Category Archives: Guarantees

Mortgage: Solicitor had failed to give surety necessary advice

In Royal Bank of Scotland v Etridge (No.2) [2001] (“Etridge”) the House of Lords considered the obligations and rights of lenders and sureties where the surety is to provide security for the borrowing of another person where that person might be in a position to exert undue influence over the surety.

The common situation is that of a wife mortgaging her interest in the matrimonial home to secure bank borrowing by her husband.

There the House of Lords was concerned to identify the minimum requirements necessary to protect the surety from granting a charge over property without fully understanding the nature and effect of the proposed transaction, and to ensure that the surety took the decision whether to provide security freely and of their own will.

Where a solicitor is advising someone mortgaging property or giving a guarantee to secure another’s debts, the requirements set by Etridge and their responsibilities are:

1. before acting, to consider whether there is any conflict of duty or interest and what is in the best interests of the surety;

2. to confirm the identity of the surety and explain to the surety the reason for the solicitor’s involvement, which is to counter any later allegation of undue influence or failure to understand the transaction and its implications;

3. to confirm that surety agrees to the solicitor so representing and advising the surety;

4. to explain and advise at a face-to-face meeting, without the borrower being present, and in appropriately non-technical language.

Other principles

1. The bank instructs the solicitor but the solicitor should be chosen by the surety. Cost and the fact a solicitor/client relationship pre-exists are important factors so the same solicitor may act for the borrower, the surety and the bank. BUT, the legal and professional duties that the solicitor assumes when accepting instructions to advise the surety, are owed to the surety alone and the solicitor must be satisfied that he can give the surety the necessary advice fully, carefully and conscientiously. If the provision of that service may be inhibited, the solicitor must cease acting for the surety and so inform the bank; and,

2. the core minimum advice to be given and involvement of the solicitor is:

(a) to explain the nature of the documents and the practical consequences for the surety if (s)he signs them (mainly loss of the property made available as security and/or, where a guarantee is being provided, being bankrupted);

(b) to explain the seriousness of the risk involved entailing:

(i) an explanation of the purpose, amount and principal terms of the new facility,

(ii) an explanation that the bank may increase the facility or change its terms or grant a new facility without referring back to the surety,

(iii) an explanation of the surety’s liability under any guarantee,

(iv) discussion of the surety’s means, the value of any property being mortgaged, and whether (s)he or the borrower have other assets with which to make repayment if the transaction fails). So routinely, the bank must provide the solicitor with financial information about the borrower so that the financial risks to be assumed by the surety may be properly explained to the surety. The relevant information will vary but as a minimum should be the borrower’s current indebtedness, the limit of any current facility, and the limit and terms of any proposed facility;

(c) to explain that the surety has a choice and that the choice is the surety’s alone. This will be informed by the borrower’s and the surety’s present financial circumstances, including their present indebtedness and financial facilities available to them discussed at 2(b)(iv) above;

(d) to ascertain whether the surety wishes to negotiate with the bank (eg to re-prioritise the order in which the bank may call upon securities and/or to fix the upper limit of the surety’s exposure at a lower level) and, if so, whether (s)he wishes to do so directly with the bank or with the bank through the solicitor; and

(e) to verify whether the surety wishes to proceed and, if so, to get the surety’s authority to write to the bank to confirm the explanation the solicitor gave the surety.

Before advising the surety, the solicitor should get any information needed from the bank (if missing from the bank’s instructions).

If the above requirements, are complied with, the bank can accept, rely upon and, if need be, enforce the surety’s security and/or guarantee.

Where the solicitor has been properly retained, the bank can assume that the solicitor has done the job properly.

If the solicitor’s advice is poor that is a matter between the surety and the solicitor.

However, if the bank ought to have realised from facts known to it that the surety has not received the appropriate advice, Etridge says any bank, proceding with the security, would do so at its own risk.

A lender might lose the benefit of security obtained in good faith, if the lender ought to have known that the surety’s concurrence to it had been got by a third party’s misconduct (more often than not the borrower’s).

A bank is put on inquiry whenever a wife offers to stand surety for her husband’s debts as (1) the transaction may well not be to the wife’s financial advantage and (2) such transactions carry a substantial risk of the husband has committing a legal or equitable wrong in getting the wife to stand surety, which may entitle the wife to set aside the transaction.

