UK: Director’s Liability For Claims Under Guarantees

Last Updated: 28 May 2009
Article by Nicholas Gould

There are an increasing number of cases coming before the Court in relation to claims under guarantees, in particular relating to their validity and the authority of company directors to bind the company or individuals in question. Nicholas Gould looks at two of these.

(i) Watersheds Limited v (1) David D A Costa (2) Paul Gentleman - QBD 13 February 2009

Here, a company wanted to raise finance to expand its business operations. Two directors took advice from a corporate finance company. The directors agreed to use the corporate finance organisation's services and the directors guaranteed performance of the company's obligations including payment. One bank loan was obtained, but an investor to provide full funding could not be found. The directors' company went into administration.

The corporate finance company claimed its fee from the company directors under the guarantee. The directors refused to pay claiming that they only entered into the agreement on the basis that the corporate finance company orally represented that they would act on a success fee or no deal no fee basis. So, the directors argued that no funding had been found and therefore no fee was payable.

If the directors had been induced to enter into the written guarantee in reliance upon the oral representation that the finance company would only charge a fee if funding were found then no fee would be payable.

Holroyd J found that there was no clear evidence from the directors that the finance company said that they would not charge a fee if funding could not be found. As a result the directors had not been misled about the written clauses relating to the minimum fee. There was also an inconsistency between the two directors evidence, which did not assist them. The finance company may have referred to a success fee during its discussions, but general discussions about a success fee did not undermine the proper nature of the agreement, and so the written terms of that agreement prevailed. There was, therefore, no inducement and no misrepresentation.

Comment

Here, the directors attempted to avoid payment by arguing that there had been a misrepresentation. They stated that they believed from their pre-contract discussions that a fee would not be paid where finance could not found. However their evidence on this matter was unclear and so the written agreement prevailed. The minimum fees, even for failed funding, had to be paid in accordance with the written agreement.

Claims under guarantees are frequently successful, and care should be taken to make sure the written agreement records the true intention of the parties. If there is to be a success fee (regardless of whether it is in a guarantee or indeed any type of contract) then it must be clearly set out in the document.

(ii) In the matter of Carson Country Homes Limited (2009) – [2009] EWHC 1143 Ch

Here, a company's directors divided the administration of a company between them. One dealt with matters relating to finance and the other to the daily operation of the company. There were company loans between the company and its parent. The director dealing with the finances would occasionally replicate the others signature on financial documents. The other director was happy for this to be done providing that he was kept informed of the nature of the document to which his signature was being applied.

The first director agreed a debenture and a guarantee with a bank. He signed them and also replicated the other director's signature.

The bank became concerned about the level of inter-company loans. The Court was then asked to appoint an administrator. The relationship between the two directors had broken down by this stage, and the director in charge of the day to day matters said that the appointment of the administrator was not valid because he had not put his signature on the debenture or the guarantee. The finance director had no choice to agree that the other director's signature was forged. However, he argued that the director knew and agreed to the replication of his signature.

The issues before Davis J was whether the finance director have the authority to sign on the other's behalf? Would Section 44 of the Companies Act 2006 render the debenture invalid in any event because of the forgery? Finally, could the finance director bind the company in any event?

The first issue was factual, and the Judge preferred the evidence of the director whose signature had been forged, rather than that of the finance director. As a result the finance director did not have any express or implied authority to sign the other's name.

On the basis that a principal could be bound by the fraudulent act of an agent, then a company could be bound by the fraudulent act of a director. As the finance director had signed in his capacity as company secretary the company was bound. The bank was therefore entitled to rely upon the document, notwithstanding the forged signature.

The administrator was, therefore, validly appointed.

Comment

The interesting aspect here was that one of the directors forged the signature of another director. The practice appeared to have been accepted between the two whilst the companies were solvent. However, once their relationship broke down the director whose signature had been forged said that he knew nothing about the guarantee. The Judge believed him, and therefore accepted that the finance director had in reality forged another director's signature.

However, the finance director had the power, when acting as the company secretary to bind the company. The forged signature was therefore irrelevant and the company was bound. The guarantee was valid and so the bank could appoint an administrator.

Conclusion

More cases are now coming before the Court in relation to claims under guarantees. In the current economic climate people are now calling upon guarantees in order to collect shortfalls in payment. These cases demonstrate that company directors who have entered into personal guarantees may well find themselves to be liable under that guarantee if the company fails. There will no doubt be more claims of this nature because of the current market conditions

These cases first appeared as part of the Legal Briefing Fenwick Elliott prepare for Building magazine. To read further case summaries, please click here.

To see further articles on matters relating to construction, engineering and energy projects, please visit www.fenwickelliott.co.uk.

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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