Category Archives: Duress

Bank didn’t get Property Company’s Director’s Guarantee by misrepresentation or duress

One of the main features of economic duress is that it involves “illegitimate pressure”: that’s to say pressure without any commercial or similar justification. The “rough and tumble of normal commercial bargaining” is not to be mistaken for illegitimate pressure. Whether it is will depend upon a consideration of all of the circumstances in any given case.

In Bank of India v Riat [2014] Nirpal Singh Riat, the Defendant, signed two limited guarantees as security for facilities provided by the Bank of India (“the Bank”) to Globepark Developments Limited (“the Company”). The Company was a family run business with Mr Riat and his son Ashwin Riat being the sole directors and shareholders. Mr Riat was a 98% shareholder. The Company developed and rented out properties.

He signed a guarantee in January 2006 (“the first guarantee”) in respect of a facility letter (“the first facility”). The first guarantee was limited to £1,237,000 together with interest, costs and expenses. He signed a second guarantee in August 2006 (“the second guarantee”) in respect of another facility letter (“the second facility”). The second guarantee was limited to £490,000 together with interest, costs and expenses.

The Company entered administration on 31 March 2010. The Bank made formal demands under the guarantees which he had resisted on various bases since March 2011.

Prior to the first facility the Claimant allegedly negligently misrepresented to the Defendant that the Claimant wished to expand its involvement in the property development sector which the Defendant said was not a true representation as to the, then, existing intention of the Claimant and induced the Defendant to enter into both of the guarantees.

The Defendant also said the first guarantee was voided for economic duress. He said the requirement of a guarantee was not mentioned at all by the Bank until the last possible moment, at a point when the Defendant had “burned his bridges” with Natwest Bank who were the, then, bankers for the Company leaving him with no practical alternative financiers.

The High Court accepted in principle that a bank’s statement that it wanted to increase its exposure in a particular business sector may, if untrue, be capable of providing the basis for a claim in misrepresentation. For example, the Bank’s policy may in fact have been to reduce lending in that business sector, or the lending may not have been its core business, or may have been limited to particular geographical areas.

The court found that the total amount of exposure in the Real Estate Sector, at the Bank’s main office, rose from £60.436 million as at 30 November 2005 to £68.287 million as at 31 January 2006. Relative to the total amount of actual advances that was an increase from 8.05% to 11.42%. So the first representation was actually true.

Even if the representation had been untrue, the court was not persuaded it had been relied on. Moreover it would have had no causal link to the facilities being taken up. They would have been taken up in full any way.

The requirement of a personal guarantee was standard practice under the Bank’s policies unless there was a good reason to waive the requirement. In fact the court found that there had been a discussion about the personal guarantee as early as 15 November 2005 because the Defendant had failed to provide a Statement of Assets and Liabilities as had been requested by the Bank. The Defendant must have known he was being requested to provide this on the sole basis that it was to ascertain his ability to give a worthwhile personal guarantee to support the Company’s application to the Bank.

The most important motivation for the Defendant choosing the Bank was that it was prepared to provide a 75/25 loan to value ratio on the Bremic Hotel which would enable the release of further funds for the purchase of other property.

There was no significant pressure from the Bank let alone “illegitimate pressure”. The requirement for a personal guarantee was not unusual and had been brought to the Defendant’s attention by 15 November 2005 at the latest. He had other options for refinancing with Handelsbanken and other institutions and had sufficient time even to obtain independent legal advice. Indeed the solicitor concerned had confirmed that he appeared to understand the implications of what he was doing before signing the guarantee.

The court was also unimpressed by the length of time it had taken the Defendant to challenge the first guarantee.

So the court confirmed that the Defendant was bound by the guarantees and refused a declaration that he could cancel them.

This blog has been posted out of general interest. It does not remove the need to get bespoke legal advice in individual cases.