By Frank Wall, Trainee Solicitor, Insolvency and Corporate Recovery Unit
The High Court judgment of Mr. Justice Clarke in Ulster Bank Ireland Limited v Louis Roche & Another dealt, principally, with the extent to which a bank may find itself unable to rely on a banking contract (in this case, a guarantee) where it can be shown that the contract was entered into as a result of the exercise of undue influence by a third party not directly connected with the bank.
In this case, the first named defendant (Mr. Roche) ran a motor business through a company called Louis Roche Motors Limited. Mr. Roche and the second named defendant (Ms. Buttimer) were partners in the personal sense of that term. Although Ms. Buttimer had no shareholding in the company and was not involved in running the company, she became a Director. When Mr. Roche transferred his banking business to Ulster Bank, one of the terms imposed was that Mr. Roche and Ms. Buttimer execute guarantees for the liabilities of the company.
Subsequently, both guarantees were called in by Ulster Bank, and proceedings against the defendants seeking to recover the monies guaranteed were commenced. Judgment was obtained by Ulster Bank against Mr. Roche but a dispute arose as to whether or not Ms. Buttimer was liable on foot of the guarantee. Two defences were advanced by Ms. Buttimer to Ulster Bank’s claim.
The first defence concerned a challenge to the circumstances surrounding Ms. Buttimer’s execution of the guarantee. While Ms. Buttimer accepted that the signature on the guarantee was hers, she asserted that she had not signed the guarantee in the presence of Ms. Sinead O’Connell, the Ulster Bank employee who purportedly witnessed Ms. Buttimer’s signature. The court stated that there was no requirement that a guarantee be witnessed. Further, the court rejected the argument put forth by Ms. Buttimer that by producing a standard form of guarantee bearing the statement “in the presence of” prior to leaving a space for the witness to sign, Ulster Bank had accepted an additional advisory responsibility or duty to Ms. Buttimer. In conclusion, the court held that even if the guarantee had been signed in the manner claimed by Ms. Buttimer, that fact would not have afforded her a defence.
The second defence concerned the question of undue influence. Ms. Buttimer contended that she was under the undue influence of Mr. Roche at the time she signed the guarantee. Having heard evidence on that point, the court found that at the material time, given the abusive nature of the relationship between the defendants, Ms. Buttimer had signed the guarantee under the undue influence of Mr. Roche.
The court then had to consider the legal question as to whether or not there were sufficient circumstances which would allow Ms. Buttimer to have the guarantee set aside. The court stated that the main issue in that regard was the existence or otherwise of constructive knowledge of undue influence on the part of the bank. In considering the question of constructive knowledge, the court first had to ask what factors would place a bank on inquiry and secondly, the court had to consider the nature of inquiry or action which a bank might then be required to make.
The court referred to the only jurisprudence in this jurisdiction on the issue at hand, which was the decision of O’Donovan J. in Ulster Bank Ireland Ltd v Fitzgerald & Anor. In that case, O’Donovan J. held that a bank was not put on inquiry simply because a wife guaranteed a loan to her husband’s business. The court stated that if it were to follow the decision in Fitzgerald, Ms. Buttimer’s defence would fail. However, counsel for Ms. Buttimer relied on a decision of the House of Lords in Bank of Scotland plc v Etridge (No. 2) (2002), which clarified the law in the UK relating to third party undue influence. The judgment in Etridge enumerated situations which would place a bank on inquiry. These included scenarios where a wife stood surety for her husband’s debts and where unmarried couples stood surety for each other’s debts in circumstances where the lender was aware of the relationship.
The court did not follow the judgment of O’Donovan J. in Fitzgerald and instead applied the general principle in Etridge to the facts of the case before it. Taking all of the circumstances of the case into account, the court was satisfied that Ulster Bank was on inquiry in respect of Ms. Buttimer’s guarantee.
Further, although the court held that while a bank that was placed on inquiry was obliged to take at least some measures to seek to ensure that the proposed surety was openly and freely agreeing to provide the requested security, because Ulster Bank had taken no such steps in this case, Clarke J. was of the view that it was unnecessary to consider the precise level of steps a bank was obliged to take once it was put on inquiry.
The court concluded that Ms. Buttimer was entitled to rely on her defence of undue influence. Ulster Bank’s claim, therefore, failed.
For further information please contact Harry Fehily, Managing Partner, of our Insolvency and Corporate Recovery Unit.
A bank may find itself unable to rely on a banking contract (in this case, a guarantee) where it can be shown that the contract was entered into as a result of the exercise of undue influence by a third party not directly connected with the bank.
A bank must consider whether they have constructive knowledge of undue influence in respect of persons entering into a guarantee. If the bank considers itself as put on inquiry they should consider the nature of inquiry or action which it might then be required to make.