Supreme Court dismisses appeal against summary judgment for bank guarantees where statutory illegality does not affect contract.

THE SUPREME COURT

[Appeal No: 346/2011]

O'Donnell J.

MacMenamin J.

Finlay Geoghegan J.

Between/

The Governor and Company of the Bank of Ireland

Plaintiff/Respondent

and

Edmund Heaphy, Regina Heaphy,

Oliver O’Sullivan and Mary O’Sullivan

Defendants/Appellants

Judgment of Ms. Justice Finlay Geoghegan delivered on the 4th day of October, 2018.

1. This appeal is against an order of the High Court (O'Neill J.) made on the 18th July, 2011 granting judgment on an application for

summary judgment against each of the first and third named defendants, Mr. Heaphy and Mr. O’Sullivan in the sum of €768,016.37

together with costs and interest and against each of the second and fourth named defendants, Mrs. Heaphy and Mrs. O’Sullivan in

the sum of €223,533.73 together with interest and costs.

2. A notice of appeal was filed in August, 2011 in reliance upon five specific grounds of appeal. The appeal had not been heard prior

to 2014 and was the subject of the direction made by the Chief Justice with the concurrence of all the other judges of the Court

pursuant to Art. 64 of the Constitution on the 29th day of October, 2014. Subsequently, the Art. 64 transfer was cancelled and the

matter reverted to this Court.

Background Facts

3. The first and second named defendants are husband and wife as are the third and fourth named defendants. Mr. Heaphy and Mr.

O’Sullivan were directors of a company, Lockson Construction Limited (“the Company”). All four defendants gave guarantees in writing

to the plaintiff in respect of the indebtedness of the Company. Mr. Heaphy and Mr. O’Sullivan each gave six guarantees, Mrs. Heaphy

two guarantees and Mrs. O’Sullivan one guarantee.

4. Prior to July, 2010 a liquidator had been appointed to the Company. At that time it was contended by the plaintiff that it was owed

by the Company a sum of €450,159.18 on a current account held at 32 South Mall, Cork together with interest of €931.15 due as at

the 5th July, 2010. The plaintiff also claimed a sum of €311,497.67 together with interest of €860.24 due on the 5th July, 2010 in

respect of a bridging loan made to the Company on the terms set out in a letter of the 9th May, 2008 and which was to have been

repaid within three months.

5. On the 5th July, 2010 the solicitors for the plaintiff by letter addressed to the liquidator of the Company demanded payment of the

sum of €763,448.24 within seven days. On the same date letters were sent to each of the first and third named defendants seeking

payment of the same sum with interest pursuant to their guarantees and to the second and fourth named defendants seeking

payment in the sum of €222,204.16 together with interest pursuant to the guarantees signed by those defendants. No payments

were made to the plaintiff.

6. The plaintiff issued a summary summons on the 14th July, 2010 seeking judgment for the sums demanded from each of the four

defendants; an appearance was entered on behalf of all four defendants and a motion for summary judgment issued on the 15th

October, 2010. That motion was grounded on an affidavit of Janet Seacy a senior business manager at the branch of the plaintiff at

32 South Mall, Cork. In the affidavit she deposed to and exhibited copies of the six letters of guarantee executed by the first and

third named defendants, the two letters of guarantee executed by the second named defendant and the single letter of guarantee

executed by the fourth named defendant.

7. At para. 7 of her affidavit she referred to the account maintained by the Company with the plaintiff and deposed that there was

“due and owing in respect thereof as of the 5th day of July 2010 the principal sum of €450,153.18 together with the sum of €931.15

in respect of interest”. She also averred that the principal sum “has been calculated in accordance with standing banking practice and

the Company has been made aware of same by the delivery to it from time to time of Bank Statements”.

8. Ms. Seacy also exhibited the facility letter making available the bridging loan and deposed that the sum due and owing on the

bridging loan was the principal sum of €311,497.67 and €860.24 in respect of interest.

9. She also deposed to and exhibited the letters of demand sent to the liquidator of the Company and the demands made on each

individual guarantor and finally deposed to the amounts due by each. In response thereto Mr. O’Sullivan swore three affidavits on

behalf of all the defendants. Those affidavits raised a number of points primarily in relation to documentation which had been sought

on their behalf by their solicitors.

10. It is relevant both to the High Court decision and this appeal to note that Mr. O’Sullivan did not dispute that the guarantees had

been signed by the relevant defendants and did not dispute that the amounts claimed were due and owing by the Company on the

current account and in respect of the bridging loan.

