Personally guaranteeing a commercial loan

Carol was the sole director of a company she operated with her partner, Ralph.

In May 2013, Carol’s company entered into a finance agreement to purchase two commercial trucks. Carol also signed a personal guarantee for the loan.

In early 2014, Carol and Ralph’s relationship ended. Carol entered into an informal arrangement with Ralph for him to continue the business under a different company name. This arrangement included Ralph taking possession of the two commercial trucks.

In January 2015, Ralph spoke to the finance company, which had financed the commercial trucks, about refinancing both trucks under his own name. By this time, the loan for the trucks was in significant arrears. The finance company told Ralph that he would need to pay the outstanding arrears before it would look at refinancing options.

In March 2015, the finance company sent Carol a repossession notice for the trucks. When Ralph found out that a repossession notice had been served, he hid the trucks. He told the finance company that he was hiding the trucks until he had arranged finance with another finance company to purchase the trucks.

In May 2015, Carol’s company was placed into liquidation. The finance company told Ralph that if he wanted to purchase both trucks, he would need to pay $164,000 by 6 July 2015.

On 30 June 2015, Ralph delivered the trucks to the finance company. The trucks were sold at auction in September 2015. However, the trucks sold for less than the balance owing on the loan. This meant that there was a residual loan balance of $77,014.72.

The finance company contacted Carol, as the personal guarantor, to pay $77,014.72.

Family Court proceedings

Carol had issued Family Court proceedings against Ralph and the Family Court had identified the outstanding debt for the trucks as relationship debt. This meant that, while the finance company could only pursue Carol, Ralph needed to pay Carol 50% of the amount owing to the finance company.

Ralph told the Family Court that he disputed the balance of the debt owed to the finance company. The Family Court said that Carol and Ralph needed to resolve the issue of how much was owed to the finance company before the proceedings could continue.

Further, Carol and Ralph had sold all their relationship property and the proceeds were in a trust account. Money could only be withdrawn from this account on the direction of the courts, or on Carol and Ralph’s joint approval.

The finance company’s position

The finance company said that Ralph never made any formal offer to purchase the trucks. It had told Ralph that he had until 6 July 2015 to pay $164,000 for both trucks. On 30 June 2015, Ralph delivered the trucks and the finance company heard nothing further from Ralph.

The trucks were sold at auction in September 2015 and a residual balance of $77,014.72 was left for Carol to pay. The finance company said it was prepared to issue bankruptcy proceedings against Carol to recover this debt.

The complaint

Ralph said that the finance company had not given him a reasonable opportunity to obtain finance to purchase the trucks. Ralph said that, had the finance company given him more time, he would have been able to purchase the trucks and there would be no residual debt owing.

Carol asked FSCL to investigate Ralph’s complaint and to determine the balance owing to the finance company.

Our view

We considered that Ralph had been given a reasonable opportunity to purchase the trucks. Ralph had been in communication with the finance company about purchasing the trucks since January 2015. The trucks were not sold at auction until September 2015, meaning Ralph had almost nine months to arrange finance.

We told Carol that we did not accept Ralph’s position and we would be unable to uphold this complaint.

The settlement offer

Another issue for Carol was that, even if Ralph did agree to release the money in the trust account, they did not have enough to pay the full balance owed to the finance company, being $77,014.72.

The finance company said it was willing to reduce the debt to $46,200. However, if Carol wanted to accept this offer, she needed to pay this sum within three weeks.

Outcome

In the end, Ralph agreed to release the money in the trust account and the settlement sum of $46,200 was paid in time. However, this was not without significant pressure from Carol, her lawyer and also Ralph’s own lawyer.

Ralph was told that the settlement offer was the best outcome that was going to be reached. We had looked at his complaint and found that the finance company was entitled to receive the full residual balance of $77,014.72.

The finance company had only offered the settlement sum as over a year had passed since the trucks had been sold. The finance company made a commercial decision that it would rather settle the matter and receive some money as soon as possible than continue with the dispute and go through the process of issuing bankruptcy proceeding against Carol.

Lesson

The relationship property aspect of this complaint made it significantly more complicated. However, at the crux of this complaint was the liability Carol had taken on by signing a personal guarantee for her company’s debt.

Even though the company was placed into liquidation and wound up, this did not absolve Carol from being liable under her guarantee for the debt owing on the trucks.