Court of Appeal: Guarantee provided by farmer for son’s €1m loan upheld

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Background

In one of two concurring judgments of the Court of Appeal, Ms Justice Finlay Geoghegan outlined the circumstances which lead to the proceedings.

In October 2005, ACC Loan Management Ltd offered credit facilities of €680,000 to Mr John Connolly for the purpose of purchasing land with planning permission for five properties. This loan was accepted and in November 2007, ACC offered further facilities of €613,000 for the purpose of building the first of the five houses and associated costs.

The security to be given for each loan included a guarantee and indemnity from Mr Maurice Connolly, the first named defendant’s father and the appellant in the Court of Appeal proceedings; supported by a first legal mortgage in charge on the 35 hectares of agricultural lands in Co Wexford.

ACC contended that the father granted to it a first guarantee and indemnity in November 2005 and a second guarantee and indemnity in November 2008.

There was default in repayment of the loans, and letters of demand were sent to the son and the appellant.

In May 2013, ACC issued a summons seeking judgment against the son as principal debtor and the appellant as guarantor pursuant to the first and second guarantee.

In due course ACC issued a motion seeking liberty to enter final judgment against both defendants.

In February 2015, the High Court granted summary judgment in favour of ACC.

Court of Appeal

Appealing the judgment of the High Court, Mr Maurice Connolly “submitted that the trial judge was correct and followed the judgments in Ulster Bank v. Roche and Buttimer and the House of Lords in Etridge in determining that even in the absence of any claim of undue influence, those judgments provide that where a bank is on notice of a familial relationship, between the borrower and the guarantor, such as between the father and son herein, that the bank is under an obligation to take some steps to ensure that the guarantees are being freely entered into by the guarantor”.

Alternatively “the bank is under an obligation to ensure that the guarantor is given independent legal advice prior to executing the guarantee”.

“…the fact that the same solicitor was acting both for the son and the appellant… the appellant had an arguable defence that the bank was in breach of its obligation to him and that such constitutes an arguable defence against the bank enforcing the guarantee against him”.

ACC submitted “that the appellant had not adduced any evidence or otherwise sought to ground a defence that he had entered into the guarantee under the undue influence of his son”. Further, it was submitted that “the trial judge erred in law in determining that the relationship between the appellant and his son as principal debtor placed the bank on inquiry and under an obligation to take some reasonable steps to ensure that the guarantees were freely entered into by the appellant”.

The appeal primarily concerned the question as to whether a guarantor who does not contend that he entered into a guarantee under the undue influence or by reason of some other wrong of the principal debtor, such as misrepresentation, nevertheless has an arguable defence against a claim made by the creditor pursuant to the guarantee upon the grounds that the creditor, being on notice of a family relationship between the guarantor and the principal debtor, was obliged to take steps to ensure that the guarantor understood the nature of the guarantee and/or freely consented to the giving of the guarantee.

The principle question to be determined by the Court of Appeal was; where a parent guarantees a substantial business loan for one of his or her children, is the lending bank obliged to take appropriate steps to ensure that the surety has received independent legal advice prior to the execution of the guarantee?

In his concurring judgment, Mr Justice Gerard Hogan considered:

Justice Geoghegan dismissed the appeal finding that Mr Maurice Connolly had not raised any arguable defence in respect of the guarantee.

Justice Hogan recognised that in de Kretser, he was “the dissentient who argued that a surety had raised an arguable defence to the effect that the Bank was under an affirmative duty to see that she was independently advised”.

However, he was persuaded by the fact that this had been rejected by the majority of the Court in de Kretser, and that the majority in de Kretser was accepted in the unanimous decision in Curran.

As such, he stated that the issue had effectively been determined in previous decisions, and submitted to the “settled views of the majority of that Court as reflected by stare decisis”.

Accordingly, the appeal was unanimously dismissed.