Personal guarantee liability: all change for company directors!

Is a company director who has provided a personal guarantee open to liability after the company’s credit limit is changed? Following a Court of Appeal ruling, things are not as straightforward as they might at first appear, as Patrick Selley finds out.

A typical situation

As a company director, you may have given a personal guarantee to the company’s suppliers. Typically, supply agreements have a credit limit at any given time. But what happens when this underlying credit limit is increased? How does this affect the personal guarantee? Have you, as a company director, been asked to pay far more under the guarantee than you ever thought you were liable for? When does an increase in the credit limit discharge your liability?

General principle

Variations to the contract between the supplier or lender made without the consent of the guarantor after the guarantee has been given can operate to discharge the guarantee (see Holme v Brunskill (1878) 3 QBD 495). For this reason nearly all bank guarantees will have carefully drafted clauses designed to avoid this happening. However, personal guarantees in supplier contracts are frequently drafted less carefully and leave the door open to arguments about discharge of liability where the underlying contract has been changed.

Variations that can discharge guarantee liability

The Court of Appeal decision in the case of Triodos Bank NV v Dobbs [2005] EWCA Civ 630 is authority for the proposition that a variation to the original contract, such as the granting of increased credit, will discharge the guarantor from liability if the variation on its true construction in fact amounts to a contract that was different to that contemplated by the parties, including the guarantor, at the time the original guarantee was given. In this case the guarantor can be discharged even if, as a director of the company, he consented to the variation.

Variations that will not discharge liability

In National Merchant Buying Society Ltd v Bellamy and Mallett [2013] EWCA Civ 452 the Claimant was an industrial and provident society that negotiated bulk purchasing agreements with suppliers for the benefit of its members. Its members were companies in the construction industry. Mr Mallett was a shareholder and joint director of his company, which was a member of this society. The company had a credit limit with the Claimant of £200,000 but appeared to be in financial difficulties. In 2002 the Claimant therefore asked Mr Mallett to provide a written personal guarantee under which guaranteed payment of "all sums which are now or may hereafter become owing" to the Claimant by the company. In 2006 Mr Mallett resigned as a director, but his guarantee remained in place. The company’s credit limit was increased to £400,000 and then to £700,000. The company became insolvent in 2008 owing the Claimant £330,000. The Claimant obtained part of that sum from its credit insurers and sought payment from Mr Mallet under the terms of the guarantee.

Mr Mallett argued that the guarantee had been given on the basis of a contract with a credit limit of £200,000, which therefore limited liability on the guarantee to £200,000. As he had not consented to the increase in the credit limit, his liability under the guarantee was therefore discharged.

The Court of Appeal decided that the guarantee was not linked to a specific contract but was a guarantee of all monies that would become due between the Claimant and the company. As the course of dealing between the Claimant and the company was in the contemplation of the parties when the guarantee was given, the liability on the personal guarantee was not discharged and Mr Mallett had to pay.

The Court said:

“The relevant question – in this as in every case – is ‘what is the nature of the guarantee obligation that the guarantor has assumed?’ The answer to the question turns on the interpretation of the guarantee, as to which there are no special rules.”

What should you do if you have provided a personal guarantee?

1. If you are resigning your position as director of a company, it is always best to remember that you need to make provision to deal with your potential guarantee liability at the point of resignation.
2. If, however, you are being pursued under the terms of an earlier personal guarantee, then you will need to:

1. Check the terms of the guarantee itself;
2. Check the terms of the underlying contract;
3. Find out what happened since you resigned; and
4. Take advice.