The recent decision of Ms Justice Stack in the High Court highlights the grave risk that can flow from signing personal guarantees.
The decision is a very clear and cogent reminder of the importance of the following:
- Simply because a transaction may be improvident and may have been entered into under undue influence and/or the guarantor did not have the benefit of adequate legal advice, does not mean that it will be set aside if the party relying on the guarantee in question (in this case the Bank) was not was aware of these factors, in which case the Bank will be entitled to rely on the guarantee.
- In giving independent legal advice in relation to any guarantee, any solicitor who is asked to give independent legal advice should carry out a full investigation in relation to the nature of the guarantee, should ascertain the extent of lands over which any Deed of charge will impact and whether the guarantor would have the ability to meet the extent of the guarantee if it were called in, and indeed what would happen if the guarantor passed away as happened in this case.
This is a very unfortunate case in which Everyday Finance (which took over a loan previously held by AIB bank) successfully pursued the widow of a deceased guarantor who signed a guarantee notwithstanding the fact that the Court found that the entering into the guarantee was improvident and the guarantee was signed under influence and without adequate ‘legal advice’.
The defendant in this case was the widow of the deceased guarantor and she was sued in her capacity as legal personal representative. The deceased had entered into a deed of charge over land in County Meath, which not alone included 59 acres of quarry lands which had previously been run by him in relation to his business and which was subsequently taken over by his son, 12 acres of agriculture lands and the family home of the deceased. It would appear that the fact that the deceased’s family home was included in the deed of charge was not known by the Bank or the deceased or indeed the solicitor who gave independent legal advice to the deceased guarantor.
Mental Capacity
Both the defendant and her son, David, argued that the deceased was unwell at the time of the signing of the deed of guarantee and the deceased’s son claimed that he had pressurised his father into entering into the deed of guarantee. He also alleged that he had attended the meetings between his father and the solicitor who was giving his father independent legal advice. The solicitor vehemently denied this and the solicitor was able to provide an attendance note which demonstrated that the deceased had met with the solicitor on his own.
It is useful to set out the current law in relation to capacity, which is that a contract made by a person who lacks capacity is valid unless the other party to the contract knew or ought to have known the incapacity. In these circumstances the contract is voidable. In this case the defendant was arguing that the Bank knew or ought to have known that the guarantor lacked capacity.
The Bank said they had no knowledge of Mr. Flood’s incapacity. The Court accepted the Bank official in question’s evidence that she never met the deceased at the time and that the deceased’s son never told her that his father was unwell. As a result of this, the Court found that the Bank has no actual or constructive notice of any alleged incapacity on the part of the deceased. The Court was also furnished with medical evidence from the independent solicitor who met the deceased to explain the terms of the guarantee, which indicated that he did not have lack of capacity at the time he signed the guarantee and the deed of charge.
Undue Influence
The Court also considered the issue of undue influence. Somewhat unusually the defendant’s son, David Flood, argued that the deed of charge or guarantee could not be enforced, because he had pressurised his father to such an extent that his father did not exercise his own independent judgment in relation to the guarantee.
The Court assessed the level of actual and presumed undue influence.
In relation to the claim of undue influence, the Court held that the test for the defendant was to show that, on the balance of probabilities, the deceased’s son, David Flood, engaged in questionable conduct by pressurising the deceased to sign the guarantee. The Court did not accept the son’s evidence that he attended meetings with the independent solicitor, that he spoke with the deceased and that the deceased did not understand what he was doing. The solicitors in question produced contemporaneous notes, indicating that the son did not attend the meetings with them when the deceased called to sign the guarantees.
In relation to presumed undue influence, the Court had to assess the relationship between father and son to see whether undue influence could be assumed, and in this case, the Court did find that the deceased’s son had controlled the various events which resulted in the deceased signing the deed of charge and deed of guarantee.
The presumption of undue influence can be rebutted. The Bank argued that the deceased’s actions in signing the deed of charge and guarantee were not directly as a result of the undue influence of his son, but the Court did not accept this argument and concluded that the deceased had placed great trust and confidence in his son.
Adequate legal advice
The Court also had to consider whether the deceased had received adequate independent legal advice.
The Court has concluded that the solicitors who gave advice to the deceased did not carry out a full investigation of the deceased assets, the extent of his wealth, or whether he had any other source of income outside of the rent he received from the company in relation to a lease over part of his lands. Furthermore, the solicitor in question did not take up the copy of the title over which deed of charge has been granted to ascertain the exact extent of these lands.
As a result of this, the Court concluded that the deceased could not have been advised whether the transactions were in his interest.
The Court concluded, also, that the transactions amounted to improvident transactions in circumstances where the quarry lands which were charged had a value of €3.5 million less the combined amount of the guarantees which the deceased has been asked to sign.
The Court then had to consider whether the fact of entering into a guarantee and the deed of charge was presumed to have been entered into under undue influence, whether if it was an improvident transaction and where there was a finding of inadequate legal advice, if this meant that the Deed of Charge/Guarantee should be set aside.
The Court concluded that the Bank took reasonable steps at all times by insisting that the deceased had taken independent legal advice in satisfaction of the conditions attached to the Bank’s loan offer.
The Court noted that the Bank’s correspondence was sent to the solicitors directly and there was no suggestion or knowledge on the part of the Bank that the deceased’s son was opening the correspondence sent to the deceased. Having taken all of the factors under consideration into account, the Court determined that the bank were entitled to rely on the Deed of Charge/Guarantee.
For further information or any related Commercial law matter please do not hesitate to contact Brendan Dillon, Pauline Horkan, or Donna Phelan on 01 296 0666.
