Covid-19 And Issues Concerning Personal Guarantees
With the Government lockdown still continuing a number of interesting questions have arisen recently relating to personal guarantees. First, how can a personal guarantee be witnessed without falling foul of the Government’s guidance on safe distancing; second, can a spouse or other close relative act as witness and, thirdly, will the Courts enforce a guarantee if it has not been properly executed as a deed.
In a business context, a personal guarantee is a part of a contract, or sometimes an entirely separate contract, in which an individual (usually a director, shareholder or associate) agrees to guarantee a company’s financial and performance obligations. If the company fails to perform its obligations, then the guarantor accepts personal liability for the losses caused by the company’s breach of contract.
Section 4 of the Statute of Frauds 1677 requires a guarantee to be given in writing (or evidenced in writing) and signed by the guarantor or a person authorised by the guarantor. It doesn’t have to be signed as a deed, but most guarantees are signed as deeds to avoid any dispute over whether the guarantor received any value in return for giving the personal guarantee.
A personal guarantee signed as a deed is required to be witnessed and, under current law, the witness must be present when the signatory signs the deed. The signatory and the witness can use electronic signatures, but the witness must be physically present when the signatory applies his e-signature. It is not sufficient for the witness to view the execution process on screen. Accordingly, witnessing by video link is not sufficient to satisfy current legal requirements.
If, therefore, arranging to have a witness present is difficult when, say, a signatory is self-isolating then (as we have advised previously) there are a number of strategies which can be adopted to ensure valid execution of deeds. These include:
There is no statutory provision requiring a witness of a deed to be independent of the signatory. However, the purpose of having a witness is so that, if necessary, they can be called upon to provide unbiased evidence of what was signed and by whom. Therefore, in order to be able to provide that unbiased evidence a witness should be independent.
To avoid the risk of a challenge being made as to the independence of a witness, it is best practice that the witness is not the signatory’s spouse or partner or a family member. This is because they may not be able to provide unbiased evidence, there may be a conflict of interest and they are not independent. Also, and perhaps most importantly, there are legal privilege rules against self-incrimination. These rules exempt a person from being compelled to answer a question when called as a witness, produce documents or provide information which might incriminate him or her in criminal proceedings or expose him or her to a penalty.
A recent case examined the position regarding a failure of a guarantee to comply as a deed and whether this failure would render the personal guarantee unenforceable.
As mentioned above, by law a guarantee must be made in writing (or evidenced in writing) and signed by the guarantor or a person authorised by the guarantor. Guarantees are not required to be signed as deeds, but most are because it avoids an argument about lack of consideration on the face of the document.
When a guarantee fails to comply with the requirements for execution as a deed, the issue for the courts is whether the guarantor received anything in return for giving the guarantee. This is important because, if the guarantee is not validly executed as a deed, it may still be valid as a contract between the parties. However, under English contract law, a promise cannot be enforced unless something (consideration) has been given or promised in exchange for it. So, before allowing a lender to enforce a guarantee, a Court will want to see evidence that the lender provided some form of valuable consideration in exchange for the promises given in the guarantee.
The problem with that is most guarantees are given after a financing agreement has been put in place; which constitutes past consideration. Generally, past consideration is not valid consideration and has no legal value as the consideration given predates the promise (guarantee) to repay.
In Signature Living Hotel Ltd v Sulyak, the Court was asked to look at the issues surrounding the validity of multiple guarantees which formed the basis of two statutory demands, which were used to present a petition to wind-up the company.
The issue before the court
Each statutory demand relied upon guarantees given by the guarantor, Signature Living Hotel Limited, in support of third-party loan agreements. Although expressed as deeds, the guarantees had not been validly executed as they had not been witnessed. It was on this basis that the guarantor argued that the guarantees were unenforceable and, further, that as defective deeds they could not then survive as simple contracts.
In short, the application failed.
The Court found that an otherwise complete guarantee, which was intended to be embodied in a deed but failed to comply with the additional formalities of a deed, could still be enforced as a contract if it was supported by consideration. Moreover, even if the guarantees were given after the loans had been made, the Court would look at the commercial realities. If it was clear, as it was in this case, that the parties had always envisaged that the guarantees would be part and parcel of a series of interlinked transactions, the guarantor could not then argue that the consideration provided by the lender was past consideration.
This case re-affirms that the Courts are generally reluctant to conclude that a commercial transaction, which the parties plainly intended to be binding and enforceable, should fail for want of consideration. In this context, a failure to correctly execute a guarantee as a deed will not necessarily make the guarantee unenforceable as a simple contract. However, from an evidential point of view, the difference in enforcing the guarantee as a contract rather than as a deed is in being able to demonstrate that valuable consideration was given in return for the guarantee at the time the guarantee was signed.
Personal guarantees have become a contentious issue of late and it’ll be interesting to see how policymakers and the law develops in this area. Such guarantees cannot now be given in support of a CBIL, but many business owners will have already given personal guarantees in support of the financial obligations of their businesses – in fact it may not be far off the mark to suggest that personal guarantees underwrite most of the small to medium sized businesses which make up the bulk of our economy. The lockdown and its impact on the financial stability of our economy will undoubtedly make business owners focus harder on the risks associated with giving personal guarantees particularly if lenders demonstrate an appetite for relying on those guarantees when unforeseen events occur such as the current pandemic.
We have years of experience of drafting and enforcing guarantees and all other security documents so if you have any concerns over the strength or enforceability of your guarantees or other finance and security documents, please do not hesitate to contact William Angas, Noel Ruddy or Dawn Shadwell.
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