To rely on a personal guarantee, make sure you tell the missus

The Message: Banks may face difficulties enforcing personal guarantees

The Case: In Mahon v FBN Bank a husband and wife sought to set aside the bank’s statutory demands for sums claimed under personal guarantees. Mr Mahon was a residential property developer who conducted his business through Criccieth Homes. He was the sole director of this company and his wife was the secretary and sole shareholder.

Mrs Mahon played no part in the management or administration duties. She looked after the couple’s three children and also worked from home as a cake baker and decorator. She was joint owner of the family home, which was worth about £450,000 in early 2008.

In 2007, Mr Mahon approached FBN for funding because the bank said it was experienced in the field and interested in funding development projects. The bank provided loans to the company and obtained personal guarantees.

FBN dealt with Mr Mahon throughout and never sought to write separately to Mrs Mahon. Its solicitors sent the documents for execution to the company’s solicitors and confirmed they required confirmation that the solicitors had explained the meaning of the guarantees to the Mahons.

Mrs Mahon claimed she never received any independent advice. She spent five minutes with the solicitors, with her husband present. She said she felt she had no option but to sign the documentation put in front of her.

In June 2008 Mr Mahon approached FBN for further financing, but the person he had previously dealt with had left. The bank declined on the basis that it lacked experience in the sort of financing that was needed.

Subsequently, the company defaulted and FBN claimed under the guarantees. On 9 October 2009, as the necessary prelude to taking bankruptcy proceedings, it served statutory demands on the Mahons claiming £1,269,000 before giving credit for the properties charged to it.

Both of the Mahons sought to set aside the statutory demands. Mrs Mahon said she had acted under the influence of her husband and not been properly advised. Mr Mahon said the properties were worth more than the debt and FBN had misrepresented its experience.

The Royal Bank of Scotland v Etridge (2001) says there may be undue influence by a husband where a wife stands surety. A bank has to make sure the wife understands what she is being asked to do. The court noted that neither FBN nor its solicitors took steps to ensure the requirements had been met and did not check that Mrs Mahon had been separately advised.

It set aside the statutory demands against her and Mr Mahon. FBN will now have to pursue the court to try to make any recovery from the Mahons. Solicitors acting for lenders and guarantors need to ensure guarantees are understood.

Summing up: Mahon v FBN Bank

• Mrs Mahon said she never had independent advice, so her personal guarantee is invalid.
• Mr Mahon claimed his personal guarantee was invalid because of misrepresentation by the bank.
• The court found both guarantees ineffective and, therefore, unenforceable.

First seen in Property Week, 24 June 2011