinary course of its business.The borrower continues to trade normally and the lender takes no steps to enforce its rights. This can cause problems in determining competing rights to property if the borrower continues to dispose of assets to third parties in the ordinary course of business.For this reason, the Australian Law Reform Commission in its General Insolvency Inquiry (1987) recommended that crystallisation of floating charges take place only in one of two situations:when a public act has occurred such as the entry into possession of property of the company by a receiver or the appointment of a liquidator; orwhen a notice to the effect that the charge has crystallised and therefore becomes fixed has been lodged with the Commission.Priorities between floating charges and later fixed chargesDoes a floating or fixed charge have priority?A company that has given a floating charge may grant a later fixed charge on assets already covered by the floating charge because this is regarded as being within the ordinary course of the company’s business.In such a case, a later fixed charge ranks ahead of a floating charge, as long as it was given before the floating charge crystallised. This is so, even if the later chargee had notice of the existence of the earlier floating charge: Re Hamilton’s Windsor Ironworks (1879) 12 Ch D 707. Does a floating or fixed charge restrict the power of a company?Even if the debenture creating the floating charge restricts the power of the company to grant later fixed charges:the later mortgagee may still have priority if the mortgage is a legal mortgage as opposed to an equitable mortgage; and the later mortgagee did not have notice of the earlier floating charge and the restriction contained in it. This rule makes it important for debenture-holders secured by a floating charge to give notice of restrictions on future borrowings by the company. What does a Company do when creating a floating charge?Where a company creates a floating charge, it must lodge with ASIC a notice including particulars of restrictions on the creation of later charges: s 263(1)(a)(iii) Corps Act 2001. Lodging this notice constitutes constructive notice to the world so as to prevent a later chargee taking priority over the prior holders of a floating charge: s 130(2) Corps Act 2001.Creating a later chargeIf the company creates a later equitable mortgage or charge, the mortgagee or chargee may take priority over the holders of the earlier charge if the prior chargee has permitted the company to represent that it is free to deal with unencumbered assets. This may occur where the company is able to retain possession of title deeds: Re Castell & Brown Ltd [1898] 1 Ch 315 - A prudent trustee for debenture-holders or chargee consequently takes possession of title deeds over the secured propertyof the company. The question of priorities of registrable charges is discussed further below.Negative PledgeA “negative pledge” is a contractual promise given by a borrowing company that it will not grant charges in favour of other creditors without the prior consent of a lender. The terms of a loan containing a negative pledge will usually provide for repayment of principal and other enforcement procedures if the negative pledge is breached. If a debtor company grants a later charge to another creditor in breach of an existing negative pledge agreement, the later chargee is able to enforce the charge provided the later chargee did not have notice of the prior negative pledge and provided valuable consideration for the later charge. Floating Charges & Negative PledgeIn the case of a registered floating charge that includes a negative pledge, later chargees are taken to have constructive notice of particulars contained in the register of charges: s 130(2). Therefore, any later chargee would be subject to the priority of the original chargee who gave notice of the negative pledge in the register of charges.Retention of Title ClausesA “retention of title clause” is a term in the contract between a buyer and seller of goods which provides that ownership of the goods does not pass to the buyer until the goods are paid for. Such clauses seek to protect the seller during the time between delivery of goods to the buyer on credit and payment of the purchase price by the buyer. Protection arises because title to the goods remains with the seller, whereas title usually passes on delivery. Where the buyer becomes insolvent before payment, the seller is able to regain possession of the goods as the owner.In the absence of a retention of title clause, the seller would stand in line as a creditor with no rights to the goods.CasesAluminium Industries Vaassen BV v Romalpa Aluminium Ltd [1976] 2 All ER 552A retention of title clause was contained in a contract for the sale of aluminium foil. Some of the foil was sold by the buyer to third parties. It kept the remainder in its possession. The price for the goods remained unpaid when a receiver was appointed by the holder of a floating charge granted by the buyer. There was no dispute that the unsold foil retained by the buyer could be repossessed by the seller. But an issue arose between the seller and the receiver as to who was entitled to the proceeds of the sale of the foil that had been sold. The court held that the effect of the retention of title clause was to make the buyer a bailee of the foil until payment took place. As a result, the buyer had a fiduciary obligation to account to the seller for the proceeds of the sales. Invalidation of Charges/LiquidationA charge may be invalidated where notification of details of a charge is not lodged with ASIC and the company granting it is placed in liquidation or voluntary administration within six months of its creation: s 266. Several sections also invalidate charges granted by an insolvent company. What charges are invalidated if the company is in liquidation?ss 588FA–588FJ permit the liquidator of an insolvent company to avoid certain antecedent transactions. These are transactions entered into by a company prior to the commencement of its winding up in insolvency. The antecedent transactions provisions apply, inter alia, to a charge that is:an unfair preference under s 588FA Corps Act 2001; oran uncommercial transaction under s 588FB Corps Act 2001; oran unfair loan under s 588FD Corps Act 2001.Unfair preferences and uncommercial transactions are referred to as “insolvent transactions” if the company was insolvent when they were entered into: s 588FC. What charges are invalidated if the transaction is considered insolvent?Under s 588FE, insolvent transactions and unfair loans entered into during specified periods prior to the “relation-back day” are voidable transactions. The relation-back day is the date of the application for winding up: s 9. An unfair preference is voidable under s 588FE(2) if it was entered into during or after the six months ending on the relation-back day. An uncommercial transaction is voidable if it was entered into during or after two years ending on the relation-back day. Unfair loans to the company are voidable whenever made: s 588FE(6).The company’s liquidator may apply to the court for a variety of orders under s 588FF in relation to voidable transactions. The orders include an order declaring the agreement constituting the transaction to be void: s 588FF(1)(h).Invalidated Floating ChargesSection 588FJ deals specifically with the invalidation of floating charges. Under s 