Paratei v ING Bank [2015] NSWSC 1368

This case concerned a group of family companies. The parents were shareholders and the parents and sons were directors of the family companies. The parents gave guarantees and mortgages over various properties owned by them to secure their companies’ debts. The bank sued for possession and a money judgment and the parents claimed unconscionability and unjustness.

Security for $4.4m facility

The first set of guarantees and mortgages were given by the parents in relation to a $4.4m facility. The parents also claimed promissory estoppel in relation to their mortgage which they alleged was given on the basis of the bank’s assurance that it would be released once certain units had been sold. The wife signed numerous mortgages and guarantees personally and for her husband pursuant to a power of attorney and gave a declaration that she had received independent legal advice and also financial advice. Her husband separately signed an undertaking agreeing to the proposal. The wife claimed that none of the documents were explained to her. In relation to the promissory estoppels claim, the wife accepted that she knew that there was a proposal to exchange one security for another but claimed that the mortgage was supposed to be temporary. The parents claimed that they were under a special disability and not in a position to make worthwhile judgments about their interests, the business being conducted by their twin sons.

The court did not believe the parents. The court found that the documents were explained to the wife and refused to accept that the bank told the wife that one of the mortgages would be only temporary. The court also found that the husband was given independent legal and financial advice and signed the undertaking agreeing to the proposal. The court noted:

The challenge is based upon equitable principles concerning unconscionable conduct, and section  7 of the Contracts Review Act. It has been said that, compared to those equitable principles, the Contracts Review Act has a lower threshold for relief, or has a wider jurisdiction, and that where both are relied upon it is generally preferable to first consider the application of the statute. I will follow that course.

The court found that while the twin sons played an important role in the management of the companies and had most of the direct contact with the bank, the parents, at least the wife, was closely involved in relation to the finances and the husband had at least a basic understanding of the financial position of the companies.

The court found no material inequality in bargaining power. The court found that while the husband suffered from impaired memory and had limited English, the court did not think these matters nor his age of 72 meant that he was not reasonably able to protect his interests. The court also found that the wife had sufficient commercial experience to appreciate the transactions. The court found that both received independent legal and financial advice and understood what and mortgage and guarantee was. The court found that the wife had sufficient information and advice available to her to enable her to make a considered judgment about whether to proceed with the transaction. The court found that the husband knew that the transaction involved the giving of a guarantee, a concept he was familiar with and that it was open to him to seek whatever information he felt he needed from his wife about the proposed transaction. The court noted that the husband chose to sign the undertaking and return it to Australia, thereby signifying his agreement to the proposal.The court said:

The mere fact that the mortgage and guarantee were executed for the husband by way of power of attorney does not give rise to any injustice.This mode of execution had been employed on previous occasions and was employed as a matter of convenience, whenever the husband was not in Australia. Its use in this case was suggested by the wife. The suggestion was acceded to by the bank, subject to the provision of an undertaking from the husband to later execute a guarantee and provide certificates of independent legal and financial advice. The bank thus sought to ensure that the husband was made aware of a transaction that would involve him giving a personal guarantee. It is relevant to note the important role played by powers of attorney in effecting transactions, and the need for third parties to be able to safely rely upon their ostensible efficacy without having to conduct an examination of the relationship between the principal and the attorney.

The court rejected the Contracts Review Act claim and found that the parents were able to adequately protect their interests and found no unconscionable conduct on the part of the bank. The court found that the parents were able to make worthwhile judgments about their interests and were capable of dealing with business matters. The court found no special disability on the part of the parents and held that the bank’s conduct was not exploitative nor predatory. The court also rejected the promissory estoppels case because there was no promise that the mortgage was only temporary.

Deed of Cross-Guarantee

As a condition of the bank extending further finance to the family companies, a cross guarantee was entered into by the wife for herself and on behalf of her husband pursuant to power of attorney. This had the effect of increasing the parents’ exposure from $4.4m to $30m. The parents agreed to guarantee repayment of the debts of all the companies and of the wife personally. The wife signed waivers of independent legal and financial advice for herself and her husband. The wife alleged that she did not know she was giving a personal guarantee for herself or for her husband.

