Lenders seeking to rely on full recourse loan agreements may face difficulties in relation to co-borrowers following the decision of the Supreme Court in Whelan v AIB.  The court looked beyond the terms of a loan agreement to the intention of the parties and found that where the co-borrowers were not central to the transaction, and had not been advised of the potential liability, then it would be unfair to allow the bank to enforce its claim against them, at least without first pursing the primary borrowers.  While the court indicated that this decision was given on "very particular facts" it will have significant implications for lenders.

The case

The plaintiffs were Mr Lynch, his wife and four children.  Mr Lynch together with Mr Conlan contracted to buy development land for €25 million funded by a facility from AIB.  The land was to be owned by Mr Lynch, members of his family and Mr Conlan and all were parties to the loan facility. Unfortunately the value of the property dropped substantially and AIB sought repayment on a full recourse basis.  The plaintiffs disputed the full recourse nature of the facility saying that at all times it was intended to be non-recourse and instituted proceedings against two law firms involved in the transaction and AIB.

O'Donnell J in the Supreme Court consider the loan facility and indicated that he was troubled by the distinction between the position of Mr Lynch and the rest of his family who were parties to the facility.  The court recognised the Mr Lynch was always a party to the transaction but his wife and children were only introduced for Mr Lynch's own private wealth management purposes.  It pointed out that the bank had no interest in these parties and they neither added to, nor detracted from, the transaction. The court noted that all drafts up to the final draft provided for recourse to Mr Conlan and Mr Lynch only and the extended family were only introduced to the facility at a very late stage.

The court found that the broader Lynch family faced a potentially ruinous personal liability of which they were not advised, and which the bank never sought or relied upon at least from a commercial perspective and stated:-

"In those circumstances there may be a residual question whether in all the very particular circumstances of this case, it would be equitable to permit the bank to enforce its legal claim against the wider members of the Lynch family, or at least to do so without having first pursued execution against the principal borrowers…"

The court set aside the judgment obtained against Mrs Lynch and the Lynch children but left it open for the Bank to pursue a new case against them at a later date.

What should lenders do now?

Given the decision of the court lenders should review any loan facilities it intends to enforce to ascertain:-

  1. Are there parties to the loan facility who were not central to the transaction and who were included for extraneous purposes (eg wealth management, tax planning, enforcement reasons)?
  2. Were these parties involved in the transaction at all times or were they a late addition to the agreements?
  3. Were these parties advised on their potential exposure?  In the present case the Lynch family were legally represented but it clear that the court felt that given their late addition to the transaction they were not given specific advice on this issue.  It may well be difficult for a lender to get clarity on this point prior to enforcement proceedings but it may be possible to infer whether advice has been given from the surrounding factual circumstances.

A lender will have to consider whether it should attempt to enforce against the principal borrower/s before making a decision whether to proceed against co-borrowers.  Depending on the facts it may be that enforcement may be difficult, if not impossible, against some co-borrowers.