National Westminster Bank Plc v Alfano & Ors

In this action the claimant, National Westminster Bank (“the Bank”), part of the Royal Bank of Scotland Group (“RBS”), claims against Gaetano Alfano, Gaetano Salvatore Alfano (“Tony Alfano”), Gaetano Franco Alfano (“Frank Alfano”) and Massimo Alfano (together, “the defendants”) pursuant to personal guarantees the Bank contends they provided to it. In the case of each of the defendants, the Bank seeks payment of £100,000 plus interest and costs. Under the personal guarantees the defendants were said to have agreed to guarantee and indemnify the liabilities of a company, Ciborio Limited (“Ciborio” or “the company”). The defendants were directors or senior managers of Ciborio.

Ciborio went into administration on 14 August 2009 and, after realising the security the Bank had, there was still an amount owing to it. As at 13 September 2010 that was £1,400,601. Although eight personal guarantees were provided to the Bank, the four defendants were the only ones considered to have sufficient means to warrant pursuing. Initially the defendants resisted the Bank’s claims on the grounds that the personal guarantees were entered as a result of economic duress, undue influence or misrepresentation on the part of the Bank. It was also alleged that a breach of certain formalities associated with completion of the guarantees meant that they were ineffective. Duress and undue influence were abandoned at the close of the trial, despite much evidence being addressed to these defences. Just prior to the trial the defendants raised a number of new defences. These turned on the personal guarantees being conditional upon the Bank taking a second debenture over the assets of Ciborio and the personal guarantees not become binding until this was done. At the close of the trial it was suggested for the first time that the Bank was liable for misrepresentation by a third party, namely Paul Alfano.

At the trial evidence on behalf of the Bank was given by Andy Thompson and Paul Stevens. Both are experienced bankers. At the relevant time Mr Thompson was a business development manager and Mr Stevens was Ciborio’s relationship manager. Both accepted that they did not directly remember certain events or the details of certain meetings. That is not surprising since they would have had many meetings with many customers during the relevant period. I accept the submission on their behalf that it was legitimate for them to base their evidence on what they would have done, given that the Bank has procedures for the different transactions it undertakes. Both Mr Thompson and Mr Stevens did not strike me as bankers who would go on a frolic of their own. Their evidence as to what they would have said or done by reference to documents or to the Bank’s practices and their own experience I regard, on the whole, as reliable. On behalf of the defendants evidence was given by Paul Alfano, Gaetano Alfano, Tony Alfano, Frank Alfano and Rose-Marie Alfano-Rogers. Neither Paul Alfano nor Mrs Alfano-Rogers are defendants. All the Alfanos have a strong family tie and they discussed the case together on a number of occasions. The first time they raised the conditionality of the personal guarantors, now the main defence, was when they served their witness statements shortly before the trial.

Ciborio was a well established family business established in 1951 by the previous generation of the Alfano family. At one time it had 100 staff and a turnover of £25 million. Paul Alfano was the finance director and managing director elect of the company. In practice he was the point of contact between the family and the Bank. Other members of the Alfano company were directors or worked in senior management positions in the company. Ciborio operated from its main freehold office and warehouse in Greenford, Middlesex and from leased premises in Rochdale, Newcastle, Cardiff and Glasgow. The leased premises were owned by Alfano Brothers Ltd Retirement Benefits Scheme (“Alfano Retirement”). Alfano Brothers Ltd was the parent company of Ciborio.

Until late 2007 the bankers to Ciborio were Halifax Bank of Scotland (“HBOS”). In October 2007, Ciborio re-financed with Five Arrows Commercial Finance Ltd (“Five Arrows”). Five Arrows lent Ciborio the sum of about £3.4 million, secured against the Greenford property, valued for this purpose in October 2007 at £4.5 million. It also provided a revolving stock facility and a confidential invoice discounting facility. As well as the security over the Greenford property, Ciborio granted Five Arrows a debenture, constituting a fixed and floating charge over its assets.

For some years the Bank had been the main bankers to Alfano Retirement. In late October 2007 Mr Stevens, at that time the relationship manager at the Bank for Alfano Retirement, became acquainted with Paul Alfano. There were discussions with a view to the Bank obtaining the banking business of Ciborio. It was an opportune time. Because of the refinancing with Five Arrows, HBOS had withdrawn soft banking facilities, although Ciborio continued to have a current account with it. One of the facilities HBOS withdrew enabled Ciborio to cover itself against currency movements. It was without such protection from October 2007 to June 2008. That had led to very significant currency losses to Ciborio in 2008. In evidence Paul Alfano expressed surprise that HBOS had acted in the way it did.

