How Good Is Your Guarantee?

Author: Ciara Gilroy and Mark Woodcock

January 18, 2019

The High Court has just granted an interlocutory injunction to a woman who claimed she was under undue influence when she signed a guarantee[1]. The security holder and their appointed receivers are now restrained from selling, possessing or otherwise dealing with property secured under the guarantee until there has been a full a plenary hearing.

Background

A Mrs Catherine Barry provided a guarantee over the debt of her son’s company for the benefit of a Bank.

Catherine Barry claims that she executed the guarantee under duress and undue influence of her son, Niall Barry. Mrs Barry claimed she was dependent on her son to run the family business following the death of her husband and he threatened to leave the business if she did not act as guarantor for the loans. Mrs Barry characterised herself as a housewife who was caring for another, disabled son and an elderly relative and was not involved in the business. Mrs Barry asserted that she received no independent legal advice and the nature of the transaction was not explained to her. The Court was not satisfied that a declaration signed by Mrs Barry stating that she had declined the opportunity to take independent legal advice absolved the obligations of the lender “in circumstances where that same overall contract may be tainted by undue influence”.

Undue Influence

In considering whether the Bank was aware of the possibility of undue influence the Court noted there was a significant non-commercial element to the guarantee as Mrs Barry had no active involvement in the business and received no direct financial benefit. The Court also noted that the Bank was on notice of the fact that there was a familial connection and Niall Barry was the primary contact in negotiating the terms. The Court considered the insidious nature of undue influence and the complications this creates for lenders. In this respect the Court considered the loan account file to be invaluable.

The importance of the Loan Account File

The Court indicated that the documentation contained in a loan account file maintained by a lender can provide a contemporaneous record of steps taken by the lender to address queries and satisfy their obligations. In particular, the loan account file can provide evidence of communications between the lender and the guarantor, efforts made by the lender to ensure the guarantor received independent legal advice and records of any prior commercial experience of the guarantor. Equally, where such documentation does not exist, the Court suggested that this can create a concern as to undue influence.

Particular Issues for Purchasers of Loans

The reliance on the loan account file and evidence of contemporaneous engagement raises a particular issue where the loan has been sold and the purchasers have stepped into the shoes of the lender. The Court stated that it is an “ongoing concern [that] successors to the lender’s title in the loan attempt to speak on behalf of that original lender and the business relationship they originally cultivated with the borrower, without producing any paperwork or evidence drawn up by that original lender.” This leaves purchasers of loans in a particularly difficult position where a challenge arises and the only evidence available is the documentation, however minimal, which was handed over on completion of the sale.

Conclusion

Banks and particularly purchasers of loan portfolios who intend to rely on guarantees should carefully review the contemporaneous documentation on their files before preparing proceedings against guarantors. This all the more important where the guarantor had no involvement in the management of a business.

However it is important to note that the Court decision is temporary and it remains to be seen how a Court will interpret everyone’s role at a full plenary hearing.

To read the full judgment click here

[1] CATHERINE BARRY v ENNIS PROPERTY FINANCE DAC, JAMES ANDERSON and PETER ALLEN [2018] IEHC 766

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