A Guarantee Called on a Defaulted Borrower

Defence 1 - spouse's independent legal advice:

• Where a guarantee is given by a person under undue influence and the creditor has notice of the relationship, the creditor may be 'put on inquiry' and must take reasonable steps to ensure the guarantor receives independent advice. This is a procedural protection.
• Whether it succeeds depends on whether the spouse was a co-guarantor or merely consented to a charge over jointly owned property, and whether the bank took reasonable steps (recommending independent advice, requiring a certificate).
• Likely outcome: If the bank can show it recommended independent advice and obtained a solicitor's certificate, the defence fails. If it simply took the signature, the guarantee may be set aside as against the spouse's interest. The bank should check its file.

Defence 2 - variation without consent:

• At common law, a material variation of the principal facility without the guarantor's consent can discharge the guarantee, because the guarantor's risk has changed.
• However, the guarantee contains an express clause permitting variation. Such clauses are generally effective to preserve the guarantee, provided the variation is within the scope contemplated. The clause is the answer to this defence.
• Likely outcome: Defence fails on the strength of the variation clause, assuming the clause is clearly drafted and the variation was not so fundamental as to fall outside it.

Defence 3 - impairment of security:

• A guarantor is discharged pro tanto (to the extent of the loss) if the creditor, without the guarantor's consent, releases or negligently impairs security held for the debt.
• Likely outcome: This is the strongest defence. If the bank delayed enforcement unreasonably and the plant depreciated as a result, the guarantor may claim an offset for the difference between the value realisable with reasonable diligence and the USD 180,000 actually realised. The bank must evidence that its enforcement was reasonable.

Next steps:

1. Assess the file on Defence 1. Locate the independent-advice certificate and the bank's correspondence recommending advice. If absent, quantify the exposure and consider settlement on the spouse's share.
2. Confirm the variation clause covers the actual variations. Obtain the variation letters and check that the interest-rate and schedule changes fall within the clause's wording. If the variation was fundamental (e.g., a new facility), the clause may not save it.
3. Build the enforcement-reasonableness file for Defence 3. This is where the bank is most exposed. Gather:
   • The timeline of enforcement (default date, demand, possession, sale).
   • Valuation evidence at the time of default and at sale.
   • Marketing evidence - was the plant advertised, were multiple bids obtained?
   • Any correspondence with Mr. Okafor about the sale.
4. Quantify the pro tanto offset. If the plant was worth, say, USD 230,000 at default and realised USD 180,000, the guarantor may argue a USD 50,000 offset. The bank should be prepared to concede this if the evidence supports it rather than litigate a weak point.
5. Demand and negotiate. Issue a formal demand for the balance (adjusted for any offset), and open settlement discussions. A negotiated resolution is usually cheaper than litigation.

Evidence discipline: Every step should be documented contemporaneously, because the guarantor's defences turn on what the bank did and recorded, not on what it intended.

Documentation lessons:

• Independent advice: Build a mandatory step into the guarantee process - recommend independent legal advice in writing, require a signed certificate, and retain it on file. This neutralises the 'put on inquiry' defence before it arises.
• Variation clauses: Ensure the guarantee expressly covers variations of rate, schedule, and security, and review the clause whenever the facility is materially restructured. Test the wording against the actual variations made.
• Co-guarantor and spouse consents: Treat consent to a charge over family property as a separate, documented transaction, not a formality.

Enforcement lessons:

• Act promptly and proportionately. Delay in realising depreciating assets (plant, vehicles, stock) creates a pro tanto offset risk. Set internal timelines for possession and sale after default.
• Maximise realisation: Obtain independent valuations, market the asset widely, document competing offers, and record why a sale price was accepted. This is the bank's defence to an impairment claim.
• Communicate with the guarantor. Informing the guarantor of enforcement steps and inviting them to participate reduces later allegations of concealment.

Governance: Add a post-enforcement review to capture lessons and feed them into template revisions and training for relationship and credit staff.