More generally, a bank is put on inquiry where (1) the transaction is not on its face to the surety’s financial advantage and (2) the relationship between the borrower and the surety causes a substantial risk that the borrower could and did exert undue influence in getting the surety to provide a guarantee or security.

The surety must therefore inform the bank of the chosen solicitor’s identity. There has to be a balance between independence on the one hand and practicality and avoidance of unnecessary financial outlay on the other.

In the High Court case of HSBC Bank Plc v Brown [2015] the court looked behind the solicitor’s certificate and found that he had failed to take any of the steps and to give the core minimum advice specified in Etridge. So the bank’s claim for possession was dismissed and the mortgage was declared unenforceable.

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

Did Bank assurances postpone liability under guarantee?

In Bank Leumi (UK) Plc v Akrill [2014] the respondent (“the bank”) sought summary judgment against the appellant (“Mr Akrill”) on two personal guarantee claims totalling £3,840,493.83 including interest and costs to be assessed, if not agreed.

Mr Akrill was a property developer through a group of companies known as the Manor Group. He was the sole beneficial owner of each of the group companies.

The bank agreed to fund the Manor Group buying and developing Clarence Flour Mill (“Manor Mill”) in Hull. Mr Akrill was told that a personal guarantee would be necessary but Mr Akrill alleged that the bank’s regional manager told him that he was in “no danger” because the loan would be no more than 60% of the value of the property and that the bank would seek to recover any monies owing in the first instance from the borrower and by enforcing its security over assets within the Manor Group, and would only look to enforce the personal guarantee against Mr Akrill in the event of a shortfall.

Mr Akrill contended that this assurance was important to him, and that without it he would not have been prepared to offer a guarantee for the full amount of the loan. He accepted that, with hindsight, he should have ensured that the bank documents reflected that assurance. The regional manager denied making the representations which Mr Akrill attributed to him and having such a conversation.

Mr Akrill later signed a further guarantee of an overdraft facility and, again, said he did so in reliance on another assurance from the regional manager by phone while he was travelling home with his wife. Mr Akrill said he was told the bank would not call it in and that that persuaded him to sign the guarantee.

The bank placed particular reliance on Clause 18 of the personal guarantees and the cases on similar provisions:

“The Guarantor [Mr Akrill] hereby acknowledges that it has not relied on any warranties or representations made by or on behalf of the Bank in entering into this Guarantee………….”

Finally, the signature pages of the guarantees warned Mr Akrill as follows:

“By giving the Guarantee you might become liable instead of or as well as the Debtor.

You should seek independent legal advice before entering into the Guarantee.”

Each of the guarantees was on the face of them executed by Mr Akrill as a deed in the presence of his solicitor. In signing each of them, the solicitor confirmed, in the bank’s standard template wording, that it had been executed by Mr Akrill in his presence and after he had explained its contents to Mr Akrill.

Despite this wording, Mr Akrill said that in each case he signed the personal guarantee at his home and then sent it to the solicitor. He also maintained that the solicitor did not advise him on the contents of either document. There was no evidence before the court from the solicitor confirming or denying this testimony.

The relevant Manor Group facility was not repaid on 30 November 2011 and remained unpaid.

Mr Akrill relied on the representations he alleged the regional manager made to him as creating collateral warranties which prevented the bank from calling upon the guarantees before seeking redress from Manor Group companies and realising its security over their assets.

Mr Akrill said that since the bank had done neither, it could not sue him under the guarantees.

The bank replied that this defence was bound to fail given the terms of the guarantees including, in particular, clause 18, and the principles the decided cases required to be applied in considering such terms.

Refusing the bank summary judgment the Court of Appeal said the sharp conflict between the evidence or Mr Akrill and the regional manager could not be resolved without cross examination. The circumstances of the guarantees’ execution and witnessing also needed looking into further. Additionally the evidence of Mr Akrill’s wife that she overheard the conversation between Mr Akrill and the regional manager, needed to be taken into account. Mr Akrill’s case, though unlikely to succeed, was not wholly implausible.

So the first instance judge was wrong to conclude that Mr Akrill had no real prospect of establishing that the regional manager made him the representations he claimed he relied on. The Court gave Mr Akrill conditional leave to defend and directed that the application be remitted to the High Court for consideration of the appropriate conditions to impose.

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

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.