It is becoming increasingly common for banks and other lenders to require borrowers or guarantors to obtain independent legal advice about their rights and obligations. Generally, these lenders will require that the solicitor providing the advice gives the lender an Independent Advice Certificate which certifies certain things.
Responsible lenders following ASIC responsible lending guidelines will require that a solicitor provide a Solicitor Guarantee Certificate of independent legal advice to confirm that the Guarantor fully understands the legal consequences of giving such a Guarantee.
Many people consider that they understand their obligations as a borrower or a guarantor, and become frustrated by this increasingly common requirement. There are a number of cases in Australia that have resulted in loans and guarantees being set aside due to borrowers and/or guarantors failing to understand the consequences of the transaction.
Following the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry it is likely that lenders’ requirements in this area will only increase.
After the Amadio case in 1983, the major banks became nervous that Guarantor parents could get out of the Guarantee by saying that they didn’t understand.
Similar cases occurred when wives signed Guarantees for their husbands benefit without properly understanding the implications. See Garcia v National Australia Bank in 1998 where again, the bank was unable to enforce the Guarantee given by the wife.
The banks response to the Amadio and Garcia cases was to require Guarantors obtain a Certificate of independent legal advice so that the banks were protected.
What type of things needs to be certified?
Depending on the lender, Independent Advice Certificates generally require that the solicitor certify that they have:
- Explained the nature and effect of the relevant documents to the borrower or guarantor (as the case may be);
- Advised the borrower or guarantor that they should carefully consider the financial risks of entering into the transaction, or providing the guarantee (as the case may be);
- Advised the borrower or guarantor to make appropriate enquiries about things like the risks involved in the loan or guarantee (as the case may be) and the adequacy of any security being given by the borrower or others;
- Asked and received confirmation from the borrower or guarantor that they had read the relevant documents and understood their general nature and effect, the solicitor’s advice and that they were entering into the transaction freely, voluntarily and without pressure.
