Big bank fails in its bid to enforce corporate 'guarantee'

A recent judgment[1] of the Full Court of the Supreme Court of South Australia provides a timely reminder to banks and financiers as to the circumstances when a guarantee will be found to be in existence and the importance of ensuring that the securities supporting a customer's facility are periodically reviewed to ensure that they are in order and otherwise enforceable.

In the matter, the Court unanimously dismissed the Commonwealth Bank of Australia's appeal from the first instance decision that dismissed its claim that the majority shareholder of the customer had given a guarantee to the bank.

Bartier Perry acted for Carotino (Australia) Pty Ltd (Carotino), the successful majority shareholder in the proceedings, both at first instance and on appeal.

The facts

At the time, Carotino was in the process of purchasing the majority shareholding in the bank's customer. The customer had an existing receivables finance facility with the bank. It was a condition of the bank's facility that the bank provides its consent to the change in ownership of the bank's customer otherwise a default of the facility would occur.

The bank consented to the change in ownership of its customer on the basis that Carotino agreed to provide a guarantee in respect of the customer's facility. Rather than requiring Carotino to sign a standard form guarantee, which was the bank's standard practice, the bank had Carotino sign a letter by which it "undertakes to execute and return a shareholders guarantee in a standard form to be provided by CBA within 7 days of receipt". The bank's own bank officer had determined that there was insufficient time for a guarantee to be signed given the short period of time until the completion of the sale of its customer's majority shareholding.

The bank's officer incorrectly noted in the bank's internal records (listing the securities it held) that a "new" guarantee from Carotino had been provided. In fact, no such guarantee had been provided and other officers assumed that a guarantee had been provided. The bank officer's error was later compounded by another bank officer who undertook the internal review of the customer's facility. That officer changed the word "new" to "existing" in the bank's security summary records. The bank officer failed to follow instructions from his superior requesting that he obtain a copy of the documents which the bank held in its security packet for the customer to confirm the dates of the securities.

The bank did not follow up on the guarantee until after its customer had been placed into voluntary administration. The bank sent a guarantee to Carotino for its execution after the commencement of the proceedings.

Relief sought

The bank sought a declaration that the letter signed by Carotino, of itself, constituted an immediately enforceable guarantee. In the alternative, the bank sought that Carotino be estopped from denying that by signing the letter, Carotino had induced the bank to assume that an immediately binding guarantee came into existence. 'Estoppel' occurs when a person is prevented by law from acting inconsistently with, or departing from, their earlier position. The bank alleged that Carotino owed in excess of $4.7m under the guarantee and sought judgment in that amount.

Surprisingly, the bank initially did not seek an order for specific performance requiring Carotino to execute a guarantee in favour of the bank. However, the bank applied during the second last day of the hearing, after the close of evidence and during the delivery of submissions, to amend its pleadings to seek an order that Carotino execute a guarantee in favour of the bank.

Carotino argued that given the bank never asked it to sign the standard form shareholders guarantee, no guarantee ever came into existence.

Findings by trial judge

The trial judge concluded that the letter did not constitute an immediately enforceable guarantee for the following reasons:

  1. The bank, during the relevant time, used a template for its standard form of shareholders guarantee and the form varied upon whether the guarantor was an individual or corporation, whether the guarantee was to be limited or unlimited, and whether it was to be supported or unsupported by other security. The court found that there was no standard form of shareholders guarantee in use by the bank in the relevant time for the preparation and dispatch to Carotino.

  2. An internal memorandum prepared by the bank stated that a letter of undertaking was to be signed acknowledging that the clients will execute the bank's security documentation including the new unlimited guarantee from Carotino. The officers of the bank took steps to have Carotino execute a guarantee.

  3. The use of the words "undertakes to execute" was a promise to do something in the future.

  4. Even if the parties did intend to be immediately bound by the letter, the court found that the guarantee was unenforceable due to uncertainty. The court determined that the letter was no more than an unenforceable undertaking in the same vein as a letter of comfort.

Also, the bank's alternative claim of estoppel was dismissed on the basis that there was no evidence that Carotino induced the bank to assume that by signing the letter, an immediately binding guarantee came into existence. To the contrary, the trial judge found that it was the errors of the bank's own bank officers which led the bank to assume that Carotino had executed a guarantee in favour of the bank. The trial judge refused the bank's late application seeking to amend its pleadings to seek an order for specific performance.


The bank appealed the decision of the trial judge dismissing the bank's claim. Curiously, the bank did not appeal the trial judge's decision refusing to grant the bank leave to amend its pleadings to seek an order for specific performance.

The full court was of the view that the trial judge correctly concluded that the letter itself did not constitute an immediately binding guarantee having regard to the cumulative effect of the following considerations:

  • The plain wording of the letter itself

  • The letter's failure to refer to several important matters concerning the terms of the guarantee alleged to be constituted by it

  • The fact that the parties did not subsequently treat the letter as an immediately binding guarantee

  • The evidence did not establish that there was only one document in common usage within the bank at the relevant time which could be described as "a Shareholders Guarantee, in a standard form"

In dismissing the bank's appeal, the Full Court commented that the bank's view of the letter itself as a guarantee, was a "surprising and bold one". The Full Court also described the bank's failure to provide a guarantee to Carotino for execution as an "embarrassing omission".


This case highlights the need to ensure that all security taken by banks and financiers is properly documented, regardless of the urgency or complexity of the transaction, and that an adequate system is in place and adhered to so that irregularities in security documentation may be identified and remedied. As this case demonstrates, the cost of not doing so can sometimes be high.

[1] Commonwealth Bank of Australia v Carotino (Australia) Pty Ltd [2011] SASCFC 110

Author: Elias Yamine