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Wives can ‘walk away’ from bank debt

Catchwords: Equity, constructive trusts, Garcia, NAB, “all monies” clause, Young J upheld by High Court, wives, bank debt, mortgage, volunteer, no benefit, unconscionable , wife walked away from debt

Can wives walk away from bank debt? A wife, who has guaranteed the bank borrowings of her husband, or husband’s company, can, in certain cases, avoid paying up when her mortgage or guarantee is called up by the bank.

The case of Garcia v N.A.B, decided last year by the High Court, saw Mrs Garcia walk away from the guarantees and a mortgage over her and her former husband’s property that she had given to the NAB to support her husband’s company’s activities.

The mortgage she signed was over an “all monies” mortgage which secured various loans for the company; monies they would borrow in the future and monies owing under future guarantees given to the bank.

The High Court upheld Justice Young, the original trial Judge’s determination, granting the wife relief, made on the basis of Yerkey v Jones, a High Court case.

The key factors were:

1. She was a volunteer who obtained no benefit from the transactions with the bank.

2. Although she was a shareholder and director of the company, she was not directly involved in its activities.

3. She did not understand the meaning and effect of the bank transactions. She understood the 1987 guarantee to be for a limited overdraft, but not secured by the “all monies” mortgage over her home which she signed in 1979. Her husband had told her it was risk proof.

4. The bank is taken to have understood that as a wife and guarantor she may have confidence in her husband in business matters, and the transactions may not have been fully explained as to their meaning and effect.

5. The bank did not take steps to explain the transactions to the wife or find out that she had received independent advice. She signed the 1987 guarantee in less than a minute.

What makes these bank transactions unenforceable against the wife is the circumstances above make the dealings “unconscionable”.

There does not have to be any undue influence by the husband that would add force to the wife’s case; nor any notice by the bank of some misconduct by the husband exploiting the wife under a special disability. The relief was available even though a claim under the Contracts Review Act for an unjust contract failed.

The old case of Yerkey received judicial condemnation because it was said to be based on the concept that a married woman is under a special disadvantage in any transaction with her husband.

Jonathan de Vere Tyndall

Article updated 7 February 2015, originally published in The Land on 22 July 1999

Editors note: The articles published contain comment only and not legal advice, for which you should retain a solicitor. No responsibility is accepted for the accuracy of the contents.