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Got them by the guarantee! Have you really?    

Personal guarantees from company directors or others are often used to secure performance of many company transactions such as leases, credit agreements for supply and loans.

Where companies fail to perform their obligations, and have few or no assets, the last throw of the dice to potentially recover proceeds is to sue on the personal guarantee.

It follows, that  it is important to ensure that guarantees are enforceable should the situation arise.  There are many ways that guarantees may not be enforceable.  Some of these include:

  • Failing to reference the particular obligations being guaranteed in a clear and unambiguous way (including reliance on oblique references to external “standard” documents);
  • Failing to outline specifically the terms and conditions applicable to the guarantee;
  • Failing to implement proper processes around the signing by the guarantor of a guarantee and/or any accompanying terms and conditions.
  • Failing to adequately document the entering of the personal guarantee.

 

Case Example

In the recent case of Toyota Motor Finance v Gardiner [2016] NSWCA 162, Toyota attempted unsuccessfully in the District Court and NSW Court of Appeal, to enforce a personal director’s guarantee purportedly given by the defendant Mr Gardiner.

Toyota had not proved that Gardiner was the guarantor, under its lease facility as it could not produce evidence that a document entitled “Booklet Terms and Conditions”, on which the guarantee was purportedly founded, was agreed by and provided to Gardiner.  Toyota was unable to provide to the court the specific Booklet Terms and Conditions it said was applicable to Gardiner.

Toyota’s attempt to get over this hurdle by filing and serving evidence that providing the Booklet Terms and Conditions was standard practice was not accepted (particularly where a Booklet that was clearly not the Terms and Conditions Gardiner would have signed – if at all – was put forward as evidence).

Do you supply goods or services on credit? Are your guarantees enforceable?  Want to enforce a guarantee?

If your business routinely takes personal guarantees as part of its loan documentation, it may be a good time to perform a health check on your guarantee documents and ensure that your processes are sufficient to ensure the enforceability of the guarantees.  Surry Partners Lawyers can provide advice on:

  1. the enforceability of existing guarantees;
  2. the processes your business will require to implement to ensure enforceable guarantees going forward; and
  3. taking steps to enforce guarantees through pre-litigation and subsequent litigation.

 

Contact:

Clement Lo, Associate

(02) 9318 6420

clement.lo@surrypartners.com.au

 

Peter English, Director

(02) 9318 6411

peter.english@surrypartners.com.au