A recent case revisited the principles established in a 1997 judgment that where a spouse has granted a security for his or her spouse's business debt, creditors have a duty to warn guarantors of the consequences of entering into the proposed arrangements, and to advise them to take independent legal advice.
The Facts of the Case
Mr and Mrs C had a mortgage with a bank ("Bank 1") secured by an all sums standard security. Mr C entered into business with his son, bottling and selling water from an artesian well, and obtained overdraft facilities from Bank 1, which Bank 1 deemed these facilities to be covered by the all sums security. In 2002 the water business began to fail and Bank 1 sought personal guarantees from Mr and Mrs C. Mr C signed a personal guarantee but Mrs C did not, and the matter was never pursued by the Bank.
Mr C subsequently arranged a remortgage with another bank in the same group ("Bank 2"). The mortgage with Bank 1 was paid off and the standard security and guarantee were discharged, but without repayment of the overdraft facilities provided to the water business. When Bank 1 realised this error they sent out new standard security and guarantee documentation to Mr and Mrs C, under cover of a letter which explained "this replaces similar documentation signed by you in 2002" This included personal guarantees from both Mr and Mrs C. Mrs C signed this new guarantee.
Mrs C later claimed in court that she was unaware of the new personal guarantee, had never taken independent legal advice on it, nor had she been advised to do so. She had been presented with only the signing page of the guarantee and did not know what she was signing. It was also established in court that Mr C had misled his wife about the purpose of the documentation she was signing, claiming it was a remortgage to shorten the term of their secured loan.
Bank 1 subsequently called up the security and Mrs C raised an action against them, arguing they had failed in their duty of care to her. The court considered the principles established by previous 1997 judgment, and ultimately ruled in favour of Mrs C.
The Benefit of Hindsight
Bank 1's error in this case seems to be that it treated the granting of a new guarantee as a mere formality and did not take the care that might have been expected in relation to a new guarantee. However, it is clear from this case that the courts expect the same degree of care from lenders at any stage, and no security exercise should be treated as merely procedural.