588FJ(2), a floating charge created during the six months ending on the relation-back day is void as against the company’s liquidator, except so far as it secures:an advance paid to the company, or at its direction, at or after that time and as considerationfor the charge; orinterest on such advance; orthe amount of a liability under a guarantee or other obligation undertaken at or after thattime on behalf of, or for the benefit of, the company; oran amount payable for property or services supplied to the company at or after that time; orinterest on an amount so payable.CasesCuthbertson & Richard Sawmills Pty Ltd v Thomas (1999) 17 ACLC 670Federal Court considered whether a charge was valid on the grounds that it was part of an undertaking on behalf of or for the benefit of the company for purposes of s 588FJ(2)(c). Charge in Favour of OfficersThis section supplements the unfair preference provisions and is aimed at situations where insolvent companies grant charges or debentures to directors shortly before going into liquidation. Charge in favour of a director or associateWhere a company creates a charge in favour of an officer or an associate and the officer takes steps to enforce the charge within six months of its creation, the charge is void unless the leave of the court is obtained to enforce it: s 267(1). This enables the director whose loan is secured to gain an advantage over other creditors and to appoint a receiver under the charge who obtains control of the company’s books. This presents difficulties for the liquidator who must apply to the court to set aside the charge as an unfair preference. The enforcement of a charge within the meaning of the section requires the taking of control or exercise of dominion over the charged assets. This may occur by the appointment of a receiver (s 267(2)(a)) or the institution of legal proceedings.Re The 21st Century Sign Co Pty Ltd (1993) 11 ACLC 161, The secretary of a company who had advanced money to it was granted a floating charge over the company’s assets in lieu of payment.About four months later the secretary demanded payment. When the company failed to comply, the secretary gave notice that the charge had crystallised and appointed a receiver. The company was subsequently wound up. The Supreme Court of Queensland held that the notice was a step in enforcing the charge for purposes of s 267(2) Corps Act 2001 and the charge was void because prior leave of the court had not been obtained under s 267(1). Where an officer who is entitled to enforce a charge exercises the right under s 436C to appoint an administrator, this is not enforcing a charge for the purposes of s 267(1). Registration of Charges – Page 264 of NotesASIC is required by s 265(1) Corps Act 2001 to keep a publicly accessible database - the Australian Register of Company Charges. What is the purpose of registering charges?The main purpose of the database is to enable a potential creditor of a company,who proposes to lend money on security of particular property, to find out whether the company has already given a charge over that property to another creditor. It also enables an unsecured creditor to determine the extent to which the assets of a company have been charged, and thereby ascertain the rights of secured creditors who rank ahead of an unsecured creditor in priority of payment. Further provisions also determine the priorities of registrable charges as against each other.Persons dealing with a company are taken to have constructive notice of the information contained in the Australian Register of Company Charges maintained by ASIC: s 130(2) Corps Act 2001.What are registrable charges?s 262 sets out the charges (whether legal or equitable) that must be registered. The following types of charges must be registered with ASIC:a floating charge on the whole or a part of the property, business or undertaking of the company. Under s 9, a floating charge includes one that has crystallised and thus becomes a fixed charge;a charge on uncalled capital;a charge on a call on shares made but not paid;a charge on a personal chattel, including personal chattels that are unascertained or to beacquired in the future - s 262(3) Corps Act 2001 defines “personal chattel” to include any article capable of complete transfer by delivery after the creation of the charge and a fixture or growing crop that is charged separately from the land;a charge on goodwill, a patent, a trademark, a copyright or a registered design;a charge on a book debt (“book debts” are defined in s 262(4) to include a debt due or to become due to the company in connection with its business. It need not actually be entered in a book and includes debts of the same nature incurred in the future. Excluded are debts in respect of mortgages and charges of land);a charge on a marketable security (“marketable security” is defined in s 9 to includedebentures, shares or bonds of any corporation or government body, options and anyinterest in a managed investment scheme. Excluded from “marketable securities” aredeposits of title to the marketable security such as share certificates. This excludes thesituation where a lender takes possession of a share certificate and acknowledges this in writing or where a transfer of the shares is registered in the lender’s name: s 262(6));a lien or charge on a crop, a lien on wool or a stock mortgage; anda charge on a negotiable instrument other than a marketable security (this includes bills of exchange, cheques and promissory notes).Procedure for Lodgement and Registration of chargesA company that creates a charge must ensure that a notification of details of a charge is lodged with ASIC: s 263(1) Corps Act 2001. What must the registration of the charge contain?Lender usually lodges the ASIC notification. The prescribed form is Corporations Regulations, Sch 2, Form 309, which requires:the date the charge was created;whether the charge is created or evidenced by a resolution, an instrument, a deposit or conduct;whether it is a fixed charge, a floating charge or both a fixed and floating charge;if the charge is a floating charge, a statement whether there are restrictions on the creation of subsequent charges;a description of the liability secured by the charge;a description of the property charged;if the charge is constituted by the issue of debentures, the name of the trustee for the debenture-holders (if any);if there is no trustee for debenture-holders, the name of the chargee; andthe amounts of payment made or discount allowed to persons, in connection with the issue of debentures: s 263(7) Corps Act 2001.Together with this notice, the company must lodge a copy of the document creating the charge, or a copy of the debenture or the first debenture if there is a series, or a statement in writing verifying the execution of the first debenture or document creating or evidencing the charge: s 263(1) and (2).What is the lodgement timeline?The time for lodgement is within 45 days after the creation of the charge (s 263(1)), or acquisition of property subject to a charge: s 264. A charge is created on the date of execution of the instrument of charge and not the date when the money is actually advanced: Esberger & Son Ltd v Capital & Counties Bank [1913] 2 Ch 366.Priorities of registrable chargesThe time of registration is important because it determines priorities among different registered charges over the same property. Priority of charges arises when a company borrows from two or