Home Information Cases Lloyds TSB Bank Plc v Shorney & Anor (2001)

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Lloyds TSB Bank Plc v Shorney & Anor (2001)

Summary

The claimant bank had not been entitled, in the absence of consent from the second defendant, to take further guarantees from the first defendant which prejudiced the equitable remedies open to the second defendant as guarantor of his liabilities.

Facts

Appeal by the claimant Bank from a decision of HH Judge Weeks allowing an appeal by the second defendant ('W') and refusing to allow the Bank to enforce a charging order by ordering a sale of the defendants' home ('the property'). In 1989 the first defendant ('H') guaranteed the liabilities of his company, up to the sum of #150,000, to the Bank. Contemporaneously, he and W charged the property to the Bank as security for H's liabilities, again limited to #150,000. The charge, which was in the Bank's standard form: (i) empowered the Bank to make further advances to H without the consent of W ('clause 16'); and (ii) contained an agreement on the part of W that, pending payment in full of H's liabilities to the Bank, she would not enforce any claim against H and/or in competition with the Bank ('clause 21'). Later in 1989 and again in 1991 H gave further guarantees to the Bank in relation to the company, increasing his liability to #290,000. W was not informed. In due course the Bank obtained judgment against H and then a charging order absolute against his interest in the property. In 1997 W discharged the amount due to the Bank under the charge, with the consequence that she became entitled to be subrogated to the rights of the Bank under the charge, per s.5 Mercantile Law Amendment Act 1856. The issue for determination was whether W's right of subrogation took priority over the Bank's charging order. If it did so, there was no equity in the property against which the Bank could enforce that order, such that no sale would fall to be ordered. The Bank contended that the effect of clause 21 was to deprive W of the benefit of any security held by the Bank until H's liabilities were paid in full.

Held

Clause 16 allowed the Bank to vary the underlying transaction without W's consent in situations where she would otherwise have been released. Clause 21 limited the way in which she might exercise her powers in equity as guarantor. However, it did not allow for any variation in the underlying transaction which might affect the remedies available to her. The underlying transaction was the liability of H for the debts of the company, which W was reasonably entitled to expect would not exceed #150,000. In the absence of consent from her to the further guarantees given by H, the Bank was not entitled to rely upon clause 21 to deprive W of the remedies that would otherwise have been available to her.
Appeal dismissed.

Court of Appeal
Astill J, Latham LJ, Walker LJ
Judgment date
20 July 2001
References

LTL 20/7/2001 : (2002) 1 FLR 81 : Times, October 25, 2001

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