Court of Appeal considers signatories to loan agreement personally liable

18 Oct 2017

It is common for directors of a corporate borrower to be required to give guarantees in support of the borrower's obligations. It is not unusual for such guarantees to be incorporated into loan agreements.

Director guarantors often seek to avoid the obligations arising under the guarantee given by them. In the recent New South Wales Court of Appeal case, Singh & others v De Castro [2017] NSWCA 241, the Court had occasion to consider whether signatories to a loan agreement for a loan to a company were also liable personally as guarantors under the terms of a guarantee incorporated within the loan agreement. The Court of Appeal found that the signatories were personally liable in this case under the terms of guarantee set out in the loan agreement signed by them. It is useful to be aware of the reasons why.

The key facts and issues on appeal

The key facts were as follows:

  • New Ridge Property Group Pty Ltd (the Borrower) entered into a Loan Agreement dated 11 September 2006 with Mr and Mrs De Castro (the Lenders) (Loan Agreement).
  • Under the Loan Agreement, the Lenders advanced $300,000 to the Borrower and the Borrower agreed to pay interest on the loan at a rate of 12 per cent per annum.
  • The Borrower defaulted in its repayments and the Lenders commenced District Court proceedings against the Borrower and its six directors (as guarantors), claiming monies due and payable under the Loan Agreement.
  • In the District Court, the Lenders contended that each of the six directors were liable under a guarantee which they argued was contained within the Loan Agreement.
  • Default judgment was entered against the Borrower (which had been deregistered) and one of the directors (who was an undischarged bankrupt). The remaining five directors (the Appellants), who unsuccessfully defended the District Court proceedings, appealed.
  • At the time the Loan Agreement was entered by the Borrower, each Appellant was a director of the Borrower.
  • The first page of the Loan Agreement identified the parties as the Lenders, the Borrower and six “Guarantors”, namely (in order of naming) Harjit, Gurmeet, Kulwant, Moninderjit, Mandhir and Sukhdev.
  • The second page recited that the Loan Agreement was between the Borrower and “the party whose names appear in Item 4 of the schedule (‘the Guarantors’)”.
  • The second page of the Loan Agreement also contained the following recitals:
    “A. The lender has at the request of the Borrower agreed to make an advance to the borrower
    B. The Guarantors have agreed to guarantee the repayment of the loan and the obligations of the Borrower pursuant to this Agreement to the lender”.
  • Harjit, Mandhir and Moninderjit conceded that their signatures appeared on page 5 of the Loan Agreement but suggested that Kulwant had tampered with the form of the Loan Agreement because the document they signed did not contain any guarantee.
  • Sukhdev and Gurmeet categorically stated that they had not signed the guarantee.
  • The Primary Judge found that under cross-examination none of Harjit, Mandhir and Moninderjit could give positive evidence of the contents of the four pages that, on their case, formed part of the document they signed in September 2006. Accordingly, they were unsuccessful in establishing that the document they signed did not contain the guarantee.
  • For the purposes of their appeal, the Appellants contended that they executed the Loan Agreement in their capacity as witnesses and directors, but not as guarantors.

Court of Appeal decision: were the officers personally bound under the terms of the guarantee?

The Court of Appeal found:

  • no reason to set aside the Primary Judge’s finding that the Appellants had signed the Loan Agreement in a form incorporating the guarantee, which finding was based on his Honour’s assessment of the credibility of the evidence as well as the objective circumstances and commercial probabilities; and
  • there was ample evidence to support the Primary Judge's finding that Sukhdev and Gurmeet had signed the Loan Agreement in a form that incorporated the guarantee (which they had challenged).

In determining the personal liability of the Appellants, the Court of Appeal noted the comments of Justice Giles in Clark Equipment Credit of Australia Ltd v Kiyose Holdings Pty Ltd who concluded that the proper approach in determining whether a signatory to a contract is personally bound was to inquire whether there was an intention that the signatory be personally bound to the contract. That intention is to be determined objectively from a construction of the contract as a whole, including (but not limited to) having regard to any qualification attached to the signature in light of the surrounding circumstances (to the extent to such circumstances could be admitted into evidence).

One of the Appellant's counsel contended that the Primary Judge erred in concluding that the objective circumstances demonstrated that Gurmeet signed the Loan Agreement in his personal capacity and therefore as a guarantor. He argued the following facts supported his argument:

  • Gurmeet had never met the Lenders and had no financial interest in dealings with them;
  • Gurmeet was not actively involved in the development activities undertaken by the Borrower; and
  • Gurmeet was not involved in drafting or negotiating the terms of the Loan Agreement.

These arguments were rejected.

The Court of Appeal considered that the following factors made it difficult to see what reason there could have been for all of the Appellants to sign the Loan Agreement unless it was for the purpose of binding each of them personally to the guarantee:

  1. the description of the parties in the Loan Agreement;
  2. the recitals in the Loan Agreement;
  3. the terms of the Loan Agreement;
  4. the fact that only two officers were required to commit the Borrower to the Loan Agreement under section 127 of the Corporations Act; and
  5. none of the signatures by the Appellants were qualified by a reference as a director or agent of the Borrower.


This case demonstrates the importance of clearly identifying the parties to the relevant contract and the capacity in which any party signs the contract if they are executing in more than one place (for example, as director and guarantor).

For further information please contact Kemp Strang Partner, murray-Nobbsd [at] kempstrang [dot] com [dot] au (David Murray-Nobbs) or Senior Associate, grunsteinj [at] kempstrang [dot] com [dot] au (Jonathan Grunstein).

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