When and why is
independent legal advice (“ILA”) required? This can seem a bit of a mystery to
the individuals who are being required to obtain this by a bank.
A bank or lender,
when put on enquiry as to the possibility of undue influence or misrepresentation
to an individual by a third party will usually insist they take ILA.
For example, where
a spouse offers to stand as guarantor for the debts of their partner or their company
or if a loan is being made from the “bank of Mum and Dad” to assist with a
house purchase and there is a bank mortgage.
During the 1990s, many
people who had given guarantees found themselves sued by banks to make good on
their financial promises. We at Mundays defended a number of individuals in
those circumstances where it was quite clear our clients had signed up to their
obligations without legal advice and had been blissfully unaware of the full
implications, including the loss of their family homes. There were many similar cases at the time. In
one, Barclays Bank Limited v O’Brien, the Supreme Court, (then the House of
Lords), establishing the principle that a bank or lender will be fixed with
constructive notice of presumed undue influence in certain circumstances, such
as those outlined above. In those situations, the bank would be unable to
enforce its security unless before taking that security, it had made sure the
individual involved had not been subject to undue influence. The one clear
route to do that is to ensure that the individual had taken ILA in accordance
with the guide rule set out in the later House of Lords case of Etridge.
The bank will
require ILA to ensure it is protected from the risk of being unable to enforce
its guarantee or security; to protect its own position.
When a solicitor
gives a certificate to a bank that ILA has been given, the bank might have a
right of action against the solicitor if the solicitor has not given the advice
properly. A solicitor cannot simply sign
a certificate to say that ILA has been given therefore unless it has indeed
been provided in accordance with the guidelines in the Etridge case.
The Etridge rules require ILA meetings to be face to face, not over the phone, and be without the presence of anybody else in the transaction involved. This is to ensure the individual fully understands their obligations both obvious in the immediate documentation they are signing, but also incorporated in what are usually references to many other documents, depending upon the nature of the transaction.
It is not the role
of the solicitor giving ILA to analyse the commercial viability of the
transaction. Whether or not a client has
an appetite for that risk is clearly their personal decision.
There must be sufficient discussion at the meeting for the solicitor to be sure that the client receiving the ILA understands their legal obligations and, most importantly, what happens if things go wrong.
process of having an independent legal adviser may seem lengthy and cumbersome,
the Supreme Court has devised it as a protection for individuals. Sometimes even those who do not view
themselves as vulnerable discover as a result of the ILA process that they had
not appreciated the implications of signing up
Whilst the Bank will
request it for its own protection, it is therefore a useful step to protect the
individual, as the Supreme Court intended.
It should be seen as a positive tool to prompt a review of what protection may need to be put in place before or at the same time as the arrangements that are being contemplated. For example, life assurance or key man insurance may assist. Is there a need to ensure wills, Powers of Attorney and any corporate documentation are in line with the potential outcomes and would allow the situation to be managed in the event of death or disability?
ILA advice sessions allow the consideration and mitigation of potentially negative outcomes as an insurance while planning for the success or positive expectations that are usually the motivating factor triggering the ILA scenario in the first place.
For more information please contact Fiona McAllister, Partner in our Corporate & Commercial team.
The contents of this article are intended as guidance for readers. It can be no substitute for specific advice. Consequently we cannot accept responsibility for this information, errors or matters affected by subsequent changes in the law, or the content of any website referred to in this article. © Mundays LLP.