It is common for credit applications by businesses to include a guarantee. If a company or partnership opens a trading account for goods or services, the supplier will often insist upon it!
Likewise, it is commonplace for a landlord to require a guarantee from a company tenant.
The need for a personal security of this type is understandable. At the 'end of the day', a supplier or landlord expects to be paid. Yet, the legal 'shields' of company and partnership law can be difficult to penetrate when it comes to collecting payment!
And even if a judgement is obtained against the debtor, there remains a question of whether there are sufficient assets available to meet the debt.
Therefore, landlords and lenders prefer the security of a personal guarantee. It is enforceable directly against the individual guarantor, even if the company debtor later becomes insolvent.
Depending upon the wording of the guarantee, the guarantor can be sued directly (i.e. without the need to firstly sue the company debtor).
If the guarantor owns assets (such as a family home), those assets can be made the subject of a seizure and sale order. There are also numerous other legal processes of enforcement. All in all, however, it's not a 'pretty picture'. Debt collection law rarely is!
But guarantees in leases and other commercial documents have now become 'standard form'. Gone are the days when a guarantee was legally drafted or carefully vetted. As a result, mistakes are being made in the prepared documents. And that's when the trouble starts!
It should always be remembered that guarantee documents are 'read down' by the Courts. They will interpret the meaning and effect of its terms in a narrow way.
In the High Court case of Chan v Cresdon, the 'lease' covered by the guarantee was read down to refer to only a registered lease. As the lease was not registered, the guarantee obligations could not be enforced against the tenant.
Guarantees have been held by the Courts to be void or unenforceable for a variety of different reasons. The following provide a few examples:
- A guarantee being set aside because it was entered into on the basis of a misrepresentation;
- A guarantee being invalid because of the non-disclosure of facts relevant to the guarantee;
- A lack of written formalities evidencing the terms of the guarantee; or
- A guarantee being unenforceable because the guaranteed debt was itself void- see Coutts v Browne- Lecky (1946) 62 TLR 421.
The following case-summaries provide greater detail on a number of grounds of defence which have been applied to guarantees.
Padstow Corp Pty Ltd v Fleming (No 2)
The case concerned the repayment of a debt under a guarantee. A landlord leased property to a company (the tenant), with the company’s directors signing as guarantors. However, the company defaulted in its repayment of rent. The landlord commenced proceedings against the ‘defendants’ directors under the guarantee. The claim was for outstanding rent, accrued interest, costs of repairs, maintenance and legal costs.
One of the defendants argued that they were not bound by the guarantee in the lease because they did not sign it in their personal capacity, but only in the capacity of a director of the company.
The guarantee clauses in the lease expressly applied if a guarantor of the tenant was named in the schedule to the lease and had signed or executed the lease. The schedule contained the names of the 2 defendants. There was a provision in the lease for signature by the company tenant and one of the defendants signed the lease as a director of the company. There was no separate provision for execution by the guarantors. Nor was there any evidence of negotiations with the defendant about a guarantee.
The issue was whether the defendant needed to sign a separate execution in his personal capacity to be properly bound by the guarantee clauses in the lease.
The Supreme Court held that whether a person has signed the document in a personal capacity was determined in accordance with the construction of the document as a whole. The basis of the surrounding circumstances known to the parties was also legally relevant.
The Court noted the defendant had received legal advice in relation to the lease; had signed personal guarantees before; was familiar with the process; and had been named as a guarantor in the lease. Thus, although the defendant had signed the document only once, his signature operated to bind both the tenant’s company, and himself personally as guarantor.
Alonso v SRS Investments (WA) Pty Ltd
The case involved a lease agreement (Lease) in respect of a commercial property. The Lease was entered into between Mr Alonso, the landlord, SRS Investments (WA) Pty Ltd, the company tenant, and Ms Elliot, (the director of the tenant company) as guarantor.
