We have previously prepared a case note on the decision before the trial judge which favoured the lender. That decision was overturned on appeal.
The trial judge disbelieved the evidence of the guarantor parents, preferring the evidence of the broker. Orders were made for possession of the guarantor parents’ properties located at Marrickville and Drummoyne and the claim against the broker was dismissed.
The main issue for determination on appeal was whether the Court should interfere with the trial judge’s credit findings. On this point, the Court of Appeal found that the trial judge erred in his finding as to the credit of the broker. The court of appeal found:
- That the broker was aware that the Iannis were not purchasing the Dural property.
- That the statement in the loan application that one of the purposes of the loan was the purchase of a property of $500,000 coupled with the inclusion of the sham contract meant that the loan application was misleading to the knowledge of the broker.
- That the loan application was further misleading, in that it inferred that the Iannis were principal debtors in the sum of $490,000 to St George whereas in fact they were guarantors..
- That a loan application made in these circumstances resulted in a transaction which was grossly improvident to the Iannis.
The Court of Appeal determined that it was open to it to review the findings of a trial judge based on credit where it is satisfied that the findings were glaringly improbable, contrary to compelling inferences or where it can be shown that the judge has misused his advantage or acted on facts which were inconsistent with the evidence.
Justice Basten made some noteworthy obiter comments concerning guarantor parents generally:
The phenomenon of elderly parents with unencumbered homes guaranteeing business engaged in by their offspring is not novel. As Handley JA noted in Davey v Challenger Managed Investments Ltd…the courts only see the cases where the businesses have failed and lenders seek possession under mortgages, without knowing “how many business ventures financed by parents in this way are successful for the benefit of the community and all concerned”: at . Handley JA further commented that the law did not treat “age and pensioner status” as disabling parents from assisting their offspring in this way. The implication of these statements is, presumably, that the courts should not be unduly ready to relieve parents of what turn out to be improvident agreements. It does not follow, however, that elderly parents are therefore without the protection of the law in respect of transactions believed, at least by the offspring, to be beneficial to their interests, regardless of the fact that they may thereby be putting at risk the sole family asset.
And further comments concerning brokers:
A further common consideration, which has become of critical significance in relation to many lending arrangements over recent years is the insertion of various intermediaries between the lender and the borrower. In the present case, as is not uncommon, the application for finance was made through a broker, being corporate entity acting through its principal. The broker was accused of misconduct which led to a cross-claim against his business and against him personally. However, the broker being the agent for the prospective borrower, a defence to an action by the lender will require separate consideration as to whether the lender has acted unconscientiously in processing the application: see, eg, Perpetual Trustee Company Ltd v Khoshaba; Tonto Home Loans Australia Pty Ltd v Tavares.
A retrial being ordered, this case (commenced in 2008) will prove to be an expensive and time consuming case for all parties involved.
Click here to read the full judgment.