Allied Irish Banks plc vs Paddy McKeown and Adelaide McCarthy [2017] IEHC 363, Costello J. 12 May 2017

On 12 May 2017 the High Court issued a judgment clarifying, amongst other things, the basis on which summary judgment will be granted in circumstances where guarantor approval has not been obtained to a material change to the underlying contractual obligations which are being guaranteed.

Background

By letter of loan offer dated the 20 May, 2013, Allied Irish Banks plc (the "Lender") offered to refinance three facilities of the first names defendant (“Borrower”). The letter stated: -

“The Bank is pleased to offer you the facilities below subject to the terms and conditions set out in this letter and subject to the Bank’s General Terms and Conditions Governing Business Lending.”

Security for the original facility included two letters of guarantee from the second named defendant (the “Guarantor”) for €1,650,000 and interest (the “Primary Guarantee”) and identical guarantee for €40,000 and interest (the “Secondary Guarantee”), both of which were provided in 2009. The Primary Guarantee was held as supporting security for facilities 1 and 2 and the Secondary Guarantee was to be held as supporting security for facility 3. The Guarantor expressly waived her entitlement to take independent legal advice prior to signing the letter which he signed and accepted on the 24th May, 2013.

Issue

Firstly, the Guarantor in this case argued that she “refused” to provide any further guarantees, while the loans of the Borrower were being renewed on a temporary basis and on that basis, she argued that the guarantees be discharged.

Separately, the Guarantor also argued that the guarantees were discharged in circumstances where there had been material changes in the underlying contractual obligations between the Lender and the Borrower. The Guarantor also relied upon the previous conduct of the Lender whereby in the past, when the Borrower sought further facilities, the Lender had sought a separate guarantee for the further facilities. No new guarantee was sought or provided for the 2013 facility.

The Primary Guarantee was an "all sums due" guarantee limited to the sum of €1,650,000. Clause 2 provided that it was to be a continuing guarantee.

Clause 6 of the Primary Guarantee provided: -

“The Bank shall be at liberty without obtaining any consent from the Guarantor and without thereby affecting its rights or the Guarantor’s liability hereunder at any time:-

(i)to determine, enlarge or vary any credit to the Borrower …”

The Lender argued, based on the clauses set out above that it was clear on its face that the Primary Guarantee is a continuing all sums due guarantee up to the amount of €1,650,000 and consequently it was not necessary for it to obtain further guarantees in respect of the 2013 facility. The 2013 facility amounts either to an enlargement or a variation of the Borrower’s credit within the meaning of Clause 6 (i) of the Primary Guarantee in that it refinances three existing facilities and that this clause expressly authorised it to do so without discharging the Primary guarantee.

Decision

Costello J noted that while the agreement of May, 2013 may well constitute a material variation of the facility in respect of which the Primary Guarantee was provided, on its face that does not discharge the guarantee. The Lender was expressly entitled to vary the Borrower’s facility without obtaining any consent from the Guarantor and without thereby affecting its rights or the Guarantors’ liability under the Primary Guarantee.

Costello J went on to further state that "In my judgment, it is clear that the guarantee has not been discharged by the grant of the facility of May, 2013. Neither has it been discharged by the failure of the bank to obtain an alternative or fresh or additional guarantee. There was no obligation on the bank so to do and a failure to obtain a new guarantee can in no way discharge the existing guarantee. It was not a guarantee limited to a specific facility; but rather was a guarantee expressed to be a continuing all sums due guarantee.

The Secondary Guarantee was entered into on identical terms to the Primary Guarantee, save that the limit was €40,000. For the reasons advanced above, the Secondary Guarantee was also found to be enforceable and ultimately the court concluded that the defendants had no bona fide defence and summary judgment was granted.

Key Implications

Although limited to the facts of the particular case, the decision provides guidance on the approach of the courts to challenges to the validity of guarantees where there is a variation to the underlying primary debt obligations.