more lenders and purports to give each of them security over the same property. If the company then defaults in payment to the lenders, the question arises as to which lender has priority in enforcing the security. s 279–282 set out a system of priorities between the holders of competing registrable charges over the same property. The general rule is that registered charges have priority according to the time they were registered. The Corporations Act only determines priorities as between holders of charges that are registrable under s 262 Corps Act 2001. Exceptions to time of registration ruleOrder of priorities of registrable charges as set out in ss 280–282 is subject to any express or implied consent given by the holder of a charge that would otherwise be entitled to priority, or any agreement between chargees, varying the priorities of the charges: s 279(2) Corps Act 2001.Floating ChargeThe holder of a registered floating charge is deemed to have consented to a subsequently registered fixed charge gaining priority where the fixed charge was created before the floating charge crystallises. This is so unless there was breach of a provision in the document creating the floatingcharge which prohibited or restricted the creation of future charges and notice of this provision was lodged with ASIC before the creation of the subsequent registered fixed charge: s 279(3) Corps Act 2001. The prescribed form of notification of details of a charge, Form 309, includes a statement whether or not the creation of subsequent charges is restricted or prohibited by the floating charge. This is a negative pledge. Priorities of Registered Charges (*refer to Failure to Notify Charges as well) – IMPORTANT!!!!!!!!!!!!!!!!!!!!!!The following rules determine priorities in relation to registered charges:Registered charges generally have priority in order of the time and date when they were entered in the Register.A prior-registered charge loses priority over a subsequently-registered charge where the subsequently-registered charge was created before the prior registered charge and the holder of the prior-registered charge is proved to have had actual or constructive notice of the subsequently-registered charge at the time the prior-registered charge was created: s 280(1)(a) Corps Act 2001. Therefore, if charge A is registered on 1 June and charge B is registered on 3 June, charge A is a prior charge and as a general rule has priority over charge B, which is a subsequent charge. However, if charge B was created first and the chargee of A had notice of charge B when charge A was created, charge B has priority over charge A.A registered charge generally has priority over an unregistered charge unless the unregistered charge was created first and the holder of the registered charge can be proven to have had actual or constructive notice at the time of the creation of the registered charge of the existence of the unregistered charge: s 280(1)(b). “Unregistered charge” is defined in s 278(1) and means a charge that is one of the categories of registrable charges under s 262 but has not been registered. Therefore, if charge A is registered and charge B is unregistered, generally charge A has priority over charge B. However, if charge B was created first and the chargee of A had notice of charge B when charge A was created, charge B has priority over charge A.Unregistered charges take priority according to their time of creation: s 281(b).Present and prospective liabilitiess 282 sets out a system of priorities in a situation where a charge secures a present liability and also secures further advances by the holder of the charge. Which charge has priority over the same property? s 282 uses the terms “present liability” and “prospective liability”. These are defined in s 261(1). “Present liability” is a liability that has arisen and the amount of which is fixed and capable of being ascertained. “Prospective liability” is any liability that may arise in the future but does not include a present liability. The prescribed form of notification of details of a charge provides for a description of whether the liability is present or prospective.Priority of ChargesAs a general rule, priority accorded to a charge over another charge only extends to a present liability under that charge as at the priority time: s 282(1). “Priority time” means the time and date on which the charge was entered in the Register: s 278(1).Prior ChargesWhere a prior-registered charge secures a prospective or future liability up to a specified maximum amount, and that amount and the nature of the prospective liability are specified in the lodged notice of charge, the prior-registered charge has priority over subsequently registered charges up to the specified amount of the prospective liability. This is irrespective of whether the further advances are made before or after registration of the subsequent charge or whether or not the prior chargee knew of the later charge: s 282(3).Lodging Notice of Prior ChargesWhere the lodged notice of charge does not specify the maximum amount secured by the registered charge, together with the nature of the prospective liability, the prior charge has priority only with respect to further advances made by the prior chargee up to the time he or she first obtained actual notice of the subsequent charge: s 282(4)(c). Section 282(2) has similar effect where the registered charge secures a prospective liability of an unspecified amount.Failure to lodge notice of chargeA charge on the property of a company is not invalid by reason only of the failure to lodge a notice of the charge with ASIC: s 262(11). system of priorities provides incentive to chargees to ensure that notice of charges are lodged and registered.A further reason for chargees to ensure that notice of their charges are lodged is provided by s 266. 6 months from liquidation date45-day limit of charge lodging and liquidiationIf a notice of charge is not lodged within the prescribed 45-day period and the company goes into liquidation or has an administrator appointed or executes a deed of company arrangement within six months, the charge will be void (liquidator does not have to take into account that charge or give it priority) as against the liquidator, company administrator or the deed’s administrator: s 266. Designed to prevent a person avoiding disclosure of the existence of a charge until just before the company goes into liquidation and then at the last moment registering the charge and acquiring its benefits.The requirement of lodgment means that the charge need not be actually registered.It is sufficient to lodge a notice that gains only provisional entry in the Register, even if this entry is subsequently deleted: Wilson v Dunn (1994) 12 ACLC 922. The time limit is subject to any extension ordered by the court under s 266(4).When else does the 45-day apply?s 266 similarly applies to situations where property is acquired subject to a charge, or a charge is assigned or varied. The operation of s 266 means that failure to lodge a notice of a charge does not automatically render the charge void against a liquidator or administrator. It merely exposes the chargee to that risk, if winding up is commenced or an administrator is appointed within 6 months of eventual lodgment.A charge is valid against a liquidator or administrator even though notice of the charge is lodged after the commencement of winding up or appointment of an administrator, as