Parties should be clear as to what security is required and what has been offered to avoid loans being unsecured.

In National Westminster Bank PLC v Garland and Barron, the defendants' company required a short extension of its overdraft facility. The bank's position was that in agreeing the further facility, it had relied on the defendants' fraudulent misrepresentations that they would agree to execute a legal charge over a property owned by one of the defendants and a third party as security. Drawings on the facility commenced. No legal charge was executed, although the defendants deposited the deeds to the property at the bank. The defendants' business relationship ended and the company was placed in administration by the bank.

The court found that it was likely that none of the parties had any clear idea of the distinction between a legal charge and a security by way of deposit of title deeds. To prove fraudulent misrepresentation, the bank had to show that when the first defendant stated he was willing to execute a formal charge over the property, he had no genuine belief in the truth of that statement. Mere delay in fulfilling a promise was unlikely, without more, to amount to evidence that the promise was given without any intention of fulfilling it. There was insufficient evidence to find that the first defendant had offered to execute a legal charge, as opposed to offering an informal security by way of deposit of the title deeds, let alone that he had been fraudulent.

Things to consider

Request and obtain unequivocal evidence confirming a borrower's intention to create a legal charge to avoid any uncertainty.