Banks and other financial institutions operate in a highly regulated environment. Issues frequently arise where an institution has breached a regulatory requirement but seeks to enforce its contractual rights; for instance, where there is a regulatory breach in the formation of a loan contract and the institution seeks to recover the loan or enforce security for the loan. The legal issues which arise are complicated. In a recent decision (Quinn v IBRC  IESC 29), the Irish Supreme Court indicated the general approach the courts should take.
The plaintiffs had provided security for loans which were said to have been illegal under financial assistance prohibitions and market abuse rules. In brief, they alleged that the defendant bank had lent money to a number of corporate investors (effectively controlled by their father/husband) to enable those investors to fund contracts for difference (CFD) positions in the bank's shares (which were at the time listed on the Irish Stock Exchange). The plaintiffs claimed that this illegality rendered their obligations under the security contracts unenforceable. The High Court held, in determining this preliminary issue, that the plaintiffs were entitled to advance and rely on an argument that the security contracts and contracts of guarantee were unenforceable for reasons of public policy (on the basis that a court will not assist in the enforcement of an illegal contract). The bank appealed to the Supreme Court.
The Supreme Court held that the security contracts were enforceable even though they were (on the plaintiffs' case) tainted with illegality. The court's analysis is complex. However, a number of key messages emerge. Regulated financial service providers operate in a highly regulated environment. Therefore, it does not follow that each and every breach of regulation should result in the ensuing contract becoming unenforceable. This would be simplistic and disproportionate.
Deciding the consequences of a regulatory breach on associated contracts primarily involves finding out what the relevant statute provides. If this yields a clear answer, then that is the end of the analysis. In many instances, however, the legislature has not clearly spelt this out. In such a situation, it will be necessary for the court to consider the broader policy implications of allowing the contract to be enforced. This is a complex and sophisticated analysis which has to be tailored to the facts of particular cases.
If the statute provides for particular consequences (such as regulatory or criminal sanctions), but is silent as to consequences for associated contracts, there is a strong inference that no additional sanctions should be read in by a court (for example, by treating associated contracts as unenforceable).
The decision highlights that there is no one size fits all solution. Another important message is that not every regulatory breach renders a loan irrecoverable or security unenforceable. One can therefore infer that Irish courts will be reluctant to allow opportunistic claims by obligors to resile from their contracts on the basis of minor breaches.
This article was originally published in the May edition of the International Financial Law Review.
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