long as it is lodged within 45 days of the creation of the charge.Where the charge is void against a liquidator or administrator, the chargee remains a creditor of the company, but without security. The chargee’s position is thereby weakened as he or she becomes merely an unsecured creditor.Satisfaction and release of property from chargeWhere the debt secured by the charge has been paid in whole or in part or the propertycharged has been partly or wholly released from the charge, the holder of the charge must forward to the company within 14 days after receipt of a request from the company, a memorandum acknowledging payment of the debt or release of the property: Corporations Regulations, Sch 2, FormJ J Leonard Properties Pty Ltd v Leonard (WA) Pty Ltd (1988) 6 ACLC 247A charge was lodged that inadvertently left out the charging clause which identified the property to be charged. The chargor went into liquidation and the chargee was notified that it was an unsecured creditor. The chargee applied for an order under the equivalent of s 274 that the debenture be rectified to include the charge clause as it had appeared in an earlier debenture. The court declined to rectify the register because to do so would prejudice the rights of unsecured creditors by displacing the right they had obtained at the commencement of winding up. This would offend against a clear principle that upon commencement of winding up, the court should not assist one creditor to improve its position relative to other pany’s own register of chargesDetails of charges, including those that do not need to be registered under s 262(1), are required to be entered in a register of charges kept by the company: s 271(2). The company must keep the register open for inspection by creditors, members and others. Breach of s 271 constitutes an offence by the company and any defaulting officer. It does not, however, affect the validity of any charge not entered in the register.law reform proposals.Australian Law Reform CommissionThe report of the Australian Law Reform Commission (ALRC) on Personal Property Securities (January 1995) recommended significant changes to the law dealing with charges. It proposed a single legal regime for all Australian jurisdictions for the regulation of priorities between competing claims for personal property security interests. The implementation of such a regime would require uniform legislation and a national register. The securities subject to the new scheme would cover all personalproperty security interests that have the commercial effect of providing financial accommodation. This includes security interests such as mortgages, liens, charges, financing leases, hire-purchase and retention of title agreements. These securities are presently regulated by a range of Commonwealth and State legislation according to form rather than substance and effect. The ALRC report also considered that the existing rules for determining priorities were unsatisfactory and sometimes an inconsistent mix of statute, common law and equity. It recommended new rules based on three rules:a registered security prevails over an unregistered one;an earlier registered security prevails over one registered later; andan unregistered but registrable security for which value is given earlier in time prevails over an unregistered security for which value is given later in time.The proposed new rules would not have regard to notice of a prior unregistered charge in the absence of fraud by the security holder.GuaranteesWhat is a guarantee?A guarantee is a promise by which one person, called the guarantor or the surety, undertakes to answer for the present or future obligation of another, call the principal debtor.The promise is made to the creditor of the principal debtor. Promise is conditional such that “if the principal debtor defaults, then I will honour the obligation’.There can be no guarantee if there is no principal debtor.If there is no action which has accrued against the principal debtor, then there is none against the guarantor.Difference between guarantee and indemnityIf the agreement is a guarantee, then the surety also escapes liability for there is no liability on the guarantor until the principal debtor fails to meet his or her obligation Turner Manufacturing Co Pty Ltd v Senes If the agreement is an indemnity, then the ‘surety’ remains liable, for the liability under an indemnity is a primary liability which exists independently of the liability of the principle debtor.Yeoman Credit Ltd v Latter There is no reason why a guarantee cannot be made to cover a continuing series of transactions such as might be found when the principal debtor ia bankers customer operating an overdraft. In such a case, the sum being guaranteed is not only a fluctuating amount, but the debt itself is one which is constantly changing, due to the rule in Clayton’s case.Requirements of a guaranteeAll guarantees taken by banks will be in writing.A contract of guarantee, like all other contracts NOT UNDER SEAL, must be support by consideration: McKay v National Australia BankConsideration is the continuation of financial accommodation already given or the present granting and subsequent continuation of financial accommodation by the bank to the principal debtor at the request of the guarantor.Since that constitutes consideration moving from the promise, it is sufficient to support the contract: Colonial Bank of Australasia v KerrThe problem of consideration becomes difficult when the guarantee is only intended to cover existing advances and no other advances are contemplated or covered by the guarantee.In these instances, the banker should give the principal debtor extra time, or alternatively, defer suing the principal debtor on the debt at the request of the debtor – Colonial Bank of Australia v Kerr (1889)Case - Clarke v Walker Pty Ltd v ThewPromise was ‘not to sue or take any proceedings against the principal debtor’During the currency of the guarantee, the creditor served a notice to pay and indicated that in lieu of payment the creditor would present a winding-up petitionThere was no payment, but instead of presenting a winding-up petition, the creditor claimed on the guaranteeGurantor pleaded total failure of considerationHigh Court held on the facts that the promise was to refrain from taking proceedings in a court, but there was no dispute that the defence would have been good had the meaning been that argued by the guarantor.Guarantee’s under the Consumer Credit Code (CCC)What guarantees are there under the Credit Code?A guarantee is subject to the CCC if it guarantees or secures obligations under a credit contract which is regulated by the code and if the guarantor is a natural person or a strata corporation – s9(1).Where the guarantee also guarantee’s other obligations it will be subject to the Code to the extent that it guarantees obligation under a credit contract – s9(2)These are called “related guarantees” What are related guarantees?A related guarantee must be in writing and signed by the guarantor – s50(1)A minimum disclosure requirement calls for the guarantor to be given a copy of the credit contract which is being guaranteed and a document in a form to be prescribed which informs the guarantor of his/her rights and obligations – s51.An important provision gives the guarantor a ‘cooling off’ period so that the guarantor may withdraw at any time before credit is provided – s53What is a guarantor liable for?Guarantor