Is it safe to use pro-forma minutes to approve a guarantee?
A decision published late last year* has caused some debate about the appropriate procedures to follow on taking a guarantee, and provided useful commentary on some common issues and in particular the use of pro-forma board minutes.
The court declined an application to set aside a guarantee by HQ Chester Limited (HQ) in favour of RBS. In short, there were simply too many arguable issues to make the case suitable for summary judgment and a full trial was appropriate. Nonetheless, points of interest in the judge's analysis include the following:
1. RBS had provided execution copies of the guarantee and a related undertaking to HQ, together with draft pro-forma minutes to which copies of the guarantee and a side-letter were attached. There has been some suggestion that this practice is unusual, but that is not so in our experience. It is doubtless good practice for board minutes approving a loan agreement or guarantee, and explaining matters such as corporate benefit, to be drafted by solicitors acting for the lender and the guarantor (as obligors), but then approved by the borrower's / guarantor's solicitors, and that is standard practice for a substantial facility, particularly a syndicated one. But banks have for many years provided standard or pro-forma board minutes for borrowers in everyday commercial lending, and the judge's acceptance that there is nothing inherently wrong with this is welcome. It is, of course, appropriate for the obligors' directors to consider and reach their own view on issues such as corporate benefit (i.e. whether it is in the best interests of the company to enter into a transaction and execute the documents), but the provision of a pro-forma board minute in fairly generic terms should not automatically raise the presumption that they have not done so.
2. An application for summary judgment was not the place, in such circumstances, to ask the court to evaluate the relative benefits, or perceived benefits, to the company in entering into the guarantee. In passing, it did not help the guarantor that its secretary had produced certified copies of board minutes apparently approving the documents, but now gave evidence that no board meeting had actually taken place! It is also striking that no first-hand evidence of the alleged breach of duty by the director had been presented (see 3 below).
3. It was suggested that the director of HQ who (together with the secretary) signed the documents had acted in breach of his fiduciary duties to the company, and that RBS was tainted with knowledge of this. This approach was based on a previous decision** that if a company purports to enter into a guarantee that is outside its usual course of business, the recipient of the guarantee is put on enquiry as to the authority of the directors of the company to give the guarantee, and that if it fails to do so it will be unable to rely on the guarantee if it transpires that the directors were not duly authorised. However in the judge's opinion (following further case law***), even in the absence of actual authority to execute the documents, RBS was entitled, in the absence of acting dishonestly or irrationally, to rely on the apparent authority of those executing them, and to treat the guarantee and side letter as validly authorised.
4. Against RBS, however, the court held that, if the documents had not been duly authorised by HQ, section 40 of the Companies Act 2006 would not assist the bank. That section provides that where a person deals with a company in good faith in respect of any transacton, the directors of the company will bind it notwithstanding any limitations upon their powers arising under the company's constitution. The judge accepted the approach that the section cannot operate unless the relevant transaction has been entered into by the directors acting as a board, and also that a potential breach by the directors of their fiduciary duties (or statutory equivalent) was not a limitation imposed or or arising from the company's constitution.
While the court's decision seems eminently sensible, the case is nonetheless a useful reminder of some of the pitfalls that may potentially arise (and arguments that can be run) when seeking to enforce a guarantee.
*Bass Jarrignton Limited v Royal Bank of Scotland 7 November 2014
** Rolled Steel Products (1986)
*** Akai Holdings ( IHKC) (Privy Council)