Misrepresentation and undue influence

24 Νοέ 2011 Misrepresentation and undue influence

LEASING LIFE  –  The Journal for Asset Finance

December 2011, Vol. 17 – No 219

By Greg Standing
 

Are guarantees worth the paper they’re written on, asks Greg Standing.

Leases of equipment to companies will often be backed up by a personal guarantee from a director to provide the lessor with some comfort should the company default on its obligations. However, a guarantee may be set aside by the court if it was procured by misrepresentation or undue influence of the guarantor.

In The Trustees of Beardsley Theobalds Retirement Benefit Scheme v Yardley, the defendant guaranteed the rent and other obligations of a company under a 15-year lease.

The defendant’s job title was ‘sales director’. He was not a board director, although the claimant was told that he was, as the claimant required the guarantee to be given by a director. He had often witnessed documents for the directors of the company, and when he was asked to sign the document he thought he was simply doing so as a witness. There was nothing on the one page of the document he was shown to indicate the document was a lease or that he was signing as a guarantor. At no point was he told he was doing so.

The company went into administration and the claimant called upon the guarantee. The defendant claimed he had signed the guarantee under the undue influence and misrepresentations of the company’s director and that he had not been given the opportunity to take legal advice.

The court found that the company was in financial difficulties and the director knew how risky it would be to be a guarantor. The director also knew he could pass the defendant off as a director given his job title. He had also misrepresented to the defendant what he was signing.

The court accepted that the defendant had signed the document under the undue influence of the director who was in a position of superiority to him and whom he trusted. The defendant should have had the opportunity to make an informed decision about what he was signing, and the risks involved, or take legal advice upon it.

Despite misrepresentations also having been made to the claimant, it would be untenable to allow the claimant to rely on the guarantee. It was aware of the company’s precarious financial position and should have checked that the guarantor was financially sound. It should have asked the defendant to confirm in writing that he agreed to be a guarantor and knew of the risks.

It should also have sought a signed confirmation from an independent solicitor that the defendant had received appropriate legal advice before signing or had waived the need to obtain such advice. A search of the relevant register at Companies House would also have shown the defendant was not a director. 

Things to consider

Lessors should be alert to these issues when obtaining a guarantee from an individual.

Confirmation that independent legal advice has been taken on the transaction should be obtained to avoid the lessor being fixed with constructive knowledge of any undue influence.

Greg Standing is a partner in Wragge & Co’s finance litigation team

πηγή:  LEASING LIFE  –  The Journal for Asset Finance  (December 2011, Vol. 17, No 219)