Decision of the High Court

11. The application for summary judgment was heard in the common law list on the 18th July, 2011. The application was considered in

accordance with the well established principles set out by this Court in Aer Rianta c.p.t. v. Ryanair Ltd. [2001] 4 I.R. 607. The parties

were represented by counsel and solicitor. At the outset there was an application for an adjournment in the course of which it was

confirmed to the Court that the defendants did not dispute that each had signed the guarantees in question. The adjournment was

refused. No issue has been pursued in respect of that decision on appeal.

12. The agreed note of both the hearing and the judge’s ex tempore judgment records that the issues contended on behalf of the

defendants to constitute arguable defences and thus grounds for refusing the application for summary judgment were:

(a) that the defendants contended that the plaintiff had failed to provide the defendants with the contractual and other

documentation pertaining to the underlying debt of the Company alleged to have been guaranteed by the defendants and

that the plaintiff should be required to do so prior to the application being determined; and

(b) that the first named defendant had deposed on affidavit that, in his capacity as a banking consultant, he had come

upon information with the potential to undermine the validity of securities for the entire Irish banking system in general

and the guarantees in issue in these proceedings.

13. The note records the decision of the High Court judge in relation to these as being:

(a) that in circumstances where the defendants had admitted they had signed the guarantees the manner in which they

were executed was irrelevant;

(b) that the defendants in their capacity as directors of the Company whose debt they had guaranteed were deemed to

have knowledge of the Company’s financial position and transactions; and

(c) that the defendants had failed to set out on affidavit the nature of any alleged underlying flaw in the Irish banking

system and its impact on the present proceedings.

14. The High Court judge having in essence rejected the existence of an arguable defence granted the plaintiff’s application for

summary judgment. It appears that no stay was placed on the judgment but that the plaintiff has not taken steps to enforce same

prior to the hearing before this Court. The Court was informed that there is other litigation between the parties.

Additional Evidence on Appeal

15. The first named defendant is a banking consultant and has filed a detailed affidavit sworn on the 27 March, 2018 exhibiting

materials which the defendants seek to rely upon in the appeal. The affidavit was sworn following a direction from the Chief Justice as

such materials had been referred to in the submissions lodged. There is an application to admit this additional evidence for the

purposes of the appeal. The Court indicated to the parties that it would consider the affidavit and application to admit the further

evidence as part of the appeal. The affidavit sets out in some detail the regulatory regime which applied to the banks including the

plaintiff following the Asset Covered Securities Act, 2001 (“the 2001 Act”) and the Asset Covered Security (Amendment) Act, 2007

(“the 2007 Act”) and regulations made thereunder. The affidavit also exhibits a number of the regulatory notices promulgated

pursuant to those Acts, the terms and conditions of the Central Bank and Financial Services Authority of Ireland when acting as

correspondent central bank with respect to credit claims and other documents.

Issues on Appeal

16. Both parties accept that the appeal must be determined in accordance with the test for granting summary judgment set out by

this Court in Aer Rianta v. Ryanair per Hardiman J. The defendants in particular rely upon the statement made therein that a

defendant should not be denied a plenary hearing unless it is “very clear” that the defendant has no case.

17. The plaintiff acknowledges that the threshold for remittal to plenary hearing is a low threshold but nevertheless emphasises the

obligation on a defendant who seeks to avoid summary judgment to identify an arguable defence to the plaintiff’s claim.

18. The grounds pursued on behalf of the defendants on appeal may be summarised as being:

(i) the plaintiff had not put before the High Court admissible evidence which entitled it to summary judgment in respect of

the debt claimed pursuant to the guarantees; and

(ii) a much broader contention and a more difficult argument sought to be made which ultimately appeared to be that by

reason of the statutory and regulatory regime which was put in place following the banking crisis in 2007 the plaintiff was

able to benefit from a historic valuation of securities given by the defendants in support of their guarantees which neither

the Company not the defendants could do. Further that the plaintiff had been able to obtain credit in reliance upon those

securities with historic valuations and, it was contended, was not obliged to repay in full credit which it had so obtained.

This, it is contended was a benefit obtained by the plaintiff in reliance inter alia on the valuations of securities received

from the defendants whilst the defendants in turn, by reason of the property collapse had not been able to realise those

values but yet remain liable to the plaintiff for the full amount of the personal debt under the terms of the guarantee.

Whilst the alleged securitisation by the plaintiff of loans including those to which the guarantees relate was referred to in the written

submissions, it appears to me that counsel for the defendants correctly did not contend that securitisation of itself could give rise to

an arguable defence. This appears to be correct having regard to the terms of the guarantees.

