Negligent lending defeats Guarantee Fund claim
25 Sep 06
Judge rules Society's Council entitled to reject claim based on solicitor's guarantee
A businessman and bank who made short-term loans at high rates of interest on the strength of a solicitor's guarantee which turned out to have been dishonestly given, have failed in their claims for compensation from the Scottish Solicitors Guarantee Fund.
Temporary Judge Gordon Reid QC in the Court of Session has rejected a petition for judicial review brought by John Billig and Allied Sterling plc, against a decision by the Law Society of Scotland's Council to reject their claims on the Fund.
The transactions date back to 1992 when Mr Billig, an experienced businessman who had begun to make short-term loans at high rates to people in urgent need, agreed to lend £50,000 to a company, Braundsway, with repayment being guaranteed by solicitor Michael Mullen. Around the same time Allied Sterling loaned £100,000 to Braundsway on the same basis.
Mr Billig had not previously dealt with transactions in Scotland. His English solicitor consulted the English Law Society and Mr Billig proceeded on the basis that in the event of default, his loan money could be recovered from the Guarantee Fund.
Unusual cases
Mr Mullen's undertakings were issued dishonestly and neither he nor Braundsway were able to repay the loans. Mr Mullen was sequestrated and prosecuted. However the Society's Council ultimately rejected the claims on the Guarantee Fund on the basis that the lenders had failed to make proper enquiries of the standing of Braundsway or Mr Mullen, they had failed to take proper advice and the undertakings were so unusual that no reasonable person would have relied on them.
Before the court Mr Billig and Allied Sterling argued that the Council had decided in effect that one could not rely on the undertaking of a Scottish solicitor even though they had not fouind that there was reason to suspect Mr Mullen's honesty; and it was wrong to find that they had been negligent.
However Mr Reid said that for them to succeed, he had to be satisfied that the Council reached a conclusion which no decision making body, correctly applying the law to the particular circumstances before them, could properly reach. Examining the substance of the Council's decison, he agreed that the overall conclusion on negligence was amply justified by the Council's findings.
"It is obvious from the history as disclosed in the material presented to the Council that the petitioners embarked upon the strategy of documenting substantial loans at very high rates of interest with only a solicitor's undertaking because they thought the Compensation Fund or the Guarantee Fund would be bound to pay in the event of solicitor default." Mr Reid added that the legislation establishing the Guarantee Fund did not provide a foolproof commercial security where a solicitor defaulted on an undertaking.
The judge also expressed the view that under the Scottish Guarantee Fund, like that in England and Wales, the Society had a discretion in an appropriate case not to make payment even where dishonesty causing loss was established. He dismissed the petition.
Mr Reid's opinion can be read at http://www.scotcourts.gov.uk/opinions/2006CSOH148.html .