In January 2008 the Bank opened two Euro accounts and a cash management service in the name of Ciborio, and in February 2008, a sterling account. In April 2008 one Euro account became active. That month Ciborio obtained automated BACS facilities through the Bank as well. (The other Euro account became active in August 2008, along with the sterling account). At this stage, the Bank had no intention of granting long term lending facilities.

In June 2008, the Bank provided Ciborio with a “Net-Nil” Multi-currency Facility (“the Multi-currency facility”). Any borrowing under it was repayable on demand. The facility contained a £1 million gross limit, with the result that Ciborio could borrow by way of overdraft up to £1 million on any of its currency accounts with the Bank provided that there was £1 million in total in other Ciborio accounts held at the Bank. As a “net-nil” facility, it was thus supposed to operate in a neutral manner so that an overdraft on one account would be offset by positive balances on other accounts. The ability to off-set sums held in different currencies in difference currencies enabled Ciborio to hedge against currency movements.

Meanwhile, Five Arrows had been acquired by GE Commercial Finance (“GE”). GE informed Ciborio that it wished Ciborio to redeem the £3.4 million loan. There were discussions in July 2008 between Paul Alfano and Mr Thompson in which Ciborio looked to the Bank to help facilitate this. Initially Mr Thompson intended to have the Bank lend £3.4 million, but that was thwarted by a further valuation of the Greenford property at a figure of £3.5 million. In mid September Mr Thompson drew up a proposal for a £2.8 million loan and an overdraft facility of £150,000. Three days later, on 19 September, both were approved after the Bank had considered the financial position of Ciborio as at May. The overdraft facility became effective but was never formally documented.

The Bank offered to loan Ciborio the sum of £2,833,600, repayable by monthly instalments over twenty years. On 16 October 2008, the Bank and Ciborio entered into a Loan Agreement in respect of that sum. Under clause 13 of the agreement the loan was to be secured by way of a first legal charge over the Greenford property and a debenture over Ciborio’s assets. Under clause 14, the loan became immediately repayable with interest upon an event of default, which included cross default under other borrowing with the Bank; insolvency and analogous proceedings; a significant drop in the value of the business or security held over it; and a material adverse change in the opinion of the Bank affecting the company’s ability to comply with the terms of the agreement.

On 17 October 2008, the monies were drawn down and paid to GE, GE also being paid the balance of some £500,000 due to it under Ciborio’s stock facility. GE released its legal charge over the Greenford property, replaced by a legal charge in favour of the Bank. GE still had the benefit of a debenture over the assets of Ciborio to cover the stock and invoice discounting facility. It was anticipated that the Bank would replace GE in respect of that facility. The Bank agreed on 6 October 2008 to defer taking its debenture over Ciborio for 3 months.

Because the Bank’s loan was less than anticipated, Ciborio had to draw £500,000 from the facility it had with GE. That was unsatisfactory because it meant less “headroom” in the facility. The Bank and Ciborio had had discussions about the Bank making a loan of £500,000 to the Alfano Pension Fund, secured on a property it owned in Scotland. In turn the Alfano Pension Fund would loan £500,000 to Ciborio, which Ciborio would use as working capital. The Bank approved the proposed Pension Fund loan in October 2008 but it was postponed because of difficulties in taking security over the Scottish property. In early October 2008 the government rescued RBS from financial collapse.

During the course of the autumn, the Bank had also been exploring with Ciborio the possibility of the Bank’s invoice discounting arm, RBS Invoice Finance (“RBSIF”), re-financing the facility GE provided to Ciborio. In the course of those discussions RBSIF inquired of Mr Thompson about the Alfanos giving personal guarantees. Mr Thompson explained that it was a third generation, family run company and he believed they would refuse.

In November 2008 the Bank informed Ciborio that RBSIF did not wish to proceed. Financial calculations by RBSIF had shown that a ten percent fall in turnover would lead to a loss of £400,000. Mr Thompson and Mr Stevens had wished to challenge this decision by RBSIF. Mr Thompson requested further information from Paul Alfano since the May information had been more favourable. By the end of November they were aware of the financial difficulties Ciborio had experienced in the course of the year. The November accounts showed a turn for the worse compared with the May figures. There were currency losses of £218,000 arising from the withdrawal of hedging facilities by HBOS earlier in the year; exceptional finance costs due to the refinancing from HBOS to Five Arrows (£117,000) and then to the Bank (£62,000); and a write off of £230,000 on plant and equipment. Mr Stevens noted that he had told Paul Alfano that without personal guarantees the Bank would be unlikely to be in a position to assist. GE increased the interest rate on the Ciborio facility in early December.

