In Ulster Bank Ltd v Roche & Buttimer  IEHC 166 the High Court departed from a previous Irish case in deciding that a personal guarantee may not be relied upon by the bank in circumstances where the bank is deemed to have constructive knowledge that the guarantee was entered into as a result of the exercise of undue influence by a party not directly connected with the bank.
Roche ran his motors business through a company, the two directors of which were him and Buttimer, with whom he was in a personal relationship. Buttimer was a director of the company but not a shareholder and she had no material involvement in the business. Ultimately the business ran into difficulties and defaulted on its facilities with the bank. The bank called in the personal guarantees from Roche and Buttimer and issued proceedings against them to recover the monies owed to it on foot of the guarantees. Buttimer defended the bank’s proceedings against her asserting undue influence on the part Roche.
The court found that on the facts of the case Buttimer had been subject to the undue influence of Roche at the time of giving the guarantee to the bank. It then fell to be decided as to the extent to which the bank may find itself unable to rely on a guarantee where it can be shown that at the guarantee was entered into as a result the exercise of undue influence by a party not directly connected with the bank.
The Court decided that the bank had been placed on enquiry of the undue influence of Roche on Buttimer because it was aware that Roche and Buttimer were in a personal relationship, that Buttimer was not a shareholder of the company suggesting the relationship was not commercial, and the bank was not aware of any active involvement by Buttimer in the business.
The Court went on to rule that the bank must take measures to ensure that the proposed guarantor is openly and freely agreeing to the guarantee in circumstances where bank is placed on such enquiry.
Buttimer was entitled to rely on the undue influence which Roche exercised over her as a defence to the Bank’s claim because of the failure of the bank to take any steps to ensure that she was acting freely in circumstances where the bank had been placed on enquiry. Accordingly the bank couldn’t rely on Buttimer’s guarantee. The Court added that its decision was based on the facts of the case and its decision didn’t outline the steps that the Bank should take in such circumstances.