Personal Guarantees - Challenging Validity

Wednesday, May 14, 2008

In ING Lease (UK) Ltd v Harwood a director unsuccessfully attempted to escape liability under a personal guarantee by alleging an agreement had been reached in negotiations that he would not be personally liable.

ING provided finance to a group of companies which was personally guaranteed by the group's chief executive, Harwood. At the instigation of ING, the group subsequently acquired another company which was also indebted to ING. Harwood alleged that it was orally agreed during discussions with ING that although his group companies would give a cross-company guarantee, he would not be personally liable for the acquired company's debts. A written composite cross-guarantee was then entered which also contained a personal guarantee by Harwood. The group companies subsequently went into administration and ING sought to recover all the outstanding monies from Harwood pursuant to the personal guarantee. This included a debt due from the group companies to a third party which had subsequently been assigned to ING

Harwood defended the claim on the basis that the discussions between him and ING amounted to a contractual agreement that he would not be personally liable. As to the assigned debt it was argued that the guarantee did not cover debts originally due to third parties.The court found that there was no evidence that the discussions about limiting Harwood's personal guarantee were intended to amount to an oral contract. There was no record that any such agreement had been reached. The discussions were simply negotiations that took place at a preliminary stage. The composite agreement had to be read on its face as meaning that Harwood had provided a personal guarantee for all the companies including the acquired company. There was no evidence from which a term could be implied that the guarantee did not cover any monies owing by the acquired company.

Although Harwood might have made it clear during the discussions with ING that he would not extend the personal guarantee, the court found that there had been no corresponding representation by ING equivalent to a promise that Harwood would never be personally liable for the acquired company's debts. Harwood was therefore bound by the personal guarantee in relation to that debt.

As to the assigned debt, the court found it was not within the original contemplation of the parties that the guarantee should extend to debts originally due to third parties.

Discussions will not amount to a binding agreement in the absence of evidence of a clear intention on behalf of the finance company to either create legal relations or alter existing ones. It is good practice that whenever such matters are discussed, a clear note is produced by the finance company and agreed by the director, so that there can be no doubt further down the line.