Wife’s guarantee to bank unenforceable due to husband’s undue influence
(Syndicate Bank v Dansingani)
Banking & Finance analysis: Ben Archer, barrister, at 4 New Square, examines a High Court decision that a guarantee given by the first defendant company director to secure the company’s liabilities to the claimant bank was enforceable but a similar guarantee given by the second defendant company director, who was the first defendant’s wife, was not enforceable as her execution of it had resulted from his undue influence.
Syndicate Bank (an undertaking of the Government of India) v Dansingani and others  EWHC 3439 (Ch)
What are the practical implications of the judgment?
Dasingani is a useful source of guidance on undue influence, and the circumstances in which it may arise in the context of guarantees and other security given by spouses. It contains helpful reflections in relation to ‘all monies’ guarantees and those cases where one spouse is, in essence, a sleeping partner in the business affairs of the other.
Whilst reaffirming the highly fact-sensitive nature of the jurisdiction, the decision should nonetheless represent a stark warning to lenders. The importance of a proper and careful evaluation, at an early stage, as to whether a lender may be treated as having been put on inquiry of the potential for undue influence cannot be overstated. Where that is the case, the decision further highlights the approach of the court to the steps a lender must take to satisfy itself that the transaction is not tainted, particularly in relation to the need for independent legal advice.
That aside, the judgment also provides some clarity in the hitherto relatively untouched area of a banker’s right of set off, so far as it relates to accounts held in different currencies. Those practitioners who advise on such matters would do well to apprise themselves of the decision.
What was the background?
The defendants were a husband and wife who were director-shareholders of a company which carried on an electronics import/export business.
The company operated a number of foreign currency accounts with the claimant bank and had the benefit of credit facilities on those accounts. The claimant extracted separate, unlimited ‘all monies’ personal guarantees from the defendants in respect of liabilities under those credit facilities.
The two relevant bank accounts were the company’s US dollar account and the Japanese yen account. At all material times, the dollar account held a credit balance, but the yen account was overdrawn. That reflected the business practices of the company: it would pay for goods in yen and sell them for dollars.
The company went into serious decline. That was partly as a result, the court found, of a downturn in the electronics market and the global recession, and partly as a result of the company having unsuccessfully speculated on currency exchange rates.
The company began to regularly exceed the limits of its credit facility. Negotiations were entered into with the claimant for further lines of credit. In consequence, the claimant sought and obtained additional security in the form of a second charge mortgage over the defendants’ jointly owned home.
Ultimately, the company failed to recover its financial health. The claimant demanded repayment of the sums owed, which was not forthcoming. It sought to enforce the guarantees and the mortgage against each of the defendants.
The second defendant’s principal line of defence was that she could not be liable under either the guarantee or the mortgage as they had been procured by the claimant in circumstances where she had been subject of undue influence by the first defendant.
A further question arose in relation to bankers’ rights of set off. The claimant argued that, following its formal demand for payment, it accrued a common law right to set off the credit balance in the dollar account against the overdraft balance in the yen account. The defendants disputed that entitlement.
What did the court decide?
It was common ground that the second defendant had signed both the mortgage and guarantee. In determining whether they ought to be set aside for undue influence, the court directed itself to apply the now familiar principles set out in Barclays Bank plc v O’Brien  4 All ER 417 and Royal Bank of Scotland v Etridge (No 2)  UKHL 44,  4 All ER 449.
Applying the authorities, the court turned to consider the extent to which the second defendant had reposed trust and confidence in the first defendant and whether, on the evidence, it could be shown that her financial affairs were de facto under his control.
It was alleged by the claimant that the second defendant was not a person who could have been unduly influenced. She was an intelligent and independent woman. She was said to be well versed in legal and business matters. It transpired, in a surprising turn of events, that the second defendant was in fact a commissioned notary public in New York State.
That notwithstanding, the court found that the second defendant had never worked outside the home. There was no evidence that she had been consulted as to the company’s business or provided with information as to its financial arrangements. The same was true of the defendants’ personal finances. The first defendant was the sole financial decision-maker and true driving force of the company. He was ‘a dominant personality, as dominant in the business and … as dominant in his relationship with his wife’ (at ). Although the second defendant was a director and shareholder of the company, that was in name only.
In entering the guarantee, the court found that the second defendant had placed complete trust and confidence in the first defendant in relation to her financial affairs. She left the decision-making in his hands, without question, and entered the transactions without any understanding of the benefit or risks to her own interests. The only acts the second defendant carried out were administrative acts of signing documents upon demand by the first defendant, as he required, so as to further his and the company’s business interests.
That did not change in the 15 years between the execution of the guarantee and the mortgage. Whilst the second defendant had initially expressed concern to the first defendant as to the risks of executing the mortgage, she eventually acquiesced, having been misled by him as to apparent assurances given by the claimant in relation to further financial support that would be offered to the company. The court found those assurances had not in fact been given. The question of whether the second defendant had placed trust and confidence in the first defendant at the time of executing the mortgage was therefore ‘inextricably bound up’ (at ) with whether she had been misled as to the risks of doing so. Her consent was given on a false basis as a result of his abuse of her trust and confidence in him. He had opted to further his own business interests to the detriment of her interests.
