Guarantees to be put to the test by Undue Influence
High Court accepts pleas of undue influence in recent cases involving personal guarantors of company loans.

Undue Influence

Two recent decisions discussed here demonstrate the type of evidence that a court will consider in assessing whether a claim of undue influence has a chance of success and give a reminder of the legal test to be met to establish the doctrine. It is rare for guarantees to be set aside on this basis and the courts will usually only intervene if the bank was sufficiently aware that undue influence had been brought to bear on the victim.

(i) Barry v Ennis Property Finance DAC and Others [2018] IEHC 766 

Ms Barry executed various guarantees in respect of loans taken out by her son's company. These loans and guarantees were secured by property near Kilmacthomas village. Ms Barry brought an application restraining the Defendants from selling, possessing or otherwise dealing with the secured property. 

"Lack of business acumen"

Ms Barry claimed that she had inherited her husband's struggling business following his sudden death and, given her lack of business acumen, had placed increasing reliance on her son in the running of the business. Her son had allegedly threatened to leave the family business if Ms Barry did not act as guarantor. She also said that she received no legal advice before doing so. Ennis disputed the claims made by Ms Barry and claimed that she was in fact the driving force behind the family business, both before and after her husband's death. 

The Court held it was clear that a lender would be put on inquiry when it becomes aware of facts suggesting a significant non-commercial element to the guarantee, including the guarantor having no active involvement in the business or clear evidence of a personal / familial connection (for example, a shared home address, surname etc.).

The Court was of the view a lender insisting that the claimant take independent legal advice before executing the guarantee would generally be considered sufficient.

Loan account file invaluable evidence for a Bank

Ms Justice Stewart also acknowledged that the nature of undue influence claims raised a number of complications for lenders. In this regard, she said that “the loan account file is invaluable” as it provided a contemporaneous record of steps taken by a lender to put any inquiries to rest. In this case, she acknowledged that Ennis had acquired the Barry loans / guarantees and may therefore not possess a complete loan file from Bank of Scotland (the original lender). However, this did not impact on the Court's assessment of undue influence. 

The first step in securing interlocutory relief is establishing the existence of a serious issue to be tried. The Court was satisfied that Ms Barry’s undue influence claims established such an issue.  The detailed case set out by Ms Barry went well beyond a bald assertion of undue influence and the Court held that none of the evidence put forward by Ennis demonstrated that Ms Barry possessed significant commercial experience and / or was not vulnerable to the undue influence of her son.

Ultimately the Court held there was a serious issue to be tried as to whether Ms Barry’s guarantee was undermined by the undue influence exerted over her by her son and granted the injunctive relief sought while urging the parties to progress the case to a plenary hearing as soon as possible.

(ii) AIB v Grove Oil (Roscrea) Limited and Others 

The Bank were seeking to recover a sum due on foot of guarantees executed by Ms Lynch in 2011 over loans given to Grove Oil (Roscrea) Limited (the "Company") by the Bank. Ms Lynch argued she was not liable on foot of these guarantees on the basis of undue influence exerted on her by the Second Named Defendant, Mr O'Sullivan.

Claim of undue influence

Ms Lynch had been in a relationship with Mr O'Sullivan and they had had a child together. She claimed she has no special training or business acumen and gave evidence that Mr O'Sullivan effectively ran the Company and that she never participated in his business affairs. While he noted there were some unsatisfactory elements to Ms Lynch's evidence the Court held that the question on summary judgment is whether, in all the circumstances, sufficient evidence has been adduced such as to raise an arguable defence. 

Evidence uncontroverted by bank

The Court held that in this case there was uncontroverted evidence that the Bank's agent left the room and asked the Ms Lynch and Mr O'Sullivan to "sort it out amongst themselves" when an issue arose about Ms Lynch's understanding of what was going on. He also said that there was evidence of a lack of any further inquiry on the Bank official's return to the room. MacGrath J. held that this, combined with the "non-commercial" nature of Ms Lynch's involvement with the Company, was sufficient in the Court's view to refuse the Bank's application for summary judgment.

Key Takeaways

A successful plea of undue influence in relation to guarantee claim is rare. However, these cases serve as a useful reminder for lenders to make the necessary inquiries where such an issue could later be raised. However as both cases were heard at stages of the claims where full findings of facts by the court are not necessary it will be interesting to see if the claims of undue influence make it past the next hurdle of the trial process.

Contributed By: Alice O'Connor 

 

Twitter 

Follow us @WilliamFryLaw