Australia: Suppliers and lenders take note - ensure that personal guarantees have been drafted and executed properly before advancing credit to customers

Last Updated: 5 June 2018
Article by Laszlo Konya and Ben Drysdale

The recent case of FJ & SM Monaghan Pty Ltd v Slade [2018] NSWCA 79 has reiterated the importance of suppliers and lenders obtaining personal guarantees that have been carefully drafted in order to enforce them.

The importance of properly drafted guarantees

Although judgement was eventually awarded against the guarantors, it took nearly five years and several arduous court proceedings for the supplier to achieve this result. Had the guarantee been worded even slightly differently, the supplier may have been unsuccessful.

This case highlights the importance of guarantees that are clearly and thoroughly articulated and that, from a creditor's perspective, expressly state that they cover all past, present and future debts owed, in the form of a continuing guarantee.

Pointon Partners has extensive experience in drafting credit terms and conditions for suppliers and general finance documents.

Contact us to have a comprehensive guarantee drawn up before advancing substantial credit or loans to customers.

Background

Between 2001 and 2013, FJ & SM Monaghan Pty Ltd (Monaghan), operated a petrol station and provided fuel on a running account to "Slade Refrigerated Transport" (Slade), a company of which a husband and wife were the sole director and sole shareholder, respectively.

From 1 July 2006, Slade's overdue account with Monaghan incurred interest at a compound rate of 2.5% per month (around 34.5% per annum).

When arrears continued to increase into 2008, Monaghan instructed a solicitor to prepare a document under which the Stephen and Wendy Slade would personally guarantee the monies owing by Slade. Monaghan threatened to cease supply of fuel if the guarantee was not provided.

On 29 July 2008, the Slades opted instead to personally guarantee the debt by providing a one page letter that read as follows:

This letter is to explain that we Stephen Slade and Wendy Slade are Directors of S & W Slade Pty Ltd trading as Slade Refrigerated Transport.
We personally guarantee the debt with F & S Monaghan for fuel supplied to Slade Refrigerated Transport.
Yours sincerely
STEPHEN SLADE WENDY SLADE

The primary decision

In 2013, Monaghan brought a proceeding in the District Court of NSW against Slade and the guarantors for the outstanding balance on the running account, plus interest.

The key issue in that proceeding was whether the guarantee covered an amount outstanding on the date of the guarantee, or thereafter from time to time.

As payments had been made by Slade in partial discharge of its underlying liability to Monaghan, the guarantors would only be liable if the guarantee covered the amount outstanding from time to time, including interest.

The primary judge held that the guarantee only covered the balance outstanding on 29 July 2008, albeit including interest, and dismissed the claim. Monaghan appealed against that judgment.

Including interest in the personal guarantee

The Court of Appeal confirmed the trial judge's finding that interest was properly construed as being included in the guaranteed amount.

In reaching their decision, the Court of Appeal noted that the only amount which could plausibly be described as the singular "debt with F & S Monaghan for fuel supplied to Slade Refrigerated Transport" was the running balance outstanding, which included interest to that date.

Whether the personal guarantee covered amounts outstanding from time to time

At trial, the primary judge had held that the reference to 'the debt' for 'fuel supplied' referred only to past indebtedness. On appeal, the Court found that the primary judge had erred in relying on this textual consideration.

When constructing the guarantee, the Court of Appeal looked to the surrounding circumstances to determine that the guarantee was a 'continuing guarantee' for the balance due from Slade to Monaghan from time to time.

In particular, the statements of account issued to Slade at the end of each month did not treat debits for fuel or interest at particular times or in particular periods as separate debts. Nor did they explicitly apportion any payments made by Slade, other than in reduction of the running account.

Nothing in the evidence suggested to the Court of Appeal that the debt between Monaghan and Slade would cease to be a single, but fluctuating, balance on the account.

Further, the guarantee was given in response to Monaghan's ultimatum to cease supplying fuel unless a guarantee was provided. The commercial purpose was therefore to secure the continued supply of fuel and credit on the terms of the existing running account.

The Appeal was allowed and judgement was entered in favour of Monaghan against the guarantors in the amount of $750,000, being the jurisdictional limit of the original District Court.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Laszlo Konya
Ben Drysdale
 
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