is liable for more than the amount of credit contract to which the guarantee relates, plus a sum which represents the reasonable expenses of enforcement – s55(1)Where the principal debtor is a minor, the guarantee cannot be enforced unless it contains a prominent statement to the effect that the guarantor may not be entitled to an indemnity against the minor – s55(3)A guarantor may apply to have the transation reopened on the ground s that it is “unjust” – s70(1)“Unjust” includes “unconscionable, harsh or oppressive” – s70(1)Unjust groundsA guarantor may apply to have the transaction reopened on the grounds that it is unjust – s70(1)Unjust includes ‘unconscionable, harsh or oppresive’Courts will be reluctant to reopen contracts when the relative strength of the parties is approximately equal or when the weaker party has received independent advice prior to entering into the contractAvoidance of guarantee’sPrecontractual CircumstancesA contract of guarantee is liable to be avoided by the misrepresentation of a material fact, even if the misrepresentation is made innocently – MacKenzie v Royal Bank of CanadaA contract of guarantee is not a contract ‘uberrimae fidei’ – or one of the utmost good faith, and that generally the creditor is not obliged to disclose information to the would-be guarantor – Davies v London and Provincial Marine Insurace CoBank not acting in good faithCooper v National Provincial Bank LtdBank had guaranteed an overdraft of Mrs R, a customer of the bank.Mrs R claimed to be released from the guarantees on the grounds that the bank had failed to inform her of several facts, which had they been known to Mrs R, would have resulted in her refusal to enter the guarantee.Mrs R husband was an undischarged bankrupt who had authority to draw upon the account and that there was information known to the bank that the husband had in fact used the account improperly in the past.Argument of the bank was that there was no legal requirement for them to disclose this information, and if they had, it would breach the bankers duty of secrecy regarding the customer.Court ruled in favour of Mrs R and said bank should have disclosed.Banks DutyBanker has an implied authority to disclose relevant account and other information if the surety is one which has been proposed by the principal debtor, but not if the surety is one of the which the debtor is unaware.The bank should realistically always seek the customer consent, or decline to answer inquiries.If the ‘would-be’ guarantor asks a question to the bank, it would be in the banks interest to respond truthfully.It is noted that the guarantor is not entitled to examine the customers account activity or be given a copy of the statement: Ross v Bank of New South WalesMisrepresentation by the BankNobile v National Australia Bank LtdBank represented to an intending guarantor that the principal debtor was in satisfactory trading position.Guarantor was thereby induced to enter the contract of guarantee.Court held contract was to be set aside under s52 of TPA as bank was in misleading conductHamilton v Watson – Information being told to Guarantor Quote“I think that this might be considered as the criterion whether the disclosure ought to be made voluntarily whether there is anything that might not naturally be expected to take place between the parties who are concerned in the transaction, that is, whether there be a contract between the debtor and the creditor, to the effect that his position shall be different from that which the surety might naturally expect and if so, the surety is to see whether that is disclosed to him. But if there be nothing which might not naturally take place between these parties, then, if the surety would guard against particular periods he must put forward the question”Instance where bank didn’t disclose and wasn’t misrepresentedBanker suspected the customer was defrauding the guarantor, yet non-disclosure was held not to invalidate the guarantee National Provincial Bank of England v Glanusk Royal Bank of Scotland v GreenshieldsSilence is considered ‘misleading’Disclosure may be required when the banker is aware, or possibly should be aware, that the proposed guarantor is acting under a misapprehension as to the truth of a material fact.If the banker allows the contract of guarantee to be concluded in such circumstances, it may be that his or her silence will amount to a misrepresentation allowing the guarantor to escape liability – Royal Bank of Scotland v GreenshieldsUndue InfluenceSome relationships are characterised by a “dominant” and “weaker” party.When a transaction bestows a benefit on the dominant party, there is a presumption of undue influence.The precise list includes parent and child, solicitor and client, trustee and beneficiary etcThere is burden of proof of the dominant party to show that he or she did not exercise undue influenceBank of New South Wales v RogersNiece resided with her uncle since the death of her father.She sought advice from the uncle on all matters related to business.She mortgaged virtually the whole of her property in order to secure advances made by the bank to her uncleCourt decided:“Creditors cannot improve their security by instigating or inducing debtors to obtain further security for their debts near relations or persons under their influence and not in a situation to resist their importunity.”‘Inference of undue influence not only ‘against the person who is able to exercise the influence’ but ‘against every person who claimed under him with notice of the equity thereby created, or with notice of the circumstances from which the court infers the equity.”Bank had onus to prove that neice had given the security FREE from any undue influences and with a full understanding of the consequences, which it could NOT – therefore charge was set aside.Husband & WifeA financier taking a guarantee from a married woman must seriously consider the problem of proving that she had sufficient understand and knowledge of what she was doingSince it is not at all obvious how this might be done, guarantees from married women must be discounted for the risk that they may be uncollectible if challenged.CasesYerkey v JonesHeld that there was a presumption of undue influence when the wife acted as guarantor or in some other way was disadvantaged by the husbands business dealings"(forced to become)…… her husband's surety by the exertion by him upon her of undue influence, affirmatively established, and on the other hand, cases where she does not understand the effect of the document or the nature of the transaction of suretyship. In the former case the fact that the creditor, on the occasion, for example, of the actual execution of the instrument, deals directly with the wife and explains the effect of the document to her will not protect him. Nothing but independent advice or relief from the ascendancy of her husband over her judgment and will would suffice. If the creditor has left it to the husband to obtain his wife's consent to become surety and no more is done independently of the husband than to ascertain that she understands what she is doing, then, if it turns out that she is in fact acting under the undue influence of her husband, it seems that the transaction will be voidable at her instance as against the creditor."In The Commonwealth v Verwayen[27], Deane?J said: "I prefer the word 'unconscientious' to 'unconscionable' in this and other areas where equity has traditionally intervened