Evidence of Debt

19. The plaintiff in response to the first contention submits that the High Court judge was correct in accordance with this Court’s

decision in Ulster Bank Ireland Limited v. O’Brien [2015] IESC 96; [2015] 2 I.R. 656 that on the evidence adduced by the plaintiff and

in the absence of relevant denials by the defendants the plaintiff had discharged the requisite onus of establishing that the debt

claimed is due from each defendant pursuant to the guarantees.

20. The application for summary judgment is made pursuant to O.37, r.1 of the Rules of the Superior Courts and insofar as relevant

provides:

“Every summary summons indorsed with a claim (other than for an account) under Order 2 to which an appearance has

been entered shall be set down before the Master by the plaintiff, on motion for liberty to enter final judgement for the

amount claimed, together with interest (if any), … Such motion shall be … supported by an affidavit sworn by the

plaintiff or by any other person who can swear positively to the facts showing that the plaintiff is entitled to the relief

claimed and stating that in the belief of the deponent there is no defence to the action …”

21. Laffoy J. at para. 14 of the judgment in Ulster Bank v. O’Brien stated in relation to the above rule:

“It is clear on the wording of that rule that, as regards proof of the claim, an affidavit sworn by a person other than the

plaintiff who can swear positively to the relevant facts is sufficient. However, the later provisions of O. 37 are protective

of the defendant. For instance, under r. 2, although it is stipulated that the motion for liberty to enter judgment under

that order shall be heard on affidavit, there is a proviso that any party desiring to cross-examine a deponent who has

made an affidavit filed on behalf of the opposite party may serve upon the party by whom such affidavit has been filed a

notice in writing requiring the production of the deponent for cross-examination, and “unless such deponent is produced

accordingly his affidavit shall not be used as evidence unless by … special leave”. Further, under r. 3 it is provided that

the defendant may show cause against the motion by affidavit.”

22. On the facts of that case Laffoy J. concluded that the deponent Ms. Murray who was in a senior position in the bank could and

did swear positively to the relevant facts to establish the plaintiff's claim. Further she concluded that the bank did not have to rely

and on the facts was not relying on an entry in a banker’s book being admitted in evidence to establish the defendant’s indebtedness.

23. Similarly on the facts of this case Ms. Seacy as a senior business manager in the relevant branch of the plaintiff is in a position to

swear positively to the facts in relation to the amounts claimed. She has deposed to the amounts due by the Company on its current

account and pursuant to the bridging term loan. The plaintiff is not relying upon an entry in its books but rather the positive averment

on oath of Ms. Seacy in relation to the amounts claimed.

24. She also deposed to the execution of each of the guarantees by the four defendants and exhibited copies of same as the basis

for the claims against the defendants for the amounts due by the Company.

25. As put by Laffoy J. in Ulster Bank v. O’Brien at para. 17 on that evidence a prima facie case has been made out by the plaintiff

that the defendants are each indebted to the plaintiff in the sums deposed to by Ms. Seacy. In the absence of a denial with some

evidence in support a court may grant summary judgment.

26. MacMenamin J. in Ulster Bank v. O’Brien put it this way at paras. 2 and 3:

“2. What is in issue in summary judgment applications is whether or not a prima facie case can be made out by the

plaintiff. The burden of proof is on the party who asserts the debt is owed. As a general principle, a prima facie case will

be made out when, on the evidence available, it would be open to a tribunal of fact, if no other evidence was given, or if

that tribunal accepted that evidence even though contradicted in its material facts, to enter a verdict for that party

(see O’Toole v. Heavey [1993] 2 I.R. 544, at pp. 546 and 547).

3. As described in the judgments of my colleagues, when one is dealing with applications for summary judgment the test

is somewhat nuanced for the protection of a defendant. If there is a real conflict on the facts or law, the matter must

be remitted for plenary hearing. I would point out that a simple, bald denial of indebtedness, whether in correspondence

or on affidavit, will not be sufficient to discharge the burden, so far as a defendant is concerned. A defendant's evidence

must set out in a clear way why the sum claimed is said not to be due and owing to a plaintiff.”

27. On the facts herein, the affidavits sworn by the third named defendant in response in the High Court do not dispute the amounts

allegedly due by the Company on each of the accounts. Undoubtedly he does refer to the request for further documentation. He was

as held by the trial judge a director of the Company and in a position to contest the amounts claimed if he considered them to be

incorrect. Whilst reference was made in submission to the statement of affairs of the Company exhibited in the second affidavit of Ms.

