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In today’s economy when a company is able to secure bank lending it has become common practice for the bank to seek a personal guarantee from the directors. However a Court of Appeal decision earlier this year should act as a warning to directors when giving such a guarantee.

The Court of Appeal ruled that a businessman was liable for more than £330,000 almost seven years after he had resigned from the company.

The company had been provided with a significant amount of credit by an industrial and provident society of which it was a member (“the society”). The society would use its purchasing power to secure discounts for its members. After the company fell into arrears the society sought personal guarantees from the directors, at first they refused. When the society threatened to withdraw the company’s credit they signed a written guarantee giving rise to a joint and several liability for all sums due to the society by the company. At the time of signing the personal guarantee the credit facility was limited to £200,000.

In 2006 when the businessman resigned as a director of the company, and sold his shareholding, the company’s debt to the society stood at approximately £400,000. This rose so that at the time when the company ceased to trade the debt to the society had increased to £700,000.

Having initially had the lower court decide that he and his co-director were liable to pay £331,627 the businessman challenged the ruling. His challenge was based on the following:

  1. The society had given no consideration for the guarantee.
  2. The threat to withdraw credit meant that the guarantee had been procured under duress.
  3. The guarantee was only short-term
  4. It had not been suggested to him to obtain legal advice.

The Court also heard argument that the society had invalidated the guarantee by seeking a new guarantee on different terms and that there had been a material variation to the contractual relationship which the directors had not consented to, namely the increased credit limit.

The Court found that allowing the company to remain a member of the society amounted to the giving of consideration, duress was not made out as there had been no illegitimate pressure applied and that as an experienced businessman there was no obligation on the society to remind him to take legal advice.

In relation to the guarantee itself it was found to be clearly worded to be an all monies guarantee which would cover everything due or becoming due and without limit. Any variation of any obligation between the society and the company, such as increasing the credit limit, would not have the effect of discharging the guarantee.

The case illustrated that the Court will look at the wording of the document and if it is clearly an all moneys type of guarantee the credit limit can be varied and a director’s liability will not be limited to the credit limit at the time the guarantee was given or the limit in place when they resign from the company. Directors when resigning from a company should ensure that they secure their release from any personal guarantee given or at the very least seek an indemnity from the remaining directors.

By Darren Stone