The Lease contained guarantee provisions, which made specific reference to the guarantor of the tenant’s obligations under the Lease. The execution page included separate execution clauses for the tenant and the guarantor. The execution clause for the tenant was signed by the guarantor above the word “Director” and her full name was printed above the words “Full Name”. The guarantor’s name was printed next to the words “Signed as a deed by” in the guarantor’s execution clause. Importantly, however, there was no signature next to the guarantor’s printed name and the guarantor denied having printed her name next to the words “Signed as a deed by”.
Was the guarantor legally bound by the guarantee, even though she had not provided a signature?
The guarantor also sought to avoid liability on several grounds, including that section 4 of the Statute of Frauds 1677 (UK) (Statute of Frauds) rendered the Lease unenforceable against her.
The Court held that the guarantor did have an objective intention to be legally bound by the Lease as guarantor of the tenant’s obligations. The absence of a signature did not preclude a finding that the guarantor had the requisite intention.
As stated, the guarantor also sought to rely on section 4 of the Statute of Frauds, arguing that the guarantee provisions of the Lease were unenforceable because she had only signed the Lease on behalf of tenant, not as a guarantor.
However, the Court rejected this argument, noting that the capacity in which the guarantor signed the Lease was irrelevant to the question of enforceability under section 4. It was held that the guarantor’s signature in the Lease (irrespective of the capacity in which she purported to sign) charged her with personal liability.
Therefore, the Guarantor was found to be liable under the guarantee provisions, and she was ordered to pay the outstanding amount due under the lease.
Australia Machinery Engineering (AME) Pty Ltd v Moore Group Holdings Pty Ltd
The case involves an action by a landlord against a tenant and its guarantors. The claim was for liquidated damages for unpaid rent and for other breaches of the lease. The lease contained a ‘suspension’ clause, which required the tenant to pay rent to the landlord 'without demand, deduction or a right of set-off'.
The tenant and guarantors pleaded by way of a defence that the landlord was in breach of an implied term in the lease. The term required the landlord to ‘do all things necessary’ to enable the tenant to have the benefit of the lease.
The tenant and guarantors' also counterclaimed against the landlord for damages for breach of that implied term and under the Australian Consumer Law for misleading or deceptive conduct.
Further, the issue was raised whether the suspension clause precluded the tenant and guarantors from raising an arguable defence to the claim for rent.
In the circumstances, the landlord’s conduct resulted in a reduction and offset of the tenant’s and guarantors’ liability under the lease and guarantee.
Security Pacific Gold Ltd v Balderston
A sub-lease existed between the plaintiff and the defendant (a company). The defendant was not permitted to move into occupation until a bank guarantee had been provided. The bank guarantee was a requirement of the sub-lease.
As an interim measure until the bank guarantee was arranged, the defendant was allowed into possession after a personal guarantee had been provided by its directors. It was provided in the form of a Deed of guarantee made on 5 March 1991 (the Deed).
Although the first year of the sub-lease was rent free, the defendant was obliged to pay outgoings. Certain outgoings became outstanding. The defendant was required to pay these outgoings and also to provide the bank guarantee. Whilst the outgoings were subsequently paid, the bank guarantee was never provided.
In October of the first year of the sub-lease, the plaintiff came to view the sub-leased premises as having been abandoned, and therefore re-entered the premises. The plaintiff alleged that, by abandoning the premises, the defendant had breached the terms of the sub-lease. The plaintiff expanded the allegations of breach by claiming a failure to provide the bank guarantee and a failure to pay certain outgoings.
As a bank guarantee was not provided, the plaintiff landlord sued for the outstanding monies under the Deed of guarantee. The issue was whether or not the plaintiff's monetary claim could be said to be referrable to moneys which became due under "the lease”. The plaintiff claimed that the personal guarantee signed by the defendant’s directors attracted a legal liability to pay the rental due.
The Court followed the High Court’s reasoning in Chan v Cresdon. It held that the 'lease' covered by the guarantee was read down to refer to only a registered lease. As the lease was not registered, the deed of guarantee could not be enforced against the defendant. Nor did the guarantee attract liability to pay rent under an equitable lease or a common law tenancy.
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