On 6 January 2009 Mr Thompson informed Paul Alfano that he would revert to the commercial credit section of the Bank (“credit”) in relation to the proposed Pension Fund loan. He needed three month financial projections to do so. Paul Alfano sent these the following day. Mr Thompson then prepared a submission to credit in relation to the Pension Fund loan. In it he indicated that he was still supportive of Ciborio and that he was now requesting approval to proceed with the Pension Fund loan in order to replace the £500,000 removed from the facility provided by GE.

“The pension fund loan was sanctioned at the end of last year however, due to the year end figures being a good distance away from what we were expecting I put a stop on this deal. I am now requesting credit’s approval to proceed with the £500k pension fund loan, in light of the new trading figures and explanation of last year’s results, to replace the working capital removed from the [invoice discounting] line. I will also be seeking to fully hedge the entire pension fund loan (£1.4m) to add some certainty going forward. When this is done the £150k overdraft will no longer be required.”

The last sentence was a reference to the fact that, as already explained, although Ciborio had no formal overdraft arrangement with the Bank, it had been approved to overdraw to the extent of £150,000. (In fact on 1 December 2009 Ciborio was £344,319 overdrawn. The figures for January were £114,319 on the 1^st; £139,812 on the 13^th; and £246,819 on the 21^st.) In concluding his submission, Mr Thompson added that RBSIF had indicated that they would be willing to assume the invoice discounting, but not the stock financing, part of the facility.

Mr Thompson’s submission went first to Dave Austen. Mr Austen noted that because Ciborio had drawn on Five Arrows for £500,000, that was causing pressure on working capital, which in turn meant Ciborio had excesses on the overdraft with the Bank. He recommended that the Bank agree to the drawdown of the Pension Fund loan. Because of its unsatisfactory financial position, Mr Austen recommended that the company should pass from being looked after by Mr Thompson and Mr Stevens to a different department of the Bank, namely Credit Risk Management (“CRM”), where the account would be more intensively managed.

The submission by Mr Thompson, and Mr Austen’s recommendation, were, in turn, reviewed by Tony Conroy, the deputy head of commercial credit at the Bank. He did that on 21 January 2009. Mr Conroy’s view was that the position was unsatisfactory. The loan was in default, there were overdraft excesses and the accounts had revealed new information not outlined at the time of the initial approval of the loan. Mr Conroy did not approve drawdown of the Pension Fund loan. Instead, he wanted further discussions to take place with Ciborio and thought that personal guarantees “may have a role”.

“If I am to consider continuation of the existing facilities and agree to the Pension Loan I would wish further conversations to be undertaken with the company as I believe the updated position calls for additional equity to be made available to support the business going forward. I accept that the current position we are in does point to the need to support this business however this must be in tandem with shareholders to ensure that sufficient working capital is available to support the business. (PGs [personal guarantees] may have a role to play here).”

In addition Mr Conroy approved Mr Austen’s recommendation that the matter be passed to CRM.

Mr Thompson would have known of Mr Conroy’s views almost straight away. Mr Thompson said it was clear from the comments of Mr Conroy that he was reluctant for the Bank to lend any more money to Ciborio or the parent company. The defendants contend that Mr Conroy was not just reluctant to lend any more money but was contemplating withdrawing the existing facilities. I do not understand the quoted passage in this way. Mr Conroy noted that the loan agreement was in default but there is no suggestion that the Bank should call default. If it mattered I would have concluded that at that point Mr Conroy was expressing unease about the Bank’s position, in particular the situation of the overdraft which was leading to the breach of covenants in the loan agreement. But, as he added, the position “does point to the need to support this business”.

Soon after having reviewed what Mr Austen and Mr Conroy had written, Mr Thompson had a conversation with Mr Austen. Mr Thompson then spoke to Paul Alfano. There is a factual dispute between Paul Alfano and Mr Thompson as to what was said during the telephone conversation between them. Paul Alfano says that all that happened was that Mr Thompson asked for a meeting and he agreed, while Mr Thompson says that he would have explained the position the credit team were taking and the need for personal guarantees. In my view it does not matter because more important is what occurred at the meeting on 26 January.

On Monday 26 January 2009 a meeting took place at the Bank’s Charing Cross, London offices between Mr Thompson, Mr Stevens and Paul Alfano. The meeting had not been mentioned by the Alfanos as being significant until shortly before the trial. At that point Ciborio’s net position on the overdraft with the Bank was £295,244 overdrawn. With the monthly salary and payments to Her Majesty’s Revenue and Customs (“HMRC”) imminent the overdraft was threatening to go higher.

