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06 April 2020
by James Cochrane, Phil Morris & Oscar Ward
COVID-19: Enforceability of Guarantees

"Better to be signed than sorry" – Ensuring the Enforceability of Guarantees for the COVID-19 Environment


Now, more than ever with the economic turmoil that COVID-19 is presenting, lenders and suppliers will be wanting to ensure payment of debts. Guarantees are often an indispensable tool for recovering cash. They are especially useful for managing risk when lending or supplying to smaller start-up companies and privately held companies. With a guarantee in place from a director of the borrower company, the lender will have recourse to that director’s personal assets if the customer fails to pay - that is, another ‘pool’ of assets to look to if the customer’s ‘pool’ has run dry.


Not surprisingly, in a financial crisis the enforceability of guarantees comes under the microscope. Any grey area could mean the difference between a full recovery or none at all. This note looks at a recent and important decision of the Court of Appeal regarding the enforceability of a common form of guarantee.


Legal requirements for a guarantee


Guarantees are a strange form of agreement. A guarantee renders another party liable for the customer’s debts. While most agreements require the parties to carry out some form of positive obligation, a guarantee is different because the guarantor hopes to never be required to perform his or her obligations. Often, the party giving the guarantee is not receiving much directly in return. For this reason, the law has developed strict rules for creating a valid guarantee.


Section 27 of the Property Law Act 2007 requires a guarantee to be ‘in writing’ and ‘signed by the guarantor’. What is or isn’t ‘signed by the guarantor’ usually speaks for itself, but what ‘in writing’ means is more open to dispute.


Enforceability of ADLS form guarantee questioned


This very issue was recently litigated in the Regan v Brougham saga. The facts of the case are relatively straightforward. The lender agreed to lend $50,000.00 to the borrower company. Like many small loans, the agreement was documented on the standard ADLS Term Loan Agreement form. On the first page of the agreement, the parties were set out. The parties were the lender, the borrower company and the guarantors (being Ms Dey and Mr Brougham) who were at the time the agreement was entered into, the directors of the borrower company. On the signature page, Ms Dey and Mr Brougham both signed the agreement as directors of the borrower company and only Mr Brougham signed as guarantor. Importantly, the agreement also contained a condition precedent that before the loan was advanced, the guarantor must have signed a deed of guarantee and indemnity in the form required by the borrower. This was never done. The borrower defaulted and the lender sought to recover the funds from the guarantor, Mr Brougham.


Both the District Court and the High Court found that there was no valid guarantee because the deed of guarantee contemplated in the Term Loan Agreement was not signed and there was insufficient clarity around matters such as when the guarantee will be triggered and what notice is required in the Term Loan Agreement.

These judgments, it is fair to say, raised eyebrows with numerous creditors and their lawyers alike, resulting in a mad scramble by many to ensure separate deeds of guarantee were signed.

The Court of Appeal, however, allowed the appeal and found:

  • the absence of the separate deed of guarantee was not fatal;
  • that the agreement contained everything necessary to constitute an enforceable guarantee;
  • all the details and terms necessary to determine with certainty what was guaranteed were in the agreement;
  • by signing the agreement as “guarantor”, Mr Brougham accepted those guarantee obligations.

So, the answer was that signing an ADLS Term Loan Agreement ‘as guarantor’ will be sufficient to constitute the guarantee being ‘in writing’ even though specific guarantee terms were not included in the agreement.


More to come…


However, this may not be the end of the matter because the Supreme Court has granted leave to hear a final appeal of this matter. It also remains to be seen whether the Government’s recently announced temporary changes to the Companies Act regarding safe harbour and business debt hibernation schemes will extend to personal guarantors who are also liable as principal debtor. If claims against a personal guarantor are not covered by the moratorium, then we expect lenders and suppliers will be lining up outside the Courthouse to file their proceedings. This area of law is very much a ‘watch this space’.


The Court of Appeal’s decision will be welcome news for lenders (especially those who have not taken the extra step of ensuring separate a deed of guarantee has been entered into). In the current economic climate there are likely to be countless loan defaults. Those lenders that have guarantees will be exploring whether they can enforce them.


Here to help


If you need assistance documenting a guarantee or you want the enforceability of your guarantee checked, get in touch with our team of experts at Stace Hammond, we can help. Contact James Cochrane, Oscar Ward, Phil Morris or Emma Falconer to discuss.

The above overview has been provided for general information purposes only.  It is not, nor is it intended to be treated as, legal advice, and is subject to change without notice.