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Personal Guarantees and independent legal advice

Tuesday September 25, 2012 at 4:23pm

I am often asked if a Personal Guarantee is unenforceable if independent legal advice was not taken before it was signed. The answer, as with many things, is “it depends”.

It is always worth looking to see if the bank or other person or organisation taking the guarantee has followed their own procedures. It is now rare for a bank or other financial institution to make a mistake, but they can happen. They must prove by their paper trail that they have complied with their own procedures. Provided they can show this, they will usually be able to enforce the Personal Guarantee.

In the recent case of National Westminster Bank plc v Alfano and others, the High Court judge found that NatWest had been meticulous with their paperwork, had followed their procedure, and the guarantees were enforceable. The bank’s policy was that independent legal advice was not necessary provided that the guarantor was fully involved in the business concerned, the guarantor had an opportunity to read the guarantee at a meeting with the bank official, and the guarantor signed a waiver saying that they had been advised to obtain independent legal advice.

In this case all but one of the guarantors were directly involved in the business and chose not to take independent legal advice, and the one who was not involved had obtained independent legal advice.

If you have given a Personal Guarantee, but had no involvement with the business concerned, and have not obtained independent legal advice, then there is a very strong possibility that the Personal Guarantee will be unenforceable.

For the organisation taking a Personal Guarantee, warning alarms should always sound if they are looking to take a guarantee from someone who is not a director or shareholder of a business being guaranteed. So the wife or husband of a director should always be asked to obtain independent legal advice before signing and Personal Guarantee, and the guarantee should not become binding unless and until that independent legal advice has been taken.

This is all based on the law of undue influence. Normally it is for the person alleging undue influence to prove it, but in certain cases there is a binding presumption of undue influence. But these cases are quite limited, such as doctor and patient, parent and child, solicitor and client. Husband and wife is not such a case of presumed undue influence, but the courts have held that the nature of the relationship should put a bank on notice, and the bank should take certain steps such as insisting that the wife should take independent legal advice.

The precise nature and format of this independent legal advice has been set out in detail by the court in the case of Royal Bank of Scotland plc v Etridge (No2) a House of Lords decision in 2001.

But if the solicitor advising the guarantor has failed to follow the procedure, unless it is aware of the irregularity the bank is entitled to assume that the solicitor has done his job properly.  In such a case the wife may have a claim against the solicitor but not against the bank.

It is not just husband and wife relations where these rules apply. It is in every case where the relationship between whoever is being asked to give the guarantee and the debtor is non-commercial.

It is always worth taking early advice on the enforceability of a Personal Guarantee. See our fixed fee advice service on Personal Guarantees.

Nigel Musgrove
Business and Litigation Solicitor
Tel: 0845 003 5639

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This blog is not intended to constitute legal advice, nor is it intended to be a complete and authoritative statement of the law, and what we say might be out of date by the time you read it. You should always seek legal advice to confirm whether or how any information in this article applies to your particular situation. We offer a free telephone consultation to discuss your particular circumstances.

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