Mr Thompson does not recall the details of the meeting and Mr Stevens cannot remember having a meeting at all. Paul Alfano gave evidence that he had a good memory of the meeting. During their oral evidence Mr Thompson and Mr Stevens accepted a good deal of what Paul Alfano said had taken place. First, the question of the payment of salaries and of duty to HMRC due at the end of the month was canvassed. Secondly, there was a discussion of personal guarantees to be given by the active Alfano members. Thirdly, there was some conversation about the debenture to be taken over Ciborio’s assets.

As to the personal guarantees Paul Alfano says that, during the course of the meeting Mr Thompson and Mr Stevens made plain that if personal guarantees were not given the Bank would not continue to support Ciborio. That would be with immediate effect, with the consequence that Ciborio would have collapsed. In my judgment that is not an accurate reflection of what transpired. Even Mr Conroy, who took the harshest line within the Bank regarding Ciborio, considered that the company ought to be supported for the time being although, as his note made clear, the Alfano family had to inject shareholder capital or personal guarantees “may have a role”. The Bank was exposed to a company in financial difficulty and there were significant excesses on the overdraft. What in those circumstances Mr Thompson and Mr Stevens did, as they were entitled to, was to seek personal guarantees from family members directly involved in the business.

With regard to the debenture, Paul Alfano’s evidence was that during the meeting he agreed to recommend that personal guarantees be given by Alfano family members on condition that it be put in place. I return to this below but at this point I simply record that I do not accept that any statement was made by the Bank representatives, or any agreement reached at the meeting, about the guarantees being conditional upon the grant of a debenture. Nor do I accept the defendants’ case in closing that Paul Alfano misrepresented the position to the family.

In any event Paul Alfano agreed to recommend that the family give personal guarantees. Mr Thompson and Mr Stevens left him to arrange that. He spoke on the telephone from the Bank’s offices to Gaetano Alfano at the Greenford site, who in turn spoke to the other Alfanos. Gaetano Alfano’s evidence was that Paul Alfano told him that the meeting was not going well, that the Bank was demanding personal guarantees but that the £500,000 Pension Fund loan was imminent and the Bank was to have a debenture, making the guarantees effectively a third ranking charge. Gaetano Alfano then explained to the family the need for personal guarantees and the other matters.

For the purpose of the guarantees asset and liability forms were sent from the Bank that day. Paul Alfano completed his form before he left the Bank’s Charing Cross offices. Later in the afternoon, after he had left the Bank, the asset and liability forms for all but two of the proposed guarantors were sent through to the Bank. The remaining two forms were forwarded the next day.

When Mr Thompson prepared an internal note the following day, 27 February, there was no mention of any conditionality of the personal guarantees.

“Following a meeting with the MD of Ciborio the directors have offered 8 x £100k pgs [personal guarantees] as additional security. A & L [asset and liability] statements for all 8 pgs have been received and all have sufficient means to support the offered guarantees.”

The note also requested a re-sanctioning of the £500,000 Pension Fund loan and the £150,000 overdraft, which “would solve the cash flow problems the company is having and bring the cash flow back to an acceptable position”. The need for authorisation to pay the payroll was also noted. In fact the Bank sanctioned the payment of some £170,000 for salaries on 27 January 2009, payment being made on the sterling account on 29 January 2009. On 29 January Paul Alfano emailed Mr Stevens requesting payment to HMRC of some £164,000 which had been stopped by the Bank. HMRC was paid.

In anticipation of a signing meeting where the personal guarantees would be signed Mr Stevens had the documentation branch of the Bank prepare the paperwork. It was not sent to the guarantors in advance of the meeting. Mr Stevens was reminded by the documentation branch of the Bank’s policy about the execution of personal guarantees. The Bank’s policy was that independent legal advice was not necessary with the fully involved directors of the company if it was waived. On no account should the guarantee waiver be signed other than at a formal signing meeting with a Bank representative present and the procedures being followed. The copy guarantee should be handed to the guarantor at the start of the meeting for perusal, if it has not been provided earlier. The guarantor should be encouraged and given time to read it. The Bank representative should re-affirm the Bank’s recommendation that all guarantors obtain independent legal advice in all cases. The waiver of legal advice should be handed to and read by the guarantor. If the guarantor was happy to proceed without independent legal advice, and the Bank representative satisfied that the guarantor fully understood the commitment being entered into, the guarantor should sign both the guarantee and waiver of legal advice in the presence of the Bank representative. The guarantee should then be dated. The Bank representative should witness both the guarantee and the waiver of legal advice.

