Sins of the Father: can a guarantor avoid liability by claiming to have been under ‘undue influence’ of a family member?5 October 2020

The parties’ arguments

In this case, both sons were joint shareholders and co-directors of the borrowers’ parent, North Star Maritime Holdings Limited, which had given corporate guarantees of the loans. However, their case was that the claimants were nevertheless put on inquiry as to the influence they alleged their father exerted over them. They relied on the fact that the claimants had dealt primarily with their father, who had worked for over 40 years in the industry. They also relied on an email sent to their father by GMTC LLC, a Greek based advisory boutique that had sourced the transaction for the claimants. In the email, GMTC had made known the claimants’ requirement for the sons to give guarantees in view of their co-ownership of the holding company, although the email commented that the father would say that the borrowers’ business was ‘ultimately all him’. The claimants had not been made aware of this email at the time, but had to accept, for the purposes of the summary judgment application, that GMTC had sent it as their agent.

The claimants submitted that they were nevertheless not put on inquiry as to potential undue influence and, further, that there was no actual undue influence. The claimants argued that they were not put on inquiry as it was entirely natural for the sons, as owners and directors of North Star, to give guarantees of loans advanced, initially, to refinance other loans from different lenders of which they had also provided personal guarantees. As such, it could not be said that the relationship between the debtors (the borrowers) and the sureties (the sons) was not commercial. Nor could it be said that the transaction was not to the sons’ financial advantage. Having failed to advance a case of any overt acts of improper pressure or coercion by their father, the sons could not show actual undue influence, and the fact that Tahir wielded considerable influence over his sons did not suffice. In short, the sons were not alleging any ‘conscious act of wrongdoing’⁴ by their father.

The sons contended that the fact the loans were for significant sums which, they claimed, substantially exceeded their assets ‘and so could ruin them’ sufficed to put the claimants on inquiry. Further, the fact that the sons were the 100% owners and directors of North Star did not, they said, assist the claimants because such interests were “not a reliable guide to the identity of the persons who actually had the conduct of the company’s business” (per Lord Nicholls of Birkenhead in Etridge). They also relied on another authority suggesting that a bank is put on inquiry in a case where the guarantor is a director and/or shareholder but does not have substantial involvement in the business⁵. The fact that their father was, as they described him, an ‘aggressive and domineering man’, who they alleged ‘completely controlled the business’ and caused their ‘unthinking and unquestioning approach to signing documentation placed in front of them’ sufficed to show his undue influence over them.

Lessons learned

Personal guarantees are not infrequently taken in ship financing transactions, and often are taken from individuals in family-owned businesses. This case illustrates the importance of giving consideration to the Etridge guidelines when seeking guarantees from parents, spouses and their (adult) children or other family members, especially where it is unclear whether or to what extent they are actively involved in the business. In this case, in which this firm had not advised on the original loan transactions, the claimants had not been advised of the need to take such protective steps, enabling the sons later to raise undue influence defences, albeit unsuccessfully.

At the outset of any loan transaction, for a lender to require a personal guarantor to take independent legal advice on their intended guarantee and to have such guarantor’s solicitor confirm the giving of such advice is not an onerous step to take and has habitually and routinely been taken in the residential mortgage context for the past 25 years. The alternative would be for the lender to have a private meeting with each such guarantor to warn them of the risks and urge them to take independent legal advice conduct, which most lenders would be loath to do, or to conduct considerable due diligence to satisfy itself that there is no such risk, a process which may be less than fully reliable, in each case with the risk of litigation down the line if the loan goes into default and calls are made on the guarantees.