Friends liable for undisclosed loan debt

Guaranteeing someone's debt,
Morgan and a group of friends formed a company to buy investment properties. The bank gave the company a loan on condition it was secured by a mortgage over the properties and an unlimited deed of guarantee. The deed of guarantee listed the company and each of the shareholders as both customers and guarantors. This meant each of the guarantors was liable for any of the customers’ debts to the bank.
May 2011

Unknown to the others, two of the company’s shareholders, Alex and Lee, later on took out a personal loan to buy a rental property. They subsequently got into difficulty with repayments on that loan and it went into arrears. The bank wrote to all of the guarantors warning it could look to them to clear Alex and Lee’s debt if it remained unpaid.

Our investigation

Morgan was unhappy about this and complained to us. He believed the bank could not rely on the guarantee because he was not told when he entered into it that he could be liable for any of the customers' future lending.

He also said the bank could not rely on the guarantee because it failed to advise the guarantors about Alex and Lee’s loan. He said he would never have agreed to the bank providing that loan to Alex and Lee had he been told about it.

On the face of it, Morgan was clearly liable under the guarantee, along with the other guarantors, for Alex and Lee’s debts to the bank. The guarantee specified each guarantor could be liable for the future lending of any of the customers. Morgan executed the guarantee in the presence of a solicitor who had certified that proper disclosure about the contents of the guarantee had been made at the time the guarantee was signed.

However, we had to consider whether there was an obligation on the bank to advise the guarantors about Alex and Lee’s loan. We found there was not. Under the Credit Contracts and Consumer Finance Act 2004, the bank was required to provide information about that loan to the guarantors only if it was a consumer credit contract as defined in the Act.

Alex and Lee’s loan was used to buy a rental property, so it was not a consumer credit contract. Even if the bank had been obliged to advise the guarantors of Alex and Lee’s loan, the guarantors would have had no right to veto the loan.


We confirmed that the bank could rely on the guarantee and did not uphold the complaint.

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