The freight business performed badly, and the companies increased their business overdraft from $560,000 to $960,000. The bank then required all five directors of the two companies to provide guarantees, and, after taking legal advice, they provided those guarantees.  

Weeks later, the companies went into liquidation. The five directors disputed their liability to meet the guarantees, saying the bank’s lending agreement was misleading because the letter of priority stipulated that the finance company had first priority over secured assets. They also said the bank had an obligation to disclose the letter of priority but failed to do so. 

Our investigation

We looked at the lending agreement, and in particular a clause stating that, unless the bank confirmed otherwise in writing, its security interest had to rank ahead of any other lender’s security interest. The main purpose of the clause was to protect the status of the security that the bank was relying on. The clause did not explicitly say that the bank had to hold first security, but rather that it had to agree in writing to reduce the ranking on its security interest. By signing the letter of priority with the finance company, the bank had, in fact, agreed in writing to reduce the ranking of its security interest. The lending agreement was therefore not misleading.

As for the complaint about the bank’s failure to disclose the letter of priority, we found the bank had no obligation to do so. A bank must disclose information to a guarantor if something unexpected takes place between it and its customer. We did not consider the letter of priority to be unusual, nor for that matter unexpected from the point of view of the directors. Furthermore, the directors had obtained legal advice before agreeing to be guarantors, and we had no reason to doubt that they would still have provided the guarantees even if told about the letter of priority.  

Outcome

We did not uphold the complaint.