Independent Advice for Borrowing

Most lenders will require security for any finance which they provide. Sometimes that security can or has to be provided by someone who is not taking out the loan or is not directly responsible for the financing facility.

For example in a family environment a wife may be asked by a lender to provide the matrimonial home as security for the business debts of the husband.

There is a strict code of conduct for lenders who require such third party security. Banks will require the third party to seek independent legal advice about the implications of supporting such borrowing. There is also case law which sets out a framework for what is required in such circumstances to ensure that the security is not provided under undue pressure.

The circumstance where a private individual offers collateral for someone else’s business debts is covered by the leading case of Etridge. This was decided by the House of Lords (Royal Bank of Scotland plc v Etridge (No.2) and related cases HL, TLR 17.10.01 or [2001] 3 WLR 1021. The judgement sets out specific steps which lenders and legal advisers must follow. Essentially this is to demonstrate that there has been no “undue influence”, primarily by the borrower but also by the lender.

These steps include the following:

  • The lender must write to the provider of the surety or collateral instructing that person to take legal advice
  • The lender should request details of the legal adviser chosen. This can be the same legal adviser as used by the person taking out the loan. If it is then that solicitor will have to decide whether there is any potential conflict of interest
  • The lender must then provide financial details about the commitment being given and any other relevant information about the circumstances of the loan
  • The lender must also provide the independent legal adviser directly with any information which might indicate that there are influences or pressures on the third party to provide security
  • The independent legal adviser must talk with the third party providing security separately from the borrower to be certain that no undue pressure is being exerted
  • The adviser must explain full details of the transaction and its implications if the borrower fails to make repayments
  • The adviser must also offer to negotiate or intervene with the lender on behalf of the person providing surety

All of the above must be documented and the provider of security must sign to acknowledge that a full explanation has been made and that the risks are fully understood and accepted.
The requirements for “Etridge advice” may not be as rigid if the surety for a loan is being provided as part of a commercial transaction, where the provider of the surety has some financial interest in the transaction. The risk of “undue influence” is considered to be less. For example a shareholder director may be required to provide a personal guarantee for a business loan for his company. However, the same principles should be followed where security is provided for finance and where there is any potential divergence of interests.

 

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How we can help

If you or your business need advice about providing security for monies borrowed by another person, another business or even a shared enterprise then please get in touch.

We can explain the implications of complex documents in a straight-forward way so that you can take an informed decision on whether you wish to offer security.

We will also discuss with you any consequences of not providing security, whether for you or for the third party to whom you are considering providing support.

If you do wish to proceed with providing security for a loan which is taken out by someone else, then on your behalf we can then provide the written reassurance to the lender in a format that is required.

If you would like help with either commercial or residential finance related issues please contact our team.

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