It is standard practice for UK banks to require anyone giving a personal guarantee whose relationship with the debtor is not purely commercial, typically a wife for her husband’s business, to take independent legal advice and follow the guidelines laid down in the Etridge case .
In a recent case a loan to a hotel development company, of which both the husband and wife were directors and shareholders, was provided on the basis of personal guarantees secured by way of a charge on the matrimonial home. The company ran out funds and the bank appointed Administrative Receivers who sold the hotel leaving a shortfall. The wife claimed that the personal guarantee had been obtained by the undue influence of her husband on whose representations she had relied as regards the funding required to complete the development. She also claimed that the bank had notice of such, had not followed the steps set out in Etridge and, consequently, could not rely upon her guarantee.
The court ruled that the husbands view on the funding required was not misrepresentation but an honestly held forecast or best estimate and the wife must have had reservations about the accuracy. As such she had no grounds to set aside the guarantee. The bank had arranged for the wife to receive independent legal advice and done enough to avoid constructive notice.
This is another example of why a spouse, not genuinely involved with the business, should carefully consider their own personal position before entering into guarantees and charges.
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