The court found that it was the parents’ decision to decide how their companies should be managed and they were not people who were unable to look after their financial interests. The court also noted that their position as proprietors of the companies meant that they were not to be regarded as true third party guarantors. The court also found that the wife had every opportunity to obtain legal advice or financial advice and the bank was entitled to rely upon their waivers. The court said:

Taking all of the above circumstances into account, I am unable to regard this as a situation where the bank has exploited or taken advantage of an inability on the part of the parents to make worthwhile decisions in their own interests. The bank was entitled to assume from at least the signed letters of offer and its letter of 10 November 2009, that the wife was aware of the transaction and that it involved the giving of a personal guarantee and had every opportunity to obtain legal and financial advice. It should not be overlooked that over a lengthy period of time the wife herself represented the companies in dealing with the bank in relation to transfers of funds. The fact that the deed of cross guarantee was executed for the husband by his wife as his attorney does not seem to me to give rise to any unfairness.

The court found no unconscionability and said:

I recognise that the scope of s 12CB of the Australian Securities and Investments Commission Act is not necessarily the same as that of the general law of unconscionable conduct.However, the conduct of the bank in relation to the deed of cross-guarantee lacks the moral deficiency required by the section. No undue pressure was applied by the bank and no unfair tactics were employed; further, the bank did not seek to exploit or take advantage of any inability on the part of the parents to protect their own interests.

Further guarantees

Further guarantees were signed on behalf of the parents by their sons in relation to the acquisition of a further development. They did not receive independent legal or financial advice about this transaction. The wife alleged that she would not have allowed her sons to use the power of attorney to give a personal guarantee. The husband said he had no memory of signing the power of attorney and did not know his sons could sign documents on his behalf.

The court found that the parents by signing the letter of confirmation to the bank consented to the guarantees executed by their sons and were aware of the nature of a guarantee. The court also noted that the further guarantees simply increased the debt by $1.65m., and did not make a large practical difference to the parent’s personal exposure to the bank under the deed of cross-guarantee. The court found that the parents could have received independent legal and financial advice but chose not to and understood the essential nature of the transaction. The court found that despite the fact that independent legal and financial advice was not obtained, the bank did not engage in unconscionable conduct. It was the parent’s choice to leave management of the companies to their sons while they were residing in Argentina and they were not persons unable to look after their interests. The court refused to find that the bank was on notice of any inability on the part of the parents to make worthwhile decisions in their own interests because they were overseas. The court said:

The mere fact that the parents were absent from Australia does not lead to that conclusion. It was apparent from the sending of money from Argentina, and the negotiations concerning the requirement for further amounts to be provided, that either or both of the parents remained involved to at least some extent in the affairs of the family companies.

The court found no unconscionability on the part of the bank.

Broadbeach mortgage

This mortgage was executed by the son on behalf of the parents. The power of attorney had been requested by the son so he could deal with the banks.

The court said:

The parents no doubt faced a very difficult situation, and the bank was taking a hard line in its own commercial interests. In reality, the stark choice presented was between giving the mortgage and thereby preserving for the time being the relationship with the bank, or declining to give the mortgage and thereby face recovery action. Nonetheless, the parents were not unable to protect their own interests in this respect. The way in which the parents conducted their business and financial affairs over the years, utilising companies and trusts, and engaging professionals such as lawyers and accountants to assist in that regard, would not have suggested to the bank that they suffered from any such inability.

The court found no inability on the part of the parents to make worthwhile decisions in their own interest and did not think that the fact that the mortgage was executed for each of them by their son, utilising the powers of attorney, gave rise to any unfairness. The court said:

The bank was evidently concerned about the state of the facilities (which were due to be repaid), and there was an immediate concern about the high loan to value ratio. I do not think that requiring a mortgage over the Broadbeach property was an unreasonable response to that concern, particularly in circumstances where it was initially suggested to the bank that the property could be used to assist the financial position. I do not think that the bank’s conduct in relation to the mortgage was morally or ethically deficient.

The court found no unconscionability.

The court gave the bank possession of the properties and monetary judgments against the parents.

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