Lenders often want loans to be secured by personal guarantees. The recent High Court case of Ulster Bank Ireland Limited v Roche and Buttimer shows that where the guarantor is in a personal relationship with the borrower, and has no involvement or financial interest in the business, the lender must tread very carefully or risk the guarantee failing.
In becoming bankers for Mr Roche’s motor business, Ulster Bank obtained a guarantee from both Mr Roche and Ms Buttimer. She was a director of the business but not active in its management and not a shareholder. When the bank called in the guarantees, Ms Buttimer argued that hers was invalid because she had signed it subject to undue influence from Mr Roche. The Court agreed: although the bank did not know about the emotional pressures placed on Ms Buttimer, it knew that she was in a personal relationship with Mr Roche and had no direct interest in the company. That was enough to put the bank on inquiry, and it had failed to take any steps to ensure Ms Buttimer’s consent was freely given.
The Court has broadened the circumstances in which a guarantee can be set aside for undue influence by a third party. In so doing it has increased the risk of guarantees failing and increased the burden on lenders. Under previous Irish case law, Ms Buttimer’s guarantee would have been upheld on the basis that the bank did not know about the undue influence. Now, where there are “red flags” suggesting that the guarantee is being given for noncommercial reasons, a lender is automatically deemed to be on notice and must take steps to ensure that the proposed guarantor is giving free, informed consent. Unfortunately, the Court did not specify what steps are needed. Until that issue is clarified by the courts, lenders wanting comfort on the enforceability of personal guarantees should, at a minimum, actively seek to ensure that potentially “vulnerable” guarantors obtain independent legal advice. This means going further than ticking a box on a form.