This is a piece of case law which becomes relevant whenever security is being taken and one of the providers of that security is not directly related to the borrower. The most common circumstance is where a husband & wife own a property which is being used to secure the business borrowing of a company where only the husband is a director.
The term ‘Etridge’ is used to describe these transactions and arises from the case of RBS vs Etridge. In this case Mrs Etridge had contested RBS’s right to enforce their security because she had been under undue influence. The case is lengthy and is one of several cases where the court was asked to rule on a lender’s ability to enforce security.
The key outcome is that where a scenario as above occurs then the lender must assume undue influence exists and must prove that it has been addressed and is not present. The key is that the onus has shifted.
Lenders had typically relied on a solicitor to provide independent legal advice to the third party provider of security. The solicitor would give the lender a letter to say advice had been given, at that point the lender would assume no undue influence and that their obligations had been met. In the case of HSBC vs Brown this was contested by Brown.
In this case Mrs Brown had given her property to secure the borrowing of her son, her son was living in her property and Mrs Brown had long since moved out. To all intense and purpose Mrs Brown considered the property as belonging to her son. Where Mrs Brown contested things was that whilst a solicitor signed off that she had received independent legal advice, she said that no advice had been given. In addition the same solicitor who provided the advice had acted for her son in relation to the bank loan.
In this case Mrs Brown had also contested that HSBC had not provided her with any paperwork about the loan prior to her signing at solicitors, nor had HSBC asked her for her choice of solicitor. Further, whilst the forms were witnessed by a solicitor no advice had actually been given and no invoice raised against Mrs Brown for the advice.
These two cases now form the Etridge issues which secured lenders seek to cover, it is why the paperwork and processes for secured business lending are what they are.
The Lender’s Duties Under Etridge
Under the Etridge principles the lender must ensure that independent legal advice is given, that the documents and seriousness of them are explained and confirm that no conflict of duty or under influence exists. They must also provide clear paperwork to the person providing the security.
Etridge also sets out the requirements which must be fulfilled by the solicitor. This includes any conflict of duty, explaining the reason for the legal advice and meeting face-to-face. During the meeting the nature and seriousness of the documents should be explained, risks outlined and it should be made clear that the decision should only be taken by the surety.
For borrowers who are using security to support commercial borrowing then it can help to know why you are being asked to do the things you are. For many SMEs there is a crossover between business and personal lives, husband & wife businesses and family businesses are especially open to Etridge issues.
If a lender is asking many questions and insisting on legal advice then it is not just to be thorough, there is a firm legal basis to it.
For any questions about commercial borrowing or how it works then please get in touch.
By Dave Farmer