Put on inquiry
The court found that there was an ‘obvious risk’ (at ) of the first defendant abusing the relationship of trust and confidence with the second defendant. The next question was whether the claimant had been put on inquiry of that risk. That turned on whether the claimant knew that, in executing the guarantee and mortgage, the second defendant was, in truth, standing as surety for the first defendant’s debts.
The claimant argued that it had not been put on inquiry: the defendants held equal shareholdings in the company and were both directors, and the debts of the company were, in effect, joint debts. But, applying the dicta of Lord Nicholls in Etridge at , it was held that the identity of those who actually controlled the company’s business was of relevance. The mere fact that the second defendant was a director-shareholder was not a reliable indicator of who truly controlled the company.
As stated, in reality the first defendant was the sole controller of the company. The court accordingly had no difficulty in determining that the second defendant, in executing the guarantee and mortgage, was standing as surety for the first defendant’s debts and that the claimant was fully aware of that fact. It was held that where a lender knows a wife is a director-shareholder in name only it would be ‘contrary to common sense to treat them as believing that the wife was fully involved and up to speed with the company business and financial situation’ (at ).
atter therefore turned upon whether the claimant could demonstrate it had taken reasonable steps to satisfy itself that there had been no undue influence, and that the second defendant had entered into the transactions of her own free will.
Prior to its execution, the claimant did not suggest that the second defendant take legal advice. It knew independent legal advice had not been obtained. It did not meet with her, nor directly correspond with her, as to the nature of the transaction. All correspondence was with the first defendant, and he was used as a conduit for communications with her. It was held that the second defendant could not have had a proper understanding of the terms and effect of guarantee at the time of its execution, or the risks generally of executing an unlimited guarantee.
The claimant, however, sought to rely upon a series of post-execution communications, which it said demonstrated that the second defendant did have a proper understanding of the transaction and had entered into it of her own free will.
Following the execution of the guarantee, the claimant – no doubt having concerns as to its validity – wrote on a number of occasions to the first defendant seeking confirmation that the second defendant had, in fact, sought independent legal advice and that she was fully aware of the guarantee’s terms and effect. That culminated in a letter to the claimant, signed by the second defendant, confirming that the implications of the guarantee were known to her, and that she did not see the need to obtain any further legal advice on the subject.
Perhaps surprisingly, the court rejected the argument that the post-execution correspondence was sufficient to discharge the claimant of its obligations to take reasonable steps or that otherwise the second defendant should be estopped from asserting undue influence.
Indeed, the signing of that letter was simply a further episode in the first defendant’s assertion of dominance and control over the defendants’ financial affairs. The court found that he was keen to avoid the expense of paying for a lawyer. He, or the second defendant’s brother, had drafted the letter. The letter had been placed in front of her. She had signed it because she trusted the first defendant. In short, she did what she was told and thought to ask no questions of it.
In that light, the court held that it could not be said that the claimant had taken reasonable steps so as to see that the second defendant had entered into the transaction of her own free will, unaffected by the first defendant’s influence. The decision to enter the guarantee was not an independent one. The claimant had doubted the validity of the guarantee from the outset, and it had not taken proper steps to rectify the position.
The guarantee had been tainted by undue influence and the court set it aside as against the second defendant.
The position as to the mortgage was more straightforward. The claimant conceded that it was in considerable difficulty in demonstrating that reasonable steps had been taken. Although the mortgage contained a warning on its front, suggesting that legal advice be taken, the claimant took no steps to ensure that the second defendant had a proper understanding of the transaction or that she was entering it of her own free will. It had not communicated directly with her in relation to the mortgage, nor had it suggested that she take independent legal advice.
The court ultimately set aside the mortgage as against the second defendant, holding (without hearing argument on the point) that the defendants’ joint interest in the property had been severed at the time of its execution.
The judge rejected that there had to be a causal link between the undue influence and the execution of the document in question, in the sense that the second defendant would have to show that had she been fully informed she would not have entered into the transaction. Causation was, in that sense, not a part of the principles relating to undue influence.
Whilst it is trite that a bank has a common law right to combine accounts held in the same currency and in the same jurisdiction, there was no reported authority on the question of whether the banker’s right of set off would entitle the claimant to set off accounts maintained in different currencies, such as the company’s yen and dollar accounts.
The court found that the answer was to be found in ‘the way in which the parties conducted themselves during the course of their banking relationship’ (at ). The company had maintained separate accounts for its own commercial reasons. But in all material correspondence with the company, the claimant had expressed the liabilities of the company by netting off the credits and debits across all of the accounts against each other.
The claimant had expressly referred to its right of set off and/or combination in a number of the documents, and ‘was at pains’ to explain that the company’s net liability would increase as a result of currency fluctuations on the yen account (at ).
In those circumstances, the court held that the claimant was entitled to set off the various accounts to calculate the net sum owed.
Court: High Court, Chancery Division
Judge: His Hon Judge Dight CBE
Date: 12 December 2019
Interviewed by Robert Matthews for Lexis PSL.