In a recent commercial court decision, Ms Justice Costello found that a failure by a bank to obtain a fresh guarantee in the refinance of existing three facilities does not discharge the original guarantees.

Details of the case

This case concerned commercial court proceedings taken by AIB seeking summary judgment against a borrower in the sum of €1,429,166.22, the borrower and the guarantor of the facilities in the sum of €40,548.60, and the guarantor in the sum of €1,387,003.82 and €40,000.

The borrower in question had refinanced three existing facilities in May 2013. As security for the three facilities, guarantees (i) dated 2 March 2009 for up to €1,650,000 plus interest and (ii) dated 1 December 2009 for up to €40,000 plus interest were executed. These guarantees guaranteed to pay and satisfy to AIB on demand all sums of money which were then or at any time thereafter might become owing to AIB from the borrower.

Following a series of demands from AIB along with unsuccessful attempts to resolve the matter by the parties, proceedings were issued in January 2017.

Continuation of guarantee

While the borrower and the guarantor did not dispute that the three facilities were refinanced and the money was not repaid, they sought leave to defend the proceedings on a number of grounds including that the guarantees granted were discharged by a material alteration of the underlying three facilities and of the contractual obligations between AIB and the borrower.

The guarantor also placed reliance on how, when the borrower had previously sought further facilities from AIB, it had previously sought separate guarantees, which did not occur in the refinance in May 2013.

In reaching her decision, Ms Justice Costello made specific reference to a clause in the guarantees providing AIB with liberty without consent to determine, enlarge or vary any credit to the borrower.

Lessons for borrowers

This case serves as a reminder to those entering guarantees to be aware of the potential consequences not just in respect of the initial facilities they are guaranteeing, but also potentially in respect of any future refinances which the guarantor may not necessarily be required to consent to or have envisaged at the time of the original guarantee.

Lessons for lenders

For lenders on the other hand, the decision highlights the importance of the clauses that can be found in many guarantees, which may allow the lender to vary the terms of the underlying loan without the guarantor’s consent.

Allied Irish Banks plc v McKoewn & Anor [2017] IEHC 363