to vindicate the requirements of good conscience. In deference to the generally accepted usage of 'unconscionable' and 'unconscionability' in this area by judges and writers however, I have thought it preferable to use those words in this judgment." Garcia v National Australia Bank Ltd – IMPORTANT IMPORTANTHeld that principle in Yerkey v Jones was good law.Wife guaranteed debts of husbands company as a volunteerWife did not fully understand the effects of guaranteesBank did not explain the document to the wifeBank on noticed of unconscionable dealing between husband and wifeDecision“The marriage relationship is such that one, often the woman, may well leave many, perhaps all, business judgments to the other spouse.In that kind of relationship, business decisions may be made with little consultation between the parties and with only the most abbreviated explanation of their purport or effect. Sometimes, with not the slightest hint of bad faith, the explanation of a particular transaction given by one to the other will be imperfect and incomplete, if not simply wrong. That that is so is not always attributable to intended deception, to any imbalance of power between the parties, or, even, the vulnerability of one to exploitation because of emotional involvement. It is, at its core, often a reflection of no more or less than the trust and confidence each has in the other.”Judge also commented:“The first in which there is actual undue influence by a husband over a wife and the second, that dealt with in Mueller, in which there is no undue influence but there is a failure to explain adequately and accurately the suretyship transaction which the husband seeks to have the wife enter for the immediate economic benefit not of the wife but of the husband, or the circumstances in which her liability may arise. The former kind of case is one concerning what today is seen as an imbalance of power. In point of legal principle, however, it is actual undue influence in that the wife, lacking economic or other power, is overborne by her husband and goes surety for her husband's debts when she does not bring a free mind and will to that decision. The latter case is not so much concerned with imbalances of power as with lack of proper information about the purport and effect of the transaction. The present appeal concerns circumstances of the latter kind rather than the former.”European Asian of Australia Ltd v Kurland and Mercentile Mututal Life Insurance Co Ltd v Gosper – State that married women were NOT to be considered as disadvantaged.Banker & Guarantor Fiduciary Relationship – IMPORTANT!Bundy’s case caused considerable concern in banking circles, for it seemed to place a very heavy burden on the banker who would like to take a guarantee or some other form of security from a third party.CaseLloyds Bank Ltd v BundySon and father banked at the same branch of Lloyds BankSon was engaged in business and maintained some company accounts at the branchSought advances from the bank and it was suggested that his father could act as guarantorAt the time of making the first guarantee, bank manager suggested Bundy should get legal advice.Bundy did this and entered as guaranteeSon later wanted more money and father acted as guarantor.Bank did not suggest he receive legal advice, and nor did Bundy get it.DecisionCourt held that the bank had breached a duty of care owed directly to Bundy.The duty was to ensure that he obtained independent advice so that he was able to make a free and informed decision“I would suggest that through all these instances there runs a simple thread. They rest on “inequality of bargaining power”. By virtue of it the English law gives relief to one who, without independent advice, enters into a contract upon terms which are very unfair or transfer property for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by reason of his own needs or desires or by his own ignorance or infirmity, coupled with undue influence or pressures brought to bear on him by or for the benefit of the other.”Both guarantee and the charge over the property were aside aside.CaseMorgan’s CaseWife signed a legal charge to a bank in order to secure a loan made to her husband.She had full knowledge of the circumstances, in the sense that she understood the nature of the charge and that she was indeed guaranteeing the loan to the husband.She hoped it was the way of saving her home from being taken from her as the result of proceedings for possession which were being brought by a previous mortgage.DecisionIn order to raise the presumption of undue influence when the parties are not in a special relationship, it is necessary to show that the transaction had itself been wrongful in that it amount to one in which an actual unfair advantage had been taken of another person.It was not enough in this situation to argue that there might have been an unfair advantage taken. Court held the customer must prove, at the very least, that the bank had taken unfair advantage so that there was a presumption of undue influence.Since the bank had not in fact taken an unfair advantage and since there was no special relationship involved – the bank could rely on the charge.BUT bank still lost because failed in providing duty of care to wife against husband.Duty of Care – IMPORTANT!Commonwealth Bank of Australia v AmadioElderly couple who read little EnglishBelieved their sons business was growing and profitable Thought that guarantee was only $50,000Signed the mortgage over their house, in the prensene of the bank manager, without reading it.Bank sought recovered of $200,000DecisionHigh court ruled that the respondents were under a special disability due to the their age and restricted knowledge of the language. The court considered that it should look to the conduct of the party attempting to enforce the dealing, holding at the facts known to the bank were such as to raise in the mind of any reasonable person a very real question as to the respondents ability to make a judgement in their own best interestsThe bank had a duty in these circumstances to make inquiries and inform the customer – THEY DID NOTHigh Court set aside the charge"Historically, courts have exercised jurisdiction to set aside contracts and other dealings on a variety of equitable grounds. They include fraud, misrepresentation, breach of fiduciary duty, undue influence and unconscionable conduct. In one sense they all constitute species of unconscionable conduct on the part of a party who stands to receive a benefit under a transaction which, in the eye of equity, cannot be enforced because to do so would be inconsistent with equity and good conscience. But relief on the ground of 'unconscionable conduct' is usually taken to refer to the class of case in which a party makes unconscientious use of his superior position or bargaining power to the detriment of a party who suffers from some special disability or is placed in some special situation of disadvantage ... Although unconscionable conduct in this narrow sense bears some resemblance to the doctrine of undue influence, there is a difference between the two. In the latter the will of the innocent party is not independent and voluntary because it is overborne. In the former the will of the innocent party, even if independent and voluntary, is the result of the disadvantageous position in which he is placed and of the other party unconscientiously taking advantage of that position." Nobile v National