Lenders are reminded to ensure all guarantors consent to any variation of the terms of a loan agreement.
The Supreme Court of Queensland has highlighted the need for lenders to obtain the consent of guarantors prior to amending the principal loan agreement in a way that will impact the guarantor’s obligations.
In Westpac Banking Corporation v Schwerdtfeger & Anor  QSC 173, each of the defendants (Guarantors) executed a guarantee and indemnity (Guarantee) guaranteeing payment of debts by Doxa LM Pty Ltd ATF the DLJ & G Family Trust (Borrower) to the Westpac Banking Corporation under a Business Finance Agreement (BFA).
The purpose of the BFA was to provide a total of $16,460,000 of the ‘On Completion’ values of various projects. Funding was to be advanced in tranches specific to the particular projects.
The conditions precedent of Tranche 2 were not met before the term of the loan expired. Accordingly, Westpac offered to vary the BFA (BFA Variation) on certain terms. This included the cancellation of the Tranche 2 facility of $7,780,000. Also a reduction in the limit on the guarantee for each of the Guarantors to $8,580,000 (Guarantee Variation). The Guarantors also executed the Guarantee Variation, which expressly signified the consent of the Guarantors to the BFA variation and to the Guarantee.
The Borrower defaulted under the BFA as varied. Therefore Westpac demanded payment of the sum of $8,580,000 from the Guarantors.
However, the Guarantors argued that they were not liable to Westpac as they had not guaranteed the BFA Variation.
The Guarantors relied upon the principle set out in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987). This states that a change of the loan agreement between lender and debtor will discharge the liability of the guarantor unless the lender shows that the alteration is insubstantial, and not prejudicial to the guarantor (the Ankar principle).
Justice Atkinson referred to the Guarantee Variation executed by the Guarantors. And confirmed that if a guarantor has consented to an alteration of a principal loan agreement, the guarantor’s liability will remain.
The Guarantors had consented to the variations. Therefore the Ankar principle did not operate to relieve them of their obligations as guarantors. So judgment was entered for Westpac in the sum claimed.
To ensure a guarantor is not able to discharge its liability, lenders who seek to vary the terms of a principal loan agreement should not do so without:
- The written consent of the guarantor, preferably obtained following the provision to the guarantor of independent legal advice about the proposed variation; or
- Express terms in the guarantee which contract out of the Ankar principle and preserve the guarantor’s liability despite any variation (see Vivlios v Westpac Banking Corporation  QCA 230 and Hickory Developments Pty Ltd v Brunswick Retail Investment Pty Ltd  VSC 224).
This publication is provided for your general information and interest only. It is not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.