Bank of Scotland v Bennett and another

Husband buying company – Husband and wife executing guarantee and charge over home – Company failing – Bank claiming possession under charge – Whether husband exercising undue influence – Whether transactions manifestly disadvantageousto wife – Whether bank taking reasonable steps to satisfy itself charge properly obtained – Bank’s claim dismissed The first defendant intended to purchase a company in Scotland. His wife, the second defendant, insisted that their matrimonial home was not to used to guarantee any loans to the company and arrangements were made for the home to be transferred into the second defendant’s name only. Subsequently the business was acquired and capital was provided as to £50,000 by the first defendant and £100,000 by South West Investment Fund Ltd (‘SWIFT’). The plaintiff bank provided an overdraft facility of £100,000 secured by a bond and a floating charge over the company’s assets and a guarantee from the first defendant limited to £100,000. The second defendant was given 11.8% of the share capital of the company. The first defendant wished to build a new factory for the company. The bank agreed to increase the overdraft facility to £400,000 requiring, inter alia, a joint and severable guarantee from the defendants for £150,000 and a second charge over the defendants’ home. SWIFT agreed to advance a further £250,000 secured by a fixed heritable security over the new factory, which ranked ahead of the bank’s floating charge and the bank’s standard security (the ranking agreement). The bank instructed the second defendant’s solicitors to arrange the charge over the home. The guarantee and the charge were duly executed by the defendants and the second defendant’s shareholding was increased to 41.5%. However the company failed and the bank appointed receivers. The bank claimed possession of the home pursuant to the charge and judgment against the first defendant was obtained. The second defendant claimed that her signature to the guarantee and the charge had been obtained by undue influence. Held The plaintiff’s claim was dismissed. 1. The pressure and influence exerted on the second defendant to procure her signature were undue and she had been subjected to coercion and victimisation so that she had not acted as free and voluntary agent.The second defendant had made out a good case of actual undue influence: see Bank of Credit and Commerce International SA v Aboody [1990] 1 QB 923. 2. Although the second defendant had shown some degree of independence and had required some persuasion, nevertheless she relied in financial matters on her husband and therefore a presumption of undue influence had been established. 3. The second defendant as the sole owner of the house was putting up the whole of the security even though she owned not more than 11.8% and later 41.5% of the shares. The security she was providing was a substantial and wholly uneconomical programme of investment and there was a high risk of her losing her home. Therefore the transactions were manifestly disadvantageous and sufficient to put the bank on inquiry. 4. The SWIFT ranking agreement and the disparity between the development costs and the ultimate value of the new factory were facts of a special and peculiar nature which were disadvantageous. The bank had failed to communicate those facts to second defendant or her solicitors and therefore the bank had failed to take reasonable steps to satisfy itself that the second defendant’s agreement to provide the guarantee and the charge had been properly obtained. Andrew Clutterbuck (instructed by Underwood & Co) appeared for the plaintiff; Nicholas Yell (instructed by Jenkin Evans, of Reading) appeared for the second defendant.