Seacy I consider counsel for the plaintiff was correct in saying that it was unnecessary to rely upon same in the absence of any

dispute as to the amounts.

28. In relation to the guarantees, the defendants sought to raise a general issue of validity and also an issue in relation to the

witnessing of same. However, crucially they did not dispute that each had signed the relevant guarantee. No evidence was given in

relation to the circumstances in which they were executed which could give rise to any arguable claim as to their invalidity.

29. On those facts, in accordance with the judgments in Ulster Bank v. O’Brien I would uphold the decision of the trial judge that the

plaintiff had proved its claim.

Plaintiff’s Commercial Advantage – A Defence or Counterclaim

30. The starting point of consideration of this aspect of the appeal must, following from the first conclusion be that the plaintiff is

prima facie entitled, pursuant to the contractual terms of the guarantees entered into by the defendants, to judgment for the

amounts due by the Company which are the subject of the guarantees. The potential defence or counterclaim sought to be made out

on behalf of the defendants is a difficult one. I intend no disrespect to counsel who sought to make it out in saying that there was a

lack of clarity as to precisely what arguable defence or indeed counterclaim in law was being contended for which might even meet

the low threshold set out in Aer Rianta v. Ryanair.

31. The essential claim which I understand is sought to be made on behalf of the defendants is that the statutory and regulatory

regime, introduced both by and pursuant to the 2001 and 2007 Acts following the giving of the bank guarantee, had the effect of

creating a commercial benefit inter alia for the plaintiff as a bank which in part relied upon valuations of securities which it held in

support of the guarantees given by the defendants, but which valuations the defendants could not avail of in their contractual

relations with the Bank.

32. Leaving to one side for a moment the question as to whether the defendants should be entitled to put before the Court on the

appeal the additional evidence referred to in the affidavit sworn in 2018 by Mr. Heaphy, even if it were to be admitted I do not

consider that it is evidence which could support in law an arguable defence or an arguable counterclaim that the defendants might be

entitled to set off against their contractual liability pursuant to the guarantee.

33. The claim sought to be made is that the plaintiff by statute and/or the regulatory regime was given a commercial advantage

which enabled it to use, for the purposes of obtaining credit, historic valuations which were no longer real or available to the

defendants. It is also asserted that the plaintiff was thereby enabled to obtain credit which it is contended it is not ultimately obliged

to repay. Those Acts were enacted and regulations made in accordance with certain public policy considerations and decisions and it

is not for the courts to debate the merits of such decisions. One of the many difficulties in relation to what the defendants seek to

contend is that even if they could make out an arguable case that there was some illegality in the arrangements enacted in relation

to the banks (and the evidence and argument falls well short of this), they have not satisfied me that there is any arguable basis

upon which it could be said that any such asserted illegality affects the contractual arrangements in existence between the plaintiff

and the defendants according to which the defendants are now liable to pay to the plaintiff the sums claimed.

34. No arguable basis has been made out upon which it could be said that any lawful provision made by statute or regulatory provision

to a bank could affect the guarantees entered into by the defendants in connection with loans obtained by the principal debtor. It

does not seem to me that the defendants have made out any basis for an arguable defence to the plaintiff’s contractual claims

against them pursuant to the guarantees.

35. Similarly even if one were to consider the claims sought to be made on the basis of an arguable claim of illegality of the statutory

or regulatory regime, it is difficult to see how that might give rise to anything in the nature of any counterclaim against the plaintiff

which might be a permissible set off, as the alleged wrongdoing is by the State or a regulatory authority rather than the plaintiff.

Further the defendants have not made out any basis for losses which they may be considered to have suffered as a result of what

they claim to be the unlawful commercial advantage given to the banks by reason of obtaining credit in reliance in part upon inflated

valuations or obtaining credit which they were not bound to repay.

36. In those circumstances, it does not appear to me that they have established either an arguable defence or an arguable

counterclaim which they might be entitled to set off such that the summary judgments granted by the High Court should be set aside.

37. In reaching this conclusion I have not referred to the contractual provision in the guarantees which on their face preclude reliance

upon a counterclaim or set off. It has not been necessary to do so and my failure to do so does not mean that such provisions might

not also be relied upon by the Bank.

38. By reason of the conclusion reached on the merits of the appeal, even if the additional evidence were to be admitted it is

unnecessary to consider the application to admit same.

Decision

39. The appeal of the defendants must be dismissed.