The signing meeting between Mr Stevens and the proposed guarantors took place at The Brookmans Park Hotel, Brookmans Park, Hertfordshire on 6 February 2009. Both Mr Stevens, Paul Alfano and some of the other Alfanos lived reasonably close by. I heard much evidence about what happened at the meeting, a great deal of which is no longer relevant given the way the defence case was advanced in closing. Paul Alfano’s evidence was that Mr Stevens threatened that if the Alfanos did not sign the Bank would withdraw facilities. None of the other Alfanos accepted that threats were made. Paul Alfano also gave evidence that Mr Stevens agreed that the guarantees were conditional on the debenture. But in the course of his oral evidence Gaetano Alfano accepted that while Paul Alfano said that the guarantees were conditional, Mr Stevens said nothing to that effect. At one point in his evidence Tony Alfano agreed with Paul Alfano on this point and said that Mr Stevens had told them that he would enter the date in the guarantee when the debenture came into force. That was not in his witness statement and I do not accept Tony Alfano’s recollection as to what Mr Stevens said.

The guarantees were signed and Mr Stevens witnessed the signatures. Despite the evidence of some of the Alfanos to the contrary I accept Mr Steven’s evidence that the guarantees were not pre-signed. The waiver of legal advice forms were signed as well. There was evidence, in particular, from Tony Alfano, that the waivers were signed later. However, Rose-Marie Alfano-Rogers gave evidence that she signed the waiver at the same time as the personal guarantee. It really does not matter. They were not needed as a matter of law. They merely confirmed that the Alfanos had not been placed under pressure to sign and that they had declined to take independent legal advice.

Once the guarantees and waivers were signed, Mr Stevens left. The guarantors were left copies. It had not been a lengthy meeting. I accept Mr Stevens’ evidence that, having accomplished the task, there was no reason for him to remain. The date of 6 February 2009 was inserted, along with Mr Stevens’ position at the Bank, when he took the signed guarantees into the Bank. That was for convenience, although it was not in accordance with the Bank’s policy. Despite the evidence of some of the Alfanos it had nothing to do with the guarantees being conditional on a Bank debenture over Ciborio being in place.

Frank Alfano was not a director of Ciborio and under the Bank’s standard procedures he was required to obtain independent legal advice. Mr Thompson recommended a close friend at solicitors, Lester Aldridge. As with the guarantees which the others signed, the proposed guarantee to be signed by Frank Alfano was, in form, a deed. Mr Stevens prepared the forms, which took longer than expected. The securities schedule sent to Frank Alfano listed the other guarantees, the debenture over Ciborio and the first charge over the Greenford property. Frank Alfano signed his guarantee at Lester Aldridge on 16 February 2009. In a letter the same date Lester Aldridge confirmed to the Bank that he had received independent legal advice and enclosed the guarantee. In his evidence Frank Alfano accepted that he received proper legal advice from Lester Aldridge. He accepted that he did not tell the solicitor that the guarantee was conditional on the second debenture.

The personal guarantees the Alfanos signed create an indemnity in clause 1.2. Under clause 6.1 a guarantor is not entitled to participate in any security held by the Bank until Ciborio’s obligations are discharged in full. Clause 8.1 provides that the guarantee is in addition to any other guarantee or security present or future held and shall not merge with or prejudice such other security. The guarantee is not to be released or affected by failure of the Bank to take any security: clause 8.2.

When the guarantees were signed on 6 February Ciborio’s overdraft was £315,912. By 16 February it was £542,796. On 18 February 2009 an amended Multi-currency facility was sent to Paul Alfano. The Bank had never obtained a signed agreement for the overdraft and now sent a £150,000 Multi Option facility for signature. Its schedule referred to the “new” debenture over Ciborio. The Bank’s signature was dated 5 February 2009; Ciborio never signed. By 1 March 2009 the overdraft had increased to £678,289.

In the following weeks Mr Steven’s assistant wrote to Ciborio that he was trying to “pull together” all Ciborio’s security and was trying to finalise the debenture. He thought that GE would need to produce a temporary and conditional release so that it would have a charge over the company’s debtors and book debts and the Bank would have the rest. Paul Alfano replied that he was not comfortable, since GE would start to get suspicious. Mr Stevens then emailed Paul Alfano:

“I understand your concern. I am just getting to grips with what Andy [Thompson] arranged for Ciborio when he also arranged the pension loan. I am looking for completion obviously to assist in allaying the fears of credit [the Bank’s credit department] over the current constant excesses. One of their key requirements was holding a debenture, and it has only come to my attention this week, that this should be in place by tomorrow.”

