Personal guarantees by directors
Good Company July 2014 edition
- Transparency and trust: seeing the way to reform
- Service of English legal proceedings on overseas directors
- Personal guarantees by directors
- Raising money under false pretences
- Holding company liability for health and safety
- Proper purpose test for access to register of members
- When not to be a de facto director
In a recent case, the Court of Appeal considered the validity of personal guarantees given by company directors to a bank in respect of the company's liabilities. The case is National Westminster Bank plc v Alfano.
In 2008 National Westminster Bank plc took over as bankers to Italian food supply company Ciborio Limited, a family business. The bank provided a loan and overdraft facility and it was intended that the company would provide a debenture over its assets. In the event the debenture was never provided.
By early 2009 the business was experiencing cash flow problems. In February 2009 personal guarantees were given by six directors of the company, and two other family members, to cover the overdraft and to secure a further loan.
The Company's financial position worsened and the directors gave notice of their intention to appoint administrators. The bank gave notice of default and sought repayment of the loan and the overdraft, sending letters of demand to the personal guarantors. Four of the directors didn't pay and the bank commenced proceedings against them in February 2011.
Court of Appeal decision
Following a High Court judgement in favour of the bank, the directors appealed. The Court of Appeal dismissed their appeal and held that the personal guarantees were valid and unconditional.
The directors claimed that it was a condition precedent to the enforcement of the guarantees that the bank would take the debenture over the assets of the company, which would be enforced before the personal guarantees were called upon.
Earlier cases had established that, where a guarantor wishes to make his guarantee dependent on the giving of some other security by a third party, he must establish that this formed part of the contract under which his guarantee was given. Further, where a guarantee was, on its face, effective on signature, little short of an express mention that it was conditional would be sufficient to establish this.
In this case, the terms of the guarantee itself were found to be inconsistent with the claim that it was conditional: it provided that it was in addition to any other guarantee or security provided and that it would not be affected by any failure of the bank to take any security. There was no contemporaneous record at the bank or the company, or in the correspondence between them, that the guarantee was intended to be conditional.
Further, regardless of the performance of the witnesses for the bank (some of whose recollection of events was limited), the Court of Appeal found that the judge had been entitled to conclude it would not have made commercial sense for the bank to accept further exposure without requiring an unconditional guarantee.
Delivery and material alteration
The directors also claimed the guarantees were handed over to the bank on the basis that they were not to become binding until the bank had taken the debenture over the company's assets and that they were therefore never formally delivered as deeds. In these circumstances the onus was on the directors to demonstrate that possession of the guarantees was given up on the basis claimed. The Court of Appeal found there was no credible evidence that the guarantees were delivered to the Bank subject to any condition.
The directors argued that the dating of the guarantees by the bank after the signing meeting made it more likely that the bank had confirmed they were not to take effect before the debenture was obtained. The judge found the absence of the date “had nothing to do with” the guarantees being conditional on the debenture and was purely a matter of convenience. The Court of Appeal agreed that this was a reasonable conclusion on the evidence.
Points to note
When giving a personal guarantee, directors need to be clear about the terms on which the guarantee is being given and when it may be enforced. In particular, if the guarantee is only to be enforceable after other security has been enforced, this needs to be spelt out in clear language.
Once a guarantee which is expressed to be a deed has been signed and given to the bank, it is likely to be treated as formally delivered and immediately binding, unless it is made clear (preferably in writing) that this is not the intention.
Ruth Lewis is an associate in the corporate group of Fieldfisher in London.