Guarantees are a common part of commerce. In a practical sense they are often unavoidable. Shareholders guarantee loans to companies; settlors guarantee loans to trusts – there is a certain symmetry because the shareholder or settlor is able to ultimately benefit from the advance. But what about when the trustees who are asked for a guarantee cannot benefit from the trust. The general expectation is that where that is the case the trustees’ liability will be limited to the assets of the trust. But will it? And what is it that guarantors are agreeing to when they guarantee borrower’s obligations?
In FAI Money v Johnston, Edward Johnston’s brother Richard Johnston who is an accountant, and his father-in-law Gavin Crawley (in their capacity as trustees) guaranteed a loan made to Edward Johnston, then a West Auckland lawyer, since bankrupted.
In due course there was a default. The trusts for which the trustees acted were of no value.
Accordingly FAI elected to pursue the trustees personally for their own distinct breaches of their undertakings. This was because under the loan agreement and the guarantees, FAI could pursue the trustees personally if deprived of recourse to the trusts’ assets because the trustees have acted without capacity, power or authority, or dishonestly, or negligently, or in breach of trust.
To establish this FAI had to show that:
“First, that the trustees were in breach of trust or lacked relevant capacity or authority or were dishonest. Secondly, that, as a result of that breach, they deprived FAI of the ability to recover all or some of the debt then owed from the assets of the two trusts.”
What was the trustees breach?
In the loan agreement the guarantors acknowledged that:
“The financial information most recently forwarded to FAI disclosing the financial condition of the borrower and each guarantor presents a true and fair picture of the relevant parties at the date of that information, and there has been no substantial adverse change in that condition since the date of that information.”
Financial information about Edward Johnston had been forwarded to FAI. It was accepted in the judgment that this information was manifestly untrue and that “Richard Johnston, as a prudent professional trustee, should first have obtained from his brother all that he needed to verify the accuracy of the … statement of assets and liabilities; and if he was not satisfied as to its accuracy, he should not have made the representation or given the warranty required. In reality he should not have become a guarantor at all.”
Accordingly, Richard Johnston was found to be negligent, and as a result not entitled to any limitation of liability. His liability was assessed as a measure of FAI’s loss due to the trustee having negligently enabled a sale to FAI’s prejudice whereby Richard Johnston deprived FAI of recourse to trust assets. The amount awarded against Richard Johnston was $137,000, which may make the next family gathering awkward.
But what about the father-in-law Mr Crawley. Well Mr Crawley fared rather better; in large part because there was no evidence that he had any knowledge of events, Edward Johnston having signed all the relevant documents under Mr Crawley’s power of attorney and deed of delegation. In this regard the court noted at  that:
“In granting that ability to Edward Johnston, furthermore, Mr Crawley was entitled to rely on Edward Johnston, as a fiduciary, exercising that ability solely when one or other of those contingencies came into play. He was entitled to anticipate that, before doing so, Edward Johnston would obtain from him express authority to exercise the power.” It is also important to note the Court’s view Mr Crawley’s power of attorney was only given in his trustee capacity.
While Mr Crawley, who was not financially sophisticated was nevertheless liable in his trustee capacity, he was not liable personally.
The facts of the case have been simplified here. However, the message is that being a trustee is anything but simple. The case also highlights the risks associated with giving a power of attorney and the need to review who might have your power of attorney from time to time.
- FAI Money v Johnston  NZHC 2060
- Powell v Thompson  1 NZLR 597 (HC) at 605
- Public Trust v Vernon  NZHC 1928 at 133 – 135
- Lines v Pikia  NZHC 503 at .