Bank Guarantees

Mr Harvey had provided a personal guarantee (capped at £720,000) along with 3 other individuals, to Dunbar Asset Plc (the “Bank”) in respect of loans it had provided to a company, Vision development Ashbrooke Limited, for the purposes of a property development project. The project was unsuccessful and the Bank sought to recover its losses, which were in excess of £4.8 million.

Having first served demand against the borrower that remained unpaid, the Bank then made demand against Mr Harvey and the other 3 guarantors under the guarantee. Statutory demands were subsequently issued by the Bank against the guarantors for the sums due.

Mr Harvey initially argued that he had no liability under the guarantee, and that the statutory demand should therefore be set aside, on the basis of promissory estoppel: The Bank had apparently indicated that they did not intend to ever enforce the guarantee. The application was dismissed by DJ Pescod (the “Initial Decision).

Mr Harvey then discovered that the statutory demand against Mr Lenney, one of his fellow guarantors, had been set aside by a different court on the basis that Mr Lenney’s signature to the guarantee had been forged by a third party. SJ Pescod therefore allowed Mr Harvey to appeal the Initial Decision on the basis that the question of a forged signature had not been argued before him.

On the hearing of the appeal, HHY Kaye QC held that, when construed as a whole, the guarantee provided that each guarantor was jointly and severably liable, even if the guarantee had not been properly executed by all parties. Looking at the construction of the provisions of the guarantee, the Court found that Mr Harvey was liable to pay the Bank and so the statutory demand remained in place and could be enforced (the “First Instance Decision”) .

Mr Harvey appealed the First Instance Decision with the issue before the court of appeal being whether, on the construction of the guarantee, the liability of a guarantor who has signed the document is conditional upon the execution of the guarantee by the other guarantors, counsel for Mr Harvey arguing that unless the guarantee was duly executed by all those proposed guarantors, the guarantee was not valid. The Bank argued, to the contrary: That there was no principle that in the case of a composite guarantee, one guarantor would not be liable in the event that the other named guarantors did not sign the guarantee.

The relevant provisions of the guarantee were as follows:

"[Clause 1]

the Guarantor [defined to mean the 4 guarantors] hereby:

(a) guarantees the payment or discharge to the Bank and undertakes that it will on first demand in writing made on it pay or discharge to the Bank all monies and liabilities which shall for the time being be due owing or incurred by the Principal Debtor to the Bank …… together also with

(i) such further sum for interest…. and banking charges; and

(ii) all costs and expenses recoverable by the Bank from the Principal Debtor; and

(b) agrees as a primary obligor and not merely as surety to indemnify the Bank on demand by the Bank from and against all losses incurred by the Bank as a result of the Principal Debtor failing to perform any obligation due to the Bank or any such obligation of the Principal Debtor being or becoming void voidable unenforceable or ineffective for any reason whatsoever …"
subject to a proviso that the total amount recoverable under the Guarantee should not exceed £720,000, in addition to interest, charges, costs and expenses.

[Clause 3: CONTINUING SECURITY]

(a) This deed is to be a continuing security to the Bank notwithstanding any settlement of account or other matter or thing whatsoever and shall extend to cover the ultimate balance due from time to time from the Principal Debtor to the Bank and until payment of such balance the Guarantor shall not be entitled to participate in any security held or money relieved by the Bank on account of such balance or to stand in the Bank's place in respect of any such security or money.

(b) This Deed is to be in addition to and is not to prejudice or be prejudiced by any other securities or guarantees (including any guarantees signed by the Guarantor) which the Bank may now or hereafter hold from or on account of the Principal Debtor and is to be binding on the Guarantor as a continuing security notwithstanding any payments from time to time made to the Bank or any settlement of account or disability or incapacity affecting the Guarantor or the death of Guarantor or any other thing whatsoever……..

[Clause 4: INVALIDITY AND INDULGENCE]

(a) Neither the obligations of the Guarantor herein contained nor the rights powers and remedies conferred in respect of the Guarantor upon the Bank by any agreement this Deed or by law shall be discharged impaired or otherwise affected by:

(i) the Bankruptcy winding-up administration or dissolution of the Guarantor or the Principal Debtor or any change in the control or ownership of the Guarantor or the Principal Debtor;

(ii) any obligations of the Guarantor or the Principal Debtor to the Bank being or becoming illegal invalid or unenforceable in any respect or any incapacity or lack of power authority or legal personality of or dissolution or change in the status of the Principal Debtor or any other person;

(iii) time or other indulgence being granted or agreed to be granted to the Guarantor or the Principal Debtor in respect of its obligations to the Bank;

(iv) any failure to take or fully to take any security contemplated by or otherwise agreed to be taken in respect of the Principal Debtor's obligations to the Bank;

(v) any failure to realise or fully to realise the value of or any release discharge exchange or substitution of any security taken in respect of the obligations of the Guarantor or the Principal Debtor to the Bank or;

(vi) any other act event or omission which but for this Clause might operate to discharge impair or otherwise affect the security hereby constituted or any of the rights powers or remedies conferred upon the Bank by this Guarantee or by law………

[Clause 15: 15 JOINT AND SEVERAL LIABILITY}

(a) Where this Deed is signed by more than one party the liability of each of them under this Deed to the Bank shall be joint and several and every agreement and undertaking on their part shall be construed accordingly.

(b) The liability under this Deed of the Guarantor and each of them if more than one shall not be avoided or invalidated by reason of any guarantee or any charge by and [sic] co-surety being invalid or unenforceable”

The Court of Appeal, having looked at various authorities and determined that there no absolute principle that if an intended guarantor does not sign the guarantee, the other guarantors are not bound. Whether this was in fact the case depended on the wording of the guarantee in question..

In this instance, the provisions of the guarantee showed that it was a single composite document and that all four guarantors were together defined as ‘the Guarantor’. As a consequence the starting point was that the guarantors were joint and severally liable only once all of the guarantors had signed the guarantee.

The Court of Appeal held then went on to consider whether any of the terms of the guarantee were sufficient to displace the above conclusion. They considered there were no such provisions in the guarantee: The provisions of clauses 3, 4 and 15 of the guarantee would only be of assistance if the guarantee had had been validly signed in the first place.

Practical Considerations

This case highlights at least the following two issues:

Firstly, the case demonstrates that if there is an intention for a guarantor to be bound notwithstanding the guarantee is not validly signed by his co-guarantors, clear wording to that effect is needed: e.g. something like "each signatory shall be bound by this Guarantee from the time it is signed by him or her, even if someone else: (a) was supposed to sign this Guarantee but did not do so, even if he or she was named as a signatory…".

Secondly the decision illustrates the importance of careful, bespoke, drafting in any given set of circumstances and is a salutary warning against assuming that precedent/standard documents contain appropriate provisions to fully protect the lender.

This legal update is provided for general information purposes only and should not be applied to specific circumstances without prior consultation with us.

For further details on any of the issues covered in this update please contact Angela Stallard, Partner in Corporate and Commercial on 020 7583 2222.