Discharge of mortgage not breach of guarantor's rights

This case was an unsuccessful appeal by a guarantor against summary judgment entered against him after the company whose loan he guaranteed went into liquidation.

In this case¹, a lender registered a mortgage over a borrower company's property and took a guarantee from the company's director as security for repayment of a loan.

The mortgaged property was sold, with the purchase price payable in three instalments, two of which were due prior to settlement of the sale.

At the time the company started showing signs of financial difficulty by failing to pay instalments due under the loan, the purchaser had paid the first two instalments of the purchase price. Around this time, the guarantor resigned as a director of the company but remained a guarantor of the loan.

Realising that, if the company was wound up, the purchaser would be an unsecured creditor for the amount of the first two instalments, the purchaser purchased the lender's securities, including the mortgage and the guarantee. Notice of assignment of the securities was given to the company and to the guarantor.

Following the passing of the date for settlement of the sale of the mortgaged property, the purchasers issued specific performance proceedings and took possession of the property. The company subsequently went into liquidation and the purchaser concluded the sale with the liquidators.

Summary judgment was entered in favour of the purchaser against the guarantor for the balance outstanding and the guarantor appealed on the basis of the following arguments:

• by discharging the mortgage, the mortgagee had breached an obligation to act in good faith by defeating his right of subrogation and further prejudicing his potential liability as guarantor; and
• by discharging the mortgage in breach of the good faith obligation, the contract could be reopened under sections 10 and 11 of the Credit Contracts Act 1981.

The court decided that:

• as the guarantor's liability under the guarantee was as if he was a principal debtor, his rights of subrogation and indemnity could not have arisen until the loan was fully paid; and

• the guarantee clearly stated that the guarantor was not discharged, nor were his obligations affected, by failure to enforce a relevant document or by releasing another party from a relevant document.

¹ Buxton v Roc Mac [2008] NZCA 129

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