The recent unreported case of Bank of Scotland plc -v- (1) Constantine Makris (2) Ben O'Sullivan ChD, 2009 reaffirms the need for lenders to ensure that their standard form personal guarantees are for "all monies" rather than a specific liability.
The liability of a guarantor under a personal guarantee is always contingent on the underlying obligation which it is actually guaranteeing.
If the parties to the underlying obligation decide to vary the obligations to the extent that the variation could be considered detrimental to the guarantor without first securing the guarantor's consent, then the guarantor may be able to argue their liability under the guarantee will be discharged. This general principle was established in the case of Holme -v- Brunskill  3-QBD495.
In the above mentioned case, Constantine Makris, Ben O'Sullivan and Vicenzo Spano, set up a new company to operate a new bar. All three individuals were also directors of the company.
The Bank of Scotland plc (BoS) issued a proposed facility letter that offered the company an overdraft facility of up to £250,000.
Some of the conditions to the facility letter included:
- A general debenture over the company along with a legal charge over the company's leasehold interest in the bar's premises;
- An all monies guarantee by Mr Spano for £250,000 supported by a legal charge over his home;
- An unsecured all monies guarantee from Mr Makris and Mr O'Sullivan for £50,000.
Each guarantee was signed and returned to BoS.
Whilst conducting legal due diligence BoS discovered that Mr Spano was not, as he had represented, the sole owner of his property. The property was in fact registered in the joint names of Mr Spano and Mr Spano's mother. Mr Spano's mother later offered BoS a joint guarantee and an indemnity and a charge over the property in favour of BoS along with her son. As a result of the change, BoS considered the security value of the property to be reduced and as a result BoS reduced the proposed overdraft facility to £230,000.
A new overdraft facility letter for £230,000 was issued and was duly accepted by the company.
Two years on, the company went into voluntary liquidation with estimated debts of £407,000.
BoS took action to recover the guaranteed amount from each of the guarantors.
As Mr Makris's personal guarantee was provided in respect of the original £250,000 facility, Mr Markis argued that his personal guarantee for £50,000 had been discharged by a material variation in the contract.
The Court held that the change in the amount available for the overdraft facility was not a material variation of the contract.
The initial offer of an overdraft had been made subject to the condition that Mr Spano provide a charge over what had been represented as Mr Spano's property. The condition was not complied with because the property was jointly owned. The second facility letter was therefore not a variation of an existing contract but a fresh offer of a smaller amount on different conditions.
The guarantee Mr Makris provided was an all monies guarantee and it therefore covered the subsequent obligation entered into by the company.
Key Point for Personal Guarantees
This case should make all lenders aware that where a facility letter is negotiated and reissued it is important to have the benefit of an all monies guarantee rather than a specific liability guarantee and indemnity. This is essential as a specific liability guarantee and indemnity would not necessarily cover any variation to a facility letter.
If you would like to discuss this case in any more detail, then please do not hesitate to contact Jonathan Simms at Clarion on 0113 336 3387. Alternatively, Jonathan can be emailed at firstname.lastname@example.org
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