No undue influence nor unconscionable bargain in shareholder guarantees

In this case1, the High Court was not satisfied that there was any undue influence exerted by a father in getting his daughters to guarantee a loan for their hotel business, nor that there was any unconscionable bargain, and the lender was not on inquiry as to either possibility.

The daughters were the sole shareholders and directors of a company which operated a hotel in Wanganui. A brewery, which supplied products to the hotel, made loans of $350,000 to the company and guarantees were provided by the daughters and their father. The company subsequently defaulted and demand was made on the daughters as guarantors.

At the times of the loans, the daughters were aged 22 and 23. They claimed that they had little or no previous experience in the hotel industry and that their father was the driving force in purchasing and setting up the business.

The Court had to decide whether the transactions could be set aside by reason of undue influence. The daughters claimed that their father had pressured them into signing the guarantee and knowledge of his undue influence ought to have been imputed to the brewery .

The Court held in relation to undue influence that:

1. it was not satisfied that there was undue influence and, even if there was, responsibility for the father's undue influence could only be imputed to the brewery if the brewery was put on notice;



2. a creditor will be put on inquiry where there is a relationship of trust and confidence between a borrower and a guarantor - however, here the borrower was a company and so the relationship was clearly a commercial one;



3. the transaction was manifestly and excessively to the financial advantage of the daughters as the guarantee made the loan to their company possible - the father had no interest in procuring the guarantee as he did not personally stand to gain anything from the loan;



4. since the borrower and the guarantors had essentially the same broad interests, there was nothing to alert the brewery to any risk of undue influence; and



5. the guarantee itself was a part of a completely usual everyday arrangement where the shareholders of closely-held companies are required to give guarantees.

The daughters also argued that the transaction constituted an unconscionable bargain. In response to that claim, the Court was of the opinion that:

1. even if the daughters were in a disadvantaged position because they had no previous business experience, there was nothing before the Court to show that the brewery had knowledge of this; and



2. there was no inadequacy of consideration as the daughters stood to gain all the benefits from the loan as shareholders and directors.

 

1 New Zealand Breweries v Jays & Ors (High Court, Wanganui, 14 December 2004)

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