B2.1: Conflict of interest guidance on guarantees

Solicitors should recognise that, in general terms, there is a clear conflict of interest between a borrower and a guarantor. There are only limited circumstances where such a conflict will not, in fact, arise and where it may be appropriate to act for both. Your attention is drawn to the terms of Rule B1.7 and Rule B2.1.

There is a useful, fuller discussion on this topic contained within A. Paterson and B. Ritchie, Law, Practice and Conduct for Solicitors (2nd edn, 2014) at paragraph 7.17 on page 220.

This guidance touches on the principles discussed and provides a non-exhaustive set of examples where conflicts can arise.

Independent advice

Solicitors should be aware that, even if initially satisfied that the circumstances are such that they could properly act for both borrower and guarantor, the lender may have requirements which make that inappropriate. For example, institutional lenders often require that a guarantor must take ‘independent’ advice. If this applies, then the solicitor will have no option other than to require the guarantor(s) to take advice from another firm (or firms as may be required).

It is a common misconception that – with the lender’s consent in place – having a different solicitor from within the same firm give advice to the guarantor(s) resolves this issue. This is not the case and the firm should not act as the advice would not be truly ‘independent’.

Some common examples of where conflicts arise

• When one member of a family is seeking to borrow money and another family member (or friend) is asked to guarantee the loan there is always going to be a conflict of interest. In situations such as these the prospective guarantor should be advised to seek their own independent advice.
  
  
• In a situation where shareholders are being asked to act as guarantors, solicitors will need to consider what shareholding each potential guarantor owns and, where appropriate, what profit share is therefore applicable.
  
  This is an important consideration as, for example, it would not be appropriate to act for both a borrower and a group of guarantors if there is an unequal shareholding or profit share but joint and several guarantees are being granted by them.
  
  
• A conflict of interest arises where either one partner offers a guarantee (or standard security) over subjects they own or where there is a separate enterprise and a partnership comprised in part of partners who are not involved in the new enterprise is asked to provide a guarantee.
  
  This commonly occurs with farming partnerships, where all parties can be members of the same family albeit different generations, and also with wind farms. The principle remains the same and it is a conflict to act for both parties.

A less common example of where a conflict can arise

Solicitors can receive instructions from lenders in relation to loans or overdraft facilities being provided to Directors of Companies where the lender is seeking a Guarantee from the Company itself.

Such instructions can contain requests for the solicitor's 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 lenders are "entirely" relying on the solicitors to obtain all necessary documents. This is an attempt, on the part of the lender, to ensure that there is no risk of their lending being set aside, the transaction being deemed voidable or their security position generally being in anyway prejudiced if the transaction has been entered into in contravention of the 2006 Act "or any associated reason".

These instructions can include statements to the effect that the lenders would not be under any obligation or expectation to make any additional enquiries or scrutinise the documentation themselves.

Imposing such terms and requirements on solicitors creates a conflict of interest between the solicitors and their clients, the lender or its customers. As the clear intention of the lender is to claim against the solicitor if it 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).

Therefore, solicitors should never 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.