Thomas was an independent director of a trustee company. The company was set up by Finn, a business owner. Thomas was not personally involved in the trustee company. Thomas had no financial interest in either the trustee company or Finn’s business and was not personally related to Finn.
In February 2023, Finn applied to the lender for a business loan. The lender agreed to loan Finn’s business $200,000.
On a busy Friday afternoon, the lender sent Thomas a copy of Finn’s loan contract to sign. Thomas thought that the lender wanted him to sign the loan agreement because he was an independent director of Finn’s trustee company. Thomas was about to leave work for the weekend when he received a copy of the loan agreement.
The lender asked Thomas to sign the loan agreement electronically, so that it could be returned as quickly as possible. The electronic signing platform skipped Thomas through the loan, from signature to signature, where required. The agreement contained a personal guarantee from Thomas.
Thomas was unaware that the lender had him sign a personal guarantee for Finn’s loan. Under the personal guarantee, Thomas would be personally liable for the loan if Finn and his company did not repay the lender. Thomas thought that his liability was limited to the assets of Finn’s trust.
When Thomas returned to his office on Monday, he had a bad feeling about the loan agreement. Thomas emailed the lender to confirm that he had not given a personal guarantee for Finn’s loan.
The lender told Thomas that they had already paid the loan out to Finn, and that they were not willing to remove his personal guarantee.
In March 2023, within weeks of receiving the loan, Finn’s company went into liquidation. The lender then took legal action against Thomas for the payment of Finn’s debt and lodged a caveat on the title to Thomas’s home.
Thomas complained to FSCL.
Dispute
Personal guarantee
Thomas said that the lender should not have asked him for a personal guarantee in the loan agreement, as he only had a professional relationship with Finn. Thomas argued that the lender asked him for a personal guarantee because the lender knew that Finn’s business was struggling when Finn contacted the lender about a loan.
Thomas felt that the lender deliberately included a personal guarantee in the loan agreement, despite knowing that he had no personal relationship with Finn, because the lender was concerned that Finn would not be able to repay the loan.
The lender said that they were comfortable with the risk of lending to Finn. The lender also said that, though they made inquiries about the financial position of Finn’s business, they were not aware that there was such a significant risk of liquidation.
The lender’s conduct
Thomas said he would never have knowingly agreed to sign a personal guarantee. The lender did not specifically point out to Thomas that the loan agreement included a personal guarantee and never mentioned that he would be personally liable, and never gave Thomas the opportunity to seek independent advice. Thomas said that the lender pressured him into signing the loan agreement and that the electronic signing process did not give him the opportunity to review the agreement.
The lender said that Thomas could have read the agreement in the process of signing it electronically. The lender considered that Thomas had the opportunity to review the agreement and that Thomas was experienced enough to understand it. The lender said that Thomas was bound by the agreement even if he did not read it.
The lender did not contact Thomas
Thomas said that the lender told him that they would call him before they paid the loan out to Finn. The lender did not call Thomas.
The lender said that Thomas was still liable under the loan agreement whether they called him or not.
Thomas also said that he asked the lender for information about the loan, and their internal complaints process, many times. The lender did not give Thomas any further information.
Review
Was it appropriate for the lender to ask Thomas for a personal guarantee?
In the lender’s communication with Finn, the lender never mentioned that they planned to ask Thomas for a personal guarantee. If the lender had checked with Finn, Finn would have explained that he did not have a personal relationship with Thomas. The lender never tried to clarify the nature of Finn and Thomas’s relationship.
The lender never told Thomas that they wanted him to provide a personal guarantee.
In our view, Finn provided the lender enough information to make the lender aware that Thomas had no personal relationship with Finn or any interest in Finn’s business. We found that the lender had not done their due diligence before asking Thomas to provide a personal guarantee.
Did the lender pressure Thomas into signing the loan agreement?
A person should not sign a document without reading it and being sure of what they are agreeing to.
However, our review showed that the lender placed significant pressure on Thomas to sign the loan agreement urgently. The lender did give Thomas any time to review the document properly, as they wanted the agreement signed urgently before Thomas left the office for the weekend. We found that the lender’s actions contributed to Thomas’s mistake about the type of guarantee he was providing.
Should the lender have paid the loan out to Finn?
Our review showed that the lender discovered the true nature of Thomas and Finn’s relationship before they paid the loan out to Finn. This meant that the lender had the opportunity to correct their mistake, or ask Thomas and Finn further questions, before paying out the loan.
Instead, the lender overrode their internal processes and paid out the loan.
The lender should not have paid the loan out to Finn once they became aware that his relationship with Thomas was a professional one.
Did the lender respond appropriately when Thomas contacted them?
It was clear from Thomas’s emails to the lender that he was unhappy with the situation. However, the lender did not give Thomas FSCL’s contact details even though Thomas asked for details of the lender’s complaints process. This is a breach of the lender’s participation agreement with FSCL, which required them to tell Thomas about their complaints process in writing.
The lender then took legal action against Thomas and lodged a caveat on the title to his home. The lender never provided Thomas with our details.
Resolution
In this case, we had to balance the legal principles in what was fair and reasonable in the circumstances.
We found that Thomas’s guarantee would likely be unenforceable because the lender took advantage of Thomas’s mistake and did not give him an opportunity to properly review the loan agreement. Further, the lender’s conduct gave Thomas the impression that his signature was only a formality.
The lender never told Thomas that they wanted him to personally guarantee Finn’s loan. The lender did not remind Thomas to obtain independent legal advice or give him an opportunity to do so. The electronic signing process skipped Thomas through the loan from signature to signature without giving him an opportunity to review the agreement.
We did not consider it fair for the lender to be able to recover their debt from Thomas. Thomas did not receive any personal benefit from the loan. Finn did not suggest to the lender that Thomas should provide a personal guarantee.
The lender had the opportunity to fix their mistake before they paid the loan out to Finn. However, they decided to ignore their internal processes and failed to ask further questions.
For these reasons, we found that the fair outcome was for Thomas to be returned to the position he would have been if he had not provided his personal guarantee.
We recommended that the lender abandon their legal action against Thomas, withdraw their caveat over his home, and release him from his personal guarantee over Finn’s loan. In our view, this is fair outcome because it was the lender’s actions that created this situation.
The lender agreed to accept our decision and the complaint was settled.
Insights for consumers
It is crucial that you read any document that you have been asked to sign, and obtain independent legal advice, before signing.
In law, you are bound by agreements that you sign even if you do not read them. We could only recommend that a consumer is released from their contractual obligations in cases where the lender’s conduct falls well short of best practices.
If a person or organisation is placing significant pressure on you to sign a document before you have had the chance to review it, you can withhold your signature until you feel you understand what you are being asked to sign. If asked to sign a personal guarantee, make sure you obtain independent advice.