Can a lender enforce its security if it breaches the Code of Banking Practice? - Part three

  • Author : Bill Stark - 11-08-2016

1.  As I have noted in blog posts over the past 2 days, there have been a number of recent Victorian Supreme Court decisions about the effect of the incorporation of the Code of Banking Practice into agreements between bankers and their customers.

2. This is the third post about that issue.

3.  You could almost feel sorry for the poor old NAB. After all, they lost against the famous guarantors Mr and Mrs Amadio many years ago!

4.  Now, in National Australia Bank Ltd v John Albert Rose [2016] VSCA 169, the Victorian Court of Appeal was called upon to determine whether the breaches by the Bank of the Banking Code of Practice caused the guarantor loss. 


5.  In 2007, John Albert Rose entered into a joint venture with a Timothy Craig Rice (‘Rice’), the first defendant at trial, to acquire investment properties on the Gold Coast (I am starting to see a pattern here). They had been personal friends for a number of years. Rose had been a successful businessman. Rice apparently had no money.

6.  Rose and Rice established a holding company in which they had equal shareholdings and, for each property acquisition, a separate subsidiary company of which they were both directors.

7.  The acquisitions were funded by a combination of (a) funds contributed by Rose and (b) borrowings from NAB, broadly speaking as follows. In March 2007, Rose contributed $4.8 million. Then, in June 2007, the joint venture acquired three properties at a total price of $10.3 million, of which around $5.7 million was borrowed from NAB. Between June and December 2007, five further properties were acquired for a total price of around $3.4 million; those purchases were funded almost entirely by borrowings from NAB.

8.  For each acquisition, Rose signed loan documents on behalf of the borrowing entity, which was the relevant subsidiary company. He also executed a guarantee in respect of each acquisition, personally guaranteeing the liabilities of the relevant borrower company to NAB. The documents were all signed in the presence of John D’Angelo, a senior business banking manager at NAB.

9.  In 2010, following default on the loans, the properties were repossessed and sold. NAB issued demands against the guarantors, including Rose, seeking payment of the outstanding balance of the loans.

10.  The trial judge (Elliott J) dismissed NAB’s claim for $3,878,744.05, plus interest and costs,brought pursuant to five guarantees executed by Rose. In summary, his Honour did so because he found that (1) NAB had breached contractual warranties by failing to comply with the Code of Banking Practice (‘Banking Code’) in taking the guarantees; and (2) those breaches had caused loss to Rose in the amount claimed by NAB.

11.  The majority of the Court of Appeal (Warren CJ and McLeish JA; Ferguson JA dissenting) granted leave to the NAB to appeal, and then dismissed the appeal.

Summary of the law in relation to the Code of Banking Practice in Victoria

12.  Therefore, the current law in relation to the Code of Banking Practice in Victoria is that:a. The Code forms a part of the contractual arrangements between a banker and its customer, andb.  Any breach of the Code that results in a loss to the guarantor who enters into a guarantee procured in those circumstances, may make the guarantee unenforceable.

About the Author

Bill Stark

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