There was an internal Bank report on Ciborio in April 2009. Fundamentally, it noted, the company should be a viable business but it was encountering severe cash flow problems. The Bank could take comfort from its security, but not from the serviceability of the debt. As regards the £500,000 Pension Fund loan, the Bank had been pushing for progress but there was a problem with the proposed security in Scotland. The trustees of the Pension Fund were looking to give alternative security by way of a mortgage over land in Sicily, but it was doubtful that this would be satisfactory to the Bank.

In May 2009 there was an independent report on the Ciborio group by the accountancy firm, BDO Stoy Hayward. It recorded that historically the group had traded profitably but more recently trading losses had been caused by the credit squeeze from Italian suppliers and the general downturn in the economic climate. Those factors had seriously damaged working capital which needed to be repaired for the group to be able to continue to trade. While management had identified the seriousness of the situation the rationalisation plan was slow to be implemented. Continuing support from GE, HMRC, the Bank and suppliers was vital. Additional support was required from the Bank. In the next twelve months there was unlikely to be any significant improvement in GE’s or the Bank’s position. GE was owed £2.4 million on an invoice discounting facility and £788,000 on a stock facility. The Bank was owed £3.4 million and HMRC, £722,000.

Ciborio through two of its directors signed heads of agreement for the proposed continuation of the Bank’s facilities in July 2009. That listed as the security in place the first legal charge over the freehold Greenford property, the first legal charge over certain of the Pension Fund’s freehold properties, and the eight personal guarantees of the Alfanos. “Additional/replacement” security was said to be the signed debenture over Ciborio and a first legal charge over two other freehold properties which the Pension Fund owned.

At the end of the month the directors gave notice of their intention to appoint administrators. That was an event of default under the loan agreement with the Bank. On 3 August 2009, the Bank gave notice of default and made a demand to Ciborio in relation to the loan secured against the Greenford property. The Bank sought the repayment of the sum of £2,729,983.38 plus interest. At the same time the Bank sought the repayment of the overdraft of £692,597.55 under the Multi-Currency facility. On 14 August 2009 Ciborio was placed into administration. The Greenford property was subsequently sold and the Bank received £2,442,813.

On 13 October 2009 the Bank sent the defendants formal letters of demand under the personal guarantees. The Bank’s solicitors sent further letters of demand early the following month. On 10 November the Bank sent a pre-action letter of claim. The defendants had meetings with their current solicitors in mid November. That firm seems to specialise in defending guarantee claims by the Bank and the Royal Bank of Scotland. On 2 February 2010 the defendants’ solicitors wrote to the Bank’s solicitors in the context of the statutory demand proceedings and noted that their clients did not accept the guarantees were properly executed and that they would need to see the originals since there had been press reports about “recreated” originals. On 17 February 2011, these proceedings were commenced against Gaetano Alfano, Tony Alfano, Frank Alfano and Massimo Alfano (but not against Paul Alfano, Antonio Alfano, Rose-Marie Alfano or Pina Alfano) in relation to the balance allegedly outstanding to the Bank.

The defendants served their defence on 1 April 2011. That defence denied that the guarantees had been validly executed. It alleged that there had been no opportunity for legal advice and that the circumstances in which the guarantees were obtained amounted to duress and/or undue influence. It relied in particular on the events at the meeting on 6 February 2009.

The defendants contend that it was a condition precedent to the proposed guarantees becoming binding that the debenture over Ciborio was taken by the Bank. Either in the 26 January 2009 meeting or the 6 February 2009 signing meeting the Bank agreed that the guarantees would not be effective until it took the debenture. That never happened. Accordingly the guarantees are not binding on the defendants or the other guarantors.

The Alfano guarantees on their face contain no scope for their being conditional on any other security. As a general principle guarantors who have not paid the principal for which they are liable cannot require the creditor to proceed against the principal or against any security for the debt which is guaranteed before having recourse to the guarantees: G Andrews & R Millett, The Law of Guarantees, 5^th ed., 2008, p. 435. In creating an indemnity, clause 1.2 creates a primary liability which is not co-extensive with the liability of the company. Thus the Bank could seek payment in full before it looked to any other security which it might have: see Vossloh AG v Alpha Trains UK Ltd [2010] EWHC 2443; [2011] 2 All ER (Comm) 307, [43]-[46]. Clause 6.1 prevents a guarantor from participating in any security until Ciborio’s obligations are discharged, which means that the guarantor cannot be subrogated to any other security until that point. Thus the clause contemplates that the Bank is free to enforce against the guarantors without enforcing any other security first. Clauses 8.1 and 8.2 are inconsistent with the personal guarantees being conditional upon the taking of further security by providing that the guarantees are in addition to other security, should not merge with or prejudice other security, and are not to be released or affected by the failure to take any further security.

