30 April 2018

Know what you are getting into – personal guarantees carry risk

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The takeaway point from this case - care must be taken in providing a personal guarantee when involved in a business.
New Zealand Corporate/Commercial Law
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B&F Papers v NZPC Holdings [2018] NZHC 35

As a term of an agreement entered into between B&F Papers Limited (B&F) and NZPC Holdings Ltd (NZPC) in 2006, the defendant director, Mr McCormack, signed a personal guarantee of NZPC's debts to B&F. B&F supplied NZPC under the agreement without problem until early 2011. At this point NZPC started to fall behind on its payments. A payment plan for delayed payment was agreed in February 2013. Mr McCormack subsequently resigned as a director of NZPC in March 2013.

Following a pattern of sporadic payments, B&F lost patience with NZPC and in 2015 commenced proceedings against Mr McCormack to recover the outstanding amount by virtue of his personal guarantee. The High Court found that Mr McCormack was liable under the personal guarantee.

The High Court did not accept Mr McCormack's argument that B&F had released him from his guarantee by way of a discussion had between him and a representative of B&F shortly after he resigned his directorship. Rather, the Judge considered that Mr McCormack had convinced himself, at the time or subsequently, that the words used in that conversation meant he was released from ongoing liability. The Court also rejected Mr McCormack's contention that the payment plan had materially varied the principal contract so as to render the guarantee ineffective, and that additional payments made by NZPC under other agreements should be applied as against the guarantee.

As the Court itself noted, the takeaway point is that care needs to be taken in providing a personal guarantee when involved in a business. It can be difficult to escape personal liability under such a guarantee, even when no longer involved in the business.

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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