Guidance related to Rule B2.1: Conflict of interest guidance on corporate guarantees sought by banks

The Professional Practice Committee have considered issues arising out of instructions by banks to solicitors in relation to loans or overdraft facilities being provided to Directors of Companies where the bank are seeking a Guarantee from the Company itself.  Such instructions contain requests for the solicitors' view on whether an opinion expressed in a resolution of the Company under Section 172(1) of the Companies Act 2006 "is justifiable in the circumstances"; and/or state that the bank are "entirely" relying on the solicitors to obtain all necessary documents to ensure that there is no risk of the bank lending being set aside and/or the transaction being deemed voidable or the banks security position generally being in anyway prejudiced if the transaction has been entered into in contravention of the 2006 Act "or any associated reason".  The instructions went on to say that the bank would not be under any obligation or expectation to make any additional enquiries or scrutinise the documentation themselves.

The Committee agreed that imposing such terms and requirements on solicitors creates a conflict of interest between the solicitors and their clients, the bank or its customers.  As the clear intention of the bank is to claim against the solicitor if the bank cannot recover from the company under the Guarantee, solicitors will be concerned about their own exposure in the event of the company's default.

The Society's Practice Rules on Standards of Conduct prohibit solicitors from acting for any client where there is a conflict between the interests of the client and the interests of the solicitor or their practice unit (Rule B1.7).

The Committee's guidance is therefore that solicitors should not accept instructions containing such onerous requirements.

If a solicitor is asked to confirm that a Resolution under the Companies Act has been passed in particular terms, the solicitor should insist on sight of either the signed written Resolution or Notices and Minutes of the General Meeting at which such a resolution was passed, and should not rely only on confirmation from the Directors or Secretary that such a Resolution has been passed.

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