If you are borrowing in the name of a company your bank will always require the directors and sometimes others to personally guarantee the obligations of your company.
If the bank requires a guarantee from someone who is not a director or from someone that they suspect gets no benefit from the loan then they may insist that the guarantors get legal advice. This is done by insisting that a lawyer give a certificate confirming that the lawyer has provided legal advice.
Lawyers are not keen to give this advice for a number of reasons:
1. Lexon is the company that provides insurance to all Queensland lawyers. Lexon sees the issuing of these certificates as risky.
2. Many of the clauses in the bank guarantees are inherently unfair.
3. The terms of guarantees can be complex.
The issuing of a solicitors certificate adds a significant cost to the expensive process of obtaining a loan.
You should speak with your bank before documents are issued to see if this cost can be avoided. We are not suggesting that you should not obtain advice. It is important to understand your rights and obligations however there is a significant cost to obtaining this kind of advice and the issuing of a certificate to the bank does not, of itself, protect you.
All of this started with a case known as Armadio.
Commercial Bank of Australia v Amadio [1983] HCA 14: An elderly couple known as the Amadios, signed a guarantee for thier son’s bank, so that their son could obtain a loan. The Amadios believed that their son’s business was doing well, but it was not. When the son’s business failed, the bank sought to enforce the guarantee against the Amadios. A court decided that the guarantee was unconscionable and said that the bank could not rely upon the guarantee. It was held that the guarantee was “manifestly disadvantageous” to the Amadios. The court decided that the bank must have been aware of this but chose to take no steps to ensure that the Amadios were properly advised.
The result is that banks will now often require a solicitors certificate to ensure that steps have been taken to protect the guarantor. Often the requirement for a certificate can be waived if the matter is dealt with early. If however, arrangements are not made at an early stage the bank may seek solicitors certificates even when the only guarantors are directors of the company.
