The recent case of The Trustees of Beardsley Theobalds Retirement Benefit Scheme v Yardley makes clear the importance for lenders to obtain confirmation that an individual signing a security document has received independent legal advice.

It is common for lenders to seek, in addition to any security document issued by an individual for the obligations of another, confirmation that the individual has had the benefit of independent legal advice before signing the security document.

There is a risk that any guarantee or security which is granted by an individual is unenforceable should the security have been granted following misrepresentation by the Lender or undue influence by any relevant person.

In The Trustees of Beardsley Theobalds Retirement Benefit Scheme v Yardley, the court set aside a guarantee because it was entered into following undue influence by a third party.

The guarantee had been granted by an individual whose job title was “sales director” although he was not a board director.  He signed a guarantee and in doing so guaranteed to a lender the rent and other financial obligations of his employer.  He regularly witnessed documents and thought he had signed the guarantee as a witness.  His employer went into administration and the lender sought to rely on the guarantee. It transpired that the board director presenting the guarantee for signature knew of the company’s financial difficulty and knew the sales director was likely to sign the document.  The court took the view that the sales director was likely to trust the board director given that he was in a superior position and there was therefore undue influence. Whilst the undue influence was not caused by the lender seeking to rely on the guarantee, the court took the view that it could not rely on the guarantee and should have made enquiries into the position of the guarantor.

The case acts as a good reminder that a lender should also seek written confirmation that a guarantor or individual signing a security document has taken legal advice.  The records available at Companies House will also show whether an individual whose job title includes the word “director” is actually a board director of the company.