Australia Bank Ltd – Basically same as above, and applied same principle from Amadio case.The creditor-principal debtor contractThe basic rule is that when the contract with the principal debtor is void or unenforceable, the guarantor cannot be held liable under the guarantee.Minor’sProblemIn Coutts & Co v Browne-Lecky, it was ruled that the contractual capacity of minors is still governed by the common law:allows minors to escape liability where the principle contract was void due to the infancy of the principal debtor even when all parties knew at the time of contracting that the principal debtor was underage.SolutionTo SOLVE the problem – guarantee as being an INDEMNITY.An indemnity imposes a more serious obligation on the guarantor and the fact that the principal debtor is suffering from contractual incapacity will not in any way assist the surety to escape liability.Banks now include in their forms of guarantee a clause to the effect that, even if the moneys guaranteed are not recoverable from the principal debtor by reason of that persons contractual incapacity, the guarantor shall nevertheless be liable for the sum as a principal debtor on the basis of an indemnity.Variation of ContractIt is a basic rule of material variation of the contract between the banker and the principal debtor will result in the discharge of the guarantor from all liability:it does not matter that the variation may have been beneficial to the guarantor unless it is obvious that the variation either is beneficial to him or immaterial – Dan v Barclays Australia Giving customer most amount of timeIt is also in the best interests of the banker to ensure that it gives the customer the most amount of time and any other indulgence which the banker believes to be in the best interests of both the bank and the customer.It is well known that this difference can be the difference between successful recovery of a loan and the total or near loss of it.During the extended period of time, it is quite possible that the financial position of the principal debtor will deteriorate even further from the circumstances which forced the granting of extra time in the first place – Nisbet v SmithDeath of Principal DebtorCauses the guarantee to ‘crystallise’It is clear that the principal debtor will not be receiving any further advances from the banker.The guarantor would not be liable for the amount of these payments.The creditor-guarantor contract – page 465A breach by creditor of any condition of the guarantee will provide a complete defence for the guarantor.Under the normal rules of a guarantee, the guarantor is not liable unless the principal debtor has defaulted.There is no reason why a guarantee may not be limited either in duration or in amount.A limitation as to the duration causes no difficulties beyond those of interpretation it is necessary to spell out precisely the obligations of the parties.Limitation of AmountIf the guarantor wants to limit the amount of liability, they must in writing, only guarantee a certain amount of the debt.i.e. “I hereby guarantee $5,000 or the $10,000 that you are to loan to D”Trade Practices Act 52A & Unconscionable conduct s52S52A(2) – Provides a list of factors which may be considered by the court when determining if conduct has been ‘unconscionable’. These include, but are NOT limited to:Inequality of bargaining powerWhether the customer is required to comply with conditions which are not reasonably necessary for the protection of the legitimate interests of the supplierWhether customer was able to understand the documentsWhether there was any undue pressure or indolence on the customer by the supplier or person acting on behalf of the supplierThe possibility that alternative goods or services were available to customer at lower costs without disclosure.REFER TO AMADIO PRINCIPLE!!!!!!!!!! - IMPORTANTNobile v National Australia Bank LtdCourt found contract set aside under s52 and under Amadio principle.Amadio principle is generally only brought up in ‘special circumstances’ whereas S52A can be brought up for any reasonCourse of business or tradeAct provides no protection for those contracts which are entered into in the course of or for the purposes of a trade, business or profession other than a farming undertaking – s6(2)Australian Bank Ltd v StokesPower to reopen contracts/Unjust ContractsAct gives court wide powers to reopen the contract in the event that the contract is found ‘to have been unjust in the circumstances relating to the contract at the time it was made’ - s7(1)A contract may be unjust because of the way in which it operates or because of the way in which it was made, but it will not be considered unjust simply because it was not in the interests of one of the parties to make the contract or because the party received no independent advice – West v AGC (Advances) LtdLender failing to protect itselfMurphy v Esanda Finance Corp“A lender who fails to protect itself and the borrower by requiring the borrower to supply evidence showing that it is at least probable that the borrower has the ability to reply the instalments, runs a very real risk that the contract is unjust”Guarantors rights against other partiesGuarantor pays debt outIf the guarantor has been forced to pay on default, he or she acquires an immediate right of action against the principal debtor.The right of action does not arse until such time as the guarantor has actually paid: Ex parte Fenton Textile Association, Pitman v PantzerRights to securitiesIf the guarantor pays off the entirety of the debt, then he or she is entitled to be subrogated to all of the rights previously enjoyed by the bank in respect of the debt.The guarantor is entitled to the benefit of all securities held by the bank for the principal debtorThe guarantor must have paid the debt off entirely before it has a right to the securities – Ewart v LattaALL MONIES"All monies" guarantees are for all amounts owing now and in the future. It is recommended that you do not agree to sign all monies guarantees due to the uncertainty as to how much you may have to pay if the borrower does not pay.Code of Banking PracticeGuaranteesThis clause 28 applies to every guarantee and indemnity obtained from you (where you are an individual at the time the guarantee and indemnity is taken) for the purpose of securing any financial accommodation or facility provided by us to another individual or a small business (called a “Guarantee”), except as provided in clauses 28.15 and 28.16.We may only accept a Guarantee if your liability:is limited to, or is in respect of, a specific amount plus other liabilities (such as interest and recovery costs) that are described in the Guarantee; oris limited to the value of a specified security at the time of recovery.A Guarantee must include a statement to the effect that the relevant provisions of this Code apply to the Guarantee but need not set out those provisions.We will do the following things before we take a Guarantee from you:we will give you a prominent notice that:you should seek independent legal and financial advice on the effect of the Guarantee; you can refuse to enter into the Guarantee; there are financial risks involved; you have a right to limit your liability in accordance with this Code and as allowed by law; andyou can request information about the transaction or facility to be guaranteed (“Facility”) (including any facility with us to be refinanced by the Facility);from 1 June 2004 we will tell