Greene King Plc v Stanley & Ors

A creditor may release a principal debtor under an individual voluntary arrangement while reserving rights against a surety. The reservation need not appear solely in the arrangement document; the court may consider the surrounding dealings and communications, including the creditor’s voting instructions and the proposal.

In cases involving a guarantee or charge over a family home, a relationship of trust and confidence and a transaction calling for explanation may raise an evidential presumption of impropriety. That presumption is not itself a finding of undue influence. The court must determine the allegation on the totality of the evidence. Material misrepresentations which create a false impression of the extent or duration of the risk may establish equitable wrongdoing. A lender which fails to take appropriate steps, or relies on materially inadequate independent advice, may have constructive knowledge of the wrongdoing.

Greene King plc lent £80,000 to David Stanley. His parents, Alan and Doris Stanley, charged their home as security. David later entered an individual voluntary arrangement under Part VIII of the Insolvency Act 1986. Greene King supported the arrangement while stating that it retained its rights against the parents’ property.

The county court dismissed Greene King’s claims and ordered the charge to be set aside. It held that completion of the IVA released the parents and that Greene King had constructive knowledge of undue influence and misrepresentation. Greene King appealed on both issues. The central questions were whether the IVA reserved Greene King’s rights against the sureties and whether the charge was enforceable in light of the equitable wrongdoing.

1. Appeal dismissed. Greene King’s rights against Mr and Mrs Stanley were preserved, but the charge was nevertheless unenforceable because the Etridge issue was decided against Greene King.
2. Under the general law, release of the principal debtor ordinarily discharges a surety. That rule is subject to an effective reservation of the creditor’s rights. There is no material distinction for this purpose between a surety and a co-debtor. The authorities, including Kearsley v Cole, Bateson v Gosling and Cole v Lynn, established that a reservation may preserve the creditor’s rights and the surety’s right of indemnity against the principal debtor.
3. The court was entitled to consider the circumstances surrounding the IVA. The statements by Greene King’s solicitors, communicated to the insolvency practitioners and David Stanley, together with Greene King’s proxy, conclusively established a reservation of rights. The reference in paragraph 8.1 of the proposal to the parents’ guarantee and charge also put creditors on notice of the security. The judge had therefore erred in applying the parole evidence rule to exclude the correspondence.
4. On the Etridge issue, the trial judge’s findings of fact were amply supported and could not properly be challenged. The relationship between the parents and their son was one of trust and confidence. The charge over the parents’ only significant asset for their son’s business venture plainly called for explanation, giving rise to an evidential presumption of impropriety.
5. The presumption was not a substitute for a finding of actual wrongdoing. However, the judge’s findings established material misrepresentations which created a false impression about the extent and duration of the risk. Those misrepresentations were an effective cause of the parents’ decision to execute the charge.
6. Greene King had taken no steps to ensure that the risks were explained or that separate advice was obtained. Even if it could rely on the solicitor’s involvement, the advice was materially deficient and given without knowledge of material facts. Greene King therefore had constructive knowledge of the impropriety, and the charge was properly set aside.

Crane J and Tuckey LJ agreed with Parker LJ. The order was: appeal dismissed with costs.

• Court of Appeal (Civil Division): dismissed Greene King’s appeal from the order of His Honour Judge Anthony sitting at Brighton County Court. The county court had dismissed the claims against Alan and Doris Stanley and ordered the legal charge to be set aside.