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Why you need to ensure personal guarantees are worded and processed correctly?

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The case of National Merchant Buying Society Limited v Andrew Bellamy and Stephen Mallet has confirmed that where a binding all monies guarantee is provided the liability of a personal guarantor cannot be extinguished...

...as a result of a variation of the principal contract which is securer.

The Case

In this matter CTF Supplies Limited (“CTF”) entered into a trading relationship with National Merchant Buying Society Limited (the “Society”) whereby the Society would purchase goods on behalf of CTF, supply those goods to CTF and the Society would then invoice CTF for the goods.

During the trading relationship between CTF and the Society, the directors of CTF at the time, Andrew Bellamy and Stephen Mallet were asked, and eventually agreed, to provide an all monies joint and several guarantee of any sums outstanding from CTF to the Society. This was required by CTF to support an increased limit on the amount of credit CTF could have at any time with the Society.

The contract and terms of trading between CTF and the Society changed over a course of their relationship mainly due to CTF’s worsened financial performance and Stephen Mallet ceased to be a director towards the end of the trading relationship.

CTF became insolvent and Stephen Mallet attempted to argue that he should not be held liable under the personal guarantee. He argued this on the basis that since the credit limit of CTF had increased without his consent, and other changes had been made that he neither consented to nor was aware of, that the guarantee that he had provided was not valid.

It was held in both the High Court and the Court of Appeal that the changes made to the principal contract between CTF and the Society did not invalidate Mr Mallet’s liability under the personal guarantee.

What this means …

The Court of Appeal has confirmed that a personal guarantor’s liability under an all monies guarantee cannot be avoided by a change to the principal contract even if the change is without the consent or knowledge of the guarantor.

This case does specifically relate to all monies guarantees and lenders should be careful that any guarantees provided are worded to guarantee all monies owing now or in the future to the lender and are not linked to any particular facility, contract or arrangement. If the guarantee relates to a specific facility, contract or arrangement a change to that contract may release the guarantee and advice should be taken by any lender or other party which is entitled to the benefit of the guarantee.

Whilst it may seem harsh that a guarantor would remain liable even if the terms of a principal contract are varied substantially, and in this case where the guarantor had ceased to be involved with the business, the contrary argument is that the burden of risk is correctly placed on the guarantor to negotiate a release from the guarantee or cap on liability under the guarantee or to ensure that the potential liability under the principal contract remains the same.

It would equally not be fair that as the risk profile of the principal contract varies, in this case so that the level of credit available to CTF increases, the personal guarantor be released from his obligations under the guarantee, leaving the Society exposed.

What you should do

As a matter of best practice to avoid any suggestion that (and potentially any litigation) a personal guarantee can be avoided for such a reason, we would always suggest:

  1. any material changes to an agreement which has been guaranteed are recorded in a variation to the existing agreement;
  2. any person who has provided a personal guarantee is required to countersign a letter acknowledging any variation to the principal agreement as a deed; and
  3. the principal agreement should contain a covenant to procure that any personal guarantors execute an acknowledgement letter as set out above on request, and any breach of such a covenant be an event of default of the principal agreement.


If you have any queries or concerns on this area or would like to discuss please do not hesitate to contact Jonathan Simms (0113 336 3387) .
 

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