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What are the rights of the Surety (principle) against a bank,

Customer Question

What are the rights of the Surety (principle) against a bank, when the bank`s conduct caused the default and losses, and demise of the company.
What is the case law regarding bank conduct, PG and Surety
Submitted: 2 years ago.
Category: Law
Expert:  Buachaill replied 2 years ago.
1. Can you better explain the situation. Did the bank advance money to the company? Was the personal guarantee given in respect of the debts of the company? In what way did the bank "cause" the default and losses of the company? How was the company trading? What type of business was the company in? Was there any change in risk guaranteed by reason of the behaviour of the bank?
Customer: replied 2 years ago.

Thankyou, I confirm that the bank had guarantees for £380k, In Jan 2010 the retail, high street business suffered major long term road works, x 8 months, destroying businesses. We litigated against the roadwork company and the business insurers.

We were successful in recovery of some of the lost profits, in July 2011. In January 2010 we approached the bank for emergency overdraft facilities. The bank declined, they also declined in April 2010 stating that there was insufficient security available, despite the presence of the government backed EFG enterprise finance guarantee. In December 2010 HMRC commenced recovery proceedings, In November 2011 the bank finally agreed to release £150k of funds using the EFG as security.

By that time the business was insolvent and went into Administration in June 2012, and the business was sold as a going concern.

The claim by the bank that in January 2010 there was insufficient security to make this emergency overdraft, for 8 months, is false. In September 2011 they fully complied with the Bank Lending Code, and the funds were released. There was no justifiable reason not to advance the funds two years earlier. When in 2011 they agreed to lend, the bank took another Guarantee for £150k, on top of the £380k guarantee which they already had. At the time of borrowing we had reduced debt from £380, down to £220k in January 2010. Meaning that they had sufficient security before requiring another guarantee.

The level of risk increased when they refused borrowing, they were very fully aware that the company would suffer severely because of these major roadworks. The bank made no investigation in 2010 about whether we could afford to repay further borrowing, which we could.

The business had also recently won a franchise for a post office, which in 2007 helped the main retail trade to grow, reducing debt month on month.

Expert:  Buachaill replied 2 years ago.
1. there are two principles relevant here. The first one is that the creditor holding a surety should do nothing to interfere with the risk covered by the guarantee. The second principle is that if there is an alteration in the risk covered by the guarantee such that there is now an increased risk covered, the surety is released from his guarantee under equitable principles. The first thing I would say is that a bank is not under any obligation to advance credit to a borrower. The bank can make up its own mind as to whether to advance credit or not. Just because a business needs credit, a bank does not have to advance it. Here, in this situation, the bank can safely decide not to advance credit. The borrowing company's only remedy is to go elsewhere to get that credit. In your situation, the bank cannot be sued for failing to advance credit to the company, just because the company needed it due to the road works.
Expert:  Buachaill replied 2 years ago.
2. Similarly, a bank does not owe a duty to a surety to consider the debtor's welfare when holding the guarantee. Here, the fact EFG funding was available, did not compel the bank, in law, to advance money. The debtor company's remedy was to seek some other financial institution to advance money. Similarly, the bank did not in law have to refuse to seek further guarantees if was to advance money. I know this is not the answer you might wish. However, the law does not offer a solution to banks failing to advance credit to ensure the financial viablility of a business. Nor does the law rescue a surety where a bank has failed to offer credit to an underfunded business.
Customer: replied 2 years ago.

I agree that no bank is ever under a duty to lend, however they are duty bound to comply with the 2009 Bank Lending Code which offers very substantial amounts of protection to businesses who are facing financial difficulty.

The Code requires them to support a rescue package if they believe one will work. They did give the rescue package, two years too late.

The wording of the Code creates a duty. They are duty bound to attend to the "finance application" with care and skill, and act in a timely manner. If they had acted as indeed they did, in 2011, then in 2010 they would have arrived at the same decision that they arrived at in November 2011. ie they advanced the loan.

Thus the allegation is not one of "they are duty bound to lend" as they are not duty bound.

I have issued proceedings regarding the 2010 application for finance and the bank initially agreed to mediate a settlement, then they realised that the future losses were for several Millions, then they have issued a Strike Out Application, to be heard in the near future.

In their Skeleton Argument they correctly identify the two key issues,

1. Was there a duty of care to attend to the 2010 Application for finance, and

2. Would the bank have advanced the funds in 2010 if they had attended to the application with the same care as they afforded the successful 2011 application when at a time when the business was all but insolvent.

The Lending code is very detailed regarding the standards that the bank are expected to engage, and the FCA confirm that they require all banks to fully comply with every aspect of the code, and to act with due care and skill.

Your comments please.

Is there any case law concerning Guarantees relating to the bank increasing the risk to the customer?

Many thanks.

Customer: replied 2 years ago.

Thankyou, Is there any case law concerning the equitable principles of surety.

The bank compels itself to lend in emergency situations, as prescribed in the Lending Code.

If a bank subscribes to the Code, then they are required to lend in such circumstances. However, If no investigation at the appropriate time is made, then clearly the bank will not lend if it does not wish to.

The breach of the code constitutes negligence in certain circumstances, do you agree?

Expert:  Nicola-mod replied 2 years ago.
It seems the professional has left this conversation. This happens occasionally, and it's usually because the professional thinks that someone else might be a better match for your question. I've been working hard to find a new professional to assist you with your question, but sometimes finding the right professional can take a little longer than expected.
I wonder whether you're OK with continuing to wait for an answer. If you are, please let me know and I will continue my search. If not, feel free to let me know and I will cancel this question for you.
Thank you!
Customer: replied 2 years ago.

Hello Nicola,

Thankyou for this. Yes, please do proceed and see what we come up with.

Apologies for the delay in reverting to you.

Regards, Nigel.

Expert:  Nicola-mod replied 2 years ago.
We will continue to look for a Professional to assist you.
Thank you for your patience,
Expert:  Nicola-mod replied 2 years ago.
I apologise as we have not yet been able to find a Professional to assist you. Do you wish for me to continue to search for someone to assist you or would you like for us to close your question at this time?
Thank you for your patience,
Expert:  Nicola-mod replied 2 years ago.

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