Enforcement of Guarantees and Third Party Security where Undue Influence is Claimed

In 2006 and 2008, Mrs. Catherine Barry provided Bank of Scotland with a number of guarantees in respect of the debts of her son’s company which were supported by a mortgage over a commercial property. The loan and security held by Bank of Scotland were subsequently acquired by Ennis Property Finance who appointed Peter Allen and James Anderson of Deloitte as joint receivers over the commercial property.

Following the appointment of the receivers, Mrs. Barry applied to the High Court for an interlocutory injunction restraining the receivers and the secured lender from dealing with her assets pending a full plenary hearing. In her application, Mrs. Barry claimed that her son put her under duress to execute the security documents threatening to leave the family business, which she was not involved in and which she relied on him to run, if she did not. Mrs. Barry also claimed that she had reservations in respect of the borrowings, that she had not received independent legal advice and that the nature of the transaction had not been explained to her.

In considering the application, the Court noted that Bank of Scotland should have been aware of the relationship between Mrs. Barry and her son who negotiated the loan, that nothing was produced to the Court to disprove that Mrs. Barry was not actively involved in the business and that there was no apparent commercial benefit to her in providing the security, all of which should have put the bank on inquiry as to whether Mrs. Barry was providing the security of her own free will.

The Court acknowledged that it would be difficult for Ennis Property Finance to disprove that undue influence was applied on an oral basis in a private setting and suggested that Bank of Scotland’s lending file would be invaluable to it as the file may include, for example, a contemporaneously taken note of enquiries made by the bank to satisfy itself that there was no presence of undue influence, notes of any engagement with the applicant as to the nature and effect of the security to be provided and any steps taken by the bank to ensure that the applicant obtained independent legal advice. Of course, the absence of these records on the bank’s file may well go towards supporting the applicant’s claim.

In granting the injunction sought, the Court held that Mrs. Barry had established an arguable case and that there was a serious issue to be tried. The full plenary hearing of this matter is schedule to take place shortly.

Whilst it should be remembered that the Court’s decision in this matter is temporary, lenders are advised to proceed with care when seeking to rely on guarantees and third party security especially in circumstances where they were not the original lender and have limited information from the original lender’s file as the Court was especially critical of loan purchasers who attempt to speak on behalf of the original lender without having the necessary knowledge or evidence for them to do so.

For further information on this topic, please contact Eoin Thomas McGuinness (Partner), or your usual AMOSS contact.

To read the full judgment click here

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