you:about any notice of demand made by us on the debtor, and any dishonour on any facility the debtor has (or has had) with us, which has occurred within 12 months before we tell you this, and from 1 June 2005 within 2 years before we tell you this; if there has been an excess or overdrawing of $100 or more on any facility the debtor has (or has had) with us which has occurred within 6 months before we tell you this, and from 1 February 2005 we will give you a list showing the extent of each of those excesses or overdrawings;we will tell you if any existing facility we have given the debtor will be cancelled, or if the Facility will not be provided, if the Guarantee is not provided;we will provide you with a copy of:any related credit contract together with a list of any related security contracts which will include a description of the type of each related security contract and of the property subject to, or proposed to be subject to, the security contract to the extent to which that property is ascertainable and we will also give you a copy of any related security contract that you request;the final letter of offer provided to the debtor by us together with details of any conditions in an earlier version of that letter of offer that were satisfied before the final letter of offer was issued;any related credit report from a credit reporting agency;any current credit-related insurance contract in our possession;any financial accounts or statement of financial position given to us by the debtor for the purposes of the Facility within 2 years prior to the day we provide you with this information;the latest statement of account relating to the Facility (and any other statement of account for a period during which a notice of demand was made by us, or a dishonour occurred, in relation to which we are required to give you information under clause 28.4(b)(i)); andany unsatisfied notice of demand made by us on the debtor in relation to the Facility where the notice was given within 2 years prior to the day we provide you with this information; and(e)we will give you other information we have about the Facility (including any facility with us to be refinanced by the Facility) that you reasonably request but we do not have to give you our own internal opinions.We will not ask you to sign a Guarantee, or accept it, unless we have:provided you with the information described in clause 28.4 to the extent that that information is required by this Code to be given to you; andallowed you until the next day to consider that information.We do not have to allow you the period referred to in clause 28.5(b) if you have obtained independent legal advice after having received the information required by clause 28.4.We will:not give the Guarantee to the debtor, or to someone acting on behalf of the debtor, to arrange the signing (except a legal practitioner or financial adviser who is working for you); andensure that you sign the Guarantee in the absence of the debtor where we attend the signing of the Guarantee.We will also provide you, on request, with additional copies of any information described in clause 28.4(d) that we have given you and will do so: within 14 days, if the original came into existence 1 year or less before the request is given; orwithin 30 days, if the original came into existence more than 1 year before the request is given,except we do not need to do so if we have given the requested information within 3 months prior to the request.We will ensure that a warning notice (substantially in the form required by section 50 of the Uniform Consumer Credit Code, and detailed in Form 4 of the Uniform Consumer Credit Code Regulations and which is consistent with this Code) appears directly above the place where you sign. You may, by written notice to us, limit the amount or nature of the liabilities guaranteed under the Guarantee, except that we do not have to accept such a limit if:it is below the debtor’s liability under the relevant credit contract at the time plus any interest or fees and charges which may be subsequently incurred in respect of that liability; orwe are obliged to make further advances or would be unable to secure the present value of an asset which is security for the loan (for example, a house under construction).You may, at any time, extinguish your liability to us under a Guarantee by paying us the then outstanding liability of the debtor (including any future or contingent liability) or any lesser amount to which your liability is limited by the terms of the Guarantee or by making other arrangements satisfactory to us for the release of the Guarantee. You can, by written notice to us:withdraw from the Guarantee at any time before the credit is first provided under the relevant credit contract; orwithdraw after credit is first provided, if the credit contract differs in a material respect from the proposed credit contract given to you before the Guarantee was signed,but only to the extent the Guarantee guarantees obligations under the credit contract.A third party mortgage will be unenforceable in relation to a future credit contract or future Guarantee unless we have:(a)given the mortgagor a copy of the contract document of the future credit contract or future Guarantee; and(b)subsequently obtained the mortgagor’s written acceptance of the extension of the third party mortgage.A Guarantee given by you will be unenforceable in relation to a future credit contract unless we have:(a)given you a copy of the contract document of the future credit contract; and(b)subsequently obtained your written acceptance of the extension of the Guarantee, except to the extent the future credit contract (together with all other existing credit contracts secured by that Guarantee), is within a limit previously agreed in writing by you and we have included in the notice we give you under clause 28.4(a) a prominent statement that the Guarantee can cover a future credit contract in this way.We will not, under a Guarantee, enforce a judgment against you unless: we have obtained judgment against the principal debtor for payment of the guaranteed liability which has been unsatisfied for 30 days after we have made written demand for payment of the judgment debt; orwe have made reasonable attempts to locate the debtor without success; orthe debtor is insolvent,but these rules in clause 28.14 do not apply where the principal debtor is a small business.Where you are a commercial asset financing guarantor or sole director guarantor clauses 28.4(b) to (e) (inclusive), 28.5, 28.6 and 28.7 do not apply.If you are a director guarantor clauses 28.4(d) and 28.5 apply as follows:we will tell you that:you have the right to receive the documents described in clause 28.4(d); andthose documents contain important information that may affect your decision to give a Guarantee;you may choose not to receive some or all of the documents described in clause 28.4(d);we will tell you how you can make these choices; we will provide you with a copy of any document described in clause 28.4(d) that you have requested; you can tell us that you do not wish to have the benefit of the period referred to in clause 28.5(b); andapart from telling you the things set out in clauses 28.16 (a)(i) and (ii), 28.16(b) and 28.16(c) and as required under other provisions of this Code, we will not attempt to influence your choices under clauses 28.16(b) and 28.16(e). ................
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