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Hazards of Signing Personal Guarantees

PLEASE NOTE: Information in this article is correct at the time of publication, please contact DFA Law for current advice on older articles.

In a ruling which underlines the potential hazards of signing personal guarantees in respect of corporate debts, a businessman has been hit with a bill for more than £330,000 almost seven years after he resigned from the relevant company. The Court of Appeal ruled that he was liable under a personal guarantee even though a large proportion of the company’s debts had been accrued following his departure.

The company, which supplied tools and materials to the building industry, had been provided with a substantial line of credit by National Merchant Buying Society Limited (NMBS), an industrial and provident society that bulk purchases goods at reduced rates on behalf of its members, of which the company was one.

The directors of the company had signed personal guarantees underwriting its debts to NMBS. At the time of the businessman’s resignation as a director in 2006, the company owed NMBS £400,000. However, the debt was subsequently increased to £700,000 before the company became insolvent, went into creditors’ voluntary liquidation and ceased to trade in 2008.

At first instance, the businessman and his co-director were each held liable to pay NMBS £331,627.26 under the terms of their personal guarantees. He alone challenged that ruling on the basis that he had not consented to the increases to the company’s credit limit subsequent to his resignation. It was submitted that those non-consensual increases amounted to variations of the contract between the company and NMBS, which had the effect of discharging his personal guarantee.

Dismissing the appeal, the Court ruled that the matter hinged on a straightforward interpretation of the wording of the guarantee. The businessman had undertaken to repay ‘all sums which are now or may hereafter become owing’ to NMBS. Had the parties intended to place any limit on that potential liability, the guarantee would have said so.

Personal guarantees must be approached with extreme care. Contact Clare Towers for advice if you are asked to provide such a guarantee.

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