HSBC Bank Plc v Brown

A lender seeking security from a surety must make appropriate preliminary checks where the transaction is not financially advantageous to the surety and the relationship creates a substantial risk of undue influence. The lender must communicate directly with the surety, obtain confirmation of the nominated solicitor, explain why independent advice is required, and provide sufficient financial information for the risks to be explained.

A solicitor’s certificate cannot be relied upon where the lender failed to take those preliminary steps and ought to have realised that the surety had not received advice meeting the Etridge minimum requirements. In those circumstances, the lender proceeds at its own risk and the security may be unenforceable.

HSBC sought possession of Myddle Farm under a legal charge given by Catherine Mary Brown to secure the indebtedness of her son, Allen, who occupied and farmed the property. Mrs Brown defended the claim, asserting that the charge was unenforceable because she had not met or been advised by the solicitor who signed the certificate of execution.

The central issues were whether HSBC had complied with the safeguards required by Royal Bank of Scotland v Etridge (No.2) [2001] UKHL 44, whether the solicitor had become Mrs Brown’s agent, and whether HSBC could rely on the certificate.

1. The court held that the transaction was not to Mrs Brown’s financial advantage and that the relationship between an elderly parent and her adult borrower son created a sufficient risk of undue influence to place HSBC on inquiry. The relationship was not, without more, an exceptional relationship in which undue influence was presumed.

2. HSBC had to take the preliminary steps identified in Royal Bank of Scotland v Etridge (No.2) [2001] UKHL 44. These included communicating directly with Mrs Brown, obtaining confirmation of the solicitor of her choice, explaining that written confirmation of independent advice was required and why, and supplying the solicitor with financial information about the borrowing and proposed facility.

3. The solicitor’s role required confirmation of identity and instructions, consideration of conflicts, a private face-to-face meeting, explanation of the nature and practical consequences of the charge, discussion of the seriousness and extent of the risks, and confirmation that the surety wished to proceed. The solicitor’s professional duties were owed to the surety alone, even though the bank initiated the instruction.

4. There was no satisfactory evidence that HSBC had communicated the purpose of the independent-advice requirement to Mrs Brown or had supplied the relevant facility letter and financial information. On the evidence, Mr Jones had not met Mrs Brown, advised her or witnessed her signature. The certificate of execution therefore did not establish that the required advice had been given.

5. HSBC had failed to take the steps necessary to constitute Mr Jones or Harrisons as Mrs Brown’s agent and was not entitled to rely on the certificate. HSBC ought to have realised that Mrs Brown had not received advice conforming to the core minimum requirements. It therefore proceeded at its own risk.

6. HSBC’s claim for possession was dismissed. The 2002 charge was declared unenforceable and was ordered to be delivered up for cancellation.