Cowan v The Royal Bank of Scotland plc

Holden v The Royal Bank of Scotland plc (both May 2011, Court of Session)

In two related cases, directors who had granted personal guarantees of their companies’ borrowings sought to avoid liability under the guarantees and resultant sequestration.

The guarantors sought an interim interdict to prevent RBS obtaining their sequestration and a reduction of the guarantees they had given, claiming that they had been induced to enter them by representations made by a bank employee regarding the legal effect of previous ones. The alleged misrepresentations were to the effect that the bank could not call upon the guarantees until it had first taken all steps to enforce the debts against the companies, including obtaining payment as a creditor at the conclusion of their administration or liquidation.

The court refused to grant interim interdict, saying the guarantors had failed to make out a sufficient case. The court observed that the argument that experienced businessmen had relied upon what a bank employee had said regarding previous guarantees for their understanding of the legal effect of more recent ones was somewhat extraordinary and would require to be supported by clear circumstantial evidence. The guarantors had also delayed too long in opposing the sequestration proceedings

In Cowan, the court expressed doubt that seeking reduction of the guarantees (a remedy which would have the effect of discharging the guarantors from any liability) was an appropriate remedy in circumstances where RBS could not otherwise recover the monies that they had advanced to the companies.

It seems from this decision that the courts will have little sympathy for experienced businessmen who have chosen not to obtain legal advice on a guarantee seeking to argue that they relied on representations from bank employees regarding the legal effect of guarantees. The case also suggests that the remedy of reduction will rarely be appropriate in respect of guarantees and that (as the defenders had argued) seeking to have the court rectify the terms of the guarantee or declare the unwritten representations form part of the conditions applying to its enforcement might have better prospects.