The law on conditions precedent to guarantees is stated by Purchas L.J in TCB Ltd v Gray [1987] Ch 458; [1988] 1 All ER 108. Following an overview of the relevant authorities his Lordship said that the position

“can be summarised in the proposition that where a guarantor wishes to make his guarantee dependent on the giving of some other valid collateral security by a third party, he must establish that this formed part of the contract under which the guarantee was given…In the absence of it being established by the guarantor that the taking of a valid security is a term of the contract between him and the lender, the guarantor cannot rely on the failure of the lender to provide himself with a valid collateral security, although he may have indicated that he was going to do so. Moreover, for such a term of the contract to be established not only must it be intended subjectively by the guarantor but it must also be brought home and accepted by the lender”: at 110g-112e.

In Byblos Bank SAL v Al-Khudairy [1987] B.C.L.C 232 the Court of Appeal accepted that where the parties have signed a guarantee which on its face is complete and effective as soon it has been signed little short of an express mention to the bank’s officers that the guarantee was conditional would have been sufficient to give rise to such a contractual term (at 242). The fact that a guarantee may contain terms which are, on their face, inconsistent with the existence of a condition precedent is the “ex facie” position: TCB Ltd v Gray, ibid, 115 e-f. Even where that is the case this may be displaced where the evidence establishes that the parties, in fact, agreed to make the agreement subject to a condition precedent.

However, I do not accept the evidence that there was an agreement to make the guarantees subject to a conditional precedent. First, the defendants never raised this point with the Bank or, it seems, anyone else. Frank Alfano, who sought independent legal advice when signing his guarantee, did not inform the solicitor. When the Bank pursued the debenture in March 2009, a good month after the guarantees were signed, Paul Alfano said that he was uncomfortable about approaching GE for a waiver. That sits ill with the evidence he now gives that he proposed, and the Bank agreed, that the guarantees be conditional. The matter was simply not raised by the defendants until shortly before the trial, notwithstanding that they had experienced legal advice for several years. No adequate explanation has been given by the Alfanos to explain this. In my view it throws a dark shadow over the evidence now proffered.

Further, there is no documentary evidence to support the contention. There is not a single contemporaneous or subsequent email or letter making the point. There is nothing in the Bank’s own documentation. Before 26 January there is mention of the debenture – it was a term of the loan agreement - and of the guarantees, but no suggestion of conditionality. If that had been agreed at the 26 January meeting one would see it referred to in Mr Thompson’s note the following day; there is nothing to that effect.

Nor is there any mention of conditionality in any of the Bank’s documents after that date. Although the schedule of securities in Frank Alfano’s documentation for the guarantee listed the Ciborio debenture, it did not make it conditional on the debenture coming into force. Nor did the amended Multi currency facility. Had the guarantees been conditional, one would have seen the Bank immediately pursue the execution of the debenture after the 6 February signing. The correspondence in March about the debenture gives no support to the notion of conditionality. After the flurry of activity in March nothing further seems to have been done. In July 2009, five months after the guarantees had been signed, Ciborio agreed heads of terms for a continuation of facilities with the Bank, which confirmed the guarantees as security. There was nothing there about the guarantees being conditional on the debenture being taken.

Nor does commercial reality support the defendants. Given its exposure to Ciborio, the Bank wanted personal guarantees to be in place. It would have been pointless for the Bank to have personal guarantees which were conditional on a debenture while GE had its debenture over Ciborio’s assets. It was unclear whether the GE debenture permitted Ciborio to grant a debenture to the Bank. Even if it did the Bank’s debenture would be a second debenture. GE would not have wished to relinquish any security given its own exposure, as revealed in the BDO report. The Bank had agreed to defer Ciborio’s obligation in the October 2008 loan agreement to grant the Bank a debenture. That obligation was waived in October 2008 in the light of RBSIF considering taking over the GE facility. The matter was pursued in March 2009 when the waiver period was coming to an end. But all along that was to be an unconditional debenture. Conditionality was never on the cards.

If there was no agreed condition precedent, the defendants contend that, since the guarantees were in the form of deeds, they were returned to the Bank on the basis that they were not to become binding until the Bank had taken the second debenture. Accordingly, they were never delivered to the Bank in the relevant sense and therefore are not binding. The legal basis for this defence is section 1(3) (b) of the Law of Property (Miscellaneous Provisions) Act 1989, which means that in order for a document to be enforceable against an individual as a deed, it is necessary for it to be delivered as a deed. Where a deed of guarantee has not been delivered, the guarantor is not bound by it or liable under it: Bibby Financial Services Ltd v Magson [2011] EWHC 2495, [336].

As will be obvious from what I have said earlier I do not accept that the Alfanos gave the Bank the guarantees on that basis. The onus was on them to demonstrate that: Rowley v Rowley (1854) Kay 242, 251, 257-8; 69 ER 103, 107,110. It may well be that some of the Alfanos did find comfort in the fact that the Bank was to take a debenture over Ciborio’s assets. However, there is no credible evidence that this was the basis on which they delivered the guarantees to Mr Stevens at the signing meeting on 6 February 2009. It is also clear that when Frank Alfano completed the guarantee at Lester Aldridge there was no such understanding.

It is then alleged that the insertion of the date “6 February 2009” after the signing meeting was a material alteration to the guarantees, which was potentially prejudicial to the guarantors and therefore discharged them. But to take advantage of the rule it must be demonstrated that the material alteration is potentially prejudicial to a person’s legal rights or obligations: Raiffeisen Zentralbank AG v Crossseas Shipping Ltd [2000] 1 WLR 1135, [27].

The bank’s procedures for the completion of the guarantees were not followed to the letter. Under those procedures they should have been dated at the time. In the circumstances of this case, however, the later dating and insertion of Mr Steven’s details and position at the Bank cannot be said to constitute material alterations, potentially prejudicial to the defendants. This defence therefore fails.

The defendants then submit that each of the guarantees was effected by misrepresentation. Mr Thompson and Mr Stevens represented to Paul Alfano on 26 January 2009 that the guarantees were only to be binding when the debenture had been taken. Mr Stevens made the same misrepresentation at the signing meeting. Those were, on the defendant’s case, misrepresentations entitling the guarantors to avoid the guarantees or to preclude the Bank from relying on them. I have already rejected the factual premises of these submissions.

In closing, it was submitted that if the Bank had not misrepresented the position, Paul Alfano did and the Bank was liable for his misrepresentations to other family members on the well-known basis recognised in Royal Bank of Scotland v Etridge (No 2) [2002] 2 AC 773. This submission gets nowhere. If the defendants had wished to advance this case it behoved them to specify Paul Alfano’s alleged misrepresentations: 16 PD, 8.2(3). That was not done: indeed, when the defendants’ case in this regard was first advanced it was done so in a tentative fashion, i.e. there was a misrepresentation by the Bank, but if not, by Paul Alfano.

There are a number of other difficulties. Both Tony Alfano and Rose-Marie Alfano-Rogers denied in evidence that Paul Alfano had misrepresented the position to them. The evidence of some of the Alfanos was that they had an “understanding” of certain matters, as opposed to actual knowledge. Perhaps that is not surprising: Paul Alfano spoke to Gaetano Alfano, who then informed the others about the need for the guarantees. So the information was second hand. In any event this is not the type of situation which falls within the Etridge principles. The relationship between Paul Alfano and the defendants does not equate to the husband and wife situation there. Although Paul Alfano was the link with the Bank and the managing director elect, all the defendants were closely involved with Ciborio, as directors or in senior management positions: cf. Royal Bank of Scotland v Chandra [2011] EWCA Civ 192, [17], [20], [27]-[28]. The Bank cannot be liable for his misrepresentations to the family.

The BDO report in May 2009 painted the background to the financial pressures Ciborio faced in 2008 and early 2009. By the time the guarantees were requested in late January 2009, Ciborio was in real financial difficulty and was making requests for the Bank to pay salaries and creditors well in excess of the overdraft facility under a Multi Currency agreement. The Bank canvassed the Alfano family injecting capital or giving personal guarantees. The Alfanos had an obvious interest in keeping the family company afloat and agreed to personal guarantees. The guarantees given were legitimately obtained and were unconditional. Following the signing of the guarantees, the Bank paid trade creditors and HMRC for five months and provided continuing support for Ciborio. Unfortunately the company’s directors finally decided to appoint administrators. It was a sad end for the family’s involvement in this well-established business. But the Bank is entitled to pursue the guarantors when there is still a deficiency after the other security has been realised. The Alfanos’ defences to this action fail.