Advice from the Bank

Sun (Auckland), Volume III, Issue 660, 11 May 1929, Page 8

Advice from the Bank

Should Manager Be Responsible ?

A BANK manager in the South who advised a client upon the financial stability of a firm found later that he was virtually responsible for his client’s loss when the firm failed. Auckland Bank managers confess frankly that they always err on the side of caution when their advice is sought.

TN the Southern case, which has been in litigation for several months, a bank manager was alleged to have persuaded a client to guarantee q firm’s security to the extent of £2,500 by representing that the firm was stable and prosperous. Later the firm failed and the guarantor was forced to pay up. His allegation was that the bank manager misrepresented the position to square off a bad debt at the bank. The action passed through its many phases and eventually reached the Appeal Court, where the client’s appeal was allowed, virtually holding the manager responsible for having advised him upon the firm’s commercial stability. The court proceedings were watched with interest by bankers throughout New Zealand because of the possibility of such an incident having a parallel. The heads of Auckland banks believe, however, that the possibility of such a recurrence is extremely remote, because of the fine discretion exercised upon questions of guarantee. MANAGERS ARE CHARY There is always the possibility that if a manager advised a man that a certain firm was worthy of guarantee, and later the firm failed, the guarantor could place the moral blame for his loss upon the banker. But the usual practice is not to recommend any action of such a far-reaching character; the prospective guarantor is left to satisfy himself upon the worth of his proposition. "Guarantees are delicate things to handle at any time,” one manager said, when discussing this question. “A manager never\ asks a man to guarantee a firm’s credit. That is not his business. And even when be is asked, he is very chary as to what he says. On occasions there ia<need for a warning, and then the advice is ‘don’t,’ but otherwise nothing is said. "If, on the other hand, a guarantor wishes to establish his own credit so that he can back the firm, that is a different thing.”

Another banker said: "If a manager deliberately advised a man that a firm’s security is good when it is not, he deserves all that is coming to him. because it will react upon him sooner or later when the firm fails. This is unprecedented, however.” New Zealand apparently has no parallel to the action which was just decided in the South, but in New South Wales some time ago two men, by hard swearing in the witness box, won a point over a bank manager who, they said, had wrongly advised them. The two men swore that they were together in the manager’s room at the signing of the document, when the manager declared the credit to be good. CAUGHT BY THE SLUMP The delicacy of a man accepting a firm’s standing with the bank was revealed to many people after the war, when the industrial slump threw many farmers and other mortgagors on to the bankruptcy market. Guarantors who had signed documents years previously had forgotten their obligations, and when the farms and businesses failed the money was called up to honour the promises. In some instances, a bank manager pointed out, guarantors exhibit inexplicable carelessness regarding their transactions. Struggling businesses are guaranteed, and when things flourish the documents are not cancelled. Later the flush of prosperity is transformed to the sting of poverty, and the uncancelled guarantee is dragged from the vault, dusted and held up to haunt the mind of its signatory. Then, s>f course, he has to pay up; but if he had been careful he could have extinguished all liability. The decision of the Appeal Court in no way prejudices the status of bank managers in the judicious exercise of their financial duties. “Our position is perfectly clear,” one man said. ‘We simply keep out of it. If a man undertakes to guarantee a certain firm, it is not the concern of the manager. He merely arranges the finance at the bank to the best of his