Australia: Cross all Ts, dot all Is: Personal guarantees gone wrong

Last Updated: 3 December 2018
Article by Sean Greenwood and Esther Khoo

Introduction

There are occasions, especially for small to medium size enterprises, where the company's director or directors have to provide a personal guarantee in order to obtain finance and/​or goods and services on credit. A personal guarantee empowers the lender or supplier to make the guarantor pay, on demand, all or part of the borrower or customer's debts, in particular when the borrower or customer becomes insolvent and is unable to pay.

For this reason, it is important for a lender or supplier to make sure any guarantee is property drafted and that there is no room to move nor arguments available to get the guarantor off the hook.

In 2017 the New South Wales Supreme Court was required to deal with a punctuation mark in a guarantee, and the question of what effect it had on the application of the personal guarantee.

The facts

In Aquawest Pty Ltd v Twynham [2017] NSWSC 652 the plaintiff entered into a standard form credit contract with Chatoyer Holdings Pty Ltd (Chatoyer). The plaintiff agreed to provide irrigation services and equipment to Chatoyer. The contract was signed on behalf of Chatoyer by Mr Twynham. Above the signature of Mr Twynham on the contract were printed (in bold) the following key words:

I agree that if I am a director/​shareholder (owning at least 15% of the shares) of the Customer [Chatoyer] I shall be personally liable for the performance of the Customer's obligations under the contract (Alleged Guarantee).

Mr Twynham was a director of Chatoyer. However, he did not own at least 15% of the shares in Chatoyer.

Chatoyer was eventually placed into liquidation and the plaintiff commenced proceedings against Mr Twynham in the Local Court, claiming from him the amount that was owing to it by Chatoyer plus interest by seeking to rely on the Alleged Guarantee.

The primary issue in dispute was the meaning of the Alleged Guarantee and whether Mr Twynham had signed the document as personally guaranteeing Chatoyer's line of credit.

Decision

In the Local Court proceedings, the Magistrate found the Alleged Guarantee to be ​"truly ambiguous" and, due to that ambiguity, could not be satisfied that Mr Twynham signed the document as a personal guarantee. Accordingly, the Local Court proceedings were dismissed with the plaintiff ordered to pay Mr Twynham's costs.

Appeal

An appeal against this decision was dismissed by the Supreme Court. Her Honour, Justice Lonergan, stated the appeal would fail regardless of any other issue because, as the Magistrate had found, due to the ambiguity of the Contract, it was not clear that Mr Twynham signed the Contract as a personal guarantee. Her Honour also noted that the phrase ​"director/​shareholder" could be interpreted in at least three different ways and, to that extent, the interpretation of the phrase that was most favourable to Mr Twynham was the one to be preferred by the Court.

Lessons

The case highlights that, when it comes to personal guarantees, it is crucial for creditors to get them right or they risk missing out on being able to enforce them. Should you receive a claim as an alleged guarantor, or you want to bring a claim against an alleged guarantor, please call us for advice.

For further information please contact:

Sean Greenwood, Associate
Phone: + 61 2 9233 5544
Email: stg@swaab.